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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2004
Commission file number 1-9601
K-V PHARMACEUTICAL COMPANY
2503 South Hanley Road
St. Louis, Missouri 63144
(314) 645-6600
Delaware (State or other jurisdiction of incorporation or organization)
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 New York Stock Exchange
Class B Common Stock, par value $.01 per share New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
7% Cumulative Convertible Preferred, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [ ] 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.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes X No
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The aggregate market value of the shares of Class A and Class B Common Stock
held by nonaffiliates of the registrant as of September 30, 2003, the last
business day of the Registrant's most recently completed second fiscal
quarter, was $643,339,373 and $176,775,780, respectively. As of June 9,
2004, the registrant had outstanding 33,010,420 and 16,054,975 shares of
Class A and Class B Common Stock, respectively, exclusive of treasury
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Portions of the definitive proxy statement of the Registrant (to
be filed pursuant to Regulation 14A for Registrant's 2004 Annual Meeting of
Shareholders, which involves the election of directors), are incorporated by
reference into Items 10, 11, 12, 13 and 14 to the extent stated in such
items.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Form 10-K, including the documents that we incorporate herein by
reference, contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Any statements about our
expectations, beliefs, plans, objectives, assumptions or future events or
performance are not historical facts and may be forward-looking. These
statements are often, but not always, made through the use of words or
phrases such as "anticipate," "estimate," "commit," "plans," "projects,"
"continuing," "ongoing," "expects," "management believes," "we believe," "we
intend" and similar words or phrases. Accordingly, these statements involve
estimates, assumptions and uncertainties that could cause actual results to
differ materially from those expressed in them. Any forward-looking
statements are qualified in their entirety by reference to the factors
discussed throughout this Form 10-K.
Factors that could cause actual results to differ materially from the
forward-looking statements include, but are not limited to, the following:
(1) the degree to which we are successful in developing new products and
commercializing products under development; (2) the degree to which we are
successful in acquiring new pharmaceutical products, drug delivery
technologies and/or companies that offer these properties; (3) the
difficulty of predicting FDA approvals; (4) acceptance and demand for new
pharmaceutical products; (5) the impact of competitive products and pricing;
(6) the availability of raw materials; (7) the regulatory environment; (8)
fluctuations in operating results; (9) the difficulty of predicting the
pattern of inventory movements by our customers; (10) the impact of
competitive response to our efforts to leverage our brand power with product
innovation, promotional programs, and new advertising; (11) the availability
of third-party reimbursement for our products; (12) our dependence on sales
to a limited number of large pharmacy chains and wholesale drug distributors
for a large portion of our total net sales; (13) risks that the company may
not ultimately prevail in its Paragraph IV litigation and that any period of
exclusivity may not in fact be realized; and (14) the risks detailed from
time to time in our filings with the Securities Exchange Commission and
detailed in this Form 10-K.
Because the factors referred to above, as well as the statements included
under the captions "Narrative Description of Business," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and elsewhere in this Form 10-K, could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by us or on our behalf, you should not place undue reliance
on any forward-looking statements. Further, any forward-looking statement
speaks only as of the date on which it is made and, unless applicable law
requires to the contrary, we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date
on which the statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for us
to predict which factors will arise, when they will arise and/or their
effects. In addition, we cannot assess the impact of each factor on our
business or financial condition or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from
those contained in any forward-looking statements.
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ITEM 1. DESCRIPTION OF BUSINESS
-----------------------
(a) GENERAL DEVELOPMENT OF BUSINESS
-------------------------------
Unless the context otherwise indicates, when we use the words "we,"
"our," "us" or "our company" we are referring to K-V Pharmaceutical
Company and its wholly-owned subsidiaries, including Ther-Rx
Corporation, ETHEX Corporation and Particle Dynamics, Inc.
We were incorporated under the laws of Delaware in 1971 as a
successor to a business originally founded in 1942. Victor M.
Hermelin, our Chairman and founder, invented and obtained initial
patents for early controlled release and enteric coating which
became part of our core business and a platform for future drug
delivery emphasis.
We develop advanced drug delivery technologies which enhance the
effectiveness of new therapeutic agents, existing pharmaceutical
products and prescription nutritional products. We have developed
and patented a wide variety of drug delivery and formulation
technologies which are primarily focused in four principal areas:
SITE RELEASE(R) bioadhesives; tastemasking; oral controlled
release; and quick dissolving tablets. We incorporate these
technologies in the products we market to control and improve the
absorption and utilization of active pharmaceutical compounds. In
1990, we established a generic marketing capability through a
wholly-owned subsidiary, ETHEX Corporation ("ETHEX"), which makes
us one of the only drug delivery research and development companies
that also markets "technologically distinguished" generic products.
In 1999, we established a wholly-owned subsidiary, Ther-Rx
Corporation ("Ther-Rx"), to market branded pharmaceuticals directly
to physician specialists.
Our wholly-owned subsidiary, Particle Dynamics, Inc. ("PDI"), was
acquired in 1972. Through PDI, we develop and market specialty
value-added raw materials, including drugs, directly compressible
and microencapsulated products, and other products used in the
pharmaceutical, nutritional, food, personal care and other markets.
(b) FISCAL 2004 HIGHLIGHTS
----------------------
RESULTS OF OPERATIONS
In fiscal 2004, we achieved a record level of earnings and our
ninth consecutive year of record revenues. The 63.1% increase in
our fiscal 2004 net income compared to fiscal 2003 resulted
primarily from a 15.9% increase in revenues to $283.9 million
coupled with the impact on fiscal 2003 net income of a $16.5
million litigation reserve established by us for potential damages
associated with a lawsuit that is currently under appeal. The
revenue increase in fiscal 2004 was largely due to continued growth
of our branded products segment.
PRODUCT DEVELOPMENT
We recognize that development of successful new products is
critical to achieving our goal of sustainable growth over the long
term. As such, our investment in research and development, which
increased 7.9% in fiscal 2004 and 78.6% in fiscal 2003 compared to
the respective prior fiscal years, and which we expect will
increase by 20%-30% in fiscal 2005 compared to fiscal 2004 and,
reflects our continued commitment to develop new products and/or
technologies through our internal development programs, and with
our external strategic partners. In fiscal 2004, Ther-Rx expanded
its product offerings with technology-improved versions of the oral
hematinic products acquired at the end of fiscal 2003. Also, over
the past two fiscal years, ETHEX has added over 30 new products to
its development pipeline, including eight products that received
Abbreviated New Drug Application (ANDA) approval from the Food and
Drug Administration (FDA).
3
Additionally, the Company has on file a New Drug Application (NDA)
with the FDA relating to a previously reported research and
development plan reported in the Company's Form 8-K filed April,
2002. The product under this application utilizes KV's proprietary
drug delivery technology and is targeted for launch in the women's
healthcare arena. We anticipate approval and introduction of this
NDA product during the second half of fiscal 2005. This product
would participate in a therapy now addressed by branded products
with annual sales of approximately $130 million. At the end of
fiscal 2004, we had a series of other product filings awaiting
approval from the FDA, the first of which was an ANDA received in
May 2004. Additional approvals are expected to occur over the
remainder of the year. In addition to our internal product
development efforts, we have licensed the exclusive rights to
co-develop certain generic and branded products with other drug
delivery companies. In fiscal 2004, we expanded our product
development efforts with strategic partners as follows:
o In January 2004, following successful completion of
Phase II studies on the endometriosis product we are
developing with FemmePharma, Inc., we purchased an
additional $3.0 million of FemmePharma's convertible
preferred stock and made an additional $1.0 million
payment under a separate license agreement with
FemmePharma. As of March 31, 2004, we have invested a
total of $5.0 million in FemmePharma's convertible
preferred stock and paid $2.0 million under the license
agreement. The endometriosis product currently being
developed employs FemmePharma's patented PARDEL(TM)
technology. The license agreement also provides for our
exclusive right to use the PARDEL(TM) technology for
certain other anti-infective products.
o In January 2004, we entered into a long-term product
development and marketing license agreement with Glenmark
Pharmaceuticals Inc., USA, a wholly-owned subsidiary of
Glenmark Pharmaceuticals Ltd. of India. Under the
agreement, Glenmark will initially develop and license
to us eight generic products for regulatory approval and
marketing in North American markets. The licensed products
include both Paragraph 3 and Paragraph 4 ANDA filing
opportunities. The agreement also provides for the
development and licensing of additional generic ANDA
products, as well as for certain branded specialty
products which may incorporate Glenmark's proprietary
platform controlled release technology. The first product
launch covered under the agreement is expected to occur
during the last half of calendar 2005.
o During fiscal 2004, we entered into four separate
licensing agreements that will expand the future
presence of Gynazole-1(R), our vaginal antifungal cream
product, to over 50 markets in Europe, Latin America,
the Middle East, Asia, Indonesia, the People's Republic
of China, Australia and New Zealand. We also received,
during fiscal 2004, our first regulatory approval to
market Gynazole-1(R) into an international market.
FINANCING
During May 2003, we completed the issuance of $200.0 million of
Contingent Convertible Subordinated Notes (the "Notes") that are
convertible, under certain circumstances, into shares of our Class
A Common Stock at an initial conversion price of $23.01 per share.
The Notes bear interest at a rate of 2.50% per annum and mature on
May 16, 2033. We may redeem some or all of the Notes at any time on
or after May 21, 2006, and holders may require us to repurchase all
or a portion of their Notes on May 1, 2008, and each fifth year
thereafter. The net proceeds to us were approximately $194.2
million, after deducting underwriting discounts, commissions and
offering expenses. The proceeds from the offering were used to
purchase $50.0 million of our Class A Common Stock, with the
remaining proceeds to be used to support the expansion of our
business, including the potential funding of future acquisitions of
products, technologies and businesses, to enter into product
licensing arrangements, to increase research and development
activities and for general corporate purposes.
4
In April 2003, we financed the purchase of an $8.8 million building
with a term loan secured by the property under a floating rate loan
with a bank. The remaining principal balance plus any unpaid
interest is due in April 2008. We also entered into an interest
rate swap agreement with the same bank, which fixed the interest
rate of the building mortgage at 5.31% per annum for the term of
the loan. The facility consists of approximately 275,000 square
feet of office, production, distribution and warehouse space.
CAPITAL EXPENDITURES
In fiscal 2004, our capital expenditures increased 35.2% to $21.8
million, which excludes the $8.8 million cost of the 275,000 square
foot building we purchased in April 2003 with proceeds from a term
loan. This increase in capital spending reflected the continued
expansion of our research and manufacturing capabilities. In fiscal
2005, we expect capital expenditures to increase by up to $50.0
million over fiscal 2004 levels as we ramp up
manufacturing/distribution, laboratory capabilities and other
facilities needed for planned growth over the next five to seven
years.
(c) INDUSTRY SEGMENTS
-----------------
We operate principally in three industry segments, consisting of
branded products marketing, specialty generics marketing and
specialty raw materials marketing. Revenues are derived primarily
from directly marketing our own technologically distinguished
generic/non-branded and brand-name products. Revenues may also be
received in the form of licensing revenues and/or royalty payments
based upon a percentage of the licensee's sales of the product, in
addition to manufacturing revenues, when marketing rights to
products using our advanced drug delivery technologies are licensed
(see Note 18 to our consolidated financial statements).
(d) NARRATIVE DESCRIPTION OF BUSINESS
---------------------------------
OVERVIEW
We are a fully integrated specialty pharmaceutical company that
develops, acquires, manufactures and markets technologically
distinguished branded and generic/non-branded prescription
pharmaceutical products. We have a broad range of dosage form
capabilities including tablets, capsules, creams, liquids and
ointments. We conduct our branded pharmaceutical operations through
Ther-Rx and our generic/non-branded pharmaceutical operations
through ETHEX. Through Particle Dynamics, we also develop,
manufacture and market technologically advanced, value-added raw
material products for the pharmaceutical, nutritional, personal
care, food and other markets.
We have a broad portfolio of drug delivery technologies which we
leverage to create technologically distinguished brand name and
specialty generic/non-branded products. We have developed and
patented 15 drug delivery and formulation technologies primarily in
four principal areas: SITE RELEASE(R) bioadhesives, oral controlled
release, tastemasking, and quick dissolving tablets. We incorporate
these technologies in the products we market to control and improve
the absorption and utilization of active pharmaceutical compounds.
These technologies provide a number of benefits, including reduced
frequency of administration, reduced side effects, improved drug
efficacy, enhanced patient compliance and improved taste.
We have a long history of developing drug delivery technologies. In
the 1950's, we received what we believe to be the first patents for
sustained release delivery systems which enhance the convenience
and effectiveness of pharmaceutical products. In our early years,
we used our technologies to develop products for other drug
marketers. Our technologies have been used in several well known
products including Actifed(R) 12-hour, Sudafed(R) SA, Centrum
Jr.(R) and Kaopectate(R) Chewable. Since the 1990's, we have chosen
to focus our drug development expertise on internally developed
products for our branded and generic/non-branded pharmaceutical
businesses.
5
For example, since its inception in March 1999, our Ther-Rx
business has successfully launched five internally developed
branded pharmaceutical products, all of which incorporate our drug
delivery technologies. In addition, during fiscal 2004, we
introduced technology-improved versions of the Chromagen(R) and
Niferex(R) oral hematinic products that we acquired at the end of
last year. Furthermore, most of the internally developed
generic/non-branded products marketed by our ETHEX business
incorporate one or more of our drug delivery technologies.
Our drug delivery technology allows us to differentiate our
products in the marketplace, both in the branded and
generic/non-branded pharmaceutical areas. We believe that this
differentiation provides substantial competitive advantages for our
products, allowing us to establish a strong record of growth and
profitability and a leadership position in certain segments of our
industry. From 1998 to March 31, 2004, we have grown net revenues
and net income at compounded annual growth rates of 19.5% and
26.3%, respectively. Ther-Rx, which was established in 1999, has
grown substantially since its inception and continues to gain
market share in its women's healthcare family of products. By
focusing on the development and marketing of
technology-distinguished, multisource drugs, over half of the more
than 125 specialty generic/non-branded products sold by our ETHEX
subsidiary are industry leaders in the multisource-brand market.
THER-RX -- OUR BRAND NAME PHARMACEUTICAL BUSINESS
We established Ther-Rx, currently our fastest growing business
segment, in 1999 to market brand name pharmaceutical products which
incorporate our proprietary technologies. Since its inception,
Ther-Rx has introduced over 15 products into two principal
therapeutic categories - women's health and oral hematinics - where
physician specialists can be reached using a smaller and highly
focused sales force. By targeting physician specialists, we believe
Ther-Rx can compete successfully without the need for a sales force
as large as pharmaceutical companies with less specialized product
lines. Ther-Rx's net revenues grew from $43.7 million in fiscal
2003 to $82.9 million in fiscal 2004 and represented 29.2% of our
fiscal 2004 total net revenues.
We established our women's healthcare franchise through the August
1999 acquisition of PreCare(R), a prescription prenatal vitamin,
from UCB Pharma, Inc. Since the acquisition, Ther-Rx has
reformulated the original product using proprietary technologies,
and subsequently has launched four internally developed products as
extensions to the PreCare(R) product line. Building upon the
PreCare(R) acquisition, we have developed a line of proprietary
products which makes Ther-Rx the leading provider of branded
prescription prenatal vitamins in the United States.
The first of our internally developed, patented line extensions to
PreCare(R) was PreCare(R) Chewables, the world's first prescription
chewable prenatal vitamin. PreCare(R) Chewables addressed a
longstanding challenge to improve pregnant women's compliance with
prenatal vitamin regimens by alleviating the difficulty that
patients experience in swallowing large prenatal pills. Ther-Rx's
second internally developed product, PremesisRx(TM), is an
innovative prenatal prescription product that incorporates our
controlled release Vitamin B6. This product is designed for use in
conjunction with a physician-supervised program to reduce
pregnancy-related nausea and vomiting, which is experienced by 50%
to 90% of women. The third product, PreCare(R) Conceive(TM), is the
first single nutritional pre-conception supplement designed for use
by both men and women. The fourth product, PrimaCare(TM), is the
first prescription prenatal/postnatal nutritional supplement with
essential fatty acids specially designed to help provide
nutritional support for women during pregnancy, postpartum recovery
and throughout the childbearing years. All of the products in the
PreCare(R) product line have been formulated to contain 1 mg. of
folic acid, which has been shown to reduce the incidence of fetal
neural tube defects by at least 50%.
In June 2000, Ther-Rx launched its first New Drug Application, or
NDA, approved product, Gynazole-1(R), the only one-dose
prescription cream treatment for vaginal yeast infections.
Gynazole-1(R) incorporates our patented drug delivery technology,
VagiSite(R), the only clinically proven and Federal Food and Drug
Administration, or FDA, approved controlled release bioadhesive
system. Since its launch, the product has gained a 26.9% market
share in the U.S. prescription vaginal antifungal cream market.
6
In addition, we have entered into licensing agreements for the
right to market Gynazole-1(R) in over 50 markets in Europe, Latin
America, the Middle East, Asia, Indonesia, the People's Republic of
China, Australia and New Zealand. We also received, during fiscal
2004, our first regulatory approval to market Gynazole-1(R) into an
international market.
Ther-Rx's cardiovascular product line consists of Micro-K(R), an
extended-release potassium supplement used to replenish
electrolytes, primarily in patients who are on medication which
depletes the levels of potassium in the body. We acquired
Micro-K(R) in March 1999 from the pharmaceutical division of Wyeth.
On March 31, 2003, we completed two acquisitions of an aggregate of
nine pharmaceutical products for a total cost of approximately
$41.3 million. The acquisitions included two leading lines of
hematinic products, Chromagen(R) and Niferex(R), and the related
line of StrongStart(R) branded prenatal vitamins, a category in
which Ther-Rx was already a market leader under the PreCare(R)
banner. These acquired brands generated $22.6 million of net sales
during fiscal 2004. Similar to our strategy with other acquired
products, we introduced technology-improved versions of the oral
hematinic product line. Since their introduction at the end of the
second quarter, the reformulated hematinic brands have generated a
69% growth rate in new prescription volume.
Based on the addition of new products and our expectation of
continued growth in our branded business, Ther-Rx added over 60 new
branded sales representatives during fiscal 2004 to increase our
specialty sales force to approximately 210. Ther-Rx's sales force
focuses on physician specialists who are identified through
available market research as frequent prescribers of our
prescription products. Ther-Rx also has a corporate sales and
marketing management team dedicated to planning and managing
Ther-Rx's sales and marketing efforts.
ETHEX -- OUR TECHNOLOGICALLY DISTINGUISHED GENERIC/NON-BRANDED
DRUG BUSINESS
We established ETHEX, currently our largest business segment, in
1990 to utilize our portfolio of drug delivery systems to develop
and market hard-to-copy generic/non-branded pharmaceuticals. We
believe many of our ETHEX products enjoy higher gross margins than
other generic pharmaceutical companies due to our approach of
selecting products that benefit from our proprietary drug delivery
systems and our specialty manufacturing capabilities. These
advantages act as barriers to entry which limit competition and
reduce the rate of price erosion typically experienced in the
generic market. ETHEX's net revenues were $181.5 million for fiscal
2004, which represented 63.9% of our total net revenues.
We have incorporated our proprietary drug delivery technology in
many of our generic/non-branded pharmaceutical products. For
example, we have included METER RELEASE(R), one of our proprietary
controlled release technologies, into the only generic equivalent
to Norpace(R) CR, an antiarrhythmic that is taken twice daily.
Further, we have used our KV/24(R) once daily technology in the
generic equivalent to IMDUR(R), a cardiovascular drug that is taken
once per day. In addition, utilizing our specialty manufacturing
expertise and a sublingual delivery system, we produced and
marketed the first non-branded alternative to Nitrostat(R)
sublingual, an anti-angina product which historically has been
difficult to manufacture.
To capitalize on ETHEX's unique product capabilities, we continue
to expand our ETHEX product portfolio. Over the past two years, we
have introduced more than 30 new generic/non-branded products and
have a number of products currently in development to be marketed
by ETHEX. Since January 1, 2002, we have received eight new
Abbreviated New Drug Application, or ANDA, approvals and have
approvals currently pending.
In addition to our internal marketing efforts, we have licensed the
exclusive rights to co-develop and market more than 15 products
with other drug delivery companies. These products will be generic
equivalents to brand name products with aggregate annual sales
totaling over $5 billion and are expected to be launched at various
times beginning in fiscal 2005 and continuing through fiscal 2007.
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By focusing our efforts on the development and marketing of
technology-distinguished, multisource drugs, over half of the more
than 125 specialty generic/non-branded products sold by our ETHEX
subsidiary are industry leaders in the multisource-brand market.
ETHEX primarily focuses on the therapeutic categories of
cardiovascular, women's health, pain management and respiratory,
leveraging our expertise in developing and manufacturing products
in these areas. In addition, we pursue opportunities outside of
these categories where we also may differentiate our products based
upon our proprietary drug delivery systems and our specialty
manufacturing expertise.
CARDIOVASCULAR. ETHEX currently markets approximately 40 products
in its cardiovascular line, including products to treat angina,
arrhythmia and hypertension, as well as for potassium
supplementation. The cardiovascular line accounted for 48.1% of
ETHEX's net revenues in fiscal 2004.
WOMEN'S HEALTH CARE. ETHEX currently markets over 20 products in
its women's healthcare line, all of which are prescription prenatal
vitamins. Based on the number of units sold, ETHEX is the leading
provider of prescription prenatal vitamins in the United States.
The women's healthcare line accounted for 11.3% of ETHEX's net
revenues in fiscal 2004.
PAIN MANAGEMENT. ETHEX currently markets 20 products in its pain
management line. Included in this line are several controlled
substance drugs, such as morphine and hydromorphone and oxycodone
capsules. The pain management line accounted for 18.1% of ETHEX's
net revenues in fiscal 2004.
RESPIRATORY. ETHEX currently markets over 30 products in its
respiratory line, which consists primarily of cough/cold products.
ETHEX is the leading provider on a unit basis of prescription
cough/cold products in the United States today. The cough/cold line
accounted for 11.3% of ETHEX's net revenues in fiscal 2004.
OTHER THERAPEUTICS. In addition to our core therapeutic lines,
ETHEX markets over 30 products in the gastrointestinal,
dermatological, anti-inflammatory, digestive enzyme and general
nutritional categories.
ETHEX has a dedicated sales and marketing team, which includes an
outside sales team of regional managers and national account
managers and an inside sales team. The outside sales force calls on
wholesalers and distributors and national drugstore chains, as well
as hospitals, nursing homes, independent pharmacies and mail order
firms. The inside sales force calls on independent pharmacies to
create pull-through at the wholesale level.
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PARTICLE DYNAMICS - OUR VALUE-ADDED RAW MATERIAL BUSINESS
Particle Dynamics develops and markets specialty raw material
products for the pharmaceutical, nutritional, food and personal
care industries. Its products include value-added active drug
molecules, vitamins, minerals and other raw material ingredients
that provide benefits such as improved taste, altered or controlled
release profiles, enhanced product stability or more efficient and
other manufacturing process advantages. Particle Dynamics is also a
significant supplier of value-added raw material for our Ther-Rx
and ETHEX businesses. Net revenues for Particle Dynamics were $16.6
million in fiscal 2004, which represented 5.8% of our total net
revenues. Particle Dynamics currently offers three distinct lines
of specialty raw material products:
o DESCOTE(R) is a family of microencapsulated tastemasked
vitamins and minerals for use in chewable nutritional
products, quick dissolve dosage forms, foods, children's
vitamins and other products.
o DESTAB(TM) is a family of direct compression products that
enables pharmaceutical manufacturers to produce tablets and
caplets more efficiently and economically.
o MicroMask(TM) is a family of products designed to alleviate
problems associated with swallowing tablets. This is
accomplished by offering superior tasting, chewable or quick
dissolving dosage forms of medication.
STRATEGIES
Our goal is to enhance our position as a leading fully integrated
specialty pharmaceutical company that utilizes its expanding drug
delivery expertise to bring technologically distinguished brand
name and generic/non-branded products to market. Our strategies
incorporate the following key elements:
INTERNALLY DEVELOP BRAND NAME PRODUCTS. We apply our existing drug
delivery technologies, research and development and manufacturing
expertise to introduce new products which can expand our existing
franchises. Since the acquisition and reformulation of PreCare(R),
we have successfully introduced four internally developed brand
name products: PreCare(R) Chewables, PremesisRx(TM), PreCare(R)
Conceive(TM) and PrimaCare(TM). These products incorporate our
proprietary oral extended release and tastemasking technologies. In
June 2000, Ther-Rx launched its first NDA approved product,
Gynazole-1(R), the only one-dose prescription cream treatment for
vaginal yeast infections. In fiscal 2004, we expanded our branded
product offerings by launching technology improved versions of the
Chromagen(R) and Niferex(R) oral hematinic product lines that were
acquired at the end of fiscal 2003. We plan to continue to use our
research and development, manufacturing and marketing expertise to
create unique brand name products within our core therapeutic areas
and we currently have a number of new products in clinical
development.
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CAPITALIZE ON ACQUISITION OPPORTUNITIES. We actively seek
acquisition opportunities for both Ther-Rx and ETHEX. Ther-Rx
continually looks for platform acquisition opportunities similar to
PreCare(R) around which we can build franchises. We believe that
consolidation among large pharmaceutical companies, coupled with
cost-containment pressures, has increased the level of sales
necessary for an individual product to justify active marketing and
promotion. This has led large pharmaceutical companies to focus
their marketing efforts on drugs with higher volume sales, newer or
novel drugs which have the potential for high volume sales and
products which fit within core therapeutic or marketing priorities.
As a result, major pharmaceutical companies increasingly have
sought to divest small or non-strategic product lines, which can be
profitable for specialty pharmaceutical companies like us.
In making acquisitions, we apply several important criteria in our
decision making process. We pursue products with the following
attributes:
o products which we believe have relevance for treatment of
significant clinical needs;
o promotionally sensitive maintenance drugs which require
continual use over a long period of time, as opposed to more
limited use products for acute indications;
o products which are predominantly prescribed by physician
specialists, which can be cost effectively marketed by our
focused sales force; and
o products which we believe have potential for technological
enhancements and line extensions based upon our drug delivery
technologies.
FOCUS SALES EFFORTS ON HIGH VALUE NICHE MARKETS. We focus our
Ther-Rx sales efforts on niche markets where we believe we can
target a relatively narrow physician audience. Because our products
are sold to specialty physician groups that tend to be relatively
concentrated, we believe that we can address these markets cost
effectively with a focused sales force. Based on the addition of
new products and our expectation of continued growth in our branded
business, Ther-Rx added over 60 new branded sales representatives
in fiscal 2004 to increase our specialty sales force to
approximately 210. We plan to continue to build our sales force as
necessary to accommodate current and future expansions of our
product lines.
PURSUE ATTRACTIVE GROWTH OPPORTUNITIES WITHIN THE GENERIC INDUSTRY.
We intend to continue to introduce generic counterparts to drugs
whose patents have expired. When patents no longer protect a
branded product, opportunities exist for ETHEX to introduce generic
counterparts to branded products. Such generic or off-patent
pharmaceutical products are generally sold at significantly lower
prices than the branded product. Accordingly, generic
pharmaceuticals provide a cost-efficient alternative to users of
branded products. We believe the health care industry will continue
to support growth in the generic pharmaceutical market and that
industry trends favor generic product expansion into the managed
care, long-term care and government contract markets. We further
believe that we are uniquely positioned to capitalize on this
growing market given our large base of proprietary drug delivery
technologies and our proven ability to lead the therapeutic
categories we enter.
ADVANCE EXISTING AND DEVELOP NEW DRUG DELIVERY TECHNOLOGIES. We
believe our drug delivery platform of 15 distinguished technologies
has unique breadth and depth. These technologies have enabled us to
create innovative products, including Gynazole-1(R), the only
one-dose vaginal antifungal prescription cream treatment for yeast
infections, incorporating VagiSite(TM), our proprietary bioadhesive
controlled release system. In addition, our tastemasking and
controlled release systems are incorporated into our prenatal
vitamins, providing them with differentiated benefits over other
products on the market.
10
We plan to continue to develop our drug delivery technologies and
have identified various technologies with substantial growth
potential, such as Trans-Cell(TM), a novel bioadhesive, controlled
release delivery system that may permit oral delivery of bioactive
peptides and proteins that are normally degraded by stomach enzymes
or first-pass liver effects.
OUR PROPRIETARY DRUG DELIVERY TECHNOLOGIES
We are a leader in the development of proprietary drug delivery
systems and formulation technologies which enhance the
effectiveness of new therapeutic agents, existing pharmaceutical
products and nutritional supplements. We have used many of these
technologies to successfully commercialize technologically
distinguished branded and generic/non branded products.
Additionally, we continue to invest our resources in the
development of new technologies. The following describes our
principal drug delivery technologies.
SITE RELEASE(R) TECHNOLOGIES. SITE RELEASE(R) is our largest family
of technologies and includes eight systems designed specifically
for oral, topical or interorificial use. These systems rely on
controlled bioadhesive properties to optimize the delivery of drugs
to either wet mucosal tissue or the skin and are the subject of
issued patents and pending patent applications. Of the technologies
developed, products using the VagiSite(TM) and DermaSite(TM)
technologies have been successfully commercialized. Our fully
developed technologies include the following:
o VagiSite(TM) is a controlled release bioadhesive delivery
system that incorporates advanced polyphasic principles to
create a bioemulsion system delivering therapeutic agents to
the vagina. We have outlicensed VagiSite(TM) for sale in
international markets for the treatment of vaginal infections.
VagiSite(TM) technology is used in Gynazole-1(R), a one-dose
prescription cream treatment for vaginal yeast infections.
o DermaSite(TM) is a semi-solid SITE RELEASE(R) configuration
for topical applications to the skin. The bioadhesive and
controlled release properties of the delivery platform have
made possible the development of products requiring a
significantly reduced frequency of application. DermaSite(TM)
technology is used in Dermarin-L(TM), a topical antifungal
product being marketed by the leading over-the-counter company
in Japan, Taisho Pharmaceutical, Ltd.
o OraSite(R) is a controlled release mucoadhesive delivery
system administered orally in a solid or liquid form. A drug
formulated with the OraSite(R) technology may be formulated as
a liquid or as a lozenge in which the dosage form liquefies
upon insertion and adheres to the mucosal surface of the
mouth, throat and esophagus. OraSite(R) possesses
characteristics particularly advantageous to therapeutic
categories such as oral hygiene, sore throat and periodontal
and upper gastrointestinal tract disorders.
o OraSert(TM) is a solid dosage-form application system
specifically designed for localized delivery of active agents
to the oral tissues. The product is formulated as a "cough
drop" type tablet, which immediately liquefies upon placement
in the mouth and bioadheres to mucosal tissue in the mouth,
throat and esophagus. OraSert(TM) possesses characteristics
particularly advantageous to therapeutic applications such as
periodontal disease, respiratory conditions, pharyngeal
conditions and upper gastrointestinal tract disorders.
o BioSert(TM) is a bioadhesive delivery system in a solid insert
formulation for vaginal or rectal administration, similar in
appearance to a vaginal or rectal suppository, which can be
used for both local and systemic delivery of drugs. The
BioSert(TM) dosage form liquefies and bioadheres to vaginal or
rectal tissues, which is of particular benefit when a patient
can no longer tolerate orally administered medications. We are
currently developing several drug products that utilize the
BioSert(TM) technology, including non-steroidal
anti-inflammatory drugs, or NSAIDs, and antifungals for a
local effect and opioids for a systemic effect.
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In addition, the following SITE RELEASE(R) technologies are
currently under development:
o Trans-Cell(TM) is a novel bioadhesive, controlled release
delivery system that may permit oral delivery of bioactive
peptides and proteins that are normally degraded by stomach
enzymes or first-pass liver effects. The Trans-EP(TM)
technology was specifically designed to provide an oral
delivery alternative to biotechnology and other compounds that
currently are delivered as injections or infused.
o OcuSite(TM) is a liquid, microemulsion delivery system
intended for topical applications in the eye. The
microemulsion formulation lends optical clarity to the
application and is ideal for ophthalmic use. The bioadhesive
and controlled release properties of this delivery system
allow for reduced dosing regimentation.
o PulmoSite(TM) applies bioadhesive and controlled release
characteristics to drug agents that are to be inhaled for
either local action to the lung or for systemic absorption.
ORAL CONTROLLED RELEASE TECHNOLOGIES. The technological preeminence
of our advanced drug delivery systems was established in the
development of our three oral controlled release technologies, all
of which have been commercialized. Our systems can be individually
designed to achieve the desired release profile for a given drug.
The release profile is dependent on many parameters, such as drug
solubility, protein binding and site of absorption. Some of the
products utilizing our oral controlled release systems in the
market include Isosorbide-5-Mononitrate (an AB rated generic
equivalent to IMDUR(R)) and Disopyramide Phosphate (an AB rated
generic equivalent of Norpace(R) CR). Our patented technologies
include the following:
o KV/24(R) is a multi-particulate drug delivery system that
encapsulates one or more drug compounds into spherical
particles which release the active drug or drugs systemically
over an 18- to 24-hour period, permitting the development of
once-a-day drug formulations. We believe that our KV/24(R)
oral dosing system is the only commercialized 24-hour oral
controlled release system that is successfully able to
incorporate more than one active compound.
o METER RELEASE(R) is a polymer-based drug delivery system that
offers different release characteristics than KV/24(R) and is
used for products that require drug release rates of between
eight and 12 hours. We have developed METER RELEASE(R) systems
in tablet, capsule and caplet form that have been
commercialized in ETHEX products in the cardiovascular,
gastrointestinal and upper respiratory product categories.
o MICRO RELEASE(R) is a microparticulate formulation that
encapsulates therapeutic agents, employing smaller particles
than KV/24(R) and METER RELEASE(R). This system is used to
extend the release of drugs in the body where precise release
profiles are less important. MICRO RELEASE(R) has been
commercialized in prescription products marketed by ETHEX and
Ther-Rx as well as over-the-counter nutritional products.
TASTEMASKING TECHNOLOGIES. Our tastemasking technologies improve
the taste of unpleasant drugs. Our three patented tastemasking
systems can be applied to liquids, chewables or dry powders. We
first introduced tastemasking technologies in 1991 and have
utilized them in a number of Ther-Rx and ETHEX products, including
PreCare(R) Chewables and most of the liquid products that are sold
in ETHEX's cough/cold line. Our patented technologies include the
following:
o LIQUETTE(R) is a tastemasking system that incorporates
unpleasant tasting drugs into a hydrophilic and lipophilic
polymer matrix to suppress the taste of a drug. This
technology is used for mildly to moderately distasteful drugs
where low manufacturing costs are particularly important.
o FlavorTech(R) is a liquid formulation technology designed to
reduce the objectionable taste of a wide variety of
therapeutic products. FlavorTech(R) technology has been used
in cough/cold syrup products sold by ETHEX and has special
application to other products, such as antibiotic, geriatric
and pediatric pharmaceuticals.
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o MicroMask(TM) is a tastemasking technology that incorporates a
dry powder, microparticulate approach to reducing
objectionable tastes by sequestering the unpleasant drug agent
in a specialized matrix. This formulation technique has the
effect of "shielding" the drug from the taste receptors
without interfering with the dissolution and ultimate
absorption of the agent within the gastrointestinal tract.
MicroMask(TM) is a more potent tastemasking technology than
LIQUETTE(R) and has been used in connection with two Ther-Rx
products.
QUICK DISSOLVING TECHNOLOGY. Our quick dissolving oral tablet
technology provides the ability to tastemask, yet dissolves in the
mouth in a matter of seconds. Most other quick-dissolving
technologies offer either quickness at the expense of poor
tastemasking or excellent tastemasking at the expense of quickness.
While still under development, this system allows for a drug to be
quickly dissolved in the mouth, and can be combined with
tastemasking capabilities that offer a unique dosage form for the
most bitter tasting drug compounds. We have been issued patents and
have patents pending for this system with the U.S. Patent and
Trademark Office, or PTO.
SALES AND MARKETING
Ther-Rx has a national sales and marketing infrastructure which
includes approximately 210 sales representatives dedicated to
promoting and marketing our branded pharmaceutical products to
targeted physician specialists. By targeting physician specialists,
we believe we can compete successfully without the need to build a
large sales force. We also have a national sales management team,
as well as a sales team dedicated to managed care and trade
accounts.
We attempt to increase sales of our branded pharmaceutical products
through physician sales calls and promotional efforts, including
sampling, advertising and direct mail. For acquired branded
products, we generally increase the level of physician sales calls
and promotion relative to the previous owner. For example, with the
PreCare(R) prenatal sales efforts, we increased the level of
physician sales calls and sampling to the highest prescribers of
prenatal vitamins. We also have enhanced our PreCare(R) brand
franchise by launching four more line extensions to address unmet
needs, including the launch of PreCare(R) Chewables, Premesis
Rx(TM), PreCare(R) Conceive(TM) and PrimaCare(TM). The PreCare(R)
product line enables us to deliver a full range of nutritional
products for physicians to prescribe to women in their childbearing
years. In addition, we added to our women's health care family of
products in June 2000 with the introduction of our first NDA
approved product, Gynazole-1(R), the only one-dose prescription
cream treatment for yeast infections. In fiscal 2004, we expanded
our branded product offerings even further when we launched
technology improved versions of the Chromagen(R) and Niferex(R)
oral hematinic product lines that were acquired at the end of
fiscal 2003. By offering multiple products to the same group of
physician specialists, we are able to maximize the effectiveness of
our experienced sales force.
ETHEX has an experienced sales and marketing team, which includes
an outside sales team, regional account managers, national account
managers and an inside sales team. The outside sales force calls on
wholesalers, distributors and national drugstore chains, as well as
hospitals, nursing homes, mail order firms and independent
pharmacies. The inside sales team calls on independent pharmacies
to create pull-through at the wholesale level.
We believe that industry trends favor generic product expansion
into the managed care, long-term care and government contract
markets. Further, we believe that our competitively priced,
technology-distinguished generic/non-branded products can fulfill
the increasing need of these markets to contain costs and improve
patient compliance. Accordingly, we intend to continue to devote
significant marketing resources to the penetration of such markets.
Particle Dynamics has a specialized technical sales group that
calls on the leading companies in the pharmaceutical, nutritional,
personal care, food and other markets in the United States.
13
During fiscal 2004, our three largest customers accounted for 25%,
16% and 13% of gross revenues. These customers were McKesson Drug
Company, Cardinal Health and Amerisource Corporation, respectively.
In fiscal 2003 and 2002, these customers accounted for gross
revenues of 23%, 14% and 18% and 20%, 19% and 13%, respectively.
Although we sell internationally, we do not have material
operations or sales in foreign countries and our sales are not
subject to unusual geographic concentration.
RESEARCH AND DEVELOPMENT
Our research and development activities include the development of
new and next generation drug delivery technologies, the formulation
of brand name proprietary products and the development of
technologically distinguished generic/non-branded versions of
previously approved brand name pharmaceutical products. In fiscal
2004, 2003 and 2002, total research and development expenses were
$20.7 million, $19.1 million and $10.7 million, respectively.
Ther-Rx currently has a number of products in its research and
development pipeline at various stages of development. The Company
has on file with the FDA an NDA application related to its
previously reported research and development plan reported in a
Form 8-K filed April 2002 that we expect approvals of in late
fiscal 2005. The product under this application utilizes KV's
proprietary drug delivery technology and is targeted for launch in
the women's healthcare arena. This product would participate in a
therapy now addressed by branded products with annual sales of
approximately $130 million. We believe we have the technological
expertise required to develop unique products to meet currently
unmet needs in the area of women's health, as well as other
therapeutic areas.
ETHEX currently has more than 30 products in its research and
development pipeline at various stages of development and
exploration. Our development process typically consists of
formulation, development and laboratory testing, and where required
(1) preliminary bioequivalency studies of pilot batches of the
manufactured product, (2) full scale bioequivalency studies using
commercial quantities of the manufactured product and (3)
submission of an ANDA, to the FDA. We believe that, unlike many
generic drug companies, we have the technical expertise required to
develop generic substitutes for hard-to-copy branded pharmaceutical
products.
In addition to our internal product development and marketing
efforts, we have licensed the exclusive rights to co-develop and
market more than 15 products with other drug delivery companies.
These products will be generic/non-branded equivalents to brand
name products with aggregate annual sales totaling over $5 billion
and are expected to be launched at various times beginning in
fiscal 2005.
14
Particle Dynamics currently has a number of products in its
research and development pipeline at various stages of development.
Particle Dynamics applies its technologies to a diverse number of
active and inactive chemicals for more efficient processing of
materials to achieve benefits such as prolonged action of release,
tastemasking, making materials more site specific and other
benefits. Typically, the finished products into which the specialty
raw materials are incorporated do not require FDA approval.
We continually apply our scientific and development expertise to
refine and enhance our existing drug delivery systems and
formulation technologies and to create new technologies that may be
used in our drug development programs. Certain of these
technologies currently under development include advanced oral
controlled release systems, quick dissolving oral delivery systems
(with and without tastemasking characteristics) and transesophageal
and intrapulmonary delivery technologies.
PATENTS AND OTHER PROPRIETARY RIGHTS
Our policy is to file patent applications in appropriate situations
to protect and preserve, for our own use, technology, inventions
and improvements that we consider important to the development of
our business. We currently hold domestic and foreign issued patents
the last of which expires in 2021 relating to our controlled
release, site-specific, quick dissolve and tastemasking
technologies. We have been granted 34 U.S. patents and have 17 U.S.
patent applications pending. In addition, we have 32 foreign issued
patents and a total of 71 patent applications pending primarily in
Canada, Europe, Australia, Japan, South America, Mexico and South
Korea (see "We depend on our patents and other proprietary rights"
under RISK FACTORS for additional information).
We currently own more than 50 U.S. and foreign trademark
registrations and have also applied for trademark protection for
the names of our proprietary controlled-release, tastemasking,
site-specific and quick dissolve technologies. We intend to
continue to trademark new technology and product names as they are
developed.
To protect our trademark, domain name, and related rights, we
generally rely on trademark and unfair competition laws, which are
subject to change. Some, but not all, of our trademarks are
registered in the jurisdictions where they are used. Some of our
other trademarks are the subject of pending applications in the
jurisdictions where they are used or intended to be used and others
are not.
MANUFACTURING AND FACILITIES
We believe that our administrative, research, manufacturing and
distribution facilities are an important factor in achieving our
long-term growth objectives. All facilities at March 31, 2004,
aggregating approximately 1.1 million square feet, are located in
the St. Louis, Missouri area. We own approximately 575,000 square
feet, with the balance under various leases at pre-determined
annual rates under agreements expiring from fiscal 2005 through
fiscal 2013, subject in most cases to renewal at our option. In
fiscal 2005, we expect capital expenditures to increase by up to
$50.0 million over fiscal 2004 levels as we ramp up
manufacturing/distribution, and laboratory capabilities and general
administrative offices purchased during fiscal 2004, and other
facilities needed for planned growth over the next five to seven
years.
We manufacture drug products in liquid, semi-solid, tablet, capsule
and caplet forms for distribution by Ther-Rx, ETHEX and our
corporate licensees and value-added specialty raw materials for
distribution by Particle Dynamics. We believe that all of our
facilities comply with applicable regulatory requirements.
We seek to maintain inventories at sufficient levels to support
current production and sales levels. During fiscal 2004, we
encountered no serious shortage of any particular raw materials and
have no indication that significant shortages will occur in the
foreseeable future.
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COMPETITION
Competition in the development and marketing of pharmaceutical
products is intense and characterized by extensive research efforts
and rapid technological progress. Many companies, including those
with financial and marketing resources and development capabilities
substantially greater than our own, are engaged in developing,
marketing and selling products that compete with those that we
offer. Our branded pharmaceutical products may also be subject to
competition from alternate therapies during the period of patent
protection and thereafter from generic equivalents. In addition,
our generic/non-branded pharmaceutical products may be subject to
competition from pharmaceutical companies engaged in the
development of alternatives to the generic/non-branded products we
offer or of which we undertake development. Our competitors may
develop generic products before we do or may have pricing
advantages over our products. In our specialty pharmaceutical
businesses, we compete primarily on the basis of product efficacy,
breadth of product line and price. We believe that our patents,
proprietary trade secrets, technological expertise, product
development and manufacturing capabilities will enable us to
maintain a leadership position in the field of advanced drug
delivery technologies and to continue to develop products to
compete effectively in the marketplace.
In addition, we compete with other pharmaceutical companies that
acquire branded product lines from other pharmaceutical companies.
These competitors may have substantially greater financial and
marketing resources than we do. Accordingly, our competitors may
succeed in product line acquisitions that we seek to acquire.
We also compete with drug delivery companies engaged in the
development of alternative drug delivery systems. We are aware of a
number of companies currently seeking to develop new non-invasive
drug delivery systems, including oral delivery and transmucosal
systems. Many of these companies may have greater research and
development capabilities, experience, manufacturing, marketing,
financial and managerial resources than we do. Accordingly, our
competitors may succeed in developing competing technologies,
obtaining FDA approval for products or gaining market acceptance
more rapidly than we do.
GOVERNMENT REGULATION
All pharmaceutical manufacturers are subject to extensive
regulation by the federal government, principally the FDA, and, to
a lesser extent, by state, local and foreign governments. The
Federal Food, Drug and Cosmetic Act, or FDCA, and other federal
statutes and regulations govern or influence, among other things,
the development, testing, manufacture, safety, labeling, storage,
recordkeeping, approval, advertising, promotion, sale and
distribution of pharmaceutical products. Pharmaceutical
manufacturers are also subject to certain record keeping and
reporting requirements, establishment registration and product
listing, and FDA inspections.
With respect to any non-biological "new drug" product with active
ingredients not previously approved by the FDA, a prospective
manufacturer must submit a full NDA, including complete reports of
preclinical, clinical and other studies to prove the product's
safety and efficacy. A full NDA may also need to be submitted for a
drug product with a previously approved active ingredient if, among
other things, the drug will be used to treat an indication for
which the drug was not previously approved, or if the abbreviated
procedure discussed below is otherwise not available. A
manufacturer intending to conduct clinical trials in humans for a
new drug may be required first to submit a Notice of Claimed
Investigational Exception for a New Drug, or IND, to the FDA
containing information relating to preclinical and clinical
studies. INDs and full NDAs may be required to be filed to obtain
approval of certain of our products, including those that do not
qualify for abbreviated application procedures. The full NDA
process, including clinical development and testing, is expensive
and time consuming.
16
The Drug Price Competition and Patent Restoration Act of 1984,
known as the Hatch-Waxman Act, established ANDA procedures for
obtaining FDA approval for generic versions of many non-biological
drugs for which patent or marketing exclusivity rights have expired
and which are bioequivalent to previously approved drugs.
"Bioequivalence" for this purpose, with certain exceptions,
generally means that the proposed generic formulation is absorbed
by the body at the same rate and extent as a previously approved
"reference drug." Approval to manufacture these drugs is obtained
by filing abbreviated applications, such as ANDAs. As a substitute
for clinical studies, the FDA requires data indicating the ANDA
drug formulation is bio-equivalent to a previously approved
reference drug among other requirements. Analogous abbreviated
application procedures apply to antibiotic drug products that are
bio-equivalent to previously approved antibiotics. The advantage of
the ANDA approval mechanism, compared to an NDA, is that an ANDA
applicant is not required to conduct preclinical and clinical
studies to demonstrate that the product is safe and effective for
its intended use and may rely, instead, on studies demonstrating
bio-equivalence to a previously approved reference drug.
In addition to establishing ANDA approval mechanisms, the
Hatch-Waxman Act fosters pharmaceutical innovation through such
incentives as non-patent exclusivity and patent restoration. The
Act provides two distinct exclusivity provisions that either
preclude the submission or delay the approval of an ANDA. A
five-year exclusivity period is provided for new chemical
compounds, and a three-year marketing exclusivity period is
provided for changes to previously approved drugs which are based
on new clinical investigations essential to the approval. The
three-year marketing exclusivity period may be applicable to the
approval of a novel drug delivery system. The marketing exclusivity
provisions apply equally to patented and non-patented drug
products. These provisions do not delay or otherwise affect the
approvability of full NDAs even when effective ANDA approvals are
not available. For drugs covered by patents, patent extension may
be provided for up to five years as compensation for reduction of
the effective life of the patent resulting from time spent in
conducting clinical trials and in FDA review of a drug application.
There has been substantial litigation in the biomedical,
biotechnology and pharmaceutical industries with respect to the
manufacture, use and sale of new products that are the subject of
conflicting patent rights. One or more patents cover most of the
proprietary products for which we are developing generic versions.
When we file an ANDA for such drug products, we will, in most
cases, be required to certify to the FDA that any patent which has
been listed with the FDA as covering the product is invalid or will
not be infringed by our sale of our product. Alternatively, we
could certify that we would not market our proposed product until
the applicable patent expires. A patent holder may challenge a
notice of noninfringement or invalidity by filing suit for patent
infringement, which would prevent FDA approval until the suit is
resolved or until at least 30 months has elapsed (or until the
patent expires, whichever is earlier). Should any entity commence a
lawsuit with respect to any alleged patent infringement by us, the
uncertainties inherent in patent litigation would make the outcome
of such litigation difficult to predict.
In addition to marketing drugs which are subject to FDA review and
approval, we market certain drug products in the United States
without FDA approval under certain "grandfather" clauses and
statutory and regulatory exceptions to the pre-market approval
requirement for "new drugs" under the Federal Food, Drug and
Cosmetic Act, or the FDCA. A determination as to whether a
particular product does or does not require FDA pre-market review
and approval can involve consideration of numerous complex and
imprecise factors. If a determination is made by the FDA that any
product marketed without approval requires such approval, the FDA
may institute enforcement actions, including product seizure, or an
action seeking an injunction against further marketing and may or
may not allow sufficient time to obtain the necessary approvals
before it seeks to curtail further marketing. For example, in
October 2002, the FDA sent warning letters to us and other
manufacturers and distributors of unapproved prescription drug
products containing the expectorant guaifenesin as a single entity
in a solid oral dosage form. Citing the recent approval of one such
product, the FDA warning letters asserted that the marketing of all
such products without NDA or ANDA approval should stop. The FDA
subsequently agreed to allow continued manufacture through May 2003
and sale through November 2003 of the products, and we have
complied with those deadlines.
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We are not in a position to predict whether or when the FDA might
choose to raise similar objections to the marketing without NDA or
ANDA approval of another category or categories of drug products
represented in our product lines. In the event such objections are
raised, we could be required or could decide to cease distribution
of additional products until pre-market approval is obtained. In
addition, we may not be able to obtain any particular approval that
may be required or such approval may not be obtained on a timely
basis.
In addition to obtaining pre-market approval for certain of our
products, we are required to maintain all facilities in compliance
with the FDA's current Good Manufacturing Practice, or cGMP,
requirements. In addition to compliance with cGMP each
pharmaceutical manufacturer's facilities must be registered with
the FDA. Manufacturers must also be registered with the Drug
Enforcement Agency, or DEA, and similar state and local regulatory
authorities if they handle controlled substances, and with the EPA
and similar state and local regulatory authorities if they generate
toxic or dangerous wastes. Noncompliance with applicable
requirements can result in fines, recall or seizure of products,
total or partial suspension of production and distribution, refusal
of the government to enter into supply contracts or to approve
NDA's, ANDA's or other applications and criminal prosecution. The
FDA also has the authority to revoke for cause drug approvals
previously granted.
The Prescription Drug Marketing Act, or PDMA, which amended various
sections of the FDCA, requires, among other things, state licensing
of wholesale distributors of prescription drugs under federal
guidelines that include minimum standards for storage, handling and
record keeping. It also imposes detailed requirements on the
distribution of prescription drug samples such as those distributed
by the Ther-Rx sales force. The PDMA sets forth substantial civil
and criminal penalties for violations of these and other
provisions.
For international markets, a pharmaceutical company is subject to
regulatory requirements, inspections and product approvals
substantially the same as those in the United States. In connection
with any future marketing, distribution and license agreements that
we may enter into, our licensees may accept or assume
responsibility for such foreign regulatory approvals. The time and
cost required to obtain these international market approvals may be
greater or lesser than those required for FDA approval.
Product development and approval within this regulatory framework
take a number of years, involve the expenditure of substantial
resources and is uncertain. Many drug products ultimately do not
reach the market because they are not found to be safe or effective
or cannot meet the FDA's other regulatory requirements. In
addition, the current regulatory framework may change and
additional regulation may arise at any stage of our product
development that may affect approval, delay the submission or
review of an application or require additional expenditures by us.
We may not be able to obtain necessary regulatory clearances or
approvals on a timely basis, if at all, for any of our products
under development, and delays in receipt or failure to receive such
clearances or approvals, the loss of previously received clearances
or approvals, or failure to comply with existing or future
regulatory requirements could have a material adverse effect on our
business.
EMPLOYEES
As of March 31, 2004, we employed a total of 1,016 employees. We
are party to a collective bargaining agreement covering 155
employees that will expire December 31, 2004. We believe that our
relations with our employees are good.
ENVIRONMENT
We do not expect that compliance with Federal, state or local
provisions regulating the discharge of materials into the
environment or otherwise relating to the protection of the
environment will have a material effect on our capital
expenditures, earnings or competitive position.
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AVAILABLE INFORMATION
We make available, free of charge through our Internet website
(http://www.kvpharmaceutical.com), our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and
amendments to these reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as
reasonably practicable after we electronically file these reports
with, or furnish them to, the Securities and Exchange Commission,
or SEC. Also, copies of our Corporate Governance Guidelines, Audit
Committee Charter, Compensation Committee Charter, Nominating and
Corporate Governance Committee Charter, Code of Ethics for Senior
Executives and Standard of Business Ethics are available on our
Internet website, and available in print to any stockholder who
requests it.
In addition, the SEC maintains an Internet website
(http://www.sec.gov) that contains reports, proxy and information
statements, and other information regarding issuers that file
electronically with the SEC.
RISK FACTORS
We operate in a rapidly changing environment that involves a number
of risks, some of which are beyond our control. The following
discussion highlights some of these risks and others are discussed
elsewhere in this report. Additional risks presently unknown to us
or that we currently consider immaterial or unlikely to occur could
also impair our operations. These and other risks could materially
and adversely affect our business, financial condition, operating
results or cash flows.
RISKS RELATED TO OUR BUSINESS
OUR FUTURE GROWTH IS LARGELY DEPENDENT UPON OUR ABILITY TO DEVELOP
NEW PRODUCTS.
We need to continue to develop and commercialize new brand name
products and generic products utilizing our proprietary drug
delivery systems to maintain the growth of Ther-Rx, ETHEX and
Particle Dynamics. To do this we will need to identify, develop and
commercialize technologically enhanced branded products and
identify, develop and commercialize drugs that are off-patent and
that can be produced and sold by us as generic products using our
drug delivery technologies. If we are unable to identify, develop
and commercialize new products, we may need to obtain licenses to
additional rights to branded or generic products, assuming they
would be available for licensing, which could decrease our
profitability. We cannot assure you that we will be successful in
pursuing this strategy.
IF WE ARE UNABLE TO COMMERCIALIZE PRODUCTS UNDER DEVELOPMENT, OUR
FUTURE OPERATING RESULTS MAY SUFFER.
Certain products we are developing will require significant
additional development and investment, including preclinical and
clinical testing, where required, prior to their commercialization.
We expect that many of these products will not be commercially
available for several years, if at all. We cannot assure you that
such products or future products will be successfully developed,
prove to be safe and effective in clinical trials (if required),
meet applicable regulatory standards, or be capable of being
manufactured in commercial quantities at reasonable cost.
19
OUR ACQUISITION STRATEGY MAY NOT BE SUCCESSFUL.
We intend to continue to acquire pharmaceutical products, novel
drug delivery technologies and/or companies that fit into our
research, manufacturing, distribution or sales and marketing
operations or that could provide us with additional products,
technologies or sales and marketing capabilities. We may not be
able to successfully identify, evaluate and acquire any such
products, technologies or companies or, if acquired, we may not be
able to successfully integrate such acquisitions into our business.
We compete with many specialty pharmaceutical companies for
products and product line acquisitions. These competitors may have
substantially greater financial and managerial resources than we
have.
WE DEPEND ON OUR PATENTS AND OTHER PROPRIETARY RIGHTS AND CANNOT BE
CERTAIN OF THEIR CONFIDENTIALITY AND PROTECTION.
Our success depends, in large part, on our ability to protect our
current and future technologies and products, to defend our
intellectual property rights and to avoid infringing on the
proprietary rights of others. We have been issued numerous patents
in the United States and in certain foreign countries, which cover
certain of our technologies, and have filed, and expect to continue
to file, patent applications seeking to protect newly developed
technologies and products. The pharmaceutical field is crowded and
a substantial number of patents have been issued. In addition, the
patent position of pharmaceutical companies can be highly uncertain
and frequently involves complex legal and factual questions. As a
result, the breadth of claims allowed in patents relating to
pharmaceutical applications or their validity and enforceability
cannot be predicted. Patents are examined for patentability at
patent offices against bodies of prior art which by their nature
may be incomplete and imperfectly categorized. Therefore, even
presuming that the examiner has been able to identify and cite the
best prior art available to him during the examination process, any
patent issued to us could later be found by a court or a patent
office during post issuance proceedings to be invalid in view of
newly-discovered prior art or already considered prior art or other
legal reasons. Furthermore, there are categories of "secret" prior
art unavailable to any examiner, such as the prior inventive
activities of others, which could form the basis for invalidating
any patent. In addition, there are other reasons why a patent may
be found to be invalid, such as an offer for sale or public use of
the patented invention in the United States more than one year
before the filing date of the patent application. Moreover, a
patent may be deemed unenforceable if, for example, the inventor or
the inventor's agents failed to disclose prior art to the PTO that
they knew was material to patentability.
The coverage claimed in a patent application can be significantly
reduced before a patent is issued, either in the United States or
abroad. Consequently, there can be no assurances that any of our
pending or future patent applications will result in the issuance
of patents. Patents issued to us may be subjected to further
proceedings limiting their scope and may not provide significant
proprietary protection or competitive advantage. Our patents also
may be challenged, circumvented, invalidated or deemed
unenforceable. Patent applications in the United States filed prior
to November 29, 2000 are currently maintained in secrecy until and
unless patents issue, and patent applications in certain other
countries generally are not published until more than 18 months
after they are first filed (which generally is the case in the
United States for applications filed on or after November 29,
2000). In addition, publication of discoveries in scientific or
patent literature often lags behind actual discoveries. As a
result, we cannot be certain that we or our licensors will be
entitled to any rights in purported inventions claimed in pending
or future patent applications or that we or our licensors were the
first to file patent applications on such inventions. Furthermore,
patents already issued to us or our pending applications may become
subject to dispute, and any dispute could be resolved against us.
For example, we may become involved in re-examination, reissue or
interference proceedings in the PTO, or opposition proceedings in a
foreign country. The result of these proceedings can be the
invalidation or substantial narrowing of our patent claims. We also
could be subject to court proceedings that could find our patents
invalid or unenforceable or could substantially narrow the scope of
our patent claims. In addition, statutory differences in patentable
subject matter may limit the protection we can obtain on some of
our inventions outside of the United States. For example, methods
of treating humans are not patentable in many countries outside of
the United States.
20
These and other issues may prevent us from obtaining patent
protection outside of the United States. Furthermore, once patented
in foreign countries, the inventions may be subjected to mandatory
working requirements and/or subject to compulsory licensing
regulations.
We also rely on trade secrets, unpatented proprietary know-how and
continuing technological innovation that we seek to protect, in
part by confidentiality agreements with licensees, suppliers,
employees and consultants. These agreements may be breached by the
other parties to these agreements. We may not have adequate
remedies for any breach. Disputes may arise concerning the
ownership of intellectual property or the applicability or
enforceability of our confidentiality agreements and there can be
no assurance that any such disputes would be resolved in our favor.
Furthermore, our trade secrets and proprietary technology may
become known or be independently developed by our competitors, or
patents may not be issued with respect to products or methods
arising from our research, and we may not be able to maintain the
confidentiality of information relating to those products or
methods. Furthermore, certain unpatented technology may be subject
to intervening rights.
WE DEPEND ON OUR TRADEMARKS AND RELATED RIGHTS.
To protect our trademarks and goodwill associated therewith, domain
name, and related rights, we generally rely on federal and state
trademark and unfair competition laws, which are subject to change.
Some, but not all, of our trademarks are registered in the
jurisdictions where they are used. Some of our other trademarks are
the subject of pending applications in the jurisdictions where they
are used or intended to be used, and others are not.
It is possible that third parties may own or could acquire rights
in trademarks or domain names in the United States or abroad that
are confusingly similar to or otherwise compete unfairly with our
marks and domain names, or that our use of trademarks or domain
names may infringe or otherwise violate the intellectual property
rights of third parties. The use of similar marks or domain names
by third parties could decrease the value of our trademarks or
domain names and hurt our business, for which there may be no
adequate remedy.
THIRD PARTIES MAY CLAIM THAT WE INFRINGE ON THEIR PROPRIETARY
RIGHTS, OR SEEK TO CIRCUMVENT OURS.
We may be required to defend against charges of infringement of
patents, trademarks or other proprietary rights of third parties.
This defense could require us to incur substantial expense and to
divert significant effort of our technical and management
personnel, and could result in our loss of rights to develop or
make certain products or require us to pay monetary damages or
royalties to license proprietary rights from third parties. If a
dispute is settled through licensing or similar arrangements, costs
associated with such arrangements may be substantial and could
include ongoing royalties. Furthermore, we cannot be certain that
the necessary licenses would be available to us on acceptable
terms, if at all. Accordingly, an adverse determination in a
judicial or administrative proceeding or failure to obtain
necessary licenses could prevent us from manufacturing, using,
selling and/or importing in to the United States certain of our
products. Litigation also may be necessary to enforce our patents
against others or to protect our know-how or trade secrets. That
litigation could result in substantial expense or put our
proprietary rights at risk of loss, and we cannot assure you that
any litigation will be resolved in our favor. There currently are
two patent infringement lawsuits pending against us. Although we do
not believe they will have a material adverse effect on our future
financial condition or results of operations, we cannot assure you
of that.
21
WE MAY BE UNABLE TO MANAGE OUR GROWTH.
Over the past nine years, our businesses and product offerings have
grown substantially. This growth and expansion has placed, and is
expected to continue to place, a significant strain on our
management, operational and financial resources. To manage our
growth, we must continue to (1) expand our operational, customer
support and financial control systems and (2) hire, train and
retain qualified personnel. We cannot assure you that we will be
able to adequately manage our growth. If we are unable to manage
our growth effectively, our business, results of operations and
financial condition could be materially adversely affected.
WE MAY NOT OBTAIN REGULATORY APPROVAL FOR OUR NEW PRODUCTS ON A
TIMELY BASIS, OR AT ALL.
Many of our new products will require FDA approval. FDA approval
typically involves lengthy, detailed and costly laboratory and
clinical testing procedures, as well as the FDA's review and
approval of the information submitted. We cannot assure you that
the products we develop will be determined to be safe and effective
in these testing procedures, or that they will be approved by the
FDA. The FDA also has the authority to revoke for cause drug
approvals previously granted.
WE MAY BE ADVERSELY AFFECTED BY THE CONTINUING CONSOLIDATION OF OUR
DISTRIBUTION NETWORK AND THE CONCENTRATION OF OUR CUSTOMER BASE.
Our principal customers are wholesale drug distributors, major
retail drug store chains, independent pharmacies and mail order
firms. These customers comprise a significant part of the
distribution network for pharmaceutical products in the United
States. This distribution network is continuing to undergo
significant consolidation marked by mergers and acquisitions among
wholesale distributors and the growth of large retail drug store
chains. As a result, a small number of large wholesale distributors
control a significant share of the market, and the number of
independent drug stores and small drug store chains has decreased.
We expect that consolidation of drug wholesalers and retailers will
increase pricing and other competitive pressures on drug
manufacturers. For the fiscal year ended March 31, 2004, our three
largest customers accounted for 25%, 16% and 13% of our gross
sales. The loss of any of these customers could materially and
adversely affect our results of operations or financial condition.
THE REGULATORY STATUS OF CERTAIN OF OUR GENERIC PRODUCTS MAY MAKE
THEM SUBJECT TO INCREASED COMPETITION.
Many of our products are manufactured and marketed without FDA
approval. For example, our prenatal products, which contain folic
acid, are sold as prescription multiple vitamin supplements. These
types of prenatal vitamins are typically regulated by the FDA as
prescription drugs, but are not covered by an NDA or ANDA. As a
result, competitors may more easily and rapidly introduce products
competitive with our prenatal and other products that have a
similar regulatory status.
CHANGES TO FDA REGULATIONS AND GUIDELINES, AS WELL AS COURT
DECISIONS AND POSSIBLE ENACTMENT OF FURTHER CHANGES IN THE
UNDERLYING STATUTORY PROVISIONS MAY IMPAIR OUR ABILITY TO QUALIFY
FOR OR UTILIZE FULLY THE 180-DAY GENERIC MARKETING EXCLUSIVITY
PERIOD FOR PATENT CHALLENGES, SUBSTANTIALLY DIMINISHING THE VALUE
OF A FAVORABLE RULING AND THE INCENTIVES FOR CHALLENGING LISTED
PATENTS. IN CASES SUCH AS THESE WHERE SUIT IS FILED BY THE
MANUFACTURER OF THE BRANDED PRODUCT, FINAL FDA APPROVAL OF AN ANDA
GENERALLY REQUIRES A FAVORABLE DISPOSITION OF THE SUIT, EITHER BY
JUDGMENT THAT THE PATENTS AT ISSUE ARE INVALID AND/OR NOT INFRINGED
OR BY SETTLEMENT. THERE CAN BE NO ASSURANCE THAT WE WILL ULTIMATELY
PREVAIL IN THESE LITIGATIONS, THAT IT WILL RECEIVE FINAL FDA
APPROVAL OF ITS ANDAS, OR THAT ANY EXPECTATION OF A PERIOD OF
GENERIC EXCLUSIVITY FOR CERTAIN OF THESE PRODUCTS WILL ACTUALLY BE
REALIZED WHEN AND IF RESOLUTION OF THE LITIGATIONS AND RECEIPT OF
FINAL APPROVALS FROM THE FDA OCCUR.
22
One of the key motivations for challenging patents is the reward of
a 180-day period of market exclusivity. Under the Hatch-Waxman Act,
the developer of a generic version of a product which is the first
to have its ANDA accepted for filing by the FDA, and whose filing
includes a certification that the patent is invalid, unenforceable
and/or not infringed (a so-called "Paragraph IV certification"),
may be eligible to receive a 180-day period of generic market
exclusivity. This period of market exclusivity provides the patent
challenger with the opportunity to earn a risk-adjusted return on
legal and development costs associated with bringing a product to
market.
In August 1999, the FDA issued a notice of proposed rulemaking in
which it proposed new regulations for implementing the 180-day
generic market exclusivity provisions. Additionally, the FDA
announced an interim modification to its generic drug exclusivity
policies in a March 2000 Industry Guidance and in a July 13, 2000
interim rule. On October 24, 2002, the FDA published an additional
proposal to adopt regulations that would further alter the patent
listing and certification procedures on which the opportunities for
180-day generic exclusivity are based. On November 1, 2002, the FDA
withdrew the August 1999 proposed rule, announcing that it would,
instead, apply the 180-day exclusivity provisions based on the
applicable statutory language as interpreted from time-to-time by
the Courts in private litigation involving patent infringement
claims or in litigation involving direct challenges to FDA's
policies and interpretations of the law. On June 18, 2003, the FDA
issued final regulations based on the October 24, 2002 proposal. We
believe that these new regulations are likely to be challenged in
Court, and cannot predict whether they will be upheld after such a
challenge.
Additionally, legislation has been introduced in Congress that
would make similar and/or additional changes in the provisions of
the Hatch-Waxman Amendments governing the listing of patents, the
requirements for making certifications to patents and the
circumstances in which a company may be awarded a 180-day marketing
exclusivity period following a successful challenge to a listed
patent. The language and scope of possible legislation on these
issues is still being vigorously debated and it is impossible to
predict whether, when or in what form any statutory changes may be
enacted as a result. The range of proposals being debated include
proposals that would severely limit or completely eliminate 180-day
generic exclusivity.
Some of these proposals, if enacted, could substantially change the
incentives and the manner in which patents on drug products are
enforced and challenged. Because our business involves both
enforcement of our own patents and challenges to the patents of
others, we are not in a position to predict whether any such
proposals, if enacted, would ultimately have a positive or negative
impact on our business. One or more of our product development or
marketing plans could be adversely affected either by additional
changes in the language or interpretation of the Hatch-Waxman
provisions or by an extended period of uncertainty over whether and
in what form such changes may be made.
While it is our practice not to disclose patent challenges, as of
March 31, 2004, we have the following patent challenges
pending which were publicly reported by the branded companies:
We filed an ANDA with the FDA seeking permission to market a
generic version of Levoxyl(R) (levothyroxine sodium) marketed by
King Pharmaceutical. We issued a notice to King on its Paragraph IV
certification, which alleges noninfringement of their patent and
seek FDA approval to market generic versions of all dosages of
Levoxyl(R) before expiration of the patents for the product. King
filed suit against us August, 2003 in the District of Delaware.
Pursuant to the Hatch-Waxman Act, the filing of the suit against us
institutes an automatic stay of FDA approval of our ANDA until the
earlier of a judgment, or 30 months from the date of the suit. The
trial is currently scheduled to begin in December, 2004.
We also filed an ANDA with the FDA seeking permission to market a
generic version of the 100mg and 200mg strengths of Toprol(R) XL
(metoprolol succinate) in extended release capsule form, marketed
by AstraZeneca LP. We issued a notice to AstraZeneca on its
Paragraph IV certification, which alleges noninfringement of their
patents and seek FDA approval to market generic versions of the
100mg and 200mg strengths of Toprol(R) XL before expiration of the
patents for the products. AstraZeneca initially filed two suits
against us in May and August 2003, which subsequently were combined
in the Eastern District of Missouri.
23
Pursuant to the Hatch-Waxman Act, the filing date of the suit
against us institutes an automatic stay of the FDA approval of the
Company's ANDA until the earlier of a judgment, or 30 months from
the date of the suit. The trial is currently scheduled to begin in
April 2005.
KV believes approval of its ANDA's with Paragraph IV submissions
would represent a significant revenue opportunity for us, and as
such intends to continue to vigorously defend its position on each
of these filings. Should the Company be successful in these cases,
it could have a materially positive effect on the future revenues
of the Company.
WE FACE THE RISK OF PRODUCT LIABILITY CLAIMS, FOR WHICH WE MAY BE
INADEQUATELY INSURED.
Manufacturing, selling and testing pharmaceutical products involve
a risk of product liability. Even unsuccessful product liability
claims could require us to spend money on litigation, divert
management's time, damage our reputation and impair the
marketability of our products. A successful product liability claim
outside of or in excess of our insurance coverage could require us
to pay substantial sums and adversely affect our results of
operations and financial condition.
We previously distributed several low-volume pharmaceutical
products that contained phenylpropanolamine, or PPA, and that were
discontinued in 2000 and 2001. We are presently named as a
defendant in a product liability lawsuit in federal court in
Mississippi involving PPA. The suit originated out of a case,
Virginia Madison, et al. v. Bayer Corporation, et al. The original
suit was filed on December 23, 2002, but was not served on us until
February 2003. The case was originally filed in the Circuit Court
of Hinds County, Mississippi, and was removed to the United States
District Court for the Southern District of Mississippi by then
co-defendant Bayer Corporation. The case has been transferred to a
Judicial Panel on Multi-District Litigation for PPA claims sitting
in the Western District of Washington. The claims against us have
now been segregated into a lawsuit brought by Johnny Fulcher
individually and on behalf of the wrongful death beneficiaries of
Linda Fulcher, deceased, against KV. It alleges bodily injury,
wrongful death, economic injury, punitive damages, loss of
consortium and/or loss of services from the use of our distributed
pharmaceuticals containing PPA that have since been discontinued
and/or reformulated to exclude PPA. Discovery only recently has
begun and we believe that we may have substantial defenses to these
claims, though the ultimate outcome of this case and the potential
effect cannot be determined.
Our product liability coverage for PPA claims expired for claims
made after June 15, 2002. Although we renewed our product liability
coverage for coverage after June 15, 2002, that policy excludes
future PPA claims in accordance with the standard industry
exclusion. Consequently, as of June 15, 2002, we have provided for
legal defense costs and indemnity payments involving PPA claims on
a going forward basis, including the Mississippi lawsuit that was
served after June 15, 2002. Moreover, we may not be able to obtain
product liability insurance in the future for PPA claims with
adequate coverage limits at commercially reasonable prices for
subsequent periods. From time to time in the future, we may be
subject to further litigation resulting from products containing
PPA that we formerly distributed. We intend to vigorously defend
any claims that may be raised in the current and future litigation.
BECAUSE WE ARE INVOLVED IN CERTAIN LEGAL PROCEEDINGS WE MAY BE
REQUIRED TO PAY DAMAGES THAT MAY IMPAIR OUR PROFITABILITY AND
REDUCE OUR LIQUIDITY.
ETHEX is a defendant in a lawsuit styled Healthpoint, Ltd. v. ETHEX
Corporation, filed in federal court in San Antonio, Texas. In
general, the plaintiffs allege that ETHEX's comparative promotion
of its Ethezyme(TM) to Healthpoint's Accuzyme(R) product resulted
in false advertising and misleading statements under various
federal and state laws, and constituted unfair competition and
misappropriation of trade secrets. In September 2001, the jury
returned verdicts against ETHEX on certain false advertising,
unfair competition and misappropriation claims. The jury awarded
compensatory and punitive damages totaling $16.5 million.
24
On October 1, 2002, the U.S. District Court for the Western
District of Texas denied ETHEX's motion to set aside the jury's
verdict. On December 17, 2002, the court entered a judgment
awarding attorneys' fees to Healthpoint in an amount to be
subsequently determined.
We believe that the jury award is excessive and is not sufficiently
supported by the facts or the law. We are vigorously prosecuting an
appeal. We and our counsel believe that there are meritorious
arguments to be raised during the appeal process; however, we
cannot give any assurance that we will prevail on appeal. As a
result of the court's earlier decisions, our results of operations
for the quarter ended September 30, 2002 included a provision for
potential damages of $16.5 million, which was reflected in accrued
liabilities on our consolidated balance sheet as of March 31, 2004.
As discussed above, Healthpoint also requested reimbursement for
approximately $1.8 million in attorneys' fees in addition to the
judgment. In September 2003, the court entered an order specifying
the amount of attorneys' fees to be awarded. As a result of this
decision, we recorded, during the quarter ended September 30, 2003,
an additional provision of $1.8 million, which was reflected in
accrued liabilities on our consolidated balance sheet as of March
31, 2004.
WE DEPEND ON LICENSES FROM OTHERS, AND ANY LOSS OF THESE LICENSES
COULD HARM OUR BUSINESS, MARKET SHARE AND PROFITABILITY.
We have acquired the rights to manufacture, use and/or market
certain products. We also expect to continue to obtain licenses for
other products and technologies in the future. Our license
agreements generally require us to develop the markets for the
licensed products. If we do not develop these markets, the
licensors may be entitled to terminate these license agreements.
We cannot be certain that we will fulfill all of our obligations
under any particular license agreement for any variety of reasons,
including insufficient resources to adequately develop and market a
product, lack of market development despite our efforts and lack of
product acceptance. Our failure to fulfill our obligations could
result in the loss of our rights under a license agreement.
Certain products we have the right to license are at certain stages
of clinical tests and FDA approval. Failure of any licensed product
to receive regulatory approval could result in the loss of our
rights under its license agreement.
OUR POLICIES REGARDING RETURNS, ALLOWANCES AND CHARGEBACKS, AND
MARKETING PROGRAMS ADOPTED BY WHOLESALERS, MAY REDUCE OUR REVENUES
IN FUTURE FISCAL PERIODS.
Based on industry practice, generic product manufacturers,
including us, have liberal return policies and have been willing to
give customers post-sale inventory allowances. Under these
arrangements, from time to time, we give our customers credits on
our generic products that our customers hold in inventory after we
have decreased the market prices of the same generic products.
Therefore, if additional competitors enter the marketplace and
significantly lower the prices of any of their competing products,
we would likely reduce the price of our comparable products. As a
result, we would be obligated to provide significant credits to our
customers who are then holding inventories of such products, which
could reduce sales revenue and gross margin for the period the
credit is provided. Like our competitors, we also give credits for
chargebacks to wholesale customers that have contracts with us for
their sales to hospitals, group purchasing organizations,
pharmacies or other retail customers. A chargeback is the
difference between the price the wholesale customer pays and the
price that the wholesale customer's end-customer pays for a
product. Although we establish reserves based on our prior
experience and our best estimates of the impact that these policies
may have in subsequent periods, we cannot ensure that our reserves
are adequate or that actual product returns, allowances and
chargebacks will not exceed our estimates.
25
INVESTIGATIONS OF THE CALCULATION OF AVERAGE WHOLESALE PRICES MAY
ADVERSELY AFFECT OUR BUSINESS.
Many government and third-party payors, including Medicare,
Medicaid, HMOs and MCOs, reimburse doctors and others for the
purchase of certain prescription drugs based on a drug's average
wholesale price, or AWP. In the past several years, state and
federal government agencies have conducted ongoing investigations
of manufacturers' reporting practices with respect to AWP, in which
they have suggested that reporting of inflated AWP's have led to
excessive payments for prescription drugs. Determination of AWP is
complex and third party payors may disagree with our calculations.
On September 25, 2003, the Commonwealth of Massachusetts filed an
action styled Commonwealth of Massachusetts v. Mylan Laboratories,
Inc. et al, in federal court in Massachusetts against ETHEX and 12
other manufacturers of generic pharmaceutical products. The
Complaint alleges, among other things, that the defendants reported
inflated pricing information for their drugs to data reporting
services, and that Massachusetts relied on this pricing data in
setting reimbursement rates under the Medicaid program. The
Complaint also alleges that Massachusetts received rebates from the
defendants under the Medicaid Drug Rebate Program that were
materially less than that to which Massachusetts was entitled.
Massachusetts seeks to recover from the defendants the amount that
it believes it overpaid and the amount it is owed in rebates, based
on claims under Massachusetts and federal law. The case is in its
early stages, and fact discovery has not yet begun. ETHEX is
vigorously defending the litigation. This action, if successful,
could adversely affect us and may have a material adverse effect on
our business, results of operations, financial condition and cash
flows.
RISING INSURANCE COSTS COULD NEGATIVELY IMPACT PROFITABILITY.
The cost of insurance, including workers' compensation, product
liability and general liability insurance, has risen significantly
in the past year and is expected to continue to increase. In
response, we may increase deductibles and/or decrease certain
coverages to mitigate these costs. These increases, and our
increased risk due to increased deductibles and reduced coverages,
could have a negative impact on our results of operations,
financial condition and cash flows.
THE IMPACT OF NEW ACCOUNTING PRINCIPLES COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.
We account for stock options granted to employees under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. Under this standard, no compensation cost is recorded
for stock options granted to employees at fair market value on the
date of grant. The Financial Accounting Standards Board has issued
an exposure draft of a new accounting standard for stock options
that would require the cost of stock options granted to employees
to be expensed. This and other new accounting principles adopted in
the future may have a material adverse effect on our results of
operations.
26
INCREASED INDEBTEDNESS MAY IMPACT OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
As a result of our issuance of 2.5% Contingent Convertible
Subordinated Notes (the "Notes") in May 2003, our indebtedness
increased by $200.0 million. Our level of indebtedness may have
several important effects on our future operations, including:
o we will be required to use a portion of our cash flow from
operations for the payment of any principal or interest due on
our outstanding indebtedness;
o our outstanding indebtedness and leverage will increase the
impact of negative changes in general economic and industry
conditions, as well as competitive pressures; and
o the level of our outstanding debt and the impact it has on
our ability to meet debt covenants associated with our
revolving line of credit arrangement may affect our
ability to obtain additional financing for working
capital, capital expenditures, acquisitions or general
corporate purposes.
General economic conditions, industry cycles and financial,
business and other factors affecting our operations, many of which
are beyond our control, may affect our future performance. As a
result, our business might not continue to generate cash flow at or
above current levels. If we cannot generate sufficient cash flow
from operations in the future to service our debt, we may, among
other things:
o seek additional financing in the debt or equity markets;
o refinance or restructure all or a portion of our indebtedness;
o sell selected assets;
o reduce or delay planned capital expenditures; or
o reduce or delay planned research and development expenditures.
These measures might not be sufficient to enable us to service our
debt. In addition, any financing, refinancing or sale of assets
might not be available on economically favorable terms.
Holders of the Notes may require us to offer to repurchase their
Notes for cash upon the occurrence of a change in control or on May
16, 2008, 2013, 2018, 2023 and 2028. The source of funds for any
repurchase required as a result of any such events will be our
available cash or cash generated from operating activities or other
sources, including borrowings, sales of assets, sales of equity or
funds provided by a new controlling entity. The use of available
cash to fund the repurchase of the Notes may impair our ability to
obtain additional financing in the future.
WE MAY HAVE FUTURE CAPITAL NEEDS AND FUTURE ISSUANCES OF EQUITY
SECURITIES WILL RESULT IN DILUTION.
We anticipate that funds generated internally, together with funds
available under our credit facility, and the proceeds received from
our Notes offering completed in May 2003, will be sufficient to
implement our business plan for the foreseeable future, subject to
additional needs as may arise if acquisition opportunities become
available. We also may need additional capital if unexpected events
occur or opportunities arise. Additional capital might be raised
through the public or private sale of debt or equity securities. If
we sell equity securities, holders of our common stock could
experience dilution. Furthermore, those securities could have
rights, preferences and privileges more favorable than those of the
Class A or Class B Common Stock. We cannot assure you that
additional funding will be available, or available on terms
favorable to us. If the funding is not available, we may not be
able to fund our expansion, take advantage of acquisition
opportunities or respond to competitive pressures.
27
RISKS RELATED TO OUR INDUSTRY
LEGISLATIVE PROPOSALS, REIMBURSEMENT POLICIES OF THIRD PARTIES,
COST CONTAINMENT MEASURES AND HEALTH CARE REFORM COULD AFFECT THE
MARKETING, PRICING AND DEMAND FOR OUR PRODUCTS.
Various legislative proposals, including proposals relating to
prescription drug benefits, could materially impact the pricing and
sale of our products. Further, reimbursement policies of third
parties may affect the marketing of our products. Our ability to
market our products will depend in part on reimbursement levels for
the cost of the products and related treatment established by
health care providers, including government authorities, private
health insurers and other organizations, such as health maintenance
organizations (HMOs) and managed care organizations (MCOs).
Insurance companies, HMOs, MCOs, Medicaid and Medicare
administrators and others are increasingly challenging the pricing
of pharmaceutical products and reviewing their reimbursement
practices. In addition, the following factors could significantly
influence the purchase of pharmaceutical products, which could
result in lower prices and a reduced demand for our products:
o the trend toward managed health care in the United States;
o the growth of organizations such as HMOs and MCOs;
o legislative proposals to reform health care and government
insurance programs; and
o price controls and non-reimbursement of new and highly priced
medicines for which the economic therapeutic rationales are
not established.
These cost containment measures and health care reform proposals
could affect our ability to sell our products.
The reimbursement status of a newly approved pharmaceutical product
may be uncertain. Reimbursement policies may not include some of
our products. Even if reimbursement policies of third parties grant
reimbursement status for a product, we cannot be sure that these
reimbursement policies will remain in effect. Limits on
reimbursement could reduce the demand for our products. The
unavailability or inadequacy of third party reimbursement for our
products could reduce or possibly eliminate demand for our
products. We are unable to predict whether governmental authorities
will enact additional legislation or regulation which will affect
third party coverage and reimbursement that reduces demand for our
products.
Our ability to market generic pharmaceutical products successfully
depends, in part, on the acceptance of the products by independent
third parties, including pharmacies, government formularies and
other retailers, as well as patients. We manufacture a number of
prescription drugs which are used by patients who have severe
health conditions. Although the brand-name products generally have
been marketed safely for many years prior to our introduction of a
generic/non-branded alternative, there is a possibility that one of
these products could produce a side effect which could result in an
adverse effect on our ability to achieve acceptance by managed care
providers, pharmacies and other retailers, customers and patients.
If these independent third parties do not accept our products, it
could have a material adverse effect on our financial condition and
results of operations.
28
EXTENSIVE INDUSTRY REGULATION HAS HAD, AND WILL CONTINUE TO HAVE, A
SIGNIFICANT IMPACT ON OUR BUSINESS, ESPECIALLY OUR PRODUCT
DEVELOPMENT, MANUFACTURING AND DISTRIBUTION CAPABILITIES.
All pharmaceutical companies, including us, are subject to
extensive, complex, costly and evolving regulation by the federal
government, principally the FDA and, to a lesser extent, the DEA
and state government agencies. The Federal Food, Drug and Cosmetic
Act, the Controlled Substances Act and other federal statutes and
regulations govern or influence the testing, manufacturing,
packing, labeling, storing, record keeping, safety, approval,
advertising, promotion, sale and distribution of our products.
Failure to comply with applicable FDA or other regulatory
requirements may result in criminal prosecution, civil penalties,
injunctions, recall or seizure of products and total or partial
suspension of production, as well as other regulatory actions
against our products and us.
We market certain drug products in the United States without FDA
approval under certain "grandfather" clauses and statutory and
regulatory exceptions to the pre-market approval requirement for
"new drugs" under the Federal Food, Drug and Cosmetic Act, or the
FDCA. A determination as to whether a particular product does or
does not require FDA pre-market review and approval can involve
consideration of numerous complex and imprecise factors. If a
determination is made by the FDA that any product marketed without
approval requires such approval, the FDA may institute enforcement
actions, including product seizure, or an action seeking an
injunction against further marketing and may or may not allow
sufficient time to obtain the necessary approvals before it seeks
to curtail further marketing. For example, in October 2002, FDA
sent warning letters to us and other manufacturers and distributors
of unapproved prescription drug products containing the expectorant
guaifenesin as a single entity in a solid oral dosage form. Citing
the recent approval of one such product, the FDA warning letters
asserted that the marketing of all such products without NDA or
ANDA approval should stop. The FDA subsequently agreed to allow
continued manufacture through May 2003 and sale through November
2003 of the products, and we have complied with those deadlines. We
are not in a position to predict whether or when the FDA might
choose to raise similar objections to the marketing without NDA or
ANDA approval of another category or categories of drug products
represented in our product lines. In the event such objections are
raised, we could be required or could decide to cease distribution
of additional products until pre-market approval is obtained. In
addition, we may not be able to obtain any particular approval that
may be required or such approvals may not be obtained on a timely
basis.
In addition to compliance with current Good Manufacturing Practice,
or cGMP, requirements, drug manufacturers must register each
manufacturing facility with the FDA. Manufacturers also must be
registered with the Drug Enforcement Administration, or DEA, and
similar state and local regulatory authorities if they handle
controlled substances, and with the Environmental Protection
Agency, or EPA, and similar state and local regulatory authorities
if they generate toxic or dangerous wastes. We are currently in
material compliance with cGMP and are registered with the
appropriate agencies. Non-compliance with applicable cGMP
requirements or the rules and regulations of these agencies can
result in fines, recall or seizure of products, total or partial
suspension of production and/or distribution, refusal of government
agencies to grant pre-market approval or other product applications
and criminal prosecution. Despite our ongoing efforts, cGMP
requirements and other regulatory requirements, and related
enforcement priorities and policies may evolve over time and we may
not be able to remain continuously in material compliance with all
of these requirements.
From time to time, governmental agencies have conducted
investigations of other pharmaceutical companies relating to the
distribution and sale of drug products to government purchasers or
subject to government or third party reimbursement. We believe that
we have marketed our products in compliance with applicable laws
and regulations. However, standards sought to be applied in the
course of governmental investigations can be complex and may not be
consistent with standards previously applied to our industry
generally or previously understood by us to be applicable to our
activities.
29
The process for obtaining governmental approval to manufacture and
market pharmaceutical products is rigorous, time-consuming and
costly, and we cannot predict the extent to which we may be
affected by legislative and regulatory developments. We are
dependent on receiving FDA and other governmental or third-party
approvals prior to manufacturing, marketing and shipping many of
our products. Consequently, there is always the chance that we will
not obtain FDA or other necessary approvals, or that the rate,
timing and cost of such approvals, will adversely affect our
product introduction plans or results of operations. In many
instances we carry inventories of products in anticipation of
launch, and if such products are not subsequently launched, we may
be required to write-off the related inventory.
OUR INDUSTRY IS HIGHLY COMPETITIVE.
Numerous pharmaceutical companies are involved or are becoming
involved in the development and commercialization of products
incorporating advanced drug delivery systems. Our business is
highly competitive, and we believe that competition will continue
to increase in the future. Many pharmaceutical companies have
invested, and are continuing to invest, significant resources in
the development of proprietary drug delivery systems. In addition,
several companies have been formed to develop specific advanced
drug delivery systems. Many of these pharmaceutical and other
companies who may develop drug delivery systems have greater
financial, research and development and other resources than we do,
as well as more experience in commercializing pharmaceutical and
drug delivery products. Those companies may develop products using
their drug delivery systems more rapidly than we do or develop drug
delivery systems that are more effective than ours and thus may
represent significant potential competitors.
Our branded pharmaceutical business is subject to competition from
larger companies with greater financial resources that can support
larger sales forces. The ability of a sales force to compete is
affected by the number of physician calls it can make, which is
directly related to its size, the brand name recognition it has in
the marketplace and its advertising and promotional efforts. We are
not as well established in our branded product sales initiative as
larger pharmaceutical companies and could be adversely affected by
competition from companies with a larger, more established sales
force and higher advertising and promotional expenditures.
Our generic pharmaceutical business is also subject to competitive
pressures from a number of companies, some of which have greater
financial resources and broader product lines. To the extent that
we succeed in being first to market with a generic/non-branded
version of a significant product, our sales and profitability can
be substantially increased in the period following the introduction
of such product and prior to additional competitors' introduction
of an equivalent product. Competition is generally on price, which
can have an adverse effect on profitability as falling prices erode
margins. In addition, the continuing consolidation of the customer
base (wholesale distributors and retail drug chains) and the impact
of managed care organizations will increase competition as
suppliers compete for fewer customers. Consolidation of competitors
will increase competitive pressures as larger suppliers are able to
offer a broader product line. Further, companies continually seek
new ways to defeat generic competition, such as filing applications
for new patents to cover drugs whose original patent protection is
about to expire, developing and marketing other dosage forms
including patented controlled-release products or developing and
marketing as over-the-counter products those branded products which
are about to lose exclusivity and face generic competition.
In addition to litigation over patent rights, pharmaceutical
companies are often the subject of objections by competing
manufacturers over the qualities of their branded or generic
products and/or their promotional activities. For example,
marketers of branded products have challenged the marketing of
certain of our non-branded products that do not require FDA
approval and are not rated for therapeutic equivalence. Currently,
ETHEX is a defendant in ongoing litigation with Healthpoint,
regarding allegations of unfair competition and misleading
marketing. A jury ruled in favor of Healthpoint and the trial court
refused to set it aside. As a result, we made an appropriate
provision for liability in our financial statements. We are
vigorously prosecuting an appeal of the trial court's decision.
Competitors' objections also may be pursued in complaints before
governmental agencies or courts.
30
These objections can be very expensive to pursue or to defend, and
the outcome of agency or court review of the issues raised is
impossible to predict. In these proceedings, companies can be
subjected to restrictions on their activities or to liability for
alleged damages despite their belief that their products and
procedures are in full compliance with appropriate standards. In
addition, companies that pursue what they believe are legitimate
complaints about competing manufacturers and/or their products may
nevertheless be unable to obtain any relief.
OUR INDUSTRY EXPERIENCES RAPID TECHNOLOGICAL CHANGE.
The drug delivery industry is a rapidly evolving field. A number of
companies, including major pharmaceutical companies, are developing
and marketing advanced delivery systems for the controlled delivery
of drugs. Products currently on the market or under development by
competitors may deliver the same drugs, or other drugs to treat the
same indications, as many of the products we market or are
developing. The first pharmaceutical branded or generic/non-branded
product to reach the market in a therapeutic area often obtains and
maintains significant market share relative to later entrants to
the market. Our products also compete with drugs marketed not only
in similar delivery systems but also in traditional dosage forms.
New drugs, new therapeutic approaches or future developments in
alternative drug delivery technologies may provide advantages over
the drug delivery systems and products that we are marketing, have
developed or are developing.
Changes in drug delivery technology may require substantial
investments by companies to maintain their competitive position and
may provide opportunities for new competitors to enter the
industry. Developments by others could render our drug delivery
products or other technologies uncompetitive or obsolete. If others
develop drugs which are cheaper or more effective or which are
first to market, sales or prices of our products could decline.
RISKS RELATED TO OUR COMMON STOCK
MANAGEMENT STOCKHOLDERS CONTROL OUR COMPANY.
At March 31, 2004, our directors and executive officers
beneficially own approximately 15% of our Class A Common Stock and
approximately 50% of our Class B Common Stock. As a result, these
persons control approximately 47% of the combined voting power
represented by our outstanding securities. These persons will
retain effective voting control of our company and are expected to
continue to have the ability to effectively determine the outcome
of any matter being voted on by our stockholders, including the
election of directors and any merger, sale of assets or other
change in control of our company.
THE MARKET PRICE OF OUR STOCK HAS BEEN AND MAY CONTINUE TO BE
VOLATILE.
The market prices of securities of companies engaged in
pharmaceutical development and marketing activities historically
have been highly volatile. In addition, any or all of the following
may have a significant impact on the market price of our common
stock: announcements by us or our competitors of technological
innovations or new commercial products; delays in the development
or approval of products; developments or disputes concerning patent
or other proprietary rights; publicity regarding actual or
potential medical results relating to products marketed by us or
products under development; regulatory developments in both the
United States and foreign countries; publicity regarding actual or
potential acquisitions; public concern as to the safety of drug
technologies or products; financial results which are different
from securities analysts' forecasts; and economic and other
external factors, as well as period-to-period fluctuations in our
financial results.
31
OUR REPORTED EARNINGS PER SHARE MAY BE MORE VOLATILE BECAUSE OF THE
CONTINGENT CONVERSION PROVISION OF THE NOTES ISSUED IN MAY 2003.
Holders of the Notes issued in May 2003 may convert the Notes into
our Class A Common Stock during any quarter, if the closing sale
price of our Class A Common Stock for at least 20 trading days in
the period of 30 consecutive trading days ending on the last
trading day of the quarter preceding the quarter in which the
conversion occurs is more than $27.61 per share (120% of the
conversion price per share of our Class A Common Stock) on that
30th trading day. Until this contingency is met, the shares
underlying the Notes are not included in the calculation of basic
or fully diluted earnings per share. Should this contingency be
met, reported earnings per share would be expected to decrease as a
result of the inclusion of the underlying shares in the earnings
per share calculation. An increase in volatility in our stock price
could cause this condition to be met in one quarter and not in a
subsequent quarter, increasing the volatility of reported fully
diluted earnings per share.
FUTURE SALES OF COMMON STOCK COULD ADVERSELY AFFECT THE MARKET
PRICE OF OUR CLASS A OR CLASS B COMMON STOCK.
As of March 31, 2004, an aggregate of 2,415,818 shares of our Class
A Common Stock and 360,990 shares of our Class B Common Stock were
issuable upon exercise of outstanding stock options under our stock
option plans, and an additional 1,279,862 shares of our Class A
Common Stock and 1,249,000 shares of Class B Common Stock were
reserved for the issuance of additional options and shares under
these plans. In addition, as of March 31, 2004, 337,500 shares of
our Class A Common Stock were reserved for issuance upon conversion
of our outstanding 7% cumulative convertible preferred stock.
Future sales of our common stock and instruments convertible or
exchangeable into our common stock and transactions involving
equity derivatives relating to our common stock, or the perception
that such sales or transactions could occur, could adversely affect
the market price of our common stock. This could, in turn, have an
adverse effect on the trading price of the Notes resulting from,
among other things, a delay in the ability of holders to convert
their Notes into our Class A Common Stock.
OUR CHARTER PROVISIONS AND DELAWARE LAW MAY HAVE ANTI-TAKEOVER EFFECTS.
Our Amended Certificate of Incorporation authorizes the issuance of
common stock in two classes, Class A Common Stock and Class B
Common Stock. Each share of Class A Common Stock entitles the
holder to one-twentieth of one vote on all matters to be voted upon
by stockholders, while each share of Class B Common Stock entitles
the holder to one full vote on each matter considered by the
stockholders. In addition, our directors have the authority to
issue additional shares of preferred stock and to determine the
price, rights, preferences, privileges and restrictions of those
shares without any further vote or action by the stockholders. The
rights of the holders of common stock will be subject to, and may
be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The existence of
two classes of common stock with different voting rights and the
ability of our directors to issue additional shares of preferred
stock could make it more difficult for a third party to acquire a
majority of our voting stock. Other provisions of our Amended
Certificate of Incorporation and Bylaws, such as a classified board
of directors, also may have the effect of discouraging, delaying or
preventing a merger, tender offer or proxy contest, which could
have an adverse effect on the market price of our Class A Common
Stock.
In addition, certain provisions of Delaware law applicable to our
company could also delay or make more difficult a merger, tender
offer or proxy contest involving our company, including Section 203
of the Delaware General Corporation Law, which prohibits a Delaware
corporation from engaging in any business combination with any
interested stockholder for a period of three years unless certain
conditions are met. Our senior management is entitled to certain
payments upon a change in control. All of our stock option plans
provide for the acceleration of vesting in the event of a change in
control of our company.
32
ITEM 2. PROPERTIES
----------
Our corporate headquarters is located at 2503 South Hanley Road in
St. Louis County, Missouri, and contains approximately 40,000
square feet of floor space. We have a lease on the building for a
period of ten years expiring December 31, 2006, with one five-year
option to renew and a following three-year renewal option. The
building is leased from an affiliated partnership of an officer and
director of the Company.
In addition, we lease or own the facilities shown in the following
table. All of these facilities are located in the St. Louis
metropolitan area.
SQUARE LEASE RENEWAL
FOOTAGE USAGE EXPIRES OPTIONS
-------------------------------------------------------------------------------
31,630 PDI Office/Mfg./Whse. 11/30/07 5 Years(1)
10,000 PDI/KV Lab/Whse. 11/30/04 None
15,000 KV/Ther-Rx Office 02/28/05 6 Months(3)
23,000 KV Office/R&D/Mfg. 12/31/06 5 Years(1)
122,350 KV Office/Whse./Lab Owned N/A
90,000 KV Mfg. Oper. Owned N/A
87,020 Under renovation(4) Owned N/A
275,505 Under renovation(5) Owned N/A
260,160 ETHEX/Ther-Rx/PDI Distribution 04/30/12 5 Years(1)
40,000 KV Warehouse 11/30/05 1 Year(2)
128,960 ETHEX/PDI Office/Whse. 05/31/11 5 Years(1)
<FN>
----------------------------------------
(1) Two five-year options.
(2) Two one-year options.
(3) Two six-month options.
(4) This facility is currently being renovated to provide an
additional research lab facility.
(5) This facility is currently being renovated into office space
for ETHEX, Ther-Rx and certain KV administrative functions and
production space for additional operations. We financed the
purchase of this facility with a term loan secured by the
facility. See "Management's Discussion and Analysis of Results
of Operations, Liquidity and Capital Resources-Liquidity and
Capital Resources."
Properties used in our operations are considered suitable for the
purposes for which they are used and are believed to be adequate to
meet our Company's needs for the reasonably foreseeable future.
However, we will consider leasing or purchasing additional
facilities from time to time, when attractive facilities become
available, to accommodate the consolidation of certain operations
and to meet future expansion plans.
ITEM 3. LEGAL PROCEEDINGS
-----------------
ETHEX is a defendant in a lawsuit styled Healthpoint, Ltd. v. ETHEX
Corporation, filed in federal court in San Antonio, Texas. In
general, the plaintiffs allege that ETHEX's comparative promotion
of its Ethezyme(TM) to Healthpoint's Accuzyme(R) product resulted
in false advertising and misleading statements under various
federal and state laws, and constituted unfair competition and
misappropriation of trade secrets. In September 2001, the jury
returned verdicts against ETHEX on certain false advertising,
unfair competition and misappropriation claims. The jury awarded
compensatory and punitive damages totaling $16.5 million. On
October 1, 2002, the U.S. District Court for the Western District
of Texas denied ETHEX's motion to set aside the jury's verdict. On
December 17, 2002, the court entered a judgment awarding attorneys'
fees to Healthpoint in an amount to be subsequently determined.
33
We believe that the jury award and judgment is excessive and is not
sufficiently supported by the facts or the law. We are vigorously
prosecuting an appeal. We and our counsel believe that there are
meritorious arguments to be raised during the appeal process;
however, we cannot give any assurance that we will prevail on
appeal. As a result of the court's earlier decisions, our results
of operations for the quarter ended September 30, 2002 included a
provision for potential damages of $16.5 million, which was
reflected in accrued liabilities on our consolidated balance sheet
as of March 31, 2004. As discussed above, Healthpoint also
requested reimbursement for approximately $1.8 million in
attorneys' fees in addition to the judgment. In September 2003, the
court entered an order specifying the amount of attorneys' fees to
be awarded. As a result of this decision, we recorded, during the
quarter ended September 30, 2003, an additional provision of $1.8
million, which was reflected in accrued liabilities on our
consolidated balance sheet as of March 31, 2004.
The Company and ETHEX are named as defendants in a second lawsuit
brought by Healthpoint and others styled Healthpoint Ltd. v. ETHEX
Corporation, filed in federal court in San Antonio, Texas. In
general, the plantiffs allege that ETHEX's comparative promotion of
its Ethezyme(TM) 830 to Healthpoint's Accuzyme(R) product resulted
in false advertising and misleading statements under various
federal and state laws, and constituted unfair competition and
misappropriation of trade secrets. The case has been inactive for
several years. Discovery has resumed and the case is expected to
proceed to trial in August, 2004. The Company believes it has
meritorious defenses and will vigorously defend the case; however,
it cannot give any assurance that it will prevail.
The Company and ETHEX are named as defendants in a case brought by
CIMA LABS, Inc. and Schwarz Pharma, Inc. and styled CIMA LABS, Inc.
et. al. v. KV Pharmaceutical Company et. al. filed in federal court
in Minnesota. It is alleged that the Company and ETHEX infringe on
a CIMA patent in connection with the manufacture and sale of
Hyoscyamine Sulfate Orally Dissolvable Tablets, 0.125 mg. The court
has denied the paintiff's motion for a preliminary injunction,
which allows ETHEX to continue marketing the product during the
pendancy of the subject lawsuit and calls into question CIMA's and
Schwarz's ability to prevail in the lawsuit. Discovery is active.
The Company believes it has meritorious defenses and will
vigorously defend the case; however, it cannot give any assurance
that it will prevail.
The Company and ETHEX are named as defendants in a case brought by
Solvay Pharmaceuticals, Inc and styled Solvay Pharmaceuticals, Inc.
v. ETHEX Corporation, filed in federal court in Minnesota. In
general, Solvay alleges that ETHEX's comparative promotion of its
Pangestyme CN 10 and Pangestyme CN 20 products to Solvay's Creon 10
and Creon 20 products resulted in false advertising and misleading
statements under various federal and state laws, and constituted
unfair and deceptive trade practices. Discovery has recently become
active. The Company believes it has meritorious defenses and will
vigorously defend the case; however, it cannot give any assurance
that it will prevail.
We previously distributed several low-volume pharmaceutical
products that contained phenylpropanolamine, or PPA, and that were
discontinued in 2000 and 2001. We are presently named as a
defendant in a product liability lawsuit in federal court in
Mississippi involving PPA. The suit originated out of a case,
Virginia Madison, et al. v. Bayer Corporation, et al. The original
suit was filed on December 23, 2002, but was not served on us until
February 2003. The case was originally filed in the Circuit Court
of Hinds County, Mississippi, and was removed to the United States
District Court for the Southern District of Mississippi by then
co-defendant Bayer Corporation. The case has been transferred to a
Judicial Panel on Multi-District Litigation for PPA claims sitting
in the Western District of Washington. The claims against us have
now been segregated into a lawsuit brought by Johnny Fulcher
individually and on behalf of the wrongful death beneficiaries of
Linda Fulcher, deceased, against KV. It alleges bodily injury,
wrongful death, economic injury, punitive damages, loss of
consortium and/or loss of services from the use of our distributed
pharmaceuticals containing PPA that have since been discontinued
and/or reformulated to exclude PPA. Discovery only recently has
begun and we believe that we may have substantial defenses to these
claims, though the ultimate outcome of this case and the potential
effect cannot be determined.
Our product liability coverage for PPA claims expired for claims
made after June 15, 2002. Although we renewed our product liability
coverage for coverage after June 15, 2002, that policy excludes
future PPA claims in accordance with the standard industry
exclusion. Consequently, as of June 15, 2002, we have provided for
legal defense costs and indemnity payments involving PPA claims on
a going forward basis, including the Mississippi lawsuit that was
served after June 15, 2002. Moreover, we may not be able to obtain
product liability insurance in the future for PPA claims with
adequate coverage limits at commercially reasonable prices for
subsequent periods. From time to time in the future, we may be
subject to further litigation resulting from products containing
PPA that we formerly distributed. We intend to vigorously defend
any claims that may be raised in the current and future litigation.
On September 25, 2003, the Commonwealth of Massachusetts filed an
action styled Commonwealth of Massachusetts v. Mylan Laboratories,
Inc. et al in federal court in Massachusetts, against ETHEX and 12
other manufacturers of generic pharmaceutical products. The
Complaint alleges, among other things, that the defendants reported
inflated pricing information for their drugs to data reporting
services, and that Massachusetts relied on this pricing data in
setting reimbursement rates under the Medicaid program. The
Complaint also alleges that Massachusetts received rebates from the
defendants under the Medicaid Drug Rebate Program that were
materially less than that to which Massachusetts was entitled.
Massachusetts seeks to recover from the defendants the amount that
it believes it overpaid and the amount it is owed in rebates, based
on claims under Massachusetts and federal law. The case is in its
early stages, and fact discovery has not yet begun. ETHEX is
vigorously defending the litigation.
34
The Company is involved in various other legal proceedings in the
ordinary course of its business. These legal proceedings include
various patent infringement actions brought by potential
competitors with respect to products we propose to market and for
which we have filed Abbreviated New Drug Applications and provided
notice of certification required under the provisions of the
Hatch-Waxman Act (see "Risks Related to Our Business").
While it is not feasible to predict the ultimate outcome of such
other proceedings, we believe that the ultimate outcome of such
other proceedings will not have a material adverse effect on our
results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the Company's fiscal year ended March 31, 2004.
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
The following is a list of current executive officers of our
Company, their ages, their positions with our Company and their
principal occupations for at least the past five years.
NAME AGE POSITION HELD AND PAST EXPERIENCE
- ---------------------------------------------------------------------------------
Victor M. Hermelin(1) 90 Chairman of the Board of the Company since 1972;
Treasurer of the Company from 1971 to 2000;
Director and Vice President of Particle Dynamics,
Inc since 1974.
Marc S. Hermelin 62 Vice Chairman of the Board of the Company since
1974; Chief Executive Officer from 1975 to
February 1994 and since December 1994; Director
and Vice President of Particle Dynamics, Inc.
since 1974.
Alan G. Johnson 69 Director, Senior Vice President-Strategic
Planning and Corporate Growth since September 27,
1999 and Secretary of the Company; Chairman of
Johnson Research & Capital, Inc., an investment
banking and institutional research firm from
January to September 1999; Member of the law firm
Gallop, Johnson & Neuman, L.C. 1976 to 1998;
Director of Siboney Corporation.
Gerald R. Mitchell 65 Vice President, Treasurer and Chief Financial
Officer since 1981.
The term of office for each executive officer of the Company expires at
the next annual meeting of the Board of Directors or at such time as
his successor has been elected and qualified.
<FN>
- -------------------------------
(1) Victor M. Hermelin is the father of Marc S. Hermelin.
35
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
a) PRINCIPAL MARKET
----------------
Our Class A Common Stock and Class B Common Stock are traded on the
New York Stock Exchange under the symbols KV.a and KV.b,
respectively.
b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
---------------------------------------------
The number of holders of record of Class A and Class B Common Stock
as of June 9, 2004 was 774 and 410, respectively (not separately
counting shareholders whose shares are held in "nominee" or "street"
names, which are estimated to represent approximately 5,000 of
Class A and of Class B additional shareholders combined).
c) STOCK PRICE AND DIVIDEND INFORMATION
------------------------------------
The high and low closing sales prices of our Class A and Class B
Common Stock during each quarter of fiscal 2004 and 2003, as
reported on the New York Stock Exchange and considering the 3 for 2
stock split declared on September 8, 2003 were as follows:
CLASS A COMMON STOCK
--------------------
FISCAL 2004 FISCAL 2003
----------- -----------
QUARTER HIGH LOW HIGH LOW
------- ---------------------- -----------------------
First...................... $20.29 $12.61 $21.30 $16.75
Second..................... 23.49 17.91 16.00 11.19
Third...................... 27.67 22.22 15.77 10.00
Fourth..................... 27.51 22.10 16.00 10.95
CLASS B COMMON STOCK
--------------------
FISCAL 2004 FISCAL 2003
----------- -----------
QUARTER HIGH LOW HIGH LOW
------- ---------------------- -----------------------
First...................... $20.39 $12.63 $22.00 $17.50
Second..................... 23.53 18.09 16.17 11.20
Third...................... 27.77 22.31 15.93 10.21
Fourth..................... 29.40 22.60 16.26 11.19
Since 1980, we have not declared or paid any cash dividends on our
common stock and we do not plan to do so in the foreseeable future.
No dividends may be paid on Class A Common Stock or Class B Common
Stock unless all dividends on the Cumulative Convertible Preferred
Stock have been declared and paid. Dividends must be paid on Class
A Common Stock when, and if, we declare and distribute dividends on
the Class B Common Stock. Dividends of $70,000 were paid in fiscal
2004 and 2003 on 40,000 shares of Cumulative Convertible Preferred
Stock. There were no undeclared and unaccrued cumulative preferred
dividends at March 31, 2004.
36
The $366,000, or $9.14 per share, of undeclared and unaccrued
cumulative preferred dividends at March 31, 2003 were paid on May
12, 2003. Also, under the terms of our credit agreement, we may not
pay cash dividends in excess of 25% of the prior year's
consolidated net income. For the foreseeable future, we plan to use
cash generated from operations for general corporate purposes,
including funding potential acquisitions, research and development
and working capital. Our board of directors reviews our dividend
policy periodically. Any payment of dividends in the future will
depend upon our earnings, capital requirements, financial condition
and other factors considered relevant by our board of directors.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
(in thousands, except per share data)
MARCH 31,
--------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Total assets $528,438 $352,668 $195,192 $151,417 $140,385
Long-term debt 210,741 10,106 4,387 5,080 16,779
Shareholders' equity 257,749 260,616 158,792 125,942 97,799
INCOME STATEMENT DATA:
YEARS ENDED MARCH 31,
--------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Revenues $283,941 $244,996 $204,105 $177,767 $142,734
% Increase 15.9% 20.0% 14.8% 24.5% 26.5%
Operating income(a)(b) $ 73,771 $ 42,929 $ 49,294 $ 37,972 $ 34,192
Net income(a)(b)(c) 45,848 28,110 31,464 23,625 24,308
Net income
per common
share-diluted(d) $ 0.90 $ 0.55 $ 0.65 $ 0.49 $ 0.53
Preferred stock dividends $ 436 $ 70 $ 70 $ 420 $ 420
<FN>
- ---------------------------
(a) Operating income in fiscal 2004 included a $3.5 million net payment
received by us in accordance with a legal settlement (see Note 11
in the accompanying Notes to Consolidated Financial Statements) and
an additional reserve of $1.8 million for attorney's fees
associated with a lawsuit (see Note 10 in the accompanying Notes to
Consolidated Financial Statements). The impact of these items, net
of applicable income taxes, was to increase net income by $1.1
million and diluted earnings per share by $.02 in fiscal 2004.
(b) Operating income in fiscal 2003 included a reserve of $16.5 million
for potential damages associated with a lawsuit (see Note 10 in the
accompanying Notes to Consolidated Financial Statements). The
impact of the litigation reserve, net of applicable income taxes,
was to reduce net income by $10.4 million and diluted earnings per
share by $.20 in fiscal 2003.
(c) Net income in fiscal 2000 included a gain associated with a $7.0
million arbitration award. The award, net of applicable income
taxes and expenses, was $3.9 million.
(d) Previously reported amounts give effect to the three-for-two stock
splits effected in the form of a 50% stock dividend that occurred
on September 29, 2003 and September 7, 2000.
37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, AND
------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Except for the historical information contained herein, the
following discussion contains forward-looking statements that are
subject to known and unknown risks, uncertainties, and other
factors that may cause our actual results to differ materially from
those expressed or implied by such forward-looking statements.
These risks, uncertainties and other factors are discussed
throughout this report and specifically under the caption
"Cautionary Statement Regarding Forward-Looking Information" and
"Risk Factors." In addition, the following discussion and analysis
of the financial condition and results of operations should be read
in conjunction with "Selected Financial Data" and our consolidated
financial statements and notes thereto appearing elsewhere in this
Form 10-K.
BACKGROUND
We are a fully integrated specialty pharmaceutical company that
develops, acquires, manufactures, and markets technologically
distinguished branded and generic/non-branded prescription
pharmaceutical products. We were incorporated in 1971 and have
become a leader in the development of advanced drug delivery and
formulation technologies that are designed to enhance therapeutic
benefits of existing drug forms. Through internal product
development and synergistic acquisitions of products, we have grown
into a fully integrated specialty pharmaceutical company. We also
develop, manufacture and market technologically advanced,
value-added raw material products for the pharmaceutical,
nutritional, food and personal care industries.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements are presented on the basis of
accounting principles that are generally accepted in the United
States. Our significant accounting policies are described in Note 2
in the accompanying notes to consolidated financial statements.
Certain of our accounting policies are particularly important to
the portrayal of our financial position and results of operations
and require the application of significant judgment by our
management. As a result, these policies are subject to an inherent
degree of uncertainty. In applying these policies, our management
makes estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosures.
We base our estimates and judgments on our historical experience,
the terms of existing contracts, our observance of trends in the
industry, information that we obtain from our customers and outside
sources, and on various other assumptions that we believe to be
reasonable and appropriate under the circumstances, the results of
which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other
sources. Although we believe that our estimates and assumptions are
reasonable, actual results may differ significantly from these
estimates. Changes in estimates and assumptions based upon actual
results may have a material impact on our results of operations
and/or financial condition. Our critical accounting policies are
described below.
REVENUE AND PROVISION FOR SALES RETURNS AND ALLOWANCES. When we
sell our products, we reduce the amount of revenue we recognize
from such sale by an estimate of future product returns and sales
allowances. Sales allowances include cash discounts, rebates,
chargebacks, and other similar expected future payments relating to
product sold in the current period. Factors that are considered in
our estimates of future product returns and sales allowances
include historical payment experience in relationship to revenues,
estimated customer inventory levels, and current contract prices
and terms with both direct and indirect customers. If actual future
payments for product returns and sales allowances exceed the
estimates we made at the time of sale, our financial position,
results of operations and cash flows would be negatively impacted.
38
The provision for chargebacks is the most significant and complex
estimate used in the recognition of revenue. We establish contract
prices for indirect customers who are supplied by our wholesale
customers. A chargeback represents the difference between our
invoice price to the wholesaler and the indirect customer's
contract price, which is lower. We credit the wholesaler for
purchases by indirect customers at the lower price. Accordingly, we
record these chargebacks at the time we recognize revenue in
connection with our sales to wholesalers. Provisions for estimating
chargebacks are calculated primarily using historical chargeback
experience, actual contract pricing and estimated wholesaler
inventory levels. We continually monitor our assumptions giving
consideration to estimated wholesaler inventory levels and current
pricing trends and make adjustments to these estimates when we
believe that the actual chargeback amounts payable in the future
will differ from our original estimates.
ALLOWANCE FOR INVENTORIES. Inventories consist of finished goods
held for distribution, raw materials and work in process. Our
inventories are stated at the lower of cost or market, with cost
determined on the first-in, first-out basis. In evaluating whether
inventory is to be stated at the lower of cost or market, we
consider such factors as the amount of inventory on hand and in the
distribution channel, estimated time required to sell existing
inventory, remaining shelf life and current and expected market
conditions, including levels of competition. We establish reserves,
when necessary, for slow-moving and obsolete inventories based upon
our historical experience and management's assessment of current
product demand.
INTANGIBLE ASSETS AND GOODWILL. Our intangible assets consist of
product rights, license agreements and trademarks resulting from
product acquisitions and legal fees and similar costs relating to
the development of patents and trademarks. Intangible assets that
are acquired are stated at cost, less accumulated amortization, and
are amortized on a straight-line basis over their estimated useful
lives. Upon approval, costs associated with the development of
patents and trademarks are amortized on a straight-line basis over
estimated useful lives ranging from five to 17 years. We determine
amortization periods for intangible assets that are acquired based
on our assessment of various factors impacting estimated useful
lives and cash flows of the acquired products. Such factors include
the product's position in its life cycle, the existence or absence
of like products in the market, various other competitive and
regulatory issues, and contractual terms. Significant changes to
any of these factors may result in a reduction in the intangible
asset's useful life and an acceleration of related amortization
expense.
We assess the impairment of intangible assets whenever events or
changes in circumstances indicate that the carrying value may not
be recoverable. Some factors we consider important which could
trigger an impairment review include the following: (1) significant
underperformance relative to expected historical or projected
future operating results; (2) significant changes in the manner of
our use of the acquired assets or the strategy for our overall
business; and (3) significant negative industry or economic trends.
When we determine that the carrying value of intangible assets may
not be recoverable based upon the existence of one or more of the
above indicators of impairment, we first perform an assessment of
the asset's recoverability. Recoverability is determined by
comparing the carrying amount of an intangible asset against an
estimate of the undiscounted future cash flows expected to result
from its use and eventual disposition. If the sum of the expected
future undiscounted cash flows is less than the carrying amount of
the intangible asset, an impairment loss is recognized based on the
excess of the carrying amount over the estimated fair value of the
intangible asset.
39
RESULTS OF OPERATIONS
FISCAL 2004 COMPARED TO FISCAL 2003
NET REVENUES BY SEGMENT
-----------------------
YEARS ENDED MARCH 31,
---------------------------------------------------
CHANGE
-------------------
($ IN THOUSANDS): 2004 2003 $ %
-------- -------- ------- -------
Branded products $ 82,868 $ 43,677 $39,191 89.7%
as % of net revenues 29.2% 17.8%
Specialty generics 181,455 179,724 1,731 1.0%
as % of net revenues 63.9% 73.4%
Specialty materials 16,550 17,395 (845) (4.9)%
as % of net revenues 5.8% 7.1%
Other 3,068 4,200 (1,132) (27.0)%
======== ======== =======
Total net revenues $283,941 $244,996 $38,945 15.9%
The increase in branded product sales was due primarily to
continued growth of our women's healthcare family of products and
the sales impact of products acquired by us on March 31, 2003. The
increase was also impacted by a March 1, 2004 price increase
instituted by Ther-Rx on all of its products. In anticipation of
the scheduled price increase, customers made larger than normal
purchases, which the Company limits to a 30-day supply and is
consistent with prior price increase policies. This forward
purchasing approximated $7.4 million during the fourth quarter.
Sales from the women's healthcare product group increased $17.9
million, or 53.6%, in fiscal 2004. Included in the women's
healthcare family of products is the PreCare(R) product line which
contributed $11.8 million of incremental sales in fiscal 2004. This
increase was attributable to increased sales volume associated with
higher market shares for PrimaCare(R), our prescription
prenatal/postnatal multivitamin and mineral supplement with
essential fatty acids, and the PreCare(R) prenatal vitamin. The
PreCare(R) family of products continues to be the leading branded
line of prescription prenatal nutritional supplements in the United
States as market share for the product line grew to 37.6% at the
end of fiscal 2004 compared to 31.0% at the end of fiscal 2003.
Sales of Gynazole-1(R), our vaginal antifungal cream product,
increased $6.1 million, or 48.8%, during fiscal 2004 as our share
of the prescription vaginal antifungal cream market increased to
26.9% at the end of fiscal 2004, from 18.1% at the end of the prior
year. The increase in sales from our women's healthcare family of
products was supplemented by $22.6 million of sales during fiscal
2004 from our two hematinic product lines, Chromagen(R) and
Niferex(R), and the StrongStart(R) prenatal vitamin product line
that we acquired at the end of fiscal 2003. Since we introduced
technology-improved versions of the hematinic products in the
second quarter of fiscal 2004, these products have generated a 69%
growth rate in new prescription volume. The increase in branded
product sales for fiscal 2004 was partially offset by a $1.2
million decline in sales of the Micro-K(R) product line.
40
The minimal growth in specialty generic sales resulted from $8.8
million of incremental sales volume from new product introductions,
primarily in the cough/cold, cardiovascular and prenatal vitamin
product lines, offset by a $7.3 million decline in sales volume
from existing products primarily in our cough/cold product line.
During fiscal 2004, we introduced 16 new products, including the
February 2004 ANDA approval for four strengths of Benazepril
Hydrochloride tablets (generic equivalent to Lotensin(R)). The
decline in sales of existing cough/cold products was due primarily
to an FDA order which required us and all manufacturers of
unapproved single-ingredient, extended-release guaifenesin products
to discontinue distribution of these products after November 2003.
The FDA ruling affected five of our guaifenesin products that were
first introduced when ANDA approval was not required. Also, we
experienced slower than anticipated ANDA approvals by the FDA on a
number of brand equivalent products that we expected to introduce
in fiscal 2004. We anticipate these approvals will occur in fiscal
2005 and, as a result, we expect specialty generic sales growth to
return to higher levels in fiscal 2005. The first of these
approvals was received in May 2004 for two strengths of Morphine
Sulphate extended release tablets which are the generic equivalent
to MS Contin(R).
The decrease in specialty material product sales was primarily due
to a slowdown in a major customer's business in the vitamin
supplement market.
The decrease in other revenue resulted from a smaller contract
manufacturing customer base due to continued de-emphasis of this
lower margin operation in our business strategy.
GROSS PROFIT BY SEGMENT
-----------------------
YEARS ENDED MARCH 31,
---------------------------------------------------
CHANGE
-------------------
($ IN THOUSANDS): 2004 2003 $ %
-------- -------- ------- -------
Branded products $ 72,008 $ 38,460 $33,548 87.2%
as % of net revenues 86.9% 88.1%
Specialty generics 110,180 106,854 3,326 3.1%
as % of net revenues 60.7% 59.5%
Specialty materials 4,789 5,720 (931) (16.3)%
as % of net revenues 28.9% 32.9%
Other (1,463) (565) (898) (158.9)%
======== ======== =======
Total gross profit $185,514 $150,469 $35,045 23.3%
as % of total net revenues 65.3% 61.4%
The increase in consolidated gross profit was primarily
attributable to the sales growth experienced by the branded
products and specialty generics segments, offset in part by a sales
decline in the specialty materials segment. The increased gross
profit percentage on a consolidated basis reflected a favorable
shift in the mix of product sales toward higher margin branded
products, which comprised a larger percentage of net revenues. The
gross profit percentage decrease experienced by the branded
products segment was due to the acquired hematinic products, which
have a slightly lower gross margin than other products in the
branded line. While the gross profit percentage in specialty
generics increased for the fiscal year, the segment experienced a
decline in gross profit as a percent of net revenues during the
fourth quarter due to more competitive pricing and higher costs
associated with a new product launch. Gross profit as a percent of
net revenues also declined in the specialty raw materials segment
during the fourth quarter as a result of unfavorable cost variances
associated with lower production volume.
41
RESEARCH AND DEVELOPMENT
------------------------
YEARS ENDED MARCH 31,
---------------------------------------------------
CHANGE
-------------------
($ IN THOUSANDS): 2004 2003 $ %
-------- -------- ------- -------
Research and development $20,651 $19,135 $1,516 7.9%
as % of net revenues 7.3% 7.8%
The increase in research and development expense resulted from
higher costs associated with the continued expansion of clinical
testing for our product development efforts and increased personnel
expenses related to the growth of our research and development
staff. The increase in research and development expense was below
management's expectation of greater spending due to rescheduling
the timing of certain clinical studies. In fiscal 2005, we expect
research and development costs to increase by approximately 20-30%
over fiscal 2004 levels.
SELLING AND ADMINISTRATIVE
--------------------------
YEARS ENDED MARCH 31,
---------------------------------------------------
CHANGE
-------------------
($ IN THOUSANDS): 2004 2003 $ %
-------- -------- ------- -------
Selling and administrative $88,333 $69,584 $18,749 26.9%
as % of net revenues 31.1% 28.4%
The increase in selling and administrative expense was primarily
due to greater personnel expenses resulting from an increase in
management personnel ($1.7 million) and expansion of the branded
sales force ($4.9 million), an increase in rent, depreciation and
utilities associated with recently added facilities ($2.5 million),
and an increase in branded marketing expense ($3.7 million)
commensurate with the growth of the segment and to support the
launch and on-going promotion of technology-improved versions of
the Chromagen(R) and Niferex(R) products we acquired at the end of
fiscal 2003. We also experienced a $4.3 million increase in legal
expense due to an increase in litigation activity coupled with the
appeal of the Healthpoint litigation (see Note 10 in the
accompanying Notes to Consolidated Financial Statements), Paragraph
IV litigation and other matters.
We anticipate that selling and administrative expenses could
increase as much as 30% to 40% for fiscal 2005 reflecting a full
year of our most recent sales force expansion to more than 200
sales representatives, continued expected increases in litigation
expenses associated with ANDA patent challenges, and the expected
approval and launch of a new women's healthcare branded product
planned for the second half of fiscal 2005. To the extent the
approval of this product by the FDA is delayed, anticipated expense
spending levels would be diminished.
42
AMORTIZATION OF INTANGIBLE ASSETS
---------------------------------
YEARS ENDED MARCH 31,
---------------------------------------------------
CHANGE
-------------------
($ IN THOUSANDS): 2004 2003 $ %
-------- -------- ------- -------
Amortization of intangible assets $4,459 $2,321 $2,138 92.1%
as % of net revenues 1.6% 0.9%
The increase in amortization of intangible assets was due primarily
to the amortization of trademarks acquired in the two product
acquisitions completed on March 31, 2003.
LITIGATION
----------
YEARS ENDED MARCH 31,
---------------------------------------------------
CHANGE
--------------------
($ IN THOUSANDS): 2004 2003 $ %
-------- -------- -------- -------
Litigation $(1,700) $16,500 $(18,200) (110.3)%
In September 2002, we recorded a litigation reserve of $16.5
million for potential damages associated with the adverse decision
made by a federal court in Texas to uphold a jury verdict in a
lawsuit against ETHEX. During fiscal 2004, we recorded an
additional litigation reserve of $1.8 million related to this
matter for attorney's fees awarded to the plaintiffs by the court
(see Note 10 in the accompanying Notes to Consolidated Financial
Statements). The impact of this reserve was more than offset by a
$3.5 million net payment, received by us during fiscal 2004, for a
settlement with a branded company of our claim that the branded
company interfered with our right to a timely introduction of a
generic product in a previous fiscal year.
OPERATING INCOME
----------------
YEARS ENDED MARCH 31,
---------------------------------------------------
CHANGE
-------------------
($ IN THOUSANDS): 2004 2003 $ %
-------- -------- ------- -------
Operating income $73,771 $42,929 $30,842 71.8%
The increase in operating income resulted primarily from a $35.0
million, or 23.3%, increase in gross profit in fiscal 2004, offset
in part by a $4.2 million increase in fiscal 2004 operating
expenses. The $18.7 million increase in our fiscal 2004 selling and
administrative expenses was primarily offset by the impact on
fiscal 2003 operating expenses of a $16.5 million litigation
reserve established by us for potential damages associated with a
lawsuit that is currently under appeal.
43
INTEREST EXPENSE
----------------
YEARS ENDED MARCH 31,
----------------------------------------------------
CHANGE
--------------------
($ IN THOUSANDS): 2004 2003 $ %
-------- -------- ------- --------
Interest expense $5,865 $325 $5,540 1,704.6%
The increase in interest expense resulted primarily from the
interest expense accrued on the $200.0 million of Convertible
Subordinated Notes issued May 16, 2003.
INTEREST AND OTHER INCOME
-------------------------
YEARS ENDED MARCH 31,
---------------------------------------------------
CHANGE
-------------------
($ IN THOUSANDS): 2004 2003 $ %
-------- -------- ------- -------
Interest and other income $2,092 $977 $1,115 114.1%
The increase in interest and other income was due to the investment
of $144.2 million of net proceeds from the May 2003 Convertible
Subordinated Notes offering in short-term, highly liquid
investments combined with the impact of an $82.3 million increase
in short-term investments during fiscal 2003 from the proceeds of a
secondary offering during that year.
PROVISION FOR INCOME TAXES
--------------------------
YEARS ENDED MARCH 31,
---------------------------------------------------
CHANGE
-------------------
($ IN THOUSANDS): 2004 2003 $ %
-------- -------- ------- -------
Provision for income taxes $24,150 $15,471 $8,679 56.1%
effective tax rate 34.5% 35.5%
The increase in the provision for income taxes resulted from a
corresponding increase in income before taxes. The decline in the
effective tax rate primarily resulted from the implementation of
various tax planning initiatives, as well as the generation of
income tax credits at both the Federal and state levels.
44
NET INCOME
----------
YEARS ENDED MARCH 31,
---------------------------------------------------
CHANGE
-------------------
($ IN THOUSANDS): 2004 2003 $ %
-------- -------- -------- -------
Net income $45,848 $28,110 $17,738 63.1%
Diluted earnings per share 0.90 0.55 0.35 63.6%
The increase in net income resulted primarily from a $38.9 million,
or $15.9%, increase in our fiscal 2004 net revenues coupled with
the impact on fiscal 2003 net income of a $16.5 million litigation
reserve established by us for potential damages associated with a
lawsuit that is currently under appeal.
FISCAL 2003 COMPARED TO FISCAL 2002
NET REVENUES BY SEGMENT
-----------------------
YEARS ENDED MARCH 31,
---------------------------------------------------
CHANGE
-------------------
($ IN THOUSANDS): 2003 2002 $ %
-------- -------- ------- -------
Branded products $ 43,677 $ 40,424 $ 3,253 8.0%
as % of net revenues 17.8% 19.8%
Specialty generics 179,724 141,007 38,717 27.5%
as % of net revenues 73.4% 69.1%
Specialty materials 17,395 19,557 (2,162) (11.1)%
as % of net revenues 7.1% 9.6%
Other 4,200 3,117 1,083 34.7%
======== ======== =======
Total net revenues $244,996 $204,105 $40,891 20.0%
The increase in branded product sales was due to continued growth
of our women's healthcare family of products. Sales from this
product group increased $5.6 million, or 20.1%, in fiscal 2003.
Gynazole-1(R), our vaginal antifungal product, continued its market
penetration as its market share increased to 18% at the end of
fiscal 2003, compared to 13% at the end of the prior fiscal year.
Due to its continued growth in market share, sales of Gynazole-1(R)
increased $4.4 million, or 53.4% during the year. Also included in
the women's healthcare family of products is the PreCare(R) product
line which contributed $1.2 million of incremental sales in fiscal
2003. This increase was primarily attributable to increased sales
volume associated with PrimaCare(R), a prescription
prenatal/postnatal multivitamin and mineral supplement with
essential fatty acids, which has continued to show growth in market
share since its introduction in the fourth quarter of fiscal 2002.
Further, the PreCare(R) family of products is currently the leading
branded line of prescription prenatal nutritional supplements in
the United States. Increased sales from the women's healthcare
family of products was partially offset by a $2.3 million, or
18.4%, decline in sales from the branded products cardiovascular
product line. The decrease in cardiovascular sales was due to the
impact of customer buying during the fourth quarter of the prior
fiscal year in anticipation of a year-end price increase coupled
with increased substitution of our generic equivalent products.
The increase in sales for specialty generics resulted primarily
from higher sales volume in the cardiovascular, pain management and
cough/cold product lines, coupled with continued expansion of our
other product lines,
45
including gastrointestinal and anti-anxiety. Increased sales from
these product lines were partially offset by a reduction in sales
in our prenatal vitamin product line. The cardiovascular product
line, which comprised 45.9% of specialty generic sales in fiscal
2003, contributed $11.2 million of increased sales from existing
products and $5.3 million of incremental sales volume from the
April 2002 ANDA approval and subsequent launch of Potassium
Chloride 20 mg. tablets (generic equivalent to K-Dur(R)). Sales
volume for the pain management product line increased $11.6 million
due to market share gains coupled with the impact of a full year of
sales of two products introduced in the prior year. The remaining
$12.9 million of increased sales volume resulted primarily from new
product introductions in the cough/cold, gastrointestinal and
anti-anxiety product lines coupled with a full year of sales on
products introduced in the prior year. We introduced 16 and 14 new
specialty generic/non-branded products in fiscal 2003 and 2002,
respectively. The $0.9 million decline in sales volume for the
prenatal product line was primarily attributable to a reduction in
the corresponding brand equivalent market. This market decline was
due, in part, to the introduction of Primacare(R) by our branded
products segment in the fourth quarter of fiscal 2002. The
increased sales volume experienced by specialty generics during
fiscal 2003 was partially offset by $1.4 million of product price
erosion that resulted primarily from normal and expected pricing
pressures in the pain management and cough/cold product lines.
The decrease in specialty material product sales was primarily due
to an unexpected softness in the nutritional supplement market for
which the specialty materials segment is a supplier.
GROSS PROFIT BY SEGMENT
-----------------------
YEARS ENDED MARCH 31,
---------------------------------------------------
CHANGE
-------------------
($ IN THOUSANDS): 2003 2002 $ %
-------- -------- ------- -------
Branded products $ 38,460 $ 34,643 $ 3,817 11.0%
as % of net revenues 88.1% 85.7%
Specialty generics 106,854 80,733 26,121 32.4%
as % of net revenues 59.5% 57.3%
Specialty materials 5,720 6,931 (1,211) (17.5)%
as % of net revenues 32.9% 35.4%
Other (565) 1,395 (1,960) (140.5)%
======== ======== ========
Total gross profit $150,469 $123,702 $ 26,767 21.6%
as % of total net revenues 61.4% 60.6%
The increase in gross profit was attributable to the sales growth
experienced by the branded products and specialty generics
segments, offset partially by a sales decline in the specialty
materials segment. The higher gross profit percentage was favorably
impacted by price increases of branded products that took effect at
the beginning of fiscal 2003 and higher margins realized on new
specialty generic products introduced during the current and prior
fiscal years. The gross profit percentage increases experienced by
the branded products and specialty generics segments were partially
offset by a decline in the gross profit percentage at the specialty
raw materials segment. This decline resulted from unfavorable cost
variances associated with lower production.
46
RESEARCH AND DEVELOPMENT
------------------------
YEARS ENDED MARCH 31,
---------------------------------------------------
CHANGE
-------------------
($ IN THOUSANDS): 2003 2002 $ %
-------- -------- ------- -------
Research and development $19,135 $10,712 $8,423 78.6%
as % of net revenues 7.8% 5.2%
The increase in research and development expense was primarily due
to higher costs associated with the expansion of clinical testing
connected to our internal product development efforts and higher
personnel expenses related to the growth of our research and
development staff.
47
SELLING AND ADMINISTRATIVE
--------------------------
YEARS ENDED MARCH 31,
---------------------------------------------------
CHANGE
-------------------
($ IN THOUSANDS): 2003 2002 $ %
-------- -------- ------- -------
Selling and administrative $69,584 $61,343 $8,241 13.4%
as % of net revenues 28.4% 30.1%
The increase in selling and administrative expense resulted
primarily from an increase in specialty generic/non-branded
marketing and promotional expenses, an increase in personnel costs
associated with corporate administration and branded products
marketing and higher insurance costs. These increases were
partially offset by a reduction in legal expenses which resulted
from insurance reimbursements of defense costs in the Healthpoint
litigation.
AMORTIZATION OF INTANGIBLE ASSETS
---------------------------------
YEARS ENDED MARCH 31,
---------------------------------------------------
CHANGE
-------------------
($ IN THOUSANDS): 2003 2002 $ %
-------- -------- ------- -------
Amortization of intangible assets $2,321 $2,353 $(32) (1.4)%
The decrease in amortization of intangible assets was due primarily
to the implementation of SFAS No. 142, Goodwill and Other
Intangible Assets, which discontinued the amortization of goodwill
effective April 1, 2002 (see Note 2 in the accompanying Notes to
Consolidated Financial Statements).
LITIGATION
----------
YEARS ENDED MARCH 31,
---------------------------------------------------
CHANGE
-------------------
($ IN THOUSANDS): 2003 2002 $ %
-------- -------- ------- -------
Litigation $16,500 $ - $16,500 n/a %
In September 2002, the Company recorded a litigation reserve of
$16.5 million for potential damages associated with the adverse
decision made by a federal court in Texas to uphold a previously
rendered jury verdict in a lawsuit against ETHEX (see Note 10 in
the accompanying Notes to Consolidated Financial Statements).
48
OPERATING INCOME
----------------
YEARS ENDED MARCH 31,
---------------------------------------------------
CHANGE
-------------------
($ IN THOUSANDS): 2003 2002 $ %
-------- -------- ------- -------
Operating income $42,929 $49,294 $(6,365) (12.9)%
The decrease in operating income resulted from the $16.5 million
litigation reserve established by us for potential damages
associated with a lawsuit. Excluding the effect of the litigation
reserve, operating income for fiscal 2003 would have increased
$10.1 million, or 20.6%, to $59.4 million.
INTEREST AND OTHER INCOME
-------------------------
YEARS ENDED MARCH 31,
---------------------------------------------------
CHANGE
-------------------
($ IN THOUSANDS): 2003 2002 $ %
-------- -------- ------- -------
Interest and other income $977 $411 $566 137.7%
The increase in interest and other income was primarily due to the
investment of $72.4 million of proceeds from the July 2002
secondary public offering in short-term, highly liquid investments.
PROVISION FOR INCOME TAXES
--------------------------
YEARS ENDED MARCH 31,
---------------------------------------------------
CHANGE
-------------------
($ IN THOUSANDS): 2003 2002 $ %
-------- -------- ------- -------
Provision for income taxes $15,471 $17,891 $(2,420) (13.5)%
effective tax rate 35.5% 36.2%
The decline in the effective tax rate was primarily due to an
increase in the usage of research and development tax credits to
reduce our tax liability.
49
NET INCOME
----------
YEARS ENDED MARCH 31,
---------------------------------------------------
CHANGE
-------------------
($ IN THOUSANDS): 2003 2002 $ %
-------- -------- ------- -------
Net income $28,110 $31,464 $(3,354) (10.7)%
diluted earnings per share 0.55 0.65 (0.10) (15.4)%
The decrease in net income resulted from the $16.5 million
litigation reserve established by us for potential damages
associated with a lawsuit. The impact of the litigation reserve,
net of applicable taxes, reduced net income by $10.4 million. The
more significant percentage decline in earnings per diluted share
for fiscal 2003 resulted from an increase in weighted average
shares outstanding due to the issuance of approximately 3.3 million
shares of Class A Common Stock in the secondary public offering
that was completed in July 2002. Excluding the effect of the
litigation reserve, net income for fiscal 2003 would have increased
$7.1 million, or 22.5%, to $38.6 million, or $0.75 per diluted
share.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash and cash equivalents and working capital were $226.9 million
and $306.6 million, respectively, at March 31, 2004, compared to
$96.3 million and $137.9 million, respectively, at March 31, 2003.
Internally generated funds from product sales continued to be the
primary source of operating capital used in the funding of our
businesses. The net cash flow from operating activities was $34.0
million in fiscal 2004 compared to $43.3 million in fiscal 2003.
This decrease resulted primarily from a decline in reserve balances
associated with sales returns and allowances, an increase in
inventories related to a number of specialty generic products we
expect to launch in the first half of fiscal 2005 and increased
inventories associated with the hematinic brands that we acquired
at the end of fiscal 2003, an increase in prepaid and other assets,
and a decrease in current liabilities due primarily to the timing
of payments made on accounts payable and accrued income taxes. The
decrease in net cash flow from operating activities in fiscal 2004
was partially offset by an increase in net income.
Net cash flow used in investing activities was $40.1 million for
fiscal 2004 compared to $32.1 million for the prior year. Capital
expenditures of $21.8 million were primarily for purchasing
machinery and equipment to upgrade and expand our pharmaceutical
manufacturing and distribution capabilities, and other building
renovation projects. We expect our capital expenditures in fiscal
2005 to increase by up to $50.0 million as we ramp up
manufacturing/distribution, laboratory capabilities and other
facilities needed for planned growth over the next five to seven
years. Other investing activities in fiscal 2003 included a $3.0
million payment related to the purchase of certain licensing rights
combined with an equity investment in FemmePharma, Inc., a women's
healthcare company. In January 2004, we made an additional $4.0
million payment to FemmePharma, Inc. to complete the purchase of
certain trademark rights for a product under development and to
increase our equity investment in the company. On March 31, 2003,
we acquired the product rights and trademarks to the Niferex(R)
line of hematinic products for a cash payment made in April 2003
for $14.3 million. Also, on March 31, 2003, we completed the
purchase of product rights and trademarks to the Chromagen(R) and
StrongStart(R) product lines for a $13.0 million cash payment made
on March 31, 2003 and two non-interest bearing $7.0 million
promissory notes, one of which was repaid in fiscal 2004 and the
other of which is due on March 31, 2005.
50
Debt increased to $218.7 million at March 31, 2004 compared to
$17.6 million at March 31, 2003. The increase primarily resulted
from the issuance in May 2003 of $200.0 million in Convertible
Subordinated Notes that are convertible, under certain
circumstances, into shares of our Class A Common Stock at an
initial conversion price of $23.01 per share. The Convertible
Subordinated Notes bear interest at a rate of 2.50% and mature on
May 16, 2033. We are also obligated to pay contingent interest at a
rate equal to 0.5% per annum during any six-month period from May
16 to November 15 and from November 16 to May 15, with the initial
six-month period commencing May 16, 2006, if the average trading
price of the Notes per $1,000 principal amount for the five trading
day period ending on the third trading day immediately preceding
the first day of the applicable six-month period equals $1,200 or
more. We may redeem some or all of the Convertible Subordinated
Notes at any time on or after May 21, 2006, at a redemption price,
payable in cash, of 100% of the principal amount of the Convertible
Subordinated Notes, plus accrued and unpaid interest (including
contingent interest, if any) to the date of redemption. Holders may
require us to repurchase all or a portion of their Convertible
Subordinated Notes on May 16, 2008, 2013, 2018, 2023 and 2028, or
upon a change in control, as defined in the indenture governing the
Convertible Subordinated Notes, at 100% of the principal amount of
the Convertible Subordinated Notes, plus accrued and unpaid
interest (including contingent interest, if any) to the date of
repurchase, payable in cash. The Convertible Subordinated Notes are
subordinate to all of our existing and future senior obligations.
The net proceeds to us were $194.2 million, after deducting
underwriting discounts, commissions and offering expenses. In April
2003, we financed the purchase of an $8.8 million building with a
term loan secured by the property under a floating rate loan with a
bank. The facility consists of approximately 275,000 square feet of
office, production, distribution and warehouse space that we are
currently renovating. The remaining principal balance plus any
unpaid interest is due in April 2008. We also entered into an
interest rate swap agreement with the same bank, which fixed the
interest rate of the building mortgage at 5.31% for the term of the
loan.
During May 2003, we used $50.0 million of the net proceeds from the
Convertible Subordinated Notes issuance to fund the repurchase of
2.0 million shares of our Class A Common Stock.
We currently have a $40.0 million unsecured revolving line of
credit with a bank that expires in October 2006. In December 2003,
we increased our unsecured supplemental credit line with the same
bank from $20.0 million to $25.0 million. The unsecured
supplemental credit line of $25.0 million, which is available for
financing acquisitions, expires in December 2004. At March 31,
2004, we had $11.6 million in open letters of credit issued under
the revolving credit line and no cash borrowings under either
credit facility.
The following table summarizes our contractual obligations (in
thousands):
LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
----- --------- --------- --------- ---------
OBLIGATIONS AT MARCH 31, 2004
- -----------------------------
Long-term debt obligations $218,650 $ 7,909 $3,153 $ 7,588 $200,000
Operating lease obligations 17,548 3,186 4,899 3,941 5,522
Other long-term obligations 3,122 - - - 3,122
----------------------------------------------------------------
Total contractual cash obligations $239,320 $11,095 $8,052 $11,529 $208,644
----------------------------------------------------------------
We believe our cash and cash equivalents balance, cash flows from
operations, funds available under our credit facilities, and
proceeds received from the Convertible Subordinated Notes issuance
will be adequate to fund operating activities for the presently
foreseeable future, including an increase in debt obligations, a
significant increase in capital expenditures, higher research and
development costs, product development activities and expansion of
marketing capabilities for the branded pharmaceutical business. In
addition, we continue to examine opportunities to expand our
business through the acquisition of or investment in companies,
technologies, product rights, research and development and other
investments that are compatible with existing businesses. We intend
to use our available cash to help in funding any acquisitions or
investments. As such, cash has been invested in short-term, highly
liquid instruments.
51
We also may use funds available under our credit facility, or
financing sources that subsequently become available, including the
future issuances of additional debt or equity securities, to fund
these acquisitions or investments. If we were to fund one or more
such acquisitions or investments, our capital resources, financial
condition and results of operations could be materially impacted in
future periods.
INFLATION
Inflation may apply upward pressure on the cost of goods and
services used by us in the future. However, we believe that the net
effect of inflation on our operations during the past three years
has been minimal. In addition, changes in the mix of products sold
and the effect of competition has made a comparison of changes in
selling prices less meaningful relative to changes in the overall
rate of inflation over the past three fiscal years.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities, an interpretation of
ARB No. 51. The primary objectives of FIN 46 are to provide
guidance on the identification of entities which a company may
control through means other than through voting rights ("variable
interest entities") and to determine when and which business
enterprise ("primary beneficiary") should consolidate the variable
interest entity. FIN 46 requires existing unconsolidated variable
interest entities to be consolidated by their primary beneficiaries
if the entities do not effectively disperse risks among the parties
involved. Variable interest entities that effectively disperse
risks will not be consolidated unless a single party holds an
interest or combination of interests that effectively recombines
risks that were previously dispersed. In addition, FIN 46 requires
that the primary beneficiary, as well as all other enterprises with
a significant variable interest in a variable interest entity, make
additional disclosures. Certain disclosure requirements of FIN 46
were effective for financial statements issued after January 31,
2003. In December 2003, the FASB revised FIN 46 (FIN 46R) to
address certain FIN 46 implementation issues. The revised
provisions were applicable no later than the first reporting period
ending after March 15, 2004. We adopted FIN 46 and FIN 46R on March
31, 2004 and, based upon the evaluation performed of all interests,
have determined we do not have any variable interest entities that
require consolidation.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS 150 establishes standards for how entities classify
and measure in their statement of financial position certain
financial instruments with characteristics of both liabilities and
equity. The provisions of SFAS 150 are effective for financial
instruments entered into or modified after May 31, 2003, and
otherwise at the beginning of the first fiscal interim period
beginning after June 15, 2003. The adoption of this statement did
not have a material impact on our results of operations or
financial position.
In April 2004, the FASB issued FASB Staff Position No. 129-1 (FSP
129-1), Disclosure Requirements under FASB Statement No. 129,
Disclosure of Information about Capital Structure, Relating to
Contingently Convertible Securities. This FSP requires the
disclosure provisions of Statement 129 to apply to all existing and
newly created contingently convertible securities and to their
potentially dilutive effects on earnings per share. The adoption of
the disclosure provisions of FSP 129-1 did not have a material
impact on our financial condition or results of operations.
52
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Our exposure to market risk is limited to fluctuating interest
rates associated with variable rate indebtedness that is subject to
interest rate changes.
Advances to us under our credit facilities bear interest at a rate
that varies consistent with increases or decreases in the publicly
announced prime rate and/or the LIBOR rate with respect to
LIBOR-related loans, if any. A material increase in such rates
could significantly increase borrowing expenses. We did not have
any cash borrowings under our credit facilities at March 31, 2004.
In May 2003, we issued $200.0 million of Convertible Subordinated
Notes. The interest rate on the Convertible Subordinated Notes is
fixed at 2.50% per annum and not subject to market interest rate
changes.
In April 2003, we entered into an $8.8 million term loan secured by
a building under a floating rate loan with a bank. We also entered
into an interest rate swap agreement with the same bank, which
fixed the interest rate of the building mortgage at 5.31% for the
term of the loan.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
of K-V Pharmaceutical Company
We have audited the accompanying consolidated balance sheets of K-V
Pharmaceutical Company and Subsidiaries as of March 31, 2004 and 2003 and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended March 31, 2004. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of K-V
Pharmaceutical Company and Subsidiaries at March 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years
in the period ended March 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
/s/ BDO Seidman, LLP
Chicago, Illinois
June 4, 2004
54
K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31,
---------------------
2004 2003
-------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
------
Current Assets:
Cash and cash equivalents.................................................. $226,911 $ 96,288
Receivables, less allowance for doubtful accounts of $402 and $422
in 2004 and 2003, respectively.......................................... 65,872 57,385
Inventories, net........................................................... 50,697 42,343
Prepaid and other assets................................................... 6,591 2,709
Deferred tax asset......................................................... 8,037 14,791
-------- --------
Total Current Assets.................................................... 358,108 213,516
Property and equipment, less accumulated depreciation...................... 75,777 51,903
Intangible assets and goodwill, net........................................ 80,809 82,577
Other assets............................................................... 13,744 4,672
-------- --------
Total Assets............................................................ $528,438 $352,668
======== ========
LIABILITIES
-----------
Current Liabilities:
Accounts payable........................................................... $ 12,650 $ 15,588
Accrued liabilities........................................................ 30,917 52,548
Current maturities of long-term debt....................................... 7,909 7,484
-------- --------
Total Current Liabilities............................................... 51,476 75,620
Long-term debt............................................................. 210,741 10,106
Other long-term liabilities................................................ 3,122 2,913
Deferred tax liability..................................................... 5,350 3,413
-------- --------
Total Liabilities....................................................... 270,689 92,052
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
--------------------
7% cumulative convertible Preferred Stock, $.01 par value;
$25.00 stated and liquidation value; 840,000 shares authorized;
issued and outstanding -- 40,000 shares at both 2004 and
2003 (convertible into Class A shares at a ratio of 8.4375 to one)...... -- --
Class A and Class B Common Stock, $.01 par value;150,000,000
and 75,000,000 shares authorized, respectively; Class A -- issued
36,080,583 and 23,651,290 at March 31, 2004 and 2003, respectively...... 362 236
Class B -- issued 16,148,739 and 10,577,119 at March 31, 2004 and 2003,
respectively (convertible into Class A shares on a one-for-one basis)... 162 106
Additional paid-in capital................................................. 123,828 120,961
Retained earnings.......................................................... 184,580 139,341
Less: Treasury Stock, 3,035,948 shares of Class A and 80,142 shares
of Class B Common Stock in 2004 and 32 shares of Class A and
53,428 shares of Class B Common Stock, in 2003, at cost................. (51,183) (28)
-------- --------
Total Shareholders' Equity................................................. 257,749 260,616
-------- --------
Total Liabilities and Shareholders' Equity................................. $528,438 $352,668
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
55
K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED MARCH 31,
--------------------------------------------------
2004 2003 2002
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues................................ $283,941 $244,996 $204,105
Cost of sales............................... 98,427 94,527 80,403
-------- -------- --------
Gross profit................................ 185,514 150,469 123,702
-------- -------- --------
Operating expenses:
Research and development................ 20,651 19,135 10,712
Selling and administrative.............. 88,333 69,584 61,343
Amortization of intangible assets....... 4,459 2,321 2,353
Litigation.............................. (1,700) 16,500 --
-------- -------- --------
Total operating expenses.................... 111,743 107,540 74,408
-------- -------- --------
Operating income............................ 73,771 42,929 49,294
-------- -------- --------
Other expense (income):
Interest expense........................ 5,865 325 350
Interest and other income............... (2,092) (977) (411)
-------- -------- --------
Total other expense (income), net........... 3,773 (652) (61)
-------- -------- --------
Income before income taxes.................. 69,998 43,581 49,355
Provision for income taxes.................. 24,150 15,471 17,891
-------- -------- --------
Net income.................................. $ 45,848 $ 28,110 $ 31,464
======== ======== ========
Net income per common share-basic........... $0.93 $0.56 $0.69
===== ===== =====
Net income per common share-diluted......... $0.90 $0.55 $0.65
===== ===== =====
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
56
K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2004, 2003 AND 2002
----------------------------------------------------------------------------
CLASS A CLASS B ADDITIONAL TOTAL
PREFERRED COMMON COMMON PAID IN TREASURY RETAINED SHAREHOLDERS'
STOCK STOCK STOCK CAPITAL STOCK EARNINGS EQUITY
----- ----- ----- ------- ----- -------- ------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE AT MARCH 31, 2001.................... $ 2 $189 $107 $ 45,792 $ (55) $ 79,907 $125,942
Net income................................... -- -- -- -- -- 31,464 31,464
Dividends paid on preferred stock............ -- -- -- -- -- (70) (70)
Conversion of 200,000 shares of preferred
stock to 1,125,000 Class A Shares........... (2) 11 -- (9) -- -- --
Sale of 12,825 Class A shares to employee
profit sharing plan......................... -- -- -- 332 6 -- 338
Issuance of 5,061 Class A shares
under product development agreement......... -- -- -- 125 -- -- 125
Conversion of 32,575 Class B shares to
Class A shares.............................. -- -- -- -- -- -- --
Stock Options exercised - 108,018 shares
of Class A less 8,847 shares repurchased
and 80,685 shares of Class B less 170
shares repurchased.......................... -- 1 1 991 -- -- 993
---------------------------------------------------------------------------
BALANCE AT MARCH 31, 2002.................... -- 201 108 47,231 (49) 111,301 158,792
Net income................................... -- -- -- -- -- 28,110 28,110
Dividends paid on preferred stock............ -- -- -- -- (70) (70)
Conversion of 175,000 Class B shares to
Class A shares.............................. -- 2 (2) -- -- -- --
Issuance of 3,285,000 Class A shares......... -- 33 -- 72,347 -- -- 72,380
Sale of 40,461 Class A shares to employee
profit sharing plan......................... -- -- -- 884 21 -- 905
Stock Options exercised - 49,563 shares
of Class A less 9,502 shares repurchased
and 40,717 shares of Class B less 112
shares repurchased.......................... -- -- -- 499 -- -- 499
---------------------------------------------------------------------------
BALANCE AT MARCH 31, 2003.................... -- 236 106 120,961 (28) 139,341 260,616
Net income................................... -- -- -- -- -- 45,848 45,848
Dividends paid on preferred stock............ -- -- -- -- (436) (436)
Conversion of 117,187 Class B shares to
Class A shares.............................. -- 1 (1) -- -- -- --
Issuance of 27,992 Class A shares
under product development agreement......... -- -- -- 505 -- -- 505
Purchase of common stock for treasury........ -- -- -- -- (51,155) -- (51,155)
Three-for-two stock dividend................. -- 120 53 -- -- (173) --
Stock Options exercised - 552,617 shares
of Class A less 91,538 shares repurchased
and 413,419 shares of Class B less
15,625 shares repurchased................... -- 5 4 2,362 -- -- 2,371
---------------------------------------------------------------------------
BALANCE AT MARCH 31, 2004.................... $-- $362 $162 $123,828 $(51,183) $184,580 $257,749
===========================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
57
K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
---------------------------------------
2004 2003 2002
-------- -------- --------
(IN THOUSANDS)
Operating Activities:
Net income............................................................. $ 45,848 $ 28,110 $ 31,464
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and other non-cash charges............... 12,663 7,773 6,478
Deferred income tax (benefit) provision............................. 8,691 (8,091) (2,376)
Deferred compensation............................................... 209 196 183
Litigation.......................................................... 1,825 16,500 -
Changes in operating assets and liabilities:
Increase in receivables, net........................................ (8,487) (3,167) (27,959)
Increase in inventories............................................. (9,977) (5,623) (2,886)
(Increase) decrease in prepaid and other assets..................... (6,294) 496 765
(Decrease) increase in accounts payable and accrued
liabilities........................................................ (10,471) 7,127 10,228
-------- -------- --------
Net cash provided by operating activities.............................. 34,007 43,321 15,897
-------- -------- --------
Investing Activities:
Purchase of property and equipment, net............................. (21,792) (16,113) (8,484)
Purchase of stock and intangible assets............................. (4,000) (3,000) -
Product acquisition................................................. (14,300) (13,000) -
-------- -------- --------
Net cash used in investing activities.................................. (40,092) (32,113) (8,484)
-------- -------- --------
Financing Activities:
Principal payments on long-term debt................................ (8,237) (743) (693)
Dividends paid on preferred stock................................... (436) (70) (70)
Proceeds from issuance of convertible notes......................... 194,165 - -
Purchase of common stock for treasury............................... (51,155) - -
Proceeds from issuance of common stock.............................. - 72,380 -
Sale of common stock to employee profit sharing plan................ - 905 338
Exercise of common stock options.................................... 2,371 499 993
-------- -------- --------
Net cash provided by financing activities.............................. 136,708 72,971 568
-------- -------- --------
Increase in cash and cash equivalents.................................. 130,623 84,179 7,981
Cash and cash equivalents:
Beginning of year................................................... 96,288 12,109 4,128
-------- -------- --------
End of year......................................................... $226,911 $ 96,288 $ 12,109
======== ======== ========
Non-cash investing and financing activities:
Term loan to finance building purchase.............................. $ 8,800 $ - $ -
Term loans refinanced............................................... - 1,738 2,450
Issuance of common stock under product development
agreement.......................................................... 505 - 125
Payments due on product acquisitions................................ - 15,983 -
Portion of product acquisition financed by promissory notes......... - 13,234 -
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. DESCRIPTION OF BUSINESS
-----------------------
K-V Pharmaceutical Company and its subsidiaries ("KV" or the
"Company") are primarily engaged in the development, acquisition,
manufacture, marketing and sale of technologically distinguished
branded and generic/non-branded prescription pharmaceutical
products. The Company was incorporated in 1971 and has become a
leader in the development of advanced drug delivery and formulation
technologies that are designed to enhance therapeutic benefits of
existing drug forms. Through internal product development and
synergistic acquisitions of products, KV has grown into a fully
integrated specialty pharmaceutical company. The Company also
develops, manufactures and markets technologically advanced,
value-added raw material products for the pharmaceutical,
nutritional, food and personal care industries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
BASIS OF PRESENTATION
---------------------
The Company's consolidated financial statements are prepared
in accordance with accounting principles generally accepted in
the United States of America. The consolidated financial
statements include the accounts of KV and its wholly-owned
subsidiaries. All material inter-company accounts and
transactions have been eliminated in consolidation. Certain
reclassifications, none of which affected net income or
retained earnings, have been made to prior year amounts to
conform to the current year presentation.
USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
disclosure of contingent liabilities at the date of the
financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results in
subsequent periods may differ from the estimates and
assumptions used in the preparation of the accompanying
consolidated financial statements.
The most significant estimates made by management include the
determination of sales allowances, valuation of inventory
balances, the determination of useful lives for intangible
assets, and the evaluation of intangible assets and goodwill
for impairment. Management periodically evaluates estimates
used in the preparation of the consolidated financial
statements and makes changes on a prospective basis when
adjustments are necessary.
CASH EQUIVALENTS
----------------
Cash equivalents consist of only those highly liquid
investments that are readily convertible to cash and that have
original maturities of three months or less. At March 31, 2004
and 2003, cash equivalents totaled $226,532 and $92,635,
respectively.
59
INVENTORIES
-----------
Inventories consist of finished goods held for distribution,
raw materials and work in process. Inventories are stated at
the lower of cost or market, with the cost determined on the
first-in, first-out (FIFO) basis. Reserves for potentially
obsolete or slow moving inventory are established by
management based on evaluation of inventory levels, forecasted
demand, and market conditions.
PROPERTY AND EQUIPMENT
----------------------
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation expense is computed over the
estimated useful lives of the related assets using the
straight-line method. The estimated useful lives are
principally 10 years for land improvements, 10 to 40 years for
buildings and improvements, 3 to 15 years for machinery and
equipment, and 3 to 10 years for office furniture and
equipment. Leasehold improvements are amortized on a
straight-line basis over the shorter of the respective lease
terms or the estimated useful life of the assets. The Company
assesses property and equipment for impairment whenever events
or changes in circumstances indicate that an asset's carrying
amount may not be recoverable.
INTANGIBLE ASSETS AND GOODWILL
------------------------------
Intangible assets consist of product rights, license
agreements and trademarks resulting from product acquisitions
and legal fees and similar costs relating to the development
of patents and trademarks. Intangible assets that are acquired
are stated at cost, less accumulated amortization, and are
amortized on a straight-line basis over estimated useful lives
of 20 years. Upon approval, costs associated with the
development of patents and trademarks are amortized on a
straight-line basis over estimated useful lives ranging from 5
to 17 years. The Company evaluates its intangible assets for
impairment whenever events or changes in circumstances
indicate that an intangible asset's carrying amount may not be
recoverable. Recoverability is determined by comparing the
carrying amount of an intangible asset against an estimate of
the undiscounted future cash flows expected to result from its
use and eventual disposition. If the sum of the expected
future undiscounted cash flows is less than the carrying
amount of the intangible asset, an impairment loss is
recognized based on the excess of the carrying amount over the
estimated fair value of the intangible asset.
Goodwill relates to the 1972 acquisition of the Company's
specialty materials segment and is recorded net of accumulated
amortization through March 31, 2002. In accordance with the
Company's adoption of Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets, on April 1, 2002, amortization of goodwill was
discontinued. Instead, goodwill is subject to at least an
annual assessment of impairment on a fair value basis.
Amortization of goodwill for fiscal 2002 was $55. Basic and
diluted earnings per share for fiscal 2002 would have been
unchanged if goodwill amortization was excluded from net
income on a pro forma basis.
OTHER ASSETS
------------
Non-marketable equity investments for which the Company does
not have the ability to exercise significant influence over
operating and financial policies (generally less than 20%
ownership) are accounted for using the cost method. Such
investments are included in "Other assets" in the accompanying
consolidated balance sheets.
These investments are periodically reviewed for
other-than-temporary declines in fair value. Other than
temporary declines in fair value are identified by evaluating
market conditions, the entity's ability to achieve forecast
and regulatory submission guidelines, as well as the entity's
overall financial condition.
60
REVENUE RECOGNITION
-------------------
Revenue from product sales is recognized when the merchandise
is shipped to an unrelated third party pursuant to Staff
Accounting Bulletin No. 104, Revenue Recognition. Accordingly,
revenue is recognized when all of the following occur: a
purchase order is received from a customer; title and risk of
loss pass to the Company's customer upon shipment of the
merchandise under the terms of FOB shipping point; prices and
estimated sales provisions for product returns, sales rebates,
payment discounts, chargebacks, and other promotional
allowances are reasonably determinable; and the customer's
payment ability has been reasonably assured.
Concurrently with the recognition of revenue, the Company
records estimated sales provisions for product returns, sales
rebates, payment discounts, chargebacks, and other sales
allowances. Sales provisions are established based upon
consideration of a variety of factors, including but not
limited to, historical relationship to revenues, historical
payment and return experience, estimated customer inventory
levels, customer rebate arrangements, and current contract
sales terms with wholesale and indirect customers. The
following briefly describes the nature of each provision and
how such provisions are estimated.
o Payment discounts are reductions to invoiced amounts
offered to customers for payment within a specified
period and are estimated upon shipment utilizing
historical customer payment experience.
o Sales rebates are offered to certain customers to
promote customer loyalty and encourage greater
product sales. These rebate programs provide that,
upon the attainment of pre-established volumes or
the attainment of revenue milestones for a specified
period, the customer receives credit against
purchases. Other promotional programs are incentive
programs periodically offered to customers. Due to
the nature of these programs, the Company is able to
estimate provisions for rebates and other
promotional programs based on the specific terms in
each agreement at the time of shipment.
o Consistent with common industry practices, the
Company has agreed to terms with its customers to
allow them to return product that is within a
certain period of the expiration date. Upon shipment
of product to customers, the Company provides for an
estimate of product to be returned. This estimate is
determined by applying a historical relationship of
customer returns to amounts invoiced.
o Generally, the Company provides credits to customers
for decreases that are made to selling prices for
the value of inventory that is owned by customers at
the date of the price reduction. The Company has not
contractually agreed to provide price adjustment
credits to its customers; instead, the Company
issues price adjustment credits at its discretion.
Price adjustment credits are estimated at the time
the price reduction occurs. The amount is calculated
based on an estimate of customer inventory levels.
o KV has arrangements with certain parties
establishing prices for the Company's products for
which the parties independently select a wholesaler
from which to purchase. Such parties are referred to
as indirect customers. A chargeback represents the
difference between the Company's invoice price to
the wholesaler and the indirect customer's contract
price, which is lower. Provisions for estimating
chargebacks are calculated primarily using
historical chargeback experience, actual contract
pricing and estimated wholesaler inventory levels.
61
Actual product returns, chargebacks and other sales allowances
incurred are, however, dependent upon future events and may be
different than the Company's estimates. The Company
continually monitors the factors that influence sales
allowance estimates and makes adjustments to these provisions
when management believes that actual product returns,
chargebacks and other sales allowances may differ from
established allowances.
Accruals for sales provisions are presented in the
consolidated financial statements as reductions to net
revenues and accounts receivable. Sales provisions totaled
$103,262, $98,929 and $98,593 for the years ended March 31,
2004, 2003 and 2002, respectively. The reserve balances
related to the sales provisions totaled $20,648 and $29,658 at
March 31, 2004 and 2003, respectively, and are included in
"Receivables, less allowance for doubtful accounts" in the
accompanying consolidated balance sheets.
The Company also enters into long-term agreements under which
it assigns marketing rights for the products it has developed
to pharmaceutical marketers. Royalties are earned based on the
sale of products.
CONCENTRATION OF CREDIT RISK
----------------------------
The Company extends credit on an uncollateralized basis
primarily to wholesale drug distributors and retail pharmacy
chains throughout the United States. As a result, the Company
is required to estimate the level of receivables which
ultimately will not be paid. The Company calculates this
estimate based on prior experience supplemented by a customer
specific review when it is deemed necessary. On a periodic
basis, the Company performs evaluations of the financial
condition of all customers to further limit its credit risk
exposure. Actual losses from uncollectible accounts have
historically been insignificant.
The Company's three largest customers accounted for
approximately 31%, 16% and 11%, and 33%, 20% and 14% of gross
receivables at March 31, 2004 and 2003, respectively.
During fiscal 2004, KV's three largest customers accounted for
25%, 16% and 13% of gross revenues. In fiscal 2003 and 2002,
the Company's three largest customers accounted for gross
revenues of 23%, 18% and 14% and 20%, 19% and 13%,
respectively.
The Company maintains cash balances that are greater than the
FDIC insurable limit.
SHIPPING AND HANDLING COSTS
---------------------------
The Company classifies shipping and handling costs in cost of
sales. The Company does not derive revenue from shipping.
RESEARCH AND DEVELOPMENT
------------------------
Research and development costs, including licensing fees for
early-stage development products, are expensed in the period
incurred.
The Company has licensed the exclusive rights to co-develop
and market various products with other drug delivery
companies. These collaborative agreements usually require the
Company to pay up-front fees and ongoing milestone payments.
When the Company makes an up-front or milestone payment,
management evaluates the stage of the related product to
determine the appropriate accounting treatment. If the product
is considered to be beyond the early development stage but has
not yet been approved by regulatory authorities, the Company
will evaluate the facts and circumstances of each case to
determine if a portion or all of the payment has future
economic benefit and should be capitalized. Payments made to
third parties subsequent to regulatory approval are
capitalized with that cost generally amortized over the
patented life of the product.
62
The Company accrues estimated costs associated with clinical
studies performed by contract research organizations based on
the total of costs incurred through the balance sheet date.
The Company monitors the progress of the trials and their
related activities to the extent possible, and adjusts the
accruals accordingly. These accrued costs are recorded as a
component of research and development expense.
DEFERRED FINANCING COSTS
------------------------
Financing costs of $5,835 related to the Contingent
Convertible Notes issuance are being amortized over five years
to the first date the debt can be put by the holders to the
Company. Deferred financing costs are included in "Other
Assets" in the accompanying consolidated balance sheet.
EARNINGS PER SHARE
------------------
Basic earnings per share is calculated by dividing net income
available to common shareholders for the period by the
weighted average number of common shares outstanding during
the period. Diluted earnings per share is based on the
treasury stock method and is computed by dividing net income
by the weighted average common shares and common share
equivalents outstanding during the periods presented assuming
the conversion of preferred shares and the exercise of all
in-the-money stock options. Common share equivalents have been
excluded from the computation of diluted earnings per share
where their inclusion would be anti-dilutive.
INCOME TAXES
------------
Income taxes are accounted for under the asset and liability
method where deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. A valuation
allowance is established when it is more likely than not that
some portion or all of the deferred tax assets will not be
realized.
63
STOCK-BASED COMPENSATION
------------------------
The Company grants stock options for a fixed number of shares
to employees with an exercise price greater than or equal to
the fair value of the shares at the date of grant. As
permissible under Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, the
Company elected to continue to account for stock option grants
to employees in accordance with Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees
and related interpretations. APB 25 requires that compensation
cost related to fixed stock option plans be recognized only to
the extent that the fair value of the shares at the grant date
exceeds the exercise price. Accordingly, no compensation
expense is recognized for stock option awards granted to
employees at or above fair value. Had the Company determined
compensation expense using the fair value method prescribed by
SFAS 123, the Company's net income and earnings per share
would have been as follows:
2004 2003 2002
---- ---- ----
Net income, as reported........................ $45,848 $28,110 $31,464
Stock based employee
compensation expense,
net of tax.................................... (695) (815) (815)
------- ------- -------
Pro forma net income........................... $45,153 $27,295 $30,649
======= ======= =======
Earnings per share:
Basic - as reported......................... $ 0.93 $ 0.56 $ 0.69
Basic - pro forma........................... 0.91 0.55 0.67
Diluted - as reported....................... 0.90 0.55 0.65
Diluted - pro forma......................... 0.88 0.53 0.64
The weighted average fair value of the options has been
estimated on the date of grant using the following weighted
average assumptions for grants in fiscal 2004, 2003 and 2002,
respectively: no dividend yield; expected volatility of 43%,
45% and 56%; risk-free interest rate of 3.00%, 2.40% and 6.00%
per annum; and expected option terms ranging from 3 to 10
years for all three years. Weighted averages are used because
of varying assumed exercise dates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The fair values of the Company's cash and cash equivalents,
receivables, accounts payable and accrued liabilities
approximate their carrying values due to the relatively short
maturity of these items. The carrying amount of all long-term
financial instruments approximates their fair value because
their terms are similar to those which can be obtained for
similar financial instruments in the current marketplace.
DERIVATIVE FINANCIAL INSTRUMENTS
--------------------------------
The Company uses a derivative to hedge variable interest rate
exposure related to a term loan secured by a building. To
achieve hedge accounting, the criteria specified in SFAS No.
133, "Accounting for Derivative Instruments and Hedging
Activities" must be met. SFAS 133 requires all derivatives,
whether designated for hedging relationships or not, to be
recorded on the consolidated balance sheet at fair value. The
accounting for changes in the value of a derivative depends on
whether the contract has been designated and qualifies for
hedge accounting. The impact of the Company's derivative on
fiscal 2004 consolidated net income was not material.
64
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In January 2003, the FASB issued Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities, an interpretation
of ARB No. 51. The primary objectives of FIN 46 are to provide
guidance on the identification of entities which the Company
may control through means other than through voting rights
("variable interest entities") and to determine when and which
business enterprise ("primary beneficiary") should consolidate
the variable interest entity. FIN 46 requires existing
unconsolidated variable interest entities to be consolidated
by their primary beneficiaries if the entities do not
effectively disperse risks among the parties involved.
Variable interest entities that effectively disperse risks
will not be consolidated unless a single party holds an
interest or combination of interests that effectively
recombines risks that were previously dispersed.
65
In addition, FIN 46 requires that the primary beneficiary, as
well as all other enterprises with a significant variable
interest in a variable interest entity, make additional
disclosures. Certain disclosure requirements of FIN 46 were
effective for financial statements issued after January 31,
2003. In December 2003, the FASB revised FIN 46 (FIN 46R) to
address certain FIN 46 implementation issues. The revised
provisions were applicable no later than the first reporting
period ending after March 15, 2004. The Company adopted FIN 46
and FIN 46R on March 31, 2004 and, based upon the evaluation
performed of all interests, have determined the Company does
not have any variable interest entities that require
consolidation.
In May 2003, the FASB issued SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS 150 establishes standards for how
entities classify and measure in their statement of financial
position certain financial instruments with characteristics of
both liabilities and equity. The provisions of SFAS 150 are
effective for financial instruments entered into or modified
after May 31, 2003, and otherwise for the first fiscal interim
period beginning after June 15, 2003. The adoption of this
statement did not have a material impact on the Company's
results of operations or financial position.
In April 2004, the FASB issued FASB Staff Position No. 129-1
(FSP 129-1), Disclosure Requirements under FASB Statement No.
129, Disclosure of Information about Capital Structure,
Relating to Contingently Convertible Securities. This FSP
requires the disclosure provisions of Statement 129 to apply
to all existing and newly created contingently convertible
securities and to their potentially dilutive effects on
earnings per share. The adoption of the disclosure provisions
of FSP 129-1 did not have a material impact on the Company's
financial condition or results of operations.
3. ACQUISITIONS AND LICENSE AGREEMENTS
-----------------------------------
On March 31, 2003, the Company acquired from Schwarz Pharma
(Schwarz) the product rights and trademarks to the Niferex(R) line
of hematinic products for $14,300, plus expenses. The acquisition
was financed with cash on hand. The purchase price was allocated to
the trademark rights acquired and is being amortized over an
estimated life of 20 years.
On March 31, 2003, the Company acquired from a subsidiary of Altana
Pharma AG (Altana) the world-wide product rights and trademarks to
the Chromagen(R) line of hematinic products and the StrongStart(R)
line of prenatal vitamin products for $27,000, plus expenses. The
purchase price was allocated to the trademark rights acquired and
is being amortized over an estimated life of 20 years.
On April 18, 2002, the Company entered into an agreement with
FemmePharma, Inc. (FemmePharma) whereby the Company was granted an
exclusive license to manufacture and sell in North America and
certain foreign markets intravaginal products and certain vaginal
anti-infective products under development (the "License
Agreement"). The initial product covered by the License Agreement
is intended for use in the treatment of endometriosis under
FemmePharma's patented PARDEL(TM) technology. In consideration for
the rights and licenses received, the Company paid $2,000 for use
of the PARDEL(TM) trademark and will pay up to an additional $7,500
upon successful achievement of certain regulatory milestones. These
milestone payments will commence upon submission of a New Drug
Application (NDA) to the Food and Drug Administration for the
initial product covered by the License Agreement. The amounts paid
and the costs to be incurred under this agreement will be allocated
to license agreements and amortized over the estimated lives of the
products upon launch. The Company is also obligated to pay
royalties on product sales covered by the License Agreement. These
disbursements will be recognized as a cost of sales concurrently
with the revenue earned on the products to which the royalties
relate.
66
Under a separate agreement, the Company invested $2,000 in
FemmePharma's convertible preferred stock in fiscal 2003 and made
an additional $3,000 convertible preferred stock investment in
January 2004 upon the completion of Phase II studies on the initial
product covered by the License Agreement. The $5,000 investment has
been accounted for using the cost method and is included in "Other
assets" in the accompanying consolidated balance sheets.
4. INVENTORIES
-----------
Inventories as of March 31, consist of:
2004 2003
---- ----
Finished goods..................... $31,028 $26,524
Work-in-process.................... 5,142 4,290
Raw materials...................... 15,529 12,532
------- -------
51,699 43,346
Reserves for obsolescence.......... (1,002) (1,003)
------- -------
$50,697 $42,343
======= =======
5. PROPERTY AND EQUIPMENT
----------------------
Property and equipment as of March 31, consist of:
2004 2003
---- ----
Land and improvements............................ $ 2,083 $ 2,083
Building and building improvements............... 17,767 17,246
Machinery and equipment.......................... 43,442 35,548
Office furniture and equipment................... 15,051 12,185
Leasehold improvements........................... 11,338 10,708
Construction-in-progress......................... 24,529 5,848
-------- --------
114,210 83,618
Less accumulated depreciation and amortization... (38,433) (31,715)
-------- --------
Net property and equipment.................... $ 75,777 $ 51,903
======== ========
Capital additions to property and equipment were $30,592,
$16,113 and $8,484 for fiscal 2004, 2003 and 2002, respectively.
Depreciation and amortization of property and equipment was $6,718,
$5,434 and $4,107 for fiscal 2004, 2003 and 2002, respectively.
Property and equipment projects classified as construction-in-
progress at March 31, 2004 are projected to be completed during
fiscal 2005 at an estimated cost of $47,000.
67
6. INTANGIBLE ASSETS AND GOODWILL
------------------------------
Intangible assets and goodwill as of March 31, consist of:
2004 2003
------------------------------- -----------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
Product rights - Micro-K(R)....... $36,140 $ (9,099) $36,140 $(7,294)
Product rights - PreCare(R)....... 8,433 (1,968) 8,433 (1,546)
Trademarks acquired:
Niferex(R)..................... 14,834 (742) 14,834 -
Chromagen(R)/StrongStart(R).... 27,642 (1,382) 27,642 -
License agreements................ 3,825 - 1,000 -
Trademarks and patents............ 2,980 (411) 3,114 (303)
------- -------- ------- -------
Total intangible assets....... 93,854 (13,602) 91,163 (9,143)
Goodwill.......................... 557 - 557 -
------- -------- ------- -------
$94,411 $(13,602) $91,720 $(9,143)
======= ======== ======= =======
As of March 31, 2004, the Company's intangible assets have a
weighted average useful life of approximately 20 years.
Amortization of intangible assets was $4,459, $2,321 and $2,298 for
fiscal 2004, 2003 and 2002, respectively. Amortization of goodwill
was $55 for fiscal 2002.
Estimated annual amortization expense is $4,563, $4,600, $4,615,
$4,630 and $4,645 for fiscal 2005, 2006, 2007, 2008 and 2009,
respectively.
68
7. OTHER ASSETS
------------
Other assets as of March 31, consist of:
2004 2003
---- ----
Cash surrender value of life insurance...... $ 2,531 $1,634
Other investments........................... 5,000 2,000
Deferred financing costs, net............... 4,993 44
Deposits.................................... 1,220 994
------- ------
$13,744 $4,672
======= ======
8. ACCRUED LIABILITIES
-------------------
Accrued liabilities as of March 31, consist of:
2004 2003
---- ----
Salaries, wages, incentives and benefits.... $ 6,160 $ 6,202
Income taxes................................ 2,409 8,402
Promotion expenses.......................... 635 2,744
Payments due on product acquisitions........ - 15,983
Litigation reserve.......................... 18,325 16,500
Other....................................... 3,388 2,717
------- -------
$30,917 $52,548
======= =======
9. LONG-TERM DEBT
--------------
Long-term debt as of March 31, consists of:
2004 2003
---- ----
Industrial revenue bonds.................... $ 205 $ 530
Notes payable............................... 6,731 13,234
Building mortgages.......................... 11,714 3,826
Convertible notes........................... 200,000 -
-------- -------
218,650 17,590
Less current portion........................ (7,909) (7,484)
-------- -------
$210,741 $10,106
======== =======
In December 2003, the Company increased its credit agreement with a
bank to $65,000. The revised agreement provides for an extension of
the Company's $40,000 revolving line of credit along with an
increase from $20,000 to $25,000 in the supplemental credit line
that is available for financing acquisitions. These credit
facilities expire in October 2006 and December 2004, respectively.
The revolving credit lines are unsecured and interest is charged at
the lower of the prime rate or the one-month LIBOR rate plus 150
basis points. At March 31, 2004, the Company had no cash borrowings
outstanding under either credit facility and $11,561 in open
letters of credit issued under the credit facilities. The credit
agreement includes covenants that impose minimum levels of earnings
before interest, taxes, depreciation and amortization, a maximum
funded debt ratio, a limit on capital expenditures and dividend
payments, a minimum fixed charge ratio and a maximum senior
leverage ratio. As of March 31, 2004, the Company was in compliance
with all of its covenants.
69
The industrial revenue bonds, which bear interest at 7.35% per
annum, mature serially through 2005 and are collateralized by
certain property and equipment, as well as through a letter of
credit, which may only be accessed in case of default on the bonds.
The bonds do not allow the holder to require the Company to redeem
the bonds.
In April 2003, the Company financed the purchase of an $8.8 million
building with a term loan secured by the property under a floating
rate loan with a bank. The facility consisted of approximately
275,000 square feet of office, production, distribution and
warehouse space. The remaining principal balance plus any unpaid
interest is due in April 2008. We also entered into an interest
rate swap agreement with the same bank, which fixed the interest
rate of the building mortgage at 5.31% for the term of the loan. At
March 31, 2004, the Company's other two outstanding building
mortgages bear interest at 7.57% and 6.27% and the remaining
principal balances plus any unpaid interest are due in December
2006 and December 2007, respectively.
In conjunction with the Altana acquisition agreement, the Company
entered into two unsecured promissory notes to finance a portion of
the transaction (see Note 3). The notes payable balance outstanding
at March 31, 2004 relates to the note due on March 31, 2005. The
second unsecured promissory entered into with Altana was repaid on
March 31, 2004.
On May 16, 2003, the Company issued $200,000 of Convertible
Subordinated Notes (the "Notes") that are convertible, under
certain circumstances, into shares of Class A common stock at an
initial conversion price of $23.01 per share. The Notes, which are
due May 16, 2033, bear interest that is payable on May 16 and
November 16 of each year at a rate of 2.50% per annum. The Company
also is obligated to pay contingent interest at a rate equal to
0.5% per annum during any six-month period from May 16 to November
15 and from November 16 to May 15, with the initial six-month
period commencing May 16, 2006, if the average trading price of the
Notes per $1,000 principal amount for the five trading day period
ending on the third trading day immediately preceding the first day
of the applicable six-month period equals $1,200 or more.
The Company may redeem some or all of the Notes at any time on or
after May 21, 2006, at a redemption price, payable in cash, of 100%
of the principal amount of the Notes, plus accrued and unpaid
interest, including contingent interest, if any. Holders may
require the Company to repurchase all or a portion of their Notes
on May 16, 2008, 2013, 2018, 2023 and 2028 or upon a change in
control, as defined in the indenture governing the Notes, at a
purchase price, payable in cash, of 100% of the principal amount of
the Notes, plus accrued and unpaid interest, including contingent
interest, if any. The Notes are subordinate to all of our existing
and future senior obligations. The net proceeds to the Company were
approximately $194.2 million, after deducting underwriting
discounts, commissions and offering expenses.
The Notes are convertible, at the holders' option, into shares of
the Company's Class A common stock prior to the maturity date under
the following circumstances:
o during any quarter commencing after June 30,
2003, if the closing sale price of the Company's
Class A common stock over a specified number of
trading days during the previous quarter is more
than 120% of the conversion price of the Notes
on the last trading day of the previous quarter.
The Notes are initially convertible at a
conversion price of $23.01 per share, which is
equal to a conversion rate of approximately
43.4594 shares per $1,000 principal amount of Notes;
o if the Company has called the Notes for redemption;
o during the five trading day period immediately
following any nine consecutive day trading
period in which the trading price of the Notes
per $1,000 principal amount for each day of such
period was less than 95% of the product of the
closing sale price of our Class A common stock
on that day multiplied by the number of shares
of our Class A common stock issuable upon
conversion of $1,000 principal amount of the
Notes; or
70
o upon the occurrence of specified corporate
transactions.
The Company has reserved 8,691,880 shares of Class A Common Stock
for issuance in the event the Notes are converted into the
Company's common shares.
The Notes, which are unsecured, do not contain any restrictions on
the payment of dividends, the incurrence of additional indebtedness
or the repurchase of the Company's securities, and do not contain
any financial covenants.
The aggregate maturities of long-term debt as of March 31, 2004 are
as follows:
2005.......................... $ 7,909
2006.......................... 973
2007.......................... 2,180
2008.......................... 1,674
2009.......................... 5,914
Thereafter.................... 200,000
--------
$218,650
========
The Company paid interest of $3,215, $389 and $417 during the years
ended March 31, 2004, 2003 and 2002, respectively.
10. COMMITMENTS AND CONTINGENCIES
-----------------------------
LEASES
The Company leases manufacturing, office and warehouse facilities,
equipment and automobiles under operating leases expiring through
fiscal 2013. Total rent expense for the years ended March 31, 2004,
2003 and 2002 was $5,246, $4,785 and $4,441, respectively.
Future minimum lease commitments under non-cancelable leases are as
follows:
2005.......................... $3,186
2006.......................... 2,576
2007.......................... 2,323
2008.......................... 1,962
2009.......................... 1,979
Later years................... 5,522
CONTINGENCIES
The Company is currently subject to legal proceedings and claims
that have arisen in the ordinary course of business. While the
Company is not presently able to determine the potential liability,
if any, related to such matters, the Company believes none of the
matters it currently faces, individually or in the aggregate, will
have a material adverse effect on its financial position or
operations except for the specific cases described in "Litigation"
below.
The Company has licensed the exclusive rights to co-develop and
market various generic equivalent products with other drug delivery
companies. These collaboration agreements require the Company to
make up-front and ongoing payments as development milestones are
attained. If all milestones remaining under these agreements were
reached, payments by the Company could total up to $28,900.
71
EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain officers and key
employees which extend for one to five years. These agreements
provide for base levels of compensation and, in certain instances,
also provide for incentive bonuses and separation benefits. Also,
the agreement with one officer contains provisions for partial
salary continuation under certain conditions, contingent upon
noncompete restrictions and providing consulting services to the
Company as specified in the agreement. The Company expensed $209,
$196 and $183, under this agreement in the years ended March 31,
2004, 2003 and 2002, respectively.
LITIGATION
ETHEX Corporation (ETHEX), a subsidiary of the Company, is a
defendant in a lawsuit styled Healthpoint, Ltd. v. ETHEX
Corporation, filed in federal court in San Antonio, Texas. In
general, the plaintiffs allege that ETHEX's comparative promotion
of its Ethezyme(TM) to Healthpoint's Accuzyme(R) product resulted
in false advertising and misleading statements under various
federal and state laws, and constituted unfair competition and
misappropriation of trade secrets. In September 2001, the jury
returned verdicts against ETHEX on certain false advertising,
unfair competition, and misappropriation claims. The jury awarded
compensatory and punitive damages totaling $16,500. On October 1,
2002, the U.S. District Court for the Western District of Texas
denied ETHEX's motion to set aside the jury's verdict. On December
17, 2002, the court entered a judgment awarding attorneys' fees to
Healthpoint in an amount to be subsequently determined.
The Company believes that the jury award and the judgment is
excessive and is not sufficiently supported by the facts or the
law. The Company is vigorously prosecuting an appeal. The Company
and its counsel believe it has meritorious arguments to be raised
during the appeal process; however, the Company cannot give any
assurance that it will prevail on appeal. As a result of the
court's earlier decisions, the Company's results of operations for
the quarter ended September 30, 2002 included a provision for
potential damages of $16,500, which was reflected in accrued
liabilities on the Company's consolidated balance sheet as of March
31, 2004. As discussed above, Healthpoint also requested
reimbursement for approximately $1,800 in attorneys' fees in
addition to the judgment. In September 2003, the court entered an
order specifying the amount of attorneys' fees to be awarded. As a
result of this decision, during the quarter ended September 30,
2003, the Company recorded an additional provision of $1,825, which
was reflected in accrued liabilities on the Company's consolidated
balance sheet as of March 31, 2004.
The Company and ETHEX are named as defendants in a second lawsuit
brought by Healthpoint and others styled Healthpoint Ltd. v. ETHEX
Corporation, filed in federal court in San Antonio, Texas. In
general, the plantiffs allege that ETHEX's comparative promotion of
its Ethezyme(TM) 830 to Healthpoint's Accuzyme(R) product resulted
in false advertising and misleading statements under various
federal and state laws, and constituted unfair competition and
misappropriation of trade secrets. The case has been inactive for
several years. Discovery has resumed and the case is expected to
proceed to trial in August, 2004. The Company believes it has
meritorious defenses and will vigorously defend the case; however,
it cannot give any assurance that it will prevail.
The Company and ETHEX are named as defendants in a case brought by
CIMA LABS, Inc. and Schwarz Pharma, Inc. and styled CIMA LABS, Inc.
et. al. v. KV Pharmaceutical Company et. al. filed in federal court
in Minnesota. It is alleged that the Company and ETHEX infringe on
a CIMA patent in connection with the manufacture and sale of
Hyoscyamine Sulfate Orally Dissolvable Tablets, 0.125 mg. The court
has denied the plaintiff's motion for a preliminary injunction,
which allows ETHEX to continue marketing the product during the
pendancy of the subject lawsuit and calls into question CIMA's and
Schwarz's ability to prevail in the lawsuit. Discovery is active.
The Company believes it has meritorious defenses and will
vigorously defend the case; however, it cannot give any assurance
that it will prevail.
72
The Company and ETHEX are named as defendants in a case brought by
Solvay Pharmaceuticals, Inc. and styled Solvay Pharmaceuticals, Inc.
v. ETHEX Corporation, filed in federal court in Minnesota. In
general, Solvay alleges that ETHEX's comparative promotion of its
Pangestyme CN 10 and Pangestyme CN 20 products to Solvay's Creon 10
and Creon 20 products resulted in false advertising and misleading
statements under various federal and state laws, and constituted
unfair and deceptive trade practices. Discovery has recently become
active. The Company believes it has meritorious defenses and will
vigorously defend the case; however, it cannot give any assurance
that it will prevail.
KV previously distributed several low volume pharmaceutical
products that contained phenylpropanolamine, or PPA, and that were
discontinued in 2000 and 2001. The Company is presently named a
defendant in a product liability lawsuit in federal court in
Mississippi involving PPA. The suit originated out of a case,
Virginia Madison, et al. v. Bayer Corporation, et al. The original
suit was filed on December 23, 2002, but was not served on KV until
February 2003. The case was originally filed in the Circuit Court
of Hinds County, Mississippi, and was removed to the United States
District Court for the Southern District of Mississippi by then
co-defendant Bayer Corporation. The case has been transferred to a
Judicial Panel on Multi-District Litigation for PPA claims sitting
in the Western District of Washington. The claims against the
Company have now been segregated into a lawsuit brought by Johnny
Fulcher individually and on behalf of the wrongful death
beneficiaries of Linda Fulcher, deceased, against KV. It alleges
bodily injury, wrongful death, economic injury, punitive damages,
loss of consortium and/or loss of services from the use of the
Company's distributed pharmaceuticals containing PPA that have
since been discontinued and/or reformulated to exclude PPA.
73
Discovery has only recently begun and management believes that the
Company may have substantial defenses to these claims, though the
ultimate outcome of this case and the potential effect cannot be
determined.
KV's product liability coverage for PPA claims expired for claims
made after June 15, 2002. Although the Company renewed its product
liability coverage for coverage after June 15, 2002, that policy
excludes future PPA claims in accordance with the standard industry
exclusion. Consequently, as of June 15, 2002, the Company has
provided for legal defense costs and indemnity payments involving
PPA claims on a going forward basis, including the Mississippi
lawsuit that was filed after June 15, 2002. Moreover, the Company
may not be able to obtain product liability insurance in the future
for PPA claims with adequate coverage limits at commercially
reasonable prices for subsequent periods. From time to time in the
future, KV may be subject to further litigation resulting from
products containing PPA that it formerly distributed. The Company
intends to vigorously defend any claims that may be raised in the
current and future litigation.
On September 25, 2003, the Commonwealth of Massachusetts filed
Commonwealth of Massachusetts v. Mylan Laboratories, Inc. et al in
Massachusetts federal court, against ETHEX Corp. and 12 other
manufacturers of generic pharmaceutical products. The complaint
alleges, among other things, that the defendants reported inflated
pricing information for their drugs to data reporting services, and
that Massachusetts relied on this pricing data in setting
reimbursement rates under the Medicaid program. The complaint also
alleges that Massachusetts received rebates from the defendants
under the Medicaid Drug Rebate Program that were materially less
than that to which Massachusetts was entitled. Massachusetts seeks
to recover from the defendants the amount that it believes it
overpaid and the amount it is owed in rebates, based on claims
under Massachusetts and federal law. The case is in its early
stages, and fact discovery has not yet begun. ETHEX is vigorously
defending the litigation.
74
The Company is involved in various other legal proceedings in the
ordinary course of its business. These legal proceedings include
various patent infringement actions brought by potential
competitors with respect to products the Company proposes to market
and for which it has filed Abbreviated New Drug Applications and
provided notice of certification required under the provisions of
the Hatch-Waxman Act. While it is not feasible to predict the
ultimate outcome of such other proceedings, the Company believes
that the ultimate outcome of such other proceedings will not have a
material adverse effect on its results of operations or financial
position.
11. GAIN FROM LEGAL SETTLEMENT
--------------------------
In September 2003, the Company received a payment from a branded
pharmaceutical company in the amount of $4,000. The payment
received by the Company was made in response to the Company's claim
that the branded company violated federal antitrust laws and
interfered with the Company's right to a timely introduction of a
generic pharmaceutical product in a previous fiscal year. The
payment was reflected by the Company in the "Litigation" line item
of operating income and was recorded net of approximately $500 of
attorney-related fees.
12. INCOME TAXES
------------
The fiscal 2004, 2003, and 2002 provisions were based on estimated
Federal and state taxable income using the applicable statutory
rates. The current and deferred Federal and state income tax
provisions for fiscal years 2004, 2003 and 2002 are as follows:
2004 2003 2002
---- ---- ----
PROVISION
Current
Federal............................... $14,184 $21,524 $18,603
State................................. 1,275 2,038 1,664
------- ------- -------
15,459 23,562 20,267
------- ------- -------
Deferred
Federal............................... 7,792 (7,207) (2,199)
State................................. 899 (884) (177)
------- ------- -------
8,691 (8,091) (2,376)
------- ------- -------
$24,150 $15,471 $17,891
======= ======= =======
The reasons for the differences between the provision for income
taxes and the expected Federal income taxes at the statutory rate
are as follows:
2004 2003 2002
---- ---- ----
Expected income tax expense................. $24,499 $15,253 $17,274
State income taxes, less
Federal income tax benefit............... 1,413 750 967
Business credits............................ (1,240) (370) (260)
Other ...................................... (522) (162) (90)
------- ------- -------
$24,150 $15,471 $17,891
======= ======= =======
75
As of March 31, 2004 and 2003, the tax effect of temporary
differences between the tax basis of assets and liabilities and
their financial reporting amounts are as follows:
2004 2003
------------------------- ------------------------
CURRENT NON-CURRENT CURRENT NON-CURRENT
------- ----------- ------- -----------
Fixed asset basis differences........ $ - $(4,870) $ - $(3,397)
Reserves for inventory and
receivables....................... 5,313 - 7,776 -
Vacation pay reserve................. 460 - 456 -
Deferred compensation................ - 1,164 - 1,092
Amortization......................... - (1,644) - (1,108)
Litigation reserve................... 6,704 - 6,056 -
Convertible notes interest........... (4,566) - - -
Other................................ 126 - 503 -
------- ------- ------- -------
Net deferred tax asset (liability) $ 8,037 $(5,350) $14,791 $(3,413)
======= ======= ======= =======
The Company paid income taxes of $22,201, $22,088, and $15,578
during the years ended March 31, 2004, 2003 and 2002, respectively.
13. EMPLOYEE BENEFITS
-----------------
STOCK OPTION PLAN AND AGREEMENTS
During fiscal 2002, the Board of Directors adopted the Company's
2001 Incentive Stock Option Plan (the "2001 Plan"), which allows
for the issuance of up to 3,750,000 shares of common stock. Prior
to the approval of the 2001 Plan, the Company operated under the
1991 Incentive Stock Option Plan, as amended, which allowed for the
issuance of up to 4,500,000 shares of common stock. Under the
Company's stock option plans, options to acquire shares of common
stock have been made available for grant to certain employees. Each
option granted has an exercise price of not less than 100% of the
market value of the common stock on the date of grant. The
contractual life of each option is generally 10 years. The
exercisability of the grants varies according to the individual
options granted. In addition to the Stock Option Plan, the Company
issues stock options periodically to executives with employment
agreements and to non-employee directors. At March 31, 2004,
options to purchase 34,875 shares of stock were outstanding
pursuant to employment agreements and grants to non-employee
directors.
76
The following summary shows the transactions for the fiscal years
2004, 2003 and 2002 under option arrangements:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------- -----------------------------
AVERAGE AVERAGE
NO. OF PRICE PER NO. OF PRICE PER
SHARES SHARE SHARES SHARE
------ ----- ------ -----
Balance, March 31, 2001........... 3,229,798 $ 6.85 1,220,434 $ 6.03
Options granted................... 543,000 13.63 - -
Options becoming exercisable...... - - 578,034 8.53
Options exercised................. (283,054) 3.82 (283,054) 3.82
Options canceled.................. (291,165) 8.49 (79,658) 7.09
--------- ---------
Balance March 31, 2002............ 3,198,579 8.12 1,435,756 7.41
Options granted................... 700,538 12.35 - -
Options becoming exercisable...... - - 566,455 9.21
Options exercised................. (135,420) 5.26 (135,420) 5.26
Options canceled.................. (260,664) 11.67 (75,952) 10.97
--------- ---------
Balance March 31, 2003............ 3,503,033 8.81 1,790,839 8.00
Options granted................... 677,313 19.56 - -
Options becoming exercisable...... - - 541,924 12.17
Options exercised................. (966,036) 7.80 (966,036) 7.80
Options canceled.................. (437,502) 11.72 (132,869) 10.37
--------- ---------
Balance March 31, 2004............ 2,776,808 $11.33 1,233,858 $ 9.71
========= =========
The weighted average fair value of options granted at market price
was $3.42, $2.18, and $3.63 per share in fiscal 2004, 2003 and
2002, respectively. The weighted average fair value of options
granted with an exercise price exceeding market price on the date
of grant was $1.97, $0.14, and $0.30 per share in fiscal 2004,
2003, and 2002, respectively.
The following table summarizes information about stock options
outstanding at March 31, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- -------------------------------
RANGE OF NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
EXERCISE OUTSTANDING LIFE AVERAGE EXERCISABLE AVERAGE
PRICES AT 3/31/04 REMAINING EXERCISE PRICE AT 3/31/04 EXERCISE PRICE
------ ---------- --------- -------------- ---------- --------------
$ 0.82 - $ 5.00 438,781 2 Years $ 3.11 307,744 $ 3.05
$ 5.01 - $10.00 755,403 6 Years $ 7.31 355,506 $ 7.14
$10.01 - $15.00 837,343 7 Years $12.03 333,948 $12.09
$15.01 - $20.00 521,122 7 Years $17.64 214,416 $18.39
$20.01 - $25.50 224,159 10 Years $23.67 22,244 $23.67
77
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 $400, $375, and $350
for fiscal 2004, 2003, and 2002, respectively. The Plan includes
features as described under Section 401(k) of the Internal Revenue
Code.
The Company's contributions to the 401(k) investment funds are 50%
of the first 7% of the salary contributed by each participant.
Contributions of $1,286, $1,185, and $1,028 were made to the 401(k)
investment funds in fiscal 2004, 2003, and 2002, respectively.
Contributions are also made to multi-employer defined benefit plans
administered by labor unions for certain union employees. Amounts
charged to pension expense and contributed to these plans were
$202, $231, and $165 in fiscal 2004, 2003, and 2002, respectively.
HEALTH AND MEDICAL INSURANCE PLAN
The Company contributes to health and medical insurance programs
for its non-union and union employees. For non-union employees, the
Company self-insures the first $100,000 of each employee's covered
medical claims. Included in accrued liabilities in the consolidated
balance sheets as of March 31, 2004 and 2003 were $450 and $400 of
accrued health insurance reserves, respectively, for claims
incurred but not reported. For union employees, the Company
participates in a fully funded insurance plan sponsored by the
union. Total health and medical insurance expense for the two plans
was $7,331, $6,636, and $5,255, in fiscal 2004, 2003, and 2002,
respectively.
14. RELATED PARTY TRANSACTIONS
--------------------------
The Company currently leases certain real property from an
affiliated partnership of an officer and director of the Company.
Lease payments made for this property during the years ended March
31, 2004, 2003, and 2002 totaled $271, $269, and $263,
respectively.
15. EQUITY TRANSACTIONS
-------------------
As of March 31, 2004 and 2003, the Company had 40,000 shares of 7%
Cumulative Convertible Preferred Stock (par value $.01 per share)
outstanding at a stated value of $25 per share. The preferred stock
is non-voting with dividends payable quarterly. The preferred stock
is redeemable at its stated value. Each share of preferred stock is
convertible into Class A Common Stock at a conversion price of
$2.96 per share. The preferred stock has a liquidation preference
of $25 per share plus all accrued but unpaid dividends prior to any
liquidation distributions to holders of Class A or Class B common
stock. No dividends may be paid on Class A or Class B common stock
unless all dividends on the Cumulative Convertible Preferred Stock
have been declared and paid. There were no undeclared and unaccrued
cumulative preferred dividends at March 31, 2004. The $366 of
undeclared and unaccrued cumulative preferred dividends at March
31, 2003 was paid in fiscal 2004. Also, under the terms of its
credit agreement, the Company may not pay cash dividends in excess
of 25% of the prior fiscal year's consolidated net income.
78
During July 2002, the Company completed a public offering of
approximately 3.3 million shares of Class A common stock. Net
proceeds to the Company were $72,380 after deducting underwriting
discounts, commissions and offering expenses.
Holders of Class A common stock are entitled to receive dividends
per share equal to 120% of the dividends per share paid on the
Class B Common Stock and have one-twentieth vote per share in the
election of directors and on other matters.
Under the terms of the Company's current loan agreement (see Note
9), the Company has limitations on paying dividends, except in
stock, on its Class A and Class B common stock. Payment of
dividends may also be restricted under Delaware Corporation law.
On September 8, 2003, the Company's Board of Directors declared a
three-for-two stock split in the form of a 50% stock dividend of
its common stock to shareholders of record on September 18, 2003,
payable on September 29, 2003. Common stock was credited and
retained earnings was charged for the aggregate par value of the
shares issued. The stated par value of each share was not changed
from $0.01.
All per share data in this report has been restated to reflect the
aforementioned three-for-two stock split in the form of a 50% stock
dividend.
79
16. EARNINGS PER SHARE
------------------
The following table sets forth the computation of basic and diluted
earnings per share:
2004 2003 2002
---- ---- ----
Numerator:
Net income(1)(2).................................. $45,848 $28,110 $31,464
Preferred stock dividends......................... (436) (70) (70)
------- ------- -------
Numerator for basic earnings per
share - income available to common
shareholders................................... 45,412 28,040 31,394
Effect of dilutive securities:
Preferred stock dividends...................... 436 70 70
------- ------- -------
Numerator for diluted earnings per
share - income available to common
shareholders after assumed conversions......... $45,848 $28,110 $31,464
======= ======= =======
Denominator:
Denominator for basic earnings per
share -- weighted-average shares............... 48,987 49,800 45,612
------- ------- -------
Effect of dilutive securities:
Employee stock options......................... 1,760 1,423 1,887
Convertible preferred stock.................... 338 338 748
------- ------- -------
Dilutive potential common shares.................. 2,098 1,761 2,635
------- ------- -------
Denominator for diluted earnings per
share -- adjusted weighted-average shares
and assumed conversions........................ 51,085 51,561 48,247
======= ======= =======
Basic earnings per share(3) ...................... $ 0.93 $ 0.56 $ 0.69
======= ======= =======
Diluted earnings per share(3)(4)(5)............... $ 0.90 $ 0.55 $ 0.65
======= ======= =======
<FN>
- ---------------------------
(1) Net income for the year ended March 31, 2004 included a $3,525
net payment received by the Company in accordance with a legal
settlement (see Note 11) and an additional reserve of $1,825
for attorney fees associated with a lawsuit (see Note 10). The
impact of these items, net of applicable income taxes, was to
increase net income by $1,097.
(2) Net income for the year ended March 31, 2003 included a
reserve of $16,500 for potential damages associated with a
lawsuit (see Note 10). The impact of the litigation reserve,
net of the applicable tax effect, was $10,444.
(3) The two-class method for Class A and Class B common stock is
not presented because the earnings per share are equivalent to
the converted method since dividends were not declared or paid
and each class of common stock has equal ownership of the
Company.
(4) Employee stock options to purchase 206,771, 170,490 and 27,550
shares of common stock at March 31, 2004, 2003 and 2002,
respectively, were outstanding but not included in the
computation of diluted earnings per share because the option
exercise price was greater than the average market price of
the common shares.
(5) The effect of 8,691,880 shares related to the assumed
conversion of the $200,000 Convertible Subordinated Notes (see
Note 9) has been excluded from the computation of diluted
earnings per share as the conditions that would permit
conversion have not been satisfied.
80
17. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
---------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
FISCAL 2004
- -----------
Net sales.................................. $59,379 $ 71,019 $69,598 $83,945 $283,941
Gross profit............................... 38,389 46,879 46,837 53,409 185,514
Pretax income.............................. 13,291 18,978 17,874 19,855 69,998
Net income................................. 8,573 12,241 11,529 13,505 45,848
Earnings per share -- basic................ 0.17 0.25 0.24 0.28 0.93
Earnings per share -- diluted.............. 0.17 0.24 0.23 0.27 0.90
FISCAL 2003
- -----------
Net sales.................................. $49,227 $ 60,482 $61,929 $73,358 $244,996
Gross profit............................... 30,149 37,001 38,201 45,118 150,469
Pretax income (loss)(a).................... 10,621 (2,220) 15,555 19,625 43,581
Net income (loss)(a)....................... 6,723 (1,405) 10,146 12,646 28,110
Earnings (loss) per share -- basic......... 0.15 (0.03) 0.20 0.25 0.56
Earnings (loss) per share -- diluted....... 0.14 (0.03) 0.19 0.24 0.55
<FN>
- -------------------------
(a) Pretax income for the three-months ended September 30, 2003 and the
year ended March 31, 2004 included a $3,525 net payment received
by the Company in accordance with a legal settlement (see Note
11) and an additional reserve of $1,825 for attorney's fees
associated with a lawsuit (see Note 10). The impact of these
items, net of applicable income taxes, was to increase net
income for the three-months ended September 30, 2003 and the
year ended March 31, 2004 by $1,097.
(b) Pretax income (loss) for the three-months ended September 30,
2002 and the year ended March 31, 2003 included a reserve of
$16,500 for potential damages associated with a lawsuit (see
Note 10). The impact of the litigation reserve, net of
applicable income taxes was to reduce net income for the
three-months ended September 30, 2002 and the year ended March 31,
2003 by $10,444.
18. SEGMENT REPORTING
-----------------
The reportable operating segments of the Company are branded
products, specialty generics and specialty materials. The operating
segments are distinguished by differences in products, marketing
and regulatory approval. Segment profits are measured based on
income before taxes and are determined based on each segment's
direct revenues and expenses. The majority of research and
development expense, corporate general and administrative expenses,
amortization and interest expense, as well as interest and other
income, are not allocated to segments, but included in the "all
other" classification. Identifiable assets for the three reportable
operating segments primarily include receivables, inventory, and
property and equipment. For the "all other" classification,
identifiable assets consist of cash and cash equivalents, corporate
property and equipment, intangible and other assets and all income
tax related assets. Accounting policies of the segments are the
same as the Company's consolidated accounting policies.
81
The following represents information for the Company's reportable
operating segments for fiscal 2004, 2003 and 2002.
FISCAL YEAR
ENDED BRANDED SPECIALTY SPECIALTY ALL
MARCH 31, PRODUCTS GENERICS MATERIALS OTHER ELIMINATIONS CONSOLIDATED
--------- -------- -------- --------- ----- ------------ ------------
----------------------------------------------------------------------------------------------------------------------------
Net revenues 2004 $82,868 $181,455 $16,550 $ 3,068 $ - $283,941
2003 43,677 179,724 17,395 4,200 - 244,996
2002 40,424 141,007 19,557 3,117 - 204,105
----------------------------------------------------------------------------------------------------------------------------
Segment profit (loss) (a)(b) 2004 31,661 101,163 1,365 (64,191) - 69,998
2003 8,361 97,339 1,692 (63,811) - 43,581
2002 7,222 74,389 3,684 (35,940) - 49,355
----------------------------------------------------------------------------------------------------------------------------
Identifiable assets 2004 24,585 70,581 8,343 426,087 (1,158) 528,438
2003 7,819 69,303 8,797 267,907 (1,158) 352,668
2002 12,555 58,618 8,774 116,403 (1,158) 195,192
----------------------------------------------------------------------------------------------------------------------------
Property and 2004 420 1,685 71 28,416 - 30,592
equipment additions 2003 634 116 143 15,220 - 16,113
2002 707 120 391 7,266 - 8,484
----------------------------------------------------------------------------------------------------------------------------
Depreciation and 2004 332 123 141 12,067 - 12,663
Amortization 2003 260 55 164 7,294 - 7,773
2002 74 79 156 6,169 - 6,478
----------------------------------------------------------------------------------------------------------------------------
<FN>
(a) In the "all other" classification, segment profit for fiscal 2004
included a $3,525 net payment received by the Company in accordance
with a legal settlement (see Note 11) and an additional reserve of
$1,825 for attorney's fees associated with a lawsuit (see Note 10).
(b) In the "all other" classification, segment profit (loss) for fiscal
2003 included a litigation reserve of $16,500 for potential damages
associated with a lawsuit (see Note 10).
Consolidated revenues are principally derived from customers in
North America and substantially all property and equipment is
located in St. Louis, Missouri.
82
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES
-----------------------
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to
the Company's management, including our principal executive officer
and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this report, we carried out
an evaluation, under the supervision and with the participation of
our management, including our principal executive officer and
principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on the
foregoing, our principal executive officer and principal financial
officer concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this report.
There have been no significant changes in our internal control over
financial reporting or in other factors that materially affected,
or is reasonably likely to materially affect, our internal controls
over financial reporting in the fourth quarter of fiscal year 2004.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information contained under the caption "INFORMATION CONCERNING
NOMINEES AND DIRECTORS CONTINUING IN OFFICE" in the Company's
definitive proxy statement to be filed pursuant to Regulation 14(a)
for its 2004 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 its 2004 Annual Meeting of Shareholders is
incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information contained under the captions "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS" and "SECURITY OWNERSHIP OF MANAGEMENT"
in the Company's definitive proxy statement to be filed pursuant to
Regulation 14(a) for its 2004 Annual Meeting of Shareholders is
incorporated herein by this reference.
83
EQUITY COMPENSATION PLAN INFORMATION
The following information regarding compensation plans of the
Company is furnished as of March 31, 2004, the end of the Company's
most recently completed fiscal year.
EQUITY COMPENSATION PLAN INFORMATION
REGARDING CLASS A COMMON STOCK
- ----------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, PRICE OF OUTSTANDING (EXCLUDING SECURITIES
WARRANTS AND RIGHTS OPTIONS, WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
------------------- ---------------------------- ------------------------
PLAN CATEGORY (a) (b) (c)
Equity compensation plans
approved by security holders(1) 2,409,068 $11.79 1,279,862
Equity compensation plans not
approved by security holders(2) 6,750 $3.22 N/A
---------
Total 2,415,818 $11.76
=========
EQUITY COMPENSATION PLAN INFORMATION
REGARDING CLASS B COMMON STOCK
- ----------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, PRICE OF OUTSTANDING (EXCLUDING SECURITIES
WARRANTS AND RIGHTS OPTIONS, WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
------------------- ---------------------------- ------------------------
PLAN CATEGORY (a) (b) (c)
Equity compensation plans
approved by security holders(1) 332,865 $9.10 1,249,000
Equity compensation plans not
approved by security holders(2) 28,125 $4.82 N/A
-------
Total 360,990 $8.77
=======
<FN>
(1) Consists of the Company's 2001 Incentive Stock Option Plan. See Note 13
of Notes to Consolidated Financial Statements.
(2) Consists of options granted to non-employee members of the Board of Directors.
84
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information contained under the caption "TRANSACTIONS WITH
DIRECTORS AND EXECUTIVE OFFICERS" in the Company's definitive proxy
statement to be filed pursuant to Regulation 14(a) for its 2004
Annual Meeting of Shareholders is incorporated herein by this
reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
--------------------------------------
The information contained under the caption "FEES BILLED BY
INDEPENDENT PUBLIC ACCOUNTANTS" in the Company's definitive proxy
statement to be filed pursuant to Regulation 14(a) for its 2004
Annual Meeting of Shareholders is incorporated herein by this
reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) 1. Financial Statements: Page
The following consolidated financial statements of the
Company are included in Part II, Item 8:
Report of Independent Certified Public Accountants............. 54
Consolidated Balance Sheets as of March 31, 2004 and 2003...... 55
Consolidated Statements of Income for the Years Ended
March 31, 2004, 2003 and 2002.................................. 56
Consolidated Statements of Shareholders' Equity for the
Years Ended March 31, 2004, 2003 and 2002...................... 57
Consolidated Statements of Cash Flows for the Years
Ended March 31, 2004, 2003 and 2002............................ 58
Notes to Financial Statements.................................. 59
2. Financial Statement Schedules:
Report of Independent Certified Public Accountants regarding
Financial Statement Schedule................................... 87
Schedule II - Valuation and Qualifying Accounts................ 88
85
(b) None.
(c) Exhibits. See Exhibit Index on pages 90 through 97 of this Report.
Management contracts and compensatory plans are designated on the
Exhibit Index.
(d) Financial Statement Schedules.
86
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
of K-V Pharmaceutical Company
The audits referred to in our report dated June 4, 2004, relating to the
consolidated financial statements of K-V Pharmaceutical Company, which are
included in Item 8 of this Form 10-K, included the audits of the accompanying
financial statement schedule. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based upon our audits. In
our opinion such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO SEIDMAN, LLP
Chicago, Illinois
June 4, 2004
87
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE AT CHARGED TO AMOUNTS BALANCE
BEGINNING COSTS AND CHARGED TO AT END
OF YEAR EXPENSES RESERVES OF YEAR
------- -------- -------- -------
(in thousands)
Year Ended March 31, 2002:
Allowance for doubtful accounts............ $ 448 $ 113 $ 158 $ 403
Inventory obsolescence..................... 587 2,215 1,694 1,108
-------- -------- -------- --------
$ 1,035 $ 2,328 $ 1,852 $ 1,511
======== ======== ======== ========
Year Ended March 31, 2003:
Allowance for doubtful accounts............ $ 403 $ (81) $ (100) $ 422
Inventory obsolescence..................... 1,108 2,053 2,158 1,003
-------- -------- -------- --------
$ 1,511 $ 1,972 $ 2,058 $ 1,425
======== ======== ======== ========
Year Ended March 31, 2004:
Allowance for doubtful accounts............ $ 422 $ (20) $ - $ 402
Inventory obsolescence..................... 1,003 2,442 2,443 1,002
-------- -------- -------- --------
$ 1,425 $ 2,422 $ 2,443 $ 1,404
======== ======== ======== ========
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.
88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
K-V PHARMACEUTICAL COMPANY
Date: June 14, 2004 By /s/ Marc S. Hermelin
------- -------------------------------------
Vice Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: June 14, 2004 By /s/ Gerald R. Mitchell
------- ------------------------------------
Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the dates indicated by the following persons
on behalf of the Company and in their capacities as members of the Board of
Directors of the Company:
Date: June 14, 2004 By /s/ Marc S. Hermelin
-----------------------------------
Marc S. Hermelin
Date: June 14, 2004 By /s/ Victor M. Hermelin
-------------------------------------
Victor M. Hermelin
Date: June 14, 2004 By /s/ Norman D. Schellenger
-----------------------------------
Norman D. Schellenger
Date: June 14, 2004 By /s/ Alan G. Johnson
-----------------------------------
Alan G. Johnson
Date: June 14, 2004 By /s/ Kevin S. Carlie
-----------------------------------
Kevin S. Carlie
Date: June 14, 2004 By /s/ John P. Isakson
----------------------------------
John P. Isakson
Date: June 14, 2004 By
----------------------------------
Jean M. Bellin
89
EXHIBIT INDEX
NEEDS TO BE UPDATED
Exhibit No. Description
- ----------- -----------
3(a) The Company's Certificate of Incorporation, which was
filed as Exhibit 3(a) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1981, is
incorporated herein by this reference.
3(b) Certificate of Amendment to Certificate of Incorporation
of the Company, effective March 7, 1983, which was filed
as Exhibit 3(c) to the Company's Annual Report on Form
10-K for the year ended March 31, 1983, is incorporated
herein by this reference.
3(c) Certificate of Amendment to Certificate of Incorporation
of the Company, effective June 9, 1987, which was filed as
Exhibit 3(d) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1988, is incorporated herein
by this reference.
3(d) Certificate of Amendment to Certificate of Incorporation
of the Company, effective September 24, 1987, which was
filed as Exhibit 3(f) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1988, is
incorporated herein by this reference.
3(e) Certificate of Amendment to Certificate of Incorporation
of the Company, effective July 17, 1986, which was filed
as Exhibit 3(e) to the Company's Annual Report on Form
10-K for the year ended March 31, 1996, is incorporated
herein by this reference.
3(f) Certificate of Amendment to Certificate of Incorporation
of the Company, effective December 23, 1991, which was
filed as Exhibit 3(f) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1996, is
incorporated herein by this reference.
3(g) Certificate of Amendment to Certificate of Incorporation
of the Company, effective September 3, 1998, which was
filed as Exhibit 4(g) to the Company's Registration
Statement on Form S-3 (Registration Statement No.
333-87402), filed May 1, 2002, is incorporated herein by
this reference.
3(h) Bylaws of the Company, as amended through November 18,
1982, which was filed as Exhibit 3(e) to the Company's
Annual Report on Form 10-K for the year ended March 31,
1993, is incorporated herein by this reference.
3(i) Amendment to Bylaws of the Company, effective July 2,
1984, which was filed as Exhibit 4(i) to the Company's
Registration Statement on Form S-3 (Registration Statement
No. 333-87402), filed May 1, 2002, is incorporated herein
by this reference.
3(j) Amendment to Bylaws of the Company, effective December 4,
1986, which was filed as Exhibit 4(j) to the Company's
Registration Statement on Form S-3 (Registration Statement
No. 333-87402), filed May 1, 2002, is incorporated herein
by this reference.
3(k) Amendment to Bylaws of the Company effective March 17,
1992, which was filed as Exhibit 4(k) to the Company's
Registration Statement on Form S-3 (Registration Statement
No. 333-87402), filed May 1, 2002, is incorporated herein
by this reference.
90
3(l) Amendment to Bylaws of the Company effective November 18,
1992, which was filed as Exhibit 4(l) to the Company's
Registration Statement on Form S-3 (Registration Statement
No. 333-87402), filed May 1, 2002, is incorporated herein
by this reference.
3(m) Amendment to Bylaws of the Company, effective December 30,
1993, which was filed as Exhibit 3(h) to the Company's
Annual Report on Form 10-K for the year ended March 31,
1996, is incorporated herein by this reference.
3(n) Amendment to Bylaws of the Company, effective September
24, 2002, which was filed as Exhibit 4(n) to the Company's
Registration Statement on Form S-3 (Registration Statement
No. 333-106294), filed June 19, 2003, is incorporated
herein by this reference.
4(a) Certificate of Designation of Rights and Preferences of 7%
Cumulative Convertible preferred stock of the Company,
effective June 9, 1987, and related Certificate of
Correction, dated June 17, 1987, which was filed as
Exhibit 4(f) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1987, is incorporated herein
by this reference.
4(b) Loan Agreement dated as of November 1, 1989, with the
Industrial Development Authority of the County of St.
Louis, Missouri, regarding private activity refunding and
revenue bonds issued by such Authority, including form of
Promissory Note executed in connection therewith, which
was filed as Exhibit 4(b) to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31,
1989, is incorporated herein by this reference.
4(c) Loan Agreement dated June 18, 1997 between the Company and
its subsidiaries and LaSalle National Bank ("LaSalle"),
which was filed as Exhibit 4(i) to the Company's Annual
Report on Form 10-K for the year ended March 31, 1997, is
incorporated herein by this reference.
4(d) Revolving Note, dated June 18, 1997, by the Company and
its subsidiaries in favor of LaSalle, which was filed as
Exhibit 4(j) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1997, is incorporated herein
by this reference.
4(e) Term Note, dated June 24, 1997, by the Company and its
subsidiaries in favor of LaSalle, which was filed as
Exhibit 4(k) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1997, is incorporated herein
by this reference.
4(f) Reimbursement Agreement dated as of October 16, 1997,
between the Company and LaSalle, which was filed as
Exhibit 4(f) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1998, is incorporated herein
by this reference.
4(g) Deed of Trust and Security Agreement dated as of October
16, 1997, between the Company and LaSalle, which was filed
as Exhibit 4(g) to the Company's Annual Report on Form
10-K for the year ended March 31, 1998, is incorporated
herein by this reference.
4(h) First Amendment, dated as of October 28, 1998, to Loan
Agreement between the Company and its subsidiaries and
LaSalle, which was filed as Exhibit 4(h) to the Company's
Annual Report on Form 10-K for the year ended March 31,
1999, is incorporated herein by this reference.
4(i) Second Amendment, dated as of March 11, 1999, to Loan
Agreement between the Company and its subsidiaries and
LaSalle, which was filed as Exhibit 4(i) to the Company's
Annual Report on Form 10-K for the year ended March 31,
1999, is incorporated herein by this reference.
91
4(j) Third Amendment, dated June 22, 1999, to Loan Agreement
between the Company and its subsidiaries and LaSalle,
which was filed as Exhibit 4(j) to the Company's Annual
Report on Form 10-K for the year ended March 31, 2000, is
incorporated herein by this reference.
4(k) Fourth Amendment, dated December 17, 1999, to Loan
Agreement between the Company and its subsidiaries and
LaSalle, which was filed as Exhibit 4(k) to the Company's
Annual Report on Form 10-K for the year ended March 31,
2000, is incorporated herein by this reference.
4(l) Fifth Amendment, dated December 21, 2001, to Loan
Agreement between the Company and its subsidiaries and
LaSalle, which was filed as Exhibit 4(l) to the Company's
Annual Report on Form 10-K for the year ended March 31,
2002, is incorporated herein by this reference.
4(m) Sixth Amendment, dated December 20, 2002, to Loan
Agreement between the Company and its subsidiaries and
LaSalle, which was filed as Exhibit 4(m) to the Company's
Annual Report on Form 10-K for the year ended March 31,
2003, is incorporated herein by this reference.
4(n) Seventh Amendment, dated April 28, 2003, to Loan Agreement
between the Company and its subsidiaries and LaSalle,
which was filed as Exhibit 4(n) to the Company's Annual
Report on Form 10-K for the year ended March 31, 2003, is
incorporated herein by this reference.
4(o) Indenture dated as of May 16, 2003, by and between the
Company and Deutsche Bank Trust Company Americas, filed on
May 21, 2003, as Exhibit 4.1 to the Company's Current
Report on Form 8-K, is incorporated herein by this
reference.
4(p) Registration Rights Agreement dated as of May 16, 2003, by
and between the Company and Deutsche Bank Securities,
Inc., as representative of the several Purchasers, filed
on May 21, 2003 as Exhibit 4.2 to the Company's Current
Report on Form 8-K, is incorporated herein by this
reference.
4(q) Eighth Amendment, dated June 30, 2003, to Loan Agreement
between the Company and its subsidiaries and LaSalle,
filed herewith.
4(r) Ninth Amendment, dated December 19, 2003, to Loan
Agreement between the Company and its subsidiaries and
LaSalle, filed herewith.
10(a)* Stock Option Agreement between the Company and Marc S.
Hermelin, Vice Chairman and Chief Executive Officer, dated
February 18, 1986, is incorporated herein by this
reference.
10(b)* First Amendment to and Restatement of the KV
Pharmaceutical 1981 Employee Incentive Stock Option Plan,
dated March 9, 1987 (the "Restated 1981 Option Plan"),
which was filed as Exhibit 10(t) to the Company's Annual
Report on Form 10-K for the year ended March 31, 1988, is
incorporated herein by this reference.
10(c)* Second Amendment to the Restated 1981 Option Plan, dated
June 12, 1987, which was filed as Exhibit 10(u) to the
Company's Annual Report on Form 10-K for the year ended
March 31, 1988, is incorporated herein by this reference.
10(d)* Revised Form of Stock Option Agreement, effective June 12,
1987, for the Restated 1981 Option Plan, which was filed
as Exhibit 10(v) to the Company's Annual Report on Form
10-K for the year ended March 31, 1988, is incorporated
herein by this reference.
92
10(e)* Consulting Agreement between the Company and Victor M.
Hermelin, Chairman of the Board, dated October 30, 1978,
as amended October 30, 1982, and Employment Agreement
dated February 20, 1974, referred to therein (which was
filed as Exhibit 10(m) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1983) and
subsequent Amendments dated as of August 12, 1986, which
was filed as Exhibit 10(f) to the Company's Annual Report
on Form 10-K for the year ended March 31, 1987, and dated
as of September 15, 1987 (which was filed as Exhibit 10(s)
to the Company's Annual Report on Form 10-K for the year
ended March 31, 1988), and dated October 25, 1988 (which
was filed as Exhibit 10(n) to the Company's Annual Report
on Form 10-K for the year ended March 31, 1989), and dated
October 30, 1989 (which was filed as Exhibit 10(n) to the
Company's Annual Report on Form 10-K for the year ended
March 31, 1990), and dated October 30, 1990 (which was
filed as Exhibit 10(n) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1991), and dated as
of October 30, 1991 (which was filed as Exhibit 10(i) to
the Company's Annual Report on Form 10-K for the year
ended March 31, 1992), are incorporated herein by this
reference.
10(f)* Restated and Amended Employment Agreement between the
Company and Gerald R. Mitchell, Vice President, Finance,
dated as of March 31, 1994, is incorporated herein by this
reference.
10(g)* Employment Agreement between the Company and Raymond F.
Chiostri, Corporate Vice-President and
President-Pharmaceutical Division, which was filed as
Exhibit 10(l) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1992, is incorporated herein
by this reference.
10(h) Lease of the Company's facility at 2503 South Hanley Road,
St. Louis, Missouri, and amendment thereto, between the
Company as Lessee and Marc S. Hermelin as Lessor, which
was filed as Exhibit 10(n) to the Company's Annual Report
on Form 10-K for the year ended March 31, 1983, is
incorporated herein by this reference.
10(i) Amendment to the Lease for the facility located at 2503
South Hanley Road, St. Louis, Missouri, between the
Company as Lessee and Marc S. Hermelin as Lessor, which
was filed as Exhibit 10(p) to the Company's Annual Report
on Form 10-K for the year ended March 31, 1992, is
incorporated herein by this reference.
10(j) Amendment to Lease Agreement, dated as of September 30,
1985, between the Industrial Development Authority of the
County of St. Louis, Missouri, as Lessor and KV
Pharmaceutical Company as Lessee, regarding lease of
facility located at 2303 Schuetz Road, St. Louis County,
Missouri, which was filed as Exhibit 10(q) to the
Company's Report on Form 10-Q for the quarter ended
December 31, 1985, is incorporated herein by this
reference.
10(k)* KV Pharmaceutical Company Fourth Restated Profit Sharing
Plan and Trust Agreement dated September 18, 1990, which
was filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-8 No. 33-36400, is incorporated herein
by this reference.
10(l)* First Amendment to the KV Pharmaceutical Company Fourth
Restated Profit Sharing Plan and Trust dated September 18,
1990, is incorporated herein by this reference.
10(m)* 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.
93
10(n)* Stock Option Agreement dated June 1, 1995, granting stock
option to Marc S. Hermelin, which was filed as Exhibit
10(w) to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, is incorporated herein by
this reference.
10(o)* Second Amendment dated as of June 1, 1995, to Employment
Agreement between the Company and Marc S. Hermelin, which
was filed as Exhibit 10(x) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996,
is incorporated herein by this reference.
10(p)* Stock Option Agreement dated as of January 22, 1996,
granting stock options to MAC & Co., which was filed as
Exhibit 10(z) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1996, is incorporated herein
by this reference.
10(q)* Third Amendment dated as of November 22, 1995, to
Employment Agreement between the Company and Marc S.
Hermelin, which was filed as Exhibit 10(aa) to the
Company's Annual Report on Form 10-K for the year ended
March 31, 1996, is incorporated herein by this reference.
10(r)* Stock Option Agreement dated as of November 22, 1995,
granting a stock option to Victor M. Hermelin, which was
filed as Exhibit 10(bb) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1996, is
incorporated herein by this reference.
10(s)* Stock Option Agreement dated as of November 6, 1996,
granting a stock option to Alan G. Johnson, which was
filed as Exhibit 10(s) to the Company's Annual Report on
Form 10-K for the year ended March 31, 2003, is
incorporated herein by this reference.
10(t)* Fourth Amendment to and Restatement, dated as of January
2, 1997, of the KV Pharmaceutical Company 1991 Incentive
Stock Option Plan, which was filed as Exhibit 10(y) to the
Company's Annual Report on Form 10-K for the year ended
March 31, 1997, is incorporated herein by this reference.
10(u)* Agreement between the Company and Marc S. Hermelin, Vice
Chairman, dated December 16, 1996, with supplemental
letter attached, which was filed as Exhibit 10(z) to the
Company's Annual Report on Form 10-K for the year ended
March 31, 1997, is incorporated herein by this reference.
10(v)* Amendment to Lease dated February 17, 1997, for the
facility located at 2503 South Hanley Road, St. Louis,
Missouri, between the Company as Lessee and Marc S.
Hermelin as Lessor, which was filed as Exhibit 10(aa) to
the Company's Annual Report on Form 10-K for the year
ended March 31, 1997, is incorporated herein by this
reference.
10(w)* Stock Option Agreement dated as of January 3, 1997,
granting a stock option to Marc S. Hermelin, which was
filed as Exhibit 10(bb) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1999, is
incorporated herein by this reference.
10(x)* Stock Option Agreement dated as of May 15, 1997, granting
a stock option to Marc S. Hermelin, which was filed as
Exhibit 10(cc) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1999, is incorporated herein
by this reference.
10(y) Asset Purchase Agreement by and between K-V Pharmaceutical
Company and American Home Products Corporation, acting
through its Wyeth-Ayerst Laboratories division, dated as
of February 11, 1999, which was filed as Exhibit 2.1 to
the Company's Report on Form 8-K filed April 5, 1999, is
incorporated herein by this reference.
94
10(z)* Amendment, dated as of October 30, 1998, to Employment
Agreement between the Company and Marc S. Hermelin, which
was filed as Exhibit 10(ee) to the Company's Annual Report
on Form 10-K for the year ended March 31, 1999, is
incorporated herein by this reference.
10(aa) Exclusive License Agreement, dated as of April 1, 1999
between Victor M. Hermelin as licenser and the Company as
licensee, which was filed as Exhibit 10(ff) to the
Company's Annual Report on Form 10-K for the year ended
March 31, 1999 is incorporated herein by this reference.
10(bb)* Stock Option Agreement dated as of March 31, 1999,
granting a stock option to Victor M. Hermelin, which was
filed as Exhibit 10(aa) to the Company's Annual Report on
Form 10-K for the year ended March 31, 2001, is
incorporated by this reference.
10(cc)* Stock Option Agreement dated as of March 31, 1999,
granting a stock option to Norman D. Schellenger, which
was filed as Exhibit 10(cc) to the Company's Annual Report
on Form 10-K for the year ended March 31, 2003, is
incorporated herein by this reference.
10(dd)* Stock Option Agreement dated as of April 1, 1999, granting
a stock option to Marc S. Hermelin, which was filed as
Exhibit 10(gg) to the Company's Annual Report on Form 10-K
for the year ended March 31, 2000, is incorporated by this
reference.
10(ee)* Stock Option Agreement dated as of August 16, 1999,
granting a stock option to Marc S. Hermelin, which was
filed as Exhibit 10 (hh) to the Company's Annual Report on
Form 10-K for the year ended March 31, 2000, is
incorporated by this reference.
10(ff)* Stock Option Agreement dated as of October 13, 1999,
granting a stock option to Alan G. Johnson, which was
filed as Exhibit 10(ff) to the Company's Annual Report on
Form 10-K for the year ended March 31, 2003, is
incorporated herein by this reference.
10(gg)* Stock Option Agreement dated as of October 13, 1999,
granting a stock option to Alan G. Johnson, which was
filed as Exhibit 10(gg) to the Company's Annual Report on
Form 10-K for the year ended March 31, 2003, is
incorporated herein by this reference.
10(hh)* Stock Option Agreement dated as of October 13, 1999,
granting a stock option to Alan G. Johnson, which was
filed as Exhibit 10(hh) to the Company's Annual Report on
Form 10-K for the year ended March 31, 2003, is
incorporated herein by this reference.
10(ii)* Stock Option Agreement dated as of October 13, 1999,
granting a stock option to Alan G. Johnson, which was
filed as Exhibit 10(ii) to the Company's Annual Report on
Form 10-K for the year ended March 31, 2003, is
incorporated herein by this reference.
10(jj)* Amendment, dated December 2, 1999, to Employment Agreement
between the Company and Marc S. Hermelin, Vice-Chairman,
which was filed as Exhibit 10(ii) to the Company's Annual
Report on Form 10-K for the year ended March 31, 2000, is
incorporated by this reference.
10(kk)* Employment Agreement between the Company and Alan G.
Johnson, Senior Vice-President, Strategic Planning and
Corporate Growth, dated September 27, 1999, which was
filed as Exhibit 10(jj) to the Company's Annual Report on
Form 10-K for the year ended March 31, 2000, is
incorporated by this reference.
10(ll)* Consulting Agreement, dated as of May 1, 1999, between the
Company and Victor M. Hermelin, Chairman, which was filed
as Exhibit 10(kk) to the Company's Annual Report on Form
10-K for the year ended March 31, 2000, is incorporated by
this reference.
10(mm)* Stock Option Agreement dated as of June 1, 2000, granting
a stock option to Marc S. Hermelin, which was filed as
Exhibit 10(gg) to the Company's Annual Report on Form 10-K
for the year ended March 31, 2001, is incorporated by this
reference.
95
10(nn)* Stock Option Agreement dated as of June 1, 2000, granting
a stock option to Marc S. Hermelin, which was filed as
Exhibit 10(hh) to the Company's Annual Report on Form 10-K
for the year ended March 31, 2001, is incorporated by this
reference.
10(oo)* Stock Option Agreement dated as of April 9, 2001, granting
a stock option to Kevin S. Carlie, which was filed as
Exhibit 10(ii) to the Company's Annual Report on Form 10-K
for the year ended March 31, 2002, is incorporated herein
by this reference.
10(pp)* Stock Option Agreement dated as of April 9, 2001, granting
a stock option to Marc S. Hermelin, which was filed as
Exhibit 10(jj) to the Company's Annual Report on Form 10-K
for the year ended March 31, 2002, is incorporated herein
by this reference.
10(qq)* Stock Option Agreement dated as of April 9, 2001, granting
a stock option to Marc S. Hermelin, which was filed as
Exhibit 10(kk) to the Company's Annual Report on Form 10-K
for the year ended March 31, 2002, is incorporated herein
by this reference.
10(rr)* Stock Option Agreement dated as of July 26, 2002, granting
a stock option to Marc S. Hermelin, which was filed as
Exhibit 10(rr) to the Company's Annual Report on Form 10-K
for the year ended March 31, 2003, is incorporated herein
by this reference.
10(ss)* Stock Option Agreement dated as of October 21, 2002,
granting a stock option to John P. Isakson, which was
filed as Exhibit 10(ss) to the Company's Annual Report on
Form 10-K for the year ended March 31, 2003, is
incorporated herein by this reference.
10(tt) License Agreement by and between the Company and
FemmePharma, Inc., dated as of April 18, 2002, which was
filed as Exhibit 10(tt) to the Company's Annual Report on
Form 10-K for the year ended March 31, 2003, is
incorporated herein by this reference.
10(uu) Stock Purchase Agreement by and between the Company and
FemmePharma, Inc., dated as of April 18, 2002, which was
filed as Exhibit 10(uu) to the Company's Annual Report on
Form 10-K for the year ended March 31, 2003, is
incorporated herein by this reference.
10(vv) Product Acquisition Agreement by and between the Company
and Schwarz Pharma dated as of March 31, 2003, which was
filed as Exhibit 10(vv) to the Company's Annual Report on
Form 10-K for the year ended March 31, 2003, is
incorporated herein by this reference.
10(ww) Product Acquisition Agreement by and between the Company
and Altana Inc. dated as of March 31, 2003, which was
filed as Exhibit 10(ww) to the Company's Annual Report on
Form 10-K for the year ended March 31, 2003, is
incorporated herein by this reference.
10(xx)* Stock Option Agreement dated as of October 21, 2002,
granting a stock option to John P. Isakson, which was
filed as Exhibit 10(xx) to the Company's Annual Report on
Form 10-K for the year ended March 31, 2003, is
incorporated herein by this reference.
10(yy) Stock Option Agreement dated as of May 30, 2003, granting
a stock option to Marc S. Hermelin, filed herewith.
21 List of Subsidiaries, filed herewith.
23 Consent of BDO Seidman, LLP, filed herewith.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, is filed
herewith.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, is filed
herewith.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, filed herewith.
96
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, filed herewith.
<FN>
*Management contract or compensation plan.
97