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SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
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COMMISSION FILE NUMBER 1-9601
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K-V PHARMACEUTICAL COMPANY
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-0618919
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
2503 SOUTH HANLEY ROAD, ST. LOUIS, MISSOURI 63144
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(314) 645-6600
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR SUCH SHORTER PERIOD
THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER
(AS DEFINED IN EXCHANGE ACT RULE 12b-2). YES X NO
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TITLE OF CLASS OF NUMBER OF SHARES
COMMON STOCK OUTSTANDING AS OF NOVEMBER 1, 2004
------------ ----------------------------------
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE 34,206,706
CLASS B COMMON STOCK, PAR VALUE $.01 PER SHARE 15,012,465
1
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited; dollars in thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net revenues..................................... $ 79,322 $ 71,019 $ 145,409 $ 130,398
Cost of sales.................................... 26,856 24,140 50,590 45,129
--------- --------- --------- ---------
Gross profit..................................... 52,466 46,879 94,819 85,269
--------- --------- --------- ---------
Operating expenses:
Research and development..................... 6,201 4,028 10,825 9,570
Selling and administrative................... 25,700 23,171 49,831 40,893
Amortization of intangible assets............ 1,148 1,113 2,270 2,224
Litigation................................... (843) (1,700) (843) (1,700)
--------- --------- --------- ---------
Total operating expenses......................... 32,206 26,612 62,083 50,987
--------- --------- --------- ---------
Operating income................................. 20,260 20,267 32,736 34,282
--------- --------- --------- ---------
Other expense (income):
Interest expense............................. 1,588 1,700 3,034 2,785
Interest and other income.................... (919) (411) (1,432) (773)
--------- --------- --------- ---------
Total other expense, net......................... 669 1,289 1,602 2,012
--------- --------- --------- ---------
Income before income taxes....................... 19,591 18,978 31,134 32,270
Provision for income taxes....................... 6,915 6,737 10,897 11,456
--------- --------- --------- ---------
Net income....................................... $ 12,676 $ 12,241 $ 20,237 $ 20,814
========= ========= ========= =========
Earnings per common share:
Basic - Class A common....................... $ 0.27 $ 0.27 $ 0.43 $ 0.44
Basic - Class B common....................... $ 0.23 $ 0.22 $ 0.36 $ 0.37
Diluted...................................... $ 0.25 $ 0.24 $ 0.40 $ 0.41
========= ========= ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
SEPTEMBER 30, MARCH 31,
2004 2004
---- ----
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents............................................................ $ 195,090 $ 226,911
Receivables, less allowance for doubtful accounts of $503 and $402
at September 30, 2004 and March 31, 2004, respectively............................ 76,004 65,872
Inventories, net..................................................................... 51,275 50,697
Prepaid and other assets............................................................. 10,137 6,591
Deferred tax asset................................................................... -- 8,037
----------- -----------
Total Current Assets.............................................................. 332,506 358,108
Property and equipment, less accumulated depreciation................................ 104,553 75,777
Intangible assets and goodwill, net.................................................. 79,599 80,809
Other assets......................................................................... 13,210 13,744
----------- -----------
TOTAL ASSETS......................................................................... $ 529,868 $ 528,438
=========== ===========
LIABILITIES
-----------
CURRENT LIABILITIES:
Accounts payable..................................................................... $ 11,845 $ 12,650
Accrued liabilities.................................................................. 8,888 30,917
Deferred tax liability............................................................... 2,547 --
Current maturities of long-term debt................................................. 8,043 7,909
----------- -----------
Total Current Liabilities......................................................... 31,323 51,476
Long-term debt....................................................................... 210,255 210,741
Other long-term liabilities.......................................................... 3,272 3,122
Deferred tax liability............................................................... 5,815 5,350
----------- -----------
TOTAL LIABILITIES.................................................................... 250,665 270,689
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
--------------------
7% cumulative convertible Preferred Stock, $.01 par value; $25.00 stated and
liquidation value; 840,000 shares authorized; issued and outstanding --
40,000 shares at September 30, 2004 and March 31,
2004 (convertible into Class A shares at a ratio of 8.4375 to one)................ -- --
Class A and Class B Common Stock, $.01 par value; 150,000,000 and
75,000,000 shares authorized, respectively;
Class A - issued 36,205,890 and 36,080,583 at September 30, 2004
and March 31, 2004, respectively.............................................. 362 362
Class B - issued 16,202,276 and 16,148,739 at September 30, 2004 and March 31,
2004, respectively (convertible into Class A shares on a one-for-one basis)... 162 162
Additional paid-in capital........................................................... 127,516 123,828
Retained earnings.................................................................... 204,782 184,580
Less: Treasury stock, 3,109,432 shares of Class A and 92,902 shares of Class B Common
Stock at September 30, 2004, respectively, and 3,035,948 shares of Class A and
80,142 shares of Class B Common Stock at March 31, 2004, respectively, at cost.... (53,619) (51,183)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY........................................................... 279,203 257,749
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................................... $ 529,868 $ 528,438
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; dollars in thousands)
SIX MONTHS ENDED
SEPTEMBER 30,
------------------------
2004 2003
-------- --------
OPERATING ACTIVITIES:
Net income............................................................. $ 20,237 $ 20,814
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and other non-cash charges............... 6,753 6,082
Deferred income tax provision....................................... 11,049 1,696
Deferred compensation............................................... 150 150
Litigation.......................................................... (843) 1,825
Changes in operating assets and liabilities:
(Increase) decrease in receivables, net............................. (10,132) 3,703
Increase in inventories, net........................................ (578) (12,759)
Increase in prepaid and other assets................................ (4,434) (3,183)
Decrease in accounts payable and accrued liabilities................ (21,991) (1,493)
-------- --------
Net cash provided by operating activities.............................. 211 16,835
-------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment, net............................. (32,526) (8,080)
Product acquisition................................................. -- (14,300)
-------- --------
Net cash used in investing activities.................................. (32,526) (22,380)
-------- --------
FINANCING ACTIVITIES:
Principal payments on long-term debt................................ (486) (437)
Dividends paid on preferred stock................................... (35) (401)
Proceeds from issuance of convertible notes......................... -- 194,236
Purchase of common stock for treasury............................... (2,436) (50,000)
Exercise of common stock options.................................... 3,451 1,446
-------- --------
Net cash provided by financing activities.............................. 494 144,844
-------- --------
Increase (decrease) in cash and cash equivalents....................... (31,821) 139,299
Cash and cash equivalents:
Beginning of year................................................... 226,911 96,288
-------- --------
End of period....................................................... $195,090 $235,587
======== ========
SUPPLEMENTAL INFORMATION:
Interest paid....................................................... $ 2,845 $ 345
Income taxes paid................................................... 5,713 9,701
NON-CASH FINANCING ACTIVITY:
Term loan to finance building purchase................................. $ -- $ 8,800
Issuance of common stock under product development
agreement.......................................................... 238 505
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of K-V
Pharmaceutical Company ("KV" or the "Company") have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by U.S. generally accepted accounting principles for
complete financial statements. However, in the opinion of management, all
adjustments (consisting of only normal recurring accruals) considered
necessary for a fair presentation have been included. The results of
operations and cash flows for the three- and six-month periods ended
September 30, 2004 are not necessarily indicative of the results of
operations and cash flows that may be expected for the fiscal year ending
March 31, 2005. The interim consolidated financial statements should be read
in conjunction with the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 2004. The balance sheet information as of March 31,
2004 has been derived from the Company's audited consolidated balance sheet
as of that date.
2. 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. As permissible under Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, the
Company elected to continue to account for stock option grants to employees
in accordance with Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees and related interpretations. APB 25
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, no compensation expense is
recognized for stock option awards granted to employees at or above fair
value. Had the Company determined compensation expense using the fair value
method prescribed by SFAS 123, the Company's net income and earnings per
share would have been as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported........................ $12,676 $12,241 $20,237 $20,814
Deduct: Stock based employee
Compensation expense, included in reported
net income, net of related tax effects....... (157) (171) (313) (340)
------- ------- ------- -------
Pro forma net income........................... $12,519 $12,070 $19,924 $20,474
======= ======= ======= =======
Earnings per share:
Basic Class A common - as reported........... $ 0.27 $ 0.27 $ 0.43 $ 0.44
Basic Class A common - pro forma............. 0.27 0.26 0.43 0.43
Basic Class B common - as reported........... 0.23 0.22 0.36 0.37
Basic Class B common - pro forma............. 0.22 0.22 0.36 0.36
Diluted - as reported........................ 0.25 0.24 0.40 0.41
Diluted - pro forma.......................... 0.25 0.24 0.39 0.40
The weighted average fair value of the options has been estimated on the
date of grant using the following weighted average assumptions for grants
during the three and six months ended September 30, 2004 and 2003,
respectively: no dividend yield; expected volatility of 37% and 43% for
Class A common stock; expected volatility of 34% and 39% for Class B common
stock; risk-free interest rate of 3.51% and 3.25% per annum; and expected
option terms ranging from 3 to 10 years for both periods. Weighted averages
are used because of varying assumed exercise dates.
5
3. EARNINGS PER SHARE
In June 2004, the Company adopted the guidance in Emerging Issues Task Force
(EITF) No. 03-06, Participating Securities and the Two-Class Method under
FASB Statement No. 128, Earnings per Share. The pronouncement required the
use of the two-class method in the calculation and disclosure of basic
earnings per share and provided guidance on the allocation of earnings and
losses for purposes of calculating basic earnings per share. Accordingly,
all periods presented have been retroactively adjusted to give effect to
such guidance. For purposes of calculating basic earnings per share,
undistributed earnings are allocated to each class of common stock based on
the contractual participation rights of each class of security. 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.
The following table sets forth the computation of basic and diluted earnings
per share:
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2004 2003 2004 2003
---- ---- ---- ----
Undistributed earnings:
Net income - diluted EPS........................ $12,676 $12,241 $20,237 $20,814
Preferred stock dividends....................... (18) (18) (35) (401)
------- ------- ------- -------
Undistributed earnings - basic EPS.............. $12,658 $12,223 $20,202 $20,413
======= ======= ======= =======
Allocation of undistributed earnings:
Class A common stock............................ $ 9,007 $ 8,680 $14,376 $14,599
Class B common stock............................ 3,651 3,543 5,826 5,814
------- ------- ------- -------
Total allocated earnings...................... $12,658 $12,223 $20,202 $20,413
======= ======= ======= =======
Weighted average shares outstanding - basic:
Class A common stock............................ 33,114 32,557 33,081 33,254
Class B common stock............................ 16,106 15,944 16,087 15,892
------- ------- ------- -------
Total weighted average shares
outstanding - basic........................ 49,220 48,501 49,168 49,146
------- ------- ------- -------
Effect of dilutive securities:
Employee stock options.......................... 994 1,816 1,236 1,740
Convertible preferred stock..................... 338 338 338 338
------- ------- ------- -------
Dilutive potential common shares.............. 1,332 2,154 1,574 2,078
------- ------- ------- -------
Weighted average shares outstanding - diluted..... 50,552 50,655 50,742 51,224
======= ======= ======= =======
Basic earnings per share:
Class A common stock............................ $ 0.27 $ 0.27 $ 0.43 $ 0.44
Class B common stock............................ 0.23 0.22 0.36 0.37
Diluted earnings per share(1) (2) ................ 0.25 0.24 0.40 0.41
======= ======= ======= =======
(1) Excluded from the computation of diluted earnings per share are
outstanding stock options whose exercise prices are greater than
the average market price of the common shares for the period
reported. For the three-month periods, excluded from the
computation were options to purchase 978,545 and 50,850 Class A and
Class B common shares at September 30, 2004 and 2003, respectively.
For the six-month periods, excluded from the computation were
options to purchase 685,076 and 211,350 Class A and Class B common
shares at September 30, 2004 and 2003, respectively.
(2) The effect of 8,691,880 shares related to the assumed conversion of
the $200,000 Convertible Subordinated Notes (see Note 7) has been
excluded from the computation of diluted earnings per share as the
conditions that would permit conversion have not been satisfied. A
recent accounting pronouncement has indicated a change in this
methodology that would affect how the Company reports diluted
earnings per share. See Note 10.
6
4. REVENUE RECOGNITION
The Company generally recognizes revenue from product sales when the
merchandise is shipped to an unrelated third party pursuant to Staff
Accounting Bulletin No. 104, Revenue Recognition in Financial Statements.
Accordingly, the Company recognizes revenue when all of the following occur:
a purchase order is received from a customer; title and risk of loss pass to
the Company's customer upon shipment of the merchandise under the terms of
FOB shipping point; prices and estimated sales provisions for product
returns, sales rebates, payment discounts, chargebacks, and other
promotional allowances are reasonably determinable; and the customer's
payment ability has been reasonably assured.
Concurrently with the recognition of revenue, the Company records estimated
sales provisions for product returns, sales rebates, payment discounts,
chargebacks, and other sales allowances. Sales provisions are established
based upon consideration of a variety of factors, including but not limited
to, historical relationship to revenues, historical payment and return
experience, estimated customer inventory levels, customer rebate
arrangements, and current contract sales terms with wholesale and indirect
customers.
Actual product returns, chargebacks and other sales allowances incurred are,
however, dependent upon future events and may be different than the
Company's estimates. The Company continually monitors the factors that
influence sales allowance estimates and makes adjustments to these
provisions when management believes that actual product returns, chargebacks
and other sales allowances may differ from established allowances.
Accruals for sales provisions are presented in the consolidated financial
statements as reductions to net revenues and accounts receivable. Sales
provisions totaled $33,558 and $22,201 for the three months ended September
30, 2004 and 2003, respectively, and $58,545 and $44,016 for the six months
ended September 30, 2004 and 2003, respectively. The reserve balances
related to the sales provisions totaled $18,360 and $20,648 at September 30,
2004 and March 31, 2004, respectively, and are included in "Receivables,
less allowance for doubtful accounts" in the accompanying consolidated
balance sheets.
5. INVENTORIES
Inventories consist of the following:
SEPTEMBER 30, 2004 MARCH 31, 2004
------------------ --------------
Finished goods..................... $ 30,662 $ 31,028
Work-in-process.................... 5,541 5,142
Raw materials...................... 16,226 15,529
----------- ----------
52,429 51,699
Reserves for obsolescence.......... (1,154) (1,002)
----------- ----------
$ 51,275 $ 50,697
=========== ==========
Management establishes reserves for potentially obsolete or slow-moving
inventory based on an evaluation of inventory levels, forecasted demand, and
market conditions.
7
6. INTANGIBLE ASSETS AND GOODWILL
SEPTEMBER 30, 2004 MARCH 31, 2004
--------------------------- ---------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------ ------------ ------ ------------
Product rights - Micro-K(R).................. $36,140 $(10,001) $36,140 $ (9,099)
Product rights - PreCare(R).................. 8,433 (2,179) 8,433 (1,968)
Trademarks acquired:
Niferex(R)................................ 14,834 (1,113) 14,834 (742)
Chromagen(R)/Strongstart(R)............... 27,642 (2,073) 27,642 (1,382)
License agreements......................... 4,600 (30) 3,825 -
Trademarks and patents..................... 3,273 (484) 2,980 (411)
------- -------- ------- --------
Total intangible assets.................. 94,922 (15,880) 93,854 (13,602)
Goodwill................................... 557 - 557 -
------- -------- ------- --------
$95,479 $(15,880) $94,411 $(13,602)
======= ======== ======= ========
As of September 30, 2004, the Company's intangible assets have a weighted
average useful life of approximately 20 years. Amortization expense for
intangible assets was $1,148 and $1,113 for the three months ended September
30, 2004 and 2003, respectively, and $2,270 and $2,224 for the six months
ended September 30, 2004 and 2003, respectively.
Assuming no additions, disposals or adjustments are made to the carrying
values and/or useful lives of the intangible assets, annual amortization
expense on product rights, trademarks acquired and other intangible assets
is estimated to be approximately $2,350 for the remainder of fiscal 2005 and
approximately $4,700 in each of the four succeeding fiscal years.
7. LONG-TERM DEBT
Long-term debt consists of the following:
SEPTEMBER 30, 2004 MARCH 31, 2004
------------------ --------------
Industrial revenue bonds.................... $ 205 $ 205
Notes payable............................... 6,866 6,731
Building mortgages.......................... 11,227 11,714
Convertible notes........................... 200,000 200,000
-------- --------
218,298 218,650
Less current portion........................ (8,043) (7,909)
-------- --------
$210,255 $210,741
======== ========
As of September 30, 2004, the Company has a credit agreement with a bank
that provides for a revolving line of credit for borrowing up to $65,000.
The credit agreement provides for a $40,000 unsecured revolving line of
credit along with an unsecured supplemental credit line of $25,000 for
financing acquisitions. These credit facilities expire in October 2006 and
December 2004, respectively. The revolving credit lines are unsecured and
interest is charged at the lower of the prime rate or the one-month LIBOR
rate plus 150 basis points. At September 30, 2004, the Company had no cash
borrowings outstanding under either credit facility. The credit agreement
includes covenants that impose minimum levels of earnings before interest,
taxes, depreciation and amortization, a maximum funded debt ratio, a limit
on capital expenditures and dividend payments, a minimum fixed charge ratio
and a maximum senior leverage ratio. As of September 30, 2004, the Company
was in compliance with all of its covenants.
8
On May 16, 2003, the Company issued $200,000 of Convertible Subordinated
Notes (the "Notes") that are convertible, under certain circumstances, into
shares of Class A common stock at an initial conversion price of $23.01 per
share. The Notes, which are due May 16, 2033, bear interest that is payable
on May 16 and November 16 of each year at a rate of 2.50% per annum. The
Company also is obligated to pay contingent interest at a rate equal to 0.5%
per annum during any six-month period from May 16 to November 15 and from
November 16 to May 15, with the initial six-month period commencing May 16,
2006, if the average trading price of the Notes per $1,000 principal amount
for the five trading day period ending on the third trading day immediately
preceding the first day of the applicable six-month period equals $1,200 or
more.
The Company may redeem some or all of the Notes at any time on or after May
21, 2006, at a redemption price, payable in cash, of 100% of the principal
amount of the Notes, plus accrued and unpaid interest, including contingent
interest, if any. Holders may require the Company to repurchase all or a
portion of their Notes on May 16, 2008, 2013, 2018, 2023 and 2028 or upon a
change in control, as defined in the indenture governing the Notes, at a
purchase price, payable in cash, of 100% of the principal amount of the
Notes, plus accrued and unpaid interest, including contingent interest, if
any. The Notes are subordinate to all of our existing and future senior
obligations.
The Notes are convertible, at the holders' option, into shares of the
Company's Class A common stock prior to the maturity date under the
following circumstances:
o during any quarter commencing after June 30, 2003, if
the closing sale price of the Company's Class A
common stock over a specified number of trading days
during the previous quarter is more than 120% of the
conversion price of the Notes on the last trading day
of the previous quarter. The Notes are initially
convertible at a conversion price of $23.01 per
share, which is equal to a conversion rate of
approximately 43.4594 shares per $1,000 principal
amount of Notes;
o if the Company has called the Notes for redemption;
o during the five trading day period immediately
following any nine consecutive day trading period in
which the trading price of the Notes per $1,000
principal amount for each day of such period was less
than 95% of the product of the closing sale price of
our Class A common stock on that day multiplied by
the number of shares of our Class A common stock
issuable upon conversion of $1,000 principal amount
of the Notes; or
o upon the occurrence of specified corporate
transactions.
The Company has reserved 8,691,880 shares of Class A Common Stock for
issuance in the event the Notes are converted into the Company's common
shares.
The Notes, which are unsecured, do not contain any restrictions on the
payment of dividends, the incurrence of additional indebtedness or the
repurchase of the Company's securities, and do not contain any financial
covenants.
9
8. SEGMENT REPORTING
The reportable operating segments of the Company are branded products,
specialty generics and specialty materials. The operating segments are
distinguished by differences in products, marketing and regulatory approval.
Segment profits are measured based on income before taxes and are determined
based on each segment's direct revenues and expenses. The majority of
research and development expense, corporate general and administrative
expenses, amortization and interest expense, as well as interest and other
income, are not allocated to segments, but included in the "all other"
classification. Identifiable assets for the three reportable operating
segments primarily include receivables, inventory, and property and
equipment. For the "all other" classification, identifiable assets consist
of cash and cash equivalents, corporate property and equipment, intangible
and other assets and all income tax related assets. Accounting policies of
the segments are the same as the Company's consolidated accounting policies.
The following represents information for the Company's reportable operating
segments for the three and six months ended September 30, 2004 and 2003.
THREE MONTHS
ENDED BRANDED SPECIALTY SPECIALTY ALL
SEPTEMBER 30, PRODUCTS GENERICS MATERIALS OTHER ELIMINATIONS CONSOLIDATED
------------- -------- -------- --------- ----- ------------ ------------
Net revenues 2004 $22,378 $51,117 $4,989 $ 838 $ - $ 79,322
2003 16,879 48,785 4,279 1,076 - 71,019
Segment profit (loss) 2004 7,136 28,718 1,037 (17,300) - 19,591
2003 4,392 28,544 557 (14,515) - 18,978
Identifiable assets 2004 21,650 81,791 7,754 419,831 (1,158) 529,868
2003 12,902 67,673 9,072 430,127 (1,158) 518,616
Property and 2004 - - 15 18,754 - 18,769
equipment additions 2003 6 - 30 4,492 - 4,528
Depreciation and 2004 68 66 70 3,208 - 3,412
amortization 2003 81 13 35 2,999 - 3,128
SIX MONTHS
ENDED BRANDED SPECIALTY SPECIALTY ALL
SEPTEMBER 30, PRODUCTS GENERICS MATERIALS OTHER ELIMINATIONS CONSOLIDATED
------------- -------- -------- --------- ----- ------------ ------------
Net revenues 2004 $38,297 $96,572 $9,120 $ 1,420 $ - $145,409
2003 31,660 88,240 8,180 2,318 - 130,398
Segment profit (loss) 2004 8,787 54,345 1,509 (33,507) - 31,134
2003 9,235 50,320 874 (28,159) - 32,270
Property and 2004 - - 15 32,511 - 32,526
equipment additions 2003 123 - 35 7,922 - 8,080
Depreciation and 2004 173 96 70 6,414 - 6,753
amortization 2003 161 28 70 5,823 - 6,082
Consolidated revenues are principally derived from customers in North
America and substantially all property and equipment is located in the
St. Louis, Missouri metropolitan area.
10
9. CONTINGENCIES - RESERVE FOR POTENTIAL LEGAL DAMAGES
ETHEX Corporation (ETHEX), a subsidiary of the Company, was a defendant in a
lawsuit styled Healthpoint, Ltd. v. ETHEX Corporation, filed in federal
court in San Antonio, Texas. The Company and ETHEX were also named as
defendants in a second lawsuit brought by Healthpoint and others styled
Healthpoint Ltd. v. ETHEX Corporation, filed in federal court in San
Antonio, Texas. During the quarter ended September 30, 2004, the Company
made a settlement payment in the amount of $16.5 million to resolve all
previously pending claims between KV and Healthpoint without the admission
of any liability. The settlement was fully reserved by the Company in
September 2002 and therefore had no impact on KV's earnings for the three
months ended September 30, 2004. The $(843,000) reflected in "Litigation" on
the Company's consolidated income statements for the three and six months
ended September 30, 2004 represents reversal of the portion of the
Healthpoint litigation reserve that remained after consideration of the
settlement payment and related litigation costs incurred during the six
month period.
The Company and ETHEX are named as defendants in a case brought by CIMA
LABS, Inc. and Schwarz Pharma, Inc. and styled CIMA LABS, Inc. et. al. v. KV
Pharmaceutical Company et. al. filed in federal court in Minnesota. It is
alleged that the Company and ETHEX infringed on a CIMA patent in connection
with the manufacture and sale of Hyoscyamine Sulfate Orally Dissolvable
Tablets, 0.125 mg. The court has denied the plaintiff's motion for a
preliminary injunction, which allows ETHEX to continue marketing the product
during the pendancy of the subject lawsuit and calls into question CIMA's
and Schwarz's ability to prevail in the lawsuit. The Company has filed
several motions for summary judgment that have yet to be decided, requesting
that the court rule that the relevant patent is unenforceable, invalid or
not infringed. CIMA and Schwarz have opposed these motions and filed a
summary judgment motion seeking the court to rule that the patent is valid.
The Company believes it has meritorious defenses and will vigorously defend
the case; however, it cannot give any assurance that it will prevail.
The Company and ETHEX are named as defendants in a case brought by Solvay
Pharmaceuticals, Inc. and styled Solvay Pharmaceuticals, Inc. v. ETHEX
Corporation, filed in federal court in Minnesota. In general, Solvay alleges
that ETHEX's comparative promotion of its Pangestyme(TM) CN 10 and
Pangestyme(TM) CN 20 products to Solvay's Creon(R) 10 and CreOn(R) 20
products resulted in false advertising and misleading statements under
various federal and state laws, and constituted unfair and deceptive trade
practices. Discovery is active. The Company believes it has meritorious
defenses and will vigorously defend the case; however, it cannot give any
assurance that it will prevail.
KV previously distributed several low volume pharmaceutical products that
contained phenylpropanolamine, or PPA, and that were discontinued in 2000
and 2001. The Company is presently named a defendant in a product liability
lawsuit in federal court in Mississippi involving PPA. The suit originated
out of a case, Virginia Madison, et al. v. Bayer Corporation, et al. The
original suit was filed on December 23, 2002, but was not served on KV until
February 2003. The case was originally filed in the Circuit Court of Hinds
County, Mississippi, and was removed to the United States District Court for
the Southern District of Mississippi by then co-defendant Bayer Corporation.
The case has been transferred to a Judicial Panel on Multi-District
Litigation for PPA claims sitting in the Western District of Washington. The
claims against the Company have now been segregated into a lawsuit brought
by Johnny Fulcher individually and on behalf of the wrongful death
beneficiaries of Linda Fulcher, deceased, against KV. It alleges bodily
injury, wrongful death, economic injury, punitive damages, loss of
consortium and/or loss of services from the use of the Company's distributed
pharmaceuticals containing PPA that have since been discontinued and/or
reformulated to exclude PPA. In May 2004, the case was dismissed with
prejudice by the U.S. District Court for the Western District of Washington
for a failure to timely file an individual complaint as required by certain
court orders. The plaintiff filed a request for reconsideration which was
opposed and subsequently denied by the court in June 2004. In July 2004, the
plaintiffs filed a notice of appeal of the dismissal. The Company intends to
oppose this appeal. Management believes that the Company may have
substantial defenses to the underlying claims, though the ultimate outcome
of this case and the potential effect cannot be determined.
KV's product liability coverage for PPA claims expired for claims made after
June 15, 2002. Although the Company renewed its product liability coverage
for coverage after June 15, 2002, that policy excludes future PPA claims in
accordance with the standard industry exclusion. Consequently, as of June
15, 2002, the Company has
11
provided for legal defense costs and indemnity payments involving PPA claims
on a going forward basis, including the Mississippi lawsuit that was filed
after June 15, 2002. Moreover, the Company may not be able to obtain product
liability insurance in the future for PPA claims with adequate coverage
limits at commercially reasonable prices for subsequent periods. From time
to time in the future, KV may be subject to further litigation resulting
from products containing PPA that it formerly distributed. The Company
intends to vigorously defend any claims that may be raised in the current
and future litigation; however, the Company cannot give any assurances it
will prevail.
The Company has been advised that one of its former distributor customers is
being sued in Florida state court captioned Darrian Kelly v. K-Mart et. al.
for personal injury allegedly caused by ingestion of K-Mart diet caplets
that are alleged to have been manufactured by the Company and to contain
PPA. The distributor has tendered defense of the case to the Company and has
asserted a right to indemnification for any financial judgment it must pay.
The Company previously notified its product liability insurer of this claim
in 1999, and the Company recently sent a letter to the insurer formally
demanding that it take over the Company's defense. While the Company does
not believe this lawsuit will have a material adverse effect on its results
of operation or financial condition, at this point, the Company has not been
provided significant information on the underlying claims and alleged
damages.
On September 25, 2003, the Commonwealth of Massachusetts filed Commonwealth
of Massachusetts v. Mylan Laboratories, Inc. et al in Massachusetts federal
court, against ETHEX Corp. and 12 other manufacturers of generic
pharmaceutical products. The complaint alleges, among other things, that the
defendants reported inflated pricing information for their drugs to data
reporting services, and that Massachusetts relied on this pricing data in
setting reimbursement rates under the Medicaid program. The complaint also
alleges that Massachusetts received rebates from the defendants under the
Medicaid Drug Rebate Program that were materially less than that to which
Massachusetts was entitled. Massachusetts seeks to recover from the
defendants the amount that it believes it overpaid and the amount it is owed
in rebates, based on claims under Massachusetts and federal law. The case is
in its early stages, and fact discovery has not yet begun. ETHEX is
vigorously defending the litigation; however, it cannot give any assurances
that it will prevail.
On or about August 5, 2004, the City of New York filed a lawsuit in U.S.
District Court for the Southern District of New York against 44
manufacturers of pharmaceuticals, including ETHEX. The complaint alleges
that the defendants inflated the average wholesale prices used to calculate
Medicaid reimbursements and that by reporting inflated pricing information
they underpaid Medicaid rebates. The case is in its early stages and fact
discovery has not yet begun. ETHEX intends to vigorously defend its
interests; however, it cannot give any assurances it will prevail.
It is possible that a number of jurisdictions may have commenced
investigations into the generic and branded pharmaceutical industry, at
large, regarding pricing and price reporting practices that may or may not
have an effect on the Company. The Company and/or its affiliates have been
notified that several jurisdictions are investigating such matters.
From time to time, the Company is involved in various other legal
proceedings in the ordinary course of its business. These legal proceedings
include various patent infringement actions brought by potential competitors
with respect to products the Company proposes to market and for which it has
filed Abbreviated New Drug Applications and provided notice of certification
required under the provisions of the Hatch-Waxman Act. While it is not
feasible to predict the ultimate outcome of such other proceedings, the
Company believes that the ultimate outcome of such other proceedings will
not have a material adverse effect on its results of operations or financial
position. For additional information regarding legal proceedings in which
the Company or its subsidiaries are a party, see Item 1 of Part II of this
report.
There are uncertainties and risks associated with all litigation and there
can be no assurances that the Company will prevail in any particular
litigation.
10. RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. (FIN) 46, Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51. The primary
objectives of FIN 46 are to provide guidance on the identification of
12
entities which the Company may control through means other than through
voting rights ("variable interest entities") and to determine when and which
business enterprise ("primary beneficiary") should consolidate the variable
interest entity. FIN 46 requires existing unconsolidated variable interest
entities to be consolidated by their primary beneficiaries if the entities
do not effectively disperse risks among the parties involved. Variable
interest entities that effectively disperse risks will not be consolidated
unless a single party holds an interest or combination of interests that
effectively recombines risks that were previously dispersed. In addition,
FIN 46 requires that the primary beneficiary, as well as all other
enterprises with a significant variable interest in a variable interest
entity, make additional disclosures. Certain disclosure requirements of FIN
46 were effective for financial statements issued after January 31, 2003. In
December 2003, the FASB revised FIN 46 (FIN 46R) to address certain FIN 46
implementation issues. The revised provisions were applicable no later than
the first reporting period ending after March 15, 2004. The Company adopted
FIN 46 and FIN 46R on March 31, 2004 and, based upon the evaluation
performed of all interests, has determined that the Company does not have
any variable interest entities that require consolidation.
In March 2004, the EITF completed its discussion of and provided consensus
guidance on Issue No. 03-06, Participating Securities and the Two-Class
Method under FASB Statement No. 128, Earnings per Share. The consensus
interpreted the definition of a "participating security", required the use
of the two-class method in the calculation and disclosure of basic earnings
per share for companies with participating securities or more than one class
of common stock, and provided guidance on the allocation of earnings and
losses for purposes of calculating basic earnings per share. Since the
Company has two classes of common stock, this consensus has been applied in
the calculation of basic earnings per share for all periods presented. There
was no impact on diluted earnings per share as reported.
In April 2004, the FASB issued FASB Staff Position No. 129-1 (FSP 129-1),
Disclosure Requirements under FASB Statement No. 129, Disclosure of
Information about Capital Structure, Relating to Contingently Convertible
Securities. This FSP requires the disclosure provisions of Statement 129 to
apply to all existing and newly created contingently convertible securities
and to their potentially dilutive effects on earnings per share. The
adoption of the disclosure provisions of FSP 129-1 did not have a material
impact on the Company's financial condition or results of operations.
In September 2004, the EITF reached a conclusion that contingently
convertible debt instruments should be included in diluted earnings per
share computations (if dilutive) regardless of whether the market price
trigger (or other contingent feature) has been met. Additionally, the EITF
stated that prior period earnings per share amounts presented for
comparative purposes should be restated to conform to this consensus, which
will be effective for reporting periods ending after December 15, 2004. The
conclusion adopted by the EITF will require the addition of approximately
8.7 million shares associated with the conversion of the Company's $200,000
Convertible Subordinated Notes to the number of shares outstanding for the
calculation of diluted earnings per share for all reported periods since the
issuance of the Notes.
13
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Form 10-Q, including the documents that we incorporate herein by
reference, contains various forward-looking statements within the meaning of
the United States Private Securities Litigation reform Act of 1995
("PSLRA"), which may be based on or include assumptions, concerning our
operations, future results and prospects. Such statements may be identified
by the use of words like "plans", "expect", "aim", "believe", "projects",
"anticipate", "commit", "intend", "estimate", "will", "should", "could", and
other expressions that indicate future events and trends.
All statements that address expectations or projections about the future,
including without limitation, statements about our strategy for growth,
product development, regulatory approvals, market position, expenditures and
financial results, are forward-looking statements.
All forward-looking statements are based on current expectations and are
subject to risk and uncertainties. In connection with the "safe harbor"
provisions, we provide the following cautionary statements identifying
important economic, political and technology factors which, among others,
could cause the actual results or events to differ materially from those set
forth or implied by the forward-looking statements and related assumptions.
Such factors include (but are not limited to) the following: (1) changes in
the current and future business environment, including interest rates and
capital and consumer spending; (2) the difficulty of predicting FDA
approvals including timing; (3) acceptance and demand for new pharmaceutical
products; (4) the impact of competitive products and pricing; (5) new
product development and launch; (6) reliance on key strategic alliances; (7)
the availability of raw materials; (8) the regulatory environment; (9)
fluctuations in operating results; (10) the difficulty of predicting the
pattern of inventory movements by our customers; (11) the impact of
competitive response to our efforts to leverage our branded power with
product innovation, promotional programs, and new advertising; (12) risks
that we may not ultimately prevail in our Paragraph IV litigation and that
any period of exclusivity may not in fact be realized; (13) risks that there
may not be a recovery in the nutritional supplements business; and (14) the
risks detailed from time to time in our filings with the Securities and
Exchange Commission.
This discussion is by no means exhaustive, but is designed to highlight
important factors that may impact the Company's outlook.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Except for the historical information contained herein, the following
discussion contains forward-looking statements that are subject to known and
unknown risks, uncertainties, and other factors that may cause our actual
results to differ materially from those expressed or implied by those
forward-looking statements. These risks, uncertainties and other factors are
discussed above under the caption "Cautionary Statement Regarding
Forward-Looking Information." In addition, the following discussion and
analysis of financial condition and results of operations should be read in
conjunction with the consolidated financial statements, the related notes to
consolidated financial statements and "Management's Discussion and Analysis
of Results of Operations and Financial Condition" included in our Annual
Report on Form 10-K for the fiscal year ended March 31, 2004, and the
unaudited interim consolidated financial statements and related notes to
unaudited interim consolidated financial statements included in Item 1 of
this Quarterly Report on Form 10-Q.
BACKGROUND
We are a fully integrated specialty pharmaceutical company that develops,
acquires, manufactures and markets technologically distinguished branded and
generic prescription pharmaceutical products. We have a broad range of
dosage form capabilities, including tablets, capsules, creams, liquids and
ointments. We conduct our branded pharmaceutical operations through Ther-Rx
Corporation and our generic pharmaceutical operations through ETHEX
Corporation, which focuses principally on technologically distinguished
generic products. Through Particle Dynamics, Inc., we develop, manufacture
and market technologically advanced, value-added raw material products for
the pharmaceutical, nutritional, personal care, food and other markets.
We have a broad portfolio of drug delivery technologies which we leverage to
create technologically distinguished brand name and specialty generic
products. We have developed and patented 15 drug delivery and formulation
technologies primarily in four principal areas: SITE RELEASE(R)
bioadhesives, oral controlled release, tastemasking and quick dissolving
tablets. We incorporate these technologies in the products we market to
control and improve the absorption and utilization of active pharmaceutical
compounds. These technologies provide a number of benefits, including
reduced frequency of administration, reduced side effects, improved drug
efficacy, enhanced patient compliance and improved taste.
Our drug delivery technologies allow us to differentiate our products in the
marketplace, both in the branded and generic pharmaceutical areas. We
believe that this differentiation provides substantial competitive
advantages for our products, allowing us to establish a strong record of
growth and profitability and a leadership position in certain segments of
our industry.
RESULTS OF OPERATIONS
Net income increased $0.4 million, or 3.6%, to $12.7 million for the three
months ended September 30, 2004 and decreased $0.6 million, or 2.8%, to
$20.2 million for the six months ended September 30, 2004. During the three-
and six-month periods, net revenues increased 11.7% and 11.5%, respectively,
as we experienced sales growth in all three of our operating segments:
branded products, specialty generics and specialty materials. The resultant
$5.6 million and $9.6 million increases in gross profit for the three- and
six-month periods, respectively, were offset by increases in operating
expenses of $5.6 million and $11.1 million, respectively. The increases in
operating expenses were primarily due to an increase in costs associated
with the addition of 80 specialty sales representatives and sales management
personnel since the year-ago second quarter to support new product
initiatives for our branded products segment, an increase in branded
marketing expense to continue the better-than-expected performance of our
technology-improved anemia product line, and increases in research and
development expense reflective of increased spending on bioequivalency
studies for products in our internal development pipeline.
15
Net Revenues by Segment
- -----------------------
($ IN THOUSANDS)
- -----------------------
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ -----------------------------------
% %
2004 2003 CHANGE 2004 2003 CHANGE
---------- ---------- ------ --------- --------- ------
Branded products $22,378 $16,879 32.6% $ 38,297 $ 31,660 21.0%
as % of total net revenues 28.2% 23.8% 26.3% 24.3%
Specialty generics 51,117 48,785 4.8% 96,572 88,240 9.4%
as % of total net revenues 64.4% 68.7% 66.4% 67.7%
Specialty materials 4,989 4,279 16.6% 9,120 8,180 11.5%
as % of total net revenues 6.3% 6.0% 6.3% 6.3%
Other 838 1,076 (22.1)% 1,420 2,318 (38.7)%
Total net revenues $79,322 $71,019 11.7% $145,409 $130,398 11.5%
The increases in branded product sales of $5.5 million and $6.6 million for
the three- and six-month periods, respectively, were due primarily to
continued growth of both our women's healthcare family of products and our
two hematinic product lines. Sales from the women's healthcare product group
increased $2.1 million, or 19.7%, in the second quarter and $2.4 million, or
11.7%, for the six-month period compared to the corresponding prior year
periods. Gynazole-1(R), our vaginal antifungal cream product, continued to
experience growth in the three- and six-month periods as our share of the
prescription vaginal antifungal cream market increased to 29.7% at the end
of the second quarter, from 20.8% at the end of the second quarter of the
prior year. Sales of Gynazole-1(R) increased $1.3 million, or 34.3%, in the
three-month period and $2.2 million, or 32.9%, for the six-month period.
Also included in the women's healthcare family of products is the PreCare(R)
product line which continued to be the leading branded line of prescription
prenatal nutritional supplements in the United States as market share for
the product line grew to 39.4% at the end of the second quarter compared to
33.8% at the end of the comparative prior year quarter. The PreCare(R)
product line contributed $8.0 million and $14.1 million of sales during the
three- and six-month periods, respectively. Sales from our two hematinic
product lines, Chromagen(R) and Niferex(R), increased 111.5% to $8.0 million
and 79.7% to $11.6 million during the three- and six-month periods,
respectively, as both product lines experienced significant growth in new
prescriptions filled. During the quarter, new prescription growth for
Chromagen(R) and Niferex(R) was 142% and 93%, respectively, when compared to
the corresponding prior year quarter. These increases were partially offset
by a $0.5 million and $0.3 million decline in sales from the Micro-K(R)
product line for the three- and six-month periods, respectively.
The $2.3 million increase in specialty generic sales for the quarter
resulted from $2.3 million of incremental sales volume from new product
introductions, primarily in the pain management and cough/cold product
lines. The $5.4 million of increased sales volume for existing products,
principally in the cardiovascular and pain management product lines was
offset by product price erosion that resulted from normal and expected
pricing pressures on certain products primarily in the cardiovascular and
pain management product lines. The $8.3 million growth in sales for the
six-month period resulted from $11.5 million in increased sales volume of
existing products, principally in the cardiovascular and pain management
product lines, coupled with $3.3 million of sales from new product
introductions in the pain management, cough/cold and other product lines.
These increases were offset in part by $6.5 million of product price erosion
on certain cardiovascular, pain management and cough/cold products. During
the first six months of fiscal 2005, we have received ANDA approval for two
strengths of Morphine Sulphate extended release tablets (the generic
equivalent to MS Contin(R)), Carbidopa Levodopa ER tablets (the generic
equivalent to Sinemet(R) CR) and Fluticasone Propionate Cream 0.05% (the
generic equivalent to Cutivate(R)) and we expect additional approvals
throughout the remainder of the fiscal year.
The increases in specialty material product sales for the three- and
six-month periods were primarily due to successful new product launches into
the over-the-counter marketplace.
The decreases in other revenue for the three- and six-month periods resulted
primarily from a smaller contract manufacturing customer base due to
continued de-emphasis of this lower margin operation in our business
strategy.
16
Gross Profit by Segment
- -----------------------
($ IN THOUSANDS)
- -----------------------
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- -----------------------------------
% %
2004 2003 CHANGE 2004 2003 CHANGE
-------- -------- ------ --------- --------- ------
Branded products $19,532 $14,528 34.4% $33,515 $27,403 22.3%
as % of net revenues 87.3% 86.1% 87.5% 86.6%
Specialty generics 31,321 30,789 1.7% 59,269 54,752 8.2%
as % of net revenues 61.3% 63.1% 61.4% 62.0%
Specialty materials 1,836 1,435 27.9% 3,119 2,588 20.5%
as % of net revenues 36.8% 33.5% 34.2% 31.6%
Other (223) 127 NM (1,084) 526 NM
Total gross profit $52,466 $46,879 11.9% $94,819 $85,269 11.2%
as % of total net revenues 66.1% 66.0% 65.2% 65.4%
The increases in gross profit of $5.6 million and $9.6 million for the
three- and six-month periods, respectively, were primarily attributable to
the sales growth experienced by all three of our segments: branded products,
specialty generics, and specialty materials. The gross profit percentage on
a consolidated basis was consistent for both the comparative three- and
six-month periods. Increases in the gross profit percentage for the branded
products segment were offset by gross profit percentage declines in
specialty generics and in other gross profit that primarily resulted from a
smaller contract manufacturing customer base due to continued de-emphasis of
this lower margin operation and higher production costs. The gross profit
percentage increases experienced by the branded products segment were
primarily due to a March 1, 2004 price increase instituted by Ther-Rx on all
of its products. The lower gross profit percentages in the specialty
generics segment reflected the impact of price erosion that primarily
occurred during the second quarter.
Research and Development
- ------------------------
($ IN THOUSANDS)
- ------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ -----------------------------------
% %
2004 2003 CHANGE 2004 2003 CHANGE
--------- --------- ------ -------- -------- ------
Research and development $ 6,201 $ 4,028 53.9% $ 10,825 $ 9,570 13.1%
as % of total net revenues 7.8% 5.7% 7.4% 7.3%
The $2.2 million increase in research and development expense for the
quarter was reflective of increased spending on bioequivalency studies for
products in our internal development pipeline. For the six-month period,
research and development expense increased only $1.3 million due to a
decline in research and development expense during the first quarter since
certain clinical studies were rescheduled for later in the year. Although
the level of research and development expense for the first six months was
below management's expectation, we continue to project that research and
development costs for fiscal 2005 could increase by approximately 20-30%
over fiscal 2004 levels.
17
Selling and Administrative
- --------------------------
($ IN THOUSANDS)
- --------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ -----------------------------------
% %
2004 2003 CHANGE 2004 2003 CHANGE
--------- -------- ------ -------- -------- ------
Selling and administrative $ 25,700 $ 23,171 10.9% $ 49,831 $ 40,893 21.9%
as % of total net revenues 32.4% 32.6% 34.3% 31.4%
The increases in selling and administrative expense of $2.5 million and $8.9
million for the three- and six-month periods, respectively, were due
primarily to greater personnel expenses resulting from expansion of the
branded sales force by 80 specialty sales representatives and sales
management personnel since the year-ago second quarter, an increase in rent,
depreciation and utilities associated with recently added facilities, an
increase in branded marketing expense commensurate with the growth of the
segment and to support the on-going promotion of technology-improved
versions of the Chromagen(R) and Niferex(R) products, higher insurance costs
related to the growth of our business and escalating insurance rates, and an
increase in professional fees associated with implementation of the internal
control provisions of the Sarbanes-Oxley Act of 2002. These increases were
offset in part by a decline in legal expense as several pending legal
matters were resolved during the quarter.
We continue to anticipate that selling and administrative expense for the
remainder of fiscal 2005 could increase by as much as 30% to 40% over fiscal
2004 levels due to a full year of our most recent sales force expansion to
more than 220 sales representatives, litigation expenses associated with
ANDA patent challenges, and the expected approval and launch of a new
women's healthcare branded product planned for the second half of fiscal
2005. To the extent the approval of this product by the FDA is delayed,
anticipated expense spending levels in the latter half of the year would be
diminished.
Litigation
- ----------
($ IN THOUSANDS)
- -----------------------
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ -----------------------------------
% %
2004 2003 CHANGE 2004 2003 CHANGE
--------- ---------- ------ -------- --------- ------
Litigation $ (843) $ (1,700) (50.4)% $ (843) $ (1,700) (50.4)%
as % of total net revenues (1.1)% (2.4)% (0.6)% (1.3)%
During the quarter ended September 30, 2004, we made a settlement payment in
the amount of $16.5 million to resolve all previously pending claims between
KV and Healthpoint without the admission of any liability (see Note 9 in the
accompanying Notes to Consolidated Financial Statements). The settlement was
fully reserved by us in September 2002 and therefore had no impact on our
second quarter earnings. The $(843,000) reflected in "Litigation" for the
three- and six-month periods represents a reversal of the portion of the
Healthpoint litigation reserve that remained after consideration of the
settlement payment and related litigation costs incurred during the six
month period.
In the second quarter of fiscal 2004, we recorded a $3.5 million net
payment, received by us during fiscal 2004, for settlement with a branded
company of our claim that the branded company interfered with our right to a
timely introduction of a generic product in a previous fiscal year. The
impact of this payment was offset in part by an additional litigation
reserve of $1.8 million related to the Healthpoint matter, which
subsequently was settled, for attorney's fees awarded by the court.
18
Interest Expense
- ----------------
($ IN THOUSANDS)
- -----------------------
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ -----------------------------------
% %
2004 2003 CHANGE 2004 2003 CHANGE
--------- --------- ------ --------- --------- ------
Interest expense $ 1,588 $ 1,700 (6.6)% $ 3,034 $ 2,785 8.9%
as % of total net revenues 2.0% 2.4% 2.1% 2.1%
The decrease in interest expense for the quarter was primarily due to an
increase in the level of capitalized interest recorded on capital projects
that we have in process. The increase in interest expense for the six-month
period resulted primarily from a full first quarter's interest accrual on
the $200.0 million of Convertible Subordinated Notes issued in May 2003.
Interest and Other Income
- -------------------------
($ IN THOUSANDS)
- -------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ -----------------------------------
% %
2004 2003 CHANGE 2004 2003 CHANGE
--------- --------- ------ --------- -------- ------
Interest and other income $ 919 $ 411 123.6% $ 1,432 $ 773 85.3%
as % of total net revenues 1.2% 0.6% 1.0% 0.6%
The increase in interest and other income for the quarter was primarily due
to income generated from the purchase of income tax credits coupled with the
impact of recording a payment received by us from another pharmaceutical
company in connection with our agreement to change the trademark of one of
our generic products. The increase in interest and other income for the
six-month period was also impacted by a full first quarter's investment of
the $144.2 million of net proceeds from the May 2003 Convertible
Subordinated Notes offering in short-term, highly liquid investments.
Provision for Income Taxes
- --------------------------
($ IN THOUSANDS)
- --------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ -----------------------------------
% %
2004 2003 CHANGE 2004 2003 CHANGE
--------- --------- ------ --------- --------- ------
Provision for income taxes $ 6,915 $ 6,737 2.6% $ 10,897 $ 11,456 (4.9)%
Effective tax rate 35.3% 35.5% 35.0% 35.5%
The declines in the effective tax rate for the three- and six-month periods
were due to the impact of various tax planning initiatives, coupled with the
generation of income tax credits at both the Federal and state levels.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and working capital were $195.1 million and $301.2
million, respectively, at September 30, 2004, compared to $226.9 million and
$306.6 million, respectively, at March 31, 2004. Internally generated funds
from product sales continued to be the primary source of operating capital
used in the funding of our businesses. Net cash flow from operating
activities was $0.2 million for the six months ended September 30, 2004.
Cash flow from operations was favorably impacted by net income adjusted for
non-cash items, but was largely offset by a reduction in the $18.3 million
reserve attributable to settlement of the Healthpoint litigation, an
increase in receivables associated with a greater concentration of sales for
specialty generics and specialty materials in the final month of the
quarter, and the impact of KV being in an income tax receivable position at
quarter end.
Net cash flow used in investing activities consisted of capital expenditures
of $32.5 million for the six months ended September 30, 2004 compared to
$8.1 million for the corresponding prior year period, which excluded the
$8.8 million cost of a building we purchased in April 2003 with proceeds
from a term loan. Capital expenditures during the first six months of fiscal
2005 were primarily for purchasing machinery and equipment to upgrade and
19
expand our pharmaceutical manufacturing and distribution capabilities, and
for other building renovation projects. Other investing activities for the
corresponding prior year quarter also included a cash payment of $14.3
million made in April 2003 for the Niferex(R) product line. We continue to
expect our capital expenditures in fiscal 2005 to increase by up to $50.0
million over fiscal 2004 levels as we ramp up our manufacturing,
distribution and laboratory capabilities and expand other facilities needed
for planned growth over the next five to seven years.
Our debt balance was $218.3 million at September 30, 2004 compared to $218.7
million at March 31, 2004. In May 2003, we issued $200.0 million in
Convertible Subordinated Notes that are convertible, under certain
circumstances, into shares of our Class A Common Stock at an initial
conversion price of $23.01 per share. The Convertible Subordinated Notes
bear interest at a rate of 2.50% and mature on May 16, 2033. We are also
obligated to pay contingent interest at a rate equal to 0.5% per annum
during any six-month period commencing May 16, 2006, if the average trading
price of the Notes per $1,000 principal amount for the five trading day
period ending on the third trading day immediately preceding the first day
of the applicable six-month period equals $1,200 or more. We may redeem some
or all of the Convertible Subordinated Notes at any time on or after May 21,
2006, at a redemption price, payable in cash, of 100% of the principal
amount of the Convertible Subordinated Notes, plus accrued and unpaid
interest (including contingent interest, if any) to the date of redemption.
Holders may require us to repurchase all or a portion of their Convertible
Subordinated Notes on May 16, 2008, 2013, 2018, 2023 and 2028, or upon a
change in control, as defined in the indenture governing the Convertible
Subordinated Notes, at 100% of the principal amount of the Convertible
Subordinated Notes, plus accrued and unpaid interest (including contingent
interest, if any) to the date of repurchase, payable in cash. The
Convertible Subordinated Notes are subordinate to all of our existing and
future senior obligations.
We have a credit agreement with a bank that provides for a revolving line of
credit for borrowing up to $65 million. The credit agreement provides for a
$40 million unsecured revolving line of credit along with an unsecured
supplemental credit line of $25 million for financing acquisitions. The $40
million unsecured revolving line of credit expires in October 2006 and the
unsecured supplemental credit line of $25 million expires in December 2004.
At September 30, 2004, we had no cash borrowings outstanding under either
credit facility.
We believe our cash and cash equivalents balance, cash flows from
operations, funds available under our credit facilities, will be adequate to
fund operating activities for the presently foreseeable future, including
the payment of short-term and long-term debt obligations, capital
improvements, research and development expenditures, product development
activities and expansion of marketing capabilities for the branded
pharmaceutical business. In addition, we continue to examine opportunities
to expand our business through the acquisition of or investment in
companies, technologies, product rights, research and development and other
investments that are compatible with our existing businesses. We intend to
use our available cash to help in funding any acquisitions or investments.
As such, cash has been invested in short-term, highly liquid instruments. We
also may use funds available under our credit facility, or financing sources
that subsequently become available, including the future issuances of
additional debt or equity securities, to fund these acquisitions or
investments. If we were to fund one or more such acquisitions or
investments, our capital resources, financial condition and results of
operations could be materially impacted in future periods.
INFLATION
Inflation may apply upward pressure on the cost of goods and services used
by us in the future. However, we believe that the net effect of inflation on
our operations during the past three years has been minimal. In addition,
changes in the mix of products sold and the effect of competition has made a
comparison of changes in selling prices less meaningful relative to changes
in the overall rate of inflation over the past three years.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements are presented on the basis of U.S.
generally accepted accounting principles. Certain of our accounting policies
are particularly important to the portrayal of our financial position and
results of
20
operations and require the application of significant judgment by our
management. As a result, these policies are subject to an inherent degree of
uncertainty. In applying these policies, we make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosures. We base our estimates and judgments on
historical experience, the terms of existing contracts, observance of trends
in the industry, information that is obtained from customers and outside
sources, and on various other assumptions that are believed to be reasonable
and appropriate under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Although we believe that
our estimates and assumptions are reasonable, actual results may differ
significantly from our estimates. Changes in estimates and assumptions based
upon actual results may have a material impact on our results of operations
and/or financial condition. Our critical accounting policies are described
below.
Revenue and Provision for Sales Returns and Allowances. When we sell our
- -------------------------------------------------------
products, we reduce the amount of revenue we recognize from such sale by an
estimate of future product returns and sales allowances. Sales allowances
include cash discounts, rebates, chargebacks, and other similar expected
future payments relating to product sold in the current period. Factors that
are considered in our estimates of future product returns and sales
allowances include historical payment experience in relationship to
revenues, estimated customer inventory levels, and current contract prices
and terms with both direct and indirect customers. If actual future payments
for product returns and sales allowances exceed the estimates we made at the
time of sale, our financial position, results of operations and cash flows
would be negatively impacted.
The provision for chargebacks is the most significant and complex estimate
used in the recognition of revenue. We establish contract prices for
indirect customers who are supplied by our wholesale customers. A chargeback
represents the difference between our invoice price to the wholesaler and
the indirect customer's contract price, which is lower. We credit the
wholesaler for purchases by indirect customers at the lower price.
Accordingly, we record these chargebacks at the time we recognize revenue in
connection with our sales to wholesalers. Provisions for estimating
chargebacks are calculated primarily using historical chargeback experience,
actual contract pricing and estimated wholesaler inventory levels. We
continually monitor our assumptions giving consideration to estimated
wholesaler inventory levels and current pricing trends and make adjustments
to these estimates when we believe that the actual chargeback amounts
payable in the future will differ from our original estimates.
Allowance for Inventories. Inventories consist of finished goods held for
- --------------------------
distribution, raw materials and work in process. Our inventories are stated
at the lower of cost or market, with cost determined on the first-in,
first-out basis. In evaluating whether inventory is to be stated at the
lower of cost or market, we consider such factors as the amount of inventory
on hand and in the distribution channel, estimated time required to sell
existing inventory, remaining shelf life and current and expected market
conditions, including levels of competition. We establish reserves, when
necessary, for slow-moving and obsolete inventories based upon our
historical experience and management's assessment of current product demand.
Intangible Assets and Goodwill. Our intangible assets consist of product
- -------------------------------
rights, license agreements and trademarks resulting from product
acquisitions and legal fees and similar costs relating to the development of
patents and trademarks. Intangible assets that are acquired are stated at
cost, less accumulated amortization, and are amortized on a straight-line
basis over their estimated useful lives. Upon approval, costs associated
with the development of patents and trademarks are amortized on a
straight-line basis over estimated useful lives ranging from five to 17
years. We determine amortization periods for intangible assets that are
acquired based on our assessment of various factors impacting estimated
useful lives and cash flows of the acquired products. Such factors include
the product's position in its life cycle, the existence or absence of like
products in the market, various other competitive and regulatory issues, and
contractual terms. Significant changes to any of these factors may result in
a reduction in the intangible asset's useful life and an acceleration of
related amortization expense.
We assess the impairment of intangible assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Some
factors we consider important which could trigger an impairment review
include the following: (1) significant underperformance relative to expected
historical or projected future operating results; (2) significant changes in
the manner of our use of the acquired assets or the strategy for our overall
business; and (3) significant negative industry or economic trends.
21
When we determine that the carrying value of an intangible asset may not be
recoverable based upon the existence of one or more of the above indicators
of impairment, we first perform an assessment of the asset's recoverability.
Recoverability is determined by comparing the carrying amount of an
intangible asset against an estimate of the undiscounted future cash flows
expected to result from its use and eventual disposition. If the sum of the
expected future undiscounted cash flows is less than the carrying amount of
the intangible asset, an impairment loss is recognized based on the excess
of the carrying amount over the estimated fair value of the intangible asset.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is limited to fluctuating interest rates
associated with variable rate indebtedness that is subject to interest rate
changes.
Advances to us under our credit facilities bear interest at a rate that
varies consistent with increases or decreases in the publicly announced
prime rate and/or the LIBOR rate with respect to LIBOR-related loans, if
any. A material increase in such rates could significantly increase
borrowing expenses. We did not have any cash borrowings under our credit
facilities at September 30, 2004.
In May 2003, we issued $200.0 million of Convertible Subordinated Notes. The
interest rate on the Convertible Subordinated Notes is fixed at 2.50% and
not subject to market interest rate changes.
In April 2003, we entered into an $8.8 million term loan secured by a
building under a floating rate loan with a bank. We also entered into an
interest rate swap agreement with the same bank, which fixed the interest
rate of the building mortgage at 5.31% per annum for the term of the loan.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our Exchange Act
reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to the Company's management, including our
principal executive officer and principal financial officer, as appropriate,
to allow timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognizes
that any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our
management, including our principal executive officer and principal
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on the foregoing, our principal
executive officer and principal financial officer concluded that our
disclosure controls and procedures were effective as of the end of the
period covered by this report.
There have been no significant changes in our internal control over
financial reporting or in other factors that have materially affected, or
are reasonably likely to materially affect, our internal controls over
financial reporting in the second quarter of fiscal year 2005.
22
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ETHEX Corporation (ETHEX) was a defendant in a lawsuit styled Healthpoint,
Ltd. v. ETHEX Corporation, filed in federal court in San Antonio, Texas and
was also named as a defendant in a second lawsuit brought by Healthpoint.
During the quarter ended September 30, 2004, we made a settlement payment in
the amount of $16.5 million to resolve all previously pending claims between
us and Healthpoint without the admission of any liability. The settlement
was fully reserved by us in September 2002 and therefore had no impact on
our earnings for the three months ended September 30, 2004. The $(843,000)
reflected in the litigation line item on our consolidated income statements
for the three and six months ended September 30, 2004 represents reversal of
the portion of the Healthpoint litigation reserve that remained after
consideration of the settlement payment and related litigation costs
incurred during the second quarter.
The Company and ETHEX are named as defendants in a case brought by CIMA
LABS, Inc. and Schwarz Pharma, Inc. and styled CIMA LABS, Inc. et. al. v. KV
Pharmaceutical Company et. al. filed in federal court in Minnesota. It is
alleged that the Company and ETHEX infringed on a CIMA patent in connection
with the manufacture and sale of Hyoscyamine Sulfate Orally Dissolvable
Tablets, 0.125 mg. The court has denied the plaintiff's motion for a
preliminary injunction, which allows ETHEX to continue marketing the product
during the pendancy of the subject lawsuit and calls into question CIMA's
and Schwarz's ability to prevail in the lawsuit. We have filed several
motions for summary judgment that have yet to be decided, requesting that
the court rule that the relevant patent is unenforceable, invalid or not
infringed. CIMA and Schwarz have opposed these motions and filed a summary
judgment motion seeking the court to rule that the patent is valid. We
believe we have meritorious defenses and will vigorously defend the case;
however, we cannot give any assurance that we will prevail.
The Company and ETHEX are named as defendants in a case brought by Solvay
Pharmaceuticals, Inc. and styled Solvay Pharmaceuticals, Inc. v. ETHEX
Corporation, filed in federal court in Minnesota. In general, Solvay alleges
that ETHEX's comparative promotion of its Pangestyme(TM) CN 10 and
Pangestyme(TM) CN 20 products to Solvay's Creon(R) 10 and Creon(R) 20
products resulted in false advertising and misleading statements under
various federal and state laws, and constituted unfair and deceptive trade
practices. Discovery is active. We believe we have meritorious defenses and
will vigorously defend the case; however, we cannot give any assurance that
we will prevail.
We previously distributed several low volume pharmaceutical products that
contained phenylpropanolamine, or PPA, and that were discontinued in 2000
and 2001. We are presently named a defendant in a product liability lawsuit
in federal court in Mississippi involving PPA. The suit originated out of a
case, Virginia Madison, et al. v. Bayer Corporation, et al. The original
suit was filed on December 23, 2002, but was not served on us until February
2003. The case was originally filed in the Circuit Court of Hinds County,
Mississippi, and was removed to the United States District Court for the
Southern District of Mississippi by then co-defendant Bayer Corporation. The
case has been transferred to a Judicial Panel on Multi-District Litigation
for PPA claims sitting in the Western District of Washington. The claims
against us have now been segregated into a lawsuit brought by Johnny Fulcher
individually and on behalf of the wrongful death beneficiaries of Linda
Fulcher, deceased, against KV. It alleges bodily injury, wrongful death,
economic injury, punitive damages, loss of consortium and/or loss of
services from the use of our distributed pharmaceuticals containing PPA that
have since been discontinued and/or reformulated to exclude PPA. In May
2004, the case was dismissed with prejudice by the U.S. District Court for
the Western District of Washington for a failure to timely file an
individual complaint as required by certain court orders. The plaintiff
filed a request for reconsideration which was opposed and subsequently
denied by the court in June 2004. In July 2004, the plaintiffs filed a
notice of appeal of the dismissal. We intend to oppose this appeal.
Management believes that we may have substantial defenses to the underlying
claims, though the ultimate outcome of this case and the potential effect
cannot be determined.
Our product liability coverage for PPA claims expired for claims made after
June 15, 2002. Although we renewed our product liability coverage for
coverage after June 15, 2002, that policy excludes future PPA claims in
accordance with the standard industry exclusion. Consequently, as of June
15, 2002, we have provided for legal defense costs and indemnity payments
involving PPA claims on a going forward basis, including the Mississippi
lawsuit that was filed after June 15, 2002. Moreover, we may not be able to
obtain product liability insurance in the future for PPA claims with
adequate coverage limits at commercially reasonable prices for subsequent
periods.
23
From time to time in the future, we may be subject to further litigation
resulting from products containing PPA that it formerly distributed. We
intend to vigorously defend any claims that may be raised in the current and
future litigation; however, we cannot give any assurances we will prevail.
We have been advised that one of our former distributor customers is being
sued in Florida state court captioned Darrian Kelly v. K-Mart et. al. for
personal injury allegedly caused by ingestion of K-Mart diet caplets that
are alleged to have been manufactured by us and to contain PPA. The
distributor has tendered defense of the case to us and has asserted a right
to indemnification for any financial judgment it must pay. We previously
notified our product liability insurer of this claim in 1999, and we
recently sent a letter to the insurer formally demanding that it take over
our defense. While we do not believe this lawsuit will have a material
adverse effect on our results of operations or financial position, at this
point, we have not been provided significant information on the underlying
claims and alleged damages.
On September 25, 2003, the Commonwealth of Massachusetts filed Commonwealth
of Massachusetts v. Mylan Laboratories, Inc. et al in Massachusetts federal
court, against ETHEX Corp. and 12 other manufacturers of generic
pharmaceutical products. The complaint alleges, among other things, that the
defendants reported inflated pricing information for their drugs to data
reporting services, and that Massachusetts relied on this pricing data in
setting reimbursement rates under the Medicaid program. The complaint also
alleges that Massachusetts received rebates from the defendants under the
Medicaid Drug Rebate Program that were materially less than that to which
Massachusetts was entitled. Massachusetts seeks to recover from the
defendants the amount that it believes it overpaid and the amount it is owed
in rebates, based on claims under Massachusetts and federal law. The case is
in its early stages, and fact discovery has not yet begun. ETHEX is
vigorously defending the litigation; however, it cannot give any assurances
that it will prevail.
On or about August 5, 2004, the City of New York filed a lawsuit in U.S.
District Court for the Southern District of New York against 44
manufacturers of pharmaceuticals, including ETHEX. The complaint alleges
that the defendants inflated the average wholesale prices used to calculate
Medicaid reimbursements and that by reporting inflated pricing information
they underpaid Medicaid rebates. The case is in its early stages and fact
discovery has not yet begun. ETHEX intends to vigorously defend its
interests; however, it cannot give any assurances that it will prevail.
It is possible that a number of jurisdictions may have commenced
investigations into the generic and branded pharmaceutical industry, at
large, regarding pricing and price reporting practices that may or may not
have an effect on the Company. The Company and/or its affiliates have been
notified that several jurisdictions are investigating such matters.
From time to time, we are involved in various other legal proceedings in the
ordinary course of our business. These legal proceedings include various
patent infringement actions brought by potential competitors with respect to
products the Company proposes to market and for which we have filed
Abbreviated New Drug Applications and provided notice of certification
required under the provisions of the Hatch-Waxman Act. While it is not
feasible to predict the ultimate outcome of such other proceedings, we
believe that the ultimate outcome of such other proceedings will not have a
material adverse effect on our results of operations or financial position.
There are uncertainties and risks associated with all litigation and there
can be no assurances that we will prevail in any particular litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our 2004 annual meeting of shareholders was held on September 9, 2004. Of
49,083,906 shares of Class A and Class B Common Stock issued, outstanding
and eligible to be voted at the meeting, holders of 42,230,429 shares,
constituting a quorum, were represented in person or by proxy at the
meeting. One matter was submitted to a vote of security holders at the
meeting, the election of three Class C director nominees to our board of
directors, each to continue in office until the year 2007. Upon tabulation
of votes cast, it was determined that the nominees had been elected. The
voting results are set forth below:
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CLASS C DIRECTOR NOMINEES
- -------------------------
ABSTENTIONS AND
NAME FOR WITHHOLD BROKER NON-VOTES
- ---- --- -------- ----------------
Jean M. Bellin 15,639,366 22,194 48,627
Norman D. Schellenger 15,634,051 27,509 48,627
Terry B. Hatfield 15,639,366 22,194 48,627
Because we have a staggered board, the terms of office of the
following named Class A and Class B directors continue after the meeting:
CLASS A (TO CONTINUE IN OFFICE UNTIL 2005)
------------------------------------------
Kevin S. Carlie
Marc S. Hermelin
David A. Van Vliet
CLASS B (TO CONTINUE IN OFFICE UNTIL 2006)
------------------------------------------
Victor M. Hermelin
Alan G. Johnson
David S. Hermelin
ITEM 5. OTHER ITEMS.
On November 5, 2004, the Company, at the recommendation of the
Compensation Committee, extended the employment agreement with Marc S.
Hermelin, Vice Chairman and CEO to March 31, 2010. Modifications to the
definition of net income and refinements to retirement and health benefits
were made.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. See Exhibit Index.
(b) Report on Form 8-K/A, filed on August 31, 2004,
reporting events under Items 4.01 and 9.01. Report on
Form 8-K, filed on August 19, 2004, reporting events
under items 4 and 9. Report on Form 8-K, filed on
July 17, 2004, reporting events under items 4 and
7(c).
25
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
K-V PHARMACEUTICAL COMPANY
Date: November 9, 2004 By /s/ Marc S. Hermelin
---------------- ---------------------------------
Marc S. Hermelin
Vice Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: November 9, 2004 By /s/ Gerald R. Mitchell
---------------- ---------------------------------
Gerald R. Mitchell
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10(a) Amendment to the employment agreement between the Company
and Marc S. Hermelin, Vice-Chairman and CEO, dated
November 5, 2004.
10(b) Employment agreement and amendments thereto between the
Company and David S. Hermelin, Director and Vice President,
Corporate Strategy and Operations Analysis.
31.1 Certification of Chief Financial Officer.
31.2 Certification of Chief Executive Officer.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
27