UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-K/A
AMENDMENT NO. 1
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 1-9601
- --------------------------------------------------------------------------------
K-V PHARMACEUTICAL COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 43-0618919
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2503 SOUTH HANLEY ROAD, ST. LOUIS, MISSOURI 63144
(Address of principal executive offices, including ZIP code)
Registrant's telephone number, including area code: (314) 645-6600
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 is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark whether the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the shares of Class A and Class B Common Stock
held by non-affiliates of the registrant as of September 28, 2007, the last
business day of the registrant's most recently completed second fiscal
quarter, was $887,560,274 and $37,278,549, respectively. As of June 6, 2008,
the registrant had outstanding 37,755,099 and 12,256,159 shares of Class A
Common Stock and Class B Common Stock, respectively. Documents incorporated by
reference: Portions of the Company's Definitive Proxy Statement for its 2008
Annual Meeting of Shareholders are incorporated by reference in Part III of
this Annual Report on Form 10-K.
EXPLANATORY NOTE
KV Pharmaceutical is filing this Form 10-K/A ("Amended Filing") in order to
amend our annual report on Form 10-K for the year ended March 31, 2008,
originally filed on June 25, 2008 ("Original Filing"), to:
o Include Exhibit 23.1, Consent of KPMG LLP, which was inadvertently
omitted from the Original Filing due to an error by the third party
that provides EDGAR services to us.
o Correct a typographical error in Note 6, Property and Equipment, of
the Notes to Consolidated Financial Statements, to change the net
property and equipment total as of March 31, 2007 from $86.9 million
to $186.9 million.
o Correct the disclosure on page 16 under the heading Government
Regulation relative to unapproved products subject to a hold by the
FDA that we will discontinue manufacturing and marketing. The
disclosure in the Original Filing indicated that we will discontinue
manufacturing and marketing all of the unapproved products subject to
the hold. The disclosure has been changed in the Amended Filing to
indicate that we will discontinue manufacturing and marketing all of
the unapproved products subject to the hold with the exception of
most of our hyoscyamine products. Discussions with the FDA are
continuing with respect to those products.
o Correct the title of Item 8 from "Report of Independent Registered
Public Accounting Firm" in the Original Filing to "Financial
Statements and Supplementary Data".
As part of the Amended Filing, Exhibits 31.1, 31.2, 32.1 and 32.2 containing
the certifications of our Chief Executive Officer and Chief Financial Officer
that were filed as exhibits to the Original Filing have been re-executed and
re-filed as of the date of this Amended Filing.
2
ITEM 1. BUSINESS
--------
(a) GENERAL DEVELOPMENT OF BUSINESS
-------------------------------
Unless the context otherwise indicates, when we use the words "we,"
"our," "us," "our company" or "KV" 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 Founder and Chairman Emeritus, invented and obtained
initial patents for early controlled release and enteric coating
which became part of our core business in the 1950's to 1970's and a
platform for later drug delivery emphasis in the 1980's to the
present.
Today, we believe 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 developed and patented
a wide variety of drug delivery and formulation technologies which
are primarily focused in four principal areas: SITE RELEASE(R);
tastemasking; oral controlled release; and oral quick dissolving
tablets. We incorporate these technologies in the products we market
to control and improve the absorption and utilization of active
pharmaceutical compounds. In 1990, we established a generic,
non-branded marketing capability through a wholly-owned subsidiary,
ETHEX Corporation ("ETHEX"), which we believe makes us one of the
only drug delivery research and development companies that also
markets its own "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. Today, we believe we are a leading, vertically
integrated specialty pharmaceutical marketer.
Our wholly-owned subsidiary, Particle Dynamics, Inc. ("PDI"), was
acquired in 1972. Through PDI, we develop and market specialty
value-added raw materials, including drugs, directly compressible and
microencapsulated products, and other products used in the
pharmaceutical, nutritional, food, personal care and other markets.
(b) SIGNIFICANT BUSINESS DEVELOPMENTS
---------------------------------
In May 2007, we acquired the U.S. marketing rights to Evamist(TM), a
new estrogen replacement therapy product delivered with a patented
metered-dose transdermal spray system, from VIVUS, Inc. Under the
terms of the asset purchase agreement, we paid $10.0 million in cash
at closing and agreed to make an additional cash payment of $141.5
million upon final approval of the product by the U.S. Food and Drug
Administration ("FDA"). The agreement also provides for two future
payments upon achievement of certain net sales milestones. If
Evamist(TM) achieves $100.0 million of net sales in a fiscal year, a
one-time payment of $10.0 million will be made, and if net sales
levels reach $200.0 million in a fiscal year, a one-time payment of
up to $20.0 million will be made. Because the product had not
obtained FDA approval when the initial payment was made at closing,
we recorded the $10.0 million payment made during the first quarter
of fiscal 2008 as in-process research and development expense. In
July 2007, FDA approval for Evamist(TM) was received and a payment of
$141.5 million was made to VIVUS, Inc. The preliminary purchase price
allocation, which is subject to change based on the final fair value
assessment, resulted in estimated identifiable intangible assets of
$52.4 million to product rights; $15.2 million to trademark rights;
$66.4 million to rights under a sublicense agreement; and, $7.5
million to a covenant not to compete. This product was purchased
using $91.5 million in cash and $50 million of our revolving line of
credit. Upon FDA approval in July 2007, we began amortizing the
product rights, trademark rights and rights under the sublicense
agreement over 15 years and the covenant not to compete over nine
years.
In May 2007, we received FDA approval to market the 100 mg and 200 mg
strengths of metoprolol succinate extended-release tablets, the
generic version of Toprol-XL(R) (marketed by AstraZeneca). In fiscal
2006, we received a favorable court ruling in a Paragraph IV patent
infringement action filed against us by AstraZeneca based on our ANDA
submissions to market these generic formulations. Since we were the
first company to file with the FDA for generic approval of the 100 mg
and 200 mg dosage strengths, we were accorded the opportunity for a
180-day exclusivity period for marketing these two dosage strengths.
The 180-day exclusivity period has allowed us to realize higher
margins on these products compared to our other generic/non-branded
products. We
3
began shipping these two products in July 2007, and along with the 25
mg strength approved in March 2008, they generated net revenues in
fiscal 2008 of $120.0 million.
We received FDA approval to market the 25 mg and 50 mg strengths of
metoprolol succinate extended-release tablets in March 2008 and May
2008, respectively. As a result of the recent 50 mg approval, KV now
offers the complete line of all four dosage strengths of metoprolol
succinate extended-release tablets - 200 mg, 100 mg, 50 mg and 25 mg.
As of March 31, 2008, KV had a 69.1% and 72.5% share of the generic
market place according to IMS Inc. for the 200 mg and 100 mg
strengths, respectively.
In July 2007, we entered into an additional licensing arrangement to
market Clindesse(R) in the People's Republic of China. We have
previously entered into licensing arrangements for the right to
market Clindesse(R) in Spain, Portugal, Andorra, Brazil, Mexico, five
Scandinavian markets and 18 Eastern European countries.
In January 2008, we entered into a definitive asset purchase
agreement with CYTYC Prenatal Products and Hologic, Inc. ("CYTYC") to
acquire the U.S. and worldwide rights to Gestiva(TM) (17-alpha
hydroxyprogesterone caproate). The New Drug Application ("NDA") for
Gestiva(TM) is currently before the FDA, pending approval for use in
the prevention of preterm birth in certain categories of pregnant
women. The proposed indication is for women with a history of at
least one spontaneous preterm delivery (i.e., less than 37 weeks),
who are pregnant with a single fetus. Under the terms of the asset
purchase agreement, we agreed to pay $82.0 million for Gestiva(TM),
$7.5 million of which was paid at closing. Because the product had
not obtained FDA approval when the initial payment was made at
closing, we recorded the $7.5 million payment as in-process research
and development expense in the fourth quarter of fiscal 2008. The
remainder of the purchase price is payable on the completion of two
milestones: (1) $2.0 million on the earlier to occur of CYTYC's
receipt of acknowledgement from the FDA that their response to the
FDA's October 20, 2006 "approvable" letter is sufficient for the FDA
to proceed with their review of the NDA or the receipt of FDA's
approval of the Gestiva(TM) NDA and (2) $72.5 million on FDA approval
of a Gestiva(TM) NDA, transfer of all rights in the NDA to us and
receipt by us of defined launch quantities of finished Gestiva(TM)
suitable for commercial sale.
(c) INDUSTRY SEGMENTS
-----------------
We operate principally in three industry segments, consisting of
branded products marketing, specialty generics marketing and
specialty raw materials marketing. We derive revenues primarily from
directly marketing our own technologically distinguished brand-name
and generic/non-branded products and products marketed under joint
development agreement with other companies. 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
21 of the Notes to the Consolidated Financial Statements.
(d) NARRATIVE DESCRIPTION OF BUSINESS
---------------------------------
OVERVIEW
We are a fully integrated specialty pharmaceutical company that
develops, manufactures, acquires 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 PDI, 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 developed a diverse portfolio of drug delivery technologies
which we leverage to create technologically distinguished brand name
and specialty generic/non-branded products. We have patented 15 drug
delivery and formulation technologies primarily in four principal
areas: SITE RELEASE(R), oral controlled release, tastemasking and
oral 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
4
provide a number of benefits, including reduced frequency of
administration, reduced side effects, improved drug efficacy,
enhanced patient compliance and improved taste.
We have a long history of developing drug delivery technologies. In
the 1950's, we received what we believe to be the first patents for
sustained release delivery systems which enhance the convenience and
effectiveness of pharmaceutical products. In our early years, we used
our technologies to develop products for other drug marketers. Our
technologies have been used in several well known products, including
Actifed(R) 12-hour, Sudafed(R) SA, Centrum Jr.(R) and Kaopectate(R)
Chewable. Since the 1990's, we have chosen to focus our drug
development expertise on internally developed products for our
branded and generic/non-branded pharmaceutical businesses.
For example, since its inception in 1999, Ther-Rx has successfully
launched 11 internally developed branded pharmaceutical products, all
of which incorporate our drug delivery technologies. We have also
introduced several technology-improved versions of the four product
franchises acquired by us. Furthermore, most of the internally
developed generic/non-branded products marketed by ETHEX incorporate
one or more of our drug delivery technologies.
Our drug delivery technologies play a vital role in our ability to
offer improved and differentiated products in our branded products
portfolio and allow us to develop hard to replicate products that are
marketed through our generic/non-branded products business. We
believe that this differentiation provides substantial competitive
advantages for our products, which has allowed us to establish a
strong record of growth and profitability and a leadership position
in certain segments of our industry. As a result, we have grown
consolidated net revenues at a compounded annual growth rate of 19.4%
over the five fiscal years in the period ended March 31, 2008 marking
the Company's 13th consecutive year of record revenues. Ther-Rx has
grown substantially since its inception in 1999 and continues to gain
market share in its women's healthcare and hematinic family of
products. Also, by focusing on the development and marketing of
technology-distinguished, multisource drugs, ETHEX has been able to
identify and bring to market niche products that leverage our
portfolio of drug delivery technologies in a way that produces
relatively high gross margin generic/non-branded products.
THER-RX -- OUR BRAND NAME PHARMACEUTICAL BUSINESS
We established Ther-Rx in 1999 to market brand name pharmaceutical
products which incorporate our proprietary technologies. Since its
inception, Ther-Rx has introduced 11 products into two principal
therapeutic categories - women's health and oral hematinics - where
physician specialists can be reached using a 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 $188.7 million in fiscal 2007 to
$214.9 million in fiscal 2008 and represented 35.7% of our fiscal
2008 total net revenues.
We established our women's healthcare franchise through our 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 six 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. Ther-Rx's second internally developed
product, PremesisRx(R), 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 who become
pregnant. The third product, PreCare Conceive(R), is the first
product designed as a prescription nutritional pre-conception
supplement. The fourth product, PrimaCare(R), 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. The fifth product, PrimaCare ONE(R), was launched
in fiscal 2005 as a
5
proprietary line extension to PrimaCare(R) and is the first prenatal
product to contain essential fatty acids in a one-dose-per-day dosage
form. During June 2008, a third party company introduced a product
purporting to be a substitute for PrimaCare ONE(R), and we are
currently engaged in litigation with this company with respect to
patent and trademark infringement and other claims. See Note 12 of
the Notes to Consolidated Financial Statements. The PrimaCare(R)
franchise has grown to be the number one branded prenatal
prescription vitamin in the U.S. Our sixth product line extension,
PreCare Premier(R), provides a wide range of vitamins and minerals,
plus a stool softener, in a small, easy-to-swallow, once-daily
caplet. Sales of our branded prescription prenatal vitamins increased
13.7% in fiscal 2008 to $82.5 million. In fiscal 2006, we expanded
our prescription nutritional franchise when Ther-Rx introduced
Encora(R), a twice-daily prescription nutritional supplement designed
to meet the key nutritional and preventative health needs of women
past their childbearing years. Sales of Encora(R) increased 45.0% in
fiscal 2008 to $4.5 million.
In 2000, Ther-Rx launched its first 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(TM), which we believe is the only
clinically proven and FDA approved controlled release bioadhesive
system. Sales of Gynazole-1(R) were $24.0 million in fiscal 2008. We
have also 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, New
Zealand, Mexico and Scandinavia.
In January 2005, Ther-Rx introduced its second NDA approved product,
Clindesse(R), the first approved single-dose therapy for bacterial
vaginosis. Similar to Gynazole-1(R), Clindesse(R) incorporates our
proprietary VagiSite(TM) bioadhesive drug delivery technology. Since
its launch, Clindesse(R) has gained 28.0% of the intravaginal
bacterial vaginosis market in the United States. Clindesse(R)
generated a 27.4% increase in sales to $40.5 million in fiscal 2008.
We have also entered into licensing agreements for the right to
market Clindesse(R) in Spain, Portugal, Andorra, Brazil, Mexico, five
Scandinavian markets, 18 Eastern European countries and the People's
Republic of China.
We established our hematinic product line by acquiring two leading
hematinic brands, Chromagen(R) and Niferex(R), in 2003. We
re-launched technology-improved versions of these products mid-way
through fiscal 2004. In fiscal 2006, we introduced two new hematinic
products -- Repliva 21/7(R) and Niferex Gold(R). We believe Repliva
21/7(R) is a product offering that represents a revolutionary
advancement in iron therapy. Repliva 21/7(R) has been uniquely
formulated to promote maximum red blood cell regeneration while
minimizing uncomfortable side effects that patients have typically
endured with traditional iron supplements. With Repliva 21/7(R)
becoming the number one branded oral iron product in the United
States and Ther-Rx being the number one provider of branded
prescription oral iron supplements in the United States, sales of our
hematinic product line grew to $53.8 million in fiscal 2008, an 11.6%
increase over fiscal 2007.
In May 2007, we acquired from VIVUS, Inc. the U.S. marketing rights
to Evamist(TM), a unique transdermal estrogen therapy delivering a
low dose of estradiol in a once-daily spray. Under terms of the asset
purchase agreement, we paid $10.0 million in cash at closing and made
an additional cash payment of $141.5 million upon final approval of
the product by the FDA in July 2007. Evamist(TM) is indicated for the
treatment of moderate-to-severe vasomotor symptoms due to menopause
and targets the estrogen replacement market where physicians and
patients are seeking an effective and safe, low-dose estrogen
product. We believe Evamist(TM) will significantly augment the
women's health offerings of our branded segment as we leverage the
promotion of this product through our expanded branded sales force.
We began shipping this product at the end of fiscal 2008.
In January 2008, we entered into a definitive asset purchase
agreement with CYTYC to acquire the U.S. and worldwide rights to
Gestiva(TM) (17-alpha hydroxyprogesterone caproate). Under the terms
of the asset purchase agreement, we agreed to pay $82.0 million for
Gestiva(TM), $7.5 million of which was paid at closing. The NDA for
Gestiva(TM) is currently before the FDA, pending approval for use in
the prevention of preterm birth in certain categories of pregnant
women. The proposed indication is for women with a history of at
least one spontaneous preterm delivery (i.e., less than 37 weeks),
who are pregnant with a single fetus. The FDA issued an "approvable"
letter for Gestiva(TM) in October 2006, and a final approval is
anticipated in fiscal 2009. The FDA has granted an Orphan Drug
Designation for Gestiva(TM). The acquisition of Gestiva(TM) is
intended to allow Ther-
6
Rx to capitalize on the already strong relationships built over the
past seven years between Ther-Rx's 330-member sales force and
Obstetrician/Gynecologists.
To capitalize on Ther-Rx's success in marketing women's health
products, we continue to look for opportunities to expand our Ther-Rx
product portfolio. As part of the May 2005 acquisition of
FemmePharma, we assumed development responsibility and secured full
worldwide marketing rights to an endometriosis product that had
successfully completed Phase II clinical trials. We are now testing
an alternative formula in a Phase II study to determine which
alternative to take into Phase III clinicals. The Company expects to
start Phase III clinicals in fiscal 2010.
Based on the addition and development of new products and our
expectation of continued growth in our branded business, Ther-Rx has
expanded its branded sales force to approximately 330 specialty sales
representatives. Ther-Rx's sales force focuses on physician
specialists who are identified through available market research as
frequent prescribers of our prescription 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 can
differentiate our products and reduce the rate of price erosion
typically experienced in the generic market. ETHEX's net revenues
increased 56.1% to $367.9 million for fiscal 2008, which represented
61.1% of our total net revenues.
In May 2007, we received FDA approval to market the 100 mg and 200 mg
strengths of metoprolol succinate extended-release tablets, the
generic version of Toprol-XL(R) (marketed by AstraZeneca). In fiscal
2006, we received a favorable court ruling in a Paragraph IV patent
infringement action filed against us by AstraZeneca based on our ANDA
submissions to market these generic formulations. Since we were the
first company to file with the FDA for generic approval of the 100 mg
and 200 mg dosage strengths, we were accorded the opportunity for a
180-day exclusivity period for marketing these two dosage strengths.
The 180-day exclusivity period has allowed us to realize higher
margins on these products compared to our other generic/non-branded
products. We began shipping these two products in July 2007 and along
with the 25 mg approved and launched in March 2008 generated net
revenues in fiscal 2008 of $120.0 million.
We have used our proprietary drug delivery technologies in many of
our generic/non-branded pharmaceutical products. For example, we have
used METER RELEASE(R), one of our proprietary controlled release
technologies, in a variety of products including the only generic
equivalent to Norpace(R) CR, an antiarrhythmic that is taken twice
daily. Further, we have used KV/24(TM) once daily technology in the
generic equivalent to IMDUR(R), a cardiovascular drug that is taken
once per day, among others.
To capitalize on ETHEX's unique product capabilities, we continue to
expand our ETHEX product portfolio. In fiscal 2006, we launched a new
InveAmp(R) line extension to our pain management business.
InveAmp(R), a unique one unit dose ampoule, was designed to make
dispensing of narcotic pain relievers more effective. In fiscal 2007,
we received ANDA approval for six strengths of diltiazem
hydrochloride extended-release capsules. As noted above, in fiscal
2008, we received FDA approval to market the 100 mg and 200 mg
strengths of metoprolol succinate extended-release tablets, the
generic version of Toprol-XL(R). We also received in fiscal 2008 ANDA
approval for ondansetron 4 mg and 8 mg orally disintegrating tablets,
the 100 mg and 200 mg strengths of morphine sulfate extended-release
tablets, the generic equivalent of MS Contin(R), and the 100 mg and
200 mg strengths of benzonatate USP capsules, the generic equivalent
to Tessalon(R). In addition, we received FDA approval to market the
25 mg and 50 mg strengths of metoprolol succinate extended-release
tablets in March 2008 and May 2008, respectively. As a result of the
recent 50 mg approval, KV now offers the complete line of all four
dosage strengths of metoprolol succinate extended-release tablets -
200 mg, 100 mg, 50 mg and 25 mg.
7
In addition to our internal product development efforts, we have
entered into several long-term product development and marketing
license agreements with various generic pharmaceutical developers and
manufacturers. Under most of these arrangements, the other parties
are responsible for developing, submitting for regulatory approval
and manufacturing the products and we are responsible for exclusively
marketing these products in the territories covered by the
in-licensing agreements. We expect certain products under these
agreements to be filed and/or approved beginning in fiscal 2009. With
the majority of our internal generic/non-branded product development
efforts primarily focused on building our pipeline with products that
use one or more of our 15 drug delivery technologies, we believe
these development agreements with existing parties will further
provide an opportunity to grow our generic/non-branded business.
These new product sources have increased the scope of our
generic/non-branded product pipeline to more than 50 product
opportunities.
The Company seeks to pursue an approach of developing generic
products that are more difficult to develop or manufacture and that
will therefore have significant barriers to entry by other generic
companies, such as metoprolol succinate extended-release tablets. The
Company has a rich generic pipeline. In fiscal year 2008, between the
Company's own internal development activities and its external
development partners, the Company filed 16 ANDAs and received 5
generic product approvals from the FDA. In fiscal year 2009, the
Company anticipates that, between its external development partners
and its own internal development activities, it will file
approximately 16 generic ANDA filings and receive six product
approvals from the FDA.
On February 14, 2006, the Company announced it had entered into an
agreement with Gedeon Richter under which the Company had acquired
exclusive rights to market a group of generic products in the United
States. However, due to changes in the generic drug marketplace, the
Company and Gedeon Richter have agreed the current portfolio of
products covered by the agreement, which has now been terminated, no
longer represent market opportunities that are worth pursuing. The
two companies remain committed partners in other endeavors and are
keeping options open to explore other more meaningful joint
opportunities.
ETHEX primarily focuses on the therapeutic categories of
cardiovascular, women's health, pain management and respiratory,
leveraging our expertise in developing and manufacturing products in
these areas. In addition, we pursue opportunities outside of these
categories where we also may differentiate our products based upon
our proprietary drug delivery systems and our specialty manufacturing
expertise.
CARDIOVASCULAR. ETHEX currently markets over 70 products in its
cardiovascular line, including products to treat angina, arrhythmia
and hypertension, as well as for potassium supplementation. The
cardiovascular line accounted for $237.2 million, or 64.5%, of
ETHEX's net revenues in fiscal 2008.
PAIN MANAGEMENT. ETHEX currently markets over 30 products in its pain
management line. Included in this line are several controlled
substance drugs, such as morphine, hydromorphone and oxycodone. Pain
management products accounted for $45.7 million, or 12.4%, of ETHEX's
net revenues in fiscal 2008.
RESPIRATORY. During most of fiscal 2008, ETHEX marketed approximately
30 products in its respiratory line, which consisted primarily of
cough/cold products. The cough/cold line accounted for $38.5 million,
or 10.5% of ETHEX's net revenues in fiscal 2008. In March 2008,
representatives of the Missouri Department of Health and Senior
Services and the FDA notified us of a hold on our inventory of
certain unapproved products. Previously, we had received notices that
required us to cease the manufacture and sale of unapproved products
containing timed-release guaifenesin. As a result of these notices,
we are currently marketing one cough/cold product. We will
discontinue manufacturing and marketing all unapproved cough/cold
products subject to the hold. See Part I, Item 1A "Risk Factors" for
additional information. The regulatory status of certain of our
generic products may make them subject to increased competition or to
regulatory decisions that may require market withdrawal of one or
more of our unapproved products.
WOMEN'S HEALTH CARE. ETHEX currently markets over 20 products in its
women's healthcare line, all of which are prescription prenatal
vitamins. The women's healthcare line accounted for $14.1 million, or
3.8%, of ETHEX's net revenues in fiscal 2008.
8
OTHER THERAPEUTICS. In addition to our core therapeutic lines, ETHEX
markets over 40 products in the gastrointestinal, dermatological,
anti-anxiety, digestive enzyme and dental categories. These
categories accounted for $32.2 million, or 8.8%, of ETHEX's net
revenues in fiscal 2008.
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, distributors and national drugstore chains, as well as
hospitals, nursing homes, independent pharmacies and mail order
firms. The inside sales force makes calls to independent pharmacies
to create demand at the wholesale level.
PDI - OUR VALUE-ADDED RAW MATERIAL BUSINESS
PDI develops and markets specialty raw material products for the
pharmaceutical, nutritional, food, personal care and other
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. PDI is also a significant supplier
of value-added raw materials for the development and manufacture of
both existing and new products at Ther-Rx and ETHEX. Net revenues for
PDI were $18.0 million in fiscal 2008, up 3.3% over net revenues of
$17.4 for fiscal 2007, which represented 3.0% of our total net
revenues.
BUSINESS STRATEGY
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 brand name products which can expand our
existing franchises. 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, possibly,
new therapeutic areas. We believe we have in place a strong pipeline
of potential new products.
CAPITALIZE ON ACQUISITION OPPORTUNITIES. We actively seek acquisition
opportunities for both Ther-Rx and ETHEX. In May 2007, we completed
the acquisition of the U.S. marketing rights to Evamist(TM), a new
low-dose estrogen transdermal spray, from VIVUS, Inc. The NDA for
this product was approved by the FDA in July 2007 and we began
shipping Evamist(TM) during the fourth quarter of fiscal 2008.
In January 2008, we entered into a definitive purchase agreement that
gives us full U.S. and worldwide rights to Gestiva(TM) (17-alpha
hydroxyprogesterone caproate) upon approval of the pending
Gestiva(TM) NDA by FDA. Gestiva(TM) is seeking an indication for use
in the prevention of preterm birth in certain categories of pregnant
women. The FDA issued an "approvable" letter for Gestiva(TM) in
October 2006, and a final approval is anticipated in late 2008. The
FDA has granted an Orphan Drug Designation for Gestiva(TM).
Ther-Rx is also continually looking for platform acquisition
opportunities similar to PreCare(R) around which it 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 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;
9
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 that have strong patent protection or can be protected;
o products which are predominantly prescribed by physician
specialists, which can be cost-effectively marketed by a 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 specialist 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 and
development of new products and our expectation of continued growth
in our branded business, Ther-Rx has expanded its branded sales force
to approximately 330 specialty sales representatives. We plan to
continue to build our sales force over time as necessary to
accommodate current and future expansions of our product lines.
PURSUE ATTRACTIVE GROWTH OPPORTUNITIES WITHIN THE GENERIC INDUSTRY.
We plan to continue introducing generic and non-branded alternatives
to select drugs whose patents have expired, particularly where we can
use our drug delivery technologies. 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. Almost two-thirds of ETHEX'S
generic/non-branded products use the Company's proprietary drug
delivery technologies, and approximately 80% rank either first or
second in their respective generic categories by volume.
In May 2007, we received FDA approval to market the 100 mg and 200 mg
strengths of metoprolol succinate extended-release tablets, the
generic version of Toprol-XL(R) (marketed by AstraZeneca). In fiscal
2006, we received a favorable court ruling in a Paragraph IV patent
infringement action filed against us by AstraZeneca based on our ANDA
submissions to market these generic formulations. Since we were the
first company to file with the FDA for generic approval of the 100 mg
and 200 mg dosage strengths, we were accorded the opportunity for a
180-day exclusivity period for marketing these two dosage strengths.
The 180-day exclusivity period has allowed us to realize higher
margins on these products compared to our other generic/non-branded
products. We began shipping these two products in July 2007 and with
the approval and launch in March 2008 of the 25 mg strength they
generated net revenues in fiscal 2008 of $120.0 million. We received
FDA approval to market the 25 mg and 50 mg strengths of metoprolol
succinate extended-release tablets in March 2008 and May 2008,
respectively. As a result of the recent 50 mg approval, KV now offers
the complete line of all four dosage strengths of metoprolol
succinate extended-release tablets - 200 mg, 100 mg, 50 mg and 25 mg.
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) and Clindesse(R),
which incorporate VagiSite(TM), our proprietary bioadhesive
controlled release system. In addition, our tastemasking and
controlled release systems are incorporated into our prenatal
vitamins, providing them with differentiated benefits over other
products on the market.
We are actively advancing our existing portfolio of drug delivery
technologies and developing or acquiring exciting new technologies
with substantial growth potential. In May 2007, we completed the
acquisition of the U.S. marketing rights to Evamist(TM), a new
low-dose estrogen transdermal spray, from VIVUS, Inc. The product was
formulated with a patented metered-dose transdermal spray system
which is designed to provide an easy, once-daily dose of estrodial
via the skin. Evamist(TM) is the first transdermal spray estrogen
replacement therapy
10
product approved for use in the U.S. The NDA for this product was
approved by the FDA in July 2007 and we began shipping Evamist(TM)
during the fourth quarter of fiscal 2008.
OUR PROPRIETARY DRUG DELIVERY TECHNOLOGIES
We believe 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 or acquisition
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.
ORAL CONTROLLED RELEASE TECHNOLOGIES. The technological leadership 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
diltiazem extended-release capsules (an AB rated generic equivalent
to Tiazac(R)) and metoprolol succinate extended-release tablets (an
AB rated generic equivalent to Toprol-XL(R)).
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.
ORAL 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.
Our unique quick dissolving tablet can be taken without water. Its
durability avoids the need for special packaging and it supports the
incorporation of our tastemasking technologies. Our oral dissolving
tablet technology is commercialized in our hyoscyamine sulfate orally
disintegrating tablets, as well as the ondansetron orally
disintegrating tablets approved by the FDA in fiscal 2008.
SALES AND MARKETING
Ther-Rx has a national sales and marketing infrastructure which
includes approximately 330 sales representatives dedicated to
promoting and marketing our branded pharmaceutical products to
targeted physician specialists. The Ther-Rx sales force focuses on
physician specialists who are identified through available market
research as frequent prescribers of products in our therapeutic
categories. Ther-Rx also has a corporate sales and marketing
management team dedicated to planning and managing Ther-Rx's sales
and marketing efforts.
11
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 six additional line extensions to address
unmet needs, including the launch of PreCare(R) Chewables, Premesis
Rx(R), PreCare Conceive(R), PrimaCare(R), PrimaCare ONE(R) and
PreCare Premier(R). 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 vaginal yeast
infections. In fiscal 2004, we further expanded our branded product
offerings 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. In January 2005, we introduced
our second NDA approved product, Clindesse(R), the first approved
single-dose therapy for bacterial vaginosis. In fiscal 2006, we
introduced Encora(R), a new prescription nutritional supplement
product, and two new hematinic products, Repliva 21/7(R) and Niferex
Gold(R). In May 2007, we completed the acquisition of the U.S.
marketing rights to Evamist(TM), a new low-dose estrogen transdermal
spray, from VIVUS, Inc. The NDA for this product was approved by the
FDA in July 2007 and we began shipping Evamist(TM) during March 2008.
By offering multiple products to the same group of physician
specialists, we believe 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 primarily calls on independent
pharmacies to create demand 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 those markets.
During fiscal 2008, our three largest customers accounted for 24.6%,
23.9% and 9.8% of gross revenues. These customers were Cardinal
Health, McKesson Drug Company and Amerisource Corporation,
respectively. In fiscal 2007 and 2006, these customers accounted for
gross revenues of 21.1%, 25.7% and 14.4%, and 15.7%, 26.9% and 12.7%,
respectively.
Although we sell internationally, we do not have material operations
or sales in foreign countries and our sales are not subject to
significant geographic concentration.
RESEARCH AND DEVELOPMENT
We have long recognized 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 at a compounded annual growth rate of 19.5% over the past
five fiscal years, reflects our continued commitment to develop new
products and/or technologies through our internal development
programs, and with our external strategic partners.
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
2008, 2007 and 2006, total research and development expenses were
$46.6 million, $31.5 million and $28.9 million, respectively,
excluding acquired in-process research and development.
12
All applications for FDA approval must contain information relating
to product formulation, raw material suppliers, stability,
manufacturing processes, packaging, labeling and quality control.
Information to support the bioequivalence of generic drug products or
the safety and effectiveness of new drug products for their intended
use is also required to be submitted. There are generally two types
of applications used for obtaining FDA approval of new products:
o New Drug Application ("NDA"). An NDA is filed when approval
is sought to market a drug with active ingredients that have
not been previously approved by the FDA. NDAs are filed for
newly developed brand products and, in certain instances,
for a new dosage form, a new delivery system or a new
indication for previously approved drugs.
o Abbreviated New Drug Application ("ANDA"). An ANDA is filed
when approval is sought to market a generic equivalent of a
drug product previously approved under an NDA and listed in
the FDA's "Orange Book" or for a new dosage strength or a
new delivery system for a drug previously approved under an
ANDA.
One requirement for FDA approval of NDAs and ANDAs is that our
manufacturing procedures and operations conform to FDA requirements
and guidelines, generally referred to as current Good Manufacturing
Practices ("cGMP"). The requirements for FDA approval encompass all
aspects of the production process, including validation and
recordkeeping, and involve changing and evolving standards.
BRANDED PRODUCT DEVELOPMENT. The process required by the FDA before a
pharmaceutical product, with active ingredients that have not been
previously approved, may be marketed in the United States generally
involves the following:
o laboratory and preclinical tests;
o submission of an Investigational New Drug ("IND")
application, which must become effective before clinical
studies may begin;
o adequate and well-controlled human clinical studies to
establish the safety and efficacy of the proposed product
for its intended use;
o submission of an NDA containing the results of the
preclinical tests and clinical studies establishing the
safety and efficacy of the proposed product for its intended
use, as well as extensive data addressing matters such as
manufacturing and quality assurance;
o scale-up to commercial manufacturing; and
o FDA approval of an NDA.
Preclinical tests include laboratory evaluation of the product, its
chemistry, formulation and stability, as well as toxicology and
pharmacology studies to help define the pharmacological profile of
the drug and assess the potential safety and efficacy of the product.
The results of these studies are submitted to the FDA as part of the
IND. They must demonstrate that the product delivers sufficient
quantities of the drug to the bloodstream or intended site of action
to produce the desired therapeutic results before human clinical
trials may begin. These studies must also provide the appropriate
supportive safety information necessary for the FDA to determine
whether the clinical studies proposed to be conducted under the IND
can safely proceed. The IND automatically becomes effective 30 days
after receipt by the FDA unless the FDA, during that 30-day period,
raises concerns or questions about the conduct of the proposed trials
as outlined in the IND. In such cases, the IND sponsor and the FDA
must resolve any outstanding concerns before clinical trials may
begin. In addition, an independent institutional review board must
review and approve any clinical study prior to initiation.
Human clinical studies are typically conducted in three sequential
phases, which may overlap:
o Phase I: The drug is initially introduced into a relatively
small number of healthy human subjects or patients and is
tested for safety, dosage tolerance, mechanism of action,
absorption, metabolism, distribution and excretion.
13
o Phase II: Studies are performed with a limited patient
population to identify possible adverse effects and safety
risks, to assess the efficacy of the product for specific
targeted diseases or conditions, and to determine dosage
tolerance and optimal dosage.
o Phase III: When Phase II evaluations demonstrate that a
dosage range of the product is effective and has an
acceptable safety profile, Phase III trials are undertaken
to evaluate further dosage and clinical efficacy and to test
further for safety in an expanded patient population at
geographically dispersed clinical study sites.
The results of the product development, preclinical studies and
clinical studies are then submitted to the FDA as part of the NDA.
The NDA drug development and approval process could take from three
to more than 10 years.
In fiscal 2005, we introduced our second NDA approved product,
Clindesse(R), the first approved single-dose therapy for bacterial
vaginosis. Similar to Gynazole-1(R), Clindesse(R) incorporates our
proprietary VagiSite(TM) bioadhesive drug delivery technology. In
fiscal 2006, we introduced Encora(R), a new prescription nutritional
supplement product, and two new hematinic products, Niferex Gold(R)
and Repliva 21/7(R). Ther-Rx currently has a number of products in
its research and development pipeline at various stages of
development. We believe we have the technological expertise required
to develop unique products to meet currently unmet needs in the area
of women's health, as well as other therapeutic areas.
As part of the May 2005 acquisition of FemmePharma, we assumed
development responsibility and secured full worldwide marketing
rights to an endometriosis product that had successfully completed
Phase II clinical trials. We are now testing an alternative formula
in a Phase II study to determine which alternative to take into Phase
III clinicals. The Company expects to start Phase III clinicals in
fiscal 2010.
In May 2007, we acquired from VIVUS, Inc. the U.S. marketing rights
to Evamist(TM), a unique transdermal estrogen therapy delivering a
low dose of estradiol in a once-daily spray. Under terms of the asset
purchase agreement, we paid $10.0 million in cash at closing and made
an additional cash payment of $141.5 million upon final approval of
the product by the FDA in July 2007. Evamist(TM) is indicated for the
treatment of moderate-to-severe vasomotor symptoms due to menopause
and targets the estrogen replacement market where physicians and
patients are seeking an effective and safe, low-dose estrogen
product. We began shipping this product at the end of fiscal 2008.
In January 2008, we entered into a definitive asset purchase
agreement with CYTYC to acquire the U.S. and worldwide rights to
Gestiva(TM) (17-alpha hydroxyprogesterone caproate). Under the terms
of the asset purchase agreement, we agreed to pay $82.0 million for
Gestiva(TM), $7.5 million of which was paid at closing. The NDA for
Gestiva(TM) is currently before the FDA, pending approval for use in
the prevention of preterm birth in certain categories of pregnant
women. The proposed indication is for women with a history of at
least one spontaneous preterm delivery (i.e., less than 37 weeks),
who are pregnant with a single fetus. The FDA issued an "approvable"
letter for Gestiva(TM) in October 2006, and a final approval is
anticipated in fiscal 2009. The FDA has granted an Orphan Drug
Designation for Gestiva(TM).
GENERIC/NON-BRANDED PRODUCT DEVELOPMENT. FDA approval of an ANDA is
required before marketing a generic equivalent of a drug approved
under an NDA in the United States or for a previously unapproved
dosage strength or delivery system for a drug approved under an ANDA.
The ANDA development process is generally less time consuming and
complex than the NDA development process. It typically does not
require new preclinical and clinical studies because it relies on the
studies establishing safety and efficacy conducted for the drug
previously approved through the NDA process. The ANDA process,
however, does require one or more bioequivalency studies to show that
the ANDA drug is bioequivalent to the previously approved drug.
Bioequivalence compares the bioavailability of one drug product with
that of another formulation containing the same active ingredient.
When established, bioequivalence confirms that the rate of absorption
and levels of concentration in the bloodstream of a formulation of
the previously approved drug and the generic drug are equivalent.
Bioavailability indicates the rate and extent of absorption and
levels of concentration of a drug product in the bloodstream needed
to produce the same therapeutic effect.
14
Supplemental ANDAs are required for approval of various types of
changes to an approved application, and these supplements may be
under review for six months or more. In addition, certain types of
changes may be approved only once new bioequivalence studies are
conducted or other requirements are satisfied.
PATENTS AND OTHER PROPRIETARY RIGHTS
When appropriate and available, we actively seek protection for our
products and proprietary information by means of U.S. and foreign
patents, trademarks, trade secrets, copyrights and contractual
arrangements. Patent protection in the pharmaceutical field, however,
can involve complex legal and factual issues. Moreover, broad patent
protection for new formulations or new methods of use of existing
chemical compounds is sometimes difficult to obtain, primarily
because the active ingredient and many of the formulation techniques
have been known for some time. Consequently, some patents claiming
new formulations or new methods of use for old drugs may not provide
meaningful protection against competition. Nevertheless, we intend to
continue to seek patent protection when appropriate and available and
otherwise to rely on regulatory-related exclusivity and trade secrets
to protect certain of our products, technologies and other scientific
information. There can be no assurance, however, that any steps taken
to protect such proprietary information will be effective.
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 fiscal 2023 relating to our
controlled-release, site-specific, quick dissolve and taste-masking
technologies. We have been granted 42 U.S. patents and have 37 U.S.
patent applications pending. In addition, we have 71 foreign issued
patents and a total of 204 patent applications pending primarily in
Canada, Europe, Australia, Japan, South America, Mexico and South
Korea (see Part I, Item 1A "Risk Factors for additional information).
We depend on our patents and other proprietary rights and cannot be
certain of their confidentiality and protection.
We currently own more than 224 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 research, manufacturing, distribution and
administrative facilities are an important factor in achieving our
long-term growth objectives. All facilities at March 31, 2008,
aggregating approximately 1.3 million square feet, are located in the
St. Louis, Missouri metropolitan area. We own facilities with
approximately 1.1 million square feet, with the balance under various
leases at pre-determined annual rates under agreements expiring from
fiscal 2009 through fiscal 2021, subject in most cases to renewal at
our option.
We manufacture drug products in liquid, cream, tablet, capsule and
caplet forms for distribution by Ther-Rx, ETHEX and our corporate
licensees and value-added specialty raw materials for distribution by
PDI. We believe that all of our facilities are in material compliance
with applicable regulatory requirements.
We seek to maintain inventories at sufficient levels to support
current production and sales levels. During fiscal 2008, we
encountered no serious shortage of any particular raw materials.
Although there can be no assurance that raw material supply will not
adversely affect our future operations, we do not believe that any
shortages will occur in the foreseeable future.
15
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 for product acquisitions with other
pharmaceutical companies. Many of these competitors 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. (See "-Research and Development").
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.
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, but do not apply to products
containing antibiotic ingredients first submitted for approval on or
before November 20, 1997. 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
16
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 alleged to
infringe outstanding 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 either
invalid or will not be infringed by the 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 non-infringement or invalidity by filing suit,
which would in most cases, prevent FDA approval until the suit is
resolved or at least 30 months have elapsed (unless 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. We are involved in various
lawsuits resulting from ANDA filings. See Note 12 of the Notes to
Consolidated Financial Statements.
In addition to marketing drugs which are subject to FDA review and
approval, we market certain drug products in the U.S. without FDA
approval under certain "grandfather" clauses and statutory and
regulatory exceptions to the pre-market approval requirement for "new
drugs" under 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 action seeking an
injunction or hold against further marketing and may or may not allow
sufficient time to obtain the necessary approvals before it seeks to
curtail further marketing. We are not in a position to predict
whether or when the FDA might choose to raise objections to the
marketing without NDA or ANDA approval of a 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 affected 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 this regard, in June 2006, May 2007 and September 2007, the FDA
issued Notices to the pharmaceutical industry stating that
manufacture of all unapproved drug products containing carbinoxamine,
carbinoxamine labeled for children under two, timed-released
guaifenesin, hydrocodone labeled for children under six and all other
unapproved products containing hydrocodone, respectively, cease by
September 6, 2006, July 9, 2006, August 26, 2007, October 31, 2007,
and December 31, 2007, respectively. These Notices affect the
continued manufacture and sale of ETHEX's Hydro-Tussin(TM) CBX Syrup,
Tri-Vent(TM) HC Liquid, Guaifenex(R) DM ER Tablets, Guaifenex(R) PSE
60 ER Tablets, PhenaVent(TM) D Capsules, Guaifenex(R) PSE 80 ER
Tablets, Pseudovent(TM) DM Tablets, Histinex(R) PV Syrup, Hydrocodone
Bitartrate & Guaifenesin Liquid, Hydro-Tussin(TM) HC Syrup,
Histinex(R) HC Syrup and Hydro-Tussin(TM) Syrup.
In March 2008, representatives of the Missouri Department of Health
and Senior Services, accompanied by representatives of the FDA,
notified us of a hold on our inventory of certain unapproved drug
products, restricting our ability to remove or dispose of those
inventories without permission.
The hold relates to a misinterpretation about the intended scope of
recent FDA notices setting limits on the marketing of unapproved
guaifenesin products. In response to notices issued by the FDA in
2002 and 2003 with respect to single-entity timed-release guaifenesin
products, and a further notice issued in 2007 with respect to
combination timed-released guaifenesin products, we timely
discontinued a number of our guaifenesin products and believed that,
by doing so, had complied with those notices. The recent action to
place a hold on certain of our products indicates that additional
guaifenesin products should also have been discontinued. In addition,
the FDA expanded the hold to include other products that did not
contain guaifenesin but were being marketed without FDA approval
under certain "grandfather clauses" and statutory and regulatory
exceptions to the pre-market approval requirement for "new drugs"
under the FDCA. FDA policies permit the agency to initiate broad
action against the marketing of additional categories of our
unapproved products, if the FDA deems approval necessary, even if the
agency has not instituted similar actions against the marketing of
such products by other
17
parties. Pursuant to discussions with the Missouri Department of
Health and Senior Services and with the FDA, the affected Morphine
and Oxycodone products have been released from the hold. We will
discontinue manufacturing and marketing all of the other unapproved
products subject to the hold with the exception of most of our
Hyoscyamine products. Discussions are continuing with respect to
these products.
The FDA has not proposed, nor do we expect them to propose, that the
products subject to the hold be recalled from the distribution
channel. We have written-off the value of the products subject to the
hold in our inventory as of March 31, 2008. We also evaluated the
active pharmaceutical ingredients and excipients used in the
manufacture of the hold products and determined that they should also
be written-off since we will be discontinuing further manufacturing
and many of them cannot be returned or sold to other manufacturers.
The write-off included in the results of operations for the fourth
quarter of fiscal 2008 totaled $5.5 million.
In October 2007, the FDA issued a Notice extending the period during
which the FDA will exercise its enforcement discretion not to
challenge continued marketing and distribution of pancreatic enzyme
products, such as ETHEX's Pangestyme(TM) product. Under the
extension, FDA will continue to exercise its enforcement discretion
with respect to unapproved pancreatic enzyme products that have an
active Investigational New Drug Application ("IND") on active status
on or before April 28, 2008 and have submitted an NDA on or before
April 28, 2009. We have timely filed an IND for such products.
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 U.S. Drug Enforcement
Administration, or DEA, and similar state and local regulatory
authorities if they handle controlled substances, with the EPA and
similar state and local regulatory authorities if they generate toxic
or dangerous wastes, and must comply with other applicable DEA and
EPA requirements. 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 NDAs, ANDAs 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. All of our facilities are registered with the State
of Missouri, where they are located, as required by Federal and
Missouri law. The PDMA 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. Many
states also require registration of out-of-state drug manufacturers
and distributors who sell products in their states, and may also
impose additional requirements or restrictions on out-of-state firms.
These requirements vary widely from state-to-state and are subject to
change with little or no direct notice to potentially affected firms.
We believe that we are currently in compliance in all material
respects with applicable state requirements. However, if we are found
to have failed to comply with applicable state requirements, we may
be subject to sanctions, including monetary penalties and potential
restrictions on our sales or other activities within particular
states.
For international markets, a pharmaceutical company is subject to
regulatory requirements, inspections and product approvals
substantially the same as those in the U.S. 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 less
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 are 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 regulatory
or approval requirements 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
18
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, 2008, we employed a total of 1,590 employees. We were
a party to a collective bargaining agreement with the Teamsters Union
covering 133 employees that would have expired on December 31, 2009.
However, in January 2008, the employee members of the union voted to
decertify their union representation. The decertification became
effective in February 2008.
ENVIRONMENT
We do not expect that compliance with Federal, state or local
provisions regulating the discharge of materials into the environment
or otherwise relating to the protection of the environment will have
a material effect on our capital expenditures, earnings or
competitive position.
AVAILABLE INFORMATION
We make available, free of charge through our Internet website
(http://www.kvpharmaceutical.com), our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and
amendments to these reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as
soon as reasonably practicable after we electronically file these
reports with, or furnish them to, the Securities and Exchange
Commission. 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 Standards of Business Ethics for all Directors and
employees are available on our Internet website, and available in
print to any shareholder who requests them. The information posted on
our website is not incorporated into this annual report.
In addition, the SEC maintains an Internet website
(http://www.sec.gov) that contains reports, proxy and information
statements, and other information regarding registrants that file
electronically with the SEC.
19
ITEM 8. Financial Statements and Supplementary Data
-------------------------------------------
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
K-V Pharmaceutical Company:
We have audited the accompanying consolidated balance sheets of K-V
Pharmaceutical Company and subsidiaries (the Company) as of March 31, 2008 and
2007, and the related consolidated statements of income, comprehensive income,
shareholders' equity and cash flows for each of the years in the three-year
period ended March 31, 2008. In connection with our audits of the consolidated
financial statements, we also have audited the accompanying financial
statement schedule. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule 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 as of March 31, 2008 and 2007, and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 31, 2008, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 123
(Revised 2004), "Share-Based Payment", effective April 1, 2006.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), K-V Pharmaceutical Company's
internal control over financial reporting as of March 31, 2008, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated June 25, 2008 expressed an adverse opinion on the
effectiveness of the Company's internal control over financial reporting.
St. Louis, Missouri
June 25, 2008
20
K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
MARCH 31,
---------------------------
2008 2007
----------- -----------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents............................................................ $ 86,345 $ 82,574
Marketable securities................................................................ 40,548 157,812
Receivables, less allowance for doubtful accounts of $867 and $716
in 2008 and 2007, respectively.................................................... 107,070 78,634
Inventories, net..................................................................... 94,980 91,515
Prepaid and other assets............................................................. 7,792 6,571
Income taxes receivable.............................................................. 9,872 --
Deferred tax asset................................................................... 22,812 14,364
----------- -----------
Total Current Assets.............................................................. 369,419 431,470
Property and equipment, less accumulated depreciation................................ 196,200 186,900
Investment securities................................................................ 81,516 --
Intangible assets and goodwill, net.................................................. 198,784 69,010
Other assets......................................................................... 23,108 20,403
----------- -----------
TOTAL ASSETS......................................................................... $ 869,027 $ 707,783
=========== ===========
LIABILITIES
-----------
CURRENT LIABILITIES:
Accounts payable..................................................................... $ 32,119 $ 18,506
Accrued liabilities.................................................................. 46,516 33,218
Income taxes payable................................................................. -- 5,558
Current maturities of long-term debt................................................. 202,020 1,897
----------- -----------
Total Current Liabilities......................................................... 280,655 59,179
Long-term debt....................................................................... 67,432 239,451
Other long-term liabilities.......................................................... 22,359 6,319
Deferred tax liability............................................................... 39,299 38,007
----------- -----------
TOTAL LIABILITIES.................................................................... 409,745 342,956
----------- -----------
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 March 31, 2008 and
2007 (convertible into Class A shares on a 8.4375 to one basis)................... -- --
Class A and Class B Common Stock, $.01 par value;150,000,000 and
75,000,000 shares authorized, respectively;
Class A - issued 40,764,603 and 40,316,426 at March 31, 2008
and 2007, respectively........................................................ 407 403
Class B - issued 12,170,172 and 12,393,982 at March 31, 2008 and
2007, respectively (convertible into Class A shares on a one-for-one basis)... 122 124
Additional paid-in capital........................................................... 158,742 150,818
Retained earnings.................................................................... 357,714 269,430
Accumulated other comprehensive (loss) income........................................ (1,543) 33
Less: Treasury stock, 3,289,324 shares of Class A and 92,902 shares of Class B Common
Stock at March 31, 2008, and 3,237,023 shares of Class A and 92,902 shares
of Class B Common Stock at March 31, 2007, at cost................................ (56,160) (55,981)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY........................................................... 459,282 364,827
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................................... $ 869,027 $ 707,783
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
YEARS ENDED MARCH 31,
-----------------------------------------------------
2008 2007 2006
--------- --------- ---------
Net revenues....................................................... $ 601,896 $ 443,627 $ 367,640
Cost of sales...................................................... 186,555 147,263 123,935
--------- --------- ---------
Gross profit....................................................... 415,341 296,364 243,705
--------- --------- ---------
Operating expenses:
Research and development....................................... 46,634 31,462 28,886
Purchased in-process research and
development and transaction costs.......................... 17,500 -- 30,441
Selling and administrative..................................... 208,206 171,936 143,437
Amortization and impairment of intangible assets............... 12,631 4,810 4,784
--------- --------- ---------
Total operating expenses........................................... 284,971 208,208 207,548
--------- --------- ---------
Operating income................................................... 130,370 88,156 36,157
--------- --------- ---------
Other expense (income):
Interest expense............................................... 10,353 8,985 6,045
Interest and other income...................................... (11,646) (9,901) (5,737)
--------- --------- ---------
Total other expense (income), net.................................. (1,293) (916) 308
--------- --------- ---------
Income before income taxes and cumulative effect
of change in accounting principle.............................. 131,663 89,072 35,849
Provision for income taxes......................................... 43,309 32,958 24,433
--------- --------- ---------
Income before cumulative effect of change
in accounting principle........................................ 88,354 56,114 11,416
Cumulative effect of change in accounting
principle (net of $670 in taxes)............................... -- 1,976 --
--------- --------- ---------
Net income......................................................... $ 88,354 $ 58,090 $ 11,416
========= ========= =========
(CONTINUED)
22
K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - (CONTINUED)
(In thousands, except per share data)
YEARS ENDED MARCH 31,
-------------------------------------------------------
2008 2007 2006
----------- ----------- -----------
Earnings per share before cumulative effect of change in
accounting principle:
Basic - Class A common.............................. $ 1.87 $ 1.19 $ 0.24
Basic - Class B common.............................. 1.55 0.99 0.20
Diluted - Class A common............................ 1.57 1.02 0.23
Diluted - Class B common............................ 1.35 0.88 0.20
Per share effect of cumulative effect of
change in accounting principle:
Basic - Class A common.............................. $ - $ 0.04 $ -
Basic - Class B common.............................. - 0.04 -
Diluted - Class A common............................ - 0.03 -
Diluted - Class B common............................ - 0.03 -
Earnings per share:
Basic - Class A common.............................. $ 1.87 $ 1.23 $ 0.24
Basic - Class B common.............................. 1.55 1.03 0.20
Diluted - Class A common............................ 1.57 1.05 0.23
Diluted - Class B common............................ 1.35 0.91 0.20
Shares used in per share calculation:
Basic - Class A common.............................. 37,150 36,813 35,842
Basic - Class B common.............................. 12,198 12,390 12,918
Diluted - Class A common............................ 59,144 58,953 49,997
Diluted - Class B common............................ 12,281 12,489 13,113
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
YEARS ENDED MARCH 31,
-----------------------------------------------
2008 2007 2006
----------- ---------- ------------
Net income............................................................. $ 88,354 $ 58,090 $ 11,416
Unrealized gain (loss) on available for sale securities:
Unrealized holding gain (loss) during the period.................... (2,424) 100 (118)
Reclassification of losses included in net income................... -- 270 --
Tax impact related to other comprehensive income (loss)............. 848 (126) 40
----------- ---------- ------------
Total other comprehensive income (loss).......................... (1,576) 244 (78)
----------- ---------- ------------
Total comprehensive income............................................. $ 86,778 $ 58,334 $ 11,338
=========== ========== ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2008, 2007 AND 2006
-------------------------------------------------------------------------------------------
ACCUMULATED TOTAL
CLASS A CLASS B ADDITIONAL OTHER SHARE-
PREFERRED COMMON COMMON PAID-IN TREASURY RETAINED COMPREHENSIVE HOLDERS'
STOCK STOCK STOCK CAPITAL STOCK EARNINGS INCOME (LOSS) EQUITY
----- ----- ----- ------- ----- -------- ------------- ------
(Dollars in thousands)
BALANCE AT MARCH 31, 2005............... $ -- $ 386 $ 133 $ 139,678 $ (53,651) $ 200,064 $ (133) $ 286,477
Net income.............................. -- -- -- -- -- 11,416 -- 11,416
Dividends paid on preferred stock....... -- -- -- -- -- (70) -- (70)
Conversion of 736,778 Class B
shares to Class A shares.............. -- 7 (7) -- -- -- -- --
Stock-based compensation................ -- -- -- 927 -- -- -- 927
Purchase of common stock for
treasury.............................. -- -- -- -- (253) -- -- (253)
Stock options exercised - 353,355
shares of Class A and 127,519
shares of Class B..................... -- 4 1 3,138 -- -- -- 3,143
Excess income tax benefits from
stock option exercises................ -- -- -- 1,437 -- -- -- 1,437
Other comprehensive loss................ -- -- -- -- -- -- (78) (78)
-----------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2006............... -- 397 127 145,180 (53,904) 211,410 (211) 302,999
Net income.............................. -- -- -- -- -- 58,090 -- 58,090
Dividends paid on preferred stock....... -- -- -- -- -- (70) -- (70)
Conversion of 441,341 Class B
shares to Class A shares.............. -- 4 (4) -- -- -- -- --
Stock-based compensation................ -- -- -- 3,984 -- -- -- 3,984
Purchase of common stock for
treasury.............................. -- -- -- -- (2,077) -- -- (2,077)
Stock options exercised - 166,169
shares of Class A and 193,899
shares of Class B..................... -- 2 1 3,617 -- -- -- 3,620
Excess income tax benefits from
stock option exercises................ -- -- -- 683 -- -- -- 683
Cumulative effect of change in
accounting principle.................. -- -- -- (2,646) -- -- -- (2,646)
Other comprehensive income.............. -- -- -- -- -- -- 244 244
-----------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2007............... -- 403 124 150,818 (55,981) 269,430 33 364,827
Net income.............................. -- -- -- -- -- 88,354 -- 88,354
Dividends paid on preferred stock....... -- -- -- -- -- (70) -- (70)
Conversion of 234,528 Class B
shares to Class A shares.............. -- 2 (2) -- -- -- -- --
Stock-based compensation................ -- -- -- 5,205 -- -- -- 5,205
Purchase of common stock for
treasury.............................. -- -- -- -- (179) -- -- (179)
Stock options exercised - 174,813
shares of Class A and 9,427 shares
of Class B........................... -- 2 -- 1,343 -- -- -- 1,345
Excess income tax benefits from
stock option exercises............... -- -- -- 1,376 -- -- -- 1,376
Reimbursement payment received
from CEO - 45,531 shares of
Class A Common Stock................. -- -- -- -- -- -- -- --
Other comprehensive loss .............. -- -- -- -- -- -- (1,576) (1,576)
-----------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2008.............. $ -- $ 407 $ 122 $ 158,742 $ (56,160) $ 357,714 $ (1,543) $ 459,282
=========================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEARS ENDED MARCH 31,
-----------------------------------------------
2008 2007 2006
------------ ---------- ----------
Operating Activities:
Net income............................................................. $ 88,354 $ 58,090 $ 11,416
Adjustments to reconcile net income to net cash provided by
operating activities:
Acquired in-process research and development........................ 17,500 -- 29,570
Cumulative effect of change in accounting principle................. -- (1,976) --
Depreciation and amortization ..................................... 31,120 22,388 18,002
Deferred income tax (benefit) provision............................. (6,308) 7,698 6,062
Deferred compensation............................................... 2,232 877 965
Stock-based compensation............................................ 5,205 3,984 927
Excess tax benefits associated with stock options................... (1,376) (683) --
Other............................................................... 1,440 270 --
Changes in operating assets and liabilities:
Decrease (increase) in receivables, net............................. (28,436) (25,063) 7,593
Increase in inventories............................................. (3,465) (20,349) (16,792)
Increase in prepaid and other assets................................ (6,443) (2,771) (1,185)
(Decrease) increase in income taxes payable......................... (1,622) 2,413 3,659
Increase in accounts payable and accrued
liabilities...................................................... 24,157 12,257 4,392
------------ ---------- ----------
Net cash provided by operating activities.............................. 122,358 57,135 64,609
------------ ---------- ----------
Investing Activities:
Purchase of property and equipment.................................. (23,656) (25,066) (58,334)
Purchase of marketable securities................................... (125,426) (178,949) (61,187)
Sale of marketable securities....................................... 158,750 128,000 --
Purchase of preferred stock......................................... -- (400) (11,300)
Product acquisitions................................................ (159,000) -- (25,643)
------------ ---------- ----------
Net cash used in investing activities.................................. (149,332) (76,415) (156,464)
------------ ---------- ----------
Financing Activities:
Principal payments on long-term debt................................ (1,896) (1,652) (892)
Proceeds from borrowing of long-term debt........................... -- -- 32,764
Proceeds from borrowing on line of credit........................... 50,000 -- --
Repayment of borrowing on line of credit............................ (20,000) -- --
Dividends paid on preferred stock................................... (70) (70) (70)
Purchase of common stock for treasury............................... (179) (2,077) (253)
Excess tax benefits associated with stock options................... 1,376 683 --
Cash deposits received for stock options............................ 1,514 4,264 1,187
------------ ---------- ----------
Net cash provided by financing activities............................. 30,745 1,148 32,736
------------ ---------- ----------
Increased (decrease) in cash and cash equivalents..................... 3,771 (18,132) (59,119)
Cash and cash equivalents:
Beginning of year................................................... 82,574 100,706 159,825
------------ ---------- ----------
End of year......................................................... $ 86,345 $ 82,574 $ 100,706
============ ========== ==========
Non-cash investing and financing activities:
Term loans refinanced............................................... $ -- $ -- $ 9,859
Stock options exercised (at expiration of two-year
forfeiture period).......................................... 1,345 3,620 3,143
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. DESCRIPTION OF BUSINESS
-----------------------
K-V Pharmaceutical Company and its subsidiaries ("KV" or the
"Company") are primarily engaged in the development, manufacture,
acquisition, 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 U.S. generally accepted accounting principles
("GAAP"). 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.
USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with GAAP
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
revenue recognition and reductions to gross revenues, inventory
valuation, intangible assets, stock-based compensation, income
taxes, and loss contingencies related to legal proceedings.
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 interest-bearing deposits that can
be redeemed on demand and investments that have original
maturities of three months or less.
INVESTMENT SECURITIES
---------------------
The Company's investment securities consist of mutual funds
comprised of U.S. government guaranteed investments and auction
rate securities. The Company classifies its investment
securities as available-for-sale with net unrealized gains or
losses recorded as a separate component of shareholders' equity,
net of any related tax effect. Auction rate securities generally
have long-term stated maturities of 20 to 30 years. However,
these securities have certain economic characteristics of
short-term investments due to a rate-setting mechanism and the
ability to liquidate them through a dutch auction process that
occurs on pre-determined intervals, up to 35 days. The Company
reclassified these securities to non-current investment
securities at March 31, 2008 to reflect the current lack of
liquidity in these investments (see Note 4).
27
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 obsolete, excess
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. Major renewals and improvements are capitalized,
while routine maintenance and repairs are expensed as incurred.
At the time properties are retired from service, the cost and
accumulated depreciation are removed from the respective
accounts and the related gains or losses are reflected in
earnings. The Company capitalizes interest on qualified
construction projects.
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 ranging from
nine to 20 years. 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. The
Company evaluates its intangible assets for impairment at least
annually or 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.
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
goodwill is subject to at least an annual assessment of
impairment on a fair value basis. If the Company determines
through the assessment process that goodwill has been impaired,
the Company will record the impairment charge in its results of
operations. The Company's test for goodwill impairment in fiscal
2008 determined there was no goodwill impairment.
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 and relate primarily to the
Company's $12,284 investment at March 31, 2008 in the preferred
stock of Strides Arcolab Limited.
28
This investment is periodically reviewed for
other-than-temporary declines in fair value. An other than
temporary decline in fair value is identified by evaluating
market conditions, the entity's ability to achieve forecast and
regulatory submission guidelines, as well as the entity's
overall financial condition.
REVENUE RECOGNITION
-------------------
Revenue is generally realized or realizable and earned when
persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the seller's price to
the buyer is fixed or determinable, and the customer's payment
ability has been reasonably assured. Accordingly, the Company
records revenue from product sales when title and risk of
ownership have been transferred to the customer. The Company
also enters into long-term agreements under which it assigns
marketing rights for products it has developed to pharmaceutical
marketers. Royalties under these arrangements are earned based
on the sale of products.
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 and actual 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 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.
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 recognition of revenue from
product sales 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 The Company markets and sells products directly to
wholesalers, distributors, warehousing pharmacy chains,
mail order pharmacies and other direct purchasing
groups. The Company also markets products indirectly to
independent pharmacies, non-warehousing chains, managed
care organizations, and group purchasing organizations,
collectively referred to as "indirect customers." The
Company enters into agreements with some indirect
customers to establish contract pricing for certain
products. These indirect customers then independently
select a wholesaler from which to purchase the products
at these contracted prices. Alternatively, the Company
may pre-authorize wholesalers to offer specified
contract pricing to other indirect customers. Under
either arrangement, the Company provides credit to the
wholesaler for any difference between the contracted
price with the indirect customer and the wholesaler's
invoice price. This credit is called a chargeback.
Provisions for estimated chargebacks are calculated
primarily using historical chargeback experience,
actual contract pricing and estimated and actual
wholesaler inventory levels.
o Generally, the Company provides credits to wholesale
customers for decreases that are made to selling prices
for the value of inventory that is owned by these
customers at the date of the price reduction. These
credits are customary in the industry and are intended
to reduce a wholesale customer's inventory cost to
better reflect current market prices. Since a reduction
in the wholesaler's invoice price reduces the
chargeback per unit, price reduction credits are
typically included as part of the reserve for
chargebacks because they act
29
essentially as accelerated chargebacks. Although the
Company contractually agreed to provide price
adjustment credits to its major wholesale customers at
the time they occur, the impact of any such price
reductions not included in the reserve for chargebacks
is immaterial to the amount of revenue recognized in
any given period.
o Established in 1990, the Medicaid Drug Rebate Program
requires a drug manufacturer to provide to each state a
rebate every calendar quarter for covered outpatient
drugs dispensed to Medicaid patients. The provision for
Medicaid rebates is based upon historical experience of
claims submitted by the various states. The Company
also monitors Medicaid legislative changes to determine
what impact such legislation may have on the provision
for Medicaid rebates.
Actual product returns, chargebacks and other sales allowances
incurred are 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 $234,427, $148,822 and
$154,662 for the years ended March 31, 2008, 2007 and 2006,
respectively. The reserve balances related to the sales
provisions totaled $46,646 and $31,281 at March 31, 2008 and
2007, respectively, and are included in "Receivables, less
allowance for doubtful accounts" in the accompanying
consolidated balance sheets.
CONCENTRATION OF CREDIT RISK
----------------------------
The Company extends credit on an uncollateralized basis
primarily to wholesale drug distributors and retail pharmacy
chains throughout the U.S. 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 31.0%, 28.6% and 9.0%, and 33.7%, 19.7% and 15.1%
of gross receivables at March 31, 2008 and 2007, respectively.
For the year ended March 31, 2008, KV's three largest customers
accounted for 24.6%, 23.9% and 9.8% of gross revenues. For the
years ended March 31, 2007 and 2006, the Company's three largest
customers accounted for gross revenues of 21.1%, 25.7% and 14.4%
and 15.7%, 26.9% and 12.7%, respectively.
The Company maintains cash balances at certain financial
institutions 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
30
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 shorter of the life of the product or the
term of the licensing agreement.
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.
ADVERTISING
-----------
Costs associated with advertising are expensed in the period in
which the advertising is used and these costs are included in
selling and administrative expense. Advertising expenses totaled
$27,545, $21,932 and $18,366 for the years ended March 31, 2008,
2007 and 2006, respectively. Advertising expense includes the
cost of product samples given to physicians for marketing to
their patients.
LITIGATION
----------
The Company is subject to litigation in the ordinary course of
business and to certain other contingencies (see Note 12). Legal
fees and other expenses related to litigation and contingencies
are recorded as incurred. The Company, in consultation with its
legal counsel, also assesses the need to record a liability for
litigation and contingencies on a case-by-case basis. Accruals
are recorded when the Company determines that a loss related to
a matter is both probable and reasonably estimable.
DEFERRED FINANCING COSTS
------------------------
Deferred financing costs of $5,835 were incurred in connection
with the issuance of convertible debt (see Note 10). These costs
are being amortized into interest expense on a straight-line
basis over the five-year period that ends on the first date the
debt can be put by the holders to the Company. Accumulated
amortization totaled $5,635 and $4,471 at March 31, 2008 and
2007, respectively. Deferred financing costs, net of accumulated
amortization, are included in "Other Assets" in the accompanying
consolidated balance sheets.
EARNINGS PER SHARE
------------------
The Company has two classes of common stock: Class A Common
Stock and Class B Common Stock that is convertible into Class A
Common Stock. With respect to dividend rights, holders of Class
A Common Stock are entitled to receive cash dividends per share
equal to 120% of the dividends per share paid on the Class B
Common Stock. For purposes of calculating basic earnings per
share, undistributed earnings are allocated to each class of
common stock based on the contractual participation rights of
each class of security.
The Company presents diluted earnings per share for Class B
Common Stock for all periods using the two-class method which
does not assume the conversion of Class B Common Stock into
Class A Common Stock. The Company presents diluted earnings per
share for Class A Common Stock using the if-converted method
which assumes the conversion of Class B Common Stock into Class
A Common Stock, if dilutive.
Basic earnings per share is computed using the weighted average
number of common shares outstanding during the period except
that it does not include unvested common shares subject to
repurchase. Diluted earnings per share is computed using the
weighted average number of common shares and, if dilutive,
potential common shares outstanding during the period. Potential
common shares consist of the incremental common shares issuable
upon the exercise of stock options, unvested common shares
subject to repurchase,
31
convertible preferred stock and the Notes. The dilutive effects
of outstanding stock options and unvested common shares subject
to repurchase are reflected in diluted earnings per share by
application of the treasury stock method. Convertible preferred
stock and the Notes are reflected on an if-converted basis. The
computation of diluted earnings per share for Class A Common
Stock assumes the conversion of the Class B Common Stock, while
the diluted earnings per share for Class B Common Stock does not
assume the conversion of those shares.
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 amount of existing
assets and liabilities and the 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. The Company evaluates the
realizability of its deferred tax assets by assessing its
valuation allowance and by adjusting the amount of such
allowance, if necessary. The factors used to assess the
likelihood of realization include the Company's forecast of
future taxable income and available tax planning strategies that
could be implemented to realize the net deferred tax assets.
Failure to achieve forecasted taxable income in applicable tax
jurisdictions could affect the ultimate realization of deferred
tax assets and could result in an increase in the Company's
effective tax rate on future earnings.
The Company accounts for uncertain tax positions in accordance
with FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes -- an Interpretation of FASB Statement No. 109"
("FIN 48"), which was issued in July 2006. This interpretation
addresses the determination of whether tax benefits claimed or
expected to be claimed on a tax return should be recorded in the
financial statements. Under FIN 48, the Company may recognize
the tax benefit from an uncertain tax position only if it is
more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the
financial statements from such a position should be measured
based on the largest benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement. The
Company recognizes interest and penalties, if any, related to
unrecognized tax benefits in income tax expense.
STOCK-BASED COMPENSATION
------------------------
Effective April 1, 2006, the Company adopted SFAS No. 123
(revised 2004), "Share-Based Payment ("SFAS 123R"), which
requires the measurement and recognition of compensation
expense, based on estimated fair values, for all share-based
compensation awards made to employees and directors over the
vesting period of the awards. The Company adopted SFAS 123R
using the modified prospective method and, as a result, did not
retroactively adjust results from prior periods. Under the
modified prospective method, stock-based compensation expense
was recognized (1) for the unvested portion of previously issued
awards that were outstanding at the initial date of adoption
based on the grant date fair value estimated in accordance with
the pro forma provisions of SFAS 123 "Accounting for Stock-Based
Compensation" and (2) for any awards granted or modified on or
subsequent to the effective date of SFAS 123R based on the grant
date fair value estimated in accordance with the provisions of
this statement. Prior to the adoption of SFAS 123R, the Company
measured compensation expense for its employee stock-based
compensation plans using the intrinsic value method prescribed
by Accounting Principles Board Opinion No. 25 ("APB 25"). The
Company also applied the disclosure provisions of SFAS 123, as
amended by SFAS 148, as if the fair value-based method had been
applied in measuring compensation expense. Under APB 25,
compensation cost for stock options was recognized based on the
excess, if any, of the quoted market price of the stock at the
grant date of the award or other measurement date over the
amount an employee must pay to acquire the stock.
32
The following table provides the pro forma effects on net income
and earnings per share for fiscal 2006 as if the fair value
recognition provisions of SFAS 123 had been applied to options
granted under the Company's employee compensation plans:
YEAR ENDED
MARCH 31, 2006
-------------------
Net income $ 11,416
Add: Stock-based compensation expense
included in net income, net of tax 641
Deduct: Stock-based compensation using the
fair value based method for all awards (2,669)
-------------------
Pro forma net income $ 9,388
===================
Earnings per share:
Basic - Class A common $ 0.24
Basic - Class B common 0.20
Diluted - Class A common 0.23
Diluted - Class B common 0.20
Earnings per share - pro forma:
Basic - Class A common $ 0.20
Basic - Class B common 0.17
Diluted - Class A common 0.19
Diluted - Class B common 0.16
COMPREHENSIVE INCOME
--------------------
Comprehensive income includes all changes in equity during a
period except those that resulted from investments by or
distributions to the Company's shareholders. Other comprehensive
income refers to revenues, expenses, gains and losses that,
under generally accepted accounting principles, are included in
comprehensive income, but excluded from net income as these
amounts are recorded directly as an adjustment to shareholders'
equity. For the Company, other comprehensive income (loss) is
comprised of the net changes in unrealized gains and losses on
available-for-sale securities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The Company's financial instruments consist primarily of cash
and cash equivalents, marketable securities, receivables,
investments, trade accounts payable, the convertible debt,
embedded derivatives related to the issuance of the convertible
debt, a mortgage loan agreement, and borrowings under the
Company's line of credit. The carrying amounts of cash and cash
equivalents, receivables and trade accounts payable are
representative of their respective fair values due to their
relatively short maturities. The fair values of marketable
securities are based on quoted market prices. The Company
estimates the fair value of its fixed rate long-term obligations
based on quoted market rates of interest and maturity schedules
for similar issues. The carrying value of these obligations
approximates their fair value.
The Company's investment in the preferred stock of Strides
Arcolab Limited of $14,311, including accrued but unpaid
dividends, had a fair value of $14,600 at March 31, 2008 based
on a valuation analysis. Based on quoted market rates, the
Company's convertible debt had a fair value of $228,360 and
$229,240 at March 31, 2008 and 2007, respectively. The carrying
amount of the mortgage loan agreement and the outstanding
balance of the line of credit approximate their fair values
because their terms are similar to those which can be obtained
for similar financial instruments in the current marketplace.
33
DERIVATIVE FINANCIAL INSTRUMENTS
--------------------------------
The Company's derivative financial instruments consist of
embedded derivatives related to the convertible debt. These
embedded derivatives include certain conversion features and a
contingent interest feature. Although the conversion features
represent embedded derivative financial instruments, based on
the de minimis value of these features at the time of issuance
and at March 31, 2008, no value has been assigned to these
embedded derivatives. The contingent interest feature provides
unique tax treatment under the Internal Revenue Service's
contingent debt regulations. In essence, interest accrues, for
tax purposes, on the basis of the instrument's comparable yield
(the yield at which the issuer would issue a fixed rate
instrument with similar terms).
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In September 2006, the Financial Accounting Standards Board
("FASB") issued SFAS No. 157, "Fair Value Measurements" ("SFAS
157"), which provides enhanced guidance for using fair value to
measure assets and liabilities. SFAS 157 clarifies the principle
that fair value should be based on the assumptions that market
participants would use when pricing an asset or liability,
provides a framework for measuring fair value under GAAP and
expands disclosure requirements about fair value measurements.
SFAS 157 is effective for financial statements issued in fiscal
years beginning after November 15, 2007, and interim periods
within those fiscal years. The Company plans to adopt SFAS 157
at the beginning of fiscal 2009 and is evaluating the impact, if
any, the adoption of SFAS 157 will have on its financial
condition and results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities" ("SFAS
159"), which permits companies to choose to measure many
financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing
companies with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge
accounting provisions. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. Companies are not allowed to
adopt SFAS 159 on a retrospective basis unless they choose early
adoption. The Company plans to adopt SFAS 159 at the beginning
of fiscal 2009 and is evaluating the impact, if any, the
adoption of SFAS 159 will have on its financial condition and
results of operations.
In March 2007, the FASB ratified the consensus reached by the
Emerging Issues Task Force ("EITF") in Issue No. 06-10,
"Accounting for Collateral Assignment Split-Dollar Life
Insurance Arrangements" ("Issue 06-10"). Issue 06-10 requires
companies with collateral assignment split-dollar life insurance
policies that provide a benefit to an employee that extends to
postretirement periods to recognize a liability for future
benefits based on the substantive agreement with the employee.
Recognition should be in accordance with FASB Statement No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions," or APB Opinion No. 12, "Omnibus Opinion - 1967,"
depending on whether a substantive plan is deemed to exist.
Companies are permitted to recognize the effects of applying the
consensus through either (1) a change in accounting principle
through a cumulative-effect adjustment to retained earnings or
to other components of equity or net assets as of the beginning
of the year of adoption or (2) a change in accounting principle
through retrospective application to all prior periods. Issue
06-10 is effective for fiscal years beginning after December 15,
2007, with early adoption permitted. The Company plans to adopt
Issue 06-10 at the beginning of fiscal 2009 and is evaluating
the impact of the adoption of Issue 06-10 on its financial
condition and results of operations.
In June 2007, the FASB ratified the consensus reached by the
EITF on Issue No. 07-3, Accounting for Advance Payments for
Goods or Services Received for Use in Future Research and
Development Activities ("Issue 07-3"), which is effective for
fiscal years beginning after December 15, 2007 and is applied
prospectively for new contracts entered into on or after the
effective date. Issue 07-3 addresses nonrefundable advance
payments for goods or services for use in future research and
development activities. Issue 07-3 will require that these
payments that will be used or rendered for future research and
development activities be deferred and capitalized and
recognized as an expense as the related goods are delivered or
the
34
related services are performed. If an entity does not expect the
goods to be delivered or the services to be rendered, the
capitalized advance payments should be expensed. The Company
plans to adopt Issue 07-3 at the beginning of fiscal 2009 and is
evaluating the impact of the adoption of this issue on its
financial condition and results of operations.
In September 2007, the EITF reached a consensus on Issue No.
07-1 ("Issue 07-1"), "Accounting for Collaborative
Arrangements." The scope of Issue 07-1 is limited to
collaborative arrangements where no separate legal entity exists
and in which the parties are active participants and are exposed
to significant risks and rewards that depend on the success of
the activity. The EITF concluded that revenue transactions with
third parties and associated costs incurred should be reported
in the appropriate line item in each company's financial
statements pursuant to the guidance in Issue 99-19, "Reporting
Revenue Gross as a Principal versus Net as an Agent." The EITF
also concluded that the equity method of accounting under
Accounting Principles Board Opinion 18, "The Equity Method of
Accounting for Investments in Common Stock," should not be
applied to arrangements that are not conducted through a
separate legal entity. The EITF also concluded that the income
statement classification of payments made between the parties in
an arrangement should be based on a consideration of the
following factors: the nature and terms of the arrangement; the
nature of the entities' operations; and whether the partners'
payments are within the scope of existing GAAP. To the extent
such costs are not within the scope of other authoritative
accounting literature, the income statement characterization for
the payments should be based on an analogy to authoritative
accounting literature or a reasonable, rational, and
consistently applied accounting policy election. The provisions
of Issue 07-1 are effective for fiscal years beginning on or
after December 15, 2008, and companies will be required to apply
the provisions through retrospective application. The Company
plans to adopt Issue 07-1 at the beginning of fiscal 2010 and is
evaluating the impact of the adoption of Issue 07-1 on its
financial condition and results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007),
"Business Combinations" ("SFAS 141(R)") which replaces SFAS 141
but retains the fundamental concept of purchase method of
accounting in a business combination and improves reporting by
creating greater consistency in the accounting and financial
reporting of business combinations, resulting in more complete,
comparable, and relevant information for investors and other
users of financial statements. To achieve this goal, the new
standard requires the acquiring entity in a business combination
to recognize all the assets acquired and liabilities assumed in
the transaction and any non-controlling interest at the
acquisition date at their fair value as of that date. This
statement requires measuring a non-controlling interest in the
acquiree at fair value which will result in recognizing the
goodwill attributable to the non-controlling interest in
addition to that attributable to the acquirer. This statement
also requires the recognition of assets acquired and liabilities
assumed arising from contractual contingencies as of the
acquisition date, measured at their acquisition date fair
values. SFAS 141(R) is effective for business combinations for
which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008 and earlier adoption is prohibited. The Company plans to
adopt SFAS 141(R) at the beginning of fiscal 2010 and is
evaluating the impact of SFAS 141(R) on its financial condition
and results of operations.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling
Interests in Consolidated Financial Statements" ("SFAS 160") an
amendment of ARB No. 51, which will affect only those entities
that have an outstanding non-controlling interest in one or more
subsidiaries or that deconsolidate a subsidiary by requiring all
entities to report non-controlling (minority) interests in
subsidiaries in the same way as equity in the consolidated
financial statements. In addition, SFAS 160 eliminates the
diversity that currently exists in accounting for transactions
between an entity and non-controlling interests by requiring
they be treated as equity transactions. SFAS 160 is effective
for fiscal years beginning after December 15, 2008. The Company
plans to adopt SFAS 160 at the beginning of fiscal 2010 and is
evaluating the impact of SFAS 160 on its financial condition and
results of operations.
In May 2008, the FASB issued FASB Staff Position No. APB 14-a,
"Accounting for Convertible Debt Instruments That May Be Settled
in Cash Upon Conversion (Including Partial Cash Settlement)."
Under the new rules for convertible debt instruments that may be
settled entirely or partially in cash upon conversion, an
35
entity should separately account for the liability and equity
components of the instrument in a manner that reflects the
issuer's economic interest cost. The effect of the proposed new
rules for the debentures is that the equity component would be
included in the paid-in-capital section of shareholders' equity
on an entity's consolidated balance sheet and the value of the
equity component would be treated as original issue discount for
purposes of accounting for the debt component of convertible
debt. The FSP will be effective for fiscal years beginning after
December 15, 2008, and for interim periods within those fiscal
years, with retrospective application required. Early adoption
is not permitted. The Company is currently evaluating the
proposed new rules and the impact on its financial condition and
results of operations.
3. ACQUISITIONS AND LICENSE AGREEMENT
----------------------------------
In January 2008, we entered into a definitive asset purchase
agreement with CYTYC Prenatal Products and Hologic, Inc. ("CYTYC") to
acquire the U.S. and worldwide rights to Gestiva(TM) (17-alpha
hydroxyprogesterone caproate). The New Drug Application ("NDA") for
Gestiva(TM) is currently before the FDA, pending approval for use in
the prevention of preterm birth in certain categories of pregnant
women. The proposed indication is for women with a history of at
least one spontaneous preterm delivery (i.e., less than 37 weeks),
who are pregnant with a single fetus. Under the terms of the asset
purchase agreement, the Company agreed to pay $82,000 for
Gestiva(TM), $7,500 of which was paid at closing. For the year ended
March 31, 2008, the Company recorded the $7,500 payment as in-process
research and development expense because the product had not obtained
FDA approval when the initial payment was made. The remainder of the
purchase price is payable on the completion of two milestones: (1)
$2,000 on the earlier to occur of CYTYC's receipt of acknowledgement
from the FDA that their response to the FDA's October 20, 2006
"approvable" letter is sufficient for the FDA to proceed with their
review of the NDA or the receipt of FDA's approval of the Gestiva(TM)
NDA and (2) $72,500 on FDA approval of a Gestiva(TM) NDA, transfer of
all rights in the NDA to the Company and receipt by the Company of
defined launch quantities of finished Gestiva(TM) suitable for
commercial sale.
In May 2007, the Company acquired the U.S. marketing rights to
Evamist(TM), a new estrogen replacement therapy product delivered
with a patented metered-dose transdermal spray system, from VIVUS,
Inc. Under terms of the Asset Purchase Agreement, the Company paid
$10,000 in cash at closing and agreed to make an additional cash
payment of $141,500 upon final approval of the product by the U.S.
Food and Drug Administration ("FDA"). The agreement also provides for
two future payments upon achievement of certain net sales milestones.
If Evamist(TM) achieves $100,000 of net sales in a fiscal year, a
one-time payment of $10,000 will be made, and if net sales levels
reach $200,000 in a fiscal year, a one-time payment of $20,000 will
be made. For the year ended March 31, 2008, the Company recorded the
$10,000 payment made at closing as in-process research and
development expense because the product had not obtained FDA approval
when the initial payment was made. In July 2007, FDA approval for
Evamist(TM) was received and the payment of $141,500 was made to
VIVUS, Inc. The preliminary purchase price allocation, which is
subject to change based on the final fair value assessment, resulted
in estimated identifiable intangible assets of $52,446 to product
rights; $15,166 to trademark rights; $66,417 to rights under a
sublicense agreement; and, $7,471 to a covenant not to compete. Upon
FDA approval in July 2007, the Company began amortizing the product
rights, trademark rights and rights under the sublicense agreement
over 15 years and the covenant not to compete over nine years.
In May 2005, the Company and FemmePharma, Inc. ("FemmePharma")
mutually agreed to terminate the license agreement between them
entered into in April 2002. As part of this transaction, the Company
acquired all of the common stock of FemmePharma for $25,000 after
certain assets of the entity had been distributed to FemmePharma's
other shareholders. Under separate agreements, the Company had
previously invested $5,000 in FemmePharma's convertible preferred
stock. Included in the Company's acquisition of FemmePharma are the
worldwide marketing rights to an endometriosis product that was
originally part of the licensing arrangement with FemmePharma that
provided the Company, among other things, marketing rights for the
product principally in the U.S. In accordance with the new agreement,
the Company acquired worldwide licensing rights of the endometriosis
product, no longer was responsible for milestone payments and
royalties specified in the original licensing agreement, and secured
exclusive worldwide rights for use of the FemmePharma technology for
vaginal anti-infective products. For the year ended March 31, 2006,
the Company recorded expense of $30,441 in connection with the
FemmePharma acquisition that consisted of $29,570 for acquired
in-process research and development and $871 in direct expenses
related to the transaction. The acquired in-process research and
36
development charge represented the estimated fair value of the
endometriosis product being developed that, at the time of the
acquisition, had no alternative future use and for which
technological feasibility had not been established. The FemmePharma
acquisition expense was determined by the Company to not be
deductible for tax purposes. The Company also allocated $375 of the
purchase price for a non-compete agreement and $300 of the purchase
price for the royalty-free worldwide license to use FemmePharma's
technology for vaginal anti-infective products acquired in the
transaction.
4. INVESTMENT SECURITIES
---------------------
The carrying amount of available-for-sale securities and their
approximate fair values at March 31, 2008 and 2007 were as follows.
MARCH 31, 2008
----------------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
Short-term marketable securities..... $ 40,538 $ 10 $ - $ 40,548
Non-current auction rate
securities........................ 83,900 - (2,384) 81,516
---------- ---------- ---------- ----------
Total............................ $ 124,438 $ 10 $ (2,384) $ 122,064
========== ========== ========== ==========
MARCH 31, 2007
----------------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
Short-term marketable securities..... $ 38,612 $ 50 $ - $ 38,662
Short-term auction rate
securities........................ 119,150 - - 119,150
---------- ---------- ---------- ----------
Total............................ $ 157,762 $ 50 $ - $ 157,812
========== ========== ========== ==========
The Company accounts for its investment securities in accordance with
SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities," and classifies them as "available for sale." The
Company's marketable securities at March 31, 2008 are recorded at
fair value based on quoted market prices using the specific
identification method and consisted of mutual funds comprised of U.S.
government investments. These marketable securities are classified as
current assets as the Company has the ability to use them for current
operating and investing purposes. For the year ended March 31, 2007,
a realized loss of $270 was recognized when the Company determined
that its unrealized loss on marketable securities had become
other-than-temporary as the duration of the losses had surpassed 24
months and the Company no longer intended to hold these securities to
recovery. There were no realized gains or losses for the years ended
March 31, 2008 and 2006.
At March 31, 2008 and 2007, the Company also had $83,900 and $119,150
of principal invested in auction rate securities ("ARS"). These
securities all have a maturity in excess of 10 years. The Company's
investments in ARS primarily represent interests in collateralized
debt obligations supported by pools of student loans, the principal
of which is guaranteed by the U.S. Government. ARS backed by student
loans are viewed as having low default risk and therefore very low
risk of credit downgrade. The ARS held by the Company are AAA rated
securities with long-term nominal maturities for which the interest
rates are reset through a dutch auction at pre-determined intervals,
up to 35 days. The auctions historically have provided a liquid
market for these securities.
With the liquidity issues experienced in global credit and capital
markets, the ARS held by the Company at March 31, 2008 have
experienced multiple failed auctions beginning in February 2008 as
the amount of securities
37
submitted for sale has exceeded the amount of purchase orders. Given
the failed auctions, the Company's ARS are illiquid until a
successful auction for them occurs.
The estimated fair value of the Company's ARS holdings at March 31,
2008 was $81,516, which reflects a $2,384 difference from the
principal value of $83,900. Although the ARS continue to pay interest
according to their stated terms, the Company has recorded an
unrealized loss of $1,550, net of tax, as a reduction to
shareholders' equity in accumulated other comprehensive loss,
reflecting adjustments to the ARS holdings that the Company has
concluded have a temporary decline in value.
The ARS are valued based on a discounted cash flow model that
considers, among other factors, the time to work out the market
disruption in the traditional trading mechanism, the stream of cash
flows (coupons) earned until maturity, the prevailing risk free yield
curve, credit spreads applicable to a portfolio of student loans with
various tenures and ratings and an illiquidity premium. These factors
were used in a Monte Carlo simulation based methodology to derive the
estimated fair value of the ARS.
At March 31, 2007, ARS are classified as current assets and included
in the line item "Marketable securities." Given the failed auctions,
the Company's ARS are illiquid until there is a successful auction
for them. Accordingly, the $81,516 of ARS have been reclassified at
March 31, 2008 from current assets to non-current assets and are
included in the line item "Investment securities."
5. INVENTORIES
-----------
Inventories as of March 31, consist of:
2008 2007
---- ----
Finished goods..................... $ 27,654 $ 35,420
Work-in-process.................... 15,925 13,294
Raw materials...................... 51,401 42,801
--------- ---------
$ 94,980 $ 91,515
========= =========
6. PROPERTY AND EQUIPMENT
----------------------
Property and equipment as of March 31, consist of:
2008 2007
---- ----
Land and improvements................................. $ 6,253 $ 6,253
Buildings and building improvements................... 109,128 108,631
Machinery and equipment............................... 86,490 73,461
Office furniture and equipment........................ 32,417 27,819
Leasehold improvements................................ 21,057 21,057
Construction-in-progress.............................. 14,870 5,865
---------- ----------
270,215 243,086
Less accumulated depreciation......................... (74,015) (56,186)
---------- ----------
Net property and equipment......................... $ 196,200 $ 186,900
========== ==========
Capital additions to property and equipment were $23,656, $25,066 and
$58,334 for the years ended March 31, 2008, 2007 and 2006,
respectively. Depreciation of property and equipment was $18,317,
$16,208 and $11,916 for the years ended March 31, 2008, 2007 and
2006, respectively.
Property and equipment projects classified as
construction-in-progress at March 31, 2008 are projected to be
completed during the next 12 months at an estimated cost of $4,595.
During the year ended March 31, 2006, the Company recorded
capitalized interest on qualifying construction projects of $940. In
fiscal 2008 and 2007, the Company did not record any capitalized
interest.
38
7. INTANGIBLE ASSETS AND GOODWILL
------------------------------
Intangible assets and goodwill as of March 31, consist of:
2008 2007
--------------------------------- ---------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------ ------------ ------ ------------
Product rights acquired:
Micro-K(R).......................... $ 36,140 $ (16,318) $ 36,140 $ (14,513)
PreCare(R).......................... 8,433 (3,654) 8,433 (3,233)
Evamist(TM).......................... 52,446 (2,378) -- --
Trademarks acquired:
Niferex(R).......................... 14,834 (3,709) 14,834 (2,967)
Chromagen(R)/StrongStart(R)........... 27,642 (6,910) 27,642 (5,528)
Evamist(TM).......................... 15,166 (688) -- --
License agreements:
Evamist(TM).......................... 66,417 (3,011) -- --
Other............................. 2,300 -- 4,400 (480)
Covenants not to compete:
Evamist(TM).......................... 7,471 (565) -- --
Other............................. 375 (109) 375 (72)
Trademarks and patents............... 5,317 (972) 4,196 (774)
---------- ---------- ---------- ----------
Total intangible assets..... 236,541 (38,314) 96,020 (27,567)
Goodwill........................ 557 - 557 -
---------- ---------- ---------- ----------
$ 237,098 $ (38,314) $ 96,577 $ (27,567)
========== ========== ========== ==========
As of March 31, 2008, the Company's intangible assets have a weighted
average useful life of approximately 16 years. Amortization of
intangible assets was $11,491, $4,810 and $4,784 for the years ended
March 31, 2008, 2007 and 2006, respectively.
During the year ended March 31, 2008, the Company recognized an
impairment charge of $1,140 for the intangible asset related to a
product right acquired under an external development agreement. Price
erosion on the product eliminated the economics of marketing the
product. The entire balance of the intangible asset was written-off
as the product is no longer expected to generate positive future cash
flows. The impairment loss is included in "Amortization and
impairment of intangible assets" in the Consolidated Statement of
Income and is included under the All Other segment in Note 21.
Assuming no other additions, disposals or adjustments are made to the
carrying values and/or useful lives of the intangible assets, annual
amortization expense on product rights, trademarks acquired and other
intangible assets is estimated to be approximately $14,500 in each of
the five succeeding fiscal years.
39
8. OTHER ASSETS
------------
Other assets as of March 31, consist of:
2008 2007
---- ----
Cash surrender value of life insurance............... $ 4,300 $ 3,874
Preferred stock investments.......................... 12,684 11,806
Accrued dividends on preferred stock ................ 2,027 1,198
Deferred financing costs, net........................ 859 2,159
Deposits............................................. 3,238 1,366
---------- ----------
$ 23,108 $ 20,403
========== ==========
9. ACCRUED LIABILITIES
-------------------
Accrued liabilities as of March 31, consist of:
2008 2007
---- ----
Salaries, wages, incentives and benefits....... $ 30,314 $ 20,669
Accrued interest payable....................... 2,721 2,192
Professional fees.............................. 4,837 5,921
Promotion expenses............................. 4,984 369
Stock option deposits.......................... 2,729 2,560
Other.......................................... 931 1,507
--------- ----------
$ 46,516 $ 33,218
========= ==========
10. LONG-TERM DEBT
--------------
Long-term debt as of March 31, consists of:
2008 2007
---- ----
Building mortgages............................. $ 39,452 $ 41,348
Line of credit................................. 30,000 --
Convertible notes.............................. 200,000 200,000
----------- -----------
269,452 241,348
Less current portion........................... (202,020) (1,897)
----------- -----------
$ 67,432 $ 239,451
=========== ===========
In June 2006, the Company entered into a credit agreement with ten
banks that provides for a revolving line of credit for borrowing up
to $320,000. This credit facility also includes a provision for
increasing the revolving commitment, at the lenders' sole discretion,
by up to an additional $50,000. The credit agreement is unsecured
unless the Company, under certain specified circumstances, utilizes
the facility to redeem part or all of its outstanding Notes. Interest
is charged under the credit facility at the lower of the prime rate
or LIBOR plus 62.5 to 150 basis points depending on the ratio of
senior debt to EBITDA. The credit facility has a five-year term
expiring in June 2011. The credit agreement contains financial
covenants that impose limits on dividend payments, require minimum
equity, a maximum senior leverage ratio and minimum fixed charge
coverage ratio. At March 31, 2008, the Company had $942 in open
letters of credit issued under the revolving credit line and $30,000
of cash borrowings outstanding under the facility.
In March 2006, the Company entered into a $43,000 mortgage loan
agreement with one of its primary lenders, in part, to refinance
$9,859 of existing mortgages. The $32,764 of net proceeds the Company
received from the
40
mortgage loan was used for working capital and general corporate
purposes. The mortgage loan, which is secured by three of the
Company's buildings, bears interest at a rate of 5.91% and matures on
April 1, 2021.
In May 2003, the Company issued $200,000 principal amount of 2.5%
Contingent Convertible Subordinated Notes due 2033 (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. In November 2007,
the average trading price of the Notes reached the threshold for the
five-day trading period that resulted in the payment of contingent
interest and beginning November 16, 2007 the Notes began to bear
interest at a rate of 3.00% per annum.
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.
Even though no holders required the Company to repurchase all or a
portion of their Notes on May 16, 2008, the Company classified the
Notes as a current liability as of March 31, 2008 due to the right
the holders had to require the Company to repurchase the Notes on May
16, 2008. Since the holders did not elect to cause us to repurchase
any of the Notes, the Notes will be reclassified as long-term
beginning with our consolidated balance sheet as of June 30, 2008.
The Notes are subordinate to all of our existing and future senior
obligations. The Notes are convertible, at the holders' option, into
shares of the Company's Class A Common Stock prior to the maturity
date under the following circumstances:
o during any quarter commencing after June 30, 2003, if the
closing sale price of the Company's Class A Common Stock
over a specified number of trading days during the previous
quarter is more than 120% of the conversion price of the
Notes on the last trading day of the previous quarter. The
Notes are initially convertible at a conversion price of
$23.01 per share, which is equal to a conversion rate of
approximately 43.4594 shares per $1,000 principal amount of
Notes;
o if the Company has called the Notes for redemption;
o during the five trading day period immediately following any
nine consecutive day trading period in which the trading
price of the Notes per $1,000 principal amount for each day
of such period was less than 95% of the product of the
closing sale price of our Class A Common Stock on that day
multiplied by the number of shares of our Class A Common
Stock issuable upon conversion of $1,000 principal amount of
the Notes; or
o upon the occurrence of specified corporate transactions.
The Company has reserved 8,691,880 shares of Class A Common Stock for
issuance in the event the Notes are converted.
The contingent interest feature of the Notes meets the criteria of
and qualifies as an embedded derivative. Although this feature
represents an embedded derivative financial instrument, based on its
de minimis value at the time of issuance and at March 31, 2008, no
value has been assigned to this embedded derivative.
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.
41
The aggregate maturities of long-term debt as of March 31, 2008 are
as follows:
Due in one year............... $ 202,020
Due in two years.............. 2,144
Due in three years............ 2,276
Due in four years............. 32,411
Due in five years............. 2,565
Thereafter.................... 28,036
----------
$ 269,452
==========
The Company paid interest of $8,648 and $7,316 for the years ended
March 31, 2008 and 2007, respectively. For the year ended March 31,
2006, the Company paid interest, net of capitalized interest, of
$4,692.
11. TAXABLE INDUSTRIAL REVENUE BONDS
--------------------------------
In December 2005, the Company entered into a financing arrangement
with St. Louis County, Missouri related to expansion of its
operations in St. Louis County. Up to $135,500 of industrial revenue
bonds may be issued to the Company by St. Louis County relative to
capital improvements made through December 31, 2009. This agreement
provides that 50% of the real and personal property taxes on up to
$135,500 of capital improvements will be abated for a period of ten
years subsequent to the property being placed in service. Industrial
revenue bonds totaling $120,407 were outstanding at March 31, 2008.
The industrial revenue bonds are issued by St. Louis County to the
Company upon its payment of qualifying costs of capital improvements,
which are then leased by the Company for a period ending December 1,
2019, unless earlier terminated. The Company has the option at any
time to discontinue the arrangement and regain full title to the
abated property. The industrial revenue bonds bear interest at 4.25%
per annum and are payable as to principal and interest concurrently
with payments due under the terms of the lease. The Company has
classified the leased assets as property and equipment and has
established a capital lease obligation equal to the outstanding
principal balance of the industrial revenue bonds. Lease payments may
be made by tendering an equivalent portion of the industrial revenue
bonds. As the capital lease payments to St. Louis County may be
satisfied by tendering industrial revenue bonds (which is the
Company's intention), the capital lease obligation, industrial
revenue bonds and related interest expense and interest income,
respectively, have been offset for presentation purposes in the
consolidated financial statements.
12. COMMITMENTS AND CONTINGENCIES
-----------------------------
LEASES
The Company leases manufacturing, office and warehouse facilities,
equipment and automobiles under operating leases expiring through
fiscal 2021. Total rent expense for the years ended March 31, 2008,
2007 and 2006 was $4,536, $4,132 and $3,819, respectively.
Future minimum lease commitments under non-cancelable operating
leases are as follows:
2009.......................... $ 2,183
2010.......................... 1,531
2011.......................... 1,378
2012.......................... 1,255
2013.......................... 861
Thereafter.................... 939
42
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 condition 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 $31,000.
LITIGATION
The Company and its subsidiaries Drugtech Corporation and Ther-Rx
Corporation were named as defendants in a declaratory judgment case
filed in the U.S. District Court for the District of Delaware by
Lannett Company, Inc. ("Lannett") on June 6, 2008 and styled Lannett
Company Inc. v. KV Pharmaceuticals et. al. Lannett has subsequently
amended its complaint. The action seeks a declaratory judgment of
patent invalidity, patent non-infringement, and patent
unenforceability for inequitable conduct with respect to five patents
owned by, and two patents licensed to, the Company or its
subsidiaries and pertaining to the PrimaCare ONE(R) product marketed
by Ther-Rx Corporation; unfair competition; deceptive trade
practices; and antitrust violations. No specific amount of damages
was stated in the complaint or amended complaint. We have not yet
been served with either the complaint or the amended complaint.
However, on June 17 2008, the Company filed a counterclaim against
Lannett in that action asserting patent infringement; federal and
common law trademark infringement, false advertising, and unfair
competition; federal false designation of origin, false description
and false representation; and common law misappropriation. The
Company has requested a temporary restraining order and preliminary
injunction against Lannett's continued sale of its product and
continued infringement of the Company's trademarks and patents,
unfair competition or misappropriation, and to require Lannett to
recall all of its shipped product. A briefing schedule has been set
by the court on the Company's motion and a hearing has been scheduled
before the court on the Company's motion on June 25, 2008. No
discovery has yet commenced nor a trial date been set.
The Company is named as a defendant in a patent infringement case
filed in the U.S. District Court for the District of Delaware by UCB,
Inc. and Celltech Manufacturing CA, Inc. (collectively, "UCB") on
April 21, 2008 and styled UCB, Inc. et al. v. KV Pharmaceutical
Company. After the Company filed an ANDA with the FDA seeking
permission to market a generic version of the 40 mg, 50 mg and 60 mg
strengths of Metadate CD(R) methylphenidate hydrochloride
extended-release capsules, UCB filed this lawsuit under a patent
owned by Celltech. In a Paragraph IV certification accompanying the
ANDA, KV contended that its proposed 40mg generic formulation would
not infringe Celltech's patent. Because the patent was not listed in
the Orange Book for the 50mg and 60mg dosages, a Paragraph I
certification was filed with respect to them. Pursuant to the
Hatch-Waxman Act, the filing of the suit against the Company
instituted an automatic stay of FDA approval of the Company's ANDA
with respect to the 40 mg strength of this product until the earlier
of a judgment in the Company's favor, or 30 months from the date of
suit. Inasmuch as the Celltech patent was not listed in the Orange
Book with respect to the 50 mg and 60 mg strengths, it is the
Company's belief that the automatic stay does not apply to the
Company's 50 mg and 60 mg strengths of this product. UCB may,
however, seek to keep these strengths tied up in the litigation. The
Company has filed an answer, asserted certain affirmative defenses
(including that Plaintiffs are estopped to assert infringement of the
50 mg and 60 mg dosages due to their not listing the Celltech patent
in the Orange Book for these dosages), and has asserted a
counterclaim in which it seeks a declaratory judgment of invalidity
and non-infringement of the claims in the Celltech patent, and an
award of attorneys fees and costs. The case has recently commenced
and no trial date has yet been set. The Company intends to vigorously
defend its interests; however, it cannot give any assurance that it
will prevail.
43
The Company is named as a defendant in a patent infringement case
filed in the U.S. District Court for the District of New Jersey by
Janssen, L.P., Janssen Pharmaceutica N.V. and Ortho-McNeil
Neurologics, Inc. (collectively, "Janssen") on December 14, 2007 and
styled Janssen, L.P. et al. v. KV Pharmaceutical Company. After the
Company filed an ANDA with the FDA seeking permission to market a
generic version of the 8 mg and 16 mg strengths of Razadyne(R) ER
(formerly Reminyl(R)) galantamine hydrobromide extended-release
capsules, Janssen filed this lawsuit for patent infringement under a
patent owned by Janssen. In the Company's Paragraph IV certification,
KV contended that its proposed generic versions do not infringe
Janssen's patent. Pursuant to the Hatch-Waxman Act, the filing date
of the suit against the Company instituted an automatic stay of FDA
approval of the Company's ANDA until the earlier of a judgment, or 30
months from the date of the suit. The Company has filed an answer and
counterclaim for declaratory judgment of non-infringement and patent
invalidity. Discovery is on-going, but no trial date has yet been
set. Following the Company's filing of an ANDA pertaining to a
generic version of the 24 mg strength of Razadyne(R) ER (formerly
Reminyl(R)) galantamine hydrobromide extended-release capsules and
the Company's giving of notice of this filing to Janssen, Janssen has
filed in June 2008 a second complaint in the same federal court,
naming the Company as a defendant in a related patent infringement
case under the same Janssen patent with respect to such 24 mg generic
version. The time to answer the new complaint has not yet run. The
Company anticipates that both cases will be coordinated before the
court. The Company intends to vigorously defend its interests;
however, it cannot give any assurance that it will prevail.
The Company is named as a defendant in a patent infringement case
filed in the U.S. District Court for the District of New Jersey by
Celgene Corporation ("Celgene") and Novartis Pharmaceuticals
Corporation and Novartis Pharma AG (collectively, "Novartis") on
October 4, 2007 and styled Celgene Corporation et al. v. KV
Pharmaceutical Company. After the Company filed an ANDA with the FDA
seeking permission to market a generic version of the 10 mg, 20 mg,
30 mg, and 40 mg strengths of Ritalin LA(R) methylphenidate
hydrochloride extended-release capsules, Celgene and Novartis filed
this lawsuit for patent infringement under the provisions of the
Hatch-Waxman Act with respect to two patents owned by Celgene and
licensed to Novartis. In the Company's Paragraph IV certification, KV
contended that its proposed generic versions do not infringe
Celgene's patents. Pursuant to the Hatch-Waxman Act, the filing date
of the suit against the Company instituted an automatic stay of FDA
approval of the Company's ANDA until the earlier of a judgment, or 30
months from the date of the suit. The Company has been served with
this complaint and has filed its answer and a counterclaim in the
case, seeking a declaratory judgment of non-infringement, patent
invalidity, and inequitable conduct in obtaining the patents. The
case is just commencing and no trial date has yet been set. Celgene
has moved to disqualify the Company's counsel in the case, asserting
a conflict of interest despite its signing of an advance waiver with
such counsel, and this motion is pending before the court. Should
this motion be granted, the Company will need to retain new counsel.
The Company does not believe that this would materially delay the
progress of the lawsuit. The Company has filed a motion for sanctions
against plaintiffs pursuant to Rule 11 of the Federal Rules of Civil
Procedure for bringing an action without proper basis and is seeking
an order dismissing the patent infringement complaint filed by
plaintiffs, and awarding the Company its costs and attorneys' fees.
Celgene has asked the court to dismiss the Company's Rule 11 motion,
and the matter is pending before the court. The Company intends to
vigorously defend its interests; however, it cannot give any
assurance that it will prevail.
The Company is named as a defendant in a patent infringement case
brought by Purdue Pharma L.P., The P.F. Laboratories, Inc., and
Purdue Pharmaceuticals L.P. ("Purdue") on January 17, 2007 against it
and an unrelated third party and styled Purdue Pharma L.P. et al. v.
KV Pharmaceutical Company et al. filed in the U.S. District Court for
the District of Delaware. After the Company filed an ANDA with the
FDA seeking permission to market a generic version of the 10 mg, 20
mg, 40 mg, and 80 mg strengths of OxyContin(R) in extended-release
tablet form, Purdue filed a lawsuit against KV for patent
infringement under the provisions of the Hatch-Waxman Act with
respect to three Purdue patents. In the Company's Paragraph IV
certification, KV contended that Purdue's patents are invalid,
unenforceable, or will not be infringed by KV's proposed generic
versions. On February 12, 2007, a second patent infringement lawsuit
was filed in the same court against the Company by Purdue, asserting
patent infringement under the same three patents with respect to the
Company's filing of an amendment to its ANDA with FDA to sell a
generic equivalent of Purdue's OxyContin(R), 30 mg and 60 mg
strengths, products. On June 6, 2007, a third patent infringement
lawsuit was filed against the Company by Purdue in the U.S. District
Court for the Southern District of New York, asserting patent
infringement under the
44
same three patents with respect to the Company's filing of an
amendment to its ANDA with FDA to sell a generic equivalent of
Purdue's OxyContin(R), 15 mg strength, product. The two lawsuits
filed in federal court in Delaware have been transferred to the
federal court in New York for multi-district litigation purposes
together with an additional lawsuit by Purdue against another
unrelated company, also in federal court in New York. Purdue
currently has similar lawsuits pending against additional unrelated
companies in federal court in New York.
The Company filed answers and counterclaims against Purdue in all
three lawsuits, asserting various defenses to Purdue's claims;
seeking declaratory relief of the invalidity, unenforceability and
non-infringement of the Purdue patents; and asserting counterclaims
against Purdue for violations of federal antitrust law, including
Sherman Act Section 1 and Section 2 for monopolization, attempt to
monopolize, and conspiracy to monopolize with respect to the U.S.
market for controlled-release oxycodone, and agreements in
unreasonable restraint of competition, and for intentional
interference with valid business expectancy. Purdue has filed replies
to the Company's counterclaims.
Pursuant to the Hatch-Waxman Act, the filing date of the suit against
the Company instituted an automatic stay of FDA approval of the
Company's ANDA until the earlier of a judgment, or 30 months from the
date of the suit. The court initially stayed all proceedings pending
determining whether Purdue committed inequitable conduct in its
dealings with the U.S. Patent and Trademark Office with respect to
the issuance of its patents, which would render such patents
unenforceable, and the court's subsequent decision on the issue. On
January 7, 2008, the court issued its decision finding that Purdue
had not committed inequitable conduct with respect to the patents in
suit. The Company, among others, has asked the court to lift the stay
so that the remainder of the case may resume but the stay has not yet
been lifted. Discovery in the suit has not yet commenced but is
expected to commence shortly after the stay is lifted on the case. No
trial date has yet been set. The Company intends to vigorously defend
its interests; 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 U.S. District
Court for the District of Minnesota. CIMA alleged that the Company
and ETHEX infringed on a CIMA patent in connection with the
manufacture and sale of Hyoscyamine Sulfate Orally Dissolvable
Tablets, 0.125 mg. The court has entered a stay pending the outcome
of the U.S. Patent and Trademark Office's reexamination of a patent
at issue in the suit. The Patent and Trademark Office has, to date,
issued a final office action rejecting all existing and proposed new
claims by CIMA with respect to this patent. CIMA has certain rights
of appeal of this rejection of its claims and has exercised those
rights. The product involved in this lawsuit is currently subject to
a hold on the Company's inventory of certain unapproved products
notified to the Company in March 2008 by representatives of the
Missouri Department of Health and Senior Services and the FDA. In the
event that such hold is lifted, ETHEX intends to resume marketing the
product during the stay in the lawsuit with CIMA. The Company intends
to vigorously defend its interests when or if the stay is lifted;
however, it cannot give any assurance it will prevail or that the
stay will be lifted.
The Company and ETHEX are named as defendants in a case brought by
Axcan ScandiPharm Inc. and styled Axcan ScandiPharm Inc. v. ETHEX
Corporation et. al., filed in U.S. District Court in Minnesota on
June 1, 2007. In general, Axcan alleges that ETHEX's comparative
promotion of its Pangestyme(TM) UL12 and Pangestyme(TM) UL18 products
to Axcan's Ultrase(R) MT12 and Ultrase(R) MT18 products resulted in
false advertising and misleading statements under various federal and
state laws, and constituted unfair and deceptive trade practices. The
Company filed a motion for judgment on the pleadings in its favor on
several grounds. The motion has been granted in part and denied in
part by the court on October 19, 2007, with the court applying the
statute of limitations to cut off Axcan's claims concerning conduct
prior to June 2001, determining that it was too early to determine
whether laches or res judicata barred the suit, and rejecting the
remaining bases for dismissal. Discovery has since commenced and a
trial date has been set for January 2010. Plaintiffs have recently
filed a motion to amend their complaint to seek declaratory judgments
that Axcan does not have "unclean hands" nor violated any antitrust
or unfair competition laws. This motion is pending before the court.
The Company intends to vigorously defend its interests; however, it
cannot give any assurance that it will prevail.
The Company has been advised that one of its former distributor
customers is being sued in Florida state court in a case captioned
Darrian Kelly v. K-Mart et. al. for personal injury allegedly caused
by ingestion of K-Mart diet
45
caplets that are alleged to have been manufactured by the Company and
to contain phenylpropanolamine, or PPA. The distributor has tendered
defense of the case to the Company and has asserted a right to
indemnification for any financial judgment it must pay. The Company
previously notified its product liability insurer of this claim in
1999 and again in 2004, and the Company has demanded that the insurer
assume the Company's defense. The insurer has stated that it has
retained counsel to secure additional factual information and will
defer its coverage decision until that information is received. The
Company intends to vigorously defend its interests; however, it
cannot give any assurance that it will not be impleaded into the
action, or that, if it is impleaded, that it would prevail.
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 will
provide for legal defense costs and indemnity payments involving PPA
claims on a going forward basis as incurred. 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 its interests in the event of such
future litigation; however, it cannot give any assurance it will
prevail.
The Company was named as a defendant in a case filed in U.S. District
Court in Missouri by AstraZeneca AB, Aktiebolaget Hassle and
AstraZeneca LP (collectively, "AstraZeneca") and styled AstraZeneca
AB et. al. v. KV Pharmaceutical Company. After the Company filed
ANDAs with the FDA seeking permission to market a generic version of
the 25 mg, 50 mg, 100 mg, and 200 mg strengths of Toprol-XL(R) in
extended-release capsule form, AstraZeneca filed lawsuits against KV
for patent infringement under the provisions of the Hatch-Waxman Act.
In the Company's Paragraph IV certification, KV contended that its
proposed generic versions do not infringe AstraZeneca's patents.
Pursuant to the Hatch-Waxman Act, the filing date of the suit against
the Company instituted an automatic stay of FDA approval of the
Company's ANDA until the earlier of a judgment, or 30 months from the
date of the suit. The Company filed motions for summary judgment with
the District Court in Missouri alleging, among other things, that
AstraZeneca's patent is invalid and unenforceable. These motions were
granted and AstraZeneca appealed. On July 23, 2007, the Court of
Appeals for the Federal Circuit affirmed the decision of the District
Court below with respect to the invalidity of AstraZeneca's patent
but reversed and remanded with respect to inequitable conduct by
AstraZeneca. AstraZeneca filed for rehearing by the Federal Circuit,
which was denied and the time has now run with respect to any
petition for certiorari to the United States Supreme Court. As a
result, the Company no longer faces the prospect of any liability to
AstraZeneca in connection with this lawsuit. KV continued to proceed
with its counterclaim against AstraZeneca for inequitable conduct in
obtaining the patents that have been ruled invalid, in order to
recover the Company's defense costs, including legal fees. In May
2008, the Company entered into a settlement agreement with
AstraZeneca and settled its remaining counterclaims against
AstraZeneca in exchange for a payment of $2,700.
The Company and/or ETHEX have been named as defendants in certain
multi-defendant cases alleging that the defendants reported improper
or fraudulent pharmaceutical pricing information, i.e., Average
Wholesale Price, or AWP, and/or Wholesale Acquisition Cost, or WAC,
information, which caused the governmental plaintiffs to incur
excessive costs for pharmaceutical products under the Medicaid
program. Cases of this type have been filed against the Company
and/or ETHEX and other pharmaceutical manufacturer defendants by the
States of Massachusetts, Alabama, Mississippi, Utah and Iowa, New
York City, and approximately 45 counties in New York State. The State
of Mississippi effectively voluntarily dismissed the Company and
ETHEX without prejudice on October 5, 2006 by virtue of the State's
filing an Amended Complaint on such date that does not name either
the Company or ETHEX as a defendant. In the remaining cases, only
ETHEX is a named defendant. On August 13, 2007, ETHEX settled the
Massachusetts lawsuit for $575 in cash and pharmaceutical products
valued at $150, both of which are to be paid or delivered over the
next two years, and received a general release; no admission of
liability was made. The New York City case and all New York county
cases (other than the Erie, Oswego and Schenectady County cases) have
been transferred to the U.S. District Court for the District of
Massachusetts for coordinated or consolidated pretrial proceedings
under the Average Wholesale Price Multidistrict Litigation (MDL No.
1456). The cases pertaining to the State of Alabama, Erie County,
Oswego
46
County, and Schenectady County were removed to federal court by a
co-defendant in October 2006, but all of these cases have since been
remanded to the state courts in which they originally were filed. A
motion is pending in New York state court to coordinate the Oswego,
Erie and Schenectady Counties cases. Each of these actions is in the
early stages, with fact discovery commencing or ongoing in the
Alabama case and the federal cases involving New York City and 42 New
York counties. On October 24, 2007, ETHEX was served with a complaint
filed in Utah state court by the State of Utah naming it and nine
other pharmaceutical companies as defendants in a pricing suit. On
November 19, 2007, the State of Utah filed an amended complaint. The
Utah suit has been removed to federal court and a motion has been
filed to transfer the case to the MDL litigation for pretrial
coordination. The State is seeking to remand the case to state court,
and the decision is pending before the court. The time for ETHEX to
answer or respond to the Utah complaint has not yet run. On October
9, 2007, the State of Iowa filed a complaint in federal court in Iowa
naming ETHEX and 77 other pharmaceutical companies as defendants in a
pricing suit. ETHEX and the other defendants have filed a motion to
dismiss the Iowa complaint. The Company intends to vigorously defend
its interests in the actions described above; however, it cannot give
any assurance it will prevail.
The Company believes that various other governmental entities have
commenced investigations into the generic and branded pharmaceutical
industry at large regarding pricing and price reporting practices.
Although the Company believes its pricing and reporting practices
have complied in all material respects with its legal obligations, it
cannot give any assurance that it would prevail if legal actions are
instituted by these governmental entities.
The Company and ETHEX were named as co-defendants in a suit in the
U.S. District Court for the Southern District of Florida filed by the
personal representative of the estate of Joyce Hoyle and her children
in connection with Ms. Hoyle's death in 2003, allegedly from
oxycodone toxicity styled Thomas Hoyle v. Purdue Pharma et al. The
suit alleged that between June 2001 and May 2003 Ms. Hoyle was
prescribed and took three different opiate pain medications
manufactured and sold by the defendants, including one product,
oxycodone, that was manufactured by the Company and marketed by
ETHEX, and that such medications were promoted without sufficient
warnings about the side effect of addiction. The causes of action
were strict liability for an inherently dangerous product,
negligence, breach of express and implied warranty and breach of
implied warranty of fitness for a particular purpose. The discovery
process had not yet begun, and the court had set the trial to
commence in July 2007. The plaintiff and the Company agreed, however,
to a tolling agreement, under which the plaintiff dismissed the case
without prejudice in return for the Company's agreement to toll the
statute of limitations in the event the plaintiff refiled its case in
the future. The case was dismissed without prejudice. On January 18,
2008, the Company and ETHEX were served with a new complaint,
substantially similar to the earlier law suit. KV and ETHEX have
filed an answer to the new complaint, as well as a motion to dismiss
the lawsuit based on expiration of the statute of limitations. This
motion is pending before the court, with a hearing scheduled by the
court on July 7, 2008. A trial date has been set for November 2008.
The Company intends to vigorously defend its interests; however, it
cannot give any assurance that it will prevail.
On September 15, 2006, a shareholder derivative suit, captioned
Fuhrman v. Hermelin et al., was filed in state court in St. Louis,
Missouri against the Company, as nominal defendant, and seven present
or former officers and directors, alleging that defendants had
breached their fiduciary duties and engaged in unjust enrichment in
connection with the granting, dating, expensing and accounting
treatment of past grants of stock options between 1995 and 2002 to
six current or former directors or officers. Relief sought included
damages, disgorgement of backdated stock options and their proceeds,
attorneys' fees, and equitable relief. On February 26, 2007, the
Fuhrman lawsuit was dismissed without prejudice by the plaintiff in
state court, and a lawsuit, captioned Krasick v. Hermelin et al., was
filed in the U.S. District Court for the Eastern District of Missouri
by the same law firms as in the Fuhrman lawsuit, with a different
plaintiff. The Krasick lawsuit was also a shareholder derivative suit
filed against the Company, as nominal defendant, and 19 present or
former officers and directors. The complaint asserted within its
fiduciary duties claims allegations that the officers and/or
directors of KV improperly (including through collusion and aiding
and abetting) backdated stock option grants in violation of
shareholder-approved plans, improperly recorded and accounted for the
allegedly backdated options in violation of GAAP, improperly took tax
deductions under the Internal Revenue Code, disseminated and filed
false financials and false SEC filings in violation of federal
securities laws and rules thereunder, and engaged in insider trading
and
47
misappropriation of information. Relief sought included damages, a
demand for accounting and recovery of the benefits allegedly
improperly received, rescission of the allegedly backdated stock
options and disgorgement of their proceeds, and reasonable attorney's
fees, in addition to equitable relief, including an injunction to
require the Company to change certain of its corporate governance and
internal control procedures. On May 11, 2007, the Company learned of
the filing of another lawsuit, captioned Gradwell v. Hermelin et al.,
also in the U.S. District Court for the Eastern District of Missouri.
The complaint was brought by the same law firms that brought the
Krasick litigation and was substantively the same as in the Krasick
litigation, other than being brought on behalf of a different
plaintiff and eliminating one individual defendant from the suit. On
July 18, 2007, the Krasick and Gradwell suits were refiled as a
consolidated action in U.S. District Court for the Eastern District
of Missouri, styled In re K-V Pharmaceutical Company Derivative
Litigation, which was substantively the same as the Krasick and
Gradwell suits. The Company moved to terminate the litigation based
on a determination by members of a Special Committee of the Board of
Directors that continuation of the litigation was not in the best
interest of KV and its shareholders. All individual officer and
director defendants joined in that motion. Plaintiffs filed a motion
for rule to show cause why the defendants' motion to terminate the
lawsuit should not be stricken and dismissed. On February 15, 2008,
the court stayed proceedings in the case until April 9, 2008, to
permit mediation pursuant to the parties' stipulation. Mediation
occurred on April 2, 2008. On May 23, 2008, all remaining parties to
the litigation filed a proposed settlement with the court which, if
approved by the court, would resolve all claims asserted in the
Action. The proposed settlement provides for a payment of fees and
expenses to plaintiffs' counsel not to exceed $1,650, which amount is
expected to be covered by insurance. The proposed settlement received
preliminary approval by the court on June 3, 2008. Notice of the
terms of the settlement has been mailed to all shareholders of record
as of May 23, 2008 and a final fairness hearing has been scheduled by
the court to be conducted on August 26, 2008.
In the course of the Special Committee's investigation, by letter
dated December 18, 2006, the Company was notified by the SEC staff
that it had commenced an investigation with respect to the Company's
stock option plans, grants, exercises, and accounting treatment. The
Company has cooperated with the SEC staff in its investigation and,
among other things, has provided them with copies of the Special
Committee's report and all documents collected by the Special
Committee in the course of its review. In December 2007, the SEC
staff, pursuant to a formal order of investigation, issued subpoenas
for additional documents and testimony by certain employees. The
production of additional documents called for by the subpoena and the
testimony of the employees was completed in May 2008.
The Company has received a subpoena from the Office of Inspector
General of the Department of Health and Human Services, seeking
documents with respect to two of ETHEX's nitroglycerin products. Both
are unapproved products, that is, they have not received FDA
approval. (FDA approval is not necessarily required for all drugs to
be sold in the marketplace, such as pre-1938 "grandfathered" products
or certain drugs reviewed under the so-called DESI process. The
Company believes that its two products come within these exceptions.)
The subpoena states that it is in connection with an investigation
into potential false claims under Title 42 of the U.S. Code, and
appears to pertain to whether these products are eligible for
reimbursement under federal health care programs, such as Medicaid
and VA programs.
Resolution of any of the matters discussed above could have a
material adverse effect on the Company's results of operations or
financial condition.
From time to time, the Company is involved in various other legal
proceedings in the ordinary course of its business. While it is not
feasible to predict the ultimate outcome of such other proceedings,
the Company believes the ultimate outcome of such other proceedings
will not have a material adverse effect on its results of operations
or financial condition.
There are uncertainties and risks associated with all litigation and
there can be no assurance the Company will prevail in any particular
litigation.
48
13. 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 the Chief Executive Officer ("CEO") contains
provisions for partial salary continuation under certain conditions,
contingent upon non-compete restrictions and providing consulting
services to the Company as specified in the agreement. In addition,
the CEO is entitled to receive retirement compensation paid in the
form of a single annuity equal to 30% of the CEO's final average
compensation payable each year beginning at retirement and continuing
for the longer of ten years or the life of the CEO. In accordance
with this agreement, the Company recognized retirement expense of
$2,232, $877 and $965 for the years ended March 31, 2008, 2007 and
2006, respectively.
14. GAIN FROM LEGAL SETTLEMENT
--------------------------
In January 2007, the Company received a $3,600 payment from an
insurance company in accordance with a settlement agreement entered
into with the insurance company for insurance coverage associated
with the Healthpoint litigation. The payment was reflected by the
Company in the "Selling and Administrative" expense line item of
operating income for the year ended March 31, 2007 and was recorded
net of approximately $1,192 of attorney-related fees.
15. INCOME TAXES
------------
The income tax provisions for the years ended March 31, 2008, 2007
and 2006, are based on estimated federal and state taxable income
using the applicable statutory rates. The current and deferred
federal and state income tax provisions, excluding income taxes
related to the cumulative effect of a change in accounting, for the
years ended March 31, 2008, 2007 and 2006 are as follows:
2008 2007 2006
---- ---- ----
PROVISION
Current:
Federal............................... $ 44,280 $ 23,434 $ 17,035
State................................. 3,414 1,918 1,552
-------- -------- --------
47,694 25,352 18,587
-------- -------- --------
Deferred:
Federal............................... (4,073) 7,042 5,521
State................................. (312) 564 325
-------- -------- --------
(4,385) 7,606 5,846
-------- -------- --------
$ 43,309 $ 32,958 $ 24,433
======== ======== ========
The reasons for the differences between the provision for income taxes and the
expected federal income taxes at the U.S. statutory rate are as follows:
2008 2007 2006
---- ---- ----
Expected income tax expense................. $ 46,082 $ 31,175 $ 12,547
Purchased in-process research
and development.......................... -- -- 10,654
State income taxes, net of
federal income tax benefit............... 2,016 1,613 1,218
Business credits............................ (1,213) (945) (831)
Domestic manufacturer deduction............. (2,829) (707) (512)
Adjustment to unrecognized tax benefits..... (2,464) 1,910 1,712
Other ...................................... 1,717 (88) (355)
--------- -------- ---------
Provision for income tax expense............ $ 43,309 $ 32,958 $ 24,433
========= ======== =========
49
As of March 31, 2008 and 2007, the tax effect of temporary
differences between the tax basis of assets and liabilities and their
financial reporting amounts are as follows:
2008 2007
-------------------------------- ---------------------------------
CURRENT NON-CURRENT CURRENT NON-CURRENT
------- ----------- ------- -----------
Fixed asset basis differences........ $ -- $ (16,996) $ -- $ (14,121)
Reserves for inventory and
receivables....................... 14,728 -- 10,307 --
Accrued compensation................. 1,612 -- -- --
Deferred compensation................ -- 3,138 -- 2,320
Amortization......................... -- 2,120 -- (3,440)
Convertible notes interest........... -- (30,305) -- (22,766)
Stock-based compensation............. 2,592 -- 1,525 --
Payroll taxes........................ 3,227 -- 2,196 --
Other................................ 653 2,744 336 --
--------- ---------- --------- ----------
Net deferred tax asset (liability) $ 22,812 $ (39,299) $ 14,364 $ (38,007)
========= ========== ========= ==========
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary
differences become deductible. Management considers the timing of
deferred tax liability reversals and projected future taxable income.
Based upon the level of historical taxable income and projections for
future taxable income over the periods in which the temporary
differences are deductible, management believes it more likely than
not the Company will realize the benefits of these deductible
differences.
An income tax benefit has resulted from the determination that
certain non-qualified stock options for which stock-based
compensation expense was recorded will create an income tax
deduction. This tax benefit has resulted in an increase to the
Company's deferred tax assets for stock options prior to the
occurrence of a taxable event or the forfeiture of the related
options. Upon the occurrence of a taxable event or forfeiture of the
underlying options, the corresponding deferred tax asset is reversed
and the excess or deficiency in the deferred tax asset is recorded to
paid-in capital in the period in which the taxable event or
forfeiture occurs.
The Company paid income taxes of $49,862, $22,134, and $15,482 during
the years ended March 31, 2008, 2007 and 2006, respectively.
The Company adopted FIN 48 effective April 1, 2007. The adoption of
FIN 48 was not material to the Company's consolidated financial
position, however, certain reclassifications of various income tax
related balance sheet amounts were required.
Upon adoption of FIN 48, the Company had $12,980 of gross
unrecognized tax benefits, of which $12,980 represents the amount of
unrecognized tax benefits that, if recognized, would favorably affect
the effective income tax rate in future periods.
50
A reconciliation of the unrecognized tax benefits at the beginning
and end of the period is as follows:
Balance of unrecognized tax benefits at April 1, 2007 $ 12,980
Increase/(decrease) in unrecognized tax benefits
resulting from tax positions taken during current period 1,347
Increase/(decrease) in unrecognized tax benefits
resulting from tax positions taken in prior periods 0
Reduction to unrecognized tax benefits as a result
of a settlement with taxing authorities 0
Reduction to unrecognized tax benefits as a result
of the lapse of the applicable statute of limitations (2,670)
--------
Balance of unrecognized tax benefits at March 31, 2008 $ 11,657
========
The Company recognizes interest and penalties associated with
uncertain tax positions as a component of income tax expense. At
April 1, 2007, the Company had accrued $1,950 for interest and
penalties. Through March 31, 2008, the Company accrued an additional
$1,450 of interest and penalties and released $1,248 of interest and
penalties as a result of the expiration of the statute of
limitations. As of March 31, 2008, the accrual for interest and
penalties was $2,152.
It is anticipated the Company will recognize approximately $1,100 of
unrecognized tax benefits within the next 12 months. This recognition
is as a result of the expected expiration of the relevant statute of
limitations.
The Company is subject to taxation in the U.S. and various states and
is subject to examination by those authorities. The Company's federal
statute of limitations has expired for fiscal years prior to 2005 and
the relevant state statutes vary. The Company currently is being
audited by the IRS for its March 31, 2006 and 2007 tax years. The IRS
is also currently auditing the employment tax returns of the Company
for calendar years 2004, 2005, 2006 and 2007. Various information
requests with respect to the periods under audit have been received
and responded to. The Company expects the IRS to issue additional
information requests. The Company does not have any state
examinations in progress at this time.
Management regularly reevaluates the Company's tax positions taken on
filed tax returns using information about recent court decisions and
legislative activities. Many factors are considered in making these
evaluations, including past history, recent interpretations of tax
law, and the specific facts and circumstances of each matter. Because
tax law and regulations are subject to interpretation and tax
litigation is inherently uncertain, these evaluations can involve a
series of complex judgments about future events and can rely heavily
on estimates and assumptions. The recorded tax liabilities are based
on estimates and assumptions that have been deemed reasonable by
management. However, if the Company's estimates are not
representative of actual outcomes, recorded tax liabilities could be
materially impacted.
The Company determined that certain options previously classified as
ISO grants were determined to have been granted with an exercise
price below the fair market value of the Company's stock on the
revised measurement dates. Under Internal Revenue Code Section 422,
ISOs may not be granted with an exercise price less than the fair
market value on the date of grant, and therefore these grants would
not likely qualify for ISO tax treatment. The disqualification of ISO
classification exposes the Company and the affected employees to
payroll related withholding taxes once the underlying shares are
released from the post exercise two-year forfeiture period and the
substantial risk of forfeiture has lapsed, which creates a taxable
event. The Company and the affected employees may also be subject to
interest and penalties for failing to properly withhold taxes and
report the taxable event on their respective tax returns. The Company
is currently reviewing the potential disqualification of ISO grants
and the related withholding tax implications with the IRS in an
effort to reach agreement on the
51
resulting tax liability. The Company recorded liabilities related to
this matter of $9,765 as of March 31, 2008 in accrued liabilities on
the consolidated balance sheet.
16. STOCK-BASED COMPENSATION
------------------------
In August 2002, the Company's shareholders approved KV's 2001
Incentive Stock Option Plan (the "2001 Plan"), which allows for the
issuance of up to 4,500 shares of common stock. Under the Company's
stock option plan, 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 ten years and the options vest at the
rate of 10% per year from the date of grant.
The Company estimates the fair value of stock options granted using
the Black-Scholes option pricing model (the "Option Model"). The
Option Model requires the use of subjective and complex assumptions,
including the option's expected term and the estimated future price
volatility of the underlying stock, which determine the fair value of
the share-based awards. The Company's estimate of expected term was
determined based on the average period of time that options granted
are expected to be outstanding considering current vesting schedules
and the historical exercise patterns of existing option plans and the
two-year forfeiture period. The expected volatility assumption used
in the Option Model is based on historical volatility over a period
commensurate with the expected term of the related options. The
risk-free interest rate used in the Option Model is based on the
yield of U.S. Treasuries with a maturity closest to the expected term
of the Company's stock options.
The Company's stock option agreements include a post-exercise service
condition which provides that exercised options are to be held by the
Company for a two-year period during which time the shares can not be
sold by the employee. If the employee terminates employment
voluntarily or involuntarily (other than by retirement, death or
disability) during the two-year period, the stock option agreements
provide the Company with the option of repurchasing the shares at the
lower of the exercise price or the fair market value of the stock on
the date of termination. This repurchase option is considered a
forfeiture provision and the two-year period is included in
determining the requisite service period over which stock-based
compensation expense is recognized. The requisite service period
initially is equal to the expected term (as discussed above) and is
revised when an option exercise occurs.
If stock options expire unexercised or an employee terminates
employment after options become exercisable, no compensation expense
associated with the exercisable, but unexercised, options is
reversed. In those instances where an employee terminates employment
before options become exercisable or the Company repurchases the
shares during the two-year forfeiture period, compensation expense
for these options is reversed as a forfeiture.
When an employee exercises stock options, the exercise proceeds
received by the Company are recorded as a deposit and classified as a
current liability for the two-year forfeiture period. The shares
issuable upon exercise of these options are accounted for as issued
when the two-year forfeiture period lapses. Until the two-year
forfeiture requirement is met, the underlying shares are not
considered outstanding and not included in calculating basic earnings
per share. In accordance with the provisions of SFAS 123R,
share-based compensation expense recognized during a period is based
on the value of the portion of share-based awards that are expected
to vest with employees. Accordingly, the recognition of share-based
compensation expense beginning April 1, 2006 has been reduced for
estimated future forfeitures. SFAS 123R requires forfeitures to be
estimated at the time of grant with adjustments recorded in
subsequent period compensation expense if actual forfeitures differ
from those estimates. Prior to adoption, the Company accounted for
forfeitures as they occurred for the disclosure of pro forma
information presented in the Notes to Consolidated Financial
Statements for prior periods. Upon adoption of SFAS 123R on April 1,
2006, the Company recognized the cumulative effect of a change in
accounting principle to reflect the effect of estimated forfeitures
related to outstanding awards that are not expected to vest as of the
adoption date. For the year ended March 31, 2007, the cumulative
adjustment increased net income by $1,976, net of tax, and increased
diluted earnings per share for Class A and Class B shares by $0.03
and $0.03, respectively.
52
The Company recognized, in accordance with SFAS 123R, stock-based
compensation expense of $5,205 and $3,984, respectively, and related
tax benefits of $1,250 and $1,134, respectively, for the years ended
March 31, 2008 and 2007. Stock-based compensation expense of $927 and
a related tax benefit of $286 were recognized in the year ended March
31, 2006. There was no stock-based employee compensation cost
capitalized as of March 31, 2008 or 2007. Cash received as deposits
for option exercises was $1,514, $4,264, and $1,187 and the actual
tax benefit realized for the tax deductions from option exercises (at
expiration of two-year forfeiture period) was $1,522, $934, and
$1,709 for 2008, 2007 and 2006, respectively.
The following weighted average assumptions were used for stock
options granted during the years ended March 31, 2008, 2007 and 2006:
YEARS ENDED MARCH 31,
---------------------------------------
2008 2007 2006
---- ---- ----
Dividend yield........................... None None None
Expected volatility...................... 42% 45% 48%
Risk-free interest rate.................. 4.53% 4.93% 4.91%
Expected term............................ 9.0 years 8.9 years 8.8 years
Weighted average fair value per
share at grant date................... $ 15.40 $ 12.98 $ 12.74
A summary of the changes in the Company's stock option plan for the
years ended March 31, 2008, 2007 and 2006 consisted of the following:
WEIGHTED AVERAGE
-----------------------------
REMAINING AGGREGATE
EXERCISE EXPECTED INTRINSIC
SHARES PRICE TERM VALUE
------ ----- ---- -----
Balance, March 31, 2005............... 3,853 $ 12.53
Options granted....................... 955 18.99
Options exercised..................... (481) 5.80 $ 8,519
Options canceled...................... (401) 14.59
------
Balance, March 31, 2006............... 3,926 14.71
Options granted....................... 555 21.64
Options exercised..................... (360) 8.80 5,631
Options canceled...................... (455) 16.62
------
Balance, March 31, 2007............... 3,666 16.11
Options granted....................... 944 27.02
Options exercised..................... (184) 5.19 3,644
Options canceled...................... (493) 19.28
------
Balance, March 31, 2008............... 3,933 $ 18.84 5.8 $24,114
======
Expected to vest at
March 31, 2008................... 3,048 $ 18.84 5.8 $18,688
Options exercisable at March 31, 2008
(excluding shares in the two-year
forfeiture period)............... 1,197 $ 16.64 5.1 $10,210
As of March 31, 2008, the Company had $42,137 of total unrecognized
compensation expense, related to stock option grants, which will be
recognized over the remaining weighted average period of 5.0 years.
53
17. EMPLOYEE BENEFITS
-----------------
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 $500, $500 and $400 for the years ended March
31, 2008, 2007 and 2006, 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 $2,477, $2,227 and $1,877 were made to the 401(k)
investment funds for the years ended March 31, 2008, 2007 and 2006,
respectively.
PENSION PLANS
Contributions are made to a multi-employer defined benefit plan
administered by Teamsters Negotiated Pension Plan for certain union
employees. In the event of a withdrawal from the multi-employer
pension plan, the Company would incur an obligation to the plan for
the portion of the unfunded benefit obligation applicable to its
employees covered by the plan. Amounts charged to pension expense and
contributed to this plan were $170, $197 and $180 for the years ended
March 31, 2008, 2007 and 2006, respectively.
In January 2008,133 employees represented by the Teamsters Union
voted to decertify union representation effective February 7, 2008.
As a result of the decertification, the Company recorded in fiscal
2008 a withdrawal liability of $923 for the portion of the unfunded
benefit obligation associated with the multi-employer pension plan
administered by the union applicable to its employees covered by the
plan.
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 $150,000 of each employee's covered
medical claims. In fiscal 2005, the Company established a Voluntary
Employees' Beneficiary Association ("VEBA") for its non-union
employees to fund payments made by the Company for covered medical
claims. As a result of funding this plan, the Company's liability for
claims incurred but not reported was reduced by $797 and $935 at
March 31, 2008 and 2007, respectively. For union employees, the
Company participated in a fully funded insurance plan sponsored by
the union. The Company's participation in the union plan ended as a
result of the decertification of union representation effective
February 7, 2008. Total health and medical insurance expense for the
two plans was $13,731, $12,029 and $9,662 for the years ended March
31, 2008, 2007 and 2006, respectively.
18. RELATED PARTY TRANSACTIONS
--------------------------
The Company currently leases certain real property from an affiliated
partnership of the Chairman and CEO of the Company. Lease payments
made for this property for the years ended March 31, 2008, 2007 and
2006 totaled $303, $296, and $284, respectively.
19. EQUITY TRANSACTIONS
-------------------
As of March 31, 2008 and 2007, 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 by the Company 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.
54
There were no undeclared and accrued cumulative preferred dividends
at March 31, 2008 and 2007. 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.
The Company has reserved 750,000 shares of Class A Common Stock for
issuance under KV's 2002 Consultants Plan. These shares may be issued
from time to time in consideration for consulting and other services
provided to the Company by independent consultants. Since inception
of this plan, the Company has issued 47,732 Class A shares as payment
for certain milestones under product development agreements.
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
10), 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.
In accordance with the Special Committee's investigation of the
Company's stock option grant practices, a remediation plan was
developed by the Committee that recommended reimbursement of $1,401
by the Company's CEO. The recommended reimbursement was made by the
CEO in November 2007 by delivery to the Company of 45,531 shares of
Class A Common Stock.
55
20. EARNINGS PER SHARE
------------------
The following table sets forth the computation of basic and diluted
earnings per share:
2008 2007 2006
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
-------- -------- -------- -------- ------- -------
Basic earnings per share:
Numerator:
Allocation of undistributed earnings before
cumulative effect of change in accounting
principle $ 69,317 $ 18,967 $ 43,768 $ 12,276 $ 8,725 $ 2,621
Allocation of cumulative effect of
change in accounting principle - - 1,543 433 - -
-------- -------- -------- -------- -------- -------
Allocation of undistributed earnings $ 69,317 $ 18,967 $ 45,311 $ 12,709 $ 8,725 $ 2,621
======== ======== ======== ======== ======== =======
Denominator:
Weighted average shares outstanding 37,582 12,299 37,180 12,455 36,277 13,065
Less - weighted average unvested
common shares subject to repurchase (432) (101) (367) (65) (435) (147)
-------- -------- -------- -------- -------- -------
Number of shares used in per
share computations 37,150 12,198 36,813 12,390 35,842 12,918
======== ======== ======== ======== ======== =======
Basic earnings per share before cumulative
effect of change in accounting principle $ 1.87 $ 1.55 $ 1.19 $ 0.99 $ 0.24 $ 0.20
Per share effect of cumulative effect of
change in accounting principle - - 0.04 0.04 - -
-------- -------- -------- -------- -------- -------
Basic earnings per share $ 1.87 $ 1.55 $ 1.23 $ 1.03 $ 0.24 $ 0.20
======== ======== ======== ======== ======== =======
Diluted earnings per share:
Numerator:
Allocation of undistributed earnings
for basic computation before cumulative
effect of change in accounting principle $ 69,317 $ 18,967 $ 43,768 $ 12,276 $ 8,725 $ 2,621
Reallocation of undistributed earnings as a
result of conversion of Class B to
Class A shares 18,967 - 12,276 - 2,621 -
Reallocation of undistributed earnings to
Class B shares - (2,344) - (1,297) - (12)
Add - preferred stock dividends 70 - 70 - 70 -
Add - interest expense convertible notes 4,388 - 3,883 - - -
-------- -------- -------- -------- -------- -------
Allocation of undistributed earnings
for diluted computation before cumulative
effect of change in accounting principle 92,742 16,623 59,997 10,979 11,416 2,609
Allocation of cumulative effect of
change in accounting principle - - 1,976 362 - -
-------- -------- -------- -------- -------- -------
Allocation of undistributed earnings $ 92,742 $ 16,623 $ 61,973 $ 11,341 $ 11,416 $ 2,609
======== ======== ======== ======== ======== =======
(CONTINUED)
56
-----------------------------------------------------------------------------
2008 2007 2006
------------------------ ------------------------ -----------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
----------- ----------- ----------- ----------- ----------- ----------
Diluted earnings per share (continued):
Denominator:
Number of shares used in basic computation 37,150 12,198 36,813 12,390 35,842 12,918
Weighted average effect of dilutive securities:
Conversion of Class B to Class A shares 12,198 - 12,390 - 12,918 -
Employee stock options 766 83 720 99 899 195
Convertible preferred stock 338 - 338 - 338 -
Convertible notes 8,692 - 8,692 - - -
--------- --------- --------- --------- --------- ---------
Number of shares used in per share
computations 59,144 12,281 58,953 12,489 49,997 13,113
========= ========= ========= ========= ========= =========
Diluted earnings per share before cumulative
effect of change in accounting principle $ 1.57 $ 1.35 $ 1.02 $ 0.88 $ 0.23 $ 0.20
Per share effect of cumulative effect of
change in accounting principle - - 0.03 0.03 - -
--------- --------- --------- --------- --------- ---------
Diluted earnings per share (1) (2) $ 1.57 $ 1.35 $ 1.05 $ 0.91 $ 0.23 $ 0.20
========== ========= ========= ========= ========= =========
<FN>
- ---------------------------
(1) Excluded from the computation of diluted earnings per share were
outstanding stock options whose exercise prices were greater
than the average market price of the common shares for the
period reported. For the years ended March 31, 2008, 2007 and
2006, excluded from the computation were options to purchase
649, 216 and 291 of Class A and Class B common shares,
respectively.
(2) For the year ended March 31, 2006, the $200,000 principal amount
of Notes convertible into 8,692 shares of Class A Common Stock
were excluded from the computation of diluted earnings per share
because their effect would have been anti-dilutive.
21. SEGMENT REPORTING
-----------------
The reportable operating segments of the Company are branded
products, specialty generic/non-branded and specialty materials. The
branded products segment includes patent-protected products and
certain trademarked off-patent products that the Company sells and
markets as brand pharmaceutical products. The specialty generics
segment includes off-patent pharmaceutical products that are
therapeutically equivalent to proprietary products. The Company sells
its branded and generic/non-branded products primarily to
pharmaceutical wholesalers, drug distributors and chain drug stores.
The specialty materials segment is distinguished as a single segment
because of differences in products, marketing and regulatory approval
when compared to the other segments.
Accounting policies of the segments are the same as the Company's
consolidated accounting policies. 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.
57
The following represents information for the Company's reportable
operating segments for fiscal 2008, 2007 and 2006.
YEAR
ENDED BRANDED SPECIALTY SPECIALTY ALL
MARCH 31, PRODUCTS GENERICS MATERIALS OTHER ELIMINATIONS CONSOLIDATED
--------- -------- -------- --------- ----- ------------ ------------
------------------------------------------------------------------------------------------------------------------------------
NET REVENUES
2008 $214,863 $367,862 $18,020 $1,151 $ - $601,896
2007 188,681 235,594 17,436 1,916 - 443,627
2006 145,503 203,787 16,988 1,362 - 367,640
------------------------------------------------------------------------------------------------------------------------------
SEGMENT PROFIT (LOSS)
2008 95,143 218,111 5,900 (187,491) - 131,663
2007 87,346 125,596 2,799 (126,669) - 89,072
2006 58,704 100,731 1,082 (124,668) - 35,849
------------------------------------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
2008 39,955 99,567 7,990 722,673 (1,158) 869,027
2007 32,995 84,581 8,410 582,955 (1,158) 707,783
2006 23,582 62,953 7,353 526,583 (1,158) 619,313
------------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT ADDITIONS
2008 257 - 119 23,280 - 23,656
2007 96 - 108 24,862 - 25,066
2006 540 1,097 269 56,428 - 58,334
------------------------------------------------------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION
2008 753 319 177 29,871 - 31,120
2007 709 338 163 21,178 - 22,388
2006 587 317 173 16,925 - 18,002
------------------------------------------------------------------------------------------------------------------------------
Consolidated revenues are principally derived from customers in North
America and substantially all property and equipment is located in
the St. Louis, Missouri metropolitan area.
22. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
---------------------------------------
1ST 2ND 3RD 4TH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
--------------------------------------------------------------------
YEAR ENDED MARCH 31, 2008
- -------------------------
Net revenues $ 114,358 $172,925 $161,623 $ 152,990 $601,896
Gross profit 74,788 127,793 111,627 101,133 415,341
Income before income taxes 9,917 62,002 46,093 13,651 131,663
Net income 6,200 40,223 32,612 9,319 88,354
Earnings per share:
Basic - Class A common 0.13 0.85 0.69 0.20 1.87
Basic - Class B common 0.11 0.71 0.57 0.16 1.55
Diluted - Class A common 0.12 0.70 0.57 0.18 1.57
Diluted - Class B common 0.10 0.60 0.49 0.15 1.35
58
1ST 2ND 3RD 4TH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
---------------------------------------------------------------------
YEAR ENDED MARCH 31, 2007
- -------------------------
Net revenues........................................ $ 96,200 $108,983 $ 117,949 $120,495 $443,627
Gross profit........................................ 62,738 70,104 79,510 84,012 296,364
Income before income taxes and cumulative
effect of change in accounting principle....... 13,335 19,655 28,048 28,034 89,072
Income before cumulative effect of change
in accounting principle........................ 8,122 12,085 18,462 17,445 56,114
Cumulative effect of change in accounting
principle...................................... 1,976 - - - 1,976
Net income.......................................... 10,098 12,085 18,462 17,445 58,090
Earnings per share before effect of change
in accounting principle:
Basic - Class A common....................... $0.17 $0.26 $0.39 $0.37 $1.19
Basic - Class B common....................... 0.14 0.21 0.33 0.31 0.99
Diluted - Class A common..................... 0.15 0.22 0.33 0.31 1.02
Diluted - Class B common..................... 0.13 0.19 0.29 0.27 0.88
Per share effect of cumulative effect of
change in accounting principle:
Basic - Class A common....................... 0.04 - - - 0.04
Basic - Class B common....................... 0.04 - - - 0.04
Diluted - Class A common..................... 0.04 - - - 0.03
Diluted - Class B common..................... 0.03 - - - 0.03
Earnings per share:
Basic - Class A common....................... 0.21 0.26 0.39 0.37 1.23
Basic - Class B common....................... 0.18 0.21 0.33 0.31 1.03
Diluted - Class A common..................... 0.19 0.22 0.33 0.31 1.05
Diluted - Class B common..................... 0.16 0.19 0.29 0.27 0.91
59
Report of Independent Registered Public Accounting Firm
- -------------------------------------------------------
The Board of Directors and Shareholders
K-V Pharmaceutical Company:
We have audited K-V Pharmaceutical Company's (the Company) internal control
over financial reporting as of March 31, 2008, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management's
Report on Internal Control Over Financial Reporting, appearing under Item
9A(a). Our responsibility is to express an opinion on the Company's internal
control over financial reporting based on our audit.
We conducted our audit 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
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the company's annual or interim
financial statements will not be prevented or detected on a timely basis. A
material weakness has been identified and included in management's assessment
that states the Company had inadequate policies and procedures over the
accounting for customer rebates.
60
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
K-V Pharmaceutical Company and subsidiaries as of March 31, 2008 and 2007, and
the related consolidated statements of income, comprehensive income,
shareholders' equity and cash flows for each of the years in the three-year
period ended March 31, 2008. This material weakness was considered in
determining the nature, timing and extent of audit tests applied in our audit
of the March 31, 2008 consolidated financial statements, and this report does
not affect our report dated June 25, 2008, which expressed an unqualified
opinion on those consolidated financial statements.
In our opinion, because of the effect of the aforementioned material weakness
on the achievement of the objectives of the control criteria, K-V
Pharmaceutical Company has not maintained effective internal control over
financial reporting as of March 31, 2008, based on criteria established in
Internal Control - Integrated Framework issued by COSO.
St. Louis, Missouri
June 25, 2008
61
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
---------------------------------------
(a) 1. Financial Statements: Page
The following consolidated financial statements of the Company are
included in Part II, Item 8 of this report:
Report of Independent Registered Public Accounting Firm........................ 66
Consolidated Balance Sheets as of March 31, 2008 and 2007...................... 67
Consolidated Statements of Income for the Years Ended March 31,
2008, 2007 and 2006............................................................ 68-69
Consolidated Statements of Comprehensive Income for the Years
Ended March 31, 2008, 2007 and 2006............................................ 70
Consolidated Statements of Shareholders' Equity for the Years
Ended March 31, 2008, 2007 and 2006............................................ 71
Consolidated Statements of Cash Flows for the Years Ended
March 31, 2008, 2007 and 2006.................................................. 72
Notes to Consolidated Financial Statements..................................... 73-105
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts................................ 115
(b) Exhibits. See Exhibit Index on pages 116 through 121 of this Report.
Management contracts and compensatory plans are designated on the
Exhibit Index.
62
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 27, 2008 By /s/ Ronald J. Kanterman
------------------- -----------------------------------------
Vice President and Chief Financial Officer
(Principal Financial Officer)
63
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3(a) The Company's Certificate of Incorporation, which was filed
as Exhibit 3(a) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1981, is incorporated herein by
this reference.
3(b) Certificate of Amendment to Certificate of Incorporation of
the Company, effective March 7, 1983, which was filed as
Exhibit 3(c) to the Company's Annual Report on Form 10-K for
the year ended March 31, 1983, is incorporated herein by
this reference.
3(c) Certificate of Amendment to Certificate of Incorporation of
the Company, effective June 9, 1987, which was filed as
Exhibit 3(d) to the Company's Annual Report on Form 10-K for
the year ended March 31, 1988, is incorporated herein by
this reference.
3(d) Certificate of Amendment to Certificate of Incorporation of
the Company, effective September 24, 1987, which was filed
as Exhibit 3(f) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1988, is incorporated herein by
this reference.
3(e) Certificate of Amendment to Certificate of Incorporation of
the Company, effective July 17, 1986, which was filed as
Exhibit 3(e) to the Company's Annual Report on Form 10-K for
the year ended March 31, 1996, is incorporated herein by
this reference.
3(f) Certificate of Amendment to Certificate of Incorporation of
the Company, effective December 23, 1991, which was filed as
Exhibit 3(f) to the Company's Annual Report on Form 10-K for
the year ended March 31, 1996, is incorporated herein by
this reference.
3(g) Certificate of Amendment to Certificate of Incorporation of
the Company, effective September 3, 1998, which was filed as
Exhibit 4(g) to the Company's Registration Statement on Form
S-3 (Registration Statement No. 333-87402), filed May 1,
2002, is incorporated herein by this reference.
3(h) Bylaws of the Company, as amended through November 18, 1982,
which was filed as Exhibit 3(e) to the Company's Annual
Report on Form 10-K for the year ended March 31, 1993, is
incorporated herein by this reference.
3(i) Amendment to Bylaws of the Company, effective July 2, 1984,
which was filed as Exhibit 4(i) to the Company's
Registration Statement on Form S-3 (Registration Statement
No. 333-87402), filed May 1, 2002, is incorporated herein by
this reference.
3(j) Amendment to Bylaws of the Company, effective December 4,
1986, which was filed as Exhibit 4(j) to the Company's
Registration Statement on Form S-3 (Registration Statement
No. 333-87402), filed May 1, 2002, is incorporated herein by
this reference.
3(k) Amendment to Bylaws of the Company, effective March 17,
1992, which was filed as Exhibit 4(k) to the Company's
Registration Statement on Form S-3 (Registration Statement
No. 333-87402), filed May 1, 2002, is incorporated herein by
this reference.
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.
64
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.
3(o) Amendment to Bylaws of the Company, effective June 28, 2004,
which was filed as Exhibit 3(o) to the Company's Annual
Report on Form 10-K for the year ended March 31, 2006, is
incorporated herein by this reference.
3(p) Amendment to Bylaws of the Company, effective June 28, 2004,
which was filed as Exhibit 3(p) to the Company's Annual
Report on Form 10-K for the year ended March 31, 2006, is
incorporated herein by this reference.
3(q) Amendment to Bylaws of the Company, effective November 30,
2007, which was filed as Exhibit 99 to the Company's Current
Report on Form 8-K, filed December 31, 2007, is incorporated
herein by this reference.
3(r) Amendment to Bylaws of the Company, effective March 26,
2008, which was filed as Exhibit 3.1 to the Company's
current Report on Form 8-K, filed March 28, 2008, 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) 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(c) 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(e) Promissory Note, dated March 23, 2006 between MECW, LLC and
LaSalle National Bank Association, filed on March 29, 2006,
as Exhibit 99 to the Company's Current Report on Form 8-K,
is incorporated herein by this reference.
4(g) Credit Agreement, dated as of June 9, 2006, among the
Company and its subsidiaries, LaSalle Bank National
Association, Citibank, F.S.B. and the other lenders thereto,
which was filed as Exhibit 4(g) to the Company's Annual
Report on Form 10-K for the year ended March 31, 2006, is
incorporated herein by this reference.
10(b)* 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(c) 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.
65
10(d) 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(e)* 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(f)* 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(g)* 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(h)* Agreement between the Company and Marc S. Hermelin, 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(i) 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(j)* 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(k) 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(l)* Amendment, dated December 2, 1999, to Employment Agreement
between the Company and Marc S. Hermelin, 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(n)* 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(o)* 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(p)* 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(q) Stock Option Agreement dated as of May 30, 2003, granting a
stock option to Marc S. Hermelin, which was filed as Exhibit
10(yy) to the Company's Annual Report on Form 10-K for the
year ended March 31, 2004, is incorporated herein by this
reference.
66
10(r)* Amendment, dated November 5, 2004, to Employment Agreement
between the Company and Marc S. Hermelin, which was filed as
Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2004, is incorporated
herein by this reference.
10(s)* K-V Pharmaceutical 2001 Incentive Stock Option Plan, which
was filed as Exhibit 10.1 to the Company's Current report on
Form 8-K filed November 22, 2005, is incorporated by this
reference.
10(t)* Form of 2001 Incentive Stock Option Plan Award Agreement for
Employees, which was filed as Exhibit 10.2 to the Company's
Current Report on Form 8-K filed November 22, 2005, is
incorporated by this reference.
10(u)* Form of 2001 Incentive Stock Option Plan Award Agreement for
Directors, which was filed as Exhibit 10.3 to the Company's
Current Report on Form 8-K filed November 22, 2005, is
incorporated by this reference.
10(v)* Employment Agreement between ETHEX and Patricia McCullough,
Chief Executive Officer of ETHEX, dated January 30, 2006,
which was filed as Exhibit 10(aa) to the Company's Annual
Report on Form 10-K for the year ended March 31, 2006, is
incorporated herein by this reference.
10(w)* Employment Agreement between the Company and Michael S.
Anderson, Corporate Vice President, Industry Presence and
Development, dated May 23, 1994, and amendments thereto,
which was filed as Exhibit 10(bb) to the Company's Annual
Report on Form 10-K for the year ended March 31, 2006, is
incorporated herein by this reference.
10(x)* Employment Agreement between the Company and Ronald J.
Kanterman, Vice President, Treasurer dated January 26, 2004,
which was filed as Exhibit 10(x) to the Company's Annual
Report on Form 10-K for the year ended March 31, 2007, is
incorporated herein by this reference.
10(y)* Employment Agreement between the Company and Gregory S.
Bentley, Senior Vice President and General Counsel, dated
April 24, 2006, which was filed as Exhibit 10(y) to the
Company's Annual Report on Form 10-K for the year ended
March 31, 2007, is incorporated herein by this reference.
10(z)* Employment Agreement between the Company and David A. Van
Vliet, Chief Administration Officer, dated September 29,
2006, which was filed as Exhibit 10(z) to the Company's
Annual Report on Form 10-K for the year ended March 31,
2007, is incorporated herein by this reference.
10(aa)* Employment Agreement between the Company and Rita E. Bleser,
President, Pharmaceutical Division, dated April 30, 2007,
which was filed as Exhibit 10(aa) to the Company's Annual
Report on Form 10-K for the year ended March 31, 2007, is
incorporated herein by this reference.
10(bb)* Employment Agreement between Ther-Rx and Gregory J. Divis,
Jr., President, Ther-Rx Corporation, dated July 20, 2007,
which was filed as Exhibit 10(bb) to the Company's Annual
Report on Form 10-K for the year ended March 31, 2007, is
incorporated herein by this reference.
10(cc)* Employment Agreement by and between the Company and Richard
H. Chibnall, Vice President, Finance and Chief Accounting
Officer, dated December 22, 1995, as amended by amendment
dated April 1, 2005, is incorporated herein by this
reference.
10(dd)* Employment Agreement by and between Particle Dynamics, Inc.
and Paul T. Brady, President, Particle Dynamics, Inc., dated
May 5, 2005, which was filed as Exhibit 10(dd) to the
Company's Annual Report on Form 10-K for the year ended March
31, 2007, is incorporated herein by this reference,
10(ee)* Employment Agreement between the Company and David S.
Hermelin, Vice President, Corporate Strategy and Operations
Analysis, dated April 8, 1998, as amended by amendment dated
August 16,
67
2004, which was filed as Exhibit 10(ee) to the Company's
Annual Report on Form 10-K for the year ended March 31, 2007,
is incorporated herein by this reference.
10(ff)* Amendment to Employment Agreement between the Company and
Ronald J. Kanterman, Vice President and Chief Financial
Officer, dated March 23, 2008, which was filed as Exhibit
10(ff) to the Company's Annual Report on Form 10-K for the
year ended March 31, 2008, is incorporated herein by this
reference.
10(gg)* Consulting agreement, dated March 23, 2008, between the
Company and Gerald R. Mitchell, which was filed as Exhibit
10(gg) to the Company's Annual Report on Form 10-K for the
year ended March 31, 2008, is incorporated herein by this
reference.
10(hh)** Asset Purchase Agreement by and between the Company and
VIVUS, Inc., dated as of March 30, 2007, which was filed as
Exhibit 10.1 to The Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2007, is incorporated
herein by this reference.
10(ii) Asset Purchase Agreement by and among the Company, CYTYC
Prenatal Products, Corp. and Hologic, Inc., dated as of
January 16, 2008, which was filed as Exhibit 10(ii) to the
Company's Annual Report on Form 10-K for the year ended March
31, 2008, is incorporated herein by this reference.
68
21 List of Subsidiaries, which was filed as Exhibit 21 to the
Company's Annual Report on Form 10-K for the year ended March
31, 2008, is incorporated herein by this reference.
23.1 Consent of KPMG 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, 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, 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.
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.
** Confidential portions of this exhibit have been redacted and filed
separately with the Commission pursuant to a confidential treatment
request in accordance with Rule 24b-2 of the Securities Exchange Act of
1934, as amended.
69