SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Mark One
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from to
Commission file number 1-9601
K-V PHARMACEUTICAL COMPANY
2503 SOUTH HANLEY ROAD
ST. LOUIS, MISSOURI 63144
(314) 645-6600
Incorporated in Delaware I.R.S. Employer Identification No. 43-0618919
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock par value $.01 per share American Stock Exchange
Class B Common Stock par value $.01 per share American 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 such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the 5,554,663 shares of Class A and
2,164,366 shares of Class B Common Stock held by nonaffiliates of the Registrant
as of June 6, 1997 was $90,957,607 and $36,253,131 respectively. As of June 6,
1997, the Registrant had outstanding 7,709,147 and 4,338,950 shares of Class A
and Class B Common Stock, respectively, exclusive of treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated into this Report by reference:
Part III: Portions of the definitive proxy statement of the Registrant
(to be filed pursuant to Regulation 14(A) for Registrant's 1997 Annual Meeting
of Shareholders, which involves the election of directors), are incorporated by
reference into Items 10, 11, 12 and 13 to the extent stated in such items.
Any forward-looking statements set forth in this Report are necessarily
subject to significant uncertainties and risks. When used in this Report, the
words "believes," "anticipates," "intends," "expects," and similar expressions
are intended to identify forward-looking statements. Actual results could be
materially different as a result of various possibilities. Readers are cautioned
not to place undue reliance on forward-looking statements, which speak only as
of the date hereof. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Item 1. Description of Business.
(a) General Development of Business.
K-V Pharmaceutical Company ("KV") was incorporated under the laws of
Delaware in 1971 as a successor to a business originally founded in 1942. Victor
M. Hermelin, KV's Chairman and founder, obtained initial patents for early
controlled release and enteric coated technologies in the early 1950's.
KV is a pioneer in the area of advanced drug delivery technologies
which enhance the effectiveness of new therapeutic agents, existing
pharmaceutical products and nutritional supplements. The Company has developed a
diverse portfolio of ten technologies, including three oral controlled release
technologies, four site-specific oral and topical delivery technologies, and
three tastemasking technologies. These systems, which are used in the Company's
products and the products of its marketing licensees, are designed to improve
and control the absorption and utilization by the human body of active
pharmaceutical compounds, allowing the compounds to be administered less
frequently with potentially reduced side effects, improved drug efficacy and/or
enhanced patient compliance. Additionally, the Company continually applies its
scientific expertise and development experience to refine and enhance its
existing drug delivery systems and formulation technologies and to create new
technologies that may be used in its drug development programs.
KV licenses the marketing rights for products developed with these drug
delivery technologies to major domestic and international brand name
pharmaceutical marketers in return for license fees, milestone payments,
research reimbursement and manufacturing and royalty revenues.
In February, 1990, KV established a generic marketing capability
through a wholly-owned subsidiary, ETHEX Corporation ("ETHEX"), which makes KV
one of the only drug delivery research and development companies that also
markets "technology distinguished" generic products.
KV's other wholly-owned subsidiary, Particle Dynamics, Inc. ("PDI"),
formerly known as Desmo Chemical Corporation, was incorporated in New York in
1948 and acquired by KV in 1972. Through PDI, the Company develops and markets
specialty pharmaceutical compounds, including directly compressible and
microencapsulated ingredients used in pharmaceutical processing, and tastemasked
vitamins and minerals for the pharmaceutical, nutritional and food industries.
(Hereinafter, KV, ETHEX and PDI are sometimes referred to collectively
as "KV" or the "Company.")
2
(b) Industry Segments
The Company operates principally in one industry segment, consisting of
pharmaceutical development, manufacturing and marketing. Revenues are received
from customers for the development, manufacture and sale of drug products to
pharmaceutical marketers and from directly marketing its own technology
distinguished generic products. Revenues may be received in the form of
licensing revenues and/or royalty payments to KV based upon a percentage of the
licensee's sales of the product, in addition to manufacturing revenues, when
marketing rights to products using KV's advance drug delivery technologies are
licensed.
(c) Narrative Description of Business
The Company is engaged in the formulation and commercialization of
brand name prescription, generic prescription and over-the-counter ("OTC")
products utilizing the Company's proprietary drug delivery technologies.
The Company develops generic drugs using its proprietary technologies
that it markets and distributes through its wholly-owned subsidiary, ETHEX
Corporation. ETHEX currently sells 40 products, 20 of which were launched over
the past two fiscal years and many of which utilize KV's drug delivery systems.
Approximately 10 additional products are expected to be launched during fiscal
1998. ETHEX Corporation distributes and markets these technology distinguished
generic products directly to various markets and classes of trade customers,
including wholesalers, chains, distributors, mail order houses, independent
pharmacies, large HMOs and PPOs. ETHEX has achieved a 100% penetration in the 25
largest wholesalers and chains. Development of generic versions of existing
brand name products is typically less costly and time consuming than the
development of new drug products, because generic drugs typically contain
pharmaceutical compounds previously approved by the FDA and generally qualify
for the use of an abbreviated testing and approval process.
The Company also enters into development and licensing arrangements
with companies that (i) hold patent or marketing exclusivity rights to existing
pharmaceutical products that may benefit from the application of KV's
proprietary drug delivery technologies, (ii) are developing new therapeutic
agents that require delivery systems or formulation capabilities such as those
offered by the Company, and/or (iii) can market and sell the products developed
by the Company. To date, KV has entered into agreements with various
pharmaceutical marketers, including Roche Holding Ltd., Sandoz (Novartis),
Janssen Pharmaceutical (Johnson & Johnson) and Taisho Ltd. of Japan. Under these
agreements, KV generally develops a product which utilizes its drug delivery
system in return for license fees, milestone payments, research reimbursement
and manufacturing and royalty revenues. The Company's licensee is generally
responsible for clinical trials, regulatory approvals and marketing activities.
In certain cases, the Company may develop a product, conduct clinical trials and
seek regulatory approval before entering into a licensing arrangement.
Particle Dynamics, Inc. has developed and markets to the
pharmaceutical, nutritional and food industries four distinct lines of specialty
raw material products. DESCOTE(R) is a family of tastemasked vitamin and mineral
products particularly applicable to chewable children's vitamins. DESTAB(TM) is
a family of direct compression products which enable pharmaceutical
manufacturers to produce tablets and caplets in a more efficient manner.
DESTRIT(TM) is a family of low dose vitamin products for direct compression into
vitamin tablets and VITACOTE(TM) is a line of stabilized vitamins for use in the
pharmaceutical and food industries.
3
During the mid-1990's, the Company implemented an integrated business
strategy to commercialize its drug delivery technologies in a variety of ways,
principally through the development and marketing of both brand name and generic
pharmaceutical products. During fiscal 1997, 1996 and 1995, revenues from the
implementation of these strategies were approximately 91%, 90% and 84%,
respectively, of the Company's total net revenues.
The Company's strategy is to maintain its position as a leading
developer of innovative drug delivery systems and to apply its technologies to
the formulation and commercialization of brand name and generic drugs and
specialty raw materials. This strategy is comprised of four main components:
The Development and Marketing of Technologically Distinguished Generic
Drugs. The Company applied and continues to apply its drug delivery systems and
formulation capabilities to develop and market technologically distinguished
generic drugs. The Company does so by (i) identifying and replicating brand name
drugs that are either off patent or are approaching patent expiration and which
require or can utilize advanced drug delivery systems, or (ii) applying the
Company's tastemasking formulations to an off patent drug in order to
meaningfully increase patient compliance and the drug's commercial appeal.
The Development of Brand Name Pharmaceuticals. The Company applies its
proprietary drug delivery technologies in the formulation and development of
brand name prescription and OTC pharmaceutical products. The Company plans to
continue to enter into long term licensing agreements with pharmaceutical
marketing companies under which the Company develops products which utilize its
drug delivery systems in return for license fees, milestone payments, research
reimbursement and manufacturing and royalty revenues on sales of the products.
Selective Acquisitions and In-Licensing Opportunities. The Company is
actively seeking opportunities to acquire additional products, product rights,
technologies, and distribution channels that complement the Company's business
and which can be integrated into the Company's existing research, manufacturing,
marketing and distribution capabilities.
Development and Marketing of Technologically Differentiated Specialty
Raw Materials. The Company combines its advanced technologies with the
utilization of its expertise in micro encapsulation and particle coating to
strategically develop new products that improve taste, tableting efficiencies
and stability while reducing manufacturing costs and increasing product quality.
DRUG DELIVERY TECHNOLOGIES
KV's proprietary drug delivery and formulation technologies enhance the
effectiveness of new therapeutic agents, existing pharmaceutical products and
nutritional supplements, such as vitamins and minerals. During the 1990's, KV
has continued to develop and introduce important new generations of technologies
which represent significant advancements in the field of drug delivery systems.
These drug delivery systems are generally organized in the areas of "controlled
release", "tastemasking" and "site specific" technologies. Many of these
technologies have been used successfully for the commercialization of products
currently being marketed by the Company and its pharmaceutical marketing
licensees. The following describes the Company's principal drug delivery
technologies.
4
Controlled Release Technologies
The Company has developed a number of controlled release drug delivery
systems and formulation techniques that tailor the drug release profiles of
certain orally administered pharmaceuticals and nutritional supplements. These
systems, which provide for a single oral dose that releases the active
ingredient over periods ranging from 12 to 24 hours, are designed to improve
patient compliance, improve drug effectiveness and reduce potential side
effects. These technologies have been used to formulate tablets, capsules and
caplets that deliver single therapeutic compounds, as well as multiple active
compounds, each requiring different release patterns within a single dosage
form.
KV/24(R) is a precisely controlled drug delivery system that can be
taken orally once every 24 hours, affording the patient a reduced dosing regimen
and dramatically reducing commonly reported side effects. KV/24(R) is also a
multi-particulate technology that can combine several different drug compounds,
each requiring its own unique release profile, in a single dosage form. KV/24(R)
systems have been developed in capsule and tablet form for a number of
prescription and OTC products.
METER RELEASE(R) is a twice a day dosing, polymer-based drug delivery
system which offers different release characteristics than KV/24(R) and is used
for products that require a drug release rate of between eight and 12 hours.
METER RELEASE(R) systems have been developed in tablet, capsule and caplet form
and have been commercialized in the cardiovascular, gastrointestinal and upper
respiratory categories through products marketed by ETHEX Corporation and under
licensing agreements in various therapeutic categories.
MICRO RELEASE(R) is a micro-particulate formulation that employs
smaller particles than KV/24(R) and METER RELEASE(R). MICRO RELEASE(R)
encapsulates therapeutic agents which improve a drug's absorption in the body
where precise release profiles are less important. MICRO RELEASE(R) has been
commercialized in prescription and OTC nutritional products, including various
prescription prenatal vitamins marketed through ETHEX Corporation.
Site Specific Technologies
KV's site specific technologies use advanced polyphasic principles that
result in a complex emulsion which adheres to the desired tissue and controls
the release of the drug. The Company has developed a number of site specific
systems and formulations that it tailors to the desired route of administration.
To date, the Company has applied its site specific technologies in cream,
lotion, lozenge and suppository form to deliver therapeutic agents to vaginal,
rectal, oral, skin, pharyngeal and esophageal tissues.
SITE RELEASE(R) is a patented, controlled release bioadhesive delivery
system which incorporates advanced polyphasic principles to create a
bio-emulsion system capable of delivering therapeutic agents in oral, topical
and vaginal forms. To the Company's knowledge, SITE RELEASE(R) is the only
bioadhesive delivery system that is clinically proven.
SITE RELEASE(R) is the subject of licensing and development agreements
with such companies as Roche Holding Ltd., Taisho Ltd. of Japan, J. Uriach & Cia
of Spain and others, to develop products for the treatment of topical and
vaginal fungal infections.
5
OraSite(R) is a controlled released mucoadhesive delivery system
administered orally in a solid or liquid form. A drug formulated with the
OraSite(R) technology may be formulated as a liquid or as a lozenge in which the
dosage form liquefies upon insertion and adheres to the mucosal surface of the
mouth, throat and esophagus. OraSite(R) possesses characteristics particularly
advantageous to therapeutic areas such as oral hygiene, sore throat and
periodontal and upper gastrointestinal tract disorders.
Trans-E(TM) (for transesophageal) is a new and novel bio-adhesive,
controlled release delivery system which may permit oral delivery of compounds
that normally would be degraded if administered orally, such as growth hormone,
calcitonin and other protein/peptides and other complex compounds. Trans-E(TM)
was specifically designed to provide an oral delivery alternative for
biotechnology and other compounds that currently are injected or infused.
BioSert(R) is a patented, bio-adhesive, controlled release system which
at room temperature is a solid rectal or vaginal suppository and after insertion
becomes a bioadhesive long acting cream. BioSert(R) has particular applications
to therapeutic areas such as antifungals, narcotic analgesics and
anti-arthritics.
Tastemasking Technologies
KV has been at the forefront in the development of pharmaceutical
formulations capable of improving the flavor of unpleasant tasting drugs. The
Company has developed numerous platforms for its tastemasking technologies,
including liquid, chewable and dry powder formulations.
FlavorTech(R) is a liquid formulation technology designed to reduce bad
tasting therapeutic products. FlavorTech(R) has been commercialized in
cough/cold syrup products marketed through ETHEX Corporation and has special
application to other products, such as antibiotic, geriatric and pediatric
pharmaceuticals. FlavorTech(R) has also been commercialized through a licensing
agreement with Sandoz (Novartis) for a liquid cough cold product.
TASTELESSE(R) is a tastemasking technology which incorporates a dry
powder, microparticulate approach to reducing objectionable tastes by
sequestering the unpleasant drug agent in a specialized matrix. The
TASTELESSE(R) technology can be formulated into chewable tablets or into packets
that can be sprinkled on food, taken directly into the mouth, or stirred into
water or other liquid before swallowing. This formulation technique has the
effect of "shielding" the drug from the taste receptors without interfering with
the dissolution and ultimate absorption of the agent within the gastrointestinal
tract. TASTELESSE(R) may be used in connection with such products as macrolide
antibiotics, amino acids, vitamins and other unpleasant tasting drug compounds.
LIQUETTE(R) is a tastemasking system which incorporates unpleasant
tasting drugs into a hydrophilic and lipophilic polymer matrix to suppress the
taste of a drug. This technology is used for mildly to moderately distasteful
drugs. The LIQUETTE(R) technology has been successfully commercialized in Japan
through a licensing agreement with SS Pharmaceutical.
6
COMPETITION
Competition in the development and marketing of pharmaceutical products
is intense and characterized by extensive research efforts and rapid
technological progress. Many companies, including those with financial and
marketing resources and development capabilities substantially greater than
those of the Company, are engaged in developing, marketing and selling products
that compete with those offered by the Company. There are also a few companies,
including KV, which specialize in drug delivery technology and the development
of products derived from those technologies for sale/licensing to pharmaceutical
marketers. The Company believes that its patents, proprietary trade secrets,
technological expertise, and product development and manufacturing capabilities
position it to continue to develop products to compete effectively in the
marketplace and maintain a leadership position in the field of advanced drug
technologies.
The Company also markets, sells and distributes generic products
directly to various markets and classes of customers through ETHEX Corporation.
ETHEX is subject to active competition from numerous firms. The primary
competitive factors in this area are customer service, quality of products and
price. The nature and level of competition varies among products, markets and
classes of customers. The Company is subject to potential additional competition
from firms who are able to obtain the necessary governmental approvals to
manufacture and distribute similar products.
REGULATION
The design, development and marketing of pharmaceutical compounds are
intensively regulated by the Federal Food and Drug Administration ("FDA") and
comparable agencies in foreign countries. For example, The Federal Food, Drug
and Cosmetic Act, the Controlled Substances Act and other United States federal
statutes and regulations impose requirements on the testing, manufacturing and
approval of the Company's products before a drug can be marketed in the United
States. Obtaining FDA approvals is a costly, time-consuming process and there is
no guarantee that such approval will be obtained with respect to an individual
product. All companies in the pharmaceutical industry are subject to FDA
inspections for compliance with current Good Manufacturing Practice ("cGMP"),
which encompasses all aspects of the production process as interpreted by the
FDA and involves changing and evolving standards. FDA inspections are a part of
a continuing effort by the FDA to oversee and upgrade the level of industry-wide
compliance with cGMP, with an emphasis on increased validation of products and
increased stringency of Standard Operating Procedures. The Company undergoes FDA
inspections at all of its facilities.
Since 1992, the Company has implemented new programs to ensure full
compliance with all of the FDA's regulatory requirements and their increasingly
vigorous interpretation by the government. In addition, KV has agreed with the
FDA in a June 1993 Consent Decree to operate in compliance with FDA requirements
and, in the event of violations of FDA requirements, has agreed to certain
procedures with respect to corrective actions that may be warranted.
With respect to potential new products, there are two principal ways
for the Company to satisfy the FDA's safety and efficacy requirements for a new
drug product, a new drug application (an "NDA") and an abbreviated new drug
application (an "ANDA"). In recent years, the Company has experienced delays in
obtaining FDA approvals. In certain instances, KV's customers have been
responsible for obtaining such FDA approvals and have been similarly delayed. A
number of products KV anticipated would be introduced to the pharmaceutical
7
market by KV or its client pharmaceutical companies in fiscal 1992 through 1997
were delayed. The Company follows a policy of not disclosing information on the
specific products covered by its FDA applications in order to protect the
confidentiality and competitive position of the Company and its customers with
respect to products which it has developed and expects to be the subject of
future market introductions.
As a consequence of the uncertainties inherent in the drug approval
process, an applicant is not in the position to predict in advance all of the
substantive and procedural requirements for FDA approval of a particular
product. In addition, the Company believes that under the agency's invocation of
its "Application Integrity Policy", the FDA will not process the Company's
applications until the Company has satisfied the FDA with respect to data
previously submitted and has implemented any additional procedures necessary to
assure the accuracy of information furnished by the Company. However, the FDA
has specifically advised the Company that the Application Integrity Policy does
not adversely delay any of its clients' NDA and ANDA submissions for products KV
has developed and will manufacture for such clients. Currently, it is the
applications of KV's clients which have the greatest value to the Company.
Therefore, the Company believes that any delay in processing the Company's own
applications will not have a material adverse effect on the Company.
The Company also cannot predict whether future legislative or
regulatory developments might have an adverse effect on the Company. It is the
Company's belief that generic drugs and drug delivery products can provide cost
savings opportunities which the Company could benefit from in its ETHEX
Corporation subsidiary's growth as well as in its drug delivery research
business.
During fiscal 1997, the Company encountered no serious shortages of any
particular raw materials and has no indications that significant shortages will
occur. However, a serious shortage of certain raw materials could have a
material adverse effect upon the Company.
The Company regards its drug delivery technologies as proprietary and
maintains an extensive trade secret and patent protection program based on
patent laws, trade secret laws and restrictions on disclosure and
transferability contained in its product license agreements. Internal safeguards
incorporated in its technologies also serve to protect the proprietary nature of
its programs. In addition, employees with access to proprietary information and
potential customers who evaluate KV's products are required to execute
non-disclosure agreements. The Company intends to maintain and enforce the
proprietary nature of its technologies. In addition to its patent and trade
secret protection, KV believes that the collective knowledge and experience of
its management and personnel and their ability to develop and enhance drug
delivery technologies and products developed from such technologies are also of
competitive significance.
The Company presently owns 38 domestic and foreign patents expiring
through 2013 and 24 trademarks expiring through 2012 (which are renewable
assuming continuous use), none of which is considered material to the continuing
operations and success of the Company. The Company considers its proprietary
know-how and processing techniques to be of greater importance to its continuing
operations than such patents.
In order to protect its goodwill, the Company has applied for trademark
protection for its technology names such as SITE RELEASE(R), KV/24(R),
FlavorTech(TM) , OraSite(R), METER RELEASE(R), MICRO RELEASE(R), DESCOTE(R), and
others. The Company intends to continue to trademark new technology and product
names as they are developed.
8
The business of the Company is generally not seasonal, although a
number of new cough/cold products marketed through ETHEX Corporation can be
subject to seasonal demand.
The nature of the Company's business does not involve unusual working
capital requirements. Inventories are maintained at sufficient levels to support
current production and sales levels.
Customers of the Company consist of large and small pharmaceutical
marketing companies, drug chains and wholesalers. During fiscal 1997 and 1996,
one unaffiliated customer, McKesson Drug Company, accounted for 15% of the
Company's consolidated revenues. During fiscal 1996, no one customer accounted
for 10% or more of consolidated revenues.
The majority of the Company's sales are related to directly marketed
generic products through ETHEX Corporation where backlog measurements are not
meaningful, due to the short lead time required (days) in filling orders at any
point in time relative to sales or income for a full 12-month period.
Research and development spending, including overhead, spent by KV on
research activities relating to the development of new products or services or
the improvement of existing products or services was approximately $4,835,000 in
fiscal 1997, $4,559,000 in fiscal 1996, and $4,525,000 in fiscal 1995. The
estimated dollar amount contributed by customers to these amounts was $4,000 in
fiscal 1997, $70,000 in fiscal 1996 and $271,000 in fiscal 1995.
Spending for KV products comes from KV internal funding and from its
major drug Company customers who have licensed marketing rights to KV-developed
products. KV's internally funded research and development spending, which does
not include licensing partners sponsored sources of funds, is approximately 8%
of current revenues.
The Company does not expect that compliance with federal, state or
local provisions regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment will have a material
effect on the Company's capital expenditures, earnings or competitive position.
As of May 25, 1997, the Company had 333 employees. The Company is
subject to a new five year collective bargaining agreement which was ratified in
July, 1996 and covers 61 employees. The Company believes that its relations with
its employees are good.
The Company presently does not have material operations or sales in
foreign countries and its domestic sales are not subject to unusual geographic
concentration.
Item 2. Properties.
The Company's corporate headquarters is located in a two-story brick
building at 2503 South Hanley Road in St. Louis County, Missouri, containing
approximately 25,000 square feet of floor space. The Company has a lease on the
building for a period of ten years expiring December 31, 2005, with one
five-year option to renew.
9
In addition, the Company has the leases and the owned facility shown in
the following table:
SQ FT LEASE RENEWAL
FACILITY USAGE LEASED EXPIRES OPTIONS
============================== =========== ======== ========= =======
2629 S. Hanley Road Mfg. Oper. 18,000 11/30/97 5 years(1)
821 Hanley Industrial Court Mfg. Oper. 5,000 11/30/97 3 years
8046-50 Litzsinger Road Mfg. Oper. 17,000 12/31/96 5 years(1)
8056 Litzsinger Road Office/Maint. 3,000 12/31/96 5 years(1)
2635 S. Hanley Road Mfg. Oper. 12,150 11/30/97 5 years(1)
819 Hanley Ind'l Ct. Mfg. Oper. 5,000 11/30/97 3 years
2525 S. Hanley Road Mfg. Oper. 16,800 06/30/97 5 Years
8054 Litzsinger Road Office 3,000 12/31/96 5 years(1)
2601 S. Hanley Road PDI Office 1,480 04/30/97 5 years(1)
10888 Metro Court Office/ 81,810 Owned N/A
Warehouse
2303 Schuetz Rd. Mfg. Oper. 90,000 Owned N/A
- ------------------------------------------------------
1 Three five-year options.
Properties used in the Company's operations are considered suitable for
the purposes for which they are used and are believed to be adequate to meet the
Company's needs for the reasonably foreseeable future. However, the Company has
considered leasing additional facilities from time to time when attractive
facilities appeared to be available to accommodate the consolidation of certain
operations and to meet future expansion plans.
Item 3. Legal Proceedings.
On April 6, 1995, the Company entered into a plea agreement with the
U.S. Department of Justice under which the Company agreed to plead guilty to (1)
two misdemeanor violations of the Federal Food, Drug and Cosmetic Act involving
the failure to file certain required reports with the FDA in 1991 with respect
to two lots of an erythromycin oral suspension product previously manufactured
by the Company and (2) two misdemeanor counts involving the shipment of two lots
of the same product, inappropriately labeled as to their shelf life. Under the
plea agreement, the Company agreed to pay a fine of $500,000 and costs of
$100,000 in installments of $75,000 every six months over 3 and one-half years,
beginning in July 1995 and was placed on probation during the payment period.
10
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 4(a). Executive Officers of the Registrant1
The following is a list of the current executive officers of the
Company, their ages, their positions with the Company and their principal
occupations for at least the past five years.
NAME AGE POSITION HELD AND PAST EXPERIENCE
- ------------------------- --------- --------------------------------------------
Victor M. Hermelin 83 Director, Chairman of the Board and
Treasurer of the Company.
Marc S. Hermelin 55 Director, Vice-Chairman of the Board and
Chief Executive Officer(2).
Alan G. Johnson 62 Director and Secretary of the Company.
Attorney at Law and Member in the law firm
of Gallop, Johnson & Neuman, L.C. since
1976; Director of MRL, Inc.; and Siboney
Corporation.
Garnet E. Peck, Ph.D. 66 Director of the Company since 1994.
Professor of Industrial Pharmacy and
Director of Industrial Pharmacy for Purdue
University School of Pharmacy and Pharmacal
Sciences since 1967.
Raymond F. Chiostri 63 Vice President and Group President of KV
since 1986 and Chief Executive Officer of
Particle Dynamics, Inc. since 1995.
President - Pharmaceutical Division of KV
1986 to 1995.
Gerald R. Mitchell 58 Vice President of Finance since 1981.
Mitchell I. Kirschner 51 Corporate Vice President of Business
Development since 1989.2
The term of office for each executive officer of the Company expires at
the next annual meeting of the directors or at such time as his successor has
been elected and qualified.
(1) This information is included in Part I as a separate item in accordance
with Instruction 3 to Item 401(b) of Regulation S-K and General Instruction
G to Form 10-K.
(2) Victor M. Hermelin is the father of Marc S. Hermelin and father-in-law of
Mitchell I. Kirschner.
11
PART II
Item 5. Market for the Company's Common Stock and Related Security Holder
Matters
a) Principal Market
The Company's Class A Common Stock and Class B Common
Stock are traded on the American Stock Exchange under the
symbols KV.A and KV.B, respectively.
b) Stock Price and Dividend Information
High and low closing sales prices on the American Stock
Exchange of the Company's Class A and Class B Common Stock
during each quarter of fiscal 1997 and 1996 were as
follows:
CLASS A COMMON STOCK
FISCAL 1997 FISCAL 1996
------------------------ ------------------------
QUARTER High Low High Low
------- ---------- ----------- ----------- ----------
First 15 7/8 11 7/8 8 1/2 5 3/8
Second 14 3/8 7 5/8 10 1/8 6 3/4
Third 12 7/8 10 3/4 13 3/8 7 3/4
Fourth 21 1/8 11 5/8 17 7/8 11 1/4
CLASS B COMMON STOCK
FISCAL 1997 FISCAL 1996
------------------------ -------------------------
QUARTER High Low High Low
------- --------- ----------- ----------- ----------
First 15 3/4 12 8 1/2 5 5/8
Second 14 1/4 7 1/2 10 7 1/2
Third 12 3/4 10 3/4 13 3/8 7 3/4
Fourth 21 11 1/2 17 7/8 11 1/2
No cash dividends were paid on the Company's Class A or Class B Common
Stock in fiscal 1997 or 1996. Dividends on Preferred Stock in the amount of
$105,437 were paid during the fourth quarter of fiscal 1997, but no other
dividends were paid during the above periods. See Note 8 to the Financial
Statements regarding limitations on the payment of dividends.
(c) Approximate Number of Holders of Common Stock
The number of holders of record of the Company's Class A and Class B
Common Stock as of June 6, 1997 was 689 and 621, respectively (not separately
counting shareholders whose shares are held in "nominee" or "street" names,
which are estimated to represent approximately 4,000 additional shareholders for
each class of common stock).
12
Item 6. Selected Financial Data
($ in 000's, except per share data)
Years Ended March 31,
---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Revenues $58,037 $49,789 $39,743 $38,171 $43,496
% Change 16.6 25.3 4.1 (12.2) 3.5
Net income
(loss) 8,924 4,043 (5,375) (8,181) 1,055
Net income (loss) per
common share (a)
(b) 0.70 0.31 (.52) (.78) .06
Total assets 41,362 27,948 27,975 31,802 39,331
Long-term debt and
other 3,071 3,452 12,153 13,323 11,886
Shareholders' Equity 33,084 20,550 9,974 13,343 21,631
<FN>
NOTES:
(a) After deducting preferred dividends of $421,750 or $.04 per common share in
1997, 1996, 1995, 1994 and 1993.
(b) Dividends were paid on the Preferred Stock in the fourth quarter of fiscal
1997 in the amount of $105,437, but no other cash dividends were paid on
any shares of common or preferred stock during the five years ended March
31, 1997.
</FN>
13
Item 7. Management's Discussion and Analysis of Results of Operations, and
Liquidity and Capital Resources
(a) Results of Operations
The following table summarizes the Company's historical results of
operations as a percentage of revenues for fiscal years 1997, 1996 and 1995.
Fiscal Year Ended
1997 1996 1995
-------------------------- ------------------------- ---------------------------
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
ETHEX (generic products) $40,225 69% $34,498 69% $24,939 63%
KV (manufacturing & licensing)
9,124 16 7,430 15 7,729 19
PDI (pharmaceutical compounds)
8,688 15 7,861 16 7,075 18
-------- -- ------- --- ------- ----
Net Revenues $58,037 100% $49,789 100% $39,743 100%
Costs and Expenses:
Manufacturing costs $29,478 51% $26,260 53% $26,066 66%
Research and development
4,835 8 4,559 9 4,525 11
Selling and administrative
13,818 24 12,749 25 11,979 30
Other, Net 599 1 2,088 4 2,548 6
-------- --- ------- ---- ------- ---
Total costs & expenses 48,730 84% $45,656 91% $45,118 113%
Income (loss) before income
taxes 9,307 16 4,133 9 (5,375) (13)
Net income (loss) $8,924 15% $4,043 8% $(5,375) (13)%
====== === ====== == ======== =====
FISCAL 1997 COMPARED TO FISCAL 1996
Revenues. Net revenues increased $8.2 million, or 17%, to $58 million
during fiscal 1997 from $49.8 million in fiscal 1996. This sales growth was
primarily due to an increase in the volume of new and existing generic products
sold by ETHEX, increased licensing revenues as well as increased sales volume in
contract services and Particle Dynamics. Net revenues from ETHEX increased $5.7
million, or 17%, to $40.2 million during fiscal 1997 from $34.5 million in
fiscal 1996. This increase was primarily due to the launch of ten new generic
products during fiscal 1997, in addition to increased sales in products
introduced in the prior year. Net revenues derived from the sale of
pharmaceutical compounds by PDI increased $.8 million, or 11%, to $8.7 million
during fiscal 1997. This increase was attributable to increased sales volumes
related to the prior years' introduction of new products for the
over-the-counter DESCOTE(R) and DESTAB(TM) product lines. Contract services
increased $1.7 million or 23% to $9.1 million in fiscal 1997 from $7.4 million
in fiscal 1996, primarily due to increased licensing revenues of $1.3 million
resulting from an agreement concluded with Roche Holding Ltd.
14
Costs and Expenses. Manufacturing costs increased $3.2 million, or 12%,
to $29.5 million during fiscal 1997 from $26.3 million in fiscal 1996.
Manufacturing costs as a percentage of revenues decreased to 51% from 53%. This
percentage decrease was primarily due to the continued growth in sales of higher
margin products by ETHEX and increased margins in the Contract manufacturing
business.
Research and development costs increased $.2 million, or 6%, to $4.8
million during fiscal 1997 from $4.6 million in fiscal 1996. This increase was
due to higher personnel costs. The Company expects to continue spending for
research and development in the future, emphasizing the development of
additional products for sale by ETHEX, as well as new drug delivery
technologies.
Selling and administrative expenses increased $1.1 million, or 8%, to
$13.8 million during fiscal 1997 from $12.7 million in the same period in fiscal
1996. However, as a percentage of revenue, selling and administrative expenses
decreased to 24% from 25%. The increase in selling and administrative expenses
was primarily related to the Company's selling and promotional activities
associated with the significant growth experienced in the sales of new and
existing generic products marketed by ETHEX and additional personnel to support
the Company's continued growth.
Interest expense decreased $1 million, or 70%, to $.4 million during
fiscal 1997 from $1.4 million in fiscal 1996. This decrease resulted from lower
effective interest rates and lower levels of average borrowing during the fiscal
1997 period. The income tax provision was $383,000 for fiscal 1997 compared to
$90,000 in fiscal 1996. The tax provision of $383,000 is for state income taxes,
while the $90,000 in 1996 was due to the effect of the alternative minimum tax.
Net Income. As a result of the factors described above, net income
improved $4.9 million or 121%, to $8.9 million for fiscal 1997 from net income
of $4.0 million in fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues. Net revenues increased $10.1 million, or 25%, to $49.8
million during fiscal 1996 from $39.7 million in fiscal 1995. This sales growth
was primarily due to an increase in the volume of new and existing generic
products sold by ETHEX and increased licensing revenue. Net revenues from ETHEX
increased $9.6 million, or 39%, to $34.5 million during fiscal 1996 from $24.9
million in fiscal 1995. This increase was primarily due to the launch of ten new
generic products during fiscal 1996, in addition to increased sales of products
introduced in the prior year. Licensing revenues increased $1.5 million to $2.3
million during fiscal 1996 due to an agreement concluded with a major
pharmaceutical manufacturer to explore the development of products utilizing
KV's drug delivery technologies. The Company recognized $1.7 million of
licensing revenue from this transaction. Net revenues derived from the sale of
pharmaceutical compounds by PDI increased $.8 million, or 11%, to $7.9 million
during fiscal 1996. This increase is attributable to the introduction of new
products for the over-the-counter DESCOTE(R) and DESTAB(TM) product lines. Those
increases were partially offset by an expected decrease in revenues derived from
contract services to $5.1 million in fiscal 1996 from $7 million in fiscal 1995
primarily due to the Company's continued de-emphasis of its lower margin
contract manufacturing business in order to develop and market higher margin
technologically distinguished generic products through ETHEX.
15
Costs and Expenses. Manufacturing costs increased $.2 million, or less
than 1%, to $26.3 million during fiscal 1996 from $26.1 million in fiscal 1995.
Manufacturing costs as a percentage of revenues decreased to 53% from 66%. This
percentage decrease was primarily due to the continued growth in sales of higher
margin generic products by ETHEX.
Research and development costs increased $34,000, or less than 1%, to
$4.6 million during fiscal 1996 from $4.5 million in fiscal 1995. This increase
was due to higher personnel costs. The Company expects to continue spending for
research and development in the future, emphasizing the development of
additional generic products for sale by ETHEX as well as new drug delivery
technologies.
Selling and administrative expenses increased $.7 million, or 6%, to
$12.7 million during fiscal 1996 from $12 million in the same period in fiscal
1995. However, as a percentage of revenue, selling and administrative expenses
decreased to 25% from 30%. The increase in selling and administrative expenses
was primarily related to the Company's selling and promotional activities
associated with the significant growth experienced in the sales of new and
existing generic products marketed by ETHEX.
Interest expense increased $.1 million, or 8%, to $1.4 million during
fiscal 1996 from $1.3 million in fiscal 1995. Such increase resulted from higher
effective interest rates and higher levels of average borrowing to support
growth in the fiscal 1996 period. The income tax provision was $90,000 for
fiscal 1996 compared to zero in fiscal 1995. The tax provision of $90,000 was
due to the effect of the alternative minimum tax. Otherwise, no provision was
made for income taxes as a result of available net operating loss carryforwards.
As of March 31, 1996, the Company's net operating loss carryforwards were $8.9
million.
Net Income (Loss). As a result of the factors described above, net
income improved $9.4 million to $4 million for fiscal 1996 from a net loss of
$5.4 million in fiscal 1995.
16
(b) Liquidity and Capital Resources
The following table sets forth selected balance sheet data and ratios
for fiscal years 1997, 1996 and 1995.
At March 31,
($ in 000's)
------------
1997 1996 1995
------------------- -------------------- -------------------
Working Capital Ratio 5.8 to 1 4.6 to 1 2.5 to 1
Quick Ratio 3.1 to 1 2.4 to 1 1.4 to 1
Debt to Debt Plus Equity .07 to 1 .14 to 1 .57 to 1
Total Liabilities to Equity .25 to 1 .36 to 1 1.80 to 1
Cash and Equivalents $ 7,628 $ 2,038 $ 1,076
Working Capital 25,017 14,053 8,927
Long Term Liabilities 3,071 3,452 12,153
Stockholders' Equity 33,084 20,550 9,974
Working capital for fiscal 1997 increased $11 million, or 78%, to $25
million due to an increase in current assets of $12.2 million and an increase in
current liabilities of $1.3 million. Net cash provided by operating activities
for fiscal 1997 included increases in receivables of $1.3 million and
inventories of $4.3 million to improve service levels, which resulted primarily
from increased sales volume of ETHEX products, and an increase in accounts
payable and accrued liabilities of $1.6 million. These changes in receivables,
inventories and payables were more than offset by net income and non-cash
charges aggregating $10.6 million, resulting in cash provided by operating
activities of $5.6 million for fiscal 1997.
At the end of fiscal 1997, the Company's "quick assets", cash, cash
equivalents and accounts receivable increased $6.9 million (74%) from the prior
year, while current liabilities increased $1.3 million (32%) resulting in a
"quick ratio" of 3.1 to 1 compared to 2.4 to 1 at the end of 1996.
The debt to debt plus equity and total liabilities to equity ratios for
fiscal 1997 decreased because of the impact of the net income for the year, the
repayment of debt and $3.5 million proceeds from the private placement sale of
200,000 shares of Class A Common Stock to Roche Holding Ltd., completed in
March, 1997.
Investing activities in fiscal 1997 reflected capital expenditures of
$2 million and net expenditures for other assets of $.8 million, which were
provided for through operations.
In January, 1996 the Company concluded an agreement with a major
pharmaceutical marketer whereby the Company received $5,000,000 and certain
other considerations, plus $5,000,000 for the sale of certain Class A common
stock options exercisable in various periods through September, 1998 (See Note
12). Under the transaction, which was entered into between the parties partially
in consideration of and replacing certain other products, the two companies
entered into an agreement for future royalties and product opportunities. The
Company gave the marketer the right to explore the Company's drug delivery
technologies with the possibility of entering into future agreements for
individual products. The transaction (other than the sale of the options) was
recorded as a reimbursement to the Company for, and thus the removal from its
balance sheet, of approximately $2,500,000 of Deferred Improved Drug
17
Entities(TM), receivables and inventory of approximately $400,000, and patents
and trademarks relating to the Company's technologies of approximately $200,000.
As a result, approximately $1,700,000 was included in licensing revenues and
$200,000 as a reimbursement of expenses.
In January, 1997, the Company concluded a broad-based agreement with
Roche Holding Ltd. of Basel, Switzerland. (Roche). As part of the agreement,
Roche purchased 200,000 shares of Common Class A stock for $3,500,000. In
addition, the agreement included an initial cash payment of $3 million on
January 1, 1997. Two additional payments of $3 million annually will be received
through January 1, 1999, unless regulatory approval of a potential follow on
product in the same therapeutic area is received prior to these dates. The
initial $3,000,000 payment has been included in revenue, while the future
payments will be similarly treated, when received. Upon approval, KV will
receive royalties on sales of the product.
The Company's cash and cash equivalents on hand at year-end were $7.6
million. The Company also had in place at March 31, 1997, a secured credit
facility aggregating $17.5 million, which is in the process of being replaced by
an unsecured revolving line of credit and letter of credit facility aggregating
$22,600,000 with LaSalle National Bank. Completion of the transition in credit
facilities occurred as of June 18, 1997. The Company's capital equipment
commitments at year-end totaled approximately $1.7 million and a planned
expansion of its corporate headquarters approximating $1.8 million is expected
to occur in fiscal 1998.
On June 15, 1997, the Company exercised its right of first refusal to
purchase for $4,300,000 the facility it had been renting at 10888 Metro Court
and a separate long-term financing of the purchase has been arranged with
LaSalle National Bank in the amount of $3,500,000. This transaction was
completed on June 24, 1997.
Although the Company generally has been able to pass along to its
customers at least a portion of cost increases in labor, manufacturing and raw
material costs under its agreements, in certain instances no increases have been
effected due to market conditions. It is not meaningful to compare changing
prices over the past three years because the products, product formulas, product
mix and sources of raw materials have varied substantially.
The Company has transitioned its revenue structure from one based on
lower margin, highly competitive, short-term contract manufacturing to focusing
on higher margin, drug delivery product marketing through ETHEX Corporation and
Particle Dynamics, Inc., its wholly-owned subsidiaries, as well as advanced
technology drug delivery products to be marketed and co-marketed under long-term
licensing agreements. These advanced technology drug delivery products and
systems are the subject of a number of long-term business arrangements and
provide differentiated and/or improved benefits derived from incorporating KV's
drug delivery system technologies. For the most part, these products can be
produced with existing manufacturing processes. The Company expects to continue
a relatively high level of expenditures and investment for research, clinical
and regulatory efforts relating to the development and commercialization of
proprietary new products and advanced technology products and their approval for
marketing.
The implementation of these strategies of focusing on drug delivery
technology distinguished product marketing capabilities through its ETHEX and
Particle Dynamics, Inc. subsidiaries and drug delivery licensing arrangements
18
with brand pharmaceutical marketing clients has allowed the Company to
de-emphasize contract services. Consequently, the Company has shifted its future
growth internally, with drug delivery product marketing capabilities and drug
delivery licensing activities constituting 91% of KV's total business
The Company believes funds generated from operating activities and
existing cash, together with the funds available under its new credit facility
and the funds provided from licensing agreements will be adequate to fund the
Company's requirements for short term needs due to the continued sales growth
being experienced.
(c) New Accounting Standards
In March 1997, the Financial Accounting Standards Board issued
Statement Number 128, Earnings Per Share. This pronouncement provides for a
different method of calculating earnings per share than is currently used.
Management feels that the adoption of this pronouncement will not have a
significant effect on its earnings per share.
Item 8. Financial Statements and Supplementary Data.
19
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of KV Pharmaceutical Company:
We have audited the consolidated balance sheets of KV Pharmaceutical Company and
Subsidiaries as of March 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended March 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of KV Pharmaceutical
Company and Subsidiaries as of March 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1997, in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
St. Louis, Missouri
June 18, 1997
20
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1997 and 1996
ASSETS 1997 1996
- ------
------------------- ------------------
Current Assets:
Cash and cash equivalents $ 7,627,523 $ 2,038,069
Receivables, less allowance for doubtful accounts of
$129,055 and $570,498 in 1997 and 1996, respectively 8,579,598 7,281,459
Inventories 12,785,588 8,450,162
Prepaid and other current assets 1,230,193 229,358
------------------ -----------------
Total Current Assets 30,222,902 17,999,048
------------------ -----------------
Net Property and Equipment 8,117,809 7,621,217
------------------ -----------------
Goodwill and other assets 3,021,009 2,328,190
------------------ -----------------
TOTAL ASSETS $ 41,361,720 $ 27,948,455
=================== =================
LIABILITIES
Current Liabilities:
Current maturities of long-term debt $ 351,316 $ 712,328
Accounts payable 2,045,048 2,068,265
Accrued liabilities 2,809,571 1,165,506
------------------- ------------------
Total Current Liabilities 5,205,935 3,946,099
Long-term debt 2,158,025 2,541,216
Other long-term liabilities 913,319 911,230
------------------- ------------------
TOTAL LIABILITIES 8,277,279 7,398,545
------------------- ------------------
Commitments and Contingencies
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; $25.00
stated and liquidation value; 840,000
shares authorized; issued and outstanding -
241,000 shares in 1997 and 1996 2,410 2,410
Class A and Class B Common Stock, $.01 par value;
60,000,000 shares of each authorized;
Class A-issued 7,717,487 and 7,120,614 in 1997 and 1996 77,175 71,207
Class B-issued 4,376,570 and 4,747,357 in 1997 and 1996 43,766 47,474
Additional paid-in capital 33,844,685 30,235,926
Retained deficit (828,642) (9,752,154)
Less: Treasury stock, 23,746 shares each of
Class A and Class B common stock, at cost (54,953) (54,953)
-------------------- -------------------
TOTAL SHAREHOLDERS' EQUITY 33,084,441 20,549,910
------------------- ------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 41,361,720 $ 27,948,455
=================== ==================
See Accompanying Notes to Consolidated Financial Statements
21
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended March 31, 1997 1996 and 1995
1997 1996 1995
---------------------- ------------------------ -----------------------
Net Revenues $ 58,037,159 $ 49,788,635 $ 39,742,554
Costs and Expenses:
Manufacturing costs 29,478,372 26,259,638 26,065,642
Research and development 4,835,478 4,559,360 4,524,956
Selling and administrative 13,817,802 12,748,726 11,978,564
Interest expense 411,237 1,377,604 1,275,622
Amortization of intangible assets 187,758 710,647 672,571
Litigation settlement - - 600,000
---------------------- ------------------------ -----------------------
Total costs and expenses 48,730,647 45,655,975 45,117,355
---------------------- ------------------------ -----------------------
Income (Loss) before income taxes 9,306,512 4,132,660 (5,374,801)
Provision for income taxes 383,000 90,000 -
---------------------- ------------------------ -----------------------
Net Income (Loss) $ 8,923,512 $ 4,042,660 $ (5,374,801)
===================== ======================== =======================
Net Income (Loss) per Common Share
(after deducting preferred dividends
of $421,750 in 1997, 1996 and 1995): $ 0.70 $ 0.31 (0.52)
===================== ======================== =======================
See Accompanying Notes to Consolidated Financial Statements
22
PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended March 31, 1997, 1996 and 1995
Class A Class B Additional Retained Total
Preferred Common Common Paid-In Earnings Treasury Shareholders'
Stock Stock Stock Capital (Deficit) Stock Equity
------------------------------------------------------------------------------------------
Balance at March 31, 1994 $2,410 $63,050 $48,011 $21,704,514 $(8,420,013) $(54,953) $13,343,019
Stock Options exercised,
420 shares of Class A and 370 shares
of Class B, less 150 shares of each
class repurchased - 3 2 (239) - - (234)
Sale of 375,000 shares of Class A - 3,750 - 2,002,448 - - 2,006,198
Conversion of 826,000 shares of Class B
Shares to Class A shares - 826 (826) - - - -
Net Loss for 1995 - - - - (5,374,801) - (5,374,801)
---------- ------------ --------- ------------- -------------- ----------- -------------
Balance at March 31, 1995 2,410 67,629 47,187 23,706,723 (13,794,814) (54,953) 9,974,182
---------- ------------ --------- ------------- -------------- ----------- -------------
Stock Options issued - - - 5,000,000 - - 5,000,000
Stock Options exercised,
194,242 shares of Class A - 1,943 - 772,107 - - 774,050
192,122 shares of Class B - - 1,922 757,096 759,018
Conversion of 163,475 shares of
Class B shares to Class A shares - 1,635 (1,635) - - - -
Net Income for 1996 - - - - 4,042,660 - 4,042,660
---------- ------------ --------- ------------- -------------- ----------- -------------
Balance at March 31, 1996 2,410 71,207 47,474 30,235,926 (9,752,154) (54,953) 20,549,910
---------- ------------ --------- ------------- -------------- ----------- -------------
Sale of 200,000 Class A shares - 2,000 - 3,498,000 - - 3,500,000
Stock Options issued as compensation - - - 114,300 - - 114,300
Stock Options exercised,
13,125 shares of Class A - 130 - 50,188 - - 50,318
13,195 shares of Class B - - 130 51,708 - - 51,838
Less 177 shares of each class
repurchased
Conversion of 383,925 shares of
Class B shares to Class A shares - 3,838 (3,838) - - - -
Dividends paid on preferred stock - - - (105,437) - - (105,437)
Net income for 1997 - - - - 8,923,512 - 8,923,512
---------- ------------ --------- ------------- ------------- --------- --------------
Balance at March 31, 1997 $2,410 $77,175 $43,766 $33,844,685 $(828,642) $(54,953) $33,084,441
---------- ------------ --------- ------------- -------------- ---------- -------------
See Accompanying Notes to Consolidated Financial Statements
23
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended March 31, 1997, 1996, and 1995
1997 1996 1995
---- ---- ----
OPERATING ACTIVITIES
Net Income (Loss) $ 8,923,512 $ 4,042,660 $ (5,374,801)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation, amortization and other non-cash charges 1,594,300 1,961,975
Stock options issued as compensation 114,300 2,098,622 -
-
Changes in operating assets and liabilities:
(Increase) in receivables (1,298,139) (440,836) (448,347)
(Increase) decrease in inventories and other current
assets (5,336,261)
(1,820,982) 3,212,927
(Increase) decrease in accounts payable and
accrued liabilities 1,620,848 483,761
(799,676)
Other 2,089 (7,861) 574,991
------------------ ------------------ -----------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 5,620,649 3,071,927 410,506
------------------ ----------------- -----------------
INVESTING ACTIVITIES
Purchase of property and equipment (1,903,134) (841,318) (334,404)
Decrease in Deferred Improved Drug Entities - 2,450,241 -
Other (880,577) (457,006) (315,840)
------------------- ------------------ ------------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (2,783,711) 1,151,917 (650,244)
------------------- ----------------- ------------------
FINANCING ACTIVITIES
Proceeds from credit facilities - 28,311,372 6,086,046
Repayment of credit facilities - (34,130,635) (6,800,000)
Proceeds from term loan facility - 6,820,189 -
Principal payments on long-term debt (744,203) (10,795,482) (483,541)
Proceeds from sale of common stock 3,500,000 - 2,006,198
Dividends paid on preferred stock (105,437) - -
Exercise (repurchase) of common stock options 102,156 1,533,068 (234)
Proceeds from sale of stock options - 5,000,000 -
------------------ ----------------- -----------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 2,752,516 (3,261,488) 808,469
------------------ ------------------ -----------------
INCREASE IN CASH AND CASH EQUIVALENTS 5,589,454 962,356 568,731
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,038,069 1,075,713 506,982
------------------ ----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,627,523 $ 2,038,069 $ 1,075,713
================== ================= =================
See Accompanying Notes to Consolidated Financial Statements
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of KV
Pharmaceutical Company (the Company) and its wholly-owned subsidiaries. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Cash Equivalents
Cash equivalents consist of highly liquid instruments that have an
original maturity of three months or less.
Inventories
Inventories are stated at the lower of cost or market, with the cost
determined on the first-in, first-out (FIFO) basis.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed
over the estimated useful lives using the straight line method.
Goodwill and other assets
The excess of cost of investment over the fair value of net assets of
the subsidiaries at the time of acquisition is being amortized on a straight
line basis over 40 years. All other deferred charges are being amortized over
periods varying from 5 to 17 years on a straight line basis.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment to its
customer. Provisions for estimated sales allowances, returns and losses are
accrued at the time revenues are recognized. The Company also enters into
long-term agreements under which it assigns marketing rights for the products it
has developed to pharmaceutical marketers. The Company recognizes royalties and
other payments specified in the agreements as income when the earnings process
is completed.
Earnings Per Share
Earnings (Loss) per share after deducting/adding preferred dividends
are based on the weighted average number of common and common equivalent share
outstanding during each year. Common equivalent shares consist of the dilutive
effect of unissued shares that would be issued upon the exercise of outstanding
stock options. The weighted average number of shares aggregated 12,106,992,
11,814,097 and 11,178,495 in 1997, 1996 and 1995, respectively.
25
Income Taxes
The Company accounts for income taxes on the liability method. Deferred
income taxes are provided on the differences between the tax basis of assets and
liabilities and their financial reporting amounts based on enacted tax rates.
These temporary differences relate primarily to depreciation, accounts
receivable and inventory reserves, deferred compensation, net operating loss
carryforward and various tax credits.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable through the estimated
un-discounted future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to fair value in
accordance with Statement of Financial Accounting Standards No 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." No impairment losses have been necessary through March 31, 1997.
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to
employees with an exercise price greater than or equal to the fair value of the
shares at the date of grant. The Company accounts for stock option grants in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees "(APB Opinion No. 25"). That Opinion requires that
compensation cost related to fixed stock options plans be recognized only to the
extent that the fair value of the shares at the grant date exceeds the exercise
price. Accordingly, the Company recognizes no compensation expense for its stock
option grants.
In October 1995, the Financial Accounting Standards Board, issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). SFAS No. 123 allows companies to continue to
account for their stock option plans in accordance with APB Opinion No. 25, but
encourages the adoption of a new accounting method based on the estimated fair
value of employee stock options. Pro forma net income and income per share,
determined as if the Company had applied the new method, are disclosed within
Note 10.
26
New Accounting Standards
In March 1997, the Financial Accounting Standards Board issued
Statement Number 128, Earnings Per Share. This pronouncement provides for a
different method of calculating earnings per share than is currently used.
Management feels that the adoption of this pronouncement will not have a
significant effect on its earnings per share.
Reclassifications
Certain amounts from the prior years' financial statements have been
reclassified to conform to the current year presentation.
Fair Value of Financial Instruments
The carrying amounts of all short-term asset and liability financial
instruments are reasonable estimates of their fair value because of the short
maturity of these items. The carrying amount of all long term financial
instruments approximates their fair value because their terms are similiar to
those which can be obtained for similar financial instruments in the current
marketplace.
2. Nature of Operations
The Company and its subsidiaries develop, manufacture and market
technology-distinguished pharmaceuticals and pharmaceutical compounds.
Prescription pharmaceuticals are sold primarily to domestic wholesalers,
drugstore chains, distributors and independent pharmacies nationwide. Contract
manufacturing and pharmaceutical compounds are sold to major domestic drug,
nutritional and food companies.
Sales to a single company aggregated 15% for the year ended March 31,
1997. No single customer accounted for 10% or more of consolidated revenues in
fiscal 1996. In addition, the balance due from this company represented
approximately 23% and 15% of consolidated accounts receivables as of March 31,
1997 and 1996, respectively.
The Company extends unsecured credit to its customers.
3. Inventories
Inventories as of March 31 consist of the following:
1997 1996
---- ----
Finished goods $ 6,941,864 $ 4,087,636
Work-in-process 1,645,879 1,772,711
Raw materials 4,494,167 2,814,815
----------- ------------
13,081,910 8,675,162
Reserves for obsolescence (296,322) (225,000)
------------- ------------
$12,785,588 $ 8,450,162
=========== ===========
27
4. Property and Equipment
Property and equipment as of March 31 consists of:
1997 1996
---- ----
Land and improvements $ 499,567 $ 499,567
Building and building
improvements 3,482,812 3,439,159
Machinery and equipment 11,792,688 11,386,962
Office furniture and equipment 3,403,378 3,053,811
Leasehold improvements 2,363,555 2,281,162
Construction-in-progress
(estimated costs to
complete at March 31,
1997 - $1,700,000) 1,114,837 176,026
--------- -------
22,656,837 20,836,687
Less accumulated depreciation
and amortization
(14,539,028) (13,215,470)
------------ ------------
Net property and equipment
$ 8,117,809 $ 7,621,217
============ ============
Depreciation of property and equipment was $1,406,542, $1,390,790 and
$1,259,922 for 1997, 1996 and 1995, respectively.
5. Other Assets
Other assets include goodwill, deferred financing charges, cash
surrender value of life insurance, deposits, trademarks and patents. As of March
31, 1997 and 1996, the unamortized excess of purchase price over net assets
acquired, net of accumulated amortization of $1,305,092 and $1,249,688, was
$833,469 and $888,873, respectively. Amortization of goodwill is being charged
to operations at $55,404 per year. Amortization of all other deferred charges
was $132,354, $655,244 and $646,439 for 1997, 1996 and 1995, respectively.
6. Accrued Liabilities
Accrued liabilities as of March 31, consist of the following:
1997 1996
---- ----
Salaries, wages and
benefits $1,352,951 $ 279,385
Interest 85,777 153,159
Income Taxes 476,000 -
Other 894,843 732,962
----------- ------------
$ 2,809,571 $ 1,165,506
=========== ============
28
7. Long Term Debt
Long-term debt at March 31 consists of the following:
1997 1996
---- ----
Industrial revenue bonds 2,480,000 2,805,000
Capital lease 29,341 448,544
---------- ---------
Total 2,509,341 3,253,544
Less current portion 351,316 712,328
---------- ---------
Long-term debt $2,158,025 $2,541,216
========== ==========
The industrial revenue bonds, which bear interest at 7.35% per annum
mature serially through 2004 and are collateralized by certain property and
equipment, as well as through a letter of credit.
The capital lease at March 31, 1997, which bears interest at 11%, is
payable monthly over the next two years.
The aggregate maturities of long-term debt as of March 31, 1997 are as
follows:
1998 $ 351,316
1999 328,025
2000 325,000
2001 325,000
2002 325,000
Later Years 855,000
----------
$2,509,341
==========
The Company paid interest of $482,471, $1,352,823, and $1,420,581
during the years ended March 31, 1997, 1996 and 1995, respectively.
8. Commitments and Contingencies
Leases
The Company has noncancelable commitments for rental of office space,
plant and warehouse facilities, transportation equipment and other personal
property under operating leases. Future minimum lease commitments under all
noncancelable operating leases are as follows:
1998 $ 744,206
1999 625,679
2000 578,811
2001 543,685
2002 514,366
Later Years 2,676,236
----------
$5,682,983
==========
29
Total rent expense for the years ended March 31, 1997, 1996 and 1995
was $1,189,349, $1,229,881 and $1,260,026, respectively.
On June 15, 1997, the Company exercised its right of first refusal to
purchase for $4,300,000 the facility it had been renting at 10888 Metro Court
and a separate long-term financing of the purchase has been arranged with
LaSalle National Bank in the amount of $3,500,000. This transaction was
completed on June 24, 1997.
Contingencies
The Company currently carries product liability coverage of $10,000,000
per occurrence and $10,000,000 in the aggregate on a "claims made" basis. There
is no assurance that the Company's present insurance will cover any potential
claims that may be asserted in the future. In addition, the Company is subject
to legal proceedings and claims which arise in the ordinary course of business.
Employment Agreements
The Company has employment agreements with certain officers and key
employees which extend for one to five years. These agreements provide for base
levels of compensation and, in certain instances, also provide for incentive
bonuses and separation benefits. Also, the agreement with one officer contains
provisions for partial salary continuation under certain conditions contingent
upon noncompete restrictions and providing consulting services to the Company as
specified in the agreement. The Company accrued $152,089 and $142,139 for this
liability in 1997 and 1996, respectively.
Credit Facility
As of March 31, 1997, the Company had a loan agreement expiring in May
1998. The agreement provided for (1) a revolving line of credit for borrowings
up to $17,500,000, subject to certain collateral requirements, (2) a term loan
which was fully amortized as of March 31, 1997, and (3) letters of credit up to
$6,000,000. The aggregate amount of outstanding debt under this agreement cannot
exceed $17,500,000. At March 31, 1997 there was no outstanding debt under this
agreement. Interest charged has been renegotiated to its current level of prime
plus 1/2 percent. Accounts receivable, inventories, equipment, real estate and
intangibles are pledged as collateral on the agreement. Certain covenants
require minimum levels of operating ratios, working capital, capital
expenditures, net worth and restrict payment of dividends. As of March 31, 1997,
the Company had approximately $4,500,000 of open letters of credit under this
agreement that reduced the total available to $13,000,000. The Company's current
credit facility is being replaced by an unsecured revolving line of credit and
letter of credit facility aggregating $22,600,000 with LaSalle National Bank,
with a three-year term and interest charged at the prime rate. Closing of this
transaction occurred as of June 18, 1997.
9. Income Taxes
The provision for income taxes consists of state taxes for 1997 and
alternative minimum tax for 1996. No provision for income taxes was required for
1995.
30
The reasons for the differences between the provision for income taxes
and the expected federal income taxes at the statutory rate are as follows:
1997 1996 1995
---- ---- ----
Computed income tax expense
(benefit) at statutory rate $3,164,000 $1,536,211 $(2,062,000)
Change in valuation allowance (3,392,000) (1,596,200) 1,926,100
Alternative minimum tax - 90,000 -
State income taxes, less
federal income tax benefit 383,000 - -
Other 228,000 59,989 135,900
----------- ------------- ----------
Provision for income taxes $ 383,000 $ 90,000 $ 0
=========== ============ ================
31
As of March 31, 1997, and 1996, the tax effect of temporary differences
between the tax basis of assets and liabilities and their financial reporting
amount are as follows:
1997 1997 1996 1996
Current Non-Current Current Non-Current
------- ----------- ------- -----------
Fixed asset basis
differences $ - $(1,132,000) $ - $(1,052,400)
Reserve for inventory and
receivables 775,000 - 302,300 -
Capitalized inventory costs 228,000 - 163,600 -
Vacation pay reserve 203,000 - - -
Deferred compensation - 290,000 - 232,300
Reserve for medical
self insurance 47,500 - 34,300 -
Net operating loss
carryforward - - - 3,369,300
Research and development
credit - 958,000 - 1,594,000
Minimum tax credit - 963,000 - 129,000
Other 125,500 - - 187,700
------------ ----------- -------------- -----------
1,379,000 1,079,000 500,200 4,459,900
Valuation allowance (1,379,000) (189,000) (500,200) (4,459,900)
----------- ----------- --------- -----------
Net deferred taxes $ 0 $ 890,000 $ 0 $ 0
================= =========== ============== ============
The components of deferred taxes are as follows as of March 31, 1997
and 1996:
1997 1996
---- ----
Deferred tax liability $(1,132,000) $(1,052,400)
Deferred tax asset 3,590,000 6,012,500
Valuation allowance (1,568,000) (4,960,100)
---------- -----------
$ 890,000 $ 0
=========== ===========
The valuation allowance decreased by approximately $3,392,100 and
$1,596,200 during 1997 and 1996 respectively.
At March 31, 1997, the Company has the following income tax
carryforwards available:
Amount Expiration Dates
------ ----------------
Regular tax credit carryforwards
(primarily research &
development credits) $958,000 1998-2010
AMT credit carryforwards $963,000 N/A
The Company paid income taxes of $846,000, $90,000 and $0, during the
years ended March 31, 1997, 1996 and 1995 respectively.
32
10. Employee Benefits
Stock Option Plan
The Company has established the KV Pharmaceutical Company Incentive
Stock Option Plan for key employees and reserved 1,965,000 shares of common
stock for such plan. Under the plan, the Stock Option Committee may grant stock
options to key employees at not less than one hundred percent (100%) of the fair
market value of the Company's Common Stock at the date of grant. The durations
and exercisability of the grants vary over a period of up to ten years from the
date of grant. During 1997 the Company granted options for 391,932 shares, but
had 46,550 shares forfeited. As of March 31, 1997, options with remaining
contractual lives of up to ten years to purchase 828,087 shares at the fair
market value at the grant date were outstanding, 342,323 of which were
exercisable.
The following summary shows the transactions for the fiscal years 1997,
1996, and 1995 under option arrangements:
Options Outstanding Options Exercisable
------------------- -------------------
Average Average
No. of Price Per No. Price per
Shares Share of Shares Share
------ ----- --------- -----
Balance, March 31, 1994 753,876 5.29 461,731 4.33
Options granted 52,500 6.94
Options becoming exercisable 64,573 5.13
Options exercised (790) 2.65 (790) 2.65
Options canceled (125,870) 7.99 (26,267) 5.71
------------- -------------
Balance, March 31, 1995 679,716 4.92 499,247 4.36
Options granted 239,825 7.29
Options becoming exercisable 86,599 6.75
Options exercised (386,364) 3.97 (386,364) 3.97
Options canceled (24,032) 6.35 (10,773) 4.66
------------- -------------
Balance, March 31, 1996 509,145 6.70 188,709 6.25
Options granted 391,932 12.00
Options becoming exercisable 205,529 10.58
Options exercised (26,440) 3.91 (26,440) 3.91
Options canceled (46,550) 8.44 (25,475) 7.89
------------- -------------
Balance, March 31, 1997 828,087 9.20 342,323 8.91
======= =======
As discussed in the Summary of Accounting Policies, the Company applies
APB Opinion No. 25 and related interpretations in accounting for this plan.
Accordingly, no compensation cost has been recognized for its incentive stock
option plan.
33
The weighted-average grant date fair value per share of stock options
granted during the year was $5.23 for A options, $4.02 for B options, and $2.79
for A options, and $1.78 for B options in 1997 and 1996, respectively. The
weighted-average significant assumptions used to determine those values using
the Black-Sholes option pricing model for 1997 and 1996, respectively, were:
Volatility of .6212 and .4972; dividend yield of 0% in both years; risk-free
interest rate of return of 6.6% and 6.0% and expected option lives of 5 or 10
years.
The following table summarizes information about stock options
outstanding at March 31, 1997:
Options Outstanding Options Exercisable
---------------------------------------------------------- ----------------------------------
Range of Exercise Number Weighted Average Weighted Number Weighted
Prices Outstanding Remaining Average Exercisable Average
at 3/31/97 Contractual Life Exercise Price at 3/31/97 Exercise Price
- ---------------------------------------------------------------------------------------- ---------------------------------
$3.00 to $6.00 103,405 4 years $4.09 86,860 $3.65
$6.00 to $9.00 349,470 6 years $7.30 144,946 $7.26
$9.00 to $12.00 356,712 7 years $12.03 32,023 $10.52
$12.00 to $16.43 18,500 10 years $16.43 78,494 $12.89
------- -------
828,087 342,323
The fair market value of options granted during the years ended March
31, 1997 and 1996 was $1,754,000 and $467,000, respectively.
The pro-forma effect on earnings for the year ended March 31, 1997 and
1996 of the method consistent with SFAS No. 123 would be to reduce reported net
income by approximately $1.7 million and $.4 million, respectively, to
approximately $7.2 million and $3.7 million.
The pro-forma effect on earnings per share for the years ended March
31, 1997 and 1996 of this method was to reduce net income per share by $.13 per
share and $.03 per share, respectively, to $.57 per share and $.28 per share.
34
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 $50,000 for fiscal 1997. No profit sharing contribution
was made in fiscal years 1996 and 1995. The Plan includes features as described
under Section 401(k) of the Internal Revenue Code. The Company is required to
make contributions to the 401(k) investment funds quarterly in an amount equal
to twenty-five (25%) of the first 4% of the salary amount contributed by each
participant. Contributions to the 401(k) investment funds of approximately
$78,000, $71,000 and $103,000 were made in 1997, 1996 and 1995, respectively.
The Plan was amended as of April 1, 1997, to require the Company to
make contributions to the 401(k) investment funds quarterly in an amount equal
to fifty percent (50%) of the first 7% of the salary contributed by each
participant.
Health and Medical Insurance Plan
The Company contributes to health and medical insurance programs for
its non-union and union employees. For non-union employees, the Company self
insures the first $50,000 of each employee's covered medical claims annually.
The Company has recorded approximately $125,000 and $90,000 of accrued health
insurance expense reserves as of March 31, 1997 and 1996, respectively, for
incurred but not reported claims. For union employees, the Company participates
in a fully funded insurance plan sponsored by the union. Expenses related to
both plans charged to operations was approximately $1,200,840, $1,058,000, and
$1,375,000 in fiscal 1997, 1996 and 1995, respectively.
11. Related Party Transactions
A director of the Company is associated with a law firm that rendered
various legal services for the Company. The Company paid the firm, in the
aggregate, approximately $257,216, $243,512 and $122,000 during the years ended
March 31, 1997, 1996 and 1995, respectively.
In addition, the Company currently leases certain real property from an
affiliated partnership of another director of the Company. Lease payments made
for this property during the years ended March 31, 1997, 1996 and 1995 totaled
approximately $231,885, $222,910 and $199,000, respectively.
12. Equity Transactions
As of March 31, 1997, the Company has outstanding 241,000 shares of 7%
Cumulative Convertible preferred stock (par value $.01 per share) at a stated
value of $25 per share. The preferred stock is non-voting with dividends payable
quarterly. The preferred stock is redeemable at its stated value. Each share of
preferred stock is convertible into Class A Common Stock at a conversion price
of $10 per share. The preferred stock has a liquidation preference of $25 per
share plus all accrued but unpaid dividends prior to any liquidation
distributions to holders of Class A or Class B Common Stock. Undeclared and
unaccrued cumulative preferred dividends at March 31, 1997 and 1996 were
$2,203,644 and $1,887,331, respectively.
35
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. No dividends may be paid on Class A or
Class B Common Stock unless all dividends on the convertible preferred stock
have been declared and paid.
Under the terms of the Company's current loan and replacement loan
agreements (See Note 8), the Company has limitations on paying dividends, except
in stock, on its Class A and B Common Stock. Payment of dividends may also be
restricted under Delaware Corporation law.
In connection with an agreement entered into in January, 1996 (See Note
14), the Company received $5,000,000 for the purchase of Class A Common Stock
options exercisable through September 29, 1998. Options valued at $1,150,000
expired at March 31, 1997. Of the funds received for the common stock purchase
options, $1,250,000 was allocated to an option to purchase shares of Class A
Common Stock at a minimum price of $40 per share, exercisable for a 30 day
period ending September 29, 1997. An additional $1,300,000 was allocated to an
option to purchase Class A Common Stock at a minimum purchase price of $45 per
share, exercisable for a 30 day period ending March 30, 1998. The final
$1,300,000 was allocated to an option to purchase Class A Common Stock at a
minimum price of $50 per share, exercisable for a 30 day period ending September
29, 1998. The actual exercise price and number of shares of Class A Common Stock
to be purchased are dependent on the fair market value of the stock for a ten
day period prior to exercise.
In January 1997, the Company entered into an agreement under which it
agreed to sell 200,000 shares of Class A Common Stock (par value $.01 per
share). The sale was completed in March of 1997, with proceeds aggregating
$3,500,000 (See note 14).
13. Litigation
In April, 1995, a plea agreement was entered into with the U.S.
Department of Justice. Under the agreement, the Company agreed to plead guilty
to certain misdemeanor violations and to pay a fine of $500,000 and cost
reimbursements of $100,000. Payments are to be made in eight semi-annual,
interest free installments of $75,000 beginning in July 1995. The Company was
also placed on probation by the FDA during the payment period. The full amount
of all costs associated with the plea agreement was also recorded in the
Company's statement of operations for the fiscal year ended March 31, 1995.
From time to time, the Company becomes involved in various legal
matters which it considers to be in the ordinary course of business. While the
Company is not presently able to determine the potential liability, if any,
related to such matters, the Company believes none of the matters, individually
or in the aggregate, will have a material adverse effect on its financial
position.
14. Agreements
In January, 1996 the Company concluded an agreement with a major
pharmaceutical marketer whereby the Company received $5,000,000 and certain
other considerations, plus $5,000,000 for the sale of certain Class A common
stock options exercisable in various periods through September, 1998 (See Note
12). Under the transaction, which was entered into between the parties partially
in consideration of and replacing certain other products, the two companies
entered into an agreement for future royalties and product opportunities. The
Company gave the marketer the right to explore the Company's drug delivery
technologies with the possibility of entering into future agreements for
individual products. The transaction (other than the sale of the options) was
36
recorded as a reimbursement to the Company for, and thus the removal from its
balance sheet, of approximately $2,500,000 of Deferred Improved Drug
Entities(TM), receivables and inventory of approximately $400,000, and patents
and trademarks relating to the Company's technologies of approximately $200,000.
As a result, approximately $1,700,000 was allocated to licensing revenues and
$200,000 as a reimbursement of expenses.
In January, 1997, the Company concluded a broad-based agreement with
Roche Holding, Ltd. Of Basel, Switzerland (Roche). Included in the terms of the
agreement, Roche purchased 200,000 shares of Common Class A Stock for
$3,500,000. The agreement also provides for the marketing by Roche, or its
licensee, of a prescription, one dose cure vaginal antifungal product. The
product combines Roche's proprietary butoconazole nitrate with KV's proprietary
SITE RELEASE(R) drug delivery technology. The product was originally developed
by KV for Syntex (U.S.A.), Inc., which was acquired by a Roche affiliate in
1995. The product received FDA approval in February, 1997. The agreement also
gives KV the right to market the product in North America and the exclusive
right to market or license the prescription product in the rest of the world.
The agreement included an initial cash payment of $3 million made in
January 1997. Two additional payments of $3 million annually will be received
through January 1, 1999, unless regulatory approval of a potential follow-on
product in the same therapeutic area is received prior to these dates. The
initial $3,000,000 payment has been included in revenue, while the future
payments will be similarly treated, when received. Upon approval, KV will
receive royalties on the sales of the follow-on product. Under the agreement, KV
also has the exclusive right to market or license the follow-on product outside
of North America.
Also, as part of the agreement, three additional products will be
developed for Roche using KV's proprietary drug delivery technologies. KV would
receive manufacturing revenues and royalties at the time the products are
marketed under separate agreements for each product.
As part of a further collaboration under the agreement, KV's
wholly-owned subsidiary, ETHEX Corporation, will market two of Roche's brand
name products generically.
15. Industry Segments
The Company operates in one industry segment, "Pharmaceutical
Development, Manufacturing and Marketing."
37
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The information contained in Registrant's Report on [Form 8-K-A
(Amendment No. 1) filed June 18, 1996] under Item 4, entitled "Changes in
Registrant's Certified Accountant," is incorporated herein by this reference.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information contained under the caption "INFORMATION CONCERNING
NOMINEE AND DIRECTORS CONTINUING IN OFFICE" in the Company's definitive proxy
statement to be filed pursuant to Regulation 14(a) for the Company's 1997 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.
Item 11. Executive Compensation.
The information contained under the captions "EXECUTIVE COMPENSATION"
and "INFORMATION AS TO STOCK OPTIONS" in the Company's definitive proxy
statement to be filed pursuant to Regulation 14(a) for the Company's 1997 annual
meeting of shareholders, which involves the election of directors, 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 the Company's 1997 annual meeting of
shareholders, which involves the election of directors, is incorporated herein
by this reference.
Item 13. Certain Relationships and Related Transactions
The information contained under the caption "TRANSACTIONS WITH ISSUER"
in the Company's definitive proxy statement to be filed pursuant to Regulation
14(a) for the Company's 1997 annual meeting of shareholders, which involves the
election of directors, is incorporated herein by this reference.
38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements: Page
The following consolidated financial statements of the
Company are included in Part II, Item 8:
Report of Independent Certified Public Accountants 20
Consolidated Balance Sheets as of
March 31, 1997 and 1996 21
Consolidated Statements of Operations
for the Years Ended March 31, 1997, 1996 and 1995 22
Consolidated Statements of Shareholders'
Equity for the Years Ended March 31,
1997, 1996 and 1995 23
Consolidated Statements of Cash Flows
for the Years Ended March 31, 1997, 1996 and 1995 24
Notes to Financial Statements 25-38
39
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of KV Pharmaceutical Company:
The audits referred to in our report dated June 18, 1997 relating to the
consolidated financial statements of KV Pharmaceutical Company which is
contained in Item 8 of this Form 10-K included the audit of the financial
statement schedule listed in the accompanying index. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based upon our
audits.
In our opinion such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO SEIDMAN, LLP
St. Louis, Missouri
June 18, 1997
40
2. Financial Statement Schedules:
Schedule II
Valuation and Qualifying Accounts
Balance at Additions charged Amounts Balance
beginning to costs and charged to at end
of year expenses reserves of year
------- -------- -------- -------
Year Ended March 31, 1995:
Allowance for doubtful accounts $ 83,633 $ 135,000 $ 49,446 $ 169,187
Inventory obsolescence 710,089 2,735,154 1,559,672 1,885,571
------- --------- --------- ---------
793,722 2,870,154 1,609,118 2,054,758
======= ========= ========= =========
Year Ended March 31, 1996:
Allowance for doubtful accounts 169,187 736,757 335,446 570,498
Inventory obsolescence 1,885,571 1,399,966 3,060,537 225,000
--------- --------- --------- --------
2,054,758 2,136,723 3,395,983 795,498
========= ========= ========= =======
Year Ended March 31, 1997:
Allowance for doubtful accounts 570,498 440,911 882,355 129,054
Inventory obsolescence 225,000 1,180,516 1,109,194 296,322
--------- --------- --------- -------
795,498 1,621,427 1,991,549 425,376
======== ========= ========= =======
Financial Statements of KV Pharmaceutical Company (separately) are omitted
because KV is primarily an operating company and its subsidiaries included in
the financial statements are wholly-owned and are not materially indebted to any
person other than through the ordinary course of business.
3. Exhibits:
See Exhibit Index on pages 43 through 49 of this Report. Management contracts
and compensatory plans are designated on the Exhibit Index.
(b) Reports on Form 8-K:
One report on Form 8-K was filed on March 20, 1997 disclosing the
sale of 200,000 Class A shares.
41
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, 1997 By /s/ Marc S. Hermelin
---------------------
Vice Chairman of the Board
(Principal Executive Officer)
Date: June 27, 1997 By /s/ Gerald R. Mitchell
-----------------------
Vice President, Finance
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on the dates indicated by the following persons on behalf
of the Company and in their capacities as members of the Board of Directors of
the Company:
Date: June 27, 1997 By /s/ Marc S. Hermelin
---------------------
Marc S. Hermelin
Date: June 27, 1997 By /s/ Victor M. Hermelin
-----------------------
Victor M. Hermelin
/s/ Garnet E. Peck, Ph.D.
-------------------------
Garnet E. Peck, Ph.D.
Date: June 27, 1997 By /s/ Alan G. Johnson
--------------------
Alan G. Johnson
EXHIBIT INDEX
Exhibit No. Description Page
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3(a) The Company's Certificate of Incorporation, which
was filed as Exhibit 3(a) to the Company's Annual
Report on Form 10-K for the year ended March 31,
1981, is incorporated herein by this reference.
3(b) Certificate of Amendment to Certificate of
Incorporation of the Company, effective March 7,
1983, which was filed as Exhibit 3(c) to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1983, is incorporated herein by
this reference.
3(c) Certificate of Amendment to Certificate of
Incorporation of the Company, effective June 9,
1987, which was filed as Exhibit 3(d) to the
Company's Annual Report on From 10-K for the year
ended March 31, 1987, is incorporated herein by
this reference.
3(d) Certificate of Amendment to Certificate of
Incorporation of the Company, effective September
24, 1987, which was filed as Exhibit 3(f) to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1988, is incorporated herein by
this reference.
3(e) Certificate of Amendment to Certificate of
Incorporation of the Company, which was filed as
Exhibit 3(e) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1996, is
incorporated herein by this reference.
3(f) Certificate of Amendment to Certificate of
Incorporation of the Company, which was filed as
Exhibit 3(f) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1996, is
incorporated herein by this reference.
3(g) Bylaws of the Company, as amended through
November 18, 1982, which was filed as Exhibit
3(e) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1993, is
incorporated hereby by this reference.
3(h) Amendment to Bylaws of the Company, which was
filed as Exhibit 3(h) to the Company's Annual
Report on Form 10-K for the year ended March 31,
1996, is incorporated herein by this reference.
4(a) Certificate of Designation of Rights and
Preferences of 7% Cumulative Convertible
preferred stock of the Company, effective June 9,
1987, and related Certificate of Correction,
dated June 17, 1987, which was filed as Exhibit
4(f) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1987, is
incorporated herein by this reference.
4(b) Loan Agreement dated as of November 1, 1989, with
the Industrial Development Authority of the
County of St. Louis, Missouri, regarding private
activity refunding and revenue bonds issued by
such Authority, including form of Promissory Note
executed in connection therewith, which was filed
as Exhibit 4(b) to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31,
1989, is incorporated herein by this reference.
4(c) Loan and Security Agreement, dated as of April
27, 1995, between the Company and its
subsidiaries and Foothill Capital Corporation,
which was filed as Exhibit 4(n) to the Company's
Annual Report on Form 10-K for the year ended
March 31, 1995, is incorporated herein by this
reference.
4(d) Revolving Loan Note, dated as of April 27, 1995,
by the Company and its subsidiaries in favor of
Foothill Capital Corporation, which was filed as
Exhibit 4(c) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1995, is
incorporated herein by this reference.
4(e) Term Note, dated as of April 27, 1995, by the
Company and its subsidiaries in favor of Foothill
Capital Corporation, which was filed as Exhibit
4(d) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1995, is
incorporated herein by this reference.
4(f) Form of Capital Equipment Note to be executed by
the Company and its subsidiaries in favor of
Foothill Capital Corporation, which was filed as
Exhibit 4(e) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1995, is
incorporated herein by this reference.
4(g) Deed of Trust and Security Agreement, dated as of
April 27, 1995, in favor of Foothill Capital
Corporation, which was filed as Exhibit 4(f) to
the Company's Annual Report on Form 10-K for the
year ended March 31, 1995, is incorporated herein
by this reference.
4(h) First Amendment to Loan and Security Agreement,
dated as of April 27, 1995, between the Company
and its subsidiaries and Foothill Capital
Corporation, dated as of March 29, 1996, which
was filed as Exhibit 4(s) to the Company's Annual
Report on Form 10-K for the year ended March 31,
1996, is incorporated herein by this reference.
4(i) Loan Agreement dated June 18, 1997 between the
Company and its subsidiaries and LaSalle National
Bank, filed herewith.
4(j) Revolving Note, dated June 18, 1997, by the
Company and its subsidiaries in favor of LaSalle
National Bank, filed herewith.
4(k) Term Note, dated June 24, 1997, by the Company
and its subsidiaries in favor of LaSalle National
Bank, filed herewith.
10(a)* Stock Option Agreement between the Company and
Marc S. Hermelin, Vice Chairman and Chief
Executive Officer, dated February 18, 1986, is
incorporated herein by this reference.
10(b)* First Amendment to and Restatement of the KV
Pharmaceutical 1981 Employee Incentive Stock
Option Plan, dated March 9, 1987 (the "Restated
1981 Option Plan"), which as filed as Exhibit
10(t) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1988, is
incorporated herein by this reference.
10(c)* Second Amendment to the Restated 1981 Option
Plan, dated June 12, 1987, which was filed as
Exhibit 10(u) to the Company's Annual Report on
Form 10- K for the year ended March 31, 1988, is
incorporated herein by this reference.
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* Management contract or compensation plan.
10(d)* Revised Form of Stock Option Agreement, effective
June 12, 1987, for the Restated 1981 Option Plan,
which was filed as Exhibit 10(v) to the Company's
Annual Report on From 10-K for the year ended
March 31, 1988, is incorporated herein by this
reference.
10(e)* Consulting Agreement between the Company and
Victor M. Hermelin, Chairman of the Board, dated
October 30, 1978, as amended October 30, 1982,
and Employment Agreement dated February 20, 1974,
referred to therein (which was filed as Exhibit
10(m) to the Company's Annual Report on From 10-K
for the year ended March 31, 1983) and subsequent
Amendments dated as of August 12, 1986, which was
filed as Exhibit 10(f) to the Company's Annual
Report on Form 10-K for the year ended March 31,
1987, and dated as of September 15, 1987 (which
was filed as Exhibit 10(s) to the Company's
Annual Report on Form 10-K for the year ended
March 31, 1988), and dated October 25, 1988
(which was filed as Exhibit 10(n) to the
Company's Annual Report on Form 10- K for the
year ended March 31, 1989), and dated October 30,
1989 (which was filed as Exhibit 10(n) to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1990), and dated October 30, 1990
(which was filed as Exhibit 10(n) to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1991), and dated as of October
30, 1991 (which was filed as Exhibit 10(i) to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1992), are incorporated herein by
this reference.
10(f)* Restated and Amended Employment Agreement between
the Company and Gerald R. Mitchell, Vice
President, Finance, dated as of March 31, 1994,
is incorporated herein by this reference.
10(g)* Employment Agreement between the Company and
Raymond F. Chiostri, Corporate Vice-President and
President-Pharmaceutical Division, which was
filed as Exhibit 10(l) to the Company's Annual
Report on Form 10-K for the year ended March 31,
1992, is incorporated herein by this reference.
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* Management contract or compensation plan.
10(h) Lease of the Company's facility at 2503 South
Hanley Road, St. Louis, Missouri, and amendment
thereto, between the Company as Lessee and Marc
S. Hermelin as Lessor, which was filed as Exhibit
10(n) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1983, is
incorporated herein by this reference.
10(i) Amendment to the Lease for the facility located
at 2503 South Hanley Road, St. Louis, Missouri,
between the Company as Lessee and Marc S.
Hermelin as Lessor, which was filed as Exhibit
10(p) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1992, is
incorporated herein by this reference.
10(j) Amendment to Lease Agreement, dated as of
September 30, 1985, between the Industrial
Development Authority of the County of St. Louis,
Missouri, as Lessor and KV Pharmaceutical Company
as Lessee, regarding lease of facility located at
2303 Schuetz Road, St. Louis County, Missouri,
which was filed as Exhibit 10(q) to the Company's
Report on Form 10-Q for the quarter ended
December 31, 1985, is incorporated herein by this
reference.
10(k)* KV Pharmaceutical Company Fourth Restated Profit
Sharing Plan and Trust Agreement dated September
18, 1990, which was filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-8 No.
33-36400, is incorporated herein by this
reference.
10(l)* First Amendment to the KV Pharmaceutical Company
Fourth Restated Profit Sharing Plan and Trust
dated September 18, 1990, is incorporated herein
by this reference.
10(m)* KV Pharmaceutical Company 1991 Incentive Stock
Option Plan, adopted as of October 7, 1991, which
was filed as Exhibit 4 to the Company's Form S-8
Registration Statement No. 33-44927, filed
January 6, 1992, is incorporated herein by this
reference.
10(n) Consent Decree and Civil Actions Nos. 4:93CV00918
and 4:93CV00919 filed June 14, 1993, in
connection with Complaint of Forfeiture on behalf
of FDA, which was filed as Exhibit 10(s) to the
Company's Annual Report on Form 10- K for the
year ended March 31, 1993, is incorporated herein
by this reference.
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* Management contract or compensation plan.
10(o) Modification of Consent Decree of Condemnation
and Permanent Injunction filed December 13, 1993,
which was filed as Exhibit 10(r) to the Company's
Annual Report on From 10-K for the year ended
March 31, 1994, is incorporated herein by this
reference.
10(p) Second Modification of Consent Decree of
Condemnation and Permanent Injunction filed April
6, 1994, which was filed as Exhibit 10(s) to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1994, is incorporated herein by
this reference.
10(q)* Employment Agreement between the Company and Marc
S. Hermelin, Vice- Chairman, dated November 15,
1993, which was filed as Exhibit 10(u) to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1994, is incorporated herein by
this reference.
10(r)* Amendment to Consulting Agreement between the
Company and Victor M. Hermelin, Chairman of the
Board, dated October 30, 1978, which was filed as
Exhibit 10(v) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1994, is
incorporated herein by this reference.
10(s)* Stock Option Agreement dated June 1, 1995,
granting stock option to Marc S. Hermelin, which
was filed as Exhibit 10(w) to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996, is incorporated herein by
this reference.
10(t)* Second Amendment dated as of June 1, 1995, to
Employment Agreement between the Company and Marc
S. Hermelin, which was filed as Exhibit 10(x) to
the Company's quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, is incorporated
herein by this reference.
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* Management contract or compensation plan.
10(u)* Amendment to and Restatement of the KV
Pharmaceutical Company's 1991 Incentive Stock
Optation Plan dated as of November 1, 1995, which
was filed as Exhibit 10(y) to the Company's
Annual Report on Form 10-K for the year ended
March 31, 1996, is incorporated herein by this
reference.
10(v)* Stock Option Agreement dated as of January 22,
1996, granting stock options to MAC & Co., which
was filed as Exhibit 10(z) to the Company's
Annual Report on Form 10-K for the year ended
March 31, 1996, is incorporated herein by this
reference.
10(w)* Third Amendment dated as of November 22, 1995, to
Employment Agreement between the Company and Marc
S. Hermelin, which was filed as Exhibit 10(aa) to
the Company's Annual Report on Form 10-K for the
year ended March 31, 1996, is incorporated herein
by this reference.
10(x)* Stock Option Agreement dated as of November 22,
1995, granting a stock option to Victor M.
Hermelin, which was filed as Exhibit 10(bb) to
the Company's Annual Report on Form 10-K for the
year ended March 31, 1996.
10(y)* Fourth Amendment to and Restatement, dated as of
January 2, 1997, of the KV Pharmaceutical Company
1991 Incentive Stock Option Plan, filed herewith.
10(z)* Agreement between the Company Marc S. Hermelin,
Vice Chairman, dated December 16, 1996, with
supplemental letter attached, filed herewith.
10(aa) Amendment to Lease dated February 17, 1997, for
the facility located at 2503 South Hanley Road,
St. Louis, Missouri between the Company as Lessee
and Marc S. Hermelin as Lessor, filed herewith.
11 Computation of per share earnings, filed
herewith.
21 List of Subsidiaries, filed herewith.
23 Consent of BDO Seidman, L.L.P., filed herewith.
27 Financial Data Schedule, filed herewith.
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* Management contract or compensation plan.