Human Capital & Careers

KV Takes Medicine for Option Goof

The drug company, under investigation by the SEC, will restate 11 years' worth of financials because of wrongly backdated options.
Stephen TaubOctober 12, 2007

KV Pharmaceutical says it will restate its financials for the fiscal years 1996 through 2006 after determining that it improperly dated stock-option grants. The company says it will record additional noncash, stock-based compensation expense of about $12 million. The restatement also will include $2.5 million of additional payroll taxes and penalties for fiscal years 2004 through 2006.

In addition, CEO Marc Hermelin has agreed to reimburse the company $1.4 million related to backdated options he received and exercised in lieu of bonuses due to him under terms of his employment agreement.

The drug company says, however, that no employee, officer, or director engaged in any intentional wrongdoing or was aware that the company’s policies and procedures for granting and accounting for stock options were materially noncompliant with generally accepted accounting principles. The company says its stock-option granting and accounting practices have been appropriate since April 2, 2006.

KV concedes that before that date, it granted options based on the lowest price between the award date and the end of the quarter for existing employees and between the first date of employment and the end of the quarter for new employees. About 78 percent of the company’s current employees receive option grants.

The company, which is the target of an informal probe by the Securities and Exchange Commission, also says that certain stock-option grants awarded to officers and directors will be repriced.

Management’s assessment of internal controls over financial reporting and its auditor’s report on internal controls over financial reporting for the year ended March 31, 2006, should no longer be relied upon, KV says.

Derivative lawsuits against some current and former company directors and officers alleging inappropriate dating of option grants are pending in U.S. District Court for the Eastern District of Missouri. All of the cases have been consolidated into a single proceeding.

Meanwhile, unrelated to the stock-options matter, the company says it will include an additional income-tax expense of about $6.9 million in restated financials for the fiscal periods from 2004 through 2006. This amount represents an increase in liabilities for uncertain tax positions taken in previous years, partially offset by certain tax refunds.