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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2003
Commission file number 1-9601
K-V PHARMACEUTICAL COMPANY
2503 South Hanley Road
St. Louis, MO 63144
(314) 645-6600
Incorporated in Delaware IRS Employer identification No. 43-0618919
Securities Registered Pursuant to Section 12(b) of the Act:
Class A Common Stock, par value $.01 per share New York Stock Exchange
Class B Common Stock, par value $.01 per share New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
7% Cumulative Convertible Preferred, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes X No
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The aggregate market value of the 19,993,164 shares of Class A and 4,900,849
shares of Class B Common Stock held by nonaffiliates of the registrant as of
September 30, 2002, the last business day of the registrant's most recently
completed second fiscal quarter, was $377,870,800 and $92,626,046,
respectively. As of June 4, 2003, the registrant had outstanding 21,750,660
and 10,604,679 shares of Class A and Class B Common Stock, respectively,
exclusive of treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Portions of the definitive proxy statement of the Registrant (to
be filed pursuant to Regulation 14A for Registrant's 2003 Annual Meeting of
Shareholders, which involves the election of directors), are incorporated by
reference into Items 10, 11, 12 and 13 to the extent stated in such items.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Form 10-K, including the documents that we incorporate herein by
reference, contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Any statements about our
expectations, beliefs, plans, objectives, assumptions or future events or
performance are not historical facts and may be forward-looking. These
statements are often, but not always, made through the use of words or
phrases such as "anticipate," "estimate," "plans," "projects," "continuing,"
"ongoing," "expects," "management believes," "we believe," "we intend" and
similar words or phrases. Accordingly, these statements involve estimates,
assumptions and uncertainties that could cause actual results to differ
materially from those expressed in them. Any forward-looking statements are
qualified in their entirety by reference to the factors discussed throughout
this Form 10-K.
Factors that could cause actual results to differ materially from the
forward-looking statements include, but are not limited to, the following:
(1) the degree to which we are successful in developing new products and
commercializing products under development; (2) the degree to which we are
successful in acquiring new pharmaceutical products, drug delivery
technologies and/or companies that offer these properties; (3) the
difficulty of predicting FDA approvals; (4) acceptance and demand for new
pharmaceutical products; (5) the impact of competitive products and pricing;
(6) the availability of raw materials; (7) the regulatory environment; (8)
fluctuations in operating results; (9) the difficulty of predicting the
pattern of inventory movements by our customers; (10) the impact of
competitive response to our efforts to leverage our brand power with product
innovation, promotional programs, and new advertising; (11) the risks
detailed from time to time in our filings with the Securities and Exchange
Commission and detailed in this Form 10-K; (12) the availability of
third-party reimbursement for our products; and (13) our dependence on sales
to a limited number of large pharmacy chains and wholesale drug distributors
for a large portion of our total net sales.
Because the factors referred to above, as well as the statements included
under the captions "Narrative Description of Business," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and elsewhere in this Form 10-K, could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by us or on our behalf, you should not place undue reliance
on any forward-looking statements. Further, any forward-looking statement
speaks only as of the date on which it is made and, unless applicable law
requires to the contrary, we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date
on which the statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for us
to predict which factors will arise, when they will arise and/or their
effects. In addition, we cannot assess the impact of each factor on our
business or financial condition or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from
those contained in any forward-looking statements.
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ITEM 1. DESCRIPTION OF BUSINESS
-----------------------
(a) GENERAL DEVELOPMENT OF BUSINESS
-------------------------------
Generally, when we use the words "we," "our," "us" or "our company"
we are referring to K-V Pharmaceutical Company and its wholly-owned
subsidiaries, including Ther-Rx Corporation, ETHEX Corporation and
Particle Dynamics, Inc.
We were incorporated under the laws of Delaware in 1971 as a
successor to a business originally founded in 1942. Victor M.
Hermelin, our Chairman and founder, invented and obtained initial
patents for early controlled release and enteric coating which
became part of our core business and a platform for future drug
delivery emphasis.
We develop advanced drug delivery technologies which enhance the
effectiveness of new therapeutic agents, existing pharmaceutical
products and nutritional supplements. We have developed and
patented a wide variety of drug delivery and formulation
technologies which are primarily focused in four principal areas:
SITE RELEASE(R) bioadhesives; tastemasking; oral controlled
release; and quick dissolving tablets. We incorporate these
technologies in the products we market to control and improve the
absorption and utilization of active pharmaceutical compounds. In
1990, we established a generic/non-branded marketing capability
through a wholly-owned subsidiary, ETHEX Corporation ("ETHEX"),
which makes us one of the only drug delivery research and
development companies that also markets "technologically
distinguished" generic/non-branded products. In 1999, we
established a wholly-owned subsidiary, Ther-Rx Corporation
("Ther-Rx"), to market branded pharmaceuticals directly to
physician specialists.
Our wholly-owned subsidiary, Particle Dynamics, Inc. ("PDI"), was
acquired in 1972. Through PDI, we develop and market specialty
value-added raw materials, including drugs, directly compressible
and microencapsulated products, and other products used in the
pharmaceutical, nutritional, food, personal care and other markets.
(b) SIGNIFICANT BUSINESS DEVELOPMENTS
---------------------------------
During July 2002, we completed a public offering of approximately
3.3 million shares of Class A common stock. Net proceeds to us were
$72.4 million, after deducting underwriting discounts, commissions
and offering expenses. The proceeds from the offering are being
used for general corporate purposes, including product
acquisitions, research and development activities and working
capital.
On March 31, 2003, we completed two acquisitions of an aggregate of
nine pharmaceutical products for a total cost of approximately
$41.3 million. The acquisitions include two leading lines of
hematinic products, Chromagen(R) and Niferex(R), and the related
line of StrongStart(R) branded prenatal vitamins, a category in
which we are a market leader under the PreCare(R) brand. Current
annual revenues of the acquired products are approximately $16.0
million. Similar to our strategy with other acquired products, we
plan to make formulation enhancements to the acquired product
lines.
In April 2003, we purchased a building for $8.8 million. The
facility consists of approximately 275,000 square feet of office,
production, distribution and warehouse space. The purchase of the
building was financed by a term loan secured by the property. The
building mortgage bears interest at 5.30% and is due in April 2008.
During May 2003, we completed the issuance of $200.0 million of
Contingent Convertible Subordinated Notes (the "Notes") that are
convertible, under certain circumstances, into shares of our Class
A common stock at an initial conversion price of $34.51 per share.
The Notes bear interest at a rate of 2.50% and mature on May 16,
2033. The net proceeds to us were approximately $194.0 million,
after deducting underwriting discounts, commissions and offering
expenses. The proceeds from the offering were used to purchase
$50.0 million of our
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Class A common stock, with the remaining proceeds to be used to fund
future acquisitions of products, technologies and businesses, and for
general corporate purposes.
(c) INDUSTRY SEGMENTS
-----------------
We operate principally in three industry segments, consisting of
branded products marketing, specialty generics marketing and
specialty raw materials marketing. Revenues are derived primarily
from directly marketing our own technologically distinguished
generic/non-branded and brand-name products. Revenues may also be
received in the form of licensing revenues and/or royalty payments
based upon a percentage of the licensee's sales of the product, in
addition to manufacturing revenues, when marketing rights to
products using our advanced drug delivery technologies are licensed
(see Note 17 to our consolidated financial statements).
(d) NARRATIVE DESCRIPTION OF BUSINESS
---------------------------------
OVERVIEW
We are a fully integrated specialty pharmaceutical company that
develops, acquires, manufactures and markets technologically
distinguished branded and generic/non-branded prescription
pharmaceutical products. We have a broad range of dosage form
capabilities including tablets, capsules, creams, liquids and
ointments. We conduct our branded pharmaceutical operations through
Ther-Rx Corporation and our generic/non-branded pharmaceutical
operations through ETHEX Corporation, which focuses principally on
technologically distinguished generic/non-branded products in
multiple therapeutic categories, with a particular emphasis on the
cardiovascular, women's health, pain management and respiratory
areas. Through Particle Dynamics, Inc., we also develop,
manufacture and market technologically advanced, value-added raw
material products for the pharmaceutical, nutritional, personal
care, food and other markets.
We have a broad portfolio of drug delivery technologies which we
leverage to create technologically distinguished brand name and
specialty generic/non-branded products. We have developed and
patented 15 drug delivery and formulation technologies primarily in
four principal areas: SITE RELEASE(R) bioadhesives, oral controlled
release, tastemasking, and quick dissolving tablets. We incorporate
these technologies in the products we market to control and improve
the absorption and utilization of active pharmaceutical compounds.
These technologies provide a number of benefits, including reduced
frequency of administration, reduced side effects, improved drug
efficacy, enhanced patient compliance and improved taste.
We have a long history of developing drug delivery technologies. In
the 1950's, we received what we believe to be the first patents for
sustained release delivery systems which enhance the convenience
and effectiveness of pharmaceutical products. In our early years,
we used our technologies to develop products for other drug
marketers. Our technologies have been used in several well known
products including Actifed(R) 12-hour, Sudafed(R) SA, Centrum
Jr.(R) and Kaopectate(R) Chewable. Since the 1990's, we have chosen
to focus our drug development expertise on internally developed
products for our branded and generic/non-branded pharmaceutical
businesses. For example, since its inception in March 1999, our
Ther-Rx business has launched five internally developed branded
pharmaceutical products, all of which incorporate our drug delivery
technologies. In addition, most of the internally developed
generic/non-branded products marketed by our ETHEX business
incorporate one or more of our drug delivery technologies.
Our drug delivery technology allows us to differentiate our
products in the marketplace, both in the branded and
generic/non-branded pharmaceutical areas. We believe that this
differentiation provides substantial competitive advantages for our
products, allowing us to establish a strong record of growth and
profitability and a leadership position in certain segments of our
industry. From 1998 to March 31, 2003, we have grown net revenues
and net income at compounded annual growth rates of 20.2% and
20.0%, respectively. Ther-Rx, which was established in 1999, has
grown substantially since its inception and continues to gain
market share in its women's healthcare family of products. Of more
than 100 products sold by our ETHEX subsidiary, approximately 58%
were
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identified as the leading product and approximately 90% were
identified as the first or second leading products in their
respective generic categories by IMS America, an independent
healthcare market research firm.
THER-RX -- OUR BRAND NAME PHARMACEUTICAL BUSINESS
We established our Ther-Rx business in 1999 to market brand name
pharmaceutical products which incorporate our proprietary
technologies. Since its inception, Ther-Rx has introduced 16
products, of which 11 were acquired and five were developed
internally using our proprietary technologies. Ther-Rx generated
$43.7 million of net revenues during fiscal 2003, which represented
17.8% of our total net revenues.
We established our women's healthcare franchise through the August
1999 acquisition of PreCare(R), a prescription prenatal vitamin,
from UCB Pharma, Inc. Since the acquisition, Ther-Rx has
reformulated the original product using proprietary technologies,
and subsequently has launched four internally developed products as
extensions to the PreCare(R) product line. Building upon the
PreCare(R) acquisition, we have developed a line of proprietary
products which makes Ther-Rx the leading provider of branded
prescription prenatal vitamins in the United States.
The first of our internally developed, patented line extensions to
PreCare(R) was PreCare(R) Chewables, the world's first prescription
chewable prenatal vitamin. PreCare(R) Chewables addressed a
longstanding challenge to improve pregnant women's compliance with
prenatal vitamin regimens by alleviating the difficulty that
patients experience in swallowing large prenatal pills. Ther-Rx's
second internally developed product, PremesisRx(TM), is an
innovative prenatal prescription product that incorporates our
controlled release Vitamin B6. This product is designed for use in
conjunction with a physician-supervised program to reduce
pregnancy-related nausea and vomiting, which is experienced by 50%
to 90% of women. The third product, PreCare(R) Conceive(TM), is the
first single nutritional pre-conception supplement designed for use
by both men and women. The fourth product, PrimaCare(TM), is the
first prescription prenatal/postnatal nutritional supplement with
essential fatty acids specially designed to help provide
nutritional support for women during pregnancy, postpartum recovery
and throughout the childbearing years. All of the products in the
PreCare(R) product line have been formulated to contain 1 mg. of
folic acid, which has been shown to reduce the incidence of fetal
neural tube defects by at least 50%.
In June 2000, Ther-Rx launched its first New Drug Application, or
NDA, approved product, Gynazole-1(R), the only one-dose
prescription cream treatment for vaginal yeast infections.
Gynazole-1(R) incorporates our patented drug delivery technology,
VagiSite(R), the only clinically proven and Federal Food and Drug
Administration, or FDA, approved controlled release bioadhesive
system. Since its launch, the product has gained an 18% market
share in the U.S. prescription vaginal antifungal cream market. In
addition, we have entered into four licensing agreements for the
right to market Gynazole-1(R) in 49 countries outside of the United
States. We expect to continue to license marketing rights for
Gynazole-1(R) in additional international markets.
Ther-Rx's cardiovascular product line consists of Micro-K(R), an
extended-release potassium supplement used to replenish
electrolytes, primarily in patients who are on medication which
depletes the levels of potassium in the body. We acquired
Micro-K(R) in March 1999 from the pharmaceutical division of Wyeth.
On March 31, 2003, we completed two acquisitions of an aggregate of
nine pharmaceutical products for a total cost of approximately
$41.3 million. The acquisitions include two leading lines of
hematinic products, Chromagen(R) and Niferex(R), and the related
line of StrongStart(R) branded prenatal vitamins, a category in
which Ther-Rx is already a market leader under the PreCare(R)
banner. Current annual revenues of the acquired products are
approximately $16.0 million. Similar to our strategy with other
acquired products, we plan to make formulation enhancements to the
acquired product lines.
Ther-Rx has approximately 160 specialty sales representatives.
Ther-Rx's sales force focuses on physician specialists who are
identified through available market research as frequent
prescribers of our prescription
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products. Ther-Rx also has a corporate sales and marketing management
team dedicated to planning and managing Ther-Rx's sales and marketing
efforts.
ETHEX -- OUR TECHNOLOGICALLY DISTINGUISHED GENERIC/NON-BRANDED DRUG
BUSINESS
We established ETHEX, currently our largest business segment, in
1990 to utilize our portfolio of drug delivery systems to develop
and market hard-to-copy generic/non-branded pharmaceuticals. We
believe many of our ETHEX products enjoy higher gross margins due
to our approach of selecting products that can take advantage of
our proprietary drug delivery systems and our specialty
manufacturing capabilities. These advantages act as barriers to
entry which limit competition and reduce the rate of price erosion
typically experienced in the generic market. ETHEX's net revenues
were $179.7 million for fiscal 2003, which represented 73.4% of our
total net revenues.
We have incorporated our proprietary drug delivery technology in
many of our generic/non branded pharmaceutical products. For
example, we have included METER RELEASE(R), one of our proprietary
controlled release technologies, into the only generic equivalent
to Norpace(R) CR, an antiarrhythmic that is taken twice daily.
Further, we have used our KV/24(R) once daily technology in the
generic equivalent to IMDUR(R), a cardiovascular drug that is taken
once per day. In addition, utilizing our specialty manufacturing
expertise and a sublingual delivery system, we produced and
marketed the first non-branded alternative to Nitrostat(R)
sublingual, an anti-angina product which historically has been
difficult to manufacture.
To capitalize on ETHEX's unique product capabilities, we continue
to expand our ETHEX product portfolio. Over the past two years, we
have introduced more than 25 new generic/non-branded products and
have a number of products currently in development to be marketed
by ETHEX. Since January 1, 2002, we have received seven new
Abbreviated New Drug Application, or ANDA, approvals and have
several currently pending.
In addition to our internal marketing efforts, we have licensed the
exclusive rights to co-develop and market nine products with other
drug delivery companies. These products will be generic equivalents
to brand name products with aggregate annual sales totaling
approximately $2.5 billion and are expected to be launched at
various times beginning in fiscal 2005 and continuing through
fiscal 2007.
ETHEX's current product line consists of more than 100 products, of
which approximately 58% were identified as the leading product and
approximately 90% were identified as the first or second leading
products in their respective generic categories by IMS America, an
independent healthcare market research firm.
ETHEX primarily focuses on the therapeutic categories of
cardiovascular, women's health, pain management and respiratory,
leveraging our expertise in developing and manufacturing products
in these areas. In addition, we pursue opportunities outside of
these categories where we also may differentiate our products based
upon our proprietary drug delivery systems and our specialty
manufacturing expertise.
CARDIOVASCULAR. ETHEX currently markets over 30 products in its
cardiovascular line, including products to treat angina, arrhythmia
and hypertension, as well as for potassium supplementation. In
addition to marketing the generic versions of IMDUR(R), Norpace
CR(R), Cardura(R) and Rythmol(R), we received an April 2002 ANDA
approval for the generic equivalent to K-Dur(R) which was launched
in fiscal 2003. The cardiovascular line accounted for 45.9% of
ETHEX's net revenues in fiscal 2003.
WOMEN'S HEALTH CARE. ETHEX currently markets 20 products in its
women's healthcare line, all of which are prescription prenatal
vitamins. Based on the number of units sold, ETHEX is the leading
provider of prescription prenatal vitamins in the United States.
The women's healthcare line accounted for 12.1% of ETHEX's net
revenues in fiscal 2003.
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PAIN MANAGEMENT. ETHEX currently markets 19 products in its pain
management line. Included in this line are several controlled
substance drugs, such as morphine and hydromorphone, as well as
oxycodone capsules, which are currently the only alternative to
OxyIR(R) capsules. The pain management line accounted for 14.2% of
ETHEX's net revenues in fiscal 2003.
RESPIRATORY. ETHEX currently markets over 30 products in its
respiratory line, which consists primarily of cough/cold products.
ETHEX is the leading provider on a unit basis of prescription
cough/cold products in the United States today. The cough/cold line
accounted for 14.4% of ETHEX's net revenues in fiscal 2003.
OTHER THERAPEUTICS. In addition to our core therapeutic lines,
ETHEX markets over 30 products in the gastrointestinal,
dermatological, anti-inflammatory, digestive enzyme and general
nutritional categories. These categories accounted for 13.4% of
ETHEX's net revenues in fiscal 2003.
ETHEX has a dedicated sales and marketing team, which includes an
outside sales team of regional managers and national account
managers and an inside sales team. The outside sales force calls on
wholesalers and distributors and national drugstore chains, as well
as hospitals, nursing homes, independent pharmacies and mail order
firms. The inside sales force calls on independent pharmacies to
create pull-through at the wholesale level.
PARTICLE DYNAMICS, INC. - OUR VALUE-ADDED RAW MATERIAL BUSINESS
Particle Dynamics develops and markets specialty raw material
products for the pharmaceutical, nutritional, food and personal
care industries. Its products include value-added active drug
molecules, vitamins, minerals and other raw material ingredients
that provide benefits such as improved taste, altered or controlled
release profiles, enhanced product stability or more efficient and
other manufacturing process advantages. Particle Dynamics is also a
significant supplier of value-added raw material for our Ther-Rx
and ETHEX businesses. Net revenues for Particle Dynamics were $17.4
million in fiscal 2003, which represented 7.1% of our total net
revenues. Particle Dynamics currently offers three distinct lines
of specialty raw material products:
o DESCOTE(R) is a family of microencapsulated tastemasked
vitamins and minerals for use in chewable nutritional
products, quick dissolve dosage forms, foods, children's
vitamins and other products. This technology is incorporated
in Centrum(R) and Centrum Jr.(R) vitamins and Flintstones(R),
Bugs Bunny(R) and One a Day(R) vitamins. DESCOTE(R) products
accounted for 36.5% of Particle Dynamics' sales in fiscal
2003.
o DESTAB(TM) is a family of direct compression products that
enables pharmaceutical manufacturers to produce tablets and
caplets more efficiently and economically. This technology is
incorporated in Di-gel(R), Maalox(R) Quick Dissolve, Tylenol
PM(R) and Mylanta(R) gelcaps, Centrum(R) and Centrum Jr.(R)
vitamins and Flintstones(R), Bugs Bunny(R) and One a Day(R)
vitamins. DESTAB(TM) products accounted for 61.9% of Particle
Dynamics' sales in fiscal 2003.
o MicroMask(TM) is a family of products designed to alleviate
problems associated with swallowing tablets. This is
accomplished by offering superior tasting, chewable or quick
dissolving dosage forms of medication. This technology is
incorporated in Triaminic(R) Soft Chew and Children's
Sudafed(R). In addition, we use MicroMask(TM) technology in
PreCare(R) Prenatal caplet, PreCare(R) Chewables and
PreCare(R) Conceive(TM), all of which are marketed by Ther-Rx.
STRATEGIES
Our goal is to enhance our position as a leading specialty
pharmaceutical company that utilizes its expanding drug delivery
expertise to bring technologically distinguished brand name and
generic/non-branded products to market. Our strategies incorporate
the following key elements:
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INTERNALLY DEVELOP BRAND NAME PRODUCTS. We apply our existing drug
delivery technologies, research and development and manufacturing
expertise to introduce new products which can expand our existing
franchises. Since the acquisition and reformulation of PreCare(R),
we have successfully introduced four internally developed brand
name products: PreCare(R) Chewables, PremesisRx(TM), PreCare(R)
Conceive(TM) and PrimaCare(TM). These products incorporate our
proprietary oral extended release and tastemasking technologies. In
June 2000, Ther-Rx launched its first NDA approved product,
Gynazole-1(R), the only one-dose prescription cream treatment for
vaginal yeast infections. We plan to continue to use our research
and development, manufacturing and marketing expertise to create
unique brand name products within our core therapeutic areas. We
currently have a number of products in clinical development. We
also plan to incorporate technology enhancements into the
Chromagen(R), Niferex(R) and StrongStart(R) product lines acquired
on March 31, 2003.
CAPITALIZE ON ACQUISITION OPPORTUNITIES. We actively seek
acquisition opportunities for both Ther-Rx and ETHEX. Ther-Rx
continually looks for platform acquisition opportunities similar to
PreCare(R) around which we can build franchises. We believe that
consolidation among large pharmaceutical companies, coupled with
cost-containment pressures, has increased the level of sales
necessary for an individual product to justify active marketing and
promotion. This has led large pharmaceutical companies to focus
their marketing efforts on drugs with higher volume sales, newer or
novel drugs which have the potential for high volume sales and
products which fit within core therapeutic or marketing priorities.
As a result, major pharmaceutical companies increasingly have
sought to divest small or non-strategic product lines, which can be
profitable for specialty pharmaceutical companies like us.
In making acquisitions, we apply several important criteria in our
decision making process. We pursue products with the following
attributes:
o products which we believe have relevance for treatment of
significant clinical needs;
o promotionally sensitive maintenance drugs which require
continual use over a long period of time, as opposed to more
limited use products for acute indications;
o products which are predominantly prescribed by physician
specialists, which can be cost effectively marketed by our
focused sales force; and
o products which we believe have potential for technological
enhancements and line extensions based upon our drug delivery
technologies.
FOCUS SALES EFFORTS ON HIGH VALUE NICHE MARKETS. We focus our
Ther-Rx sales efforts on niche markets where we believe we can
target a relatively narrow physician audience. Because our products
are sold to specialty physician groups that tend to be relatively
concentrated, we believe that we can address these markets cost
effectively with a focused sales force. Currently, we have
approximately 160 sales representatives who principally call on
gynecologists and obstetricians. We plan to continue to build our
sales force as necessary to accommodate current and future
expansions of our product lines.
PURSUE ATTRACTIVE GROWTH OPPORTUNITIES WITHIN THE GENERIC INDUSTRY.
We intend to continue to introduce generic counterparts to drugs
whose patents have expired. When patents no longer protect a
branded product, opportunities exist for ETHEX to introduce generic
counterparts to branded products. Such generic or off-patent
pharmaceutical products are generally sold at significantly lower
prices than the branded product. Accordingly, generic
pharmaceuticals provide a cost-efficient alternative to users of
branded products. We believe the health care industry will continue
to support growth in the generic pharmaceutical market and that
industry trends favor generic product expansion into the managed
care, long-term care and government contract markets. We further
believe that our competitively priced, technologically
distinguished generic/non-branded products can help contain costs
and improve patient compliance.
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ADVANCE EXISTING AND DEVELOP NEW DRUG DELIVERY TECHNOLOGIES. We
believe our drug delivery platform of 15 distinguished technologies
has unique breadth and depth. These technologies have enabled us to
create innovative products, including Gynazole-1(R), the only
one-dose vaginal antifungal prescription cream treatment for yeast
infections, incorporating VagiSite(TM), our proprietary bioadhesive
controlled release system. In addition, our tastemasking and
controlled release systems are incorporated into our prenatal
vitamins, providing them with differentiated benefits over other
products on the market. We plan to continue to develop our drug
delivery technologies and have identified various technologies with
substantial growth potential, such as TransCell(TM), a novel
bioadhesive, controlled release delivery system that may permit
oral delivery of bioactive peptides and proteins that are normally
degraded by stomach enzymes or first-pass liver effects.
OUR PROPRIETARY DRUG DELIVERY TECHNOLOGIES
We are a leader in the development of proprietary drug delivery
systems and formulation technologies which enhance the
effectiveness of new therapeutic agents, existing pharmaceutical
products and nutritional supplements. We have used many of these
technologies to successfully commercialize technologically
distinguished branded and generic/non branded products.
Additionally, we continue to invest our resources in the
development of new technologies. The following describes our
principal drug delivery technologies.
SITE RELEASE(R) TECHNOLOGIES. SITE RELEASE(R) is our largest family
of technologies and includes eight systems designed specifically
for oral, topical or interorificial use. These systems rely on
controlled bioadhesive properties to optimize the delivery of drugs
to either wet mucosal tissue or the skin and are the subject of
issued patents and pending patent applications. Of the technologies
developed, products using the VagiSite(TM) and DermaSite(TM)
technologies have been successfully commercialized. Our fully
developed technologies include the following:
o VagiSite(TM) is a controlled release bioadhesive delivery
system that incorporates advanced polyphasic principles to
create a bioemulsion system delivering therapeutic agents to
the vagina. We have outlicensed VagiSite(TM) for sale in
international markets for the treatment of vaginal infections.
VagiSite(TM) technology is used in Gynazole-1(R), a one-dose
prescription cream treatment for vaginal yeast infections.
o 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. DermaSite(TM)
technology is used in Dermarin-L(TM), a topical antifungal
product being marketed by the leading over-the-counter company
in Japan, Taisho Pharmaceutical, Ltd.
o OraSite(R) is a controlled release 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
categories such as oral hygiene, sore throat and periodontal
and upper gastrointestinal tract disorders.
o OraSert(TM) is a solid dosage-form application system
specifically designed for localized delivery of active agents
to the oral tissues. The product is formulated as a "cough
drop" type tablet, which immediately liquefies upon placement
in the mouth and bioadheres to mucosal tissue in the mouth,
throat and esophagus. OraSert(TM) possesses characteristics
particularly advantageous to therapeutic applications such as
periodontal disease, respiratory conditions, pharyngeal
conditions and upper gastrointestinal tract disorders.
o BioSert(TM) is a bioadhesive delivery system in a solid insert
formulation for vaginal or rectal administration, similar in
appearance to a vaginal or rectal suppository, which can be
used for both local and systemic delivery of drugs. The
BioSert(TM) dosage form liquefies and bioadheres to vaginal or
rectal tissues, which is of
9
particular benefit when a patient can no longer tolerate orally
administered medications. We are currently developing several
drug products that utilize the BioSert(TM) technology, including
non-steroidal anti-inflammatory drugs, or NSAIDs, and antifungals
for a local effect and opioids for a systemic effect.
In addition, the following SITE RELEASE(R) technologies are
currently under development:
o TransCell(TM) is a novel bioadhesive, controlled release delivery
system that may permit oral delivery of bioactive peptides and
proteins that are normally degraded by stomach enzymes or first-
pass liver effects. The TransCell(TM) technology was specifically
designed to provide an oral delivery alternative to biotechnology
and other compounds that currently are delivered as injections or
infused. In "proof of principle" and "proof of concept" studies
conducted during fiscal 2002, the TransCell(TM) delivery system
demonstrated the successful oral delivery of the hormone
calcitonin, a drug used in the treatment and prevention of
osteoporosis and to normalize calcium levels in renal dialysis
patients.
o OcuSite(TM) is a liquid, microemulsion delivery system
intended for topical applications in the eye. The
microemulsion formulation lends optical clarity to the
application and is ideal for ophthalmic use. The bioadhesive
and controlled release properties of this delivery system
allow for reduced dosing regimentation.
o PulmoSite(TM) applies bioadhesive and controlled release
characteristics to drug agents that are to be inhaled for
either local action to the lung or for systemic absorption.
ORAL CONTROLLED RELEASE TECHNOLOGIES. The technological preeminence
of our advanced drug delivery systems was established in the
development of our three oral controlled release technologies, all
of which have been commercialized. Our systems can be individually
designed to achieve the desired release profile for a given drug.
The release profile is dependent on many parameters, such as drug
solubility, protein binding and site of absorption. Some of the
products utilizing our oral controlled release systems in the
market include Isosorbide-5-Mononitrate (an AB rated generic
equivalent to IMDUR(R)) and Disopyramide Phosphate (an AB rated
generic equivalent of Norpace(R) CR). Our patented technologies
include the following:
o KV/24(R) is a multi-particulate drug delivery system that
encapsulates one or more drug compounds into spherical
particles which release the active drug or drugs systemically
over an 18- to 24-hour period, permitting the development of
once-a-day drug formulations. We believe that our KV/24(R)
oral dosing system is the only commercialized 24-hour oral
controlled release system that is successfully able to
incorporate more than one active compound.
o METER RELEASE(R) is a polymer-based drug delivery system that
offers different release characteristics than KV/24(R) and is
used for products that require drug release rates of between
eight and 12 hours. We have developed METER RELEASE(R) systems
in tablet, capsule and caplet form that have been
commercialized in ETHEX products in the cardiovascular,
gastrointestinal and upper respiratory product categories.
o MICRO RELEASE(R) is a microparticulate formulation that
encapsulates therapeutic agents, employing smaller particles
than KV/24(R) and METER RELEASE(R). This system is used to
extend the release of drugs in the body where precise release
profiles are less important. MICRO RELEASE(R) has been
commercialized in prescription products marketed by ETHEX and
Ther-Rx as well as over-the-counter nutritional products.
TASTEMASKING TECHNOLOGIES. Our tastemasking technologies improve
the taste of unpleasant drugs. Our three patented tastemasking
systems can be applied to liquids, chewables or dry powders. We
first introduced tastemasking technologies in 1991 and have
utilized them in a number of Ther-Rx and ETHEX products, including
PreCare(R) Chewables and most of the liquid products that are sold
in ETHEX's cough/cold line. Our patented technologies include the
following:
10
o LIQUETTE(R) is a tastemasking system that 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
where low manufacturing costs are particularly important.
o FlavorTech(R) is a liquid formulation technology designed to
reduce the objectionable taste of a wide variety of
therapeutic products. FlavorTech(R) technology has been used
in cough/cold syrup products sold by ETHEX and has special
application to other products, such as antibiotic, geriatric
and pediatric pharmaceuticals.
o MicroMask(TM) is a tastemasking technology that incorporates a
dry powder, microparticulate approach to reducing
objectionable tastes by sequestering the unpleasant drug agent
in a specialized matrix. This formulation technique has the
effect of "shielding" the drug from the taste receptors
without interfering with the dissolution and ultimate
absorption of the agent within the gastrointestinal tract.
MicroMask(TM) is a more potent tastemasking technology than
LIQUETTE(R) and has been used in connection with two Ther-Rx
products.
QUICK DISSOLVING TECHNOLOGY. Our OraQuick(TM) system is a
quick-dissolving tablet technology that provides the ability to
tastemask, yet dissolves in the mouth in a matter of seconds. Most
other quick-dissolving technologies offer either quickness at the
expense of poor tastemasking or excellent tastemasking at the
expense of quickness. While still under development, this system
allows for a drug to be quickly dissolved in the mouth, and can be
combined with tastemasking capabilities that offer a unique dosage
form for the most bitter tasting drug compounds. We have been
issued patents and have patents pending for this system with the
U.S. Patent and Trademark Office, or PTO.
SALES AND MARKETING
Ther-Rx has a national sales and marketing infrastructure which
includes approximately 160 sales representatives dedicated to
promoting and marketing our branded pharmaceutical products to
targeted physician specialists. By targeting physician specialists,
we believe we can compete successfully without the need to build a
large sales force. We also have a national sales management team,
as well as a sales team dedicated to managed care and trade
accounts.
We attempt to increase sales of our branded pharmaceutical products
through physician sales calls and promotional efforts, including
sampling, advertising and direct mail. For acquired branded
products, we generally increase the level of physician sales calls
and promotion relative to the previous owner. For example, with the
PreCare(R) prenatal sales efforts, we increased the level of
physician sales calls and sampling to the highest prescribers of
prenatal vitamins. We also have enhanced our PreCare(R) brand
franchise by launching four more line extensions to address unmet
needs, including the launch of PreCare(R) Chewables, Premesis
Rx(TM), PreCare(R) Conceive(TM) and PrimaCare(TM). The PreCare(R)
product line enables us to deliver a full range of nutritional
products for physicians to prescribe to women in their childbearing
years. In addition, we added to our women's health care family of
products in June 2000 with the introduction of our first NDA
approved product, Gynazole-1(R), the only one-dose prescription
cream treatment for yeast infections. By offering multiple products
to the same group of physician specialists, we are able to maximize
the effectiveness of our experienced sales force.
ETHEX has an experienced sales and marketing team, which includes
an outside sales team, regional account managers, national account
managers and an inside sales team. The outside sales force calls on
wholesalers, distributors and national drugstore chains, as well as
hospitals, nursing homes, mail order firms and independent
pharmacies. The inside sales team calls on independent pharmacies
to create pull-through at the wholesale level.
We believe that industry trends favor generic product expansion
into the managed care, long-term care and government contract
markets. Further, we believe that our competitively priced,
technologically distinguished
11
generic/non-branded products can fulfill the increasing need of
these markets to contain costs and improve patient compliance.
Accordingly, we intend to continue to devote significant marketing
resources to the penetration of such markets.
Particle Dynamics has a specialized technical sales group that
calls on the leading companies in the pharmaceutical, nutritional,
personal care, food and other markets in the United States.
During fiscal 2003, our three largest customers accounted for 23%,
18% and 14% of gross revenues. These customers were McKesson Drug
Company, Amerisource Corporation and Cardinal Health, respectively.
In fiscal 2002 and 2001, these customers accounted for gross
revenues of 20%, 13% and 19% and 23%, 14% and 20%, respectively.
Although we sell internationally, we do not have material
operations or sales in foreign countries and our sales are not
subject to unusual geographic concentration.
RESEARCH AND DEVELOPMENT
Our research and development activities include the development of
new and next generation drug delivery technologies, the formulation
of brand name proprietary products and the development of
technologically distinguished generic/non-branded versions of
previously approved brand name pharmaceutical products. In fiscal
2003, 2002 and 2001, total research and development expenses were
$19.1 million, $10.7 million, and $9.3 million, respectively.
Ther-Rx currently has a number of products in its research and
development pipeline at various stages of development. We believe
we have the technological expertise required to develop unique
products to meet currently unmet needs in the area of women's
health, as well as other therapeutic areas.
ETHEX currently has more than 30 products in its research and
development pipeline at various stages of development and
exploration. Our development process typically consists of
formulation, development and laboratory testing, and where required
(1) preliminary bioequivalency studies of pilot batches of the
manufactured product, (2) full scale bioequivalency studies using
commercial quantities of the manufactured product and (3)
submission of an ANDA, to the FDA. We believe that, unlike many
generic drug companies, we have the technical expertise required to
develop generic substitutes to the hard-to-copy branded
pharmaceutical products. Since January 1, 2002, ETHEX has received
the following seven ANDA approvals from the FDA:
ETHEX PRODUCT BRAND EQUIVALENT
-------------------------------------------------- -------------------------------
Propafenone HCI Tablets Rythmol(R)
Buspirone HCI Tablets BuSpar(R)
Hydrocodone Bitartrate & Acetaminophen Elixir CIII Lortab(R) Elixir
Potassium Chloride 20mEq Extended Release Tablets K-Dur 20(R)
Prednisolone Syrup USP Prelone(R)
Dextroamphetamine Sulfate Tablets, 5mg Dexedrine(R), Dextrostat(R)
Dextroamphetamine Sulfate Tablets, 10mg Dextrostat(R)
In addition to our internal product development and marketing
efforts, we have licensed the exclusive rights to co-develop and
market nine products with other drug delivery companies. These
products will be generic/non-branded equivalents to brand name
products with aggregate annual sales totaling approximately $2.5
billion and are expected to be launched at various times beginning
in fiscal 2005.
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Particle Dynamics currently has a number of products in its
research and development pipeline at various stages of development.
Particle Dynamics applies its technologies to a diverse number of
active and inactive chemicals for more efficient processing of
materials to achieve benefits such as prolonged action of release,
tastemasking, making materials more site specific and other
benefits. Typically, the finished products into which the specialty
raw materials are incorporated do not require FDA approval.
We continually apply our scientific and development expertise to
refine and enhance our existing drug delivery systems and
formulation technologies and to create new technologies that may be
used in our drug development programs. Certain of these
technologies currently under development include advanced oral
controlled release systems, quick dissolving oral delivery systems
(with and without tastemasking characteristics) and transesophageal
and intrapulmonary delivery technologies.
PATENTS AND OTHER PROPRIETARY RIGHTS
Our policy is to file patent applications in appropriate situations
to protect and preserve, for our own use, technology, inventions
and improvements that we consider important to the development of
our business. We currently hold domestic and foreign issued patents
the last of which expires in 2018 relating to our controlled
release, site-specific, quick dissolve and tastemasking
technologies. We have been granted 28 U.S. patents and have 16 U.S.
patent applications pending. In addition, we have 36 foreign issued
patents and a total of 84 patent applications pending primarily in
Canada, Europe, Australia, Japan and South Korea (see "We depend on
our patents and other proprietary rights" under RISK FACTORS for
additional information).
We currently own more than 50 U.S. and foreign trademark
registrations and have also applied for trademark protection for
the names of our proprietary controlled-release, tastemasking,
site-specific and quick dissolve technologies. We intend to
continue to trademark new technology and product names as they are
developed.
To protect our trademark, domain name, and related rights, we
generally rely on trademark and unfair competition laws, which are
subject to change. Some, but not all, of our trademarks are
registered in the jurisdictions where they are used. Some of our
other trademarks are the subject of pending applications in the
jurisdictions where they are used or intended to be used and others
are not.
MANUFACTURING AND FACILITIES
We believe that our administrative, research, manufacturing and
distribution facilities are an important factor in achieving our
long-term growth objectives. All facilities at March 31, 2003,
aggregating approximately 833,000 square feet, are located in the
St. Louis, Missouri area. We own approximately 299,000 square feet,
with the balance under various leases at pre-determined annual
rates under agreements expiring from 2003 through 2012, subject in
most cases to renewal at our option. On April 28, 2003, we
purchased a building consisting of approximately 275,000 square
feet of office, production, distribution and warehouse space. We
believe our facilities are suitable for the purposes for which they
are used and adequate to meet our needs for at least the next three
years.
We manufacture drug products in liquid, semi-solid, tablet, capsule
and caplet forms for distribution by Ther-Rx, ETHEX and our
corporate licensees and value-added specialty raw materials for
distribution by Particle Dynamics. We believe that all of our
facilities comply with applicable regulatory requirements.
We seek to maintain inventories at sufficient levels to support
current production and sales levels. During fiscal 2003, we
encountered no serious shortage of any particular raw materials and
have no indication that significant shortages will occur in the
foreseeable future.
13
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 our own, are engaged in developing,
marketing and selling products that compete with those that we
offer. Our branded pharmaceutical products may also be subject to
competition from alternate therapies during the period of patent
protection and thereafter from generic equivalents. In addition,
our generic/non-branded pharmaceutical products may be subject to
competition from pharmaceutical companies engaged in the
development of alternatives to the generic/non-branded products we
offer or of which we undertake development. Our competitors may
develop generic products before we do or may have pricing
advantages over our products. In our specialty pharmaceutical
businesses, we compete primarily on the basis of product efficacy,
breadth of product line and price. We believe that our patents,
proprietary trade secrets, technological expertise, product
development and manufacturing capabilities position us to maintain
a leadership position in the field of advanced drug delivery
technologies and to continue to develop products to compete
effectively in the marketplace.
In addition, we compete with other pharmaceutical companies that
acquire branded product lines from other pharmaceutical companies.
These competitors may have substantially greater financial and
managerial resources than we do. Accordingly, our competitors may
succeed in product line acquisitions that we seek to acquire.
We also compete with drug delivery companies engaged in the
development of alternative drug delivery systems. We are aware of a
number of companies currently seeking to develop new non-invasive
drug delivery systems, including oral delivery and transmucosal
systems. Many of these companies may have greater research and
development capabilities, experience, manufacturing, marketing,
financial and managerial resources than we do. Accordingly, our
competitors may succeed in developing competing technologies,
obtaining FDA approval for products or gaining market acceptance
more rapidly than we do.
GOVERNMENT REGULATION
All pharmaceutical manufacturers are subject to extensive
regulation by the federal government, principally the FDA, and, to
a lesser extent, by state, local and foreign governments. The
Federal Food, Drug and Cosmetic Act, or FDCA, and other federal
statutes and regulations govern or influence, among other things,
the development, testing, manufacture, safety, labeling, storage,
recordkeeping, approval, advertising, promotion, sale and
distribution of pharmaceutical products. Pharmaceutical
manufacturers are also subject to certain record keeping and
reporting requirements, establishment registration and product
listing, and FDA inspections.
With respect to any non-biological "new drug" product with active
ingredients not previously approved by the FDA, a prospective
manufacturer must submit a full NDA, including complete reports of
preclinical, clinical and other studies to prove the product's
safety and efficacy. A full NDA may also need to be submitted for a
drug product with a previously approved active ingredient if, among
other things, the drug will be used to treat an indication for
which the drug was not previously approved, or if the abbreviated
procedure discussed below is otherwise not available. A
manufacturer intending to conduct clinical trials in humans for a
new drug may be required first to submit a Notice of Claimed
Investigational Exception for a New Drug, or IND, to the FDA
containing information relating to preclinical and clinical
studies. INDs and full NDAs may be required to be filed to obtain
approval of certain of our products, including those that do not
qualify for abbreviated application procedures. The full NDA
process, including clinical development and testing, is expensive
and time consuming.
The Drug Price Competition and Patent Restoration Act of 1984,
known as the Waxman-Hatch Act, established ANDA procedures for
obtaining FDA approval for generic versions of many non-biological
drugs for which patent or marketing exclusivity rights have expired
and which are bioequivalent to previously approved drugs.
14
"Bioequivalence" for this purpose, with certain exceptions,
generally means that the proposed generic formulation is absorbed
by the body at the same rate and extent as a previously approved
"reference drug." Approval to manufacture these drugs is obtained
by filing abbreviated applications, such as ANDAs. As a substitute
for clinical studies, the FDA requires data indicating the ANDA
drug formulation is bio-equivalent to a previously approved
reference drug among other requirements. Analogous abbreviated
application procedures apply to antibiotic drug products that are
bio-equivalent to previously approved antibiotics. The advantage of
the ANDA approval mechanism, compared to an NDA, is that an ANDA
applicant is not required to conduct preclinical and clinical
studies to demonstrate that the product is safe and effective for
its intended use and may rely, instead, on studies demonstrating
bio-equivalence to a previously approved reference drug.
In addition to establishing ANDA approval mechanisms, the
Waxman-Hatch Act fosters pharmaceutical innovation through such
incentives as non-patent exclusivity and patent restoration. The
Act provides two distinct exclusivity provisions that either
preclude the submission or delay the approval of an ANDA. A
five-year exclusivity period is provided for new chemical
compounds, and a three-year marketing exclusivity period is
provided for changes to previously approved drugs which are based
on new clinical investigations essential to the approval. The
three-year marketing exclusivity period may be applicable to the
approval of a novel drug delivery system. The marketing exclusivity
provisions apply equally to patented and non-patented drug
products. These provisions do not delay or otherwise affect the
approvability of full NDAs even when effective ANDA approvals are
not available. For drugs covered by patents, patent extension may
be provided for up to five years as compensation for reduction of
the effective life of the patent resulting from time spent in
conducting clinical trials and in FDA review of a drug application.
There has been substantial litigation in the biomedical,
biotechnology and pharmaceutical industries with respect to the
manufacture, use and sale of new products that are the subject of
conflicting patent rights. One or more patents cover most of the
proprietary products for which we are developing generic versions.
When we file an ANDA for such drug products, we will, in most
cases, be required to certify to the FDA that any patent which has
been listed with the FDA as covering the product is invalid or will
not be infringed by our sale of our product. Alternatively, we
could certify that we would not market our proposed product until
the applicable patent expires. A patent holder may challenge a
notice of noninfringement or invalidity by filing suit for patent
infringement, which would prevent FDA approval until the suit is
resolved or until at least 30 months has elapsed (or until the
patent expires, whichever is earlier). Should any entity commence a
lawsuit with respect to any alleged patent infringement by us, the
uncertainties inherent in patent litigation would make the outcome
of such litigation difficult to predict.
In addition to marketing drugs which are subject to FDA review and
approval, we market products under (a) certain "grandfather"
clauses of the FDCA that exempt certain categories of drugs from
some or all pre-market approval requirements, and (b) additional
statutory and regulatory exceptions from pre-market approval
requirements that apply to certain drug products that fall outside
of the legal definition of a "new drug." A determination as to
whether a particular product does or does not require pre-market
NDA or ANDA approval can involve numerous complex considerations.
The FDA has published a Compliance Policy Guide that recognizes the
marketing of certain categories of drug products without an
approved NDA or ANDA as long as those products are not
significantly different in formulation than products marketed
before November 13, 1984. With respect to these products, any
enforcement action initiated by the FDA would typically affect all
similarly situated products at the same time and in a similar
manner. If a product is significantly different from all products
marketed before November 13, 1984 or falls outside of the scope of
the Compliance Guide or raises significant new questions of safety
or effectiveness, however, the FDA could make a determination
whether or not the new drug provisions are applicable to it without
first implementing the procedures called for by the policy guide
and could single out the product for immediate regulatory action,
including seizure or injunction against further marketing. We list
all of our marketed drug products, as required, with the FDA. We
believe that each of our products which has been marketed without
FDA approval qualifies for deferral of regulatory action under the
Compliance Policy Guide or under other agency policies. The FDA has
initiated no regulatory or judicial proceeding to prevent the
marketing of these products. However, if a determination is made by
the FDA that a
15
particular drug requires an approved NDA or ANDA, we may be required
to cease distribution of the product until such approval is obtained.
In addition to obtaining pre-market approval for certain of our
products, we are required to maintain all facilities in compliance
with the FDA's current Good Manufacturing Practice, or cGMP,
requirements. In addition to compliance with cGMP each
pharmaceutical manufacturer's facilities must be registered with
the FDA. Manufacturers must also be registered with the Drug
Enforcement Agency, or DEA, and similar state and local regulatory
authorities if they handle controlled substances, and with the EPA
and similar state and local regulatory authorities if they generate
toxic or dangerous wastes. Noncompliance with applicable
requirements can result in fines, recall or seizure of products,
total or partial suspension of production and distribution, refusal
of the government to enter into supply contracts or to approve
NDA's, ANDA's or other applications and criminal prosecution. The
FDA also has the authority to revoke for cause drug approvals
previously granted.
The Prescription Drug Marketing Act, or PDMA, which amended various
sections of the FDCA, requires, among other things, state licensing
of wholesale distributors of prescription drugs under federal
guidelines that include minimum standards for storage, handling and
record keeping. It also imposes detailed requirements on the
distribution of prescription drug samples such as those distributed
by the Ther-Rx sales force. The PDMA sets forth substantial civil
and criminal penalties for violations of these and other
provisions.
For international markets, a pharmaceutical company is subject to
regulatory requirements, inspections and product approvals
substantially the same as those in the United States. In connection
with any future marketing, distribution and license agreements that
we may enter into, our licensees may accept or assume
responsibility for such foreign regulatory approvals. The time and
cost required to obtain these international market approvals may be
greater or lesser than those required for FDA approval.
Product development and approval within this regulatory framework
take a number of years, involve the expenditure of substantial
resources and is uncertain. Many drug products ultimately do not
reach the market because they are not found to be safe or effective
or cannot meet the FDA's other regulatory requirements. In
addition, the current regulatory framework may change and
additional regulation may arise at any stage of our product
development that may affect approval, delay the submission or
review of an application or require additional expenditures by us.
We may not be able to obtain necessary regulatory clearances or
approvals on a timely basis, if at all, for any of our products
under development, and delays in receipt or failure to receive such
clearances or approvals, the loss of previously received clearances
or approvals, or failure to comply with existing or future
regulatory requirements could have a material adverse effect on our
business.
EMPLOYEES
As of March 31, 2003, we employed a total of 916 employees. We are
party to a collective bargaining agreement covering 155 employees
that will expire December 31, 2004. We believe that our relations
with our employees are good.
ENVIRONMENT
We do 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 our capital
expenditures, earnings or competitive position.
AVAILABLE INFORMATION
We make available, free of charge through our Internet website
(http://www.kvpharmaceutical.com), our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and
amendments to these reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 as soon
16
as reasonably practicable after we electronically file these reports
with, or furnish them to, the Securities and Exchange Commission,
or SEC.
In addition, the SEC maintains an Internet website
(http://www.sec.gov) that contains reports, proxy and information
statements, and other information regarding issuers that file
electronically with the SEC.
RISK FACTORS
We operate in a rapidly changing environment that involves a number
of risks, some of which are beyond our control. The following
discussion highlights some of these risks and others are discussed
elsewhere in this report. Additional risks presently unknown to us
or that we currently consider immaterial or unlikely to occur could
also impair our operations. These and other risks could materially
and adversely affect our business, financial condition, operating
results or cash flows.
RISKS RELATED TO OUR BUSINESS
WE NEED TO INTERNALLY DEVELOP NEW PRODUCTS TO ACHIEVE OUR STRATEGIC
OBJECTIVES.
We need to continue to develop and commercialize new brand name
products and generic products utilizing our proprietary drug
delivery systems to maintain the growth of Ther-Rx, ETHEX and
Particle Dynamics. To do this we will need to identify, develop and
commercialize technologically enhanced branded products and
identify, develop and commercialize drugs that are off-patent and
that can be produced and sold by us as generic/non-branded products
using our drug delivery technologies. If we are unable to identify,
develop and commercialize new products, we may need to obtain
licenses to additional rights to branded or generic products,
assuming they would be available for licensing, which could
decrease our profitability. We cannot assure you that we will be
successful in pursuing this strategy.
WE MAY NOT BE ABLE TO COMMERCIALIZE PRODUCTS UNDER DEVELOPMENT.
Certain products we are developing will require significant
additional development and investment, including preclinical and
clinical testing, where required, prior to their commercialization.
We expect that many of these products will not be commercially
available for several years, if at all. We cannot assure you that
such products or future products will be successfully developed,
prove to be safe and effective in clinical trials (if required),
meet applicable regulatory standards, or be capable of being
manufactured in commercial quantities at reasonable cost.
OUR ACQUISITION STRATEGY MAY NOT BE SUCCESSFUL.
We intend to continue to acquire pharmaceutical products, novel
drug delivery technologies and/or companies that fit into our
research, manufacturing, distribution or sales and marketing
operations or that could provide us with additional products,
technologies or sales and marketing capabilities. We may not be
able to successfully identify, evaluate and acquire any such
products, technologies or companies or, if acquired, we may not be
able to successfully integrate such acquisitions into our business.
We compete with many specialty pharmaceutical companies for
products and product line acquisitions. These competitors may have
substantially greater financial and managerial resources than we
have.
WE DEPEND ON OUR PATENTS AND OTHER PROPRIETARY RIGHTS.
Our success depends, in large part, on our ability to protect our
current and future technologies and products, to defend our
intellectual property rights and to avoid infringing on the
proprietary rights of others. We have been issued numerous patents
in the United States and in certain foreign countries which cover
certain of our
17
technologies, and have filed, and expect to continue to file,
patent applications seeking to protect newly developed
technologies and products. The pharmaceutical field is crowded and
a substantial number of patents have been issued. In addition, the
patent position of pharmaceutical companies can be highly
uncertain and frequently involves complex legal and factual
questions. As a result, the breadth of claims allowed in patents
relating to pharmaceutical applications or their validity and
enforceability cannot be predicted. Patents are examined for
patentability at patent offices against bodies of prior art which
by their nature may be incomplete and imperfectly categorized.
Therefore, even presuming that the examiner has been able to
identify and cite the best prior art available to him during the
examination process, any patent issued to us could later be found
by a court or a patent office during post issuance proceedings to
be invalid in view of newly-discovered prior art or already
considered prior art or other legal reasons. Furthermore, there
are categories of "secret" prior art unavailable to any examiner,
such as the prior inventive activities of others, which could form
the basis for invalidating any patent. In addition, there are
other reasons why a patent may be found to be invalid, such as an
offer for sale or public use of the patented invention in the
United States more than one year before the filing date of the
patent application. Moreover, a patent may be deemed unenforceable
if, for example, the inventor or the inventor's agents failed to
disclose prior art to the PTO that they knew was material to
patentability.
The coverage claimed in a patent application can be significantly
reduced before a patent is issued, either in the United States or
abroad. Consequently, there can be no assurances that any of our
pending or future patent applications will result in the issuance
of patents. Patents issued to us may be subjected to further
proceedings limiting their scope and may not provide significant
proprietary protection or competitive advantage. Our patents also
may be challenged, circumvented, invalidated or deemed
unenforceable. Patent applications in the United States filed prior
to November 29, 2000 are currently maintained in secrecy until and
unless patents issue, and patent applications in certain other
countries generally are not published until more than 18 months
after they are first filed (which generally is the case in the
United States for applications filed on or after November 29,
2000). In addition, publication of discoveries in scientific or
patent literature often lags behind actual discoveries. As a
result, we cannot be certain that we or our licensors will be
entitled to any rights in purported inventions claimed in pending
or future patent applications or that we or our licensors were the
first to file patent applications on such inventions. Furthermore,
patents already issued to us or our pending applications may become
subject to dispute, and any dispute could be resolved against us.
For example, we may become involved in re-examination, reissue or
interference proceedings in the PTO, or opposition proceedings in a
foreign country. The result of these proceedings can be the
invalidation or substantial narrowing of our patent claims. We also
could be subject to court proceedings that could find our patents
invalid or unenforceable or could substantially narrow the scope of
our patent claims. In addition, statutory differences in patentable
subject matter may limit the protection we can obtain on some of
our inventions outside of the United States. For example, methods
of treating humans are not patentable in many countries outside of
the United States. These and other issues may prevent us from
obtaining patent protection outside of the United States.
Furthermore, once patented in foreign countries, the inventions may
be subjected to mandatory working requirements and/or subject to
compulsory licensing regulations.
We also rely on trade secrets, unpatented proprietary know-how and
continuing technological innovation that we seek to protect, in
part by confidentiality agreements with licensees, suppliers,
employees and consultants. These agreements may be breached by the
other parties to these agreements. We may not have adequate
remedies for any breach. Disputes may arise concerning the
ownership of intellectual property or the applicability or
enforceability of our confidentiality agreements and there can be
no assurance that any such disputes would be resolved in our favor.
Furthermore, our trade secrets and proprietary technology may
become known or be independently developed by our competitors, or
patents may not be issued with respect to products or methods
arising from our research, and we may not be able to maintain the
confidentiality of information relating to those products or
methods. Furthermore, certain unpatented technology may be subject
to intervening rights.
WE DEPEND ON OUR TRADEMARKS AND RELATED RIGHTS.
We also rely on our brand names. To protect our trademarks and
goodwill associated therewith, domain name, and related rights, we
generally rely on federal and state trademark and unfair
competition laws, which are subject
18
to change. Some, but not all, of our trademarks are registered in
the jurisdictions where they are used. Some of our other
trademarks are the subject of pending applications in the
jurisdictions where they are used or intended to be used, and
others are not.
It is possible that third parties may own or could acquire rights
in trademarks or domain names in the United States or abroad that
are confusingly similar to or otherwise compete unfairly with our
marks and domain names, or that our use of trademarks or domain
names may infringe or otherwise violate the intellectual property
rights of third parties. The use of similar marks or domain names
by third parties could decrease the value of our trademarks or
domain names and hurt our business, for which there may be no
adequate remedy.
THIRD PARTIES MAY CLAIM THAT WE INFRINGE ON THEIR PROPRIETARY
RIGHTS, OR SEEK TO CIRCUMVENT OURS.
We may be required to defend against charges of infringement of
patents, trademarks or other proprietary rights of third parties.
This defense could require us to incur substantial expense and to
divert significant effort of our technical and management
personnel, and could result in our loss of rights to develop or
make certain products or require us to pay monetary damages or
royalties to license proprietary rights from third parties. If a
dispute is settled through licensing or similar arrangements, costs
associated with such arrangements may be substantial and could
include ongoing royalties. Furthermore, we cannot be certain that
the necessary licenses would be available to us on acceptable
terms, if at all. Accordingly, an adverse determination in a
judicial or administrative proceeding or failure to obtain
necessary licenses could prevent us from manufacturing, using,
selling and/or importing in to the United States certain of our
products. Litigation also may be necessary to enforce our patents
against others or to protect our know-how or trade secrets. That
litigation could result in substantial expense or put our
proprietary rights at risk of loss, and we cannot assure you that
any litigation will be resolved in our favor. There currently are
two patent infringement law suits pending against us. Although we
do not believe they will have a material adverse effect on our
future financial condition or results of operations, we cannot
assure you of that.
WE MAY BE UNABLE TO MANAGE OUR GROWTH.
Over the past eight years, our businesses and product offerings
have grown substantially. This growth and expansion has placed, and
is expected to continue to place, a significant strain on our
management, operational and financial resources. To manage our
growth, we must continue to (1) expand our operational, customer
support and financial control systems and (2) hire, train and
retain qualified personnel. We cannot assure you that we will be
able to adequately manage our growth. If we are unable to manage
our growth effectively, our business, results of operations and
financial condition could be materially adversely affected.
WE MAY NOT OBTAIN REGULATORY APPROVAL FOR OUR NEW PRODUCTS ON A
TIMELY BASIS, OR AT ALL.
Many of our new products will require FDA approval. FDA approval
typically involves lengthy, detailed and costly laboratory and
clinical testing procedures, as well as the FDA's review and
approval of the information submitted. We cannot assure you that
the products we develop will be determined to be safe and effective
in these testing procedures, or that they will be approved by the
FDA. The FDA also has the authority to revoke for cause drug
approvals previously granted.
WE MAY BE ADVERSELY AFFECTED BY THE CONTINUING CONSOLIDATION OF OUR
DISTRIBUTION NETWORK AND THE CONCENTRATION OF OUR CUSTOMER BASE.
Our principal customers are wholesale drug distributors, major
retail drug store chains, independent pharmacies and mail order
firms. These customers comprise a significant part of the
distribution network for pharmaceutical products in the United
States. This distribution network is continuing to undergo
significant consolidation marked by mergers and acquisitions among
wholesale distributors and the growth of large retail drug store
chains. As a result, a small number of large wholesale distributors
control a significant share of the market, and the
19
number of independent drug stores and small drug store chains has
decreased. We expect that consolidation of drug wholesalers and
retailers will increase pricing and other competitive pressures on
drug manufacturers. For the fiscal year ended March 31, 2003, our
three largest customers accounted for 23%, 18% and 14% of our
gross sales. The loss of any of these customers could materially
and adversely affect our results of operations or financial
condition.
THE REGULATORY STATUS OF CERTAIN OF OUR NON-BRANDED PRODUCTS MAY
MAKE THEM SUBJECT TO INCREASED COMPETITION.
Many of our products are manufactured and marketed without FDA
approval. For example, our prenatal products, which contain folic
acid, are sold as prescription multiple vitamin supplements. These
types of prenatal vitamins are typically regulated by the FDA as
prescription drugs, but are not covered by an NDA or ANDA. As a
result, competitors may more easily and rapidly introduce products
competitive with our prenatal and other products that have a
similar regulatory status.
CHANGES TO FDA REGULATIONS AND GUIDELINES, AS WELL AS COURT
DECISIONS AND POSSIBLE ENACTMENT OF FURTHER CHANGES IN THE
UNDERLYING STATUTORY PROVISIONS MAY IMPAIR OUR ABILITY TO QUALIFY
FOR OR UTILIZE FULLY THE 180-DAY GENERIC MARKETING EXCLUSIVITY
PERIOD FOR PATENT CHALLENGES, SUBSTANTIALLY DIMINISHING THE VALUE
OF A FAVORABLE RULING AND THE INCENTIVES FOR CHALLENGING LISTED
PATENTS.
One of the key motivations for challenging patents is the reward of
a 180-day period of market exclusivity. Under the Waxman-Hatch Act,
the developer of a generic version of a product which is the first
to have its ANDA accepted for filing by the FDA, and whose filing
includes a certification that the patent is invalid, unenforceable
and/or not infringed (a so-called "Paragraph IV certification"),
may be eligible to receive a 180-day period of generic market
exclusivity. This period of market exclusivity provides the patent
challenger with the opportunity to earn a risk-adjusted return on
legal and development costs associated with bringing a product to
market.
In August 1999, the FDA issued a notice of proposed rulemaking in
which it proposed new regulations for implementing the 180-day
generic market exclusivity provisions. Additionally, the FDA
announced an interim modification to its generic drug exclusivity
policies in a March 2000 Industry Guidance and in a July 13, 2000
interim rule. On October 24, 2002, the FDA published an additional
proposal to adopt regulations that would further alter the patent
listing and certification procedures on which the opportunities for
180-day generic exclusivity are based. On November 1, 2002, the FDA
withdrew the August 1999 proposed rule, announcing that it would,
instead, apply the 180-day exclusivity provisions based on the
applicable statutory language as interpreted from time-to-time by
the Courts in private litigation involving patent infringement
claims or in litigation involving direct challenges to FDA's
policies and interpretations of the law. On June 18, 2003, the FDA
issued final regulations based on the October 24, 2002 proposal. We
believe that these new regulations are likely to be challenged in
Court, and cannot predict whether they will be upheld after such a
challenge.
Additionally, legislation has been introduced in Congress that
would make similar and/or additional changes in the provisions of
the Waxman-Hatch Amendments governing the listing of patents, the
requirements for making certifications to patents and the
circumstances in which a company may be awarded a 180-day marketing
exclusivity period following a successful challenge to a listed
patent. The language and scope of possible legislation on these
issues is still being hotly debated and it is impossible to predict
whether, when or in what form any statutory changes may be enacted
as a result. The range of proposals being debated include proposals
that would severely limit or completely eliminate 180-day generic
exclusivity.
Some of these proposals, if enacted, could substantially change the
incentives and the manner in which patents on drug products are
enforced and challenged. Because our business involves both
enforcement of our own patents and challenges to the patents of
others, we are not in a position to predict whether any such
proposals, if enacted, would ultimately have a positive or negative
impact on our business. One or more of our product development or
marketing plans could be adversely affected either by additional
changes in the language or
20
interpretation of the Waxman-Hatch provisions or by an extended
period of uncertainty over whether and in what form such changes
may be made.
WE FACE THE RISK OF PRODUCT LIABILITY CLAIMS, FOR WHICH WE MAY BE
INADEQUATELY INSURED.
Manufacturing, selling and testing pharmaceutical products involve
a risk of product liability. Even unsuccessful product liability
claims could require us to spend money on litigation, divert
management's time, damage our reputation and impair the
marketability of our products. A successful product liability claim
outside of or in excess of our insurance coverage could require us
to pay substantial sums and adversely affect our results of
operations and financial condition.
We previously distributed several low volume pharmaceutical
products that contained phenylpropanolamine, or PPA, and that were
discontinued in 2000 and 2001. We are presently named as one of
several defendants in two product liability lawsuits in federal
court in Nevada and Mississippi involving PPA. Both cases have been
transferred to the nationwide, multi-district litigation for PPA
claims now pending in the U.S. District Court for the Western
District of Washington. Each lawsuit alleges bodily injury,
wrongful death, economic injury, punitive damages, loss of
consortium and/or loss of services from the use of our distributed
pharmaceuticals containing PPA that have since been discontinued
and/or reformulated to exclude PPA. Discovery in these cases is
ongoing. We believe that we have substantial defenses to these
claims, though the ultimate outcome of these cases and the
potential effect on us cannot be determined.
We are being defended and indemnified in the Nevada PPA lawsuits by
our liability insurer subject to aggregate products-completed
operations policy limits in the amount of $10 million and subject
to a reservation of rights. Our product liability coverage was
obtained on a claims made basis and provides coverage for
judgments, settlements and defense costs arising from product
liability claims. However, such insurance may not be adequate to
remove the risk from some or all product liability claims,
including PPA claims, and is subject to the limitations described
in the terms of the policies. Furthermore, our product liability
coverage for PPA claims expired for claims made after June 15,
2002. Although we renewed our product liability coverage for a
policy term of June 15, 2002 through June 15, 2003, that policy
excludes future PPA claims in accordance with the standard industry
exclusion. Consequently, as of June 15, 2002, we have provided for
legal defense costs and indemnity payments involving PPA claims on
a going forward basis, including the Mississippi lawsuit that was
filed during the June 15, 2002 through June 15, 2003 policy period.
From time to time in the future, we may be subject to further
litigation resulting from products containing PPA that we formerly
distributed. We intend to vigorously defend against any claims that
may be raised in the current and future litigations.
BECAUSE WE ARE INVOLVED IN CERTAIN LEGAL PROCEEDINGS WE MAY BE
REQUIRED TO PAY DAMAGES THAT MAY IMPAIR OUR PROFITABILITY AND
REDUCE OUR LIQUIDITY.
ETHEX is a defendant in a lawsuit styled Healthpoint, Ltd. v. ETHEX
Corporation, pending in federal court in San Antonio, Texas. In
general, the plaintiffs allege that ETHEX's comparative promotion
of its Ethezyme(TM) to Healthpoint's Accuzyme(R) product resulted
in false advertising and misleading statements under various
federal and state laws, and constituted unfair competition and
misappropriation of trade secrets. In September 2001, the jury
returned verdicts against ETHEX on certain false advertising,
unfair competition, and misappropriation claims. The jury awarded
compensatory and punitive damages totaling $16.5 million. On
October 1, 2002, the U.S. District Court for the Western District
of Texas denied ETHEX's motion to set aside the jury's verdict. On
December 17, 2002, the court entered a judgment awarding attorneys'
fees to Healthpoint in an amount to be subsequently determined.
We believe that the jury award is excessive and is not sufficiently
supported by the facts or the law. We intend to vigorously appeal
once a final judgment has been entered by the court. We and our
counsel believe that there are meritorious arguments to be raised
during the appeal process, however, we are not presently able to
predict the
21
outcome of the pending District Court's motions or an appeal.
As a result of the court's earlier decisions, our results
of operations for fiscal 2003 included a reserve for potential
damages of $16.5 million, which is reflected in accrued liabilities
on our consolidated balance sheet as of March 31, 2003. To date
Healthpoint has requested reimbursement for approximately $1.8
million in attorneys' fees in addition to the judgment discussed
above. We are contesting Healthpoint's entitlement to and their
requested amount of attorneys' fees. As of this date, the court had
not entered any order with respect to the amount of attorneys' fees
to be awarded. Our counsel has advised us that the amount could
range from zero to $1.8 million, the amount requested by
Healthpoint. Based on our current analysis we believe that the
reserve as recorded will be adequate to cover any judgment,
including attorneys' fees, which may result at the end of the
appeal process. We are continually evaluating the need for
additional reserves as the case progresses through the appeal
process.
WE DEPEND ON LICENSES FROM OTHERS, AND ANY LOSS OF THESE LICENSES
COULD HARM OUR BUSINESS, MARKET SHARE AND PROFITABILITY.
We have acquired the rights to manufacture, use and/or market
certain products. We also expect to continue to obtain licenses for
other products and technologies in the future. Our license
agreements generally require us to develop the markets for the
licensed products. If we do not develop these markets, the
licensors may be entitled to terminate these license agreements.
We cannot be certain that we will fulfill all of our obligations
under any particular license agreement for any variety of reasons,
including insufficient resources to adequately develop and market a
product, lack of market development despite our efforts and lack of
product acceptance. Our failure to fulfill our obligations could
result in the loss of our rights under a license agreement.
Certain products we have the right to license are at certain stages
of clinical tests and FDA approval. Failure of any licensed product
to receive regulatory approval could result in the loss of our
rights under its license agreement.
WE MAY HAVE FUTURE CAPITAL NEEDS AND FUTURE ISSUANCES OF EQUITY
SECURITIES WILL RESULT IN DILUTION.
We anticipate that funds generated internally, together with funds
available under our credit facility, and the proceeds received from
our Notes offering completed in May 2003, will be sufficient to
implement our business plan for the foreseeable future, subject to
additional needs as may arise if acquisition opportunities become
available. We also may need additional capital if unexpected events
occur or opportunities arise. Additional capital might be raised
through the public or private sale of debt or equity securities. If
we sell equity securities, holders of our common stock could
experience dilution. Furthermore, those securities could have
rights, preferences and privileges more favorable than those of the
Class A common stock. We cannot assure you that additional funding
will be available, or available on terms favorable to us. If the
funding is not available, we may not be able to fund our expansion,
take advantage of acquisition opportunities or respond to
competitive pressures.
RISKS RELATED TO OUR INDUSTRY
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY CHANGES IN THIRD PARTY
REIMBURSEMENT PRACTICES, THIRD PARTY REJECTION OF OUR PRODUCTS AND
RELATED PRICING PRESSURES.
The market for our products may be limited by actions of third
party payers, such as government and private health insurers and
managed care organizations. For example, many managed health care
organizations are now controlling the pharmaceuticals that appear
on their lists of reimbursable medications. The resulting
competition among pharmaceutical companies to place their products
on these formulary lists has created a trend of downward pricing
pressure in the industry. In addition, many managed care
organizations are pursuing various ways to reduce pharmaceutical
costs and are considering formulary contracts primarily with those
pharmaceutical
22
companies that can offer a full line of products for a given
therapeutic category or disease state. Our products might not be
included in the formulary lists of managed care organizations.
Also, downward pricing pressure in the industry generally may
negatively impact our results of operations.
Our ability to market generic/non-branded pharmaceutical products
successfully depends, in part, on the acceptance of the products by
independent third parties, including pharmacies, government
formularies and other retailers, as well as patients. We
manufacture a number of prescription drugs which are used by
patients who have severe health conditions. Although the brand-name
products generally have been marketed safely for many years prior
to our introduction of a generic/non-branded alternative, there is
a possibility that one of these products could produce a side
effect which could result in an adverse effect on our ability to
achieve acceptance by managed care providers, pharmacies and other
retailers, customers and patients. If these independent third
parties do not accept our products, it could have a material
adverse effect on our revenues and profitability.
Furthermore, a number of legislative and regulatory proposals aimed
at changing the health care system have been proposed. We cannot
predict whether any of these proposals will be adopted or the
effect they may have on our business. The fact that these proposals
are pending, the nature of these proposals, and the adoption of any
of these proposals are likely to increase industry-wide pricing
pressures.
OUR BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION.
Our business is subject to extensive regulation by numerous
governmental authorities in the United States and other countries,
particularly the FDA. Failure to comply with applicable FDA or
other regulatory requirements may result in criminal prosecution,
civil penalties, injunctions, recall or seizure of products and
total or partial suspension of production, as well as other
regulatory actions against our products and us.
We market certain drug products in the United States without FDA
approval under certain "grandfather" clauses and statutory and
regulatory exceptions to the pre-market approval requirement for
"new drugs" under the Federal Food, Drug and Cosmetic Act, or the
FDCA. A determination as to whether a particular product does or
does not require FDA pre-market review and approval can involve
consideration of numerous complex and imprecise factors. If a
determination is made by the FDA that any product marketed without
approval requires such approval, the FDA may institute enforcement
actions, including product seizure, or an action seeking an
injunction against further marketing and may or may not allow
sufficient time to obtain the necessary approvals before it seeks
to curtail further marketing. For example, in October 2002, FDA
sent warning letters to manufacturers and distributors of
unapproved prescription drug products containing the expectorant
guaifenesin as a single entity in a solid oral dosage form. Citing
the recent approval of one such product, the FDA warning letters
asserted that the marketing of all such products without NDA or
ANDA approval should stop. The FDA subsequently agreed to allow
continued manufacture through May 2003 and sale through October
2003 of the products, and we are complying with those deadlines
unless and until we obtain NDA or ANDA approval for our versions of
the affected guaifenesin products. We are not in a position to
predict whether or when the FDA might choose to raise similar
objections to the marketing without NDA or ANDA approval of another
category or categories of drug products represented in our product
lines. In the event such objections are raised, we could be
required or could decide to cease distribution of additional
products until pre-market approval is obtained. In addition, we may
not be able to obtain any particular approval that may be required
or such approvals may not be obtained on a timely basis.
In addition to compliance with current Good Manufacturing Practice,
or cGMP, requirements, drug manufacturers must register each
manufacturing facility with the FDA. Manufacturers also must be
registered with the Drug Enforcement Administration, or DEA, and
similar state and local regulatory authorities if they handle
controlled substances, and with the Environmental Protection
Agency, or EPA, and similar state and local regulatory authorities
if they generate toxic or dangerous wastes. We are currently in
material compliance with cGMP and are registered with the
appropriate agencies. Non-compliance with applicable cGMP
requirements or the rules and regulations of these agencies can
result in fines, recall or seizure of products, total or partial
suspension of
23
production and/or distribution, refusal of government agencies to
grant pre-market approval or other product applications and
criminal prosecution. Despite our ongoing efforts, cGMP
requirements and other regulatory requirements, and related
enforcement priorities and policies may evolve over time and we
may not be able to remain continuously in material compliance with
all of these requirements.
From time to time, governmental agencies have conducted
investigations of other pharmaceutical companies relating to the
distribution and sale of drug products to government purchasers or
subject to government or third party reimbursement. We believe that
we have marketed our products in compliance with applicable laws
and regulations. However, standards sought to be applied in the
course of governmental investigations may not be consistent with
standards previously applied to our industry generally or
previously understood by us to be applicable to our activities.
OUR INDUSTRY IS HIGHLY COMPETITIVE.
Numerous pharmaceutical companies are involved or are becoming
involved in the development and commercialization of products
incorporating advanced drug delivery systems. Our business is
highly competitive, and we believe that competition will continue
to increase in the future. Many pharmaceutical companies have
invested, and are continuing to invest, significant resources in
the development of proprietary drug delivery systems. In addition,
several companies have been formed to develop specific advanced
drug delivery systems. Many of these pharmaceutical and other
companies who may develop drug delivery systems have greater
financial, research and development and other resources than we do,
as well as more experience in commercializing pharmaceutical and
drug delivery products. Those companies may develop products using
their drug delivery systems more rapidly than we do or develop drug
delivery systems that are more effective than ours and thus may
represent significant potential competitors.
Our branded pharmaceutical business is subject to competition from
larger companies with greater financial resources that can support
larger sales forces. The ability of a sales force to compete is
affected by the number of physician calls it can make, which is
directly related to its size, the brand name recognition it has in
the marketplace and its advertising and promotional efforts. We are
not as well established in our branded product sales initiative as
larger pharmaceutical producers and could be adversely affected by
competition from companies with a larger, more established sales
force and higher advertising and promotional expenditures.
Our generic/non-branded pharmaceutical business is also subject to
competitive pressures from a number of companies, some of which
have greater financial resources and broader product lines. To the
extent that we succeed in being first to market with a
generic/non-branded version of a significant product, our sales and
profitability can be substantially increased in the period
following the introduction of such product and prior to additional
competitors' introduction of an equivalent product. Competition is
generally on price, which can have an adverse effect on
profitability as falling prices erode margins. In addition, the
continuing consolidation of the customer base (wholesale
distributors and retail drug chains) and the impact of managed care
organizations will increase competition as suppliers compete for
fewer customers. Consolidation of competitors will increase
competitive pressures as larger suppliers are able to offer a
broader product line. Further, companies continually seek new ways
to defeat generic competition, such as filing applications for new
patents to cover drugs whose original patent protection is about to
expire, developing and marketing other dosage forms including
patented controlled-release products or developing and marketing as
over-the-counter products those branded products which are about to
lose exclusivity and face generic competition.
In addition to litigation over patent rights, pharmaceutical
companies are often the subject of objections by competing
manufacturers over the qualities of their branded or generic
products and/or their promotional activities. For example,
marketers of branded products have challenged the marketing of
certain of our non-branded products that do not require FDA
approval and are not rated for therapeutic equivalence. Currently,
ETHEX is a defendant in ongoing litigation with Healthpoint,
regarding allegations of unfair competition and misleading
marketing. A jury verdict against us is currently pending, which
the court refused to set aside. As a
24
result, we made an appropriate provision for liability in our
financial statements. We intend to vigorously appeal the judgment
entered by the court. Competitors' objections may be pursued in
complaints before governmental agencies or courts. These
objections can be very expensive to pursue or to defend, and the
outcome of agency or court review of the issues raised is
impossible to predict. In these proceedings, companies can be
subjected to restrictions on their activities or to liability for
alleged damages despite their belief that their products and
procedures are in full compliance with appropriate standards. In
addition, companies that pursue what they believe are legitimate
complaints about competing manufacturers and/or their products may
nevertheless be unable to obtain any relief.
OUR INDUSTRY EXPERIENCES RAPID TECHNOLOGICAL CHANGE.
The drug delivery industry is a rapidly evolving field. A number of
companies, including major pharmaceutical companies, are developing
and marketing advanced delivery systems for the controlled delivery
of drugs. Products currently on the market or under development by
competitors may deliver the same drugs, or other drugs to treat the
same indications, as many of the products we market or are
developing. The first pharmaceutical branded or generic/non-branded
product to reach the market in a therapeutic area often obtains and
maintains significant market share relative to later entrants to
the market. Our products also compete with drugs marketed not only
in similar delivery systems but also in traditional dosage forms.
New drugs, new therapeutic approaches or future developments in
alternative drug delivery technologies may provide advantages over
the drug delivery systems and products that we are marketing, have
developed or are developing.
Changes in drug delivery technology may require substantial
investments by companies to maintain their competitive position and
may provide opportunities for new competitors to enter the
industry. Developments by others could render our drug delivery
products or other technologies uncompetitive or obsolete. If others
develop drugs which are cheaper or more effective or which are
first to market, sales or prices of our products could decline.
THE HOLDERS OF THE NOTES MAY REQUIRE US TO REPURCHASE THE NOTES
UPON THE OCCURRENCE OF A CHANGE IN CONTROL.
On May 16, 2008, 2013, 2018, 2023 and 2028 and upon the occurrence
of a change in control, holders of the Notes may require us to
offer to repurchase their Notes for cash. The source of funds for
any repurchase required as a result of any such events will be our
available cash or cash generated from operating activities or other
sources, including borrowings, sales of assets, sales of equity or
funds provided by a new controlling entity. The use of available
cash to fund the repurchase of the Notes may impair our ability to
obtain additional financing in the future.
OUR REPORTED EARNINGS PER SHARE MAY BE MORE VOLATILE BECAUSE OF THE
CONVERSION CONTINGENCY PROVISION OF THE NOTES ISSUED IN MAY 2003.
Holders of the Notes issued in May 2003 may convert the Notes into
our Class A common stock during any quarter commencing after June
30, 2003, if the closing sale price of our Class A common stock for
at least 20 trading days in the period of 30 consecutive trading
days ending on the last trading day of the quarter preceding the
quarter in which the conversion occurs is more than 120% of the
conversion price per share of our Class A common stock on that 30th
trading day. Until this contingency is met, the shares underlying
the Notes are not included in the calculation of basic or fully
diluted earnings per share. Should this contingency be met,
reported earnings per share would be expected to decrease as a
result of the inclusion of the underlying shares in the earnings
per share calculation. An increase in volatility in our stock price
could cause this condition to be met in one quarter and not in a
subsequent quarter, increasing the volatility of reported fully
diluted earnings per share.
25
RISKS RELATED TO OUR CLASS A COMMON STOCK
MANAGEMENT STOCKHOLDERS CONTROL OUR COMPANY.
At March 31, 2003, our directors and executive officers
beneficially own approximately 15% of our Class A common stock and
approximately 51% of our Class B common stock. As a result, these
persons control approximately 47% of the combined voting power
represented by our outstanding securities. These persons will
retain effective voting control of our company and are expected to
continue to have the ability to effectively determine the outcome
of any matter being voted on by our stockholders, including the
election of directors and any merger, sale of assets or other
change in control of our company.
THE MARKET PRICE OF OUR STOCK HAS BEEN AND MAY CONTINUE TO BE
VOLATILE.
The market prices of securities of companies engaged in
pharmaceutical development and marketing activities historically
have been highly volatile. In addition, any or all of the following
may have a significant impact on the market price of our Class A
common stock: announcements by us or our competitors of
technological innovations or new commercial products; delays in the
development or approval of products; developments or disputes
concerning patent or other proprietary rights; publicity regarding
actual or potential medical results relating to products marketed
by us or products under development; regulatory developments in
both the United States and foreign countries; publicity regarding
actual or potential acquisitions; public concern as to the safety
of drug technologies or products; financial results which are
different from securities analysts' forecasts; and economic and
other external factors, as well as period-to-period fluctuations in
our financial results.
FUTURE SALES OF COMMON STOCK COULD ADVERSELY AFFECT OUR CLASS A
COMMON STOCK.
As of March 31, 2003, an aggregate of 1,827,082 shares of our Class
A common stock and 508,273 shares of our Class B common stock were
issuable upon exercise of outstanding stock options under our stock
option plans, and an additional 1,945,175 shares of our Class A
common stock and 1,261,000 shares of Class B common stock were
reserved for the issuance of additional options and shares under
these plans. In addition, as of March 31, 2003, 225,000 shares of
our Class A common stock were reserved for issuance upon conversion
of our outstanding 7% cumulative convertible preferred stock.
Future sales of our common stock and instruments convertible or
exchangeable into our common stock and transactions involving
equity derivatives relating to our common stock, or the perception
that such sales or transactions could occur, could adversely affect
the market price of our common stock. This could, in turn, have an
adverse effect on the trading price of the Notes resulting from,
among other things, a delay in the ability of holders to convert
their Notes into our Class A common stock.
OUR CHARTER PROVISIONS AND DELAWARE LAW MAY HAVE ANTI-TAKEOVER
EFFECTS.
Our Amended Certificate of Incorporation authorizes the issuance of
common stock in two classes, Class A common stock and Class B
common stock. Each share of Class A common stock entitles the
holder to one-twentieth of one vote on all matters to be voted upon
by stockholders, while each share of Class B common stock entitles
the holder to one full vote on each matter considered by the
stockholders. In addition, our directors have the authority to
issue additional shares of preferred stock and to determine the
price, rights, preferences, privileges and restrictions of those
shares without any further vote or action by the stockholders. The
rights of the holders of common stock will be subject to, and may
be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The existence of
two classes of common stock with different voting rights and the
ability of our directors to issue additional shares of preferred
stock could make it more difficult for a third party to acquire a
majority of our voting stock. Other provisions of our Certificate
of Incorporation and Bylaws, such as a classified board of
directors, also may have the effect of discouraging, delaying or
preventing a merger,
26
tender offer or proxy contest, which could have an adverse effect
on the market price of our Class A common stock.
In addition, certain provisions of Delaware law applicable to our
company could also delay or make more difficult a merger, tender
offer or proxy contest involving our company, including Section 203
of the Delaware General Corporation Law, which prohibits a Delaware
corporation from engaging in any business combination with any
interested stockholder for a period of three years unless certain
conditions are met. Our senior management is entitled to certain
payments upon a change in control. All of our stock option plans
provide for the acceleration of vesting in the event of a change in
control in our company.
ITEM 2. PROPERTIES
----------
Our corporate headquarters is located at 2503 South Hanley Road in
St. Louis County, Missouri, and contains approximately 40,000
square feet of floor space. We have a lease on the building for a
period of ten years expiring December 31, 2006, with one five-year
option to renew. The building is leased from an affiliated
partnership of an officer and director of the Company.
In addition, we lease or own the facilities shown in the following
table:
SQUARE LEASE RENEWAL
FOOTAGE USAGE EXPIRES OPTIONS
--------------------------------------------------------------------------------
31,630 PDI Office/Mfg./Whse. 11/30/07 5 Years(1)
10,000 PDI/KV Lab/Whse. 11/30/03 None
23,000 KV Office/R&D/Mfg. 12/31/06 5 Years(1)
122,350 KV Office/Whse./Lab Owned N/A
90,000 KV Mfg. Oper. Owned N/A
87,020 ETHEX/Ther-Rx/Whse. Owned N/A
260,160 ETHEX/Ther-Rx/PDI Distribution 04/30/12 5 Years(1)
40,000 KV Warehouse 11/30/03 None
128,960 ETHEX/Ther-Rx/PDI Office/Whse. 05/31/11 5 Years(1)
----------------------------------------
(1) Two five-year options.
In April 2003, we purchased a building that consists of
approximately 275,000 square feet of additional office, production,
distribution and warehouse space. Properties used in our operations
are considered suitable for the purposes for which they are used
and are believed to be adequate to meet our Company's needs for the
reasonably foreseeable future. However, we will consider leasing or
purchasing additional facilities from time to time, when attractive
facilities become available, to accommodate the consolidation of
certain operations and to meet future expansion plans.
ITEM 3. LEGAL PROCEEDINGS
-----------------
ETHEX is a defendant in a lawsuit styled Healthpoint, Ltd. v. ETHEX
Corporation, pending in federal court in San Antonio, Texas. The
suit was filed by Healthpoint, Ltd., or Healthpoint, on August 3,
2000 and later was joined by companies affiliated with Healthpoint.
In general, the plaintiffs allege that ETHEX's comparative
promotion of its Ethezyme(TM) to Healthpoint's Accuzyme(R) product
resulted in false advertising and misleading statements under
various federal and state laws, and constituted unfair competition
and misappropriation of trade secrets. In September 2001, the jury
returned verdicts against ETHEX on certain false advertising,
unfair
27
competition, and misappropriation claims. The jury awarded
compensatory and punitive damages totaling $16.5 million. On
October 1, 2002, the U.S. District Court for the Western District
of Texas denied ETHEX's motion to set aside the jury's verdict. On
December 17, 2002, the court entered a judgment awarding
attorneys' fees to Healthpoint in an amount to be subsequently
determined.
We believe that the jury award is excessive and is not sufficiently
supported by the facts or the law. We intend to vigorously appeal
once the court has entered a final judgment. We and our counsel
believe that there are meritorious arguments to be raised during
the appeal process; however, we are not presently able to predict
the outcome of the pending District Court's motions or an appeal.
As a result of the court's earlier decisions, our results of
operations for fiscal 2003 included a reserve for potential damages
of $16.5 million, which is reflected in accrued liabilities on our
consolidated balance sheet as of March 31, 2003. To date
Healthpoint has requested reimbursement for approximately $1.8
million in attorneys' fees in addition to the judgment discussed
above. We are contesting Healthpoint's entitlement to and their
requested amount of attorneys' fees. As of this date, the court had
not entered any order with respect to the amount of attorneys' fees
to be awarded. Our counsel has advised us that the amount could
range from zero to $1.8 million, the amount requested by
Healthpoint. Based on our current analysis we believe that the
reserve as recorded will be adequate to cover any judgment,
including attorneys' fees, which may result at the end of the
appeal process. We are continually evaluating the need for
additional reserves as the case progresses through the appeal
process.
We previously distributed several low volume pharmaceutical
products that contained phenylpropanolamine, or PPA, and that were
discontinued in 2000 and 2001. We are presently named as one of
several defendants in two product liability lawsuits in federal
court in Nevada and Mississippi involving PPA. The Nevada case is
Deuel, David, et al. v. KV Pharmaceutical Company, Inc. The suit
was filed on June 11, 2001. Discovery has been initiated in this
case, and we currently have completed the basic fact discovery and
depositions, however no discovery cut-off date has been assigned
and there is presently no trial date. The Mississippi case is
Virginia Madison, et al. v. Bayer Corporation, et al. We are one of
several defendants named in the lawsuit. The suit was filed on
December 23, 2002, but was not served on us until February 2003.
The case was originally filed in the Circuit Court of Hinds County,
Mississippi, and was removed to the United States District Court
for the Southern District of Mississippi by co-defendant Bayer
Corporation. The Plaintiffs have filed a motion to remand the case
to the Circuit Court of Hinds County, Mississippi, which has caused
the Court to enter a stay of all proceedings pending a resolution
of the motion. So far, the Court has not ruled on the motion. Both
the Nevada and Mississippi cases have been transferred to a
Judicial Panel on Multi District Litigation for PPA claims sitting
in the Western District of Washington. Each lawsuit alleges bodily
injury, wrongful death, economic injury, punitive damages, loss of
consortium and/or loss of services from the use of our distributed
pharmaceuticals containing PPA that have since been discontinued
and/or reformulated to exclude PPA. We believe that we have
substantial defenses to these claims, though the ultimate outcome
of these cases and the potential effect on us cannot be determined.
We are being defended and indemnified in the Nevada PPA lawsuits by
our liability insurer subject to aggregate products-completed
operations policy limits in the amount of $10 million and subject
to a reservation of rights. Our product liability coverage was
obtained on a claims made basis and provides coverage for
judgments, settlements and defense costs arising from product
liability claims. However, such insurance may not be adequate to
remove the risk from some or all product liability claims,
including PPA claims, and is subject to the limitations described
in the terms of the policies. Furthermore, our product liability
coverage for PPA claims expired for claims made after June 15,
2002. Although we renewed our product liability coverage for a
policy term of June 15, 2002 through June 15, 2003, that policy
excludes future PPA claims in accordance with the standard industry
exclusion. Consequently, as of June 15, 2002, we have provided for
legal defense costs and indemnity payments involving PPA claims on
a going forward basis, including the Mississippi lawsuit that was
filed during the June 15, 2002 through June 15, 2003 policy period.
Moreover, we may not be able to obtain product liability insurance
in the future for PPA claims with adequate coverage limits at
commercially reasonable prices for subsequent periods. From time to
time in the future, we may be subject to further litigation
resulting from products containing PPA that we formerly
distributed. We intend to vigorously defend any claims that may be
raised in the current and future litigations.
28
From time to time, we become involved in various legal matters in
addition to the above described matters, that we consider to be in
the ordinary course of business. While we are not presently able to
determine the potential liability, if any, related to such matters,
we believe none of such matters, individually or in the aggregate,
will have a material adverse effect on our financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the Company's fiscal year ended March 31, 2003.
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
The following is a list of current executive officers of our
Company, their ages, their positions with our Company and their
principal occupations for at least the past five years.
NAME AGE POSITION HELD AND PAST EXPERIENCE
- --------------------------------------------------------------------------------------------------------------------
Victor M. Hermelin 89 Director, Chairman of the Board.(1)
Marc S. Hermelin 61 Director, Vice-Chairman of the Board and Chief Executive Officer.
Alan G. Johnson 68 Director, Senior Vice President-Strategic Planning and Corporate Growth since
September 27, 1999 and Secretary of the Company; Chairman of Johnson
Research & Capital, Inc., an investment banking and institutional research
firm from January to September 1999; Member of the law firm Gallop, Johnson &
Neuman, L.C. 1976 to 1998; Director of Siboney Corporation.
Gerald R. Mitchell 64 Vice President, Treasurer and Chief Financial Officer since 1981.
The term of office for each executive officer of the Company expires at
the next annual meeting of the Board of Directors or at such time as
his successor has been elected and qualified.
- -------------------------------
(1) Victor M. Hermelin is the father of Marc S. Hermelin.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
--------------------------------------------------------------------
MATTERS
-------
a) PRINCIPAL MARKET
----------------
Our Class A Common Stock and Class B Common Stock are traded on the
New York Stock Exchange under the symbols KV.a and KV.b,
respectively.
b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
---------------------------------------------
The number of holders of record of Class A and Class B Common Stock
as of June 4, 2003 was 655 and 444, respectively (not separately
counting shareholders whose shares are held in "nominee" or
"street" names, which are estimated to represent approximately
6,000 of Class A and of Class B additional shareholders combined).
29
c) STOCK PRICE AND DIVIDEND INFORMATION
------------------------------------
The high and low closing sales prices of our Class A and Class B
Common Stock, as reported on the New York Stock Exchange, during
each quarter of fiscal 2003 and 2002 were as follows:
CLASS A COMMON STOCK
--------------------
FISCAL 2003 FISCAL 2002
----------- -----------
QUARTER HIGH LOW HIGH LOW
------- ---- --- ---- ---
First...................... $31.95 $25.12 $27.75 $16.50
Second..................... 24.00 16.78 30.95 24.00
Third...................... 23.66 15.00 29.50 23.79
Fourth..................... 24.00 16.42 29.43 23.90
CLASS B COMMON STOCK
--------------------
FISCAL 2003 FISCAL 2002
----------- -----------
QUARTER HIGH LOW HIGH LOW
------- ---- --- ---- ---
First...................... $33.00 $26.25 $33.50 $16.25
Second..................... 24.25 16.80 33.00 26.30
Third...................... 23.90 15.31 32.46 26.80
Fourth..................... 24.39 16.78 33.03 27.00
Since 1980, we have not declared or paid any cash dividends on our
common stock and we do not plan to do so in the foreseeable future.
No dividends may be paid on Class A common stock or Class B common
stock unless all dividends on the Cumulative Convertible Preferred
Stock have been declared and paid. Dividends must be paid on Class
A common stock when, and if, we declare and distribute dividends on
the Class B common stock. Undeclared and unaccrued cumulative
preferred dividends were approximately $366,000, or $9.14 per
share, at March 31, 2003 and 2002. Also, under the terms of our
credit agreement, we may not pay cash dividends in excess of 25% of
the prior year's consolidated net income. Dividends of $70,000 were
paid in fiscal 2003 and 2002 on 40,000 shares of Cumulative
Convertible Preferred Stock. On May 12, 2003, we also paid a
dividend of approximately $366,000, or $9.14 per share, to
Cumulative Convertible Preferred Stock holders of record on March
31, 2003 for the previously undeclared and unaccrued cumulative
preferred dividends. For the foreseeable future, we plan to use
cash generated from operations for general corporate purposes,
including funding potential acquisitions, research and development
and working capital. Our board of directors reviews our dividend
policy periodically. Any payment of dividends in the future will
depend upon our earnings, capital requirements, financial condition
and other factors considered relevant by our board of directors.
30
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
YEARS ENDED MARCH 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
BALANCE SHEET DATA: ($ in thousands, except per share data)
Total assets $352,668 $195,192 $151,417 $140,385 $127,990
Long-term debt 10,106 4,387 5,080 16,779 31,491
Shareholders' equity 260,616 158,792 125,942 97,799 67,548
INCOME STATEMENT DATA:
Revenues $244,996 $204,105 $177,767 $142,734 $112,853
% Increase 20.0% 14.8% 24.5% 26.5% 15.5%
Operating income(b) $ 42,929(b) $ 49,294 $ 37,972 $ 34,192 $ 24,116
Net income(a)(b) 28,110(b) 31,464 23,625 24,308(a) 23,340(a)
Net income
per common
share-diluted(c) $ 0.82 $ 0.98 $ 0.74 $ 0.80(a) $ 0.78(a)
Preferred Stock Dividends $ 70 $ 70 $ 420 $ 420 $ 422
- ----------------
(a) Net income in fiscal 2000 and 1999 includes gains associated with
$7.0 million and $13.3 million in arbitration awards, respectively.
The awards net of applicable income taxes and expenses were $3.9
million and $8.0 million in fiscal 2000 and 1999, respectively.
(b) Operating income in fiscal 2003 includes a reserve of $16.5 million
for potential damages associated with a lawsuit (see Note 10). The
impact of the litigation reserve, net of applicable income taxes,
was to reduce net income by $10.4 million and diluted earnings per
share by $.30 in fiscal 2003.
(c) Previously reported amounts give effect to the three-for-two stock
splits effected in the form of a 50% stock dividend that occurred
on September 7, 2000 and April 17, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, AND
------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Except for the historical information contained herein, the
following discussion contains forward-looking statements that are
subject to known and unknown risks, uncertainties, and other
factors that may cause our actual results to differ materially from
those expressed or implied by such forward-looking statements.
These risks, uncertainties and other factors are discussed
throughout this report and specifically under the caption
"Cautionary Statement Regarding Forward-Looking Information" and
"Risk Factors." In addition, the following discussion and analysis
of the financial condition and results of operations should be read
in conjunction with "Selected Financial Data" and our consolidated
financial statements and notes thereto appearing elsewhere in this
Form 10-K.
BACKGROUND
We develop, acquire, manufacture and market technologically
distinguished branded and generic prescription pharmaceutical
products. We also enter into licensing agreements with
pharmaceutical marketing companies to develop and commercialize
additional brand name products. Until the mid-1990's, we derived
most of our revenues from our manufacturing and licensing
activities. Today, we derive most of our revenues from our product
sales. While we expect to continue to enter into new licensing
agreements, we emphasize the
31
development or acquisition and marketing of technologically
distinguished prescription products, whether branded or
generic/non-branded through our Ther-Rx and ETHEX business lines,
as well as specialty raw materials through Particle Dynamics.
In 1990, we established our ETHEX business to market and distribute
technologically distinguished generic/non-branded drugs that use
our proprietary technologies. Net revenues from ETHEX have
increased from $13.5 million in fiscal 1994 to $179.7 million in
fiscal 2003.
We launched our Ther-Rx business in 1999 to market branded
pharmaceutical products. We acquired and introduced our first two
of 16 Ther-Rx branded products, Micro-K(R) and PreCare(R), in March
and August 1999, respectively. Ther-Rx has also introduced four
internally developed product line extensions to PreCare(R) since
October 1999, including PrimaCare(TM) in the fourth quarter of
fiscal 2002, the first prescription prenatal/postnatal nutritional
supplement with essential fatty acids specially designed to help
provide nutritional support for women during pregnancy, postpartum
recovery and throughout the childbearing years. In June 2000, we
launched our first NDA approved product, Gynazole-1(R), a one-dose
prescription cream treatment for vaginal yeast infections. Net
revenues from Ther-Rx have increased from $1.8 million in fiscal
1999 to $43.7 million in fiscal 2003.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements are presented on the basis of
accounting principles that are generally accepted in the United
States. Our significant accounting policies are described in Note 2
to our consolidated financial statements. Certain of our accounting
policies are particularly important to the portrayal of our
financial position and results of operations and require the
application of significant judgment by our management. As a result,
these policies are subject to an inherent degree of uncertainty. In
applying these policies, our management makes estimates and
judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosures. We base our
estimates and judgments on our historical experience, the terms of
existing contracts, our observance of trends in the industry,
information that we obtain from our customers and outside sources,
and on various other assumptions that we believe to be reasonable
and appropriate under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources.
Although we believe that our estimates and assumptions are
reasonable, actual results may differ significantly from these
estimates. Changes in estimates and assumptions based upon actual
results may have a material impact on our results of operations
and/or financial condition. Our critical accounting policies are
described below.
REVENUE RECOGNITION AND SALES ALLOWANCES. We recognize revenue on
product sales upon shipment when title and risk of loss have
transferred to the customer and when estimated sales provisions for
product returns, sales rebates, payment discounts, chargebacks, and
other promotional programs are reasonably determinable. Accruals
for these provisions are presented in the consolidated financial
statements as reductions to revenues and accounts receivable.
Provisions for estimated product returns, sales rebates, payment
discounts, and other promotional programs require a limited degree
of subjectivity, yet combined represent a significant portion of
the provisions. These provisions are estimated based on historical
payment experience, historical relationship to revenues, estimated
customer inventory levels and contract terms. Such provisions are
reasonably determinable due to the limited number of assumptions
and consistency of historical experience.
The provision for chargebacks is the most significant and complex
estimate used in the recognition of revenue. We establish contract
prices for indirect customers who are supplied by our wholesale
customers. A chargeback represents the difference between our
invoice price to the wholesaler and the indirect customer's
contract price, which is lower. We credit the wholesaler for
purchases by indirect customers at the lower price. Accordingly, we
record these chargebacks at the time we recognize revenue in
connection with our sales to wholesalers. Provisions for estimating
chargebacks are calculated primarily using historical chargeback
experience, actual contract pricing
32
and estimated wholesaler inventory levels. We continually monitor
our assumptions giving consideration to estimated wholesaler
inventory levels and current pricing trends and make adjustments
to these provisions when we believe that the actual chargeback
credits will differ from the estimated provisions.
ALLOWANCE FOR INVENTORIES. Inventories consist of finished goods
held for distribution, raw materials and work in process. Our
inventories are stated at the lower of cost or market, with cost
determined on the first-in, first-out basis. In evaluating whether
inventory is to be stated at the lower of cost or market, we
consider such factors as the amount of inventory on hand and in the
distribution channel, estimated time required to sell existing
inventory, remaining shelf life and current and expected market
conditions, including levels of competition. We establish reserves,
when necessary, for slow-moving and obsolete inventories based upon
our historical experience and management's assessment of current
product demand. If we determine that inventory is overvalued based
upon the above factors, then the necessary provisions to reduce
inventories to their net realizable value are made.
INTANGIBLE ASSETS AND GOODWILL. Our intangible assets consist of
product rights, license agreements and trademarks resulting from
product acquisitions and legal fees and similar costs relating to
the development of patents and trademarks. Intangible assets that
are acquired are stated at cost, less accumulated amortization, and
are amortized on a straight-line basis over estimated useful lives
of 20 years. Upon approval, costs associated with the development
of patents and trademarks are amortized on a straight-line basis
over estimated useful lives ranging from five to 17 years. We
determine amortization periods for intangible assets that are
acquired based on our assessment of various factors impacting
estimated useful lives and cash flows of the acquired products.
Such factors include the product's position in its life cycle, the
existence or absence of like products in the market, various other
competitive and regulatory issues, and contractual terms.
Significant changes to any of these factors may result in a
reduction in the intangible asset's useful life and an acceleration
of related amortization expense.
We assess the impairment of intangible assets whenever events or
changes in circumstances indicate that the carrying value may not
be recoverable. Some factors we consider important which could
trigger an impairment review include the following, (1) significant
underperformance relative to expected historical or projected
future operating results; (2) significant changes in the manner of
our use of the acquired assets or the strategy for our overall
business; and (3) significant negative industry or economic trends.
When we determine that the carrying value of intangible assets may
not be recoverable based upon the existence of one or more of the
above indicators of impairment, we first perform an assessment of
the asset's recoverability. Recoverability is determined by
comparing the carrying amount of an intangible asset against an
estimate of the undiscounted future cash flows expected to result
from its use and eventual disposition. If the sum of the expected
future undiscounted cash flows is less than the carrying amount of
the intangible asset, an impairment loss is recognized based on the
excess of the carrying amount over the estimated fair value of the
intangible asset.
Goodwill relates to the 1972 acquisition of our specialty materials
segment and is recorded net of accumulated amortization through
March 31, 2002. As of April 1, 2002, we adopted Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets, which eliminated the amortization of goodwill,
resulting in an increase in pretax income of approximately $55,000
for the fiscal year ended March 31, 2003. Adoption of this standard
did not have a material effect on the Company's consolidated
financial statements. Upon adoption of SFAS No. 142, we performed
the initial impairment test of our goodwill and determined that no
impairment of the recorded goodwill existed. In accordance with
SFAS No. 142, we will test goodwill for impairment at least
annually and more frequently if an event occurs which indicates the
goodwill may be impaired.
33
RESULTS OF OPERATIONS
FISCAL 2003 COMPARED TO FISCAL 2002
NET REVENUES BY SEGMENT
YEARS ENDED MARCH 31,
------------------------------------------------
CHANGE
------------------
($ IN THOUSANDS): 2003 2002 $ %
-------- -------- -------- -------
Branded products $ 43,677 $ 40,424 $ 3,253 8.0%
as % of net revenues 17.8% 19.8%
Specialty generics 179,724 141,007 38,717 27.5%
as % of net revenues 73.4% 69.1%
Specialty materials 17,395 19,557 (2,162) (11.1)%
as % of net revenues 7.1% 9.6%
Other 4,200 3,117 1,083 34.7%
-------- -------- --------
Total net revenues $244,996 $204,105 $ 40,891 20.0%
The increase in branded product sales was due to continued growth
of our women's healthcare family of products. Sales from this
product group increased $5.6 million, or 20.1%, in fiscal 2003.
Gynazole-1(R), our vaginal antifungal product, continued its market
penetration as its market share increased to 18% at the end of
fiscal 2003, compared to 13% at the end of the prior fiscal year.
Due to its continued growth in market share, sales of Gynazole-1(R)
increased $4.4 million, or 53.4% during the year. Also included in
the women's healthcare family of products is the PreCare(R) product
line which contributed $1.2 million of incremental sales in fiscal
2003. This increase was primarily attributable to increased sales
volume associated with PrimaCare(R), a prescription
prenatal/postnatal multivitamin and mineral supplement with
essential fatty acids, which has continued to show growth in market
share since its introduction in the fourth quarter of fiscal 2002.
Further, the PreCare(R) family of products is currently the leading
branded line of prescription prenatal nutritional supplements in
the United States. Increased sales from the women's healthcare
family of products was partially offset by a $2.3 million, or
18.4%, decline in sales from the branded products cardiovascular
product line. The decrease in cardiovascular sales was due to the
impact of customer buying during the fourth quarter of the prior
fiscal year in anticipation of a year-end price increase coupled
with increased substitution of our generic equivalent products.
The increase in sales for specialty generics resulted primarily
from higher sales volume in the cardiovascular, pain management and
cough/cold product lines, coupled with continued expansion of our
other product lines, including gastrointestinal and anti-anxiety.
Increased sales from these product lines was partially offset by a
reduction in sales in our prenatal vitamin product line. The
cardiovascular product line, which comprised 45.9% of specialty
generic sales in fiscal 2003, contributed $11.2 million of
increased sales from existing products and $5.3 million of
incremental sales volume from the April 2002 ANDA approval and
subsequent launch of Potassium Chloride 20 mg. tablets (generic
equivalent to K-Dur(R)). Sales volume for the pain management
product line increased $11.6 million due to market share gains
coupled with the impact of a full year of sales of two products
introduced in the prior year. The remaining $12.9 million of
increased sales volume resulted primarily from new product
introductions in the cough/cold, gastrointestinal and anti-anxiety
product lines coupled with a full year of sales on products
introduced in the prior year. We introduced 16 and 14 new specialty
generic/non-branded products in fiscal 2003 and 2002, respectively.
The $0.9 million decline in sales volume for the prenatal product
line was primarily attributable to a reduction in the corresponding
brand equivalent market. This market decline was due, in part, to
the introduction of Primacare(R) by our branded products segment in
the fourth quarter of fiscal 2002. The increased sales volume
experienced by specialty generics during fiscal 2003
34
was partially offset by $1.4 million of product price erosion that
resulted primarily from normal and expected pricing pressures in
the pain management and cough/cold product lines.
The decrease in specialty material product sales was primarily due
to an unexpected softness in the nutritional supplement market for
which the specialty materials segment is a supplier.
GROSS PROFIT BY SEGMENT
YEARS ENDED MARCH 31,
------------------------------------------------
CHANGE
------------------
($ IN THOUSANDS): 2003 2002 $ %
-------- -------- -------- -------
Branded products $ 38,460 $ 34,643 $ 3,817 11.0%
as % of net revenues 88.1% 85.7%
Specialty generics 106,854 80,733 26,121 32.4%
as % of net revenues 59.5% 57.3%
Specialty materials 5,720 6,931 (1,211) (17.5)%
as % of net revenues 32.9% 35.4%
Other (565) 1,395 (1,960) (140.5)%
-------- -------- --------
Total gross profit $150,469 $123,702 $ 26,767 21.6%
as % of total net revenues 61.4% 60.6%
The increase in gross profit was attributable to the sales growth
experienced by the branded products and specialty generics
segments, offset partially by a sales decline in the specialty
materials segment. The higher gross profit percentage was favorably
impacted by price increases of branded products that took effect at
the beginning of fiscal 2003 and higher margins realized on new
specialty generic products introduced during the current and prior
fiscal years. The gross profit percentage increases experienced by
the branded products and specialty generics segments were partially
offset by a decline in the gross profit percentage at the specialty
raw materials segment. This decline resulted from unfavorable cost
variances associated with lower production.
RESEARCH AND DEVELOPMENT
YEARS ENDED MARCH 31,
------------------------------------------------
CHANGE
------------------
($ IN THOUSANDS): 2003 2002 $ %
-------- -------- -------- -------
Research and development $19,135 $ 10,712 $ 8,423 78.6%
as % of net revenues 7.8% 5.2%
The increase in research and development expense was primarily due
to higher costs associated with the expansion of clinical testing
connected to our internal product development efforts and higher
personnel expenses related to the growth of our research and
development staff. In fiscal 2004, we expect research and
development costs to increase by approximately 30% over fiscal 2003
levels.
35
SELLING AND ADMINISTRATIVE
YEARS ENDED MARCH 31,
------------------------------------------------
CHANGE
------------------
($ IN THOUSANDS): 2003 2002 $ %
-------- -------- -------- -------
Selling and administrative $ 69,584 $ 61,343 $ 8,241 13.4%
as % of net revenues 28.4% 30.1%
The increase in selling and administrative expense resulted
primarily from an increase in specialty generic/non-branded
marketing and promotional expenses, an increase in personnel costs
associated with corporate administration and branded products
marketing and higher insurance costs. These increases were
partially offset by a reduction in legal expenses which resulted
from insurance reimbursements of defense costs in the Healthpoint
litigation.
AMORTIZATION OF INTANGIBLE ASSETS
YEARS ENDED MARCH 31,
------------------------------------------------
CHANGE
------------------
($ IN THOUSANDS): 2003 2002 $ %
-------- -------- -------- -------
Amortization of intangible assets $ 2,321 $ 2,353 $ (32) (1.4)%
The decrease in amortization of intangible assets was due primarily
to the implementation of SFAS No. 142, Goodwill and Other
Intangible Assets, which discontinued the amortization of goodwill
effective April 1, 2002 (see Notes 2 and 6 in the accompanying
Notes to Consolidated Financial Statements).
LITIGATION
YEARS ENDED MARCH 31,
------------------------------------------------
CHANGE
------------------
($ IN THOUSANDS): 2003 2002 $ %
-------- -------- -------- -------
Litigation $16,500 $ - $ 16,500 n/a %
In September 2002, the Company recorded a litigation reserve of
$16.5 million for potential damages associated with the adverse
decision made by a federal court in Texas to uphold a previously
rendered jury verdict in a lawsuit against ETHEX Corporation, a
wholly-owned subsidiary of the Company (see Note 10 in the
accompanying Notes to Consolidated Financial Statements).
36
OPERATING INCOME
YEARS ENDED MARCH 31,
------------------------------------------------
CHANGE
------------------
($ IN THOUSANDS): 2003 2002 $ %
-------- -------- -------- -------
Operating income $ 42,929 $ 49,294 $(6,365) (12.9)%
The decrease in operating income resulted from the $16.5 million
litigation reserve established by us for potential damages
associated with a lawsuit. Excluding the effect of the litigation
reserve, operating income for fiscal 2003 increased $10.1 million,
or 20.6%, to $59.4 million.
INTEREST AND OTHER INCOME
YEARS ENDED MARCH 31,
------------------------------------------------
CHANGE
------------------
($ IN THOUSANDS): 2003 2002 $ %
-------- -------- -------- -------
Interest and other income $ 977 $ 411 $ 566 137.7%
The increase in interest and other income was primarily due to the
investment of $72.4 million of proceeds from the July 2002
secondary public offering in short-term, highly liquid investments.
PROVISION FOR INCOME TAXES
YEARS ENDED MARCH 31,
------------------------------------------------
CHANGE
------------------
($ IN THOUSANDS): 2003 2002 $ %
-------- -------- -------- -------
Provision for income taxes $ 15,471 $ 17,891 $(2,420) (13.5)%
effective tax rate 35.5% 36.2%
The decline in the effective tax rate was primarily due to an
increase in research and development tax credits.
37
NET INCOME
YEARS ENDED MARCH 31,
------------------------------------------------
CHANGE
------------------
($ IN THOUSANDS): 2003 2002 $ %
-------- -------- -------- -------
Net income $ 28,110 $ 31,464 $(3,354) (10.7)%
Diluted earnings per share 0.82 0.98 (0.16) (16.3)%
The decrease in net income resulted from the $16.5 million
litigation reserve established by us for potential damages
associated with a lawsuit. The impact of the litigation reserve,
net of applicable taxes, reduced net income by $10.4 million. The
more significant percentage decline in earnings per diluted share
for fiscal 2003 resulted from an increase in weighted average
shares outstanding due to the issuance of approximately 3.3 million
shares of Class A common stock in the secondary public offering
that was completed in July 2002. Excluding the effect of the
litigation reserve, net income for fiscal 2003 would have increased
$7.1 million, or 22.5%, to $38.6 million, or $1.12 per diluted
share.
FISCAL 2002 COMPARED TO FISCAL 2001
NET REVENUES BY SEGMENT
YEARS ENDED MARCH 31,
------------------------------------------------
CHANGE
------------------
($ IN THOUSANDS): 2002 2001 $ %
-------- -------- -------- -------
Branded products $ 40,424 $ 25,206 $ 15,218 60.4%
as % of net revenues 19.8% 14.2%
Specialty generics 141,007 132,154 8,853 6.7%
as % of net revenues 69.1% 74.3%
Specialty materials 19,557 17,088 2,469 14.4%
as % of net revenues 9.6% 9.6%
Other 3,117 3,319 (202) (6.1)%
-------- -------- --------
Total net revenues $204,105 $177,767 $ 26,338 14.8%
The increase in branded product sales was due to increased sales
volume among all product categories. Sales from the women's health
care family of products increased $11.3 million, or 69.2%, in
fiscal 2002. Included in women's health care is the PreCare(R)
family of prenatal products, which contributed $9.1 million of
incremental sales in fiscal 2002 due to volume-related increases in
market share. During the fourth quarter of fiscal 2002, Ther-Rx
introduced PrimaCare(TM), a prescription prenatal/postnatal
multivitamin and mineral supplement with essential fatty acids. We
also market Gynazole-1(R), a vaginal antifungal product introduced
in the first quarter of fiscal 2001. Due to its continued growth in
market share, Gynazole-1(R) sales increased $2.2 million, or 38.1%,
in fiscal 2002. Sales from the cardiovascular disease product line
increased $4.0 million, or 47.8%, in fiscal 2002 as customer
inventories returned to normal levels.
The increase in specialty generic sales was primarily due to a
$17.8 million increase in the sales volume of existing products
coupled with $10.8 million of incremental sales from new products.
The cardiovascular product
38
line, which comprised 45.4% of specialty generic sales, accounted
for $7.2 million of the total sales growth. We introduced 14 new
products in fiscal 2002. The volume growth experienced by
specialty generics was partially offset by $19.7 million of
product price erosion that resulted from normal and expected
competitive pricing pressures on certain products.
The increase in specialty raw material product sales was primarily
due to sales of new products and increased sales of existing
products.
GROSS PROFIT
YEARS ENDED MARCH 31,
------------------------------------------------
CHANGE
------------------
($ IN THOUSANDS): 2002 2001 $ %
-------- -------- -------- -------
Gross profit $123,702 $107,104 $ 16,598 15.5%
as % of net revenues 60.6% 60.3%
The increase in gross profit was primarily attributable to the
increased level of product sales. The higher gross profit
percentage in fiscal 2002 resulted primarily from a shift in the
mix of product sales toward higher margin branded products
comprising a larger percentage of net revenues and favorable cost
variances associated with increased production. The positive impact
of these two factors was partially offset by the price erosion in
certain specialty generic products discussed above.
RESEARCH AND DEVELOPMENT
YEARS ENDED MARCH 31,
------------------------------------------------
CHANGE
------------------
($ IN THOUSANDS): 2002 2001 $ %
-------- -------- -------- -------
Research and development $ 10,712 $ 9,282 $ 1,430 15.4%
as % of net revenues 5.2% 5.2%
The increase in research and development expense was primarily due
to higher costs associated with clinical testing connected to our
internal product development efforts and higher personnel expenses
related to expansion of our research and development staff.
39
SELLING AND ADMINISTRATIVE
YEARS ENDED MARCH 31,
------------------------------------------------
CHANGE
------------------
($ IN THOUSANDS): 2002 2001 $ %
-------- -------- -------- -------
Selling and administrative $ 61,343 $ 57,509 $ 3,834 6.7%
as % of net revenues 30.1% 32.4%
The increase in selling and administrative expense was due
primarily to an increase in personnel costs associated with
corporate administration and branded marketing.
INTEREST EXPENSE
YEARS ENDED MARCH 31,
------------------------------------------------
CHANGE
------------------
($ IN THOUSANDS): 2002 2001 $ %
-------- -------- -------- -------
Interest expense $ 350 $ 1,072 $ (722) (67.4)%
The decrease in interest expense was due to a corresponding
reduction in debt.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash and cash equivalents and working capital were $96.3 million
and $137.9 million, respectively, at March 31, 2003, compared to
$12.1 million and $81.4 million, respectively, at March 31, 2002.
Internally generated funds from product sales growth continued to
be the primary source of operating capital used to fund our
businesses. The net cash flow from operating activities was $43.3
million in fiscal 2003 compared to $15.9 million in fiscal 2002.
The 172.5% increase in net cash flow from operating activities
resulted primarily from an increase in cash earnings coupled with
the receipt of certain delayed customer payments which were due at
the end of fiscal 2002 and collected during the first quarter of
fiscal 2003. These increases were offset in part by an increase in
inventories due to increased production of specialty generic
products in fiscal 2003, in anticipation of continued sales growth
and an increase in current liabilities due to an increase in
accounts payable related to purchases to support our production
increases and the timing of income tax payments.
Net cash flow used in investing activities was $32.1 million for
fiscal 2003 compared to $8.5 million for the prior year. Capital
expenditures of $16.1 million were funded by net cash flows from
operating activities. Our investment in capital assets was
primarily for purchasing machinery and equipment to upgrade and
expand our pharmaceutical manufacturing and distribution
capabilities, and for other building renovations. Other investing
activities for the year included a $3.0 million payment related to
the purchase of certain licensing rights combined with an equity
investment in a women's healthcare company. Also, on March 31,
2003, we completed the purchase of product rights and trademarks to
the Chromagen(R) and StrongStart(R) product lines from a subsidiary
of Altana Pharma AG (Altana) and the Niferex(R) product line from
Schwarz Pharma. The acquisition of the Chromagen(R) and
StrongStart(R) product lines was financed with a $13.0 million cash
payment made on March 31, 2003 and two non-interest bearing $7.0
million promissory notes issued to Altana, which are due on the
first and second anniversaries of the agreement. A cash payment of
$14.3 million was made in April 2003 for the Niferex(R) product
line.
40
Total debt increased to $17.6 million at March 31, 2003 compared to
$5.1 million at March 31, 2002. The increase resulted from the
issuance of two non-interest bearing $7.0 million promissory notes
to Altana as partial funding for the Chromagen(R) and
StrongStart(R) product line acquisitions on March 31, 2003. The two
notes are due on the first and second anniversaries of the
agreement. The promissory notes, which are non-interest bearing,
were discounted using imputed interest rates of 3.36% and 4.08%,
respectively, both of which approximate the Company's borrowing
rate for similar debt instruments at the time of the borrowing. The
present value of the notes was determined to be $13.2 million,
resulting in a discount of $0.8 million.
In December 2002, the Company refinanced a $1.7 million building
mortgage that was due in March 2004. The refinanced building
mortgage bears interest at 6.27% and is due in December 2007.
As of March 31, 2003, we have a credit agreement with a bank that
provides for a revolving line of credit for borrowing up to $60
million. The credit agreement provides for a $40 million unsecured
revolving line of credit along with an unsecured supplemental
credit line of $20 million for financing acquisitions. The $40
million unsecured revolving line of credit expires in October 2004.
The unsecured supplemental credit line of $20 million, which was
renewed in December 2002, expires in December 2003. At March 31,
2003, we had no borrowings outstanding under either credit facility
and $11.9 million in open letters of credit issued under the
revolving credit line.
During July 2002, we completed a public offering of approximately
3.3 million shares of Class A common stock. Net proceeds to us were
$72.4 million, after deducting underwriting discounts, commissions
and offering expenses. The proceeds from the offering are being
used for general corporate purposes, including product
acquisitions, research and development activities and working
capital. At March 31, 2003, the net proceeds were temporarily
invested in short-term, highly liquid instruments.
On April 28, 2003, we purchased a building for $8.8 million. The
facility consists of approximately 275,000 square feet of office,
production, distribution and warehouse space. The purchase of the
building was financed by a term loan secured by the property. The
building mortgage bears interest at 5.30% and requires monthly
principal payments of $49,000 plus interest through March 2008. The
remaining principal balance plus any unpaid interest is due in
April 2008.
During May 2003, we completed the issuance of $200.0 million of
Contingent Convertible Subordinated Notes (the Notes) that are
convertible, under certain circumstances, into shares of our Class
A common stock at an initial conversion price of $34.51 per share.
The Notes bear interest at a rate of 2.50% and mature on May 16,
2033. We may redeem some or all of the Notes at any time on or
after May 21, 2006, at a redemption price, payable in cash, of 100%
of the principal amount of the Notes, plus accrued and unpaid
interest (including contingent interest, if any) to the date of
redemption. Holders may require us to repurchase all or a portion
of their Notes on May 16, 2008, 2013, 2018, 2023 and 2028, and upon
a change in control, as defined in the indenture governing the
Notes, at 100% of the principal amount of the Notes, plus accrued
and unpaid interest (including contingent interest, if any) to the
date of repurchase, payable in cash. The Notes are subordinate to
all of our existing and future senior obligations. The net proceeds
to us were approximately $194.0 million, after deducting
underwriting discounts, commissions and offering expenses. The
proceeds from the offering were used to purchase $50.0 million of
our Class A common stock, with the remaining proceeds to be used to
fund future acquisitions of products, technologies or businesses,
and for general corporate purposes.
As a result of the significant increase in debt related to the
$200.0 million Notes issuance, the $60 million revolving line of
credit we have with a bank was changed. The credit agreement, which
previously included covenants that impose minimum levels of
earnings before interest, taxes, depreciation and amortization, a
maximum funded debt ratio, and a limit on capital expenditures and
dividend payments, was expanded to include a minimum fixed charge
ratio and a maximum senior leverage ratio.
41
The following table summarizes our contractual obligations (in
thousands):
2008 AND
TOTAL 2004 2005 2006 2007 THEREAFTER
----- ---- ---- ---- ---- ----------
OBLIGATIONS AT MARCH 31, 2003
-----------------------------
Long-term debt $ 17,590 $ 7,484 $ 7,052 $ 386 $ 1,593 $ 1,075
Operating leases 20,115 3,072 2,761 2,390 2,308 9,584
Other long-term liabilities 2,913 - - - - 2,913
------------------------------------------------------------------------------
Total obligations at March 31, 2003 40,618 10,556 9,813 2,776 3,901 13,572
EVENTS SUBSEQUENT TO MARCH 31, 2003
-----------------------------------
Building mortgage 8,800 539 588 588 588 6,497
Convertible notes 200,000 - - - - 200,000
------------------------------------------------------------------------------
Total contractual cash obligations $249,418 $ 11,095 $ 10,401 $ 3,364 $ 4,489 $220,069
------------------------------------------------------------------------------
We believe our cash and cash equivalents balance, cash flows from
operations, funds available under our credit facilities, proceeds
received from our secondary public offering of Class A common stock
completed during July 2002 and proceeds received from our Notes
offering completed in May 2003 will be adequate to fund operating
activities for the presently foreseeable future, including the
payment of short-term and long-term debt obligations, capital
improvements, research and development expenditures, product
development activities and expansion of marketing capabilities for
the branded pharmaceutical business. In addition, we continue to
examine opportunities to expand our business through the
acquisition of or investment in companies, technologies, product
rights, research and development and other investments that are
compatible with our existing businesses. We intend to use our
available cash to help in funding any acquisitions or investments.
As such, cash has been invested in short-term, highly liquid
instruments. We also may use funds available under our credit
facility, or financing sources that subsequently become available,
including the future issuances of additional debt or equity
securities, to fund these acquisitions or investments. If we were
to fund one or more such acquisitions or investments, our capital
resources, financial condition and results of operations could be
materially impacted in future periods.
INFLATION
Inflation may apply upward pressure on the cost of goods and
services used by us in the future. However, we believe that the net
effect of inflation on our operations during the past three years
has been minimal. In addition, changes in the mix of products sold
and the effect of competition has made a comparison of changes in
selling prices less meaningful relative to changes in the overall
rate of inflation over the past three years.
RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. This statement is effective for fiscal years beginning after
June 15, 2002. Management does not believe the adoption of this
statement will have a material impact on the results of operations
or financial position of the Company.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 addresses
financial accounting and reporting for the impairment or disposal
of long-lived assets. It supersedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of, and certain provisions of APB No. 30, Reporting the
Effects of Disposal of a Segment of a Business and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions, for the
disposal of a segment of a business. SFAS 144 establishes a single
accounting model, based on the framework established in SFAS 121,
for long-lived assets to be disposed of by sale and resolves other
implementation issues related to SFAS 121. This statement was
adopted by the Company effective April 1, 2002. The adoption of
SFAS 144 did not have a material impact on the Company's results of
operations or financial position.
42
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections. SFAS 145 rescinds, amends or makes
various technical corrections to certain existing authoritative
pronouncements. Management does not believe the adoption of this
statement will have a material impact on the results of operations
or financial position of the Company.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 addresses the
recognition, measurement, and reporting of costs associated with
exit and disposal activities, including costs related to
terminating a contract that is not a capital lease and termination
benefits that employees who are involuntarily terminated receive
under the terms of a one-time benefit arrangement that is not an
ongoing benefit arrangement or an individual deferred-compensation
contract. SFAS 146 requires recording costs associated with exit or
disposal activities at their fair values when a liability has been
incurred. Under previous guidance, certain exit costs were accrued
upon management's commitment to an exit plan, which is generally
before an actual liability has been incurred. This statement is
effective for exit or disposal activities that are initiated after
December 31, 2002. The adoption of SFAS 146 did not have a material
impact on the Company's results of operations or financial
position.
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN 45
elaborates on disclosures to be made by a guarantor in its
financial statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is required
to recognize, at the inception of the guarantee, a liability for
the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of
FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002 and the disclosure requirements
are effective for all financial statements of periods ending after
December 31, 2002. At March 31 2003, the Company was not a
guarantor on any debt instruments.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment
of FASB Statement No. 123. SFAS 148 amends SFAS 123, Accounting for
Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
SFAS 148 is effective for the Company's fiscal year ended March 31,
2003. The Company did not adopt the fair value method of valuing
stock options, however, the adoption of the disclosure provisions
of SFAS 148 did not have a material impact on the Company's
financial condition or results of operations.
In January 2003, the FASB issued FIN No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51. FIN 46
provides guidance on: 1) the identification of entities for which
control is achieved through means other than through voting rights
and 2) how to determine when and which business enterprise should
consolidate such entities. In addition, FIN 46 requires that any
enterprises with a significant variable interest in these types of
entities make additional disclosures in all financial statements
initially issued after January 31, 2003. The Company does not
anticipate the adoption of this Interpretation will have any impact
on its financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS 150 establishes standards for how entities classify
and measure in their statement of financial position certain
financial instruments with characteristics of both liabilities and
equity. The provisions of SFAS 150 are effective for financial
instruments entered into or modified after May 31, 2003, and
otherwise shall be effective at the beginning of the first fiscal
interim period beginning after June 15, 2003. The Company does not
expect adoption of this statement to have a material impact on its
results of operations or financial position.
43
ITEM 7a. QUANTITIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
44
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Board of Directors
of K-V Pharmaceutical Company
We have audited the consolidated balance sheets of K-V Pharmaceutical
Company and Subsidiaries as of March 31, 2003 and 2002 and the related
consolidated statements of income, shareholders' equity and cash flows for
each of the three years in the period ended March 31, 2003. These
consolidated 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 auditing standards generally
accepted in the United States of America. 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 K-V
Pharmaceutical Company and Subsidiaries at March 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years
in the period ended March 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
/s/ BDO Seidman, LLP
Chicago, Illinois
May 23, 2003
45
K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31,
-----------------------
2003 2002
-------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
------
Current Assets:
Cash and cash equivalents.................................................. $ 96,288 $ 12,109
Receivables less allowance for doubtful accounts of $422 and $403
in 2003 and 2002, respectively.......................................... 57,385 54,218
Inventories, net........................................................... 42,343 35,097
Prepaid and other assets................................................... 2,709 2,102
Deferred tax asset......................................................... 14,791 5,227
-------- --------
Total Current Assets.................................................... 213,516 108,753
Property and equipment, less accumulated depreciation...................... 51,903 41,224
Intangible assets and goodwill, net........................................ 82,577 41,293
Other assets............................................................... 4,672 3,922
-------- --------
Total Assets............................................................ $352,668 $195,192
======== ========
LIABILITIES
-----------
Current Liabilities:
Accounts payable........................................................... $ 15,588 $ 10,312
Accrued liabilities........................................................ 52,548 16,332
Current maturities of long-term debt....................................... 7,484 712
-------- --------
Total Current Liabilities............................................... 75,620 27,356
Long-term debt............................................................. 10,106 4,387
Other long-term liabilities................................................ 2,913 2,717
Deferred tax liability..................................................... 3,413 1,940
-------- --------
Total Liabilities....................................................... 92,052 36,400
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
--------------------
7% cumulative convertible Preferred Stock, $.01 par value; $25.00 stated
and liquidation value; 840,000 shares authorized; issued and
outstanding -- 40,000 shares in both 2003 and 2002 (convertible
into Class A shares at a ratio of 5.625 to one)........................ -- --
Class A and Class B Common Stock, $.01 par value;150,000,000
and 75,000,000 shares authorized, respectively; Class A -- issued
23,651,290 and 20,158,334 at March 31, 2003 and 2002, respectively...... 236 201
Class B -- issued 10,577,119 and 10,711,514 at March 31, 2003 and 2002,
respectively (convertible into Class A shares on a one-for-one basis)... 106 108
Additional paid-in capital................................................. 120,961 47,231
Retained earnings.......................................................... 139,341 111,301
Less: Treasury Stock, 32 shares of Class A and 53,428 shares
of Class B Common Stock in 2003 and 40,493 shares of Class A and
53,428 shares of Class B Common Stock, in 2002, at cost................. (28) (49)
-------- --------
Total Shareholders' Equity................................................. 260,616 158,792
-------- --------
Total Liabilities and Shareholders' Equity................................. $352,668 $195,192
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
46
K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED MARCH 31,
--------------------------------------------------
2003 2002 2001
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues................................ $244,996 $204,105 $177,767
Cost of sales............................... 94,527 80,403 70,663
-------- -------- --------
Gross profit................................ 150,469 123,702 107,104
-------- -------- --------
Operating expenses:
Research and development................ 19,135 10,712 9,282
Selling and administrative.............. 69,584 61,343 57,509
Amortization of intangible assets....... 2,321 2,353 2,341
Litigation.............................. 16,500 -- --
-------- -------- --------
Total operating expenses.................... 107,540 74,408 69,132
-------- -------- --------
Operating income............................ 42,929 49,294 37,972
-------- -------- --------
Other income (expense):
Interest and other income............... 977 411 164
Interest expense........................ (325) (350) (1,072)
-------- -------- --------
Total other income (expense), net........... 652 61 (908)
-------- -------- --------
Income before income taxes.................. 43,581 49,355 37,064
Provision for income taxes.................. 15,471 17,891 13,439
-------- -------- --------
Net income.................................. $ 28,110 $ 31,464 $ 23,625
======== ======== ========
Net income per common share-basic........... $0.84 $1.03 $0.80
===== ===== =====
Net income per common share-diluted......... $0.82 $0.98 $0.74
===== ===== =====
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
47
K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2003, 2002 AND 2001
---------------------------------------------------------------------------------
CLASS A CLASS B ADDITIONAL TOTAL
PREFERRED COMMON COMMON PAID IN TREASURY RETAINED SHAREHOLDERS'
STOCK STOCK STOCK CAPITAL STOCK EARNINGS EQUITY
----- ----- ----- ------- ----- -------- ------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE AT MARCH 31, 2000..................... $ 2 $123 $ 66 $ 40,864 $(55) $ 56,799 $ 97,799
Net income.................................... -- -- -- -- -- 23,625 23,625
Dividends paid on preferred stock............. -- -- -- -- -- (420) (420)
Product development........................... -- -- -- 200 -- -- 200
Conversion of 422,088 Class B shares
to Class A shares -- 4 (4) -- -- -- --
Stock Options exercised:
46,004 shares of Class A................... -- -- -- 366 -- -- 366
994,081 shares of Class B.................. -- -- 10 4,362 -- -- 4,372
Three-for-two stock split..................... -- 62 35 -- -- (97) --
---------------------------------------------------------------------------
BALANCE AT MARCH 31, 2001..................... 2 189 107 45,792 (55) 79,907 125,942
Net income.................................... -- -- -- -- -- 31,464 31,464
Dividends paid on preferred stock............. -- -- -- -- (70) (70)
Conversion of 200,000 shares of preferred
stock to 1,125,000 Class A Shares........... (2) 11 -- (9) -- -- --
Sale of 12,825 Class A shares to employee
profit sharing plan......................... -- -- -- 332 6 -- 338
Issuance of 5,061 Class A shares
under product development agreement......... -- -- -- 125 -- -- 125
Conversion of 32,575 Class B shares to
Class A shares.............................. -- -- -- -- -- -- --
Stock Options exercised:
108,018 shares of Class A less 8,847 shares
repurchased............................... -- 1 -- 530 -- -- 531
80,685 shares of Class B less 170 shares
repurchased............................... -- -- 1 461 -- -- 462
---------------------------------------------------------------------------
BALANCE AT MARCH 31, 2002..................... -- 201 108 47,231 (49) 111,301 158,792
Net income.................................... -- -- -- -- -- 28,110 28,110
Dividends paid on preferred stock............. -- -- -- -- (70) (70)
Conversion of 175,000 Class B shares to
Class A shares.............................. -- 2 (2) -- -- -- --
Issuance of 3,285,000 Class A shares.......... -- 33 -- 72,347 -- -- 72,380
Sale of 40,461 Class A shares to employee
profit sharing plan......................... -- -- -- 884 21 -- 905
Stock Options exercised:
42,478 shares of Class A less 9,502 shares
repurchased............................... -- -- -- 105 -- -- 105
40,717 shares of Class B less 112 shares
repurchased............................... -- -- -- 394 -- -- 394
---------------------------------------------------------------------------
BALANCE AT MARCH 31, 2003..................... $-- $236 $106 $120,961 $(28) $139,341 $260,616
===========================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
48
K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
---------------------------------------------
2003 2002 2001
-------- -------- --------
(IN THOUSANDS)
Operating Activities:
Net income............................................................. $ 28,110 $ 31,464 $ 23,625
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization....................................... 7,755 6,460 5,724
Deferred income tax (benefit) provision............................. (8,091) (2,376) 2,294
Deferred compensation............................................... 196 183 174
Litigation.......................................................... 16,500 - -
Changes in operating assets and liabilities:
Increase in receivables, net........................................ (3,167) (27,959) (2,578)
Increase in inventories............................................. (5,623) (2,886) (2,097)
Decrease (increase) in prepaid and other assets..................... 514 783 (4,700)
Increase (decrease) in accounts payable and accrued.................
liabilities...................................................... 7,127 10,228 (5,372)
-------- -------- --------
Net cash provided by operating activities.............................. 43,321 15,897 17,070
-------- -------- --------
Investing Activities:
Purchase of property and equipment, net............................. (16,113) (8,484) (8,057)
Purchase of stock and intangible assets............................. (3,000) - -
Product acquisition................................................. (13,000) - -
-------- -------- --------
Net cash used in investing activities.................................. (32,113) (8,484) (8,057)
-------- -------- --------
Financing Activities:
Principal payments on long-term debt................................ (743) (693) (17,646)
Proceeds from credit facility....................................... - - 5,000
Dividends paid on preferred stock................................... (70) (70) (420)
Proceeds from issuance of common stock.............................. 72,380 - -
Sale of common stock to employee profit sharing plan................ 905 338 -
Exercise of common stock options.................................... 499 993 4,738
-------- -------- --------
Net cash provided by (used in) financing activities.................... 72,971 568 (8,328)
-------- -------- --------
Increase in cash and cash equivalents.................................. 84,179 7,981 685
Cash and cash equivalents:
Beginning of year................................................... 12,109 4,128 3,443
-------- -------- --------
End of year......................................................... $ 96,288 $ 12,109 $ 4,128
======== ======== ========
Non-cash investing and financing activities:
Term loans refinanced.................................................. $ 1,738 $ 2,450 $ -
Issuance of common stock under product development
agreement........................................................... - 125 -
Payments due on product acquisitions................................... 15,983 - -
Portion of product acquisition financed by promissory notes............ 13,234 - -
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. DESCRIPTION OF BUSINESS
-----------------------
K-V Pharmaceutical Company and its subsidiaries ("KV" or the
"Company") are primarily engaged in the development, acquisition,
manufacture, marketing and sale of technologically distinguished
branded and generic/non-branded prescription pharmaceutical
products. The Company was incorporated in 1971 and has become a
leader in the development of advanced drug delivery and formulation
technologies that are designed to enhance therapeutic benefits of
existing drug forms. Through internal product development and
synergistic acquisitions of products, KV has grown into a fully
integrated specialty pharmaceutical company. The Company also
develops, manufactures and markets technologically advanced,
value-added raw material products for the pharmaceutical,
nutritional, food and personal care industries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
PRINCIPLES OF CONSOLIDATION
---------------------------
The Company's consolidated financial statements are prepared
in accordance with accounting principles generally accepted in
the United States of America. The consolidated financial
statements include the accounts of KV and its wholly-owned
subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
disclosure of contingent liabilities at the date of the
financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results in
subsequent periods may differ from the estimates and
assumptions used in the preparation of the accompanying
consolidated financial statements.
The most significant estimates made by management include the
determination of sales allowances, valuation of inventory
balances, the determination of useful lives for intangible
assets, and the evaluation of intangible assets and goodwill
for impairment. Management periodically evaluates estimates
used in the preparation of the consolidated financial
statements and makes changes on a prospective basis when
adjustments are necessary.
CASH EQUIVALENTS
----------------
Cash equivalents consist of only those highly liquid
investments that are readily convertible to cash and that have
original maturities of three months or less. At March 31, 2003
and 2002, cash equivalents totaled $92,635 and $10,350,
respectively.
INVENTORIES
-----------
Inventories consist of finished goods held for distribution,
raw materials and work in process. Inventories are stated at
the lower of cost or market, with the cost determined on the
first-in, first-out (FIFO) basis. Reserves for potentially
obsolete or slow moving inventory are established by
management based on evaluation of inventory levels, forecasted
demand, and market conditions.
50
PROPERTY AND EQUIPMENT
----------------------
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation expense is computed over the
estimated useful lives of the related assets using the
straight-line method. The estimated useful lives are
principally 10 years for land improvements, 10 to 40 years for
buildings and improvements, 3 to 15 years for machinery and
equipment, and 3 to 10 years for office furniture and
equipment. Leasehold improvements are amortized on a
straight-line basis over the shorter of the respective lease
terms or the estimated useful life of the assets. The Company
assesses property and equipment for impairment whenever events
or changes in circumstances indicate that an asset's carrying
amount may not be recoverable.
INTANGIBLE ASSETS AND GOODWILL
------------------------------
Intangible assets consist of product rights, license
agreements and trademarks resulting from product acquisitions
and legal fees and similar costs relating to the development
of patents and trademarks. Intangible assets that are acquired
are stated at cost, less accumulated amortization, and are
amortized on a straight-line basis over estimated useful lives
of 20 years. Upon approval, costs associated with the
development of patents and trademarks are amortized on a
straight-line basis over estimated useful lives ranging from 5
to 17 years. The Company evaluates its intangible assets for
impairment whenever events or changes in circumstances
indicate that an intangible asset's carrying amount may not be
recoverable. Recoverability is determined by comparing the
carrying amount of an intangible asset against an estimate of
the undiscounted future cash flows expected to result from its
use and eventual disposition. If the sum of the expected
future undiscounted cash flows is less than the carrying
amount of the intangible asset, an impairment loss is
recognized based on the excess of the carrying amount over the
estimated fair value of the intangible asset.
Goodwill relates to the 1972 acquisition of the Company's
specialty materials segment and is recorded net of accumulated
amortization through March 31, 2002. In accordance with the
Company's adoption of Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets, on April 1, 2002, amortization of goodwill was
discontinued. Instead, goodwill is now subject to at least an
annual assessment of impairment on a fair value basis. The
Company's initial goodwill impairment test as of April 1, 2002
resulted in no impairment of goodwill. Amortization of
goodwill for both fiscal 2002 and 2001 was $55. Basic and
diluted earnings per share for fiscal 2002 and 2001 would have
been unchanged if goodwill amortization was excluded from net
income on a pro forma basis.
OTHER ASSETS
------------
Non-marketable equity investments for which the Company does
not have the ability to exercise significant influence over
operating and financial policies (generally less than 20%
ownership) are accounted for using the cost method. Such
investments are included in "Other assets" in the accompanying
consolidated balance sheets.
These investments are periodically reviewed for
other-than-temporary declines in fair value. Other than
temporary declines in fair value are identified by evaluating
market conditions, the entity's ability to achieve forecast
and regulatory submission guidelines, as well as the entity's
overall financial condition.
REVENUE RECOGNITION
-------------------
Revenue from product sales is recognized when the merchandise
is shipped to an unrelated third party pursuant to Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements. Accordingly, revenue is recognized when all of the
following occur: a purchase order is received from a customer;
title and risk of loss pass to the Company's customer upon
shipment of the merchandise under the terms of FOB
51
shipping point; prices and estimated sales provisions for product
returns, sales rebates, payment discounts, chargebacks, and
other promotional allowances are reasonably determinable; and,
the customer's payment ability has been reasonably assured.
Concurrently with the recognition of revenue, the Company
records estimated sales provisions for product returns, sales
rebates, payment discounts, chargebacks, and other sales
allowances. Sales provisions are established based upon
consideration of a variety of factors, including but not
limited to, historical relationship to revenues, historical
payment and return experience, estimated customer inventory
levels, customer rebate arrangements, and current contract
sales terms with wholesale and indirect customers. The
following briefly describes the nature of each provision and
how such provisions are estimated.
o Payment discounts are reductions to invoiced amounts
offered to customers for payment within a specified
period and are estimated upon shipment utilizing
historical customer payment experience.
o Sales rebates are offered to certain customers to
promote customer loyalty and encourage greater product
sales. These rebate programs provide that, upon the
attainment of pre-established volumes or the attainment
of revenue milestones for a specified period, the
customer receives credit against purchases. Other
promotional programs are incentive programs
periodically offered to customers. Due to the nature
of these programs, the Company is able to estimate
provisions for rebates and other promotional programs
based on the specific terms in each agreement at
the time of shipment.
o Consistent with common industry practices, the
Company has agreed to terms with its customers to
allow them to return product that is within a
certain period of the expiration date. Upon shipment
of product to customers, the Company provides for an
estimate of product to be returned. This estimate is
determined by applying a historical relationship of
customer returns to amounts invoiced.
o Generally the Company provides credits to customers
for decreases that are made to selling prices for
the value of inventory that is owned by customers at
the date of the price reduction. The Company has not
contractually agreed to provide price adjustment
credits to its customers; instead, the Company
issues price adjustment credits at its discretion.
Price adjustment credits are estimated at the time
the price reduction occurs. The amount is calculated
based on an estimate of customer inventory levels.
o KV has arrangements with certain parties
establishing prices for the Company's products for
which the parties independently select a wholesaler
from which to purchase. Such parties are referred to
as indirect customers. A chargeback represents the
difference between the Company's invoice price to
the wholesaler and the indirect customer's contract
price, which is lower. Provisions for estimating
chargebacks are calculated primarily using
historical chargeback experience, actual contract
pricing and estimated wholesaler inventory levels.
Actual product returns, chargebacks and other sales allowances
incurred are, however, dependent upon future events and may be
different than the Company's estimates. The Company
continually monitors the factors that influence sales
allowance estimates and makes adjustments to these provisions
when management believes that actual product returns,
chargebacks and other sales allowances may differ from
established allowances.
Accruals for sales provisions are presented in the
consolidated financial statements as reductions to net
revenues and accounts receivable. Sales provisions totaled
$98,929, $98,592 and $85,881 for the years ended March 31,
2003, 2002 and 2001, respectively. The reserve balances
related to the sales provisions totaled $29,658 and $18,958 at
March 31, 2003 and 2002, respectively, and are included in
"Receivables, less allowance for doubtful accounts" in the
accompanying consolidated balance sheets.
52
The Company also enters into long-term agreements under which
it assigns marketing rights for the products it has developed
to pharmaceutical marketers. Royalties are earned based on the
sale of products.
CONCENTRATION OF CREDIT RISK
----------------------------
The Company extends credit on an uncollateralized basis
primarily to wholesale drug distributors and retail pharmacy
chains throughout the United States. As a result, the Company
is required to estimate the level of receivables which
ultimately will not be paid. The Company calculates this
estimate based on prior experience supplemented by a customer
specific review when it is deemed necessary. On a periodic
basis, the Company performs evaluations of the financial
condition of all customers to further limit its credit risk
exposure. Actual losses from uncollectible accounts have
historically been insignificant.
The Company's three largest customers accounted for
approximately 33%, 20% and 14%, and 29%, 25% and 12% of gross
receivables at March 31, 2003 and 2002, respectively.
During fiscal 2003, KV's three largest customers accounted for
23%, 18% and 14% of gross revenues. In fiscal 2002 and 2001,
the Company's three largest customers accounted for gross
revenues of 20%, 19% and 13% and 23%, 20% and 14%,
respectively.
SHIPPING AND HANDLING COSTS
---------------------------
The Company classifies shipping and handling costs in cost of
sales. The Company does not derive revenue from shipping.
RESEARCH AND DEVELOPMENT
------------------------
Research and development costs, including licensing fees of
early-stage development products, are expensed in the period
incurred.
The Company has licensed the exclusive rights to co-develop
and market various products with other drug delivery
companies. These collaborative agreements usually require the
Company to pay up-front fees and ongoing milestone payments.
When the Company makes an up-front or milestone payment,
management evaluates the stage of the related product to
determine the appropriate accounting treatment. If the product
is considered to be beyond the early development stage but has
not yet been approved by regulatory authorities, the Company
will evaluate the facts and circumstances of each case to
determine if a portion or all of the payment has future
economic benefit and should be capitalized. Payments made to
third parties subsequent to regulatory approval are
capitalized with that cost generally amortized over the
patented life of the product.
The Company accrues estimated costs associated with clinical
studies performed by contract research organizations based on
the total of costs incurred through the balance sheet date.
The Company monitors the progress of the trials and their
related activities to the extent possible, and adjusts the
accruals accordingly. These accrued costs are recorded as a
component of research and development expense.
EARNINGS PER SHARE
------------------
Basic earnings per share is calculated by dividing net income
available to common shareholders for the period by the
weighted average number of common shares outstanding during
the period. Diluted earnings per share is based on the
treasury stock method and is computed by dividing net income
by the weighted average common shares and common share
equivalents outstanding during the periods presented assuming
the conversion of preferred shares and the exercise of all
in-the-money stock options. Common share equivalents
53
have been excluded from the computation of diluted earnings per
share where their inclusion would be anti-dilutive.
INCOME TAXES
------------
Income taxes are accounted for under the asset and liability
method where deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. A valuation
allowance is established when it is more likely than not that
some portion or all of the deferred tax assets will not be
realized.
STOCK-BASED COMPENSATION
------------------------
The Company grants stock options for a fixed number of shares
to employees with an exercise price greater than or equal to
the fair value of the shares at the date of grant. As
permissible under Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, the
Company elected to continue to account for stock option grants
to employees in accordance with Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees
and related interpretations. APB 25 requires that compensation
cost related to fixed stock option plans be recognized only to
the extent that the fair value of the shares at the grant date
exceeds the exercise price. Accordingly, no compensation
expense is recognized for stock option awards granted to
employees at or above fair value. Had the Company determined
compensation expense using the fair value method prescribed by
SFAS 123, the Company's net income and earnings per share
would have been as follows:
2003 2002 2001
---- ---- ----
Net income, as reported........................ $ 28,110 $ 31,464 $ 23,625
Stock based employee
compensation expense,
net of tax................................... (815) (815) (907)
-------- -------- --------
Pro forma net income........................... $ 27,295 $ 30,649 $ 22,718
======== ======== ========
Earnings per share:
Basic - as reported......................... $ 0.84 $ 1.03 $ 0.80
Basic - pro forma........................... 0.82 1.00 0.77
Diluted - as reported....................... 0.82 0.98 0.74
Diluted - pro forma......................... 0.79 0.95 0.71
The weighted average fair value of the options has been
estimated on the date of grant using the following weighted
average assumptions for grants in fiscal 2003, 2002 and 2001,
respectively: no dividend yield; expected volatility of 45%,
56% and 56%; risk-free interest rate of 2.40%, 6.00% and 6.50%
per annum; and expected option terms ranging from 3 to 10
years for all three years. Weighted averages are used because
of varying assumed exercise dates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The fair values of the Company's cash and cash equivalents,
receivables, accounts payable and accrued liabilities
approximate their carrying values due to the relatively short
maturity of these items. The carrying
54
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 August 2001, the FASB issued SFAS No. 143, Accounting for
Asset Retirement Obligations. SFAS 143 addresses financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated
asset retirement costs. This statement is effective for fiscal
years beginning after June 15, 2002. Management does not
believe the adoption of this statement will have a material
impact on the results of operations or financial position of
the Company.
In August 2001, the FASB issued SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. SFAS 144
addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. It supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, and
certain provisions of APB No. 30, Reporting the Effects of
Disposal of a Segment of a Business and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for the
disposal of a segment of a business. SFAS 144 establishes a
single accounting model, based on the framework established in
SFAS 121, for long-lived assets to be disposed of by sale and
resolves other implementation issues related to SFAS 121. This
statement was adopted by the Company effective April 1, 2002.
The adoption of SFAS 144 did not have a material impact on the
Company's results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections. SFAS 145 rescinds, amends
or makes various technical corrections to certain existing
authoritative pronouncements. Management does not believe the
adoption of this statement will have a material impact on the
results of operations or financial position of the Company.
In July 2002, the FASB issued SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. SFAS 146
addresses the recognition, measurement, and reporting of costs
associated with exit and disposal activities, including costs
related to terminating a contract that is not a capital lease
and termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an
individual deferred-compensation contract. SFAS 146 requires
recording costs associated with exit or disposal activities at
their fair values when a liability has been incurred. Under
previous guidance, certain exit costs were accrued upon
management's commitment to an exit plan, which is generally
before an actual liability has been incurred. This statement
is effective for exit or disposal activities that are
initiated after December 31, 2002. The adoption of SFAS 146
did not have a material impact on the Company's results of
operations or financial position.
In November 2002, the FASB issued FASB Interpretation (FIN)
No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 elaborates on disclosures to be made by a
guarantor in its financial statements about its obligations
under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of
the guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or
modified after December 31, 2002 and the disclosure
requirements are effective for all financial statements of
periods ending after December 31, 2002. At March 31, 2003, the
Company was not a guarantor on any debt instruments.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure--an
amendment of FASB Statement No. 123. SFAS 148 amends SFAS 123,
Accounting for
55
Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation.
In addition, SFAS 148 amends the disclosure requirements of
SFAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the
method used on reported results. SFAS 148 is effective for
the Company's fiscal year ended March 31, 2003. The Company
did not adopt the fair value method of valuing stock options,
however, the adoption of the disclosure provisions of SFAS
148 did not have a material impact on the Company's financial
condition or results of operations.
In January 2003, the FASB issued FIN No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51.
FIN 46 provides guidance on: 1) the identification of entities
for which control is achieved through means other than through
voting rights and 2) how to determine when and which business
enterprise should consolidate such entities. In addition, FIN
46 requires that any enterprises with a significant variable
interest in these types of entities make additional
disclosures in all financial statements initially issued after
January 31, 2003. The Company does not anticipate the adoption
of this Interpretation will have any impact on its financial
position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS 150 establishes standards for how
entities classify and measure in their statement of financial
position certain financial instruments with characteristics of
both liabilities and equity. The provisions of SFAS 150 are
effective for financial instruments entered into or modified
after May 31, 2003, and otherwise shall be effective at the
beginning of the first fiscal interim period beginning after
June 15, 2003. The Company does not expect adoption of this
statement to have a material impact on its results of
operations or financial position.
RECLASSIFICATIONS
-----------------
Certain reclassifications to prior years' financial
information have been made to conform to the fiscal 2003
presentation.
3. ACQUISITIONS AND LICENSE AGREEMENTS
-----------------------------------
On March 31, 2003, the Company acquired from Schwarz Pharma
(Schwarz) the product rights and trademarks to the Niferex(R) line
of hematinic products for $14,300, plus expenses. The acquisition
was financed with cash on hand. The purchase price was allocated to
the trademark rights acquired and is being amortized over an
estimated life of 20 years.
On March 31, 2003, the Company acquired from a subsidiary of Altana
Pharma AG (Altana) the world-wide product rights and trademarks to
the Chromagen(R) and StrongStart(R) product lines for $27,000, plus
expenses. The Chromagen(R) product line includes three hematinic
products used in the treatment of anemias and one prenatal vitamin,
while the StrongStart(R) product line consists of two prenatal
vitamin products. In accordance with the acquisition agreement, the
Company entered into a transitional supply agreement. The
acquisition was financed with a $13,000 cash payment and two
non-interest bearing $7,000 promissory notes issued to Altana,
which are due on the first and second anniversaries of the
agreement. The promissory notes, which are non-interest bearing,
were discounted using imputed interest rates of 3.36% and 4.08%,
respectively, both of which approximate the Company's borrowing
rate for similar debt instruments at the time of the borrowing.
Using the imputed interest rates, the present value of the notes
was
56
determined to be $13,234, resulting in a discount of $766. The
purchase price was allocated to the trademark rights acquired and
is being amortized over an estimated life of 20 years.
On April 18, 2002, the Company entered into an agreement with
FemmePharma, Inc. (FemmePharma) whereby the Company was granted an
exclusive license to manufacture and sell in North America and
certain foreign markets intravaginal products containing Danazol
and certain vaginal anti-infective products under development (the
License Agreement). The initial product covered by the License
Agreement is intended for use in the treatment of endometriosis
under FemmePharma's patented Pardel(TM) technology. In
consideration for the rights and licenses received, the Company
paid $1,000 for use of the Pardel(TM) trademark and will pay up to
an additional $8,500 upon successful achievement of certain
regulatory milestones. These milestone payments will commence upon
submission of a New Drug Application (NDA) to the Food and Drug
Administration for the initial product covered by the License
Agreement. The amounts paid and the costs to be incurred under this
agreement will be allocated to license agreements and amortized
over the estimated lives of the products upon launch. The Company
is also obligated to pay royalties on product sales covered by the
License Agreement. These disbursements will be recognized as a cost
of sales concurrently with the revenue earned on the products to
which the royalties relate.
Under a separate agreement, the Company invested $2,000 in
FemmePharma's convertible preferred stock and agreed to make an
additional $3,000 convertible preferred stock investment following
commencement of Phase III studies by the FDA on the initial product
covered by the License Agreement. The $2,000 investment was
accounted for using the cost method since the Company does not have
the ability to exercise significant influence over operating and
financial policies of FemmePharma. This investment is included in
"Other assets" in the accompanying consolidated balance sheets.
4. INVENTORIES
-----------
Inventories as of March 31, consist of:
2003 2002
---- ----
Finished goods..................... $ 26,524 $ 18,600
Work-in-process.................... 4,290 4,702
Raw materials...................... 12,532 12,903
-------- --------
43,346 36,205
Reserves for obsolescence.......... (1,003) (1,108)
-------- --------
$ 42,343 $ 35,097
======== ========
57
5. PROPERTY AND EQUIPMENT
----------------------
Property and equipment as of March 31, consist of:
2003 2002
---- ----
Land and improvements................................. $ 2,083 $ 2,083
Building and building improvements.................... 17,246 16,611
Machinery and equipment............................... 35,548 31,497
Office furniture and equipment........................ 12,185 8,766
Leasehold improvements................................ 10,708 3,195
Construction-in-progress (estimated costs to
complete at March 31, 2003 was $1,433)............. 5,848 5,353
-------- --------
83,618 67,505
Less accumulated depreciation and amortization........ (31,715) (26,281)
-------- --------
Net property and equipment......................... $ 51,903 $ 41,224
======== ========
Purchases of property and equipment were $16,113, $8,484 and $8,057
for fiscal 2003, 2002 and 2001, respectively. Depreciation and
amortization of property and equipment was $5,434, $4,107 and
$3,383 for fiscal 2003, 2002 and 2001, respectively.
6. INTANGIBLE ASSETS AND GOODWILL
------------------------------
Intangible assets and goodwill as of March 31, consist of:
2003 2002
--------------------------------- ---------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------ ------------ ------- ------------
Product rights - Micro-K(R)....... $36,140 $(7,294) $36,140 $(5,490)
Product rights - PreCare(R)....... 8,433 (1,546) 8,433 (1,124)
Trademarks acquired............. 42,476 - - -
License agreements.............. 1,000 - - -
Trademarks and patents.......... 3,114 (303) 3,046 (269)
------- ------- ------- -------
Total intangible assets..... 91,163 (9,143) 47,619 (6,883)
Goodwill........................ 557 - 557 -
------- ------- ------- -------
$91,720 $(9,143) $48,176 $(6,883)
======= ======= ======= =======
Amortization of intangible assets was $2,321, $2,298 and $2,286 for
fiscal 2003, 2002 and 2001, respectively. Amortization of goodwill
was $55 for fiscal 2002 and 2001.
Estimated annual amortization expense is $4,450 for each of the
five succeeding fiscal years.
58
7. OTHER ASSETS
------------
Other assets as of March 31, consist of:
2003 2002
---- ----
Cash surrender value of life insurance............... $1,634 $1,845
Other investments.................................... 2,000 -
Deposits............................................. 994 2,015
Other................................................ 44 62
------ ------
$4,672 $3,922
====== ======
8. ACCRUED LIABILITIES
-------------------
Accrued liabilities as of March 31, consist of:
2003 2002
---- ----
Salaries, wages, incentives and benefits....... $ 6,202 $ 5,665
Income taxes................................... 8,402 6,929
Promotion expenses............................. 2,744 2,846
Payments due on product acquisitions........... 15,983 -
Assumed liabilities - product acquisitions..... 1,882 -
Litigation reserve............................. 16,500 -
Other.......................................... 835 892
------- -------
$52,548 $16,332
======= =======
9. LONG-TERM DEBT
--------------
Long-term debt as of March 31, consists of:
2003 2002
---- ----
Industrial revenue bonds.................... $ 530 $ 855
Building mortgages.......................... 3,826 4,244
Notes payable............................... 13,234 -
------- ------
17,590 5,099
Less current portion........................ (7,484) (712)
------- ------
$10,106 $4,387
======= ======
As of March 31, 2003, the Company has a credit agreement with a
bank that provides for a revolving line of credit for borrowing up
to $60,000. The credit agreement provides for a $40,000 unsecured
revolving line of credit along with an unsecured supplemental
credit line of $20,000 for financing acquisitions. The $40,000
unsecured revolving line of credit expires in October 2004. The
unsecured supplemental credit line of $20,000, which was renewed in
December 2002, expires in December 2003. The revolving credit lines
charge interest at the lower of the prime rate or the one-month
LIBOR rate plus 150 basis points. At March 31, 2003, the Company
had $11,906 in open letters of credit issued under the credit
facilities. The credit agreement includes covenants that impose
minimum levels of earnings before interest, taxes, depreciation and
amortization, a maximum funded debt ratio, and a limit on capital
expenditures and dividend payments. As of March 31, 2003, the
Company was in compliance with all of its covenants.
59
The industrial revenue bonds, which bear interest at 7.35% per
annum, mature serially through 2005 and are collateralized by
certain property and equipment, as well as through a letter of
credit, which may only be accessed in case of default on the bonds.
The bonds do not allow the holder to require the Company to redeem
the bonds.
In December 2002, the Company refinanced $1,738 of a building
mortgage that was due in March 2004. At March 31, 2003, the
building mortgages bear interest at 7.57% and 6.27% and require
monthly principal payments of $19 and $13 plus interest through
November 2006 and November 2007, respectively. The remaining
principal balances plus any unpaid interest are due on December 20,
2006 and December 20, 2007, respectively.
The notes payable relate to two unsecured promissory notes for
$7,000 each that were entered into in conjunction with the Altana
acquisition agreement (see Note 3). The two notes are due on March
31, 2004 and March 31, 2005. The promissory notes, which are
non-interest bearing, were discounted using imputed interest rates
of 3.36% and 4.08%, respectively, both of which approximate the
Company's borrowing rate for similar debt instruments at the time
of the borrowing. The present value of the notes was determined to
be $13,234, resulting in a discount of $766.
The aggregate maturities of long-term debt as of March 31, 2003 are
as follows:
2004.......................... $ 7,484
2005.......................... 7,052
2006.......................... 386
2007.......................... 1,593
2008.......................... 1,075
-------
$17,590
=======
The Company paid interest of $389, $417 and $1,329 during the years
ended March 31, 2003, 2002 and 2001, respectively.
10. COMMITMENTS AND CONTINGENCIES
-----------------------------
LEASES
The Company leases manufacturing, office and warehouse facilities,
equipment and automobiles under operating leases expiring through
2012. Total rent expense for the years ended March 31, 2003, 2002
and 2001 was $4,785, $4,441 and $4,319, respectively.
Future minimum lease commitments under non-cancelable leases are as
follows:
2004.......................... $ 3,072
2005.......................... 2,761
2006.......................... 2,390
2007.......................... 2,308
2008.......................... 1,962
Later years................... 7,622
60
CONTINGENCIES
The Company is currently subject to legal proceedings and claims
that have arisen 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 it currently faces, individually or in the aggregate, will
have a material adverse effect on its financial position or
operations except for the Healthpoint and PPA litigation described
in Litigation below.
The Company has licensed the exclusive rights to co-develop and
market various generic equivalent products with other drug delivery
companies. These collaboration agreements require the Company to
make up-front and ongoing payments as development milestones are
attained. If all milestones remaining under these agreements were
reached, payments by the Company could total up to $17,300.
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 $196,
$183 and $174, under this agreement in the years ended March 31,
2003, 2002 and 2001, respectively.
LITIGATION
ETHEX Corporation (ETHEX), a subsidiary of the Company, is a
defendant in a lawsuit styled Healthpoint, Ltd. v. ETHEX
Corporation, pending in federal court in San Antonio, Texas. In
general, the plaintiffs allege that ETHEX's comparative promotion
of its Ethezyme(TM) to Healthpoint's Accuzyme(R) product resulted
in false advertising and misleading statements under various
federal and state laws, and constituted unfair competition and
misappropriation of trade secrets. In September 2001, the jury
returned verdicts against ETHEX on certain false advertising,
unfair competition, and misappropriation claims. The jury awarded
compensatory and punitive damages totaling $16,500. On October 1,
2002, the U.S. District Court for the Western District of Texas
denied ETHEX's motion to set aside the jury's verdict. On December
17, 2002, the court entered a judgment awarding attorneys' fees to
Healthpoint in an amount to be subsequently determined.
We believe that the jury award is excessive and is not sufficiently
supported by the facts or the law. We intend to vigorously appeal
once the court has entered a final judgment. We and our counsel
believe that there are meritorious arguments to be raised during
the appeal process; however, we are not presently able to predict
the outcome of the pending District Court's motions or an appeal.
As a result of the court's earlier decisions, our results of
operations for fiscal 2003 included a reserve for potential damages
of $16,500, which is reflected in accrued liabilities on our
consolidated balance sheet as of March 31, 2003. To date
Healthpoint has requested reimbursement for approximately $1,800 in
attorneys' fees in addition to the judgment discussed above. We are
contesting Healthpoint's entitlement to and their requested amount
of attorneys' fees. As of this date, the court had not entered any
order with respect to the amount of attorneys' fees to be awarded.
Our counsel has advised us that the amount could range from zero to
$1,800, the amount requested by Healthpoint. Based on our current
analysis we believe that the reserve as recorded will be adequate
to cover any judgment, including attorneys' fees, which may result
at the end of the appeal process. We are continually evaluating the
need for additional reserves as the case progresses through the
appeal process.
61
We previously distributed several low volume pharmaceutical
products that contained phenylpropanolamine, or PPA, and that were
discontinued in 2000 and 2001. We are presently named as one of
several defendants in two product liability lawsuits in federal
court in Nevada and Mississippi involving PPA. The Nevada case is
Deuel, David, et al. v. KV Pharmaceutical Company, Inc. The suit
was filed on June 11, 2001. Discovery has been initiated in this
case, and we currently have completed the basic fact discovery and
depositions, however no discovery cut-off date has been assigned
and there is presently no trial date. The Mississippi case is
Virginia Madison, et al. v. Bayer Corporation, et al. We are one of
several defendants named in the lawsuit. The suit was filed on
December 23, 2002, but was not served on us until February 2003.
The case was originally filed in the Circuit Court of Hinds County,
Mississippi, and was removed to the United States District Court
for the Southern District of Mississippi by co-defendant Bayer
Corporation. The Plaintiffs have filed a motion to remand the case
to the Circuit Court of Hinds County, Mississippi, which has caused
the Court to enter a stay of all proceedings pending a resolution
of the motion. So far, the Court has not ruled on the motion. Both
the Nevada and Mississippi cases have been transferred to a
Judicial Panel on Multi District Litigation for PPA claims sitting
in the Western District of Washington. Each lawsuit alleges bodily
injury, wrongful death, economic injury, punitive damages, loss of
consortium and/or loss of services from the use of our distributed
pharmaceuticals containing PPA that have since been discontinued
and/or reformulated to exclude PPA. We believe that we have
substantial defenses to these claims, though the ultimate outcome
of these cases and the potential effect on us cannot be determined.
We are being defended and indemnified in the Nevada PPA lawsuits by
our products liability insurer subject to a reservation of rights.
Our product liability coverage was obtained on a claims made basis
and provides coverage for judgments, settlements and defense costs
arising from product liability claims. However, such insurance may
not be adequate to remove the risk from some or all product
liability claims, including PPA claims, and is subject to the
limitations described in the terms of the policies. Furthermore,
our product liability coverage for PPA claims expired for claims
made after June 15, 2002. Although we renewed our product liability
coverage for a policy term of June 15, 2002 through June 15, 2003,
that policy excludes future PPA claims in accordance with the
standard industry exclusion. Consequently, as of June 15, 2002, we
have provided for legal defense costs and indemnity payments
involving PPA claims on a going forward basis, including the
Mississippi lawsuit that was filed during the June 15, 2002 through
June 15, 2003 policy period. Moreover, we may not be able to obtain
product liability insurance in the future for PPA claims with
adequate coverage limits at commercially reasonable prices for
subsequent periods. From time to time in the future, we may be
subject to further litigation resulting from products containing
PPA that we formerly distributed. We intend to vigorously defend
any claims that may be raised in the current and future
litigations.
From time to time, we become involved in various legal matters in
addition to the above described matters, that we consider to be in
the ordinary course of business. While we are not presently able to
determine the potential liability, if any, related to such matters,
we believe none of such matters, individually or in the aggregate,
will have a material adverse effect on our financial position.
62
11. INCOME TAXES
------------
The fiscal 2003, 2002, and 2001 provisions were based on estimated
Federal and state taxable income using the applicable statutory
rates. The current and deferred Federal and state income tax
provisions for fiscal years 2003, 2002 and 2001 are as follows:
2003 2002 2001
---- ---- ----
PROVISION
Current
Federal............................... $21,524 $18,603 $10,072
State................................. 2,038 1,664 1,073
------- ------- -------
23,562 20,267 11,145
------- ------- -------
Deferred
Federal............................... (7,207) (2,199) 2,061
State................................. (884) (177) 233
------- ------- -------
(8,091) (2,376) 2,294
------- ------- -------
$15,471 $17,891 $13,439
======= ======= =======
The reasons for the differences between the provision for income
taxes and the expected Federal income taxes at the statutory rate
are as follows:
2003 2002 2001
---- ---- ----
Expected income tax expense................. $15,253 $17,274 $12,972
State income taxes, less
Federal income tax benefit............... 750 967 849
Business credits............................ (370) (260) (142)
Other ...................................... (162) (90) (240)
------- ------- -------
$15,471 $17,891 $13,439
======= ======= =======
As of March 31, 2003 and 2002, the tax effect of temporary
differences between the tax basis of assets and liabilities and
their financial reporting amounts are as follows:
2003 2002
-------------------------------- ------------------------------
CURRENT NON-CURRENT CURRENT NON-CURRENT
Fixed asset basis differences........ $ - $(3,397) $ - $(2,126)
Reserves for inventory and
receivables....................... 7,776 - 4,376 -
Vacation pay reserve................. 456 - 464 -
Deferred compensation................ - 1,092 - 1,004
Amortization......................... - (1,108) - (818)
Litigation reserve................... 6,056 - - -
Other................................ 503 - 387 -
------- ------- ------ -------
Net deferred tax asset (liability) $14,791 $(3,413) $5,227 $(1,940)
======= ======= ====== =======
The Company paid income taxes of $22,088, $15,578 and $11,971
during the years ended March 31, 2003, 2002 and 2001, respectively.
63
12. EMPLOYEE BENEFITS
-----------------
STOCK OPTION PLAN AND AGREEMENTS
During fiscal 2002, the Board of Directors adopted the Company's
2001 Incentive Stock Option Plan (the 2001 Plan), which allows for
the issuance of up to 3,750,000 shares of common stock. Prior to
the approval of the 2001 Plan, the Company operated under the 1991
Incentive Stock Option Plan, as amended, which allowed for the
issuance of up to 4,500,000 shares of common stock. Under the
Company's stock option plans, options to acquire shares of common
stock have been made available for grant to certain employees. Each
option granted has an exercise price of not less than 100% of the
market value of the common stock on the date of grant. The
contractual life of each option is generally 10 years. The
exercisability of the grants varies according to the individual
options granted. In addition to the Stock Option Plan, the Company
issues stock options periodically related to employment agreements
with its executives and to non-employee directors. At March 31,
2003, options to purchase 244,150 shares of stock were outstanding
pursuant to employment agreements and grants to non-employee
directors.
The following summary shows the transactions for the fiscal years
2003, 2002 and 2001 under option arrangements:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
AVERAGE AVERAGE
NO. OF PRICE PER NO. OF PRICE PER
SHARES SHARE SHARES SHARE
------ ----- ------ -----
Balance, March 31, 2000........... 3,087,645 $ 7.90 1,779,264 $ 7.10
Options granted................... 592,125 15.62 - -
Options becoming exercisable...... - - 433,351 11.13
Options exercised................. (1,344,348) 7.15 (1,344,348) 7.15
Options canceled.................. (182,223) 10.47 (54,644) 9.01
---------- ----------
Balance March 31, 2001............ 2,153,199 10.27 813,623 9.04
Options granted................... 362,000 20.44 - -
Options becoming exercisable...... - - 385,356 12.79
Options exercised................. (188,703) 5.73 (188,703) 5.73
Options canceled.................. (194,110) 12.73 (53,105) 10.63
---------- ----------
Balance March 31, 2002............ 2,132,386 12.18 957,171 11.11
Options granted................... 467,025 18.52 - -
Options becoming exercisable...... - - 377,637 13.81
Options exercised................. (90,280) 7.89 (90,280) 7.89
Options canceled.................. (173,776) 17.51 (50,635) 16.45
---------- ----------
Balance March 31, 2003............ 2,335,355 $13.22 1,193,893 $11.97
========== ==========
The weighted-average fair value of options granted at market price
was $3.27, $5.45 and $4.18 per share in fiscal 2003, 2002 and 2001,
respectively. The weighted-average fair value of options granted
with an exercise price exceeding market price on the date of grant
was $0.21, $0.45 and $1.83 per share in fiscal 2003, 2002 and 2001,
respectively.
64
The following table summarizes information about stock options
outstanding at March 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- -------------------------------
RANGE OF NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
EXERCISE OUTSTANDING LIFE AVERAGE EXERCISABLE AVERAGE
PRICES AT 3/31/03 REMAINING EXERCISE PRICE AT 3/31/03 EXERCISE PRICE
------ ---------- --------- -------------- ---------- --------------
$ 1.23 - $ 5.00 167,888 2 Years $ 3.24 110,968 $ 3.08
$ 5.01 - $ 9.00 252,713 4 Years $ 5.62 155,072 $ 5.57
$ 9.01 - $14.00 875,921 6 Years $11.01 513,616 $11.08
$14.01 - $21.00 818,363 7 Years $17.05 377,532 $17.24
$21.01 - $29.01 220,470 9 Years $24.09 36,705 $24.05
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 $445, $350 and $300
for fiscal 2003, 2002 and 2001, respectively. The Plan includes
features as described under Section 401(k) of the Internal Revenue
Code.
The Company's contributions to the 401(k) investment funds are 50%
of the first 7% of the salary contributed by each participant.
Contributions of $1,185, $1,028 and $907 were made to the 401(k)
investment funds in fiscal 2003, 2002 and 2001, 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
$231, $165 and $161 in fiscal 2003, 2002 and 2001, 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 $100,000 of each employee's covered
medical claims. Included in accrued liabilities in the consolidated
balance sheets as of March 31, 2003 and 2002 were $400 and $400 of
accrued health insurance reserves, respectively, for claims
incurred but not reported. For union employees, the Company
participates in a fully funded insurance plan sponsored by the
union. Total health and medical insurance expense for the two plans
was $6,636, $5,255, and $4,088 in fiscal 2003, 2002 and 2001,
respectively.
13. RELATED PARTY TRANSACTIONS
--------------------------
The Company currently leases certain real property from an
affiliated partnership of an officer and director of the Company.
Lease payments made for this property during the years ended March
31, 2003, 2002 and 2001 totaled $269, $263 and $246, respectively.
14. EQUITY TRANSACTIONS
-------------------
During July 2002, the Company completed a public offering of
approximately 3.3 million shares of Class A common stock. Net
proceeds to the Company were $72,380 after deducting underwriting
discounts, commissions and offering expenses.
65
As of March 31, 2003 and 2002, the Company had 40,000 shares of 7%
Cumulative Convertible Preferred Stock (par value $.01 per share)
outstanding at a stated value of $25 per share. The preferred stock
is non-voting with dividends payable quarterly. The preferred stock
is redeemable at its stated value. Each share of preferred stock is
convertible into Class A Common Stock at a conversion price of
$4.45 per share. The preferred stock has a liquidation preference
of $25 per share plus all accrued but unpaid dividends prior to any
liquidation distributions to holders of Class A or Class B common
stock. No dividends may be paid on Class A or Class B common stock
unless all dividends on the Cumulative Convertible Preferred Stock
have been declared and paid. Undeclared and unaccrued cumulative
preferred dividends were $366, or $9.14 per share, at both March
31, 2003 and 2002. Also, under the terms of its credit agreement,
the Company may not pay cash dividends in excess of 25% of the
prior fiscal year's consolidated net income.
Holders of Class A common stock are entitled to receive dividends
per share equal to 120% of the dividends per share paid on the
Class B Common Stock and have one-twentieth vote per share in the
election of directors and on other matters.
Under the terms of the Company's current loan agreement (see Note
9), the Company has limitations on paying dividends, except in
stock, on its Class A and Class B common stock. Payment of
dividends may also be restricted under Delaware Corporation law.
On August 18, 2000, the Company's Board of Directors declared a
three-for-two stock split in the form of a 50% stock dividend of
its common stock to shareholders of record on August 28, 2000,
payable on September 7, 2000. 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.
66
15. EARNINGS PER SHARE
------------------
The following table sets forth the computation of basic and diluted
earnings per share:
2003 2002 2001
---- ---- ----
Numerator:
Net income(1)..................................... $28,110 $31,464 $23,625
Preferred stock dividends......................... (70) (70) (420)
------- ------- -------
Numerator for basic earnings per
share - income available to common
shareholders................................... 28,040 31,394 23,205
Effect of dilutive securities:
Preferred stock dividends...................... 70 70 420
------- ------- -------
Numerator for diluted earnings per
share - income available to common
shareholders after assumed conversions......... $28,110 $31,464 $23,625
======= ======= =======
Denominator:
Denominator for basic earnings per
share -- weighted-average shares............... 33,200 30,408 28,981
------ ------ ------
Effect of dilutive securities:
Employee stock options......................... 949 1,258 1,662
Convertible preferred stock.................... 225 499 1,350
------- ------- -------
Dilutive potential common shares.................. 1,174 1,757 3,012
------- ------- -------
Denominator for diluted earnings per
share -- adjusted weighted-average shares and
assumed conversions............................ 34,374 32,165 31,993
======= ======= =======
Basic earnings per share(2) ...................... $ 0.84 $ 1.03 $ 0.80
======= ======= =======
Diluted earnings per share(2)(3) ................. $ 0.82 $ 0.98 $ 0.74
======= ======= =======
- -------------------------
(1) Net income for the year ended March 31, 2003 includes
a reserve of $16,500 for potential damages associated
with a lawsuit (see Note 10). The impact of the
litigation reserve, net of the applicable tax effect,
was $10,444.
(2) The two-class method for Class A and Class B common
stock is not presented because the earnings per share
are equivalent to the if-converted method since
dividends were not declared or paid and each class of
common stock has equal ownership of the Company.
(3) Employee stock options to purchase 170,490, 27,550 and
5,750 shares of Class A common stock at March 31,
2003, 2002 and 2001, respectively, are not presented
because these options are anti-dilutive. The exercise
prices of these options exceeded the average market
prices of the shares under option in each respective
period.
67
16. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
---------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
FISCAL 2003
- -----------
Net sales.................................. $49,227 $60,482 $61,929 $73,358 $244,996
Gross profit............................... 30,149 37,001 38,201 45,118 150,469
Pretax income (loss)(a).................... 10,621 (2,220) 15,555 19,625 43,581
Net income (loss)(a)....................... 6,723 (1,405) 10,146 12,646 28,110
Earnings (loss) per share - basic.......... 0.22 (0.04) 0.30 0.37 0.84
Earnings (loss) per share - diluted........ 0.21 (0.04) 0.29 0.36 0.82
FISCAL 2002
- -----------
Net sales.................................. $45,220 $50,658 $51,553 $56,674 $204,105
Gross profit............................... 27,645 29,408 32,247 34,402 123,702
Pretax income.............................. 8,883 11,027 12,782 16,663 49,355
Net income................................. 5,663 7,030 8,148 10,623 31,464
Earnings per share - basic................. 0.19 0.23 0.26 0.35 1.03
Earnings per share - diluted............... 0.18 0.22 0.25 0.33 0.98
NOTE:
----
(a) Pretax income (loss), for the three-months ended September 30,
2002 and the year ended March 31, 2003 includes a reserve of
$16,500 for potential damages associated with a lawsuit (see
Note 10). The impact of the litigation reserve, net of
applicable income taxes was to reduce net income for the
three months ended September 30, 2002 and the year ended
March 31, 2003 by $10,444.
17. SEGMENT REPORTING
-----------------
The reportable operating segments of the Company are branded
products, specialty generics and specialty materials. The operating
segments are distinguished by differences in products, marketing
and regulatory approval. Segment profits are measured based on
income before taxes and are determined based on each segment's
direct revenues and expenses. The majority of research and
development expense, corporate general and administrative expenses,
amortization and interest expense, as well as interest and other
income, are not allocated to segments, but included in the "all
other" classification. Identifiable assets for the three reportable
operating segments primarily include receivables, inventory, and
property and equipment. For the "all other" classification,
identifiable assets consist of cash and cash equivalents, corporate
property and equipment, intangible and other assets and all income
tax related assets. Accounting policies of the segments are the
same as the Company's consolidated accounting policies.
68
The following represents information for the Company's reportable
operating segments for fiscal 2003, 2002 and 2001.
FISCAL YEAR
ENDED BRANDED SPECIALTY SPECIALTY ALL
MARCH 31 PRODUCTS GENERICS MATERIALS OTHER ELIMINATIONS CONSOLIDATED
--------- -------- -------- --------- ----- ------------ ------------
- ---------------------------------------------------------------------------------------------------------------------------------
Net revenues 2003 $43,677 $179,724 $17,395 $ 4,200 $ - $244,996
2002 40,424 141,007 19,557 3,117 - 204,105
2001 25,206 132,154 17,088 3,319 - 177,767
- ---------------------------------------------------------------------------------------------------------------------------------
Segment profit (loss) (a) 2003 8,361 97,339 1,692 (63,811) - 43,581
2002 7,222 74,389 3,684 (35,940) - 49,355
2001 (6,490) 71,779 4,333 (32,558) - 37,064
- ---------------------------------------------------------------------------------------------------------------------------------
Identifiable assets 2003 7,819 69,303 8,797 267,907 (1,158) 352,668
2002 12,555 58,618 8,774 116,403 (1,158) 195,192
2001 9,497 31,241 8,278 103,559 (1,158) 151,417
- ---------------------------------------------------------------------------------------------------------------------------------
Property and 2003 634 116 143 15,220 - 16,113
equipment additions 2002 707 120 391 7,266 - 8,484
2001 226 805 91 6,935 - 8,057
- ---------------------------------------------------------------------------------------------------------------------------------
Depreciation and 2003 260 55 164 7,276 - 7,755
Amortization 2002 74 79 156 6,151 - 6,460
2001 82 180 152 5,310 - 5,724
- ---------------------------------------------------------------------------------------------------------------------------------
(a) In the "all other" classification, segment profit (loss) for the
year ended March 31, 2003 includes a litigation reserve of $16,500
for potential damages associated with a lawsuit (see Note 10).
Consolidated revenues are principally derived from customers in
North America and substantially all property and equipment is
located in St. Louis, Missouri.
18. SUBSEQUENT EVENTS
-----------------
PURCHASE OF BUILDING
On April 28, 2003, the Company completed the purchase of an office
building for $8,800. The facility consists of approximately 275,000
square feet of office, production, distribution and warehouse
space. The purchase of the building was financed by a term loan
secured by the property. The building mortgage bears interest at
5.30% and requires monthly principal payments of $49 plus interest
through March 2008. The remaining principal balance plus any unpaid
interest is due in April 2008.
SALE OF $200 MILLION CONTINGENT CONVERTIBLE SUBORDINATED NOTES
On May 16, 2003, the Company issued $200,000 of 2.50% Contingent
Convertible Notes due May 16, 2033 (the Notes). Approximately
$50,000 of the proceeds from the sale of these Notes was used to
repurchase shares of Class A common stock, with the remainder to
be used for potential acquisitions and general corporate purposes.
The Notes bear interest at a rate of 2.50% per annum, which is
payable on May 16 and November 16 of each year, beginning November
16, 2003. The Company also will pay contingent interest at a rate
equal to 0.5% per annum during any six-month period from May 16 to
November 15 and from November 16 to May 15, with the initial
six-month period commencing May 16, 2006, if the average trading
price of the Notes reaches certain thresholds.
69
The Company may redeem some or all of the Notes at any time on or
after May 21, 2006, at a redemption price, payable in cash, of 100%
of the principal amount of the Notes, plus accrued and unpaid
interest, including contingent interest, if any. Holders of the
Notes may require the Company to repurchase all or a portion of
their Notes on May 16, 2008, 2013, 2018, 2023 and 2028 and upon a
change in control, as defined in the indenture governing the Notes,
at a purchase price, payable in cash, of 100% of the principal
amount of the Notes, plus accrued and unpaid interest, including
contingent interest, if any.
The Notes are convertible, at the holders' option, into shares of
the Company's Class A common stock prior to the maturity date in the
following circumstances:
o during any quarter commencing after June 30,
2003, if the closing sale price of the Company's
Class A common stock over a specified number of
trading days during the previous quarter is more
than 120% of the conversion price of the Notes
on the last trading day of the previous quarter.
The Notes are initially convertible at a
conversion price of $34.51 per share, which is
equal to a conversion rate of approximately
28.9771 shares per $1,000 principal amount of
Notes;
o if the Company has called the Notes for redemption;
o during the five trading day period immediately
following any nine consecutive day trading
period in which the trading price of the Notes
per $1,000 principal amount for each day of such
period was less than 95% of the product of the
closing sale price of our Class A common stock
on that day multiplied by the number of shares
of our Class A common stock issuable upon
conversion of $1,000 principal amount of the
Notes; or
o upon the occurrence of specified corporate transactions.
The Notes, which are unsecured, do not contain any restrictions on
the payment of dividends, the incurrence of additional indebtedness
or the repurchase of the Company's securities, and do not contain
any financial covenants.
The Company incurred approximately $6,000 of fees and other
origination costs related to the issuance of the Notes. These costs
will be amortized over a five-year period.
As a result of the significant increase in debt related to the
$200.0 million Notes issuance, the $60 million revolving line of
credit the Company has with a bank was changed (see Note 9). The
credit agreement, which previously included covenants that impose
minimum levels of earnings before interest, taxes, depreciation and
amortization, a maximum funded debt ratio, and a limit on capital
expenditures and dividend payments, was expanded to include a
minimum fixed charge ratio and a maximum senior leverage ratio.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information contained under the caption "INFORMATION CONCERNING
NOMINEES AND DIRECTORS CONTINUING IN OFFICE" in the Company's
definitive proxy statement to be filed pursuant to Regulation 14(a)
for its 2003 Annual Meeting of Shareholders, which involves the
election of directors, is incorporated herein by this reference.
Also see Item 4(a) of Part I hereof.
70
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information contained under the captions "EXECUTIVE
COMPENSATION" and "INFORMATION AS TO STOCK OPTIONS" in the
Company's definitive proxy statement to be filed pursuant to
Regulation 14(a) for its 2003 Annual Meeting of Shareholders is
incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information contained under the caption "SECURITY OWNERSHIP OF
PRINCIPAL HOLDERS AND MANAGEMENT" in the Company's definitive proxy
statement to be filed pursuant to Regulation 14(a) for its 2003
Annual Meeting of Shareholders is incorporated herein by this
reference.
EQUITY COMPENSATION PLAN INFORMATION
The following information regarding compensation plans of the
Company is furnished as of March 31, 2003, the end of the Company's
most recently completed fiscal year.
71
EQUITY COMPENSATION PLAN INFORMATION
REGARDING CLASS A COMMON STOCK
- ----------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, PRICE OF OUTSTANDING (EXCLUDING SECURITIES
WARRANTS AND RIGHTS OPTIONS, WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
------------------- ---------------------------- ------------------------
PLAN CATEGORY (A) (B) (C)
Equity compensation plans
approved by security holders(1) 1,737,332 $13.28 1,945,175
Equity compensation plans not
approved by security holders(2) 89,750 $15.58 N/A
---------
Total 1,827,082 $13.39 1,945,175
========= =========
EQUITY COMPENSATION PLAN INFORMATION
REGARDING CLASS B COMMON STOCK
- ----------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, PRICE OF OUTSTANDING (EXCLUDING SECURITIES
WARRANTS AND RIGHTS OPTIONS, WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
------------------- ---------------------------- ------------------------
PLAN CATEGORY (A) (B) (C)
Equity compensation plans
approved by security holders(1) 353,873 $12.51 1,261,000
Equity compensation plans not
approved by security holders(2) 154,400 $13.72 N/A
-------
Total 508,273 $12.87 1,261,000
======= =========
(1) Consists of the Company's 2001 Incentive Stock Option Plan.
See Note 12 of Notes to Consolidated Financial Statements.
(2) Consists of options that the Vice Chairman elected to take in lieu
of earned incentive cash compensation and options granted to
non-employee members of the Board of Directors.
72
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information contained under the caption "TRANSACTIONS WITH
ISSUER" in its definitive proxy statement to be filed pursuant to
Regulation 14(a) for its 2003 Annual Meeting of Shareholders is
incorporated herein by this reference.
ITEM 14. CONTROLS AND PROCEDURES
-----------------------
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to
the Company's management, including our principal executive officer
and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our
management, including our principal executive officer and principal
financial officer, of the effectiveness of the design and operation
of our disclosure controls and procedures. Based on the foregoing,
our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were
effective.
There have been no significant changes in our internal controls or
in other factors that could significantly affect the internal
controls subsequent to the date we completed our evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) 1. Financial Statements: Page
The following consolidated financial statements of the Company
are included in Part II, Item 8:
Report of Independent Certified Public Accountants............. 45
Consolidated Balance Sheets as of March 31, 2003 and 2002...... 46
Consolidated Statements of Income for the Years Ended
March 31, 2003, 2002 and 2001................................ 47
Consolidated Statements of Shareholders' Equity for the Years
Ended March 31, 2003, 2002 and 2001.......................... 48
Consolidated Statements of Cash Flows for the Years Ended
March 31, 2003, 2002 and 2001................................ 49
73
Notes to Financial Statements.................................. 50
2. Financial Statement Schedules:
Report of Independent Certified Public Accountants regarding
Financial Statement Schedule................................... 75
Schedule II - Valuation and Qualifying Accounts................ 76
3. Exhibits:
See Exhibit Index on pages 80 through 86 of this Report.
Management contracts and compensatory plans are designated on
the Exhibit Index.
(b) A report on Form 8-K was filed by the Company on February 4, 2003
for a Regulation FD Disclosure.
74
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Board of Directors
of KV Pharmaceutical Company
The audits referred to in our report dated May 23, 2003 relating to the
consolidated financial statements of K-V Pharmaceutical Company, which are
included in Item 8 of this Form 10-K, included the audit of the accompanying
financial statement schedule. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based upon our audits. In
our opinion such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO SEIDMAN, LLP
Chicago, Illinois
May 23, 2003
75
2. Financial Statement Schedules:
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE AT CHARGED TO AMOUNTS BALANCE
BEGINNING COSTS AND CHARGED TO AT END
OF YEAR EXPENSES RESERVES OF YEAR
------- -------- -------- -------
(in thousands)
Year Ended March 31, 2001:
Allowance for doubtful accounts............ $ 438 $ 13 $ 3 $ 448
Inventory obsolescence..................... 1,062 418 893 587
------------- ------------- ------------- --------------
$ 1,500 $ 431 $ 896 $ 1,035
============= ============= ============= ==============
Year Ended March 31, 2002:
Allowance for doubtful accounts............ $ 448 $ 113 $ 158 $ 403
Inventory obsolescence..................... 587 2,215 1,694 1,108
------------- ------------- ------------- --------------
$ 1,035 $ 2,328 $ 1,852 $ 1,511
============= ============= ============= ==============
Year Ended March 31, 2003:
Allowance for doubtful accounts............ $ 403 $ (81) $ (100) $ 422
Inventory obsolescence..................... 1,108 2,053 2,158 1,003
------------- ------------- ------------- --------------
$ 1,511 $ 1,972 $ 2,058 $ 1,425
============= ============= ============= ==============
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.
76
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 27, 2003 By /s/ Marc S. Hermelin
-----------------------------------------
Vice Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: June 27, 2003 By /s/ Gerald R. Mitchell
-----------------------------------------
Vice President, Treasurer and
Chief Financial Officer
(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 27, 2003 By /s/ Marc S. Hermelin
-----------------------------------------
Marc S. Hermelin
Date: June 27, 2003 By /s/ Victor M. Hermelin
-----------------------------------------
Victor M. Hermelin
Date: June 27, 2003 By /s/ Norman D. Schellenger
-----------------------------------------
Norman D. Schellenger
Date: June 27, 2003 By /s/ Alan G. Johnson
-----------------------------------------
Alan G. Johnson
Date: June 27, 2003 By /s/ Kevin S. Carlie
-----------------------------------------
Kevin S. Carlie
Date: June 27, 2003 By /s/ John P. Isakson
-----------------------------------------
John P. Isakson
77
CERTIFICATIONS
I, Marc S. Hermelin, Vice Chairman and Chief Executive Officer, certify that:
1. I have reviewed this Annual Report on Form 10-K of KV Pharmaceutical
Company;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Annual Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Annual Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Annual Report (the "Evaluation Date"); and
c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this Annual Report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: June 27, 2003
/s/ MARC S. HERMELIN
------------------------
Marc S. Hermelin
Vice Chairman and Chief Executive Officer
(Principal Executive Officer)
78
I, Gerald R. Mitchell, Vice President, Treasurer and Chief Financial Officer,
certify that:
1. I have reviewed this Annual Report on Form 10-K of KV Pharmaceutical
Company;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Annual Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Annual Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Annual Report (the "Evaluation Date"); and
c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this Annual Report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: June 27, 2003
/s/ GERALD R. MITCHELL
--------------------------
Gerald R. Mitchell
Vice President, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
79
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3(a) The Company's Certificate of Incorporation, which was
filed as Exhibit 3(a) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1981, is
incorporated herein by this reference.
3(b) Certificate of Amendment to Certificate of Incorporation
of the Company, effective March 7, 1983, which was filed
as Exhibit 3(c) to the Company's Annual Report on Form
10-K for the year ended March 31, 1983, is incorporated
herein by this reference.
3(c) Certificate of Amendment to Certificate of Incorporation
of the Company, effective June 9, 1987, which was filed as
Exhibit 3(d) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1988, 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, effective July 17, 1986, 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, effective December 23, 1991, 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) Certificate of Amendment to Certificate of Incorporation
of the Company, effective September 3, 1998, which was
filed as Exhibit 4(g) to the Company's Registration
Statement on Form S-3 (Registration Statement No.
333-87402), filed May 1, 2002, is incorporated herein by
this reference.
3(h) 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 herein by this reference.
3(i) Amendment to Bylaws of the Company, effective July 2,
1984, which was filed as Exhibit 4(i) to the Company's
Registration Statement on Form S-3 (Registration Statement
No. 333-87402), filed May 1, 2002, is incorporated herein
by this reference.
3(j) Amendment to Bylaws of the Company, effective December 4,
1986, which was filed as Exhibit 4(j) to the Company's
Registration Statement on Form S-3 (Registration Statement
No. 333-87402), filed May 1, 2002, is incorporated herein
by this reference.
3(k) Amendment to Bylaws of the Company effective March 17,
1992, which was filed as Exhibit 4(k) to the Company's
Registration Statement on Form S-3 (Registration Statement
No. 333-87402), filed May 1, 2002, is incorporated herein
by this reference.
80
3(l) Amendment to Bylaws of the Company effective November 18,
1992, which was filed as Exhibit 4(l) to the Company's
Registration Statement on Form S-3 (Registration Statement
No. 333-87402), filed May 1, 2002, is incorporated herein
by this reference.
3(m) Amendment to Bylaws of the Company, effective December 30,
1993, 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.
3(n) Amendment to Bylaws of the Company, effective September 24,
2002, which was filed as Exhibit 4(n) to the Company's
Registration Statement on Form S-3 (Registration Statement
No. 333-106294), filed June 19, 2003, is incorporated herein
by this reference.
4(a) Certificate of Designation of Rights and Preferences of 7%
Cumulative Convertible preferred stock of the Company,
effective June 9, 1987, and related Certificate of
Correction, dated June 17, 1987, which was filed as
Exhibit 4(f) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1987, is incorporated herein
by this reference.
4(b) Loan Agreement dated as of November 1, 1989, with the
Industrial Development Authority of the County of St.
Louis, Missouri, regarding private activity refunding and
revenue bonds issued by such Authority, including form of
Promissory Note executed in connection therewith, which
was filed as Exhibit 4(b) to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31,
1989, is incorporated herein by this reference.
4(c) Loan Agreement dated June 18, 1997 between the Company and
its subsidiaries and LaSalle National Bank ("LaSalle"),
which was filed as Exhibit 4(i) to the Company's Annual
Report on Form 10-K for the year ended March 31, 1997, is
incorporated herein by this reference.
4(d) Revolving Note, dated June 18, 1997, by the Company and
its subsidiaries in favor of LaSalle, which was filed as
Exhibit 4(j) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1997, is incorporated herein
by this reference.
4(e) Term Note, dated June 24, 1997, by the Company and its
subsidiaries in favor of LaSalle, which was filed as
Exhibit 4(k) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1997, is incorporated herein
by this reference.
4(f) Reimbursement Agreement dated as of October 16, 1997,
between the Company and LaSalle, which was filed as
Exhibit 4(f) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1998, is incorporated herein
by this reference.
4(g) Deed of Trust and Security Agreement dated as of October
16, 1997, between the Company and LaSalle, which was filed
as Exhibit 4(g) to the Company's Annual Report on Form
10-K for the year ended March 31, 1998, is incorporated
herein by this reference.
4(h) First Amendment, dated as of October 28, 1998, to Loan
Agreement between the Company and its subsidiaries and
LaSalle, which was filed as Exhibit 4(h) to the Company's
Annual Report on Form 10-K for the year ended March 31,
1999, is incorporated herein by this reference.
4(i) Second Amendment, dated as of March 11, 1999, to Loan
Agreement between the Company and its subsidiaries and
LaSalle, which was filed as Exhibit 4(i) to the Company's
Annual Report on Form 10-K for the year ended March 31,
1999, is incorporated herein by this reference.
81
4(j) Third Amendment, dated June 22, 1999, to Loan Agreement
between the Company and its subsidiaries and LaSalle,
which was filed as Exhibit 4(j) to the Company's Annual
Report on Form 10-K for the year ended March 31, 2000, is
incorporated herein by this reference.
4(k) Fourth Amendment, dated December 17, 1999, to Loan
Agreement between the Company and its subsidiaries and
LaSalle, which was filed as Exhibit 4(k) to the Company's
Annual Report on Form 10-K for the year ended March 31,
2000, is incorporated herein by this reference.
4(l) Fifth Amendment, dated December 21, 2001, to Loan
Agreement between the Company and its subsidiaries and
LaSalle, which was filed as Exhibit 4(l) to the Company's
Annual Report on Form 10-K for the year ended March 31,
2002, is incorporated herein by this reference.
4(m) Sixth Amendment, dated December 20, 2002, to Loan
Agreement between the Company and its subsidiaries and
LaSalle, filed herewith.
4(n) Seventh Amendment, dated April 28, 2003, to Loan Agreement
between the Company and its subsidiaries and LaSalle,
filed herewith.
4(0) Indenture dated as of May 16, 2003, by and between the
Company and Deutsche Bank Trust Company Americas, filed on
May 21, 2003, as Exhibit 4.1 to the Company's Current
Report on Form 8-K, is incorporated herein by this
reference.
4(p) Registration Rights Agreement dated as of May 16, 2003, by
and between the Company and Deutsche Bank Securities,
Inc., as representative of the several Purchasers, filed
on May 21, 2003 as Exhibit 4.2 to the Company's Current
Report on Form 8-K, is incorporated herein by this
reference.
10(a)* Stock Option Agreement between the Company and Marc S.
Hermelin, Vice Chairman and Chief Executive Officer, dated
February 18, 1986, is incorporated herein by this
reference.
10(b)* First Amendment to and Restatement of the KV
Pharmaceutical 1981 Employee Incentive Stock Option Plan,
dated March 9, 1987 (the "Restated 1981 Option Plan"),
which as filed as Exhibit 10(t) to the Company's Annual
Report on Form 10-K for the year ended March 31, 1988, is
incorporated herein by this reference.
10(c)* Second Amendment to the Restated 1981 Option Plan, dated
June 12, 1987, which was filed as Exhibit 10(u) to the
Company's Annual Report on Form 10-K for the year ended
March 31, 1988, is incorporated herein by this reference.
10(d)* Revised Form of Stock Option Agreement, effective June 12,
1987, for the Restated 1981 Option Plan, which was filed
as Exhibit 10(v) to the Company's Annual Report on Form
10-K for the year ended March 31, 1988, is incorporated
herein by this reference.
10(e)* Consulting Agreement between the Company and Victor M.
Hermelin, Chairman of the Board, dated October 30, 1978,
as amended October 30, 1982, and Employment Agreement
dated February 20, 1974, referred to therein (which was
filed as Exhibit 10(m) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1983) and
subsequent Amendments dated as of August 12, 1986, which
was filed as Exhibit 10(f) to the Company's Annual Report
on Form 10-K for the year ended March 31, 1987, and dated
as of September 15, 1987 (which was filed as Exhibit 10(s)
to the Company's Annual Report on Form 10-K for the year
ended March 31, 1988), and dated October 25, 1988 (which
was filed as Exhibit 10(n) to the Company's Annual Report
on Form 10-K for the year ended March 31, 1989), and dated
October 30, 1989 (which was filed as Exhibit 10(n) to the
Company's Annual Report on Form 10-K for the year ended
March 31, 1990), and dated October 30, 1990 (which was
filed as Exhibit 10(n) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1991), and dated as
of
82
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)* 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(n)* 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(o)* 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(p)* 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.
83
10(q)* 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(r)* 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(s)* Stock Option Agreement dated as of November 6, 1996,
granting a stock option to Alan G. Johnson, filed herewith.
10(t)* 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(u)* Agreement between the Company and Marc S. Hermelin, Vice
Chairman, dated December 16, 1996, with supplemental
letter attached, which was filed as Exhibit 10(z) to the
Company's Annual Report on Form 10-K for the year ended
March 31, 1997, is incorporated herein by this reference.
10(v) 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(w)* Stock Option Agreement dated as of January 3, 1997,
granting a stock option to Marc S. Hermelin, which was
filed as Exhibit 10(bb) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1999, is
incorporated herein by this reference.
10(x)* Stock Option Agreement dated as of May 15, 1997, granting
a stock option to Marc S. Hermelin, which was filed as
Exhibit 10(cc) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1999, is incorporated herein
by this reference.
10(y) Asset Purchase Agreement by and between K-V Pharmaceutical
Company and American Home Products Corporation, acting
through its Wyeth-Ayerst Laboratories division, dated as
of February 11, 1999, which was filed as Exhibit 2.1 to
the Company's Report on Form 8-K filed April 5, 1999, is
incorporated herein by this reference.
10(z)* Amendment, dated as of October 30, 1998, to Employment
Agreement between the Company and Marc S. Hermelin, which
was filed as Exhibit 10(ee) to the Company's Annual Report
on Form 10-K for the year ended March 31, 1999, is
incorporated herein by this reference.
10(aa) Exclusive License Agreement, dated as of April 1, 1999
between Victor M. Hermelin as licenser and the Company as
licensee, which was filed as Exhibit 10(ff) to the
Company's Annual Report on Form 10-K for the year ended
March 31, 1999 is incorporated herein by this reference.
10(bb)* Stock Option Agreement dated as of March 31, 1999,
granting a stock option to Victor M. Hermelin, which was
filed as Exhibit 10(aa) to the Company's Annual Report on
Form 10-K for the year ended March 31, 2001, is
incorporated by this reference.
10(cc)* Stock Option Agreement dated as of March 31, 1999, granting
a stock option to Norman D. Schellenger, filed herewith.
10(dd)* Stock Option Agreement dated as of April 1, 1999, granting
a stock option to Marc S. Hermelin, which was filed as
Exhibit 10(gg) to the Company's Annual Report on Form 10-K
for the year ended March 31, 2000, is incorporated by this
reference.
84
10(ee)* Stock Option Agreement dated as of August 16, 1999,
granting a stock option to Marc S. Hermelin, which was
filed as Exhibit 10 (hh) to the Company's Annual Report on
Form 10-K for the year ended March 31, 2000, is
incorporated by this reference.
10(ff)* Stock Option Agreement dated as of October 13, 1999, granting
a stock option to Alan G. Johnson, filed herewith.
10(gg)* Stock Option Agreement dated as of October 13, 1999, granting
a stock option to Alan G. Johnson, filed herewith.
10(hh)* Stock Option Agreement dated as of October 13, 1999, granting
a stock option to Alan G. Johnson, filed herewith.
10(ii)* Stock Option Agreement dated as of October 13, 1999, granting
a stock option to Alan G. Johnson, filed herewith.
10(jj)* Amendment, dated December 2, 1999, to Employment Agreement
between the Company and Marc S. Hermelin, Vice-Chairman,
which was filed as Exhibit 10(ii) to the Company's Annual
Report on Form 10-K for the year ended March 31, 2000, is
incorporated by this reference.
10(kk)* Employment Agreement between the Company and Alan G.
Johnson, Senior Vice-President, Strategic Planning and
Corporate Growth, dated September 27, 1999, which was
filed as Exhibit 10(jj) to the Company's Annual Report on
Form 10-K for the year ended March 31, 2000, is
incorporated by this reference.
10(ll)* Consulting Agreement, dated as of May 1, 1999, between the
Company and Victor M. Hermelin, Chairman, which was filed
as Exhibit 10(kk) to the Company's Annual Report on Form
10-K for the year ended March 31, 2000, is incorporated by
this reference.
10(mm)* Stock Option Agreement dated as of June 1, 2000, granting
a stock option to Marc S. Hermelin, which was filed as
Exhibit 10(gg) to the Company's Annual Report on Form 10-K
for the year ended March 31, 2001, is incorporated by this
reference.
10(nn)* Stock Option Agreement dated as of June 1, 2000, granting
a stock option to Marc S. Hermelin, which was filed as
Exhibit 10(hh) to the Company's Annual Report on Form 10-K
for the year ended March 31, 2001, is incorporated by this
reference.
10(oo)* Stock Option Agreement dated as of April 9, 2001, granting
a stock option to Kevin S. Carlie, which was filed as
Exhibit 10(ii) to the Company's Annual Report on Form 10-K
for the year ended March 31, 2002, is incorporated herein
by this reference.
10(pp)* Stock Option Agreement dated as of April 9, 2001, granting
a stock option to Marc S. Hermelin, which was filed as
Exhibit 10(jj) to the Company's Annual Report on Form 10-K
for the year ended March 31, 2002, is incorporated herein
by this reference.
10(qq)* Stock Option Agreement dated as of April 9, 2001, granting
a stock option to Marc S. Hermelin, which was filed as
Exhibit 10(kk) to the Company's Annual Report on Form 10-K
for the year ended March 31, 2002, is incorporated herein
by this reference.
10(rr)* Stock Option Agreement dated as of July 26, 2002, granting
a stock option to Marc S. Hermelin, filed herewith.
10(ss)* Stock Option Agreement dated as of October 21, 2002, granting
a stock option to John P. Isakson, filed herewith.
10(tt) License Agreement by and between the Company and FemmePharma,
Inc., dated as of April 18, 2002, filed herewith.
10(uu) Stock Purchase Agreement by and between the Company and
FemmePharma, Inc., dated as of April 18, 2002, filed
herewith.
10(vv) Product Acquisition Agreement by and between the Company
and Schwarz Pharma dated as of March 31, 2003, filed
herewith.
10(ww) Product Acquisition Agreement by and between the Company
and Altana Inc. dated as of March 31, 2003, filed herewith.
10(xx)* Amendment, dated as of March 31, 2003, to Consulting
Agreement between the Company and Victor M. Hermelin,
which was filed as Exhibit 10(kk) to the Company's Annual
Report on Form 10-K for the year ended March 31, 2000, filed
herewith.
10(yy)* Amendment, dated as of April 3, 2003, to Employment Agreement
between the Company and Victor M. Hermelin, filed herewith.
85
21 List of Subsidiaries, filed herewith.
23 Consent of BDO Seidman, LLP, filed herewith.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
filed herewith.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
filed herewith.
*Management contract or compensation plan.
86