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