-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D4TBrQqx2LyqzW88pfOxO0FzwMmHzxgU4nxLZeCI9ks4hEIPbTdfLBeP+v8UCV5q WCQmePzoTNUjLQxBBQTYTw== 0000950114-96-000171.txt : 19960716 0000950114-96-000171.hdr.sgml : 19960716 ACCESSION NUMBER: 0000950114-96-000171 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960715 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: KV PHARMACEUTICAL CO /DE/ CENTRAL INDEX KEY: 0000057055 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 430618919 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09601 FILM NUMBER: 96595073 BUSINESS ADDRESS: STREET 1: 2503 S HANLEY RD CITY: ST LOUIS STATE: MO ZIP: 63144 BUSINESS PHONE: 3146456600 MAIL ADDRESS: STREET 1: 2503 S HANLEY RD CITY: ST LOUIS STATE: MO ZIP: 63144 10-K405 1 KV PHARMACEUTICAL CO. FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION ---------------------------------- Washington, D.C. 20549 FORM 10-K Mark One [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended March 31, 1996 OR -------------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the Transition period from ----------- to ------------------ Commission file number 1-9601 -------------------------- K-V PHARMACEUTICAL COMPANY 2503 SOUTH HANLEY ROAD ST. LOUIS, MISSOURI 63144 (314) 645-6600 Incorporated in Delaware I.R.S. Employer Identification No. 43-0618919 Securities registered pursuant to Section 12(b) of the Act: Class A Common Stock par value $.01 per share American Stock Exchange Class B Common Stock par value $.01 per share American Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: 7% Cumulative Convertible Preferred, par value $.01 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the 5,003,652 shares of Class A and 2,463,400 shares of Class B Common Stock held by nonaffiliates of the Registrant as of June 21, 1996 was $63,171,107 and $31,408,350 respectively. As of June 21, 1996, the Registrant had outstanding 7,187,343 and 4,649,436 shares of Class A and Class B Common Stock, respectively, exclusive of treasury shares. DOCUMENTS INCORPORATED BY REFERENCE The following document is incorporated into this Report by reference: Part III: Portions of the definitive proxy statement of the Registrant (to be filed pursuant to Regulation 14(A) for Registrant's 1996 Annual Meeting of Shareholders, which involves the election of directors), is incorporated by reference into Items 10, 11, 12 and 13 to the extent stated in such items. 2 Item 1. Description of Business. ------------------------ (a) General Development of Business. ------------------------------- K-V Pharmaceutical Company ("KV") was incorporated under the laws of Delaware in 1971 as a successor to a business originally founded in 1942. Victor M. Hermelin, KV's Chairman and founder, obtained initial patents for early controlled release and enteric coated technologies in the early 1950's. KV is a pioneer in the area of advanced drug delivery technologies which enhance the effectiveness of new therapeutic agents, existing pharmaceutical products and nutritional supplements. The Company has developed a diverse portfolio of ten technologies, including three oral controlled release technologies, four site-specific oral and topical delivery technologies, and three tastemasking technologies. These systems, which are used in the Company's products and the products of its marketing licensees, are designed to improve and control the absorption and utilization by the human body of active pharmaceutical compounds, allowing the compounds to be administered less frequently with potentially reduced side effects, improved drug efficacy and/or enhanced patient compliance. Additionally, the Company continually applies its scientific expertise and development experience to refine and enhance its existing drug delivery systems and formulation technologies and to create new technologies that may be used in its drug development programs. KV licenses the marketing rights for products developed with these drug delivery technologies to major domestic and international brand name pharmaceutical marketers in return for license fees, milestone payments, research reimbursement and manufacturing and royalty revenues. In February, 1990, KV established a generic marketing capability through a wholly-owned subsidiary, ETHEX Corporation ("ETHEX"), which makes KV one of the only drug delivery research and development companies that also markets "technology distinguished" generic products. Through ETHEX, the Company directly markets and distributes generic products to national drug store chains, wholesalers and distributors, as well as independent pharmacies and mail order firms. KV's other wholly-owned subsidiary, Particle Dynamics, Inc. ("PDI"), formerly known as Desmo Chemical Corporation, was incorporated in New York in 1948 and acquired by KV in 1972. Through PDI, the Company develops and markets specialty pharmaceutical raw materials, including directly compressible and microencapsulated ingredients used in pharmaceutical processing, tastemasked vitamins and minerals for the nutritional and food industries, and other products in combination with KV's controlled release and tastemasking technologies. (Hereinafter, KV, ETHEX and PDI are sometimes referred to collectively as "KV" or the "Company.") 2 3 (b) Industry Segments ----------------- The Company operates principally in one industry segment, consisting of pharmaceutical development, manufacturing and marketing. The Company engages in the research and development, production and sale of drug products in a variety of dosage forms utilizing KV's proprietary drug delivery technologies. Revenues are received from customers for the development, manufacture and sale of drug products to pharmaceutical marketers and from directly marketing its own technology distinguished generic products. Revenues may be received in the form of licensing revenues and/or royalty payments to KV based upon a percentage of the licensee's sales of the product, in addition to manufacturing revenues, when marketing rights to products using KV's advance drug delivery technologies are licensed. (c) Narrative Description of Business --------------------------------- The Company is engaged in the formulation and commercialization of brand name prescription, generic prescription and over-the-counter ("OTC") products utilizing the Company's proprietary drug delivery technologies. The Company is a pioneer in the area of advanced drug delivery technologies, and has developed and patented a wide variety of drug delivery and formulation technologies, including controlled release, site specific and tastemasking systems. These systems, which are used in the Company's products and the products of its marketing licensees, are designed to improve and control the absorption and utilization by the human body of active pharmaceutical compounds, allowing the compounds to be administered less frequently with potentially reduced side effects, improved drug efficacy and /or enhanced patient compliance. The Company develops generic drugs using its proprietary technologies that it markets and distributes through its wholly-owned subsidiary, ETHEX Corporation. ETHEX currently offers 33 products, 20 of which were launched over the past two fiscal years and 27 of which utilize KV's drug delivery systems. Approximately 10 additional products are expected to be launched during fiscal 1997. ETHEX Corporation distributes and markets these technology distinguished generic products directly to various markets and classes of trade customers, including wholesalers, chains, distributors, mail order houses, independent pharmacies, large HMOs and PPOs. ETHEX has achieved a 100% penetration in the 25 largest wholesalers and chains. Development of generic versions of existing brand name products is typically less costly and time consuming than the development of new drug products, because generic drugs that require FDA approval typically contain pharmaceutical compounds previously approved by the FDA and generally qualify for the use of an abbreviated testing and approval process. The Company also enters into development and licensing arrangements with companies that (i) hold patent or marketing exclusivity rights to existing pharmaceutical products that may benefit from the application of KV's proprietary drug delivery technologies, (ii) are developing new therapeutic agents that require delivery systems or formulation capabilities such as those offered by the Company, and/or (iii) can 3 4 market and sell the products developed by the Company. To date, KV has entered into 15 such agreements with various pharmaceutical marketers, including Glaxo Wellcome, Sandoz, Janssen Pharmaceutica (Johnson & Johnson) and Taisho Ltd. of Japan. Under these agreements, KV generally develops a product which utilizes its drug delivery system in return for license fees, milestone payments, research reimbursement and manufacturing and royalty revenues. The Company's licensee is generally responsible for clinical trials, regulatory approvals and marketing activities. In certain cases, the Company may develop a product, conduct clinical trials and seek regulatory approval before entering into a licensing arrangement. In 1996, the Company also entered into an agreement with a major pharmaceutical company to explore the development of products utilizing KV's drug delivery technologies. Particle Dynamics, Inc. has developed and markets to the pharmaceutical, nutritional and food industries four distinct lines of specialty raw material products. DESCOTE(R) is a family of tastemasked vitamin and mineral products particularly applicable to chewable OTC pharmaceutical products and children's vitamins. DESTAB(TM) is a family of direct compression products which enable pharmaceutical manufacturers to produce tablets and caplets in a more efficient manner. DESTRIT(TM) is a family of low dose vitamin products for direct compression into vitamin tablets and VITACOTE(TM) is a line of stabilized vitamins for use in the pharmaceutical and food industries. Since 1994, the Company has strategically de- emphasized its historical business of providing lower margin short term supply contract manufacturing services to pharmaceutical companies and has implemented an integrated business strategy that allows the Company to commercialize its drug delivery technologies in a variety of ways, principally through the development of both brand name and generic pharmaceutical products. During fiscal 1996, approximately 69% of the Company's net revenues were derived from the sale of generic products by ETHEX, in contrast to 63% in fiscal 1995, and 35% in fiscal 1994. The Company's marketing strategy is to maintain its position as a leading developer of innovative drug delivery systems and to apply its technologies to the formulation and commercialization of technologically distinguished brand name and generic drugs. This marketing strategy is comprised of three main components: The Development of Technologically Distinguished Generic Drugs. The Company applied and continues to apply its drug delivery systems and formulation capabilities to develop technologically distinguished generic drugs. The Company does so by (i) identifying and replicating brand name drugs that are either off patent or are approaching patent expiration and which require advanced drug delivery systems, or (ii) applying the Company's tastemasking formulations to an off patent drug in order to meaningfully increase patient compliance and the drug's commercial appeal. The Development of Brand Name Pharmaceuticals. The Company applies its proprietary drug delivery technologies in the formulation and development of 4 5 brand name prescription and OTC pharmaceutical products. The Company plans to continue to enter into long term licensing agreements with pharmaceutical marketing companies under which the Company develops products which utilize its drug delivery systems in return for license fees, milestone payments, research reimbursement and manufacturing and royalty revenues on sales of the products. Selective Acquisitions and In-Licensing Opportunities. The Company is actively seeking opportunities to acquire additional products, product rights, technologies, and distribution channels that complement the Company's business and which can be integrated into the Company's existing research, manufacturing or distribution operations or provide additional products, technologies or marketing and sales capabilities. DRUG DELIVERY TECHNOLOGIES - -------------------------- KV's proprietary drug delivery and formulation technologies enhance the effectiveness of new therapeutic agents, existing pharmaceutical products and nutritional supplements, such as vitamins and minerals. KV's controlled release drug delivery systems are designed to control the amount and rate of release of a drug to optimize its therapeutic effect, thus reducing or eliminating undesirable or unsafe side effects. During the 1990's, KV has continued to develop and introduce important new generations of technologies which represent significant advancements in the field of drug delivery systems. These drug delivery systems are generally organized in the areas of "controlled release", "tastemasking" and "site specific" technologies. These technologies are based on the absorption, distribution and excretion characteristics of individual drugs in the body and the many physiological and environmental variances which influence drug ingestion and utilization. Many of these technologies have been used successfully for the commercialization of products currently being marketed by the Company and its pharmaceutical marketing licensees. The following describes the Company's principal drug delivery technologies. Controlled Release Technologies - ------------------------------- The Company has developed a number of controlled release drug delivery systems and formulation techniques that tailor the drug release profiles of certain orally administered pharmaceuticals and nutritional supplements. These systems, which provide for a single oral dose that releases the active ingredient over periods ranging from six to 24 hours, are designed to improve patient compliance, improve drug effectiveness and reduce potential side effects. These technologies have been used to formulate tablets, capsules and caplets that deliver single therapeutic compounds, as well as multiple active compounds, each requiring different release patterns within a single dosage form. KV/24(R) is a precisely controlled drug delivery system that can be taken orally once every 24 hours, affording the patient a reduced dosing regimen and dramatically reducing commonly reported side effects. KV/24(R) is also a multi-particulate 5 6 technology that can combine several different drug compounds, each requiring its own unique release profile, in a single dosage form. KV/24(R) systems have been developed in capsule and tablet form for a number of prescription and OTC products. METER RELEASE(R) is a twice a day dosing, polymer- based drug delivery system which offers different release characteristics than KV/24(R) and is used for products that require a drug release rate of between eight and 12 hours. METER RELEASE(R) systems have been developed in tablet, capsule and caplet form and have been commercialized in the cardiovascular, gastrointestinal and upper respiratory categories through products marketed by ETHEX Corporation and under licensing agreements in various therapeutic categories. MICRO RELEASE(R) is a micro-particulate formulation that employs smaller particles than KV/24(R) and METER RELEASE(R). MICRO RELEASE(R) encapsulates therapeutic agents which improve a drug's absorption in the body where precise release profiles are less important. MICRO RELEASE(R) has been commercialized in prescription and OTC nutritional products, including various prenatal vitamins marketed through ETHEX Corporation. Tastemasking Technologies - ------------------------- KV has been at the forefront in the development of pharmaceutical formulations capable of improving the flavor of unpleasant tasting drugs. The Company has developed numerous platforms for its tastemasking technologies, including liquid, chewable and dry powder formulations. FlavorTech(TM) is a liquid formulation technology designed to reduce bad tasting therapeutic products. FlavorTech(TM) has been commercialized in cough/cold syrup products marketed through ETHEX Corporation and has special application to other products, such as antibiotic, geriatric and pediatric pharmaceuticals. FlavorTech(TM) is the subject of a recent licensing agreement with Sandoz Pharmaceuticals Corporation for one of its liquid cough/cold products. TASTELESSE(R) is a tastemasking technology which incorporates a dry powder, microparticulate approach to reducing objectionable tastes by sequestering the unpleasant drug agent in a specialized matrix. The TASTELESSE(R) technology can be formulated into chewable tablets or into packets that can be sprinkled on food, taken directly into the mouth, or stirred into water or other liquid before swallowing. This formulation technique has the effect of "shielding" the drug from the taste receptors without interfering with the dissolution and ultimate absorption of the agent within the gastrointestinal tract. TASTELESSE(R) may be used in connection with such products as macrolide antibiotics, amino acids, vitamins and other unpleasant tasting drug compounds. LIQUETTE(R) is a tastemasking system which incorporates unpleasant tasting drugs into a hydrophilic and lipophilic polymer matrix to suppress the taste of a 6 7 drug. This technology is used for mildly to moderately distasteful drugs. The LIQUETTE(R) technology has been successfully commercialized in Japan through a licensing agreement with SS Pharmaceutical. Site Specific Technologies - -------------------------- KV's site specific technologies use advanced polyphasic principles that result in a complex emulsion which adheres to the desired tissue and controls the release of the drug. The Company has developed a number of site specific systems and formulations that it tailors to the desired route of administration. To date, the Company has applied its site specific technologies in cream, lotion, lozenge and suppository form to deliver therapeutic agents to vaginal, rectal, oral, skin, pharyngeal and esophageal tissues. SITE RELEASE(R) is a patented, controlled release bioadhesive delivery system which incorporates advanced polyphasic principles to create a bio-emulsion system capable of delivering therapeutic agents in oral, topical and vaginal forms. To the Company's knowledge, SITE RELEASE(R) is the only bioadhesive delivery system that is clinically proven. SITE RELEASE(R) is the subject of licensing and development agreements with such companies as Syntex Corporation, Taisho Ltd. of Japan, J. Uriach & Cia of Spain and others, to develop products for the treatment of topical and vaginal fungal infections. OraSite(R) is a controlled released mucoadhesive delivery system administered orally in a solid or liquid form. A drug formulated with the OraSite(R) technology may be formulated as a liquid or as a lozenge in which the dosage form liquefies upon insertion and adheres to the mucosal surface of the mouth, throat and esophagus. OraSite(R) possesses characteristics particularly advantageous to therapeutic areas such as oral hygiene, sore throat and periodontal and upper gastrointestinal tract disorders. Trans-E(TM) (for transesophageal) is a new and novel bio-adhesive, controlled release delivery system which may permit oral delivery of compounds that normally would be degraded if administered orally, such as growth hormone, calcitonin and other protein/peptides and other complex compounds. Trans-E(TM) was specifically designed to provide an oral delivery alternative to biotechnology and other compounds that currently are injected or infused. BioSert(R) is a patented, bio-adhesive, controlled release system which at room temperature is a solid rectal or vaginal suppository and after insertion becomes a bioadhesive long acting cream. BioSert(R) has particular applications to therapeutic areas such as antifungals, narcotic analgesics and anti-arthritics. 7 8 COMPETITION - ----------- Competition in the development and marketing of pharmaceutical products is intense and characterized by extensive research efforts and rapid technological progress. Many companies, including those with financial and marketing resources and development capabilities substantially greater than those of the Company, are engaged in developing, marketing and selling products that compete with those offered by the Company. There are also a few companies, including KV, which specialize in drug delivery technology and the development of products derived from those technologies for sale/licensing to pharmaceutical marketers. The Company believes that its patents, proprietary trade secrets, technological expertise, product development and manufacturing capabilities position it to continue to develop products to compete effectively in the marketplace and maintain a leadership position in the field of advanced drug technologies. The Company also sells directly to various markets and classes of customers with respect to its technologically distinguished generic products marketed by ETHEX Corporation. The Company believes ETHEX is subject to active competition from numerous firms. The primary competitive factors in this area are customer service, quality of products, approval for manufacture and distribution by the FDA, and price. The competition varies among products, markets and classes of customers. The Company is subject to potential additional competition from firms who are able to obtain the necessary governmental approvals to manufacture and distribute similar products. REGULATION - ---------- The design, development and marketing of pharmaceutical compounds are intensively regulated by the Federal Food and Drug Administration ("FDA") and comparable agencies in foreign countries. For example, The Federal Food, Drug and Cosmetic Act, the Controlled Substances Act and other United States federal statues and regulations impose requirements on the testing, manufacturing and approval of the Company's products before a drug can be marketed in the United States. Obtaining FDA approvals is a costly, time-consuming process and there is no guarantee that such approval will be obtained with respect to an individual product. All companies in the pharmaceutical industry are subject to FDA inspections for compliance with current Good Manufacturing Practice ("cGMP"), which encompasses all aspects of the production process as interpreted by the FDA and involves changing and evolving standards. FDA inspections are a part of a continuing effort by the FDA to upgrade the level of industry-wide compliance with cGMP, with an emphasis on increased validation of products and increased stringency of Standard Operating Procedures. The Company undergoes FDA inspections at all of its facilities. On April 21, 1993, the FDA instituted a civil seizure action involving essentially all of the Company's solid oral dosage form drug products. On June 14, 1993, the Company entered into a Consent Decree (the Agreement) with the FDA which settled the seizure action and required the Company to engage cGMP experts to certify that these products were manufactured in conformity with cGMP and that the Company's facilities 8 9 are operated in compliance with cGMP. The certifications necessary for the release of seized products were substantially completed by June 1994. In December 1995, the Company was informed by the FDA that it had been found to be in substantial compliance with cGMP requirements, resulting in the expiration of certain requirements of the Agreement, including the requirement that the Company submit cGMP data with respect to all solid oral dosage drugs manufactured by the Company before releasing such drugs for sale to the public. Since 1992, the Company has implemented new programs to ensure full compliance with all of the FDA's regulatory requirements and their increasingly vigorous interpretation by the government. With respect to potential new products, there are two principal ways for the Company to satisfy the FDA's safety and efficacy requirements for a new drug product, a new drug application (an "NDA") and an abbreviated new drug application ( an "ANDA"). In recent years, the Company has experienced delays in obtaining FDA approval and, in certain instances, KV's customer is responsible for obtaining the FDA approvals and have been similarly delayed. A number of products KV anticipated would be introduced to the pharmaceutical market by KV or its client pharmaceutical companies in fiscal 1992 through 1996 were delayed. The Company follows a policy of not disclosing information on the specific products covered by its FDA applications in order to protect the confidentiality and competitive position of the Company and its customers with respect to products which it has developed and expects to be the subject of future market introductions. As a consequence of the uncertainties inherent in the drug approval process, an applicant is not in the position to predict in advance all of the substantive and procedural requirements for FDA approval of a particular product. In addition, the Company believes that under the agency's invocation of its "Application Integrity Policy", the FDA will not process the Company's applications until the Company has satisfied the FDA with respect to data previously submitted and has implemented any additional procedures necessary to assure the accuracy of information furnished by the Company. However, the FDA has specifically advised the Company that the Application Integrity Policy does not adversely delay any of its clients' NDA and ANDA submissions for products KV has developed and will manufacture for such clients. Currently, it is the applications of KV's clients which have the greatest value to the Company. Therefore, the Company believes that any delay in processing the Company's own applications will not have a material adverse effect on the Company. The Company also cannot predict whether future legislative or regulatory developments might have an adverse effect on the Company. It is the Company's belief that generic drugs and drug delivery products can provide cost savings opportunities which the Company could benefit from in its ETHEX Corporation subsidiary's growth as well as in its drug delivery research business. Some raw materials essential to the Company's business are furnished 9 10 by its customers for conversion to finished products. During fiscal 1996, the Company encountered no serious shortages of any particular raw materials and has no indications that significant shortages will occur. However, a serious shortage of certain raw materials could have a material adverse effect upon the Company. The Company regards its drug delivery technologies as proprietary and maintains an extensive trade secret and patent protection program. Because the patent laws often serve as an educational tool to others and sometimes afford only limited practical protection, the Company also relies on trade secret laws and restrictions on disclosure and transferability contained in its product license agreements. Internal safeguards incorporated in its technologies also serve to protect the proprietary nature of its programs. In addition, employees with access to proprietary information and potential customers who evaluate KV's products are required to execute non-disclosure agreements. The Company intends to maintain and enforce the proprietary nature of its technologies. In addition to its patent and trade secret protection, KV believes that the collective knowledge and experience of its management and personnel and their ability to develop and enhance drug delivery technologies and products developed from such technologies are also of competitive significance. The Company presently owns 38 domestic and foreign patents expiring through 2013 and 24 trademarks expiring through 2007 (which are renewable assuming continuous use), none of which is considered material to the continuing operations and success of the Company. The Company considers its proprietary know-how and processing techniques to be of greater importance to its continuing operations than such patents. In order to protect its goodwill, the Company has applied for trademark protection for its technology names such as SITE RELEASE(R), KV/24(R), FlavorTech(TM), OraSite(R), METER RELEASE(R), MICRO RELEASE(R), DESCOTE(R), IMPROVED DRUG ENTITIES(TM), and others. The Company intends to continue to trademark new technology and product names as they are developed. The business of the Company is generally not seasonal, although a number of new cough/cold products marketed through ETHEX Corporation can be subject to seasonal demand. The nature of the Company's business does not involve unusual working capital requirements. Inventories are maintained at sufficient levels to support current production and sales levels. Customers of the Company consist of large and small pharmaceutical marketing companies, drug chains and wholesalers. During fiscal 1996 and 1995, no unaffiliated customer individually accounted for 10% or more of the Company's consolidated revenues. Previously, the Company's backlog of orders was driven by the 10 11 contract manufacturing business segment with lead times ranging from several months and purchase orders covering up to one year commitments. The Company has transitioned itself so the majority of its sales are related to directly marketed generic products through ETHEX Corporation. Backlog measurements are not meaningful, due to the short lead time required (days) in filling orders at any point in time relative to sales or income for a full 12-month period. The estimated direct dollar amount, including overhead, spent by KV on research activities relating to the development of new products or services or the improvement of existing products or services was approximately $4,629,000 in fiscal 1996, $4,795,000 in fiscal 1995, and $4,805,000 in fiscal 1994. The estimated dollar amount contributed by customers to these amounts was approximately $70,000 in fiscal 1996, $271,000 in fiscal 1995 and $200,000 in fiscal 1994. Research and development spending for KV products comes from KV internal funding and from its major drug company customers who have licensed marketing rights to KV-developed products. KV's research and development spending, not including other sponsored sources of funds, is approximately 9% of current revenues. This does not include amounts KV's licensing partners are separately spending for development and clinical research on KV products. Extending KV's development dollars through the significant external resources of its clients has enabled KV to increase what can be accomplished through KV's internal research budget. The Company does not expect that compliance with federal, state or local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment will have a material effect on the Company's capital expenditures, earnings or competitive position. As of June 30, 1996, the Company had 304 employees. The Company is subject to a collective bargaining agreement which expires in 1996 and covers 50 employees. A new collective bargaining agreement is expected to be ratified in July, 1996. The Company believes that its relations with its employees are good. The Company presently does not have material operations or sales in foreign countries and its domestic sales are not subject to unusual geographic concentration. Item 2. Properties. ---------- The Company's general offices are located in a two-story brick building at 2503 South Hanley Road in St. Louis County, Missouri, containing approximately 25,000 square feet of floor space. The Company has a lease on the building for a period expiring December 31, 1996, which is in the process of being renewed. In addition, the Company has the leases and the owned facility shown 11 12 in the following table:
SQ FT LEASE RENEWAL FACILITY USAGE LEASED EXPIRES OPTIONS - --------------------------------------------------------------------------------- 2629 S. Hanley Road Mfg. Oper. 18,000 11/30/97 5 years 821 Hanley Industrial Court Mfg. Oper. 5,000 11/30/97 3 years 8046-50 Litzsinger Road Mfg. Oper. 17,000 12/31/96 5 years 8056 Litzsinger Road Office/Maint. 3,000 12/31/96 5 years 2635 S. Hanley Road Mfg. Oper. 12,150 11/30/97 5 years 819 Hanley Ind'l Ct. Mfg. Oper. 5,000 11/30/97 3 years 2525 S. Hanley Road Mfg. Oper. 16,800 06/30/97 None 8054 Litzsinger Road Office 3,000 12/31/96 5 years 10888 Metro Court Office/Warehouse 81,810 09/30/99 10 years 2601 S. Hanley Road PDI Office 1,480 04/30/97 5 years 2303 Schuetz Rd. Mfg. Oper. 90,000 Owned N/A Two five year options
Properties used in the Company's operations are considered suitable for the purposes for which they are used and are believed to be adequate to meet the Company's needs for the reasonably foreseeable future. However, the Company has considered leasing additional facilities from time to time when attractive facilities appeared to be available to accommodate the consolidation of certain operations and to meet future expansion plans. Item 3. Legal Proceedings. ----------------- On June 14, 1993, a consent decree agreement was executed between the Company and the FDA which required the Company to take various actions to assure that the Company's products are manufactured in conformity with cGMP and that KV facilities are operated in compliance with cGMP. In December 1995, the Company was informed by the FDA that it had been found to be in substantial compliance with cGMP requirements, resulting in the expiration of certain requirements of the Agreement, including the requirement that the Company submit cGMP data with respect to all solid oral dosage drugs manufactured by the Company before releasing such drugs for sale to the public. Management believes that the Company can operate satisfactorily under the agreement and does not anticipate any material long-term adverse effects. On April 6, 1995, the Company entered into a plea agreement with the U.S. Department of Justice under which the Company agreed to plead guilty to (1) two misdemeanor violations of the Federal Food, Drug and Cosmetic Act involving the failure to file certain required reports with the FDA in 1991 with respect to two lots of an 12 13 erythromycin oral suspension product previously manufactured by the Company and (2) two misdemeanor counts involving the shipment of two lots of the same product, inappropriately labeled as to their shelf life. Under the plea agreement, the Company agreed to pay a fine of $500,000 and costs of $100,000 in installments of $75,000 every six months over 3 1/2 years, beginning in July 1995. Item 4. Submission of Matters to a Vote of Security Holders. --------------------------------------------------- Not applicable. 13 14 Item 4(a). Executive Officers of the Registrant. ------------------------------------ The following is a list of the current executive officers of the Company, their ages, their positions with the Company and their principal occupations for at least the past five years.
NAME AGE POSITION HELD AND PAST EXPERIENCE - --------------------------------------------------------------- Victor M. Hermelin 82 Director, Chairman of the Board and Treasurer of the Company. Marc S. Hermelin 54 Director, Vice-Chairman of the Board and Chief Executive Officer. Alan G. Johnson 61 Director and Secretary of the Company. Attorney at Law and Member in the law firm of Gallop, Johnson & Neuman, L.C. since 1976; Director of MRL, Inc.; Siboney Corporation and Triax Communications Corporation Garnet E. Peck, Ph.D. 65 Director of the Company since 1994. Professor of Industrial Pharmacy and Director of Industrial Pharmacy for Purdue University School of Pharmacy and Pharmacal Sciences since 1967. Raymond F. Chiostri 62 Vice President and Group President of KV since 1986 and Chief Executive Officer of Particle Dynamics, Inc. since 1995. President - Pharmaceutical Division of KV 1986 to 1995. Gerald R. Mitchell 57 Vice President of Finance since 1981. Mitchell I. Kirschner 50 Corporate Vice President of Business Development since 1989. The term of office for each executive officer of the Company expires at the next annual meeting of the directors or at such time as his successor has been elected and qualified. - ------------------------------ This information is included in Part I as a separate item in accordance with Instruction 3 to Item 401(b) of Regulation S-K and General Instruction G to Form 10-K. Victor M. Hermelin is the father of Marc S. Hermelin and father-in-law of Mitchell I. Kirschner.
14 15 PART II Item 5. Market for the Company's Common Stock and ----------------------------------------- Related Security Holder Matters ------------------------------- a) Principal Market ---------------- The Company's Class A Common Stock and Class B Common Stock are traded on the American Stock Exchange under the symbols KV.A and KV.B, respectively. b) Stock Price and Dividend Information ------------------------------------ High and low closing sales prices on the American Stock Exchange of the Company's Class A and Class B Common Stock during each quarter of fiscal 1996 and 1995 were as follows:
CLASS A COMMON STOCK - -------------------- FISCAL 1996 FISCAL 1995 ---------------- --------------- QUARTER High Low High Low - ------- ------ ------ ------ ----- First 8 1/2 5 3/8 9 3/8 7 1/4 Second 10 1/8 6 3/4 9 1/4 6 1/2 Third 13 3/8 7 3/4 8 4 3/8 Fourth 17 7/8 11 1/4 7 1/2 5 1/8 CLASS B COMMON STOCK - -------------------- FISCAL 1996 FISCAL 1995 ---------------- --------------- QUARTER High Low High Low - ------- ------ ------ ------ ----- First 8 1/2 5 5/8 9 1/8 7 3/8 Second 10 7 1/2 9 1/4 6 1/2 Third 13 3/8 7 3/4 7 7/8 4 5/8 Fourth 17 7/8 11 1/2 7 1/2 5 1/4
No cash dividends were paid on the Company's Class A Common Stock or Class B Common Stock in fiscal 1996 or 1995. See Note 2 to the Financial Statements regarding limitations on the payment of dividends. (c) Approximate Number of Holders of Common Stock --------------------------------------------- The number of holders of record of the Company's Class A and Class 15 16 B Common Stock as of June 21, 1996 was 742 and 677, respectively (not separately counting shareholders whose shares are held in "nominee" or "street" names, which are estimated to represent approximately 4,000 additional shareholders for each class of common stock). Item 6. Selected Financial Data
($ in 000's, except per share data) Years Ended March 31, ----------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Revenues $49,789 $39,743 $38,171 $43,496 $42,019 % Change 25.3 4.1 (12.2) 3.5 19.6 Net income (loss) 4,043 (5,375) (8,181) 1,055 90 Net income (loss) per common share 0.31 (.52) (.78) .06 (.05) Total assets 29,170 29,028 31,802 39,331 33,653 Long-term debt and other 3,452 12,153 13,323 11,886 9,040 Shareholders' Equity 20,550 9,974 13,343 21,631 20,993 NOTES: - ----- After deducting preferred dividends of $421,750 or $.04 per common share in 1996, 1995, 1994 and 1993 and $593,696 or $.06 per common share in 1992. There were no cash dividends paid on any shares of common stock during the five years ended March 31, 1996. Fiscal year 1992 has been restated to reflect the effect of the accounting change made in 1993 of valuing inventories from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method.
16 17 Item 7. Management's Discussion and Analysis of Results of -------------------------------------------------- Operations, and Liquidity and Capital Resources ----------------------------------------------- (a) Results of Operations --------------------- The following table summarizes the Company's historical results of operations as a percentage of revenues for fiscal years 1996, 1995 and 1994.
Fiscal Year Ended 1996 1995 1994 --------------- --------------- --------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (Dollars in thousands) ETHEX (generic products) $34,498 69% $24,939 63% $13,532 35% KV (manufacturing & licensing) 7,430 15 7,729 19 16,702 44 PDI (pharmaceutical compounds) 7,861 16 7,075 18 7,937 21 ------- --- ------- --- ------- --- Net Revenues $49,789 100% $39,743 100% $38,171 100% Costs and Expenses: Manufacturing costs $26,260 53% $26,066 66% $27,558 72% Research and development 4,559 9 4,525 11 5,605 14 Selling and administrative 12,749 25 11,979 30 11,926 31 Other, Net 2,088 4 2,548 6 1,263 3 ------- --- ------- --- ------- --- Total costs & expenses $45,656 91% $45,117 113% $46,352 121% Income (loss) before income taxes 4,133 9 (5,375) (13) (8,181) (21) Net income (loss) $4,043 8% $(5,375) (13)% $(8,181) (21)% ======= === ======= === ======= ===
FISCAL 1996 COMPARED TO FISCAL 1995 - ----------------------------------- Revenues. Net revenues increased $10.1 million, or 25%, to $49.8 million during fiscal 1996 from $39.7 million in fiscal 1995. This sales growth was primarily due to an increase in the volume of new and existing generic products sold by ETHEX and increased licensing revenue. Net revenues from ETHEX increased $9.6 million, or 39%, to $34.5 million during fiscal 1996 from $24.9 million in fiscal 1995. This increase was primarily due to the launch of ten new generic products during fiscal 1996, in addition to increased sales in products introduced in the prior year. Licensing revenues increased $1.5 million to $2.3 million during fiscal 1996 due to an agreement concluded with a major pharmaceutical manufacturer to explore the development of products utilizing KV's drug delivery technologies. The Company recognized $1.7 million of licensing revenue from this transaction. Net revenues derived from the sale of 17 18 pharmaceutical compounds by PDI increased $.8 million, or 11%, to $7.9 million during fiscal 1996. This increase is attributable to the introduction of new products for the over-the-counter DESCOTE(R) and DESTAB(TM) product lines. Those increases were partially offset by an expected decrease in revenues derived from contract services to $5.1 million in fiscal 1996 from $7.0 million in fiscal 1995 primarily due to the Company's continued de-emphasis of its lower margin contract manufacturing business in order to develop and market higher margin technologically distinguished generic products through ETHEX. Costs and Expenses. Manufacturing costs increased $.2 million, or less than 1%, to $26.3 million during fiscal 1996 from $26.1 million in fiscal 1995. Manufacturing costs as a percentage of revenues decreased to 53% from 66%. This percentage decrease was primarily due to the continued growth in sales of higher margin generic products by ETHEX. Research and development costs increased $34,000, or less than 1%, to $4.6 million during fiscal 1996 from $4.5 million in fiscal 1995. This increase was due to higher personnel costs. The Company expects to continue spending for research and development in the future, emphasizing the development of additional generic products for sale by ETHEX, as well as new drug delivery technologies. Selling and administrative expenses increased $.7 million, or 6%, to $12.7 million during fiscal 1996 from $12.0 million in the same period in fiscal 1995. However, as a percentage of revenue, selling and administrative expenses decreased to 25% from 30%. The increase in selling and administrative expenses was primarily related to the Company's selling and promotional activities associated with the significant growth experienced in the sales of new and existing generic products marketed by ETHEX. Interest expense increased $.1 million, or 8%, to $1.4 million during fiscal 1996 from $1.3 million in fiscal 1995. Such increase resulted from higher effective interest rates and higher levels of average borrowing to support growth in the fiscal 1996 period. The income tax provision was $90,000 for fiscal 1996 compared to zero in fiscal 1995. The tax provision of $90,000 was due to the effect of the alternative minimum tax. Otherwise, no provision was made for income taxes as a result of available net operating loss carryforwards. As of March 31, 1996, the Company's net operating loss carryforwards were $8.9 million. Net Income (Loss). As a result of the factors described above, net income improved $9.4 million to $4.0 million for fiscal 1996 from a net loss of $5.4 million in fiscal 1995. FISCAL 1995 COMPARED TO FISCAL 1994 - ----------------------------------- Revenues. Net revenues increased $1.6 million, or 4%, to $39.7 million during fiscal 1995 from $38.2 million in fiscal 1994. This increase was primarily due to the increase in revenues derived from the sales of generic products by ETHEX. Net revenues from ETHEX increased $11.4 million, or 84%, to $24.9 million during fiscal 18 19 1995 from $13.5 million in fiscal 1994. This increase was primarily due to the introduction of ten new generic products during fiscal 1995 and increased sales of existing ETHEX products. Net revenues derived from the sale of pharmaceutical compounds by PDI decreased $.9 million, or 11%, to $7.0 million during fiscal 1995 from $7.9 million in fiscal 1994. This decrease was primarily a result of a general decline in sales of vitamins. Increases from the sale of generic products by ETHEX were partially offset by an expected 54% decrease in revenues derived from manufacturing and licensing arrangements to $7.7 million in fiscal 1995 from $16.7 million in fiscal 1994, primarily due to the Company's strategic de-emphasis of its lower margin contract manufacturing business in order to focus on the development and marketing of higher margin technologically distinguished generic products through ETHEX. Costs and Expenses. Manufacturing costs decreased $1.5 million, or 5%, to $26.1 million during fiscal 1995 from $27.6 million in fiscal 1994. Manufacturing costs as a percentage of revenues decreased to 66% from 72%. This decrease was primarily due to a significant improvement in the mix of ETHEX products. While normal manufacturing costs associated with certain production and laboratory expenses were reduced, these reductions were more than offset by product testing and validation expenses incurred related to new generic products introduced by ETHEX and the write down of inventories of materials associated with discontinued lower margin products previously manufactured by the Company for third parties. Fiscal 1994 manufacturing costs increased due to production inefficiencies and additional laboratory testing in the manufacturing process related to the release of seized products. The additional laboratory testing in connection with the FDA action is considered by the Company as a one- time charge and does not reflect any required increase in manufacturing costs associated with ongoing validation. Research and developments costs decreased $1.1 million, or 20%, to $4.5 million during fiscal 1995 from $5.6 million in fiscal 1994. This decrease was primarily due to reduced materials and supplies consumed. Selling and administrative expenses increased to $12.0 million during fiscal 1995 from $11.9 million in fiscal 1994. Selling and administrative expenses as a percentage of revenues decreased to 30% from 31%. The slight increase in selling and administrative expenses was primarily related to the Company's selling and promotional activities associated with the increase in sales of generic products marketed by ETHEX and was partially offset by reduced selling expenses related to PDI. Interest expense increased $.4 million, or 44%, to $1.3 million during fiscal 1995 from $.9 million in fiscal 1994. Such increase resulted from significantly higher effective interest rates charged by the Company's former lender and higher levels of average borrowing in the fiscal 1995 compared to fiscal 1994. The Company made no provision for income taxes in 1995 or 1994 as a result of available net operating loss carryforwards. As of March 31, 1995, the Company's net operating loss carryforwards were $11.1 million. 19 20 Net Income/(Loss). As a result of the factors described above, the Company recorded a net loss of $5.4 million in fiscal 1995 compared to a net loss of $8.2 million in fiscal 1994. (b) Liquidity and Capital Resources ------------------------------- The following table sets forth selected balance sheet data and ratios for fiscal years 1994, 1995 and 1996.
At March 31, ($ in 000's) ------------ 1996 1995 1994 ----------------------------------- Working Capital Ratio 3.7 to 1 2.3 to 1 3.4 to 1 Quick Ratio 2.0 to 1 1.3 to 1 1.4 to 1 Debt to Debt Plus Equity .14 to 1 .57 to 1 .50 to 1 Total Liabilities to Equity .42 to 1 1.91 to 1 1.38 to 1 Cash and Equivalents $ 2,038 $ 1,076 $ 507 Working Capital 14,053 8,927 12,154 Long Term Debt 3,452 12,153 13,323 Stockholders' Equity 20,550 9,974 13,343
Working capital for fiscal 1996 increased $5.1 million, or 57%, to $14.1 million due to an increase in current assets of $3.4 million and a decrease in current liabilities of $1.7 million. Net cash used in operating activities for fiscal 1996 included increases in receivable of $.6 million and inventories of $1.8 million, which resulted primarily from increased sales volume of ETHEX products, and a decrease in accounts payable and accrued liabilities of $.6 million. These changes in receivables, inventories and payables were more than offset by net income and noncash charges aggregating $6.1 million, resulting in cash provided by operationing activities of $3.1 million for fiscal 1996. At the end of fiscal 1996, the Company's "quick assets", cash, cash equivalents and accounts receivable increased $1.6 million (18%) from the prior year, while current liabilities decreased $1.7 million (25%) resulting in a "quick ratio" of 2.0 to 1 compared to 1.3 to 1 at the end of 1995. The debt-to-debt-plus-equity and total- liabilities-to-equity ratios for fiscal 1996 decreased because of the impact of the net profit for the year, the repayment of debt and $5.0 million proceeds from the sale of stock options as part of an agreement with a major pharmaceutical company. For fiscal 1995, the debt-to-debt- plus-equity and total-liabilities-to-equity ratios increased because of the impact of the net loss for the year, which was partially offset by a $2 million capital infusion from the sale of Class A Common Stock. Investing activities in fiscal 1996 reflected capital expenditures of $.8 million and net expenditures for other assets of $.5 million, which were provided for 20 21 through operations and the proceeds received for the reimbursement of clinical costs related to Deferred Improved Drug Entities(TM). In January 1996, the Company concluded an agreement with a major pharmaceutical company to explore the development of products utilizing KV's drug delivery technologies. Upon signing of the Agreement, KV received $5 million, as well as certain other considerations, plus $5.0 million for the sale of certain Class A common stock options issued to the other party. The accounting treatment for the funds received (other than from the sale of options) was to reimburse the Company for, and eliminate from its balance sheet, $2.5 million of Deferred Improved Drug Entities(TM), receivables and inventory of $.4 million, and patents and trademarks relating to the Company's technologies of $.2 million, with $1.7 million allocated to licensing revenues and $.2 million as a reimbursement of expenses. A portion of the funds received was used to reduce the Company's outstanding long term debt, which is reflected in financing activities as a net decrease in borrowings of $9.8 million. The Company's cash and cash equivalents on hand at March 31, 1996 were $2.0 million. In addition, the Company currently has in place a credit facility with Foothill Capital Corporation under which it has the ability to borrow up to $17.5 million. This credit facility consists of a revolving loan, a term loan, a capital equipment loan facility and letter of credit support of the Company's outstanding industrial revenue bond and other requirements. As of March 31, 1996, the Company repaid its term loan in full ($5.8 million) simultaneously with entering into an amendment to its credit facility which, at the Company's request, allows Foothill to redisburse the term loan to the Company, subject to certain conditions, with the same amortization schedule as if the loan were amortized over a period ending April 27, 2001. The Company's capital equipment commitments at year-end totaled approximately $50,000. As part of its credit facility, the Company has available $1,500,000 to finance new capital expenditures. Although the Company generally has been able to pass along to its customers at least a portion of cost increases in labor, manufacturing and raw material costs under its agreements, in certain instances no increases have been effected due to market conditions. It is not meaningful to compare changing prices over the past three years because the products, product formulas, product mix and sources of raw materials have varied substantially. The Company is continuing to transition its revenue base from one based on lower margin, highly competitive, short-term contract manufacturing to one based on higher margin, technology distinguished generic products, which it is focusing on marketing through ETHEX Corporation, as well as advanced technology drug delivery products to be marketed and co-marketed under long term marketing agreements and ventures. These advanced technology products (Improved Drug Entities(TM)) are the subject of a number of long- term business arrangements and have differentiated and improved benefits derived from KV's drug delivery system technologies. For the most part, these products can be produced with existing manufacturing processes. The Company expects to continue a relatively high level of expenditures and investment for 21 22 research, clinical and regulatory efforts relating to the development and commercialization of proprietary new products and Improved Drug Entities(TM) and their approval for marketing. The Company has and is continuing to implement strategies to introduce additional products through its ETHEX subsidiary and de-emphasize contract services. This move to directly market its own technology distinguished generics has allowed the Company to rely less upon the dependence of its pharmaceutical marketing clients for growth and to shift its revenue growth internally, principally through ETHEX and the Company's licensing activities. During fiscal 1995 and 1996, ETHEX introduced 10 new products in each year, and it plans to launch a similar number in fiscal 1997. The Company believes funds generated from operating activities, the increased level of credit available from the new credit facility and existing cash will be adequate to fund the Company's requirements for short term needs due to sales growth being experienced by the continued anticipated growth of ETHEX or otherwise. Item 8. Financial Statements and Supplementary Data. ------------------------------------------- 22 23 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ----------------- To the Board of Directors and Shareholders of KV Pharmaceutical Company: We have audited the consolidated balance sheets of KV Pharmaceutical Company and Subsidiaries as of March 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended March 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects the financial position of KV Pharmaceutical Company and Subsidiaries as of March 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1996, in conformity with generally accepted accounting principles. BDO SEIDMAN, LLP St. Louis, Missouri July 12, 1996 23 24 KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, 1996 and 1995
ASSETS 1996 1995 - ------ ------------ ------------ Current Assets: Cash and cash equivalents $ 2,038,069 $ 1,075,713 Receivables, net 8,502,714 7,893,585 Inventories, net 8,450,162 6,591,587 Prepaid and other assets 229,358 266,951 ------------ ------------ Total Current Assets 19,220,303 15,827,836 ------------ ------------ Net Property and Equipment 7,621,217 8,167,874 ------------ ------------ Deferred Improved Drug Entities(TM) - 2,962,827 Goodwill and other assets 2,328,190 2,069,245 ------------ ------------ TOTAL ASSETS $ 29,169,710 $ 29,027,782 ============ ============ LIABILITIES - ----------- Current Liabilities: Current maturities of long-term debt $ 712,328 $ 1,814,682 Accounts payable 2,068,265 2,565,247 Accrued liabilities 2,386,761 2,521,162 ------------ ------------ Total Current Liabilities 5,167,354 6,901,091 Long-term debt 2,541,216 11,233,418 Other long-term liabilities 911,230 919,091 ------------ ------------ TOTAL LIABILITIES 8,619,800 19,053,600 ------------ ------------ Commitments and Contingencies SHAREHOLDERS' EQUITY - -------------------- Preferred stock, $.01 par value; $25.00 stated and liquidation value; 840,000 shares authorized; issued and outstanding - 241,000 shares in 1996 and 1995 2,410 2,410 Class A and Class B Common Stock, $.01 par value; 60,000,000 shares of each authorized; Class A-issued 7,120,614 and 6,762,897 in 1996 and 1995 71,207 67,629 Class B-issued 4,747,357 and 4,718,710 in 1996 and 1995 47,474 47,187 Additional paid-in capital 30,235,926 23,706,723 Retained deficit (9,752,154) (13,794,814) Less: Treasury stock, 23,746 shares each of Class A and Class B common stock, at cost (54,953) (54,953) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 20,549,910 9,974,182 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 29,169,710 $ 29,027,782 ============ ============ See Accompanying Notes to Consolidated Financial Statements
24 25 KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended March 31, 1996, 1995 and 1994
Revenues 1996 1995 1994 ------------ ------------- ------------ Net Revenues $ 49,788,635 $ 39,742,554 $ 38,170,568 Costs and Expenses: Manufacturing costs 26,259,638 26,065,642 27,557,936 Research and development 4,559,360 4,524,956 5,605,364 Selling and administrative 12,748,726 11,978,564 11,925,517 Interest expense 1,377,604 1,275,622 852,062 Amortization of intangible assets 710,647 672,571 410,983 Litigation settlement - 600,000 - ------------ ------------- ------------ Total costs and expenses 45,655,975 45,117,355 46,351,862 ------------ ------------- ------------ Income (Loss) before income taxes 4,132,660 (5,374,801) (8,181,294) Provision for income taxes 90,000 - - ------------ ------------- ------------ Net Income (Loss) $ 4,042,660 $ (5,374,801) $ (8,181,294) ============ ============= ============ Net Income (Loss) per Common Share (after deducting preferred dividends): $421,750 in 1996, 1995 and 1994. $ 0.31 $ (0.52) $ (0.78) ============ ============= ============ See Accompanying Notes to Consolidated Financial Statements
25 26 KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended March 31, 1996, 1995 and 1994
Class A Class B Additional Retained Total Preferred Common Common Paid Earnings Treasury Shareholders' Stock Stock Stock In Capital (Deficit) Stock Equity --------- -------- -------- ------------ ---------- --------- ------------ Balance at April 1, 1993 $ 2,410 $ 62,688 $ 48,348 $ 21,810,939 $ (238,719) $ (54,953) $ 21,630,713 Stock Options exercised, 1,365 shares of Class A and 1,390 shares of Class B, less 100 shares of each class repurchased - 12 13 9,557 - - 9,582 Cash dividends - preferred stock - - - (115,982) - - (115,982) Conversion of Class B shares to Class A shares - 350 (350) - - - - Net Loss for 1994 - - - - (8,181,294) - (8,181,294) ------- -------- -------- ------------ ----------- --------- ------------ Balance at March 31, 1994 2,410 63,050 48,011 21,704,514 (8,420,013) (54,953) 13,343,019 Stock Options exercised, 420 shares of Class A and 370 shares of Class B, less 150 shares of each class repurchased - 3 2 (239) - - (234) Sale of 375,000 shares of Class A - 3,750 - 2,002,448 - - 2,006,198 Conversion of Class B shares to Class A shares - 826 (826) - - - - Net Loss for 1995 - - - - (5,374,801) - (5,374,801) ------- -------- -------- ------------ ----------- --------- ------------ Balance at March 31, 1995 2,410 67,629 47,187 23,706,723 (13,794,814) (54,953) 9,974,182 ------- -------- -------- ------------ ----------- --------- ------------ Stock Options issued - - - 5,000,000 - - 5,000,000 Stock Options exercised, 194,242 shares of Class A - 1,943 - 772,107 - - 774,050 192,122 shares of Class B - - 1,922 757,096 - - 759,018 Conversion of 163,475 shares of Class B shares to Class A shares - 1,635 (1,635) - - - - Net Income for 1996 - - - - 4,042,660 - 4,042,660 ------- -------- -------- ------------ ----------- --------- ------------ Balance at March 31, 1996 $ 2,410 $ 71,207 $ 47,474 $ 30,235,926 $(9,752,154) $ (54,953) $ 20,549,910 ------- -------- -------- ------------ ----------- --------- ------------ See Accompanying Notes to Consolidated Financial Statements
26 27 KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended March 31, 1996, 1995, and 1994
1996 1995 1994 ---- ---- ---- OPERATING ACTIVITIES Net Income (Loss) $ 4,042,660 $ (5,374,801) $ (8,181,294) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation, amortization and other non-cash charges 2,098,622 1,961,975 1,577,076 Changes in operating assets and liabilities: (Increase) decrease in receivables (609,129) (1,181,549) 3,920,411 (Increase) decrease in inventories and other current assets, net (1,820,982) 3,212,927 490,892 (Decrease) increase in accounts payable and accrued liabilities, net (631,383) 1,216,963 (152,004) Other (7,861) 574,991 132,000 ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,071,927 410,506 (2,212,919) ------------ ------------ ------------ INVESTING ACTIVITIES Purchase of property and equipment (841,318) (334,404) (1,349,959) (Decrease) increase in Deferred Improved Drug Entitites, net 2,450,241 - (7,000) Other, net (457,006) (315,840) (151,720) ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,151,917 (650,244) (1,508,679) ------------ ------------ ------------ FINANCING ACTIVITIES Proceeds from credit facilities 28,311,372 6,086,046 15,700,000 Repayment of credit facilities (34,130,635) (6,800,000) (14,450,000) Proceeds from term loan facility 6,820,189 - - Principal payments on long-term debt (10,795,482) (483,541) (471,086) Proceeds from sale of common stock - 2,006,198 - Dividends paid on preferred stock - - (115,982) Exercise (repurchase) of common stock options 1,533,068 (234) 9,582 Proceeds from sale of stock options 5,000,000 - - ------------ ------------ ------------ NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (3,261,488) 808,469 672,514 ------------ ------------ ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 962,356 568,731 (3,049,084) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,075,713 506,982 3,556,066 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,038,069 $ 1,075,713 $ 506,982 ============ ============ ============ See Accompanying Notes to Consolidated Financial Statements
27 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies. ------------------------------------------ (a) Principles of Consolidation: --------------------------- The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. (b) Nature of Operations: -------------------- KV is engaged principally in the development, manufacture and marketing of technology-distinguished pharmaceuticals and pharmaceutical compounds. Prescription pharmaceuticals are sold primarily to domestic wholesalers, drugstore chains, distributors and independent pharmacies nationwide, while contract manufacturing and the sale of pharmaceutical compounds are to major domestic drug and food manufacturers. (c) Revenue Recognition: ------------------- The Company recognizes revenue from product sales upon shipment to the customer. The Company also enters into long-term agreements under which it assigns marketing rights for products it develops for pharmaceutical marketers and recognizes royalties or other payments as specified in the agreements as they are earned. (d) Statements of Cash Flows: ------------------------ Cash equivalents consist of highly liquid instruments that have an original maturity of three months or less. During the year ended March 31, 1995, the Company converted accounts payable of approximately $902,000 into notes payable to vendors in a non-cash financing transaction (see Note 3. Long Term Debt.) (e) Receivables: ----------- Accounts receivable are stated less allowances of approximately $570,500 and $169,000 in 1996 and 1995, respectively. The Company's receivables are primarily derived from companies in the pharmaceutical industry. A single company's account receivable balance represented approximately 15% and 17% of consolidated accounts receivable on March 31, 1996 and 1995, respectively. (f) Inventories: ----------- Inventories are priced at cost, determined on the first-in, first-out (FIFO) method or market, whichever is lower. Inventories as of March 31 consist of the following:
1996 1995 ---- ---- Finished goods $4,087,636 $2,677,389 Work-in-process 1,772,711 3,480,095 Raw materials 2,814,815 2,319,674 ---------- ---------- 8,675,162 8,477,158 Reserves for obsolescence (225,000) (1,885,571) ---------- ---------- $8,450,162 $6,591,587 ========== ==========
28 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (g) Property and Equipment: ---------------------- Property and Equipment, at cost as of March 31 consists of:
1996 1995 ---- ---- Land and improvements $ 499,567 $ 499,567 Building and building improvements 3,439,159 3,429,702 Machinery and equipment 11,386,962 10,866,048 Office furniture and equipment 3,053,811 2,919,001 Leasehold improvements 2,281,162 2,257,834 Construction-in-progress 176,026 23,217 -------------- -------------- 20,836,687 19,995,369 Less accumulated depreciation and amortization (13,215,470) (11,827,495) -------------- -------------- Net property and equipment $ 7,621,217 $ 8,167,874 ============== ==============
Depreciation of property and equipment is computed based on estimated useful lives using the straight- line method and amounted to $1,390,790, $1,259,922, $1,141,128 in 1996, 1995 and 1994, respectively. The rates used to compute depreciation and amortization were as follows: Building 4% Building improvements 10% Machinery and equipment 10 - 33 1/3% Leasehold improvements Lease life plus renewal period - minimum 10% Office furniture and equipment 10%
(h) Other Assets: ------------ Deferred Improved Drug Entities(TM) represent incremental outside clinical expenditures related to the application of KV technologies to off-patent and patented drugs. From time to time, payments under customer licensing agreements are made and/or applied in reimbursement of these costs. Since 1993, the capitalized costs of Deferred Improved Drug Entities(TM) have been amortized over a period of five years, beginning at the earlier of the date the products are marketed or five years from the date the costs are incurred. 29 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Products which the Company determines not to be marketable are expensed at the time of such determination. Amortization and other charges associated with these expenditures amounted to $2,962,827 (principally related to a customer reimbursement. See Note 8) $570,900 and $354,854 in 1996, 1995 and 1994, respectively. Other assets primarily include goodwill, deferred financing charges, cash surrender value of life insurance, deposits, trademarks and patents. As of March 31, 1996 and 1995, the unamortized excess of purchase price over net assets acquired, which is net of accumulated amortization of $1,249,688 and $1,194,290, respectively, was $888,873 and $944,278, respectively, and is being amortized over a 40-year period at $55,404 per year. All other deferred charges are being amortized over periods varying from five to seventeen years. Amortization of such other deferrals amounted to $142,708, $75,749, and $25,694 in 1996, 1995 and 1994, respectively. (i) Accrued Liabilities: ------------------- Accrued liabilities as of March 31, consist of the following:
1996 1995 ---- ---- Salaries and wages $ 278,617 $ 594,331 Interest 153,159 128,397 Rebates 1,092,485 979,446 Other 862,500 818,988 ---------- ---------- $2,386,761 $2,521,162 ========== ==========
(j) Earnings Per Share: ------------------ Net income (loss) per common share is computed by dividing net income (loss) less/plus preferred dividends by the weighted average number of common shares and common share equivalents (if dilutive) outstanding during the period. Common share equivalents consist of those common shares that would be issued upon the exercise of outstanding stock options. The weighted average number of shares used in the computations were 11,835,421, 11,178,495 and 11,055,196 in 1996, 1995, 1994 respectively. Primary and fully-diluted income (loss) per share are the same for each of the years presented. (k) Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 30 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (l) Fair Value of Financial Instruments: ----------------------------------- The carrying amounts of all asset and liability financial instruments approximate their estimated fair values at March 31, 1996. Fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties. (m) New Accounting Standards: ------------------------ In March and October, 1995, the Financial Accounting Standards Board issued Statements No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and No. 123, "Accounting for Stock-Based Compensation." Both Statements are effective in 1997, and neither is currently expected to have a significant effect on the financial statements of the Company. (n) Income Tax: ---------- Deferred income taxes are recognized for the tax consequences in future years of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the temporary differences are expected to affect taxable income. These temporary differences relate primarily to depreciation, accounts receivable reserve and inventory obsolescence reserve, deferred compensation, net operating loss carryforward and the research and development credit. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company paid income taxes of $90,000, $0, and $0 during the years ended March 31, 1996, 1995 and 1994 respectively. (o) Reclassifications: ----------------- Certain amounts of the prior years' financial statements have been reclassified to conform to the current year presentation. 31 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Equity Transactions. ------------------- As of March 31, 1996, the Company has outstanding 241,000 shares of 7% Cumulative Convertible preferred stock (par value $.01 per share) at a stated value of $25 per share. The preferred stock is non-voting with dividends payable quarterly. The preferred stock is redeemable at its stated value. Each share of preferred stock is convertible into Class A Common Stock at a conversion price of $20 per share. The preferred stock has a liquidation preference of $25 per share plus all accrued but unpaid dividends prior to any liquidation distributions to holders of Class A or Class B Common Stock. Undeclared and unaccrued cumulative preferred dividends at March 31, 1996 and 1995 were $1,887,331 and $1,465,581, respectively. Holders of Class A Common Stock are entitled to receive dividends per share equal to 120% of the dividends per share paid on the Class B Common Stock and have one- twentieth vote per share. No dividends may be paid on Class A or Class B Common Stock unless all dividends on the convertible preferred stock have been declared and paid. Under the terms of the Company's current loan agreement (See Note 3), the Company is restricted from declaring and paying any dividends, except in stock, on its Class A and B Common Stock. Payment of dividends may also be restricted under Delaware Corporation law. Between November, 1994 and March, 1995, the Company entered into agreements under which it sold 375,000 shares of Class A Common Stock (par value $.01 per share) with proceeds aggregating approximately $2,006,000, net of issuance costs of approximately $134,000. In connection with an agreement entered into in January, 1996 (See Note 8), the Company received $5,000,000 for the purchase of Class A Common Stock options exercisable through September 29, 1998. Of the funds received for the common stock purchase options, $1,150,000 was allocated to a stock purchase option providing the right to purchase the Company's Class A Common Stock at a minimum price of $35 per share, exercisable for a 30 day period ending March 30, 1997, an additional $1,250,000 was allocated to an option to purchase shares of Class A Common Stock at a minimum price of $40 per share, exercisable for a 30 day period ending September 29, 1997, an additional $1,300,000 was allocated to an option to purchase Class A Common Stock at a minimum purchase price of $45 per share, exercisable for a 30 day period ending March 30, 1998, and an additional $1,300,000 was allocated to an option to purchase Class A Common Stock at a minimum price of $50 per share, exercisable for a 30 day period ending September 29, 1998. The actual exercise price and number of shares of Class A Common Stock to be purchased are dependent on the fair market value of the stock for a ten day period prior to exercise. 32 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. Long Term Debt. -------------- Long-term debt at March 31, 1996 and 1995 consists of the following:
1996 1995 ---- ---- Revolving credit line $ 0 $ 2,175,000 Term loan agreement 0 6,750,000 Industrial revenue bond 2,805,000 3,130,000 Capital lease and other notes payable 448,544 993,100 ---------- ----------- Total 3,253,544 13,048,100 Less current portion 712,328 1,814,682 ---------- ----------- Long-term debt $2,541,216 $11,233,418 ========== ===========
In May, 1995, the Company replaced its prior revolving loan agreement, which consisted of a line of credit of approximately $8,925,000 and letter of credit facility of approximately $4,800,000, with a new credit facility aggregating $17,500,000. The new loan agreement is for an initial three-year term, until May, 1998, with automatic one-year renewals thereafter unless either party gives notice of intent not to renew. The agreement provides for (1) a revolving credit line up to a maximum of $17,500,000, subject to collateral coverage requirements on accounts receivable and inventory; (2) a three-year term loan in the initial amount of $6,750,000, amortizing over six years in equal monthly principal installments of $93,750 and secured by real estate and equipment; and, (3) a letter of credit facility of up to $6,000,000. Under the agreement, the aggregate amount of these facilities cannot exceed $17,500,000 and interest on outstanding indebtedness is charged at 1 1/2 percent in excess of the reference prime rate (8 1/4% at March 31, 1996). The agreement contains covenants including, among other things, maintaining certain operating ratios, working capital, capital expenditure and tangible net worth, as defined, (at least $8 million until March 31, 1996 and $9 million thereafter) levels and restrictions on payment of dividends (see Note 2). The Company has pledged as collateral a security interest in all accounts receivable, inventories, equipment, real estate and intangibles. In March, 1996, the Company prepaid the real estate and equipment term loan portion of the facility and amended the agreement to allow the Company to re-borrow amounts against the unamortized initial balance of the loan. As of March 31, 1996, $5,812,500 was available under this arrangement. The industrial revenue bonds, which bear interest at 7.35% per annum mature serially through 2004 and are collateralized by certain property and equipment through a letter of credit. Capital leases and other notes payable include notes payable to vendors of $448,544 at March 31, 1996, which bear interest (10% to 12%) and are payable monthly over the next two years. The maturities of all long-term debt as of March 31, 1996 for the year ending March 31, 1997 and the four succeeding years are $712,328, $362,486, $325,000, 33 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $325,000 and $325,000, respectively. The Company paid interest of $1,352,823, $1,420,581 and $818,764 during the years ended March 31, 1996, 1995 and 1994, respectively. 4. Income Taxes. ------------ Effective April 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). SFAS 109 requires the tax benefit of net operating losses and income tax credits be reported as an asset to the extent management assesses the utilization of such net operating losses and credits to be more likely than not. Since the realization of tax benefits related to the Company's operating loss carryforward and tax credits is uncertain, a valuation allowance has been recorded to offset the deferred tax asset. The cumulative effect of this change in accounting had no effect on the statement of operations for the year ended March 31, 1994. The provision for income taxes is $90,000 for 1996 and is attributable to alternative minimum tax. No provision was required for 1995 and 1994. Provisions for federal income taxes differ from the amount computed by applying the combined statuary federal income tax rate and effective state tax rate of 38% for 1996, 1995, and 1994 to income (loss) before tax. The reasons for these differences are as follows:
1996 1995 1994 ---- ---- ---- Computed income tax expense (benefit) at statutory rate $1,536,211 $(2,062,000) $(3,108,900) Net operating loss carryforward tax effect (1,572,011) 1,791,700 3,065,900 Alternative minimum tax 90,000 -- -- Goodwill amortization, fines and other items not deductible for tax purposes 35,800 270,300 43,000 ---------- ----------- ----------- Provision for income taxes $ 90,000 $ -- $ -- ========== =========== ===========
Temporary differences between book and tax income arise because the tax effects of transactions are recorded in the year in which they enter into the determination of taxable income. As a result, the book provisions for taxes differ from the actual taxes reported on the income tax returns. 34 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of March 31, 1996, and 1995, the tax effect of temporary differences between the tax basis of assets and liabilities and their financial reporting amount are as follows:
1996 1996 1995 1995 Current Non-Current Current Non-Current ------- ----------- ------- ----------- Fixed asset basis differences $ - $(1,052,400) $ - $ (953,500) Reserve for inventory and receivables 302,300 - 716,500 - Capitalized inventory costs 163,600 - 61,900 - Vacation pay reserve - - 142,400 - Deferred compensation - 232,300 - 178,300 Reserve for medical self insurance 34,300 - 38,700 - Net operating loss carryforward - 3,369,300 - 4,206,100 Research and development credit - 1,594,000 - 1,625,600 Minimum tax credit - 129,000 - 61,100 Deferred clinical costs - - - 440,300 Other - 188,200 39,100 - --------- ----------- --------- ----------- 500,200 4,459,900 998,400 5,557,900 Valuation allowance (500,200) (4,459,900) (998,400) (5,557,900) --------- ----------- --------- ----------- Net deferred taxes $ - $ - $ - $ - ========= =========== ========= ===========
The components of deferred taxes are as follows as of March 31, 1996 and 1995:
1996 1995 ---- ---- Deferred tax liability $(1,053,000) $ (957,300) Deferred tax asset 6,013,100 7,513,600 Valuation allowance (4,960,100) (6,556,300) ----------- ----------- $ - $ - =========== ===========
The valuation allowance (decreased) increased by approximately $(1,596,200) and $1,926,100 during 1996 and 1995 respectively. 35 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At March 31, 1996, the Company has the following income tax carryforwards available:
Expiration Dates ---------------- Regular tax operating loss carryforwards $8,866,600 2006-2010 Regular tax credit carryforwards (primarily research & development credits) 1,594,000 1996-2010 AMT credit carryforwards 129,100 -
5. Commitments and Contingencies. ----------------------------- Lease Commitments: - ----------------- The Company has noncancelable commitments for rental of office space, plant and warehouse facilities, transportation equipment and other personal property under operating leases. Future minimum lease commitments under all noncancelable operating leases are as follows: 1997 $1,071,972 1998 1,065,587 1999 833,959 2000 430,008 2001 209,879 Total rental expense for the years ended March 31, 1996, 1995, and 1994 was $1,229,881, $1,260,026 and $1,140,856, respectively. Employment Agreements: - --------------------- The Company has employment agreements with certain officers and key employees which extend for one to five years. These agreements provide for base levels of compensation and, in certain instances, also provide for incentive bonuses and separation benefits. Also, the agreement with one officer contains provisions for partial salary continuation under certain conditions contingent upon non compete restrictions and providing consulting services to the Company as specified in the agreement. The Company accrued $142,139 and $124,991 for this liability in 1996 and 1995, respectively. 36 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Litigation: - ---------- In April, 1995, a plea agreement was entered into with the U.S. Department of Justice. Under the agreement the Company agreed to plead guilty to (1) two misdemeanor violations of the Federal Food, Drug and Cosmetic Act involving the failure to file certain required reports with the FDA in 1991 with respect to two lots of an erythromycin oral suspension product previously manufactured by the Company and (2) two misdemeanor counts involving the shipment of two lots of the same product, inappropriately labeled as to their shelf life. Under the plea agreement, the Company agreed to pay a fine of $500,000 and costs of $100,000 in installments of $75,000 every six months over 3 1/2 years without interest, beginning in July 1995 and was placed on probation during the payment period. The full amount of liability associated with the fine was recorded in the Company's statement of operations for the fiscal year ended March 31, 1995. From time to time, the Company becomes involved in various legal matters which it considers to be in the ordinary course of business. While the Company is not presently able to determine the potential liability, if any, related to such matters, the Company believes none of the matters, individually or in the aggregate, will have a material adverse effect on its financial position. Regulatory Activities: - --------------------- The Company has been operating under a consent decree agreement with the U.S. Food and Drug Administration ("FDA") since June 14, 1993, which required the Company to take various actions to assure that the Company's products are manufactured in conformity with cGMP and the Company's facilities are operated in compliance with cGMP. In December, 1995, the Company was informed by the FDA that it had been found to be in substantial compliance with cGMP requirements, resulting in the expiration of certain requirements of the agreement, including the requirement that the Company submit cGMP data with respect to all solid oral dosage drugs manufactured by the Company before releasing such drugs for sale to the public. 6. Related Party Transactions. -------------------------- A director of the Company is associated with a law firm that rendered various legal services for the Company. The Company paid the firm, in the aggregate, approximately $243,512, $122,000 and $184,000 during fiscal 1996, 1995 and 1994, respectively. In addition, the Company currently leases certain real property from an affiliated partnership of another director of the Company. Lease payments made for this property during the years ended March 31, 1996, 1995 and 1994 totaled approximately $222,910, $199,000, and $214,000, respectively. 37 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Employee Benefits. ----------------- The Company has stock option plans under which options granted qualify as "incentive stock options" under the Internal Revenue Code. Under the plans, options are granted at fair market value and are exercisable in varying amounts over a period of up to ten years from date of grant. Incentive stock options for 393,840 shares were authorized but not granted as of March 31, 1996. The following summary shows the transactions for the fiscal years 1996, 1995, and 1994 under option arrangements:
Options Outstanding Options Exercisable ------------------------ ------------------------- Average Average No. of Price Per No. of Price Per Shares Share Shares Share -------- --------- -------- --------- Balance, April 1, 1993 698,496 4.67 382,592 4.17 Options granted 130,850 9.03 Options becoming exercisable 72,025 5.47 Options exercised (2,755) 3.71 (2,755) 3.71 Options canceled (59,099) 7.23 (13,864) 6.09 -------- -------- Balance, March 31, 1994 767,492 5.22 437,998 4.33 Options granted 52,500 6.94 Options becoming exercisable 64,573 5.13 Options exercised (790) 2.65 (790) 2.65 Options canceled (126,970) 7.98 (26,267) 5.71 -------- -------- Balance, March 31, 1995 692,232 4.93 475,514 4.37 Options granted 522,375 5.51 Options becoming exercisable 86,599 6.75 Options exercised (386,364) 3.97 (386,364) 3.97 Options canceled (22,932) 6.45 (10,773) 4.66 -------- -------- Balance, March 31, 1996 805,311 5.72 164,976 6.54 ======== ========
The Company has a qualified trusteed profit sharing plan (the "Plan") covering substantially all non- union employees, under which the Company's annual contribution to the Plan, as determined by the Board of Directors, is discretionary. No contribution was made in any of the years presented. The Plan incorporated features described under Section 401(k) of the Internal Revenue Code. The Company is required to make contributions to the 401(k) investment funds annually in an amount equal to twenty-five percent (25%) of the first 4% of the salary amount contributed by each participant. Contributions to the 401(k) investment funds of approximately $71,000, $103,000 and $77,000 were made in 1996, 1995 and 1994, respectively. The Company contributes to health and medical insurance programs for its non-union and union employees. The Company self insures the first $50,000 of each non-union employee's covered medical claims annually. Expenses related to these programs are charged to operations and totaled approximately $1,058,000, $1,375,000 and $1,506,000 in fiscal 1996, 1995 and 1994, respectively. The Company has recorded approximately $90,000 and $37,000 of accrued health insurance expense reserves as of March 31, 1996 and 1995, respectively, relating to incurred but not reported claims. 38 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. Agreement --------- In January, 1996 the Company concluded an agreement with a major pharmaceutical marketer whereby the Company received $5,000,000 and certain other considerations, plus $5,000,000 for the sale of certain Class A common stock options exercisable in various periods through September, 1998 (See Note 2). Under the transaction, which was entered into between the parties partially in consideration of and replacing certain other products, the two companies entered into an agreement for future royalties and product opportunities and the Company gave the marketer the right to explore the Company's drug delivery technologies with the possibility of entering into agreements for individual products. The accounting treatment for the funds received (other than from the sale of options) was to reimburse the Company for, and eliminate from its balance sheet, approximately $2,500,000 of Deferred Improved Drug Entities(TM), receivables and inventory of approximately $400,000, and patents and trademarks relating to the Company's technologies of approximately $200,000, with approximately $1,700,000 allocated to licensing revenues and $200,000 as a reimbursement of expenses. 9. Industry Segments. ----------------- The Company operates in one industry segment, "Pharmaceutical Development, Manufacturing and Marketing." During fiscal 1996, 1995 and 1994, no customers accounted for 10% or more of consolidated sales. 39 40 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ----------------- To the Board of Directors and Shareholders of KV Pharmaceutical Company: The audits referred to in our report dated July 12, 1996 relating to the consolidated financial statements of KV Pharmaceutical Company which is contained in Item 8 of this Form 10-K included the audit of the financial statement schedule listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based upon our audits. In our opinion such financial statement schedule presents fairly, in all material respects, the information set forth therein. BDO SEIDMAN, LLP St. Louis, Missouri July 12, 1996 40 41 2. Financial Statement Schedules: ----------------------------- Schedule II Valuation and Qualifying Accounts
Balance at Additions charged Amounts beginning to costs and charged Balance at of year expenses reserves end of year ---------- ----------------- -------- ----------- Year Ended March 31, 1994: Allowance for doubtful accounts $ 77,488 $ 19,876 $ 13,731 $ 83,633 Inventory obsolescence 554,528 159,015 3,454 710,089 ---------- ---------- ---------- ---------- 632,016 178,891 17,185 793,722 ========== ========== ========== ========== Year Ended March 31, 1995: Allowance for doubtful accounts 83,633 135,000 49,446 169,187 Inventory obsolescence 710,089 2,735,154 1,559,672 1,885,571 ---------- ---------- ---------- ---------- 793,722 2,870,154 1,609,118 2,054,758 ========== ========== ========== ========== Year Ended March 31, 1996: Allowance for doubtful accounts 169,187 736,757 335,446 570,498 Inventory obsolescence 1,885,571 1,399,966 3,060,537 225,000 ---------- ---------- ---------- ---------- $2,054,758 $2,136,723 $3,395,983 $ 795,498 ========== ========== ========== ==========
Financial Statements of KV Pharmaceutical Company (separately) are omitted because KV is primarily an operating company and its subsidiaries included in the financial statements are wholly-owned and are not materially indebted to any person other than through the ordinary course of business. 3. Exhibits: -------- See Exhibit Index on pages 45 through 50 of this Report. Management contracts and compensatory plans are designated on the Exhibit Index. (b) Reports on Form 8-K: ------------------- No reports on Form 8-K were filed during the fourth quarter of fiscal 1996. 41 42 Item 9. Changes in and Disagreements with Accountants on ------------------------------------------------ Accounting and Financial Disclosure. ----------------------------------- The information contained in Registrant's Report on [Form 8-K-A (Amendment No. 1) filed June 18, 1996] under Item 4, entitled "Changes in Registrant's Certified Accountant," is incorporated herein by this reference. PART III Item 10. Directors and Executive Officers of the Registrant. -------------------------------------------------- The information contained under the caption "INFORMATION CONCERNING NOMINEE AND DIRECTORS CONTINUING IN OFFICE" in the Company's definitive proxy statement to be filed pursuant to Regulation 14(a) for the Company's 1996 annual meeting of shareholders, which involves the election of directors, is incorporated herein by this reference. Also see Item 4(a) of Part I hereof. Item 11. Executive Compensation. ---------------------- The information contained under the captions "EXECUTIVE COMPENSATION" and "INFORMATION AS TO STOCK OPTIONS" in the Company's definitive proxy statement to be filed pursuant to Regulation 14(a) for the Company's 1996 annual meeting of shareholders, which involves the election of directors, is incorporated herein by this reference. Item 12. Security Ownership of Certain Beneficial Owners and --------------------------------------------------- Management. ---------- The information contained under the captions "SECURITY OWNERSHIP OF PRINCIPAL HOLDERS AND MANAGEMENT" in the Company's definitive proxy statement to be filed pursuant to Regulation 14(a) for the Company's annual meeting of shareholders, which involves the election of directors is incorporated herein by this reference. Item 13. Certain Relationships and Related Transactions. ---------------------------------------------- The information contained under the caption "TRANSACTIONS WITH ISSUER" in the Company's definitive proxy statement to be filed pursuant to Regulation 14(a) for the Company's 1996 annual meeting of shareholders, which involves the election of directors, is incorporated herein by this reference. 42 43 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on ------------------------------------------------------ Form 8-K. -------- (a) 1. Financial Statements: Page -------------------- The following consolidated financial statements of the Company are included in Part II, Item 8: Report of Independent Certified Public Accountants 23 Consolidated Balance Sheets as of March 31, 1996 and 1995 24 Consolidated Statements of Operations for the Years Ended March 31, 1996, 1995 and 1994 25 Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 1996, 1995 and 1994 26 Consolidated Statements of Cash Flows for the Years Ended March 31, 1996, 1995 and 1994 27 Notes to Financial Statements 28-41 43 44 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KV PHARMACEUTICAL COMPANY Date: July 15, 1996 By /s/ Marc S. Hermelin ------------------------------- Vice Chairman of the Board (Principal Executive Officer) Date: July 15, 1996 By /s/ Gerald R. Mitchell ------------------------------- Vice President, Finance (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the dates indicated by the following persons on behalf of the Company and in their capacities as members of the Board of Directors of the Company: Date: July 15, 1996 By /s/ Marc S. Hermelin ------------------------------- Marc S. Hermelin Date: July 15, 1996 By /s/ Victor M. Hermelin ------------------------------- Victor M. Hermelin ------------------------------- Garnet E. Peck, Ph.D. Date: July 15, 1996 By /s/ Alan G. Johnson ------------------------------- Alan G. Johnson 44 45 EXHIBIT INDEX -------------
Exhibit Number Description Page - -------------- ----------- ---- 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 of 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, 1987, is incorporated herein by this reference. 3(d) 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, filed herewith. 3(f) Certificate of Amendment to Certificate of Incorporation of the Company, filed herewith. 3(g) By-Laws of the Company, as amended through November 18, 1982, which was filed as Exhibit 3(e) to the Company's Annual Report on Form 10-K for the year ended March 31, 1993, is incorporated hereby by this reference. 3(h) Amendment to the By-Laws of the Company, filed herewith. 4(a) Certificate of Designation of Rights and Preferences of 7% Cumulative Convertible preferred stock of the Company, effective June 9, 1987, and related Certificate of Correction, dated June 17, 1987, which was filed as Exhibit 4(f) to the Company's Annual Report on Form 10-K for the year ended March 31, 1987, is incorporated herein by this reference. 4(b) Loan Agreement dated as of November 1, 1989, with the Industrial Development Authority of the County of St. Louis, Missouri, regarding private activity refunding and revenue bonds issued by such Authority, including form of Promissory Note executed in connection therewith, which was filed as Exhibit 4(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1989, is incorporated herein by this reference. 4(c) Credit Agreement dated as of September 30, 1993, with Bank One, Indianapolis, National Association ("1993 Credit Agreement"), with Security Agreement (Equipment, Inventory, Accounts Receivable and General Intangibles), Security Agreement (Intellectual Property) and First Amendment to First Deed of Trust and Security Agreement executed in connection therewith, which was filed as Exhibit 4(c) to the Company's Annual Report on Form 10-K for the year ended March 31, 1994, is incorporated herein by this reference. 45 46 EXHIBIT INDEX ------------- Exhibit Number Description Page - -------------- ----------- ---- 4(d) First Amendment to 1993 Credit Agreement dated June 25, 1994, which was filed as Exhibit 4(d) to the Company's Annual Report on Form 10-K for the year ended March 31, 1994, is incorporated herein by this reference. 4(e) Second Amendment to 1993 Credit Agreement dated as of November 1, 1994, which was filed as Exhibit 4(e) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, is incorporated herein by this reference. 4(f) Security Agreement dated November 1, 1994, by Particle Dynamics, Inc., for the benefit of Bank One, Indianapolis, National Association, which was filed as Exhibit 4(f) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, is incorporated herein by this reference. 4(g) Security Agreement dated November 1, 1994, by ETHEX Corporation for the benefit of Bank One, Indianapolis, National Association, which was filed as Exhibit 4(g) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, is incorporated herein by this reference. 4(h) Second Amendment, dated as of November 1, 1994, to First Deed of Trust and Security Agreement in favor of Bank One, Indianapolis, National Association, which was filed as Exhibit 10-Q for the quarter ended September 30, 1994, is incorporated herein by this reference. 4(i) Third Amendment to 1993 Credit Agreement, dated as of November 14, 1994, which was filed as Exhibit 4(i) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, is incorporated herein by this reference. 4(j) Fourth Amendment to 1993 Credit Agreement, dated as of February 10, 1995, which was filed as Exhibit 4(j) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994, is incorporated herein by this reference. 4(k) Pledge Agreement dated as of February 10, 1995, in favor of Bank One, Indianapolis, National Association, which was filed as Exhibit 4(k) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994, is incorporated herein by this reference. 4(l) Fifth Amendment to 1993 Credit Agreement, dated as of April 21, 1995, which was filed as Exhibit 4(l) to the Company Annual Report on Form 10- K for the year ended March 31, 1995, and incorporated herein by this reference. 4(m) Sixth Amendment to 1993 Credit Agreement, dated as of May 4, 1995, which was filed as Exhibit 4(m) to the Company Annual Report on Form 10-K for the year ended March 31, 1995, and incorporated herein by this reference. 46 47 EXHIBIT INDEX ------------- Exhibit Number Description Page - -------------- ----------- ---- 4(n) Loan and Security Agreement, dated as of April 27, 1995, between the Company and its subsidiaries and Foothill Capital Corporation, which was filed as Exhibit 4(n) to the Company Annual Report on Form 10-K for the year ended March 31, 1995, and incorporated herein by this reference. 4(o) Revolving Loan Note, dated as of April 27, 1995, by the Company and its subsidiaries and Foothill Capital Corporation, which was filed as Exhibit 4(o) to the Company Annual Report on Form 10-K for the year ended March 31, 1995, and incorporated herein by this reference. 4(p) Term Note, dated as of April 27, 1995, by the Company and its subsidiaries in favor of Foothill Capital Corporation, which was filed as Exhibit 4(p) to the Company Annual Report on Form 10-K for the year ended March 31, 1995, and incorporated herein by this reference. 4(q) Form of Capital Equipment Note to be executed by the Company and its subsidiaries in favor of Foothill Capital Corporation, which was filed as Exhibit 4(q) to the Company Annual Report on Form 10-K for the year ended March 31, 1995, and incorporated herein by this reference. 4(r) Deed of Trust and Security Agreement, dated as of April 27, 1995, in favor of Foothill Capital Corporation, which was filed as Exhibit 4(r) to the Company Annual Report on Form 10-K for the year ended March 31, 1995, and incorporated herein by this reference. 4(s) First Amendment to Loan and Security Agreement, dated as of April 27, 1995, between the Company and its subsidiaries and Foothill Capital Corporation, dated as of March 29, 1996, filed herewith. 10(a) KV Pharmaceutical Company 1976 Employee Stock Option Plan, which was filed as Exhibit 1 to the Company's Form S-8 Registration Statement No. 2-56793, filed June 29, 1976, is incorporated herein by this reference. 10(b) Current Form of Stock Option Agreement for KV Pharmaceutical Company 1976 Employee Stock Option Plan, which was filed as Exhibit 15(b) to the Company's Post-Effective Amendment No. 5 to Form S-8 Registration Statement No. 2-56793, filed February 16, 1982, is incorporated herein by this reference. 10(c) First Amendment to KV Pharmaceutical Company 1976 Employee Stock Option Plan, adopted November 17, 1981, which was filed as Exhibit 4(e) to the Company's Post-Effective Amendment No. 5 to Form S-8 Registration Statement No. 2-56793, filed February 16, 1982, is incorporated herein by this reference. 10(d) Stock Option Agreement between the Company and Marc S. Hermelin, Vice Chairman and Chief Executive Officer, dated February 18, 1986, is incorporated herein by this reference. 10(e) First Amendment to and Restatement of the KV Pharmaceutical 1981 Employee Incentive Stock Option Plan, dated March 9, 1987 (the "Restated 1981 Option Plan"), which was filed as Exhibit 10(t) to the Company's Annual Report on Form 10-K for the year ended March 31, 1988, is incorporated herein by this reference. - ------------------- Management contract or compensation plan. 47 48 EXHIBIT INDEX ------------- Exhibit Number Description Page - -------------- ----------- ---- 10(f) Second Amendment to the Restated 1981 Option Plan, dated June 12, 1987, which was filed as Exhibit 10(u) to the Company's Annual Report on Form 10-K for the year ended March 31, 1988, is incorporated herein by this reference. 10(g) Revised Form of Stock Option Agreement, effective June 12, 1987, for the Restated 1981 Option Plan, which was filed as Exhibit 10(v) to the Company's Annual Report on Form 10-K for the year ended March 31, 1988, is incorporated herein by this reference. 10(h) Consulting Agreement between the Company and Victor M. Hermelin, Chairman of the Board, dated October 30, 1978, as amended October 30, 1982, and Employment Agreement dated February 20, 1974, referred to therein (which was filed as Exhibit 10(m) to the Company's Annual Report on Form 10-K for the year ended march 31, 1983) and subsequent Amendments dated as of August 12, 1986, which was filed as Exhibit 10(r) to the Company's Annual Report on Form 10-K for the year ended march 31, 1987, and dated as of September 15, 1987 (which was filed as Exhibit 10(s) to the Company's Annual Report on Form 10-K for the year ended March 31, 1988), and dated October 25, 1988 (which was filed as Exhibit 10(n) to the Company's Annual Report on Form 10-K for year ended March 31, 1989), and dated October 30, 1989 (which was filed as Exhibit 10(n) to the Company's Annual Report on Form 10-K for the year ended March 31, 1990), and dated October 30, 1990 (which was filed as Exhibit 10(n) to the Company's Annual Report on Form 10-K for the year ended March 31, 1991), and dated as of October 30, 1991 (which was filed as Exhibit 10(i) to the Company's Annual Report on Form 10-K for the year ended March 31, 1992), are incorporated herein by this reference. 10(i) Restated and Amended Employment Agreement between the Company and Gerald R. Mitchell, Vice President, Finance, dated as of March 31, 1994, is incorporated herein by this reference. 10(j) 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(k) 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. - ------------------------ Management contract or compensation plan. 48 49 EXHIBIT INDEX ------------- Exhibit Number Description Page - -------------- ----------- ---- 10(l) 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(m) Amendment to Lease Agreement, dated as of September 30, 1985, between the Industrial Development Authority of the County of St. Louis, Missouri, as Lessor and KV Pharmaceutical Company as Lessee, regarding lease of facility located at 2303 Schuetz Road, St. Louis County, Missouri, which was filed as Exhibit 10(q) to the Company's Report on Form 10-Q for the quarter ended December 31, 1985, is incorporated herein by this reference. 10(n) 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(o) 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(p) KV Pharmaceutical Company 1991 Incentive Stock Option Plan, adopted as of October 7, 1991, which was filed as Exhibit 4 to the Company's Form S-8 Registration Statement No. 33-44927, filed January 6, 1992, is incorporated herein by this reference. 10(q) Consent Decree and Civil Actions Nos. 4:93CV00918 and 4:93CV00919 filed June 14, 1993, in connection with Complaint of Forfeiture on behalf of FDA, which was filed as Exhibit 10(s) to the Company's Annual Report on Form 10-K for the year ended March 31, 1993, is incorporated herein by this reference. 10(r) Modification of Consent Decree of Condemnation and Permanent Injunction filed December 13, 1993, which was filed as Exhibit 10(r) to the Company's Annual Report on Form 10-K for the year ended March 31, 1994, is incorporated herein by this reference. 10(s) Second Modification of Consent Decree of Condemnation and Permanent Injunction filed April 6, 1994, which was filed as Exhibit 10(s) to the Company's Annual Report on Form 10-K for the year ended March 31, 1994, is incorporated herein by this reference. 10(t) Employment Agreement between the Company and Ted G. Wood, President and Chief Executive Officer, dated February 14, 1994, which was filed as Exhibit 10(t) to the Company's Annual Report on Form 10-K for the year ended March 31, 1994, is incorporated herein by this reference. - ------------------------ Management contract or compensation plan. 49 50 EXHIBIT INDEX ------------- Exhibit Number Description Page - -------------- ----------- ---- 10(u) Employment Agreement between the Company and Marc S. Hermelin, Vice-Chairman, dated November 15, 1993, which was filed as Exhibit 10(u) to the Company's Annual Report on Form 10-K for the year ended March 31, 1994, is incorporated herein by this reference. 10(v) Amendment to Consulting Agreement between the Company and Victor M. Hermelin, Chairman of the Board, dated October 30, 1978, which was filed as Exhibit 10(v) to the Company's Annual Report on Form 10-K for the year ended March 31, 1994, is incorporated herein by this reference. 10(w) Stock Option Agreement dated June 1, 1995, granting stock option to Marc S. Hermelin, which was filed as Exhibit 10(w) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, is incorporated herein by this reference. 10(x) Second Amendment dated as of June 1, 1995, to Employment Agreement between the Company and Marc S. Hermelin, which was filed as Exhibit 10(x) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, is incorporated herein by this reference. 10(y) Amendment to and Restatement of the KV Pharmaceutical Company's 1991 Incentive Stock Option Plan dated as of November 1, 1995, filed herewith. 10(z) Stock Option Agreements dated as of January 22, 1996, granting stock options to MAC & Co., filed herewith. 10(aa) Third Amendment dated as of November 22, 1995, to Employment Agreement between the Company and Marc. S. Hermelin, filed herewith. 10(bb) Stock Option Agreement dated as of November 22, 1995, granting a stock option to Victor M. Hermelin, filed herewith. 11(a) Computation of per share earnings, filed herewith. 16(a) Letter regarding change in certifying accountants, which was filed as Exhibit 16 to the Company's Report on Form 8-K/A, No. 2, filed June 27, 1996, is incorporated herein by this reference. 22(a) List of Subsidiaries filed herewith. 23(a) Consent of BDO Seidman, L.L.P., filed herewith. 27(a) Financial Data Schedule, filed herewith. - ------------------------- Management contract or compensation plan. 50
EX-3.(E) 2 AMENDMENT OF CERTIFICATE OF INCORPORATION 1 Exhibit 3(e) CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION * * * * * * * * * * * K-V PHARMACEUTICAL COMPANY, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That the Board of Directors of said corporation, at a meeting duly held, adopted a resolution proposing and declaring advisable the following amendment to the Certificate of Incorporation of said corporation. RESOLVED, that Paragraph 4 of the Certificate of Incorporation of the Company be amended in its entirety to read as follows: 4. The total number of shares which the corporation shall have the authority to issue is Twelve Million (12,000,000) shares, of the par value of Seventeen Cents ($.17) each, amounting in the aggregate to Two Million Forty Thousand Dollars ($2,040,000). SECOND: That in lieu of a meeting and vote of stockholders, the stockholders have given written consent to said amendment in accordance with the provisions of section 228 of the General Corporation Law of the State of Delaware and written notice of the adoption of the amendment has been given as provided in section 228 of the General Corporation Law of the State of Delaware to every stockholder entitled to such notice. 2 THIRD: that the aforesaid amendment was duly adopted in accordance with the applicable provisions of section 242 and 228 of the General Corporation Law of the State of Delaware. FOURTH: That this Certificate of Amendment of the Certificate of Incorporation shall be effective on July 21, 1986. IN WITNESS WHEREOF, said K-V PHARMACEUTICAL COMPANY has caused this certificate to be signed by Marc S. Hermelin, its Vice Chairman of the Board of Directors and attested by Alan G. Johnson, its Secretary, this 9th day of July, 1986. K-V PHARMACEUTICAL COMPANY /s/ Marc S. Hermelin ------------------------------------ Marc S. Hermelin Vice Chairman of the Board of Directors and Chief Executive Officer /s/ Alan G. Johnson - ------------------------ Alan G. Johnson, Secretary EX-3.(F) 3 AMENDMENT OF CERTIFICATE OF INCORPORATION 1 Exhibit 3(f) CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION ---------------------------- K-V PHARMACEUTICAL COMPANY, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of K-V Pharmaceutical Company resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the first two unnumbered paragraphs of Article 4 of the Company's Certificate of Incorporation be amended to read as follows in their entirety: "4. The aggregate number, class and par value of shares which the corporation shall have authority to issue shall be One Hundred and Twenty-Five Million (125,000,000), which shall be divided among the following classes:
Par Value Number Class of Stock Per Share of Shares - -------------- --------- --------- Preferred Stock $ .01 5,000,000 Class A Common Stock $ .01 60,000,000 Class B Common Stock $ .01 60,000,000 ----------- Total 125,000,000
The number of authorized shares of Preferred Stock or any class of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative majority vote of the stock of the corporation 2 entitled to vote, without the separate vote of holders of any class of Common Stock or any class or series of Preferred Stock, unless a vote of any such holders of a class or series of Preferred Stock is required pursuant to the certificate or certificates establishing such class or series." FURTHER RESOLVED, that Section 4.5 of Article 4 of the Company's Certificate of Incorporation be amended to read as follows in its entirety: "4.5. Dividends and Distributions. --------------------------- Subject to applicable provisions of law, the preference of the Preferred Stock and of any other stock ranking prior to the Common Stock as to dividends, and the provisions of this Section 4.5, the holders of the Common Stock of all classes shall be entitled to receive dividends at such time and in such amounts as may be determined by the board of directors. Holders of one class of Common Stock shall be entitled to receive dividends, other than dividends payable in the capital stock of the Corporation, only if dividends in the same type of property are simultaneously declared with respect to the other class of Common Stock. The amount of any dividend, other than a dividend payable in the capital stock of the corporation, to be paid per share of Class A Common Stock shall equal 120% of the non-stock dividend per share declared and paid on each share of Class B Common Stock. No Common Stock dividend may be paid or stock splits issued on the Common Stock other than stock dividends or stock splits of Class A Common Stock to the holders of Class A Common Stock which are equal to simultaneous stock dividends or stock splits of Class B Common Stock to holders of Class B Common Stock. Dividends on the Class A Common Stock shall be distributed not later than the date upon which the dividend is distributed on the Class B Common Stock. Notwithstanding the foregoing, stock dividends of either class of Common Stock may be payable to the holders of both classes of Common Stock so long as such distribution is made equally on a per share basis, regardless of class, and simultaneously to both classes of Common Stock." SECOND: That thereafter, pursuant to resolution of its Board of Directors, a special meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. 3 THIRD: That said amendment was duly adopted in accordance with provisions of Section 242 of the General Corporation Law of the State of Delaware. FOURTH: That the capital of said corporation shall not be reduced under or by reason of said amendment. IN WITNESS WHEREOF, said K-V Pharmaceutical Company caused its corporate seal to be hereunto affixed and this certificate to be signed by Marc S. Hermelin, its Vice Chairman of the Board of Directors and Chief Executive Officer, and Alan G. Johnson, its Secretary, this 23rd day of December, 1991. K-V PHARMACEUTICAL COMPANY By:/s/ Marc S. Hermelin ------------------------------- Marc S. Hermelin, Vice Chairman of the Board of Directors and Chief Executive Officer (Corporate Seal) ATTEST: /s/ Alan G. Johnson - -------------------------- Alan G. Johnson, Secretary
EX-3.(H) 4 AMENDMENT TO BY-LAWS 1 Exhibit 3(h) AMENDMENT TO BYLAWS AUTHORIZED BY THE BOARD OF DIRECTORS DECEMBER 30, 1993 RESOLVED, that Article V of the By-Laws of the Corporation be, and hereby is, amended, which amendment shall become automatically effective upon the hiring and commencement of the employment of a new President and Chief Executive Officer, as contemplated hereby, as follows: Section 6A of Article V shall be changed to Section 7, and the following language shall be deleted from said Section: "The vice-chairman of the board of directors shall be the chief executive officer of the corporation. He shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the board of directors are carried into effect, subject, however, to the right of the board of directors by resolution to delegate any specific powers to any other officer, director or agent of the corporation." and said delete language shall be replaced with the following: THE VICE-CHAIRMAN OF THE BOARD Section 7. The vice-chairman of the board of directors shall have such duties as may be conferred upon him by the board of directors. The vice chairman may, on behalf of the corporation, execute or give final approval for all contracts, deeds, notes, bonds, mortgages, certificates, instruments, commitments, budgets, plans and expenditures. He may vote all securities which the corporation is entitled to vote. In the absence or inability to act of the chairman of the board or the president, he shall have and exercise all of the powers and duties of the chairman of the board, and the president, respectively. The existing Section 7 and Section 8 shall be deleted in their entirety and replaced with the following: THE PRESIDENT Section 8. the president shall be the chief executive officer of the corporation. He shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the board of directors are carried into effect, subject, however, to the right of the board of directors to delegate any specific powers to any other officer, director or agent of the corporation. In the absence or inability to act of the vice-chairman of the board, he shall have and exercise all of the powers and duties of the chairman of the board and the vice-chairman of the board. EX-4.(S) 5 FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT 1 EXHIBIT 4(s) FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT This First Amendment to Loan and Security Agreement (this "Amendment") is entered into as of March 29, 1996 by and among Foothill Capital Corporation, a California corporation ("Foothill") and K-V Pharmaceutical Company, a Delaware corporation ("K-V"), Particle Dynamics, Inc., a New York corporation ("PDI") and wholly owned subsidiary of K-V, and Ethex Corporation, a Missouri corporation ("Ethex") and wholly owned subsidiary of K-V (K-V, PDI, and Ethex are sometimes collectively referred to as "Borrower"). R E C I T A L S: A. Foothill and Borrower previously entered into a Loan and Security Agreement dated as of April 27, 1995 (the "Loan Agreement"). B. Pursuant to the terms of the Loan Agreement, Foothill agreed to provide revolving advances as set forth in the Loan Agreement. In addition, Foothill also agreed to provide a term loan to the Borrower in the amount of $6,750,000.00 (the "Term Loan"). C. K-V proposes to prepay a portion of or prepay the Term Loan in full upon execution of this Amendment and has requested that Foothill allow said prepayment and K-V has further requested that Foothill allow K-V to reborrow under the Term Loan facility as set forth in the Loan Agreement up to the currently outstanding principal balance of the Term Loan which is $5,812,500.00. Foothill has agreed to the foregoing subject to the terms and conditions of this Amendment. NOW THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Foothill and Borrower hereby agree as follows: 1. All capitalized terms not expressly defined in this Amendment shall have the meanings as set forth in the Loan Agreement. 2. Foothill agrees that Borrower may prepay a portion of or all of the outstanding principal balance of the Term Loan which is currently $5,812,500.00 upon execution of this Amendment, provided that there is not then existing any Event of Default or any event which, with the passage of time, would become an Event of Default. 3.(a) Upon payment by Borrower of a portion of or all of the Term Loan, including all accrued and unpaid interest, Foothill agrees, subject to the terms of this Amendment, to advance to Borrower upon its request up to the maximum amount of Five Million Eight Hundred Twelve Thousand Five Hundred and no/100 Dollars ($5,812,500.00) as a term loan. Borrower acknowledges that all advances must be made in increments of One Million Dollars ($1,000,000.00). Foothill shall charge an additional fee (the 2 "Term Loan Fee") in the amount of one-quarter of one percent (0.25%) of the amount of each advance made by Foothill to Borrower. All advances requested by Borrower will be made by Foothill in its sole reasonable discretion and subject to there being at the time the request for said advance is made no Event of Default in existence or event which, with the passage of time, would become an Event of Default. The maximum amount to be advanced by Foothill in one or more advances to Borrower shall not exceed the sum of Five Million Eight Hundred Twelve Thousand Five Hundred and no/100 Dollars ($5,812,500.00). The Borrower shall have no right after any future prepayments to reborrow sums which have been prepaid. As an example, if Borrower prepays the Term Loan in full and then requests a new term loan in the amount of $4,000,000.00 and subsequently prepays the sum of $3,000,000.00 reducing the outstanding principal balance of the Term Loan to $1,000,000.00, the maximum amount which Borrower could still obtain through an additional advance would be $1,812,500.00. (b) Any advance requested by Borrower for a term loan may, subject to Foothill's discretion, be subject to a new appraisal with respect to the Equipment or the Real Property which appraisal shall, in Foothill's reasonable discretion, reflect values for the Equipment and the Real Property sufficient to support any additional advance requested by Borrower. Borrower agrees that prior to the disbursement of any additional advance requested by Borrower as a term loan, it will execute a new Term Note in the form as attached hereto as Exhibit 1 with all appropriate blanks completed. 4. Section 2.3 of the Loan Agreement is hereby revised by deleting therefrom reference to Six Million Seven Hundred Fifty Thousand Dollars ($6,750,000.00) and inserting in lieu thereof the sum of Five Million Eight Hundred Twelve Thousand Five Hundred and no/100 Dollars ($5,812,500.00). 5. The effectiveness of this Amendment is subject to confirmation by Foothill, in its sole satisfaction, that all representations, warranties and covenants of Borrower as set forth in the Loan Agreement remain true and correct and that there has been no violation or breach of same as of the date hereof. 6. As an inducement for Foothill to enter into this Amendment, Borrower hereby releases, discharges and acquits forever Foothill and any of its officers, directors, servants, agents, employees, and attorneys, past and present, from any and all claims, demands and causes of action, of whatever nature, whether in contract or tort, accrued or to accrue, contingent or vested, known or unknown, arising out of or relating to the loans evidenced by the Loan Agreement, as hereby amended, or Foothill's administration of same or any other actions taken pursuant to the Loan Agreement or under any other documents or instruments evidencing loans made by Foothill to Borrower or the administration of same through the date hereto. Borrower hereby further indemnifies and holds Foothill, any officers, directors, servants, agents, employees and attorneys of Foothill, past or present, -2- 3 harmless from any and all such claims, demands and causes of action by Borrower or anyone claiming by, through or under Borrower or any of them, said indemnity to cover all losses and expenses incurred by Foothill, its officers, directors, servants, agents, employees or attorneys, past or present, in connection with any such claims, demands, or causes of action, including all attorneys' fees and costs. 7. Borrower hereby ratifies and confirms that the Loan Agreement and all security interests in the Collateral and all other rights in favor of Foothill as provided in the Loan Agreement and all other agreements delivered by or on behalf of Borrower to Foothill in connection therewith remain in full force and effect and remain enforceable in accordance with their respective terms. Borrower further acknowledges that there is no Event of Default in existence. Borrower hereby specifically reaffirms its liability for payment to Foothill of all of the Obligations. In the event of any conflict between the terms of this Amendment and the Loan Agreement, the terms hereof shall control. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to Loan and Security Agreement to be executed as of the date first above written. K-V PHARMACEUTICAL COMPANY, a Delaware Corporation BY:_____________________________________ Gerald R. Mitchell, Vice President, Finance PARTICLE DYNAMICS, INC., a New York Corporation BY:_____________________________________ Gerald R. Mitchell, Vice President ETHEX CORPORATION, a Missouri Corporation BY:_____________________________________ Gerald R. Mitchell, Vice President ACCEPTED AND AGREED this _______ day of _______________, 1996 FOOTHILL CAPITAL CORPORATION BY:____________________________________ Its:________________________________ -3- EX-10.(Y) 6 AMENDED AND RESTATED 1991 INCENTIVE STOCK OPTION PLAN 1 Exhibit 10(y) K-V PHARMACEUTICAL COMPANY AMENDED AND RESTATED 1991 INCENTIVE STOCK OPTION PLAN 1. PURPOSE OF THE PLAN The K-V Pharmaceutical Company Amended and Restated 1991 Stock Option Plan ("Plan") is intended to provide additional incentive to certain valued and trusted employees of K-V Pharmaceutical Company, a Delaware corporation, and its subsidiaries (the "Company"), by encouraging them to acquire shares of the $.01 par value Class B common stock of the Company (the "Stock") through options to purchase Stock granted pursuant to the Plan ("Options"), thereby increasing such employees' proprietary interest in the business of the Company and providing them with an increased personal interest in the continued success and progress of the Company, the result of which will promote both the interests of the Company and its shareholders. Options granted under the Plan will be intended to qualify as "incentive stock options" ("1505") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). Each employee granted an Option shall enter into an agreement with the Company (the "Option Agreement") setting forth the terms and conditions of the Option, as determined in accordance with this Plan. 2. ADMINISTRATION OF PLAN This Plan shall be administered by the Compensation and Stock Option Committee appointed by the Board of Directors of the Company (the "Committee"), to be composed of at least two (2) members of the Board of Directors of the Company. Members of the Committee shall not be eligible to receive Options under this Plan. The Committee shall have the sole power: (a) Subject to the provisions of the Plan, to determine the terms and conditions of all Options; to construe and interpret the Plan and Options granted under it; to determine the time or times an Option may be exercised, the number of shares as to which an Option may be exercised at any one time, and when an Option may terminate; to establish, amend and revoke rules and regulations relating to the Plan and its administration; and to correct any defect, supply any omission, or reconcile any inconsistency in the Plan, or in any Option Agreement, in a manner and to the extent it shall deem necessary, all of which determinations and interpretations made by the Committee shall be conclusive and binding on all Optionees and on their legal representatives and beneficiarieS; and 2 (b) To determine all questions of policy and expediency that may arise in the administration of the Plan and generally exercise such powers and perform such acts as are deemed necessary or expedient to promote the best interests of the Company. 3. SHARES SUBJECT TO THE PLAN (a) Subject to the provisions of paragraph 13 below, the Stock which may be issued pursuant to Options granted under the Plan shall not exceed in the aggregate five hundred fifty thousand (550,000) shares of Class A Common Stock of the Company and three hundred seventy-five thousand (375,000) shares of Class B Common Stock of the Company. If any Options granted under the Plan terminate, expire or are surrendered without having been exercised in full, the number of shares of Stock not purchased under such Options shall be available again for the purpose of the Plan. (b) At any time that the Committee determines that there exists a public market for Class A Common Stock of the Company, it may designate that an Option to purchase shares of Class B Common Stock of the Company shall be exercisable to purchase shares of Class A Common stock of the Company instead of Class B Common Stock. Such redesignation of an Option shall not affect the purchase price under such Option or the number of shares with respect to which such Option has been granted. Notwithstanding the foregoing, no redesignation of an Option shall be effective if such redesignation constitutes a modification of such Option within the meaning of Section 424(h) of the Code. 4. PERSONS ELIGIBLE FOR OPTIONS All employees of the Company who are not members of the Committee shall be eligible to receive the grant of Options under the Plan. The Committee shall determine the employees to whom Options shall be granted, the time or times such Options shall be granted, the number of shares to be subject to each Option and the times when each Option may be exercised. The Committee shall seek information, advice and recommendations from management to assist the Committee in its independent determination as to the employees to whom Options shall be granted. An employee who has been granted an Option (an "Optionee"), if he or she is otherwise eligible, may be granted additional Options. 5. PURCHASE PRICE The purchase price of each share of Stock covered by each ISO ("Purchase Price") shall not be less than one hundred percent (100%) of the Fair Market Value Per Share (as defined below) of the Stock on the date the ISO is granted; provided, however, if when an ISO is granted the Optionee receiving the ISO owns or will be considered to own by reason of Section 424(d) of the Code more than ten percent (10%) of the total combined voting power of all classes -2- 3 of stock of the Company, the purchase price of the Stock covered by such ISO shall not be less than one hundred and ten percent (110%) of the Fair Market Value Per Share of the Stock on the date the ISO is granted. "Fair Market Value Per Share" of the Stock shall mean: (i) if the Stock is not publicly traded, the amount determined by the Committee on the date of the grant of the Option; (ii) if the Stock is traded only otherwise than on a securities exchange and is not quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), the closing quoted selling price of the Stock on the date of grant of the Option as quoted in "pink sheets" published by the National Daily Quotation Bureau; (iii) if the Stock is traded only otherwise than on a securities exchange and is quoted on NASDAQ, the closing quoted selling price of the Stock on the date of grant of the Option, as reported by the Wall Street Journal; or (iv) if the Stock is admitted to trading on a securities exchange, the closing quoted selling price of the Stock on the date of grant of the Option, as reported in the Wall Street Journal. For purposes of Items (i) through (iv) of this paragraph, if there were no sales on the date of the grant of an Option, the Fair Market Value Per Share shall be determined by the Committee in accordance with Section 20.2031-2 of the Federal Estate Tax Regulations. 6. DURATION OF OPTIONS Any outstanding Option and all unexercised rights thereunder shall expire and terminate automatically upon the earliest of: (i) the cessation of the employment or engagement of the Optionee by the Company for any reason other than retirement (as provided by contract between the Company any such person or otherwise under normal Company policies), death or disability; (ii) the date which is three months following the effective date of the Optionee's retirement from the Company's service; (iii) the date which is one year following the date on which the Optionee's service with the Company ceases due to disability (or due to the death with respect to Options issued prior to the date of this amendment); (iv) the date of expiration of the Option determined by the Committee at the time the Option is granted and specified in such Option; and (v) in any event, the tenth annual anniversary date of the granting of the Option, or, if when an ISO is granted the Optionee owns (or would be considered to own by reason of Section 424(d) of the Code) more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, then on the fifth such anniversary; provided, however, that the Committee shall have the right, but not the obligation, to extend the expiry of the Options held by an Optionee whose service with the Company has ceased for any reason to the end of their original terms (either upon issuance of the Option or at such time as the Option would otherwise terminate), notwithstanding that such Options may no longer qualify as ISOs under the Code. -3- 4 7. EXERCISE OF OPTIONS (a) An Option may be exercisable in installments or otherwise upon such terms as the Committee shall determine when the Option is granted. In the event that an Option is exercisable only in installments and the Optionee has been employed by the Company for five or more years as of the date such Option was granted, such Option shall become fully exercisable upon the termination of employment of the Optionee by reason of death or disability, if and to the extent that such acceleration would not cause a violation of the limitations contained in Section 422(b)(7) of the Code. If acceleration by reason of termination because of disability would cause a violation of the limitations contained in Section 422(b)(7) of the Code, acceleration shall occur only in amount such that such acceleration does not cause a violation of Section 422(b)(7) of the Code and the acceleration of the exercisability of any portion of the Option which would be in violation of such limitation shall be deferred until January 1 of the year following that in which termination of employment occurs. In the event termination of employment occurs by reason of death, acceleration of the exercisability of any portion of the Option shall occur only as and to the extent that such acceleration will not cause a violation of the limitations contained in Section 422(b)(7) of the Code. Notwithstanding anything to the contrary contained in this Plan, the Committee at any time may accelerate the time at which any Option granted hereunder is exercisable. (b) No Option will be exercisable (and any attempted exercise will be deemed null and void) if such exercise would create a right of recovery for "short-swing profits" under Section 16(b) of the Securities Exchange Act of 1934, unless the Optionee pays the Company the amount of such "short-swing profits" at the time of the exercise of the Option. (c) In the event that a portion of an ISO which first becomes exercisable exceeds the limitations contained in Section 422(b)(7) of the Code, the shares purchased pursuant to Options in excess of such limitation shall be deemed to be non-qualified stock options and shall be identified accordingly on the certificates representing such shares and in the stock transfer records of the Company. 8. METHOD OF EXERCISE (a) When the right to purchase shares accrues, Options may be exercised by giving written notice to the Company stating the number of shares for which the Option is being exercised, accompanied by payment in full by cash, or its equivalent, acceptable to the Company, of the purchase price for the shares being purchased. The Company shall issue a separate certificate or certificates of Stock for each Option exercised by an Optionee. -4- 5 (b) In the Committee's discretion, determined at the time the Option is granted, payment of the purchase price for the shares may be made in whole or in part with other shares of Stock of the Company which are free and clear of all liens and encumbrances. The value of the shares of Stock tendered in payment for the shares being purchased shall be the Fair Market Value Per Share on the date of the Optionee's notice of exercise. (c) Notwithstanding the foregoing, the Company shall have the right to postpone the time of delivery of the shares for such period as may be required for the Company, with reasonable diligence, to comply with any applicable listing requirements of any national securities exchange or the National Association of Securities Dealers, Inc. or any Federal, state or local law. If the Optionee, or other person entitled to exercise the Option, fails to timely accept delivery of and pay for the shares specified in such notice, the Committee shall have the right to terminate the Option with respect to such shares. 9. NONTRANSFERABILITY OF OPTIONS No Option granted under the Plan shall be assignable or transferable by the Optionee, either voluntarily or by operation of law, other than by will or the laws of descent and distribution, and, during the lifetime of the Optionee, shall be exercisable only by the Optionee. 10. CONTINUANCE OF EMPLOYMENT Nothing contained in the Plan or in any Option granted under the Plan shall confer upon any Optionee any rights with respect to the continuation of employment by the Company or interfere in any way with the right of the Company (subject to the terms of any separate employment agreement to the contrary) at any time to terminate such employment or to increase or decrease the compensation of the Optionee from the rate in existence at the time of the granting of any Option. 11. RESTRICTIONS ON SHARES If the Company shall be advised by counsel that certain requirements under the Federal or state securities laws must be met before Stock may be issued under this Plan, the Company shall notify all persons who have been issued Options, and the Company shall have no liability for failure to issue Stock under any exercise of Options because of delay while such requirements are being met or the inability of the Company to comply with such requirements. -5- 6 12. PRIVILEGE OF STOCK OWNERSHIP No person entitled to exercise any Option granted under the Plan shall have the rights or privileges of a stockholder of the Company for any shares of Stock issuable upon exercise of such Option until such person has become the holder of record of such shares. No adjustment shall be made for dividends or other rights for which the record date is prior to the date on which such person becomes the holder of record, except as provided in paragraph 13 below. 13. ADJUSTMENT (a) If the number of outstanding shares of Stock are Increased or decreased, or such shares are exchanged for a different number or kind of shares or securities of the Company through reorganization, merger, recapitalization, reclassification, stock dividend, stock split, combination of shares, or other similar transaction, the aggregate number of shares of Stock subject to the Plan as provided in paragraph 3 above, and the shares of Stock subject to issued and outstanding Options under the Plan shall be appropriately and proportionately adjusted by the Committee. Any such adjustment in an outstanding Option shall be made without change in the aggregate purchase price applicable to the unexercised portion of the Option but with an appropriate adjustment in the price for each share or other unit of any security covered by the Option. (b) Notwithstanding paragraph (a), upon: (i) the dissolution or liquidation of the Company, (ii) a reorganization, merger or consolidation of the Company with one or more corporations in which the Company is not the surviving corporation, (iii) a sale of substantially all of the assets of the Company, or (iv) the transfer of more than 80% of the then outstanding Stock of the Company to another entity or person in a single transaction or series of transactions, the Plan shall terminate, and any outstanding Options granted under the Plan shall terminate on the day before the consummation of the transaction; provided that the Board shall have the right, but shall not be obligated, to accelerate the time in which any Options may be exercised prior to such a termination. However, the termination of such Options shall not occur if provision is made in writing in connection with the transaction, in a manner acceptable to the Board, for: (A) the continuance of the Plan and assumption of outstanding Options, or (B) the substitution for such Options of new options to purchase the stock of a successor corporation (or parent or subsidiary thereof), with appropriate adjustments as to number and kind of shares and option price. The Board of Directors shall have the authority to amend this paragraph to provide for a requirement that a successor corporation assume any outstanding Options. -6- 7 (c) Adjustments under this paragraph 13 shall be made by the Committee whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of Stock shall be issued under the Plan or in connection with any such adjustment. 14. HOLDING PERIOD AND FORFEITURE OF STOCK (a) All Stock purchased pursuant to the exercise of an Option shall be held by the Company for a period of two (2) years from the date of exercise (the "Holding Period"). Notwithstanding anything contained herein to the contrary, if an Optionee leaves the employ of the Company during the Holding Period for any reason other than the retirement (under normal Company policies), death or disability of such Optionee, the Optionee's purchase of such Stock shall be voidable at the Committee's sole option and discretion. If any purchase of Stock is voided by reason of the provisions of this paragraph 14, an amount determined as provided in paragraph 14(d) shall thereupon be returned in full to the Optionee. Notwithstanding the foregoing, the Committee at any time may waive the Holding Period requirement set forth herein with respect to any outstanding options. (b) At any time within the Holding Period that the Committee determines that there exists a public market for Class A Common Stock of the Company, it may cancel an Optionee's Class B Common Stock of the Company then being held, and issue in lieu thereof an equivalent number of Class A Common Stock of the Company. (c) In the event that an Optionee incurs a financial hardship within the Holding Period, which is determined by the Committee in its sole discretion upon written application by the Optionee and after review of the facts and circumstances to be of an immediate and heavy nature, the Committee may authorize the repurchase of the Optionee's Stock by the Company at a price as determined under paragraph 14(d) and payment of the proceeds of such repurchase to the Optionee. (d) In the event that a purchase of Stock is voided by reason of the provisions of this paragraph 14(a) or repurchased by the Company by reason of the financial hardship of an Optionee, the amount paid to such Optionee by reason of the voided transaction or the repurchase of such Stock shall be the least of: (i) the funds paid by the Optionee in connection with the voided transaction; (ii) the value in cash of Stock used to purchase such Stock, determined as of the date of such purchase, less any amount which would have been forfeited by reason of this paragraph 14 relative to Stock used to purchase the forfeited Stock if such Stock had not been so used and the Holding Period relative to such Stock had not expired; or (iii) the Fair Market Value Per Share, as determined in -7- 8 accordance with the provisions of paragraph 5 hereof, on the termination date of the Optionee's employment with the Company or the date of the repurchase made pursuant to paragraph 14(b), as the case may be. (e) In order to facilitate the repurchase of Stock by the Company in accordance with the terms of paragraph 14(a) hereof, if an Optionee leaves the employ of the Company during the Holding Period and the Company rescinds the purchase of Stock by such Optionee, each Optionee who exercises any Option or portion thereof shall, at the time of payment thereof, as provided in paragraph 7(a) hereof, deliver to the Company a form of stock power and assignment signed by such Optionee in form and substance satisfactory to the Company, rendering the certificate representing the shares purchased negotiable to the Company. An Optionee may at any time request delivery of Stock in payment of the Purchase Price for additional Stock pursuant to paragraph 8(b) hereof notwithstanding the fact that such Stock has not been held for two (2) years from the date of exercise of the Option pursuant to which it was purchased. 15. OPTIONEE'S RIGHT TO PLEDGE (a) Notwithstanding the provisions of paragraph 14(a) hereof, if any Optionee who exercises an Option demonstrates to the Committee a need to obtain financing for the purchase of Stock pursuant to such exercise and indicates his good faith intention to remain in the employ of the Company during the Holding Period, the Committee, in its sole discretion, may permit delivery of any Stock purchased pursuant to the exercise of any Option to a financial institution for use by such Optionee as collateral security for the purchase of the Stock, subject to any necessary or appropriate restrictions with respect thereto as may be required to comply with applicable Federal and state securities laws and/or the listing requirements of any national securities exchange. (b) If Stock is delivered to an Optionee in order to facilitate a pledge described in paragraph 15(a), the Company shall have the right to cancel said Stock upon the exercise of the Company's election to void the purchase of such Stock pursuant to the provisions of paragraph 14(a). Upon the cancellation of such Stock and application by the holder thereof, the Company shall pay to the holder the amount payable for such Stock as calculated under the provisions of paragraph 14(c) hereof. (c) Any Stock delivered to an Optionee pursuant to the provisions of this paragraph 15 shall contain a legend stating that the Stock is subject to cancellation pursuant to the terms of this Plan and that upon cancellation the amount payable to the holder thereof shall be limited as provided in the Plan. -8- 9 16. DELIVERY OF CERTIFICATES If the Optionee remains in the employ of the Company throughout the Holding Period, or leaves the employ of the Company by reason of retirement (under normal Company policies), death or disability, the Company shall deliver to the Optionee or his personal representative (as the case may be), as soon as practicable thereafter, certificates representing the Stock purchased by the Optionee under the Option free and clear of restriction except for the restrictions which are necessary to assure compliance by the Company and the Optionee with applicable Federal and state securities laws and/or the listing requirements of any national securities exchange (the "Certificates"). If the Company fails or declines to exercise its right to void any purchase pursuant to the terms of paragraph 14 hereof, the Company shall deliver the Certificates to those Optionees as soon as practicable after the expiration of two (2) years from the date of exercise of the applicable Option. In the event an Option is exercised using Stock as consideration for the Purchase Price, the Company shall issue separate certificates for each block of shares delivered in payment of the Option Price and for the balance of shares purchased at such exercise. 17. INVESTMENT PURPOSE Each Option granted hereunder may be issued on the condition that any purchase of Stock pursuant to the exercise of an Option which shall not be the subject of a registration statement permitting the sale or other distribution thereof shall be for investment purposes and not with a view to resale or distribution (the "Restricted Stock"). If requested by the Company, each Optionee must agree, at the time of the purchase of any Restricted Stock, to execute an "investment letter" setting forth such investment intent in the form acceptable to the Company and must consent to any stock certificate issued to him thereunder bearing a restrictive legend setting forth the restrictions applicable to the further resale, transfer or other conveyance thereof without registration under the Securities Act of 1933, as amended, and under the applicable securities or blue sky laws of any other jurisdiction (together, the "Securities Laws"), or the availability of exemptions from registration thereunder and to the placing of transfer restrictions on the records of the transfer agent for such Stock. No Restricted Stock may thereafter be resold, transferred or otherwise conveyed unless: (1) an opinion of the Optionee's counsel is received, in form and substance satisfactory to counsel for the Company, that registration under the applicable Securities Laws is not required; or (2) such Stock is registered under the applicable Securities Laws; or -9- 10 (3) "no action" letters are received from the staff of the Securities and Exchange Commission and from the administrative agencies administering all other applicable securities or blue sky laws, based on the option of counsel for Optionee in form and substance reasonably satisfactory to counsel for the Company, advising that registrations under the Securities Laws are not required. 18. AMENDMENT AND TERMINATION OF PLAN (a) The Board of Directors of the Company may, from time to time, with respect to any shares at the time not subject to Options, suspend or terminate the Plan or amend or revise the terms of the Plan; provided that any amendment to the Plan shall be approved by a majority of the shareholders of the Company if the amendment would (i) materially increase the benefits accruing to participants under the Plan; (ii) increase the number of shares of Stock which may be issued under the Plan, except as permitted under the provisions of paragraph 13 above; or (iii) materially modify the requirements as to eligibility for participation in the Plan. (b) Subject to the provisions in paragraph 13 above, the Plan shall terminate ten (10) years from the earlier of the adoption of the Plan by the Board of Directors or its approval by the shareholders. (c) Subject to the provisions in paragraph 13 above, no amendment, suspension or termination of this Plan shall, without the consent of the Optionee, alter or impair any rights or obligations under any Option granted to such Optionee under the Plan. 19. EFFECTIVE DATE OF PLAN The Plan shall become effective upon adoption by the Board of Directors of the Company and approval by the Company's shareholders; provided, however, that prior to approval of the Plan by the Company's shareholders but after adoption by the Board of Directors, Options may be granted under the Plan subject to obtaining such approval. 20. TERM OF PLAN No Option shall be granted pursuant to the Plan after ten (10) years from the earlier of the date of adoption of the Plan by the Board of Directors of the Company or the date of approval by the Company's shareholders. -10- EX-10.(Z) 7 COMMON STOCK PURCHASE OPTION 1 Exhibit 10(z) THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND SUCH STATE LAWS. THE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND SUCH STATE LAWS PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. CLASS A COMMON STOCK PURCHASE OPTION Dated: January 22, 1996 K-V PHARMACEUTICAL COMPANY Option for the Purchase of Class A Common Stock (Subject to Adjustment as Hereinafter Provided) K-V PHARMACEUTICAL COMPANY, a Delaware corporation (the "Company"), hereby certifies that, in consideration of the payment to the Company of the sum of $1,150,000, MAC & Co. is entitled, subject to the terms set forth below, to purchase from the Company upon surrender of this Option at any time before 5 o'clock p.m., St. Louis, Missouri local time during the period (the "Exercise Period") commencing on March 1, 1997 and ending March 30, 1997 (said latter time being referred to herein as the "Expiration Time"), that number of shares of fully paid and non-assessable shares (the "Shares") of the Class A Common Stock of the Company, $.01 par value per share (the "Class A Common Stock"), as shall be determined by dividing $17,500,000 (the "Aggregate Payment") by the Purchase Price. For the purposes hereof, the Purchase Price shall mean the greater of: (i) $35.00 per Share or (ii) 80% of the Current Market Price of the Class A Common Stock at the Exercise Date; Current Market Price shall mean the average closing market price of the Class A Common Stock reported by the American Stock Exchange (or other exchange or market which is the principal trading market for the Class A Common Stock) for the ten trading day period ending on, and including, the third business day preceding the Exercise Date; and Exercise Date shall mean the date this Option is received by the Company for exercise with the Subscription Form attached hereto fully completed and executed and accompanied by the Aggregate Payment. As used herein, the term "Company" includes any corporation which shall succeed to or assume the obligations of the Company hereunder. 2 1. Exercise of Option. ------------------ 1.1. Full Exercise. This Option may be exercised in full, but ------------- not in part, at any time during the Exercise Period by the holder hereof by surrendering this Option, together with a Subscription Form in the form of Exhibit A, duly executed by such holder to the Company, at any time prior - --------- to the Expiration Time, at the Company's principal office, accompanied by payment in cash or by certified or official bank check payable to the order of the Company in the amount of the aggregate Purchase Price, subject to any adjustments provided for in Section 2. 1.2. Delivery of Certificates. As soon as practicable after ------------------------ any exercise of this Option and payment of the aggregate Purchase Price payable upon such exercise, and in any event within ten (10) days thereafter, the Company, at its expense, will cause to be issued in the name of and delivered to the holder of this Option, or as such holder may direct (upon payment by such holder of any applicable transfer taxes), subject to the requirements of Section 3, certificates for the number of fully paid and non-assessable shares of Class A Common Stock (or other securities or property) to which such holder shall be entitled upon such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then current market value of one full share. 2. Adjustments to Purchase Price and Number of Securities. ------------------------------------------------------ 2.1. Subdivision and Combination. In case the Company shall --------------------------- at any time subdivide or combine the outstanding shares of Class A Common Stock, the Purchase Price and number of Shares issuable hereunder shall be adjusted accordingly. 2.2. Merger or Consolidation. In case of any consolidation or ----------------------- merger of the Company with or into another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding Class A Common Stock), the corporation formed by such consolidation or merger shall, upon written request, execute and deliver to the holder of this Option then outstanding an equivalent substitute or supplemental option providing the right to receive, upon exercise, the shares of stock and/or other securities and property receivable upon such consolidation or merger by a holder of the number of shares of Class A Common Stock for which this Option could have been exercised immediately prior to the consolidation or merger. 3. Compliance with the Act; Restrictions on Transfer; Investment ------------------------------------------------------------ Representation. This Option and the shares of Class A Common Stock issuable - -------------- upon the exercise hereof have not been registered under the Act. The holder hereof by acceptance hereof agrees that this Option and all securities acquired upon the exercise hereof will be disposed of only in accordance with the Act and the rules and regulations of the Securities and Exchange Commission thereunder. The exercise of this Option by the holder shall be a confirmation by the holder, at the time of exercise, that such holder is acquiring the Shares or other securities upon the exercise of this Option, for the holder's own account, for investment, and not with a present view to distribution of the Shares or other securities, or of this Option. 3 4. Reservation of Stock. The Company will at all times reserve -------------------- and keep available, solely for issuance and delivery upon the exercise of this Option, all such shares of Class A Common Stock and other securities as shall be deliverable against the due exercise of this Option. 5. Notices of Record Date, Etc. In case the Company shall take a ---------------------------- record of the holders of its Class A Common Stock (or other securities at the time receivable upon the exercise of this Option) for the purpose of: (a) entitling them to receive any dividend or other distribution of any shares of the capital stock of the Company, or securities convertible into shares of the capital stock of the Company; (b) any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation, or any conveyance of all or substantially all of the assets of the Company to another corporation; or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company; the Company will mail or cause to be mailed to the holder of this Option a notice thereof at least ten days prior to the record date. 6. Miscellaneous. This Option shall be governed by and construed ------------- under the laws of the State of Delaware. Nothing contained herein shall prohibit or limit in any manner the right of the Company to issue and sell shares of Class A Common Stock or other securities of the Company for such consideration and upon such terms as the Board of Directors of the Company deems appropriate, regardless of whether or not such transaction would be dilutive to the shares of Class A Common Stock issuable upon the exercise of this Option. IN WITNESS WHEREOF, the Company has caused this Option to be duly signed in its behalf as of the date first set forth above. K-V PHARMACEUTICAL COMPANY By: /s/ Marc S. Hermelin ----------------------------------- Marc S. Hermelin, Vice Chairman and Chief Executive Officer 4 THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND SUCH STATE LAWS. THE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND SUCH STATE LAWS PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. CLASS A COMMON STOCK PURCHASE OPTION Dated: January 22, 1996 K-V PHARMACEUTICAL COMPANY Option for the Purchase of Class A Common Stock (Subject to Adjustment as Hereinafter Provided) K-V PHARMACEUTICAL COMPANY, a Delaware corporation (the "Company"), hereby certifies that, in consideration of the payment to the Company of the sum of $1,250,000, MAC & Co. is entitled, subject to the terms set forth below, to purchase from the Company upon surrender of this Option at any time before 5 o'clock p.m., St. Louis, Missouri local time during the period (the "Exercise Period") commencing on September 1, 1997 and ending September 29, 1997 (said latter time being referred to herein as the "Expiration Time"), that number of shares of fully paid and non-assessable shares (the "Shares") of the Class A Common Stock of the Company, $.01 par value per share (the "Class A Common Stock"), as shall be determined by dividing $20,000,000 (the "Aggregate Payment") by the Purchase Price. For the purposes hereof, the Purchase Price shall mean the greater of: (i) $40.00 per Share or (ii) 80% of the Current Market Price of the Class A Common Stock at the Exercise Date; Current Market Price shall mean the average closing market price of the Class A Common Stock reported by the American Stock Exchange (or other exchange or market which is the principal trading market for the Class A Common Stock) for the ten trading day period ending on, and including, the third business day preceding the Exercise Date; and Exercise Date shall mean the date this Option is received by the Company for exercise with the Subscription Form attached hereto fully completed and executed and accompanied by the Aggregate Payment. As used herein, the term "Company" includes any corporation which shall succeed to or assume the obligations of the Company hereunder. 5 1. Exercise of Option. ------------------ 1.1. Full Exercise. This Option may be exercised in full, but ------------- not in part, at any time during the Exercise Period by the holder hereof by surrendering this Option, together with a Subscription Form in the form of Exhibit A, duly executed by such holder to the Company, at any time prior - --------- to the Expiration Time, at the Company's principal office, accompanied by payment in cash or by certified or official bank check payable to the order of the Company in the amount of the aggregate Purchase Price, subject to any adjustments provided for in Section 2. 1.2. Delivery of Certificates. As soon as practicable after ------------------------ any exercise of this Option and payment of the aggregate Purchase Price payable upon such exercise, and in any event within ten (10) days thereafter, the Company, at its expense, will cause to be issued in the name of and delivered to the holder of this Option, or as such holder may direct (upon payment by such holder of any applicable transfer taxes), subject to the requirements of Section 3, certificates for the number of fully paid and non-assessable shares of Class A Common Stock (or other securities or property) to which such holder shall be entitled upon such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then current market value of one full share. 2. Adjustments to Purchase Price and Number of Securities. ------------------------------------------------------ 2.1. Subdivision and Combination. In case the Company shall --------------------------- at any time subdivide or combine the outstanding shares of Class A Common Stock, the Purchase Price and number of Shares issuable hereunder shall be adjusted accordingly. 2.2. Merger or Consolidation. In case of any consolidation or ----------------------- merger of the Company with or into another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding Class A Common Stock), the corporation formed by such consolidation or merger shall, upon written request, execute and deliver to the holder of this Option then outstanding an equivalent substitute or supplemental option providing the right to receive, upon exercise, the shares of stock and/or other securities and property receivable upon such consolidation or merger by a holder of the number of shares of Class A Common Stock for which this Option could have been exercised immediately prior to the consolidation or merger. 3. Compliance with the Act; Restrictions on Transfer; Investment ------------------------------------------------------------ Representation. This Option and the shares of Class A Common Stock issuable upon the exercise hereof have not been registered under the Act. The holder hereof by acceptance hereof agrees that this Option and all securities acquired upon the exercise hereof will be disposed of only in accordance with the Act and the rules and regulations of the Securities and Exchange Commission thereunder. The exercise of this Option by the holder shall be a confirmation by the holder, at the time of exercise, that such holder is acquiring the Shares or other securities upon the exercise of this Option, for the holder's own account, for investment, and not with a present view to distribution of the Shares or other securities, or of this Option. 6 4. Reservation of Stock. The Company will at all times reserve -------------------- and keep available, solely for issuance and delivery upon the exercise of this Option, all such shares of Class A Common Stock and other securities as shall be deliverable against the due exercise of this Option. 5. Notices of Record Date, Etc. In case the Company shall take a ---------------------------- record of the holders of its Class A Common Stock (or other securities at the time receivable upon the exercise of this Option) for the purpose of: (a) entitling them to receive any dividend or other distribution of any shares of the capital stock of the Company, or securities convertible into shares of the capital stock of the Company; (b) any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation, or any conveyance of all or substantially all of the assets of the Company to another corporation; or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company; the Company will mail or cause to be mailed to the holder of this Option a notice thereof at least ten days prior to the record date. 6. Miscellaneous. This Option shall be governed by and construed ------------- under the laws of the State of Delaware. Nothing contained herein shall prohibit or limit in any manner the right of the Company to issue and sell shares of Class A Common Stock or other securities of the Company for such consideration and upon such terms as the Board of Directors of the Company deems appropriate, regardless of whether or not such transaction would be dilutive to the shares of Class A Common Stock issuable upon the exercise of this Option. IN WITNESS WHEREOF, the Company has caused this Option to be duly signed in its behalf as of the date first set forth above. K-V PHARMACEUTICAL COMPANY By: /s/ Marc S. Hermelin ----------------------------------- Marc S. Hermelin, Vice Chairman and Chief Executive Officer 7 THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND SUCH STATE LAWS. THE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND SUCH STATE LAWS PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. CLASS A COMMON STOCK PURCHASE OPTION Dated: January 22, 1996 K-V PHARMACEUTICAL COMPANY Option for the Purchase of Class A Common Stock (Subject to Adjustment as Hereinafter Provided) K-V PHARMACEUTICAL COMPANY, a Delaware corporation (the "Company"), hereby certifies that, in consideration of the payment to the Company of the sum of $1,300,000, MAC & Co. is entitled, subject to the terms set forth below, to purchase from the Company upon surrender of this Option at any time before 5 o'clock p.m., St. Louis, Missouri local time during the period (the "Exercise Period") commencing on March 1, 1998 and ending March 30, 1998 (said latter time being referred to herein as the "Expiration Time"), that number of shares of fully paid and non-assessable shares (the "Shares") of the Class A Common Stock of the Company, $.01 par value per share (the "Class A Common Stock"), as shall be determined by dividing $22,500,000 (the "Aggregate Payment") by the Purchase Price. For the purposes hereof, the Purchase Price shall mean the greater of: (i) $45.00 per Share or (ii) 80% of the Current Market Price of the Class A Common Stock at the Exercise Date; Current Market Price shall mean the average closing market price of the Class A Common Stock reported by the American Stock Exchange (or other exchange or market which is the principal trading market for the Class A Common Stock) for the ten trading day period ending on, and including, the third business day preceding the Exercise Date; and Exercise Date shall mean the date this Option is received by the Company for exercise with the Subscription Form attached hereto fully completed and executed and accompanied by the Aggregate Payment. As used herein, the term "Company" includes any corporation which shall succeed to or assume the obligations of the Company hereunder. 8 1. Exercise of Option. ------------------ 1.1. Full Exercise. This Option may be exercised in full, but ------------- not in part, at any time during the Exercise Period by the holder hereof by surrendering this Option, together with a Subscription Form in the form of Exhibit A, duly executed by such holder to the Company, at any time prior - --------- to the Expiration Time, at the Company's principal office, accompanied by payment in cash or by certified or official bank check payable to the order of the Company in the amount of the aggregate Purchase Price, subject to any adjustments provided for in Section 2. 1.2. Delivery of Certificates. As soon as practicable after ------------------------ any exercise of this Option and payment of the aggregate Purchase Price payable upon such exercise, and in any event within ten (10) days thereafter, the Company, at its expense, will cause to be issued in the name of and delivered to the holder of this Option, or as such holder may direct (upon payment by such holder of any applicable transfer taxes), subject to the requirements of Section 3, certificates for the number of fully paid and non-assessable shares of Class A Common Stock (or other securities or property) to which such holder shall be entitled upon such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then current market value of one full share. 2. Adjustments to Purchase Price and Number of Securities. ------------------------------------------------------ 2.1. Subdivision and Combination. In case the Company shall ---------------------------- at any time subdivide or combine the outstanding shares of Class A Common Stock, the Purchase Price and number of Shares issuable hereunder shall be adjusted accordingly. 2.2. Merger or Consolidation. In case of any consolidation or ------------------------ merger of the Company with or into another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding Class A Common Stock), the corporation formed by such consolidation or merger shall, upon written request, execute and deliver to the holder of this Option then outstanding an equivalent substitute or supplemental option providing the right to receive, upon exercise, the shares of stock and/or other securities and property receivable upon such consolidation or merger by a holder of the number of shares of Class A Common Stock for which this Option could have been exercised immediately prior to the consolidation or merger. 3. Compliance with the Act; Restrictions on Transfer; Investment ------------------------------------------------------------ Representation. This Option and the shares of Class A Common Stock issuable - -------------- upon the exercise hereof have not been registered under the Act. The holder hereof by acceptance hereof agrees that this Option and all securities acquired upon the exercise hereof will be disposed of only in accordance with the Act and the rules and regulations of the Securities and Exchange Commission thereunder. The exercise of this Option by the holder shall be a confirmation by the holder, at the time of exercise, that such holder is acquiring the Shares or other securities upon the exercise of this Option, for the holder's own account, for investment, and not with a present view to distribution of the Shares or other securities, or of this Option. 9 4. Reservation of Stock. The Company will at all times reserve -------------------- and keep available, solely for issuance and delivery upon the exercise of this Option, all such shares of Class A Common Stock and other securities as shall be deliverable against the due exercise of this Option. 5. Notices of Record Date, Etc. In case the Company shall take a ---------------------------- record of the holders of its Class A Common Stock (or other securities at the time receivable upon the exercise of this Option) for the purpose of: (a) entitling them to receive any dividend or other distribution of any shares of the capital stock of the Company, or securities convertible into shares of the capital stock of the Company; (b) any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation, or any conveyance of all or substantially all of the assets of the Company to another corporation; or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company; the Company will mail or cause to be mailed to the holder of this Option a notice thereof at least ten days prior to the record date. 6. Miscellaneous. This Option shall be governed by and construed ------------- under the laws of the State of Delaware. Nothing contained herein shall prohibit or limit in any manner the right of the Company to issue and sell shares of Class A Common Stock or other securities of the Company for such consideration and upon such terms as the Board of Directors of the Company deems appropriate, regardless of whether or not such transaction would be dilutive to the shares of Class A Common Stock issuable upon the exercise of this Option. IN WITNESS WHEREOF, the Company has caused this Option to be duly signed in its behalf as of the date first set forth above. K-V PHARMACEUTICAL COMPANY By: /s/ Marc S. Hermelin ---------------------------------- Marc S. Hermelin, Vice Chairman and Chief Executive Officer 10 THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND SUCH STATE LAWS. THE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND SUCH STATE LAWS PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. CLASS A COMMON STOCK PURCHASE OPTION Dated: January 22, 1996 K-V PHARMACEUTICAL COMPANY Option for the Purchase of Class A Common Stock (Subject to Adjustment as Hereinafter Provided) K-V PHARMACEUTICAL COMPANY, a Delaware corporation (the "Company"), hereby certifies that, in consideration of the payment to the Company of the sum of $1,300,000, MAC & Co. is entitled, subject to the terms set forth below, to purchase from the Company upon surrender of this Option at any time before 5 o'clock p.m., St. Louis, Missouri local time during the period (the "Exercise Period") commencing on September 1, 1998 and ending September 29, 1998 (said latter time being referred to herein as the "Expiration Time"), that number of shares of fully paid and non-assessable shares (the "Shares") of the Class A Common Stock of the Company, $.01 par value per share (the "Class A Common Stock"), as shall be determined by dividing $25,000,000 (the "Aggregate Payment") by the Purchase Price. For the purposes hereof, the Purchase Price shall mean the greater of: (i) $50.00 per Share or (ii) 80% of the Current Market Price of the Class A Common Stock at the Exercise Date; Current Market Price shall mean the average closing market price of the Class A Common Stock reported by the American Stock Exchange (or other exchange or market which is the principal trading market for the Class A Common Stock) for the ten trading day period ending on, and including, the third business day preceding the Exercise Date; and Exercise Date shall mean the date this Option is received by the Company for exercise with the Subscription Form attached hereto fully completed and executed and accompanied by the Aggregate Payment. As used herein, the term "Company" includes any corporation which shall succeed to or assume the obligations of the Company hereunder. 11 1. Exercise of Option. ------------------ 1.1. Full Exercise. This Option may be exercised in full, but ------------- not in part, at any time during the Exercise Period by the holder hereof by surrendering this Option, together with a Subscription Form in the form of Exhibit A, duly executed by such holder to the Company, at any time prior - --------- to the Expiration Time, at the Company's principal office, accompanied by payment in cash or by certified or official bank check payable to the order of the Company in the amount of the aggregate Purchase Price, subject to any adjustments provided for in Section 2. 1.2. Delivery of Certificates. As soon as practicable after ------------------------ any exercise of this Option and payment of the aggregate Purchase Price payable upon such exercise, and in any event within ten (10) days thereafter, the Company, at its expense, will cause to be issued in the name of and delivered to the holder of this Option, or as such holder may direct (upon payment by such holder of any applicable transfer taxes), subject to the requirements of Section 3, certificates for the number of fully paid and non-assessable shares of Class A Common Stock (or other securities or property) to which such holder shall be entitled upon such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then current market value of one full share. 2. Adjustments to Purchase Price and Number of Securities. ------------------------------------------------------ 2.1. Subdivision and Combination. In case the Company shall --------------------------- at any time subdivide or combine the outstanding shares of Class A Common Stock, the Purchase Price and number of Shares issuable hereunder shall be adjusted accordingly. 2.2. Merger or Consolidation. In case of any consolidation or ----------------------- merger of the Company with or into another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding Class A Common Stock), the corporation formed by such consolidation or merger shall, upon written request, execute and deliver to the holder of this Option then outstanding an equivalent substitute or supplemental option providing the right to receive, upon exercise, the shares of stock and/or other securities and property receivable upon such consolidation or merger by a holder of the number of shares of Class A Common Stock for which this Option could have been exercised immediately prior to the consolidation or merger. 3. Compliance with the Act; Restrictions on Transfer; Investment ------------------------------------------------------------ Representation. This Option and the shares of Class A Common Stock issuable - -------------- upon the exercise hereof have not been registered under the Act. The holder hereof by acceptance hereof agrees that this Option and all securities acquired upon the exercise hereof will be disposed of only in accordance with the Act and the rules and regulations of the Securities and Exchange Commission thereunder. The exercise of this Option by the holder shall be a confirmation by the holder, at the time of exercise, that such holder is acquiring the Shares or other securities upon the exercise of this Option, for the holder's own account, for investment, and not with a present view to distribution of the Shares or other securities, or of this Option. 12 4. Reservation of Stock. The Company will at all times reserve -------------------- and keep available, solely for issuance and delivery upon the exercise of this Option, all such shares of Class A Common Stock and other securities as shall be deliverable against the due exercise of this Option. 5. Notices of Record Date, Etc. In case the Company shall take a ---------------------------- record of the holders of its Class A Common Stock (or other securities at the time receivable upon the exercise of this Option) for the purpose of: (a) entitling them to receive any dividend or other distribution of any shares of the capital stock of the Company, or securities convertible into shares of the capital stock of the Company; (b) any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation, or any conveyance of all or substantially all of the assets of the Company to another corporation; or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company; the Company will mail or cause to be mailed to the holder of this Option a notice thereof at least ten days prior to the record date. 6. Miscellaneous. This Option shall be governed by and construed ------------- under the laws of the State of Delaware. Nothing contained herein shall prohibit or limit in any manner the right of the Company to issue and sell shares of Class A Common Stock or other securities of the Company for such consideration and upon such terms as the Board of Directors of the Company deems appropriate, regardless of whether or not such transaction would be dilutive to the shares of Class A Common Stock issuable upon the exercise of this Option. IN WITNESS WHEREOF, the Company has caused this Option to be duly signed in its behalf as of the date first set forth above. K-V PHARMACEUTICAL COMPANY By: /s/ Marc S. Hermelin ---------------------------------- Marc S. Hermelin, Vice Chairman and Chief Executive Officer EX-10.(AA) 8 THIRD AMENDMENT TO EMPLOY. AGR. WITH MARC HERMELIN 1 THIRD AMENDMENT TO EMPLOYMENT AGREEMENT BETWEEN KV PHARMACEUTICAL COMPANY AND MARC S. HERMELIN ---------------- This Third Amendment ("Third Amendment") to the Employment Agreement between KV Pharmaceutical Company ("KV") and Marc S. Hermelin ("Hermelin") dated November 15, 1993, as amended (as so amended, the "Employment Agreement") is entered into this 22nd day of November 1995. Whereas, KV has requested Hermelin's assistance in order to achieve increased profitability for the fiscal year ending March 31, 1997; and Whereas, as a shareholder and holder of incentive stock options, Hermelin considers it to be in his personal best interest to accomplish the increased profitability of KV as much as possible; and Whereas, in order to achieve such increased profitability, in part, Hermelin has voluntarily agreed to forego certain payments to which Hermelin would otherwise be entitled under his contractual arrangement with KV; Therefore, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by Hermelin and KV, KV and Hermelin agree that the bonus payable to Hermelin under the Employment Agreement with respect to the fiscal year ending March 31, 1997 shall be capped and limited to an amount not to exceed 50% of the Base Salary payable to Hermelin in accordance with the terms of the Employment Agreement. In witness whereof, KV and Hermelin have entered into this Third Amendment to the Employment Agreement as of the date set forth above. KV Pharmaceutical Company By: /s/ Gerald R. Mitchell /s/ Marc S. Hermelin ------------------------------- ------------------------ Gerald R. Mitchell Marc S. Hermelin Vice President-Finance EX-10.(BB) 9 STOCK OPTION AGREEMENT 1 STOCK OPTION AGREEMENT (Non-Assignable) Date: Option Number: 1056 November 22, 1995 Number of Shares Purchasable 75,000 To Purchase Shares of Class B Common Stock -of- K-V PHARMACEUTICAL COMPANY Issued Pursuant to the 1991 Incentive Stock Option Plan (the "Plan") --------------------------------------------- THIS CERTIFIES THAT Victor M. Hermelin is hereby granted the option to purchase, at the option price of $8.525 per share, all or any part of that number of fully paid and non-assessable shares of the Class B Common Stock, par value $0.01 per share ("Class B Common Stock"), of K-V Pharmaceutical Company, a Delaware corporation (hereinafter called the "Company") above set forth, upon and subject to the following terms and conditions: This Option and all rights to purchase shares hereunder shall expire five (5) years from the date hereof (hereinafter called the "expiration date"). This Option and all rights hereunder shall be non-assignable and non-transferable, except to the extent that the holder's legatees, personal representatives or distributees in the event of the holder's death may be permitted to exercise this Option as hereinafter set forth. Any attempted transfer, assignment, pledge, hypothecation or other disposition of this Option except as provided herein or in accordance with the Company's 1991 Incentive Stock Option Plan (the "Plan") shall be null and void and without effect. As of November 22, 1995, and prior to its expiration or earlier termination, this Option shall be exercisable from time to time in cumulative installments as to all or any of the shares then purchasable hereunder as follows: During the twelve-month period commencing November 22, 1995 and ending November 21, 1996, it may be exercised as to 20% of the shares originally subject hereto; and during each additional consecutive twelve-month period, it may be exercised as to an additional 20%; until the fifth twelve- 2 month period, during which this Option shall be exercisable as to all the shares subject hereto. This Option may be exercised from time to time only by delivery to the Company at its main office (attention of the Secretary) of a duly signed notice in writing stating the number of shares with respect to which this Option is being exercised and the time and date of delivery thereof, which time and date of delivery shall be during the normal business hours of the Company on a regular business day not less than fifteen (15) days after the giving of such notice unless an earlier date has been mutually agreed upon; provided, however, that not less than ten (10) shares may be purchased at any one time unless the number purchased is the total number then purchasable hereunder; and provided further that this Option may not be exercised at any time when this Option or the granting or exercise hereof violates any law or governmental order or regulation. At the time of delivery specified in such notice, the Company shall, without transfer or issue tax to the holder (or other person entitled to exercise this Option) transfer and set aside for the benefit of the holder (or other person entitled to exercise this Option) a certificate or certificates out of the Company's theretofore authorized but unissued or reacquired shares of Class B Common Stock as the Company may elect (with appropriate legend thereon, if deemed necessary by the Company, containing the representation by the person exercising the Option that the shares purchased shall be for investment purposes and not with a view to resale or distribution) against payment of the option price in full for the number of shares purchased by either (i) cash (including a certified or bank cashier's check or the equivalent thereof), or (ii) at the discretion of the Committee, as defined in the Plan, by delivering at fair market value, as determined by the Committee (as provided under the Plan), Company Common Stock already owned by the Participant, or (iii) any combination of cash and Company Common Stock, to be held by the Company and subsequently delivered to the holder (or such other person) as hereinafter provided. If the holder fails to pay for any part of the number of shares specified in such notice as required, the right to purchase such shares may be terminated by the Committee. Except as hereinafter provided, no Option may be exercised at any time unless the holder hereof is an employee of the Company or any of its subsidiaries. To the extent that this Option has not been exercised in full prior to its termination or expiration date, whichever occurs sooner, it shall terminate and become void and of no effect. All Class B Common Stock purchased pursuant to the exercise of an Option shall be held by the Company for a period of two years from the date of exercise (the "Holding Period"). If the holder leaves the employ of the Company during the Holding Period for any reason, except retirement (under normal Company policies), death or disability, the holder's purchase thereof shall be voidable at the Company's sole option and discretion at any time within the Holding Period. If any purchase of Class B Common Stock is so 2 3 voided, the least of (i) the funds paid by the holder in connection with the voided transaction; (ii) the value in cash of Common Stock used to purchase such Class B Common Stock, determined as of the date of such purchase, less any amount which would have been forfeited pursuant to the Plan relative to Stock used to purchase the forfeited stock if such Stock has not been so used and the Holding Period relative to such stock had not expired; or (iii) the fair market value per shares, as determined on the date of termination of the holder's employment with the Company in accordance with the provisions of the Plan, shall be returned in full to the holder within thirty (30) days after such purchase is voided provided, however, no payment shall be due prior to the time that the Company is in possession of the Class B Common Stock and an executed stock power with respect to such Stock. In order to facilitate the repurchase of Class B Common Stock by the Company in accordance with the terms of this paragraph, each holder who exercises any Option or portion thereof shall, at the time of payment for such Class B Common Stock, as provided hereinabove, deliver to the Company a form of stock power and assignment signed by such holder in form and substance satisfactory to the Company, rendering the certificate representing the shares purchased negotiable to the Company. Notwithstanding the foregoing, if any holder who exercises an Option demonstrates to the Committee of the Company a need to obtain financing for the purchase of Class B Common Stock and indicates his good faith intention to remain in the employ of the Company during the Holding Period, the Committee, in its sole discretion, may permit delivery of any Class B Common Stock purchased hereunder to a financial institution for use as collateral security for the purchase of the Class B Common Stock, subject to any necessary or appropriate restrictions with respect thereto as may be required to comply with applicable federal and state securities laws and/or the listing requirements of any national securities exchange, and the holder may use any Class B Common Stock so held in payment of the Option Price for additional Class B Common Stock as provided for herein. If the holder remains in the employ of the Company throughout the Holding Period, or is terminated by reason of death, disability or retirement (under normal Company policies) the Company shall deliver to the holder or the holder's personal representative, as soon as practicable thereafter, certificates representing the Class B Common Stock purchased hereunder (the "Certificates"), free and clear of restrictions except for the restrictions which are necessary to assure compliance by the Company and the holder with applicable federal and state securities laws and/or the listing requirements of any national securities exchange. If the Company fails or declines to exercise its right to void any purchase pursuant to the terms of the preceding paragraph hereof, the Company shall deliver the Certificates to the holder as soon as practicable after the expiration of two years from the date of exercise. This Option shall not confer upon the holder any right to remain in the employ of the Company or any subsidiary thereof and shall not confer upon the holder any rights in the stock of the Company prior to the issuance of a stock certificate pursuant to the 3 4 exercise of this Option. No adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. Except as provided in this paragraph, upon termination of the holder's employment with the Company or any of its subsidiaries for any reason, this Option shall terminate. If the employment of the Participant is terminated by reason of retirement (under normal Company policies) any outstanding Option or unexercised portion thereof granted to him may be fully exercised by the Participant, his personal representative, executor, administrator, heirs or devisees, as applicable, at any time, within three months from the date of termination by reason of retirement. If the employment of a Participant is terminated by reason of death or disability, any outstanding Option or unexercised portion thereof which was granted to him may be fully exercised by the Participant, his personal representative, executor, administrator, heirs or devisees, as applicable, at any time within one year from the date of termination by reason of death or disability, provided that the Participant has completed five (5) full years of employment with the Company from the date the Option was granted. If the Participant has not completed five (5) full years of employment with the Company from the date the Option was granted, the Option may be exercised only to the extent exercisable as of the date of termination of employment. Notwithstanding any of the foregoing, no Option shall be exercisable at any time after the expiration of employment from the Company to any Parent or Subsidiary thereof, or vice verse, shall not be deemed a termination of employment. In the event that the outstanding shares of Class B Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation, or in the event that there is a "corporate transaction" as that term is defined in the Regulations under Section 425 of the Internal Revenue Code of 1986, by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, spin-off, combination of shares or dividend payable in capital stock, this Option shall, to the extent that it has not been exercised, entitle the holder upon the subsequent exercise of this Option to such number and kind of securities or other property, subject to the terms of the Option, to which the holder would be entitled had the holder actually owned the shares subject to the unexercised portion of this Option at the time of the occurrence of such event, and the aggregate purchase price upon the subsequent exercise of this Option shall be the same as if the Class B Common Stock of the Company originally optioned were being purchased as provided herein; provided, however, that each such adjustment in the number and kind of shares subject to this Option, including any adjustment in the Option price, shall be made in such manner as not to constitute a "modification" as defined in Section 425 of the Internal Revenue Code of 1986. Any such adjustment made by the Committee shall be conclusive. Upon the occurrence of: (i) the dissolution or liquidation of the Company, (ii) a reorganization, merger or consolidation of the Company with one or more corporations in which the Company is not the surviving corporation, (iii) a sale of substantially all of the 4 5 assets of the Company or (iv) the transfer of more than 80% of the then outstanding Stock of the Company to another entity or person in a single transaction or series of transactions, the Plan shall terminate, and any outstanding Options granted under the Plan shall terminate on the day before the consummation of the transaction; provided that the Board of Directors shall have the right, but shall not be obligated, to accelerate the time in which any Options may be exercised prior to such a termination. However, the termination of such Options shall not occur if the Board of Directors takes certain actions as provided in the Plan. In addition, the Board of Directors has the authority to amend the Plan to require that a successor corporation assume any outstanding Options. The Company may postpone the issuance and delivery of shares upon any exercise of this Option, if necessary, until admission of such shares to listing on any stock exchange and completion of registration and qualification of such shares under any applicable state or federal law, rule or regulation. The holder hereof shall make such representations and furnish such information to the Company as may be appropriate to permit the Company to issue such shares in compliance with the provisions of the Securities Act of 1933, as amended (the "Securities Act"), or any other applicable law, including state securities laws. Without limiting the generality of the foregoing, if requested by the Company, the holder will represent, in form acceptable to the Company, that the holder is purchasing any shares issued pursuant hereto for investment purposes and not with a view to resale or distribution. The holder, by acceptance of this Option, hereby consents to the placing of restrictive legend on any stock certificate for shares purchased hereunder, setting forth the restrictions applicable to the further resale, transfer or other conveyance thereof without registration under the Securities Act or other applicable law or the availability of an exemption from registration thereunder and to the placing of transfer restrictions on the records of the transfer agent for such shares. In addition, the holder hereof will not thereafter resell, transfer or otherwise convey any shares purchased hereunder without compliance with one of the following three conditions: (1) an opinion of the holder's counsel is received, in form and substance satisfactory to counsel for the Company, that registration under the Securities Act and applicable state securities laws is not required; or (2) such shares have been registered for sale under the Securities Act and any applicable state securities laws; or (3) a "no-action" letter is received from the staff of the Securities and Exchange Commission and from applicable state securities agencies, based on an opinion of the holder's counsel in form and substance reasonably satisfactory to counsel for the Company, advising that registration under the Security Act is not required. This Option is issued pursuant to the provisions of the Company's 1991 Incentive Stock Option Plan, the receipt of a copy of which the holder acknowledges by virtue of the acceptance hereof, and is subject to all the terms and conditions of said Plan. 5 6 A determination by the Committee of any questions which may arise with respect to the interpretation and construction of the provisions of this Option or of said Plan shall be final. The Committee may authorize and establish such rules, regulations and revisions thereof not inconsistent with the provisions of said Plan as it may deem advisable. WITNESS the seal of the Company and the signatures of its duly authorized officers or agents. Dated: November 22, 1995 K-V PHARMACEUTICAL COMPANY By /s/Gerald R. Mitchell --------------------------------- Vice President, Finance ACCEPTED: /s/Victor M. Hermelin - ----------------------------- Victor M. Hermelin 6 EX-11.(A) 10 COMPUTATION OF PER SHARE EARNINGS 1 Exhibit 11(a) KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES EARNINGS (LOSS) PER SHARE CALCULATIONS
Year Ended March 31, 1996 1995 1994 ------------ ------------ ------------ Calculation of Primary Earnings (Loss) per Share: Net Income (Loss) $ 4,042,660 $ (5,374,801) $ (8,181,294) Less dividends on preferred stock (421,750) (421,750) (421,750) ------------ ------------ ------------ Earnings (Loss) Attributed to Common Stock 3,620,910 (5,796,551) (8,603,044) ============ ============ ============ Average Number of Common Shares and Common Share Equivalents Outstanding: Average common shares outstanding 11,521,884 11,178,495 11,055,196 Common share equivalents (after application of treasury stock method) 313,537 N/A N/A ------------ ------------ ------------ Average Common Shares and Common Share Equivalents Outstanding 11,835,421 11,178,495 11,055,196 ============ ============ ============ Primary Earnings (Loss) per Share $ 0.31 $ (0.52) $ (0.78) ============ ============ ============ Calculations of Fully-Diluted Earnings (Loss) per Share: Earnings (Loss) per Share: Net income (loss) $ 4,042,660 $ (5,374,801) $ (8,181,294) Less dividends on preferred stock (421,750) (421,750) (421,750) Plus dividends not payable due to preferred stock conversion 421,750 421,750 421,750 ------------ ------------ ------------ Earnings (Loss) Attributed to Common Stock 4,042,660 (5,374,801) (8,181,294) ============ ============ ============ Average Number of Shares Outstanding on a Fully-Diluted Basis: Average common shares outstanding 11,521,884 11,178,495 11,055,196 Shares issuable upon conversion of stock options 372,370 248,709 361,709 Common equivalent shares for preferred stock 301,250 301,250 301,250 ------------ ------------ ------------ Average Number of Shares Outstanding on a Fully-Diluted Basis 12,195,504 11,728,454 11,718,155 ============ ============ ============ Fully-Diluted Earnings (Loss) per Share $ 0.33 $ (0.46) $ (0.70) ============ ============ ============ The two-class method for Class A and Class B Common Stock is not presented because the earnings (loss) per share is equivalent to the if-converted method since dividends were not declared or paid and each class of common stock has equal ownership of the Company. This calculation is submitted although it is contrary to Paragraph 40 of APB Opinion No. 15 as it produces an anti-dilutive result. Also, the preferred stock would not qualify as a common share equivalent because the cash yield at issuance was not less than 66 2/3% of the then current average Aa corporate bond yield.
EX-22.(A) 11 LIST OF SUBSIDIARIES 1 EXHIBIT 22(a) LIST OF SUBSIDIARIES -------------------- Particle Dynamics, Inc. (formerly known as Desmo Chemical Corporation), a New York Corporation, a wholly-owned subsidiary of KV Pharmaceutical Company. ETHEX Corporation, (formerly known as KV Pharmaceuticals International, Inc.) a Missouri Corporation, a wholly-owned subsidiary of KV Pharmaceutical Company. EX-23.(A) 12 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1 EXHIBIT 23(a) CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ----------------- KV Pharmaceutical Company St. Louis, Missouri We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Numbers 2-56793, 2-76173, 33-36400, 33-44927 and 333-199) of our report dated July 12, 1996, relating to the consolidated financial statements of KV Pharmaceutical Company appearing in the Company's Annual Report on Form 10-K for the year ended March 31, 1996. BDO SEIDMAN, LLP St. Louis, Missouri July 12, 1996 EX-27 13 FINANCIAL DATA SCHEDULE
5 YEAR MAR-31-1996 APR-01-1995 MAR-31-1996 2,038,069 0 8,502,714 0 8,450,162 19,220,303 7,621,217 0 29,169,710 5,167,354 0 118,681 0 2,410 0 29,169,710 49,788,635 49,788,635 0 26,259,638 17,308,086 0 2,088,251 4,132,660 90,000 4,042,660 0 0 0 4,042,660 .31 .33
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