KV PHARMACEUTICAL CO /DE/, S-3, 2000-03-28

KV PHARMACEUTICAL CO /DE/
S-3, 2000-03-28
PHARMACEUTICAL PREPARATIONS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 28, 2000
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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K-V PHARMACEUTICAL COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
DELAWARE 43-0618919
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>

2503 SOUTH HANLEY ROAD
ST. LOUIS, MISSOURI 63144
(314) 645-6600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

GERALD R. MITCHELL
VICE PRESIDENT, TREASURER
K-V PHARMACEUTICAL COMPANY
2503 SOUTH HANLEY ROAD
ST. LOUIS, MISSOURI 63144
(314) 645-6600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------

COPY OF ALL CORRESPONDENCE TO:

<TABLE>
<S> <C>
THOMAS A. LITZ, ESQ. MARK C. SMITH, ESQ.
THOMPSON COBURN LLP ALLISON R. SCHNEIROV, ESQ.
ONE MERCANTILE CENTER SKADDEN, ARPS, SLATE,
ST. LOUIS, MISSOURI 63101 MEAGHER & FLOM LLP
TELEPHONE: (314) 552-6000 FOUR TIMES SQUARE
FACSIMILE: (314) 552-7000 NEW YORK, NEW YORK 10036
TELEPHONE: (212) 735-3000
FACSIMILE: (212) 735-2000
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
- ---------------

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
- ---------------

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
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CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A common stock, par value
$0.01 per share.................. 4,600,000 shares(1) $ 32.00(2) $147,200,000(2) $38,861(2)
- ----------------------------------------------------------------------------------------------------------------------
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</TABLE>

(1) Includes an aggregate of 600,000 shares of Class A common stock that may be
purchased by the underwriters from K-V Pharmaceutical Company to cover
over-allotments, if any.

(2) Estimated solely for the purpose of determining the amount of the
registration fee pursuant to Rule 457(c) based on the average of the high
and low prices on March 24, 2000 as reported on the New York Stock Exchange.
------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

- --------------------------------------------------------------------------------
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<PAGE> 2

The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not
soliciting offers to buy these securities in any state where the offer
or sale is not permitted.

SUBJECT TO COMPLETION, DATED MARCH 28, 2000

4,000,000 Shares

KV PHARMACEUTICAL LOGO

Class A Common Stock

------------------

We are selling 3,335,000 shares of Class A common stock and the selling
stockholders are selling 665,000 shares of Class A common stock. We will not
receive any of the proceeds from the shares of common stock sold by the selling
stockholders.

Our Class A common stock is traded on the New York Stock Exchange under the
symbol "KV.A." On March 24, 2000, the last reported sale price for our Class A
common stock on the New York Stock Exchange was $32.1875 per share.

The underwriters have an option to purchase a maximum of 600,000 additional
shares of Class A common stock from us to cover over-allotments of shares.

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 5.

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO PROCEEDS TO
PRICE TO DISCOUNTS AND K-V SELLING
PUBLIC COMMISSIONS PHARMACEUTICAL STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share............................. $ $ $ $
Total................................. $ $ $ $
</TABLE>

Delivery of the shares will be made on or about , 2000.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

CREDIT SUISSE FIRST BOSTON DEUTSCHE BANC ALEX. BROWN
BANC OF AMERICA SECURITIES LLC WARBURG DILLON READ LLC

The date of this prospectus is , 2000.
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TABLE OF CONTENTS

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PAGE
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PROSPECTUS SUMMARY.................. 1
RISK FACTORS........................ 5
USE OF PROCEEDS..................... 10
PRICE RANGE OF COMMON STOCK......... 11
DIVIDEND POLICY..................... 11
CAPITALIZATION...................... 12
SELECTED CONSOLIDATED FINANCIAL
DATA.............................. 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS..................... 15
BUSINESS............................ 21
MANAGEMENT.......................... 37
</TABLE>

<TABLE>
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PAGE
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PRINCIPAL AND SELLING
STOCKHOLDERS...................... 39
DESCRIPTION OF CAPITAL STOCK........ 41
UNDERWRITING........................ 45
NOTICE TO CANADIAN RESIDENTS........ 46
LEGAL MATTERS....................... 47
EXPERTS............................. 47
WHERE YOU CAN FIND MORE
INFORMATION....................... 48
INFORMATION INCORPORATED BY
REFERENCE......................... 48
INDEX TO CONSOLIDATED FINANCIALS
STATEMENTS........................ F-1
</TABLE>

------------------------

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
AS OF THE DATE OF THIS DOCUMENT.
------------------------

"BioSert", "DESCOTE", "Guaifenex", "Hista-Vent", "Histinex", "KV/24",
"LIQUETTE", "METER RELEASE", "Micro-K", "MICRO RELEASE", "NatalCare", "OraSite",
"PreCare" and "SITE RELEASE" are federally registered trademarks of K-V
Pharmaceutical. "Anemagen", "Bromfenex", "DESTAB", "DermaSite", "Fe-Tinic",
"FlavorTech", "Hydro-Tussin", "MicroMask", "OcuSite", "OraQuick", "OraSert",
"PreCare Conceive", "PremesisRx", "Pseudovent", "PulmaSite", "Quadra-Hist",
"Trans-EP" and "VagiSite" are trademarks of K-V Pharmaceutical. Other trademarks
or servicemarks appearing in this prospectus are the property of their
respective holders.
------------------------

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements relate to future events or our
future financial performance, and are identified by terms such as "may," "will,"
"should," "expects," "plans," "intends," "anticipates," "believes," "potential,"
or "continue," or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially. In evaluating these
statements, you should specifically consider various factors, including risks
outlined under "Risk Factors." These factors may cause our actual results to
differ materially from any forward-looking statement made in this prospectus.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of such statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus to conform the statements to actual results.
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(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 5

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that you should consider
before investing in our Class A common stock. You should read the entire
prospectus carefully. Unless otherwise specified, all information in this
prospectus assumes no exercise of the underwriters' over-allotment option.
Generally, when we use the words "we," "our," "us" or "our company" we are
referring to K-V Pharmaceutical Company and its wholly-owned subsidiaries
Ther-Rx Corporation, ETHEX Corporation, Particle Dynamics, Inc. and DrugTech
Corporation.

K-V PHARMACEUTICAL COMPANY

We are a fully integrated specialty pharmaceutical company that develops,
acquires, manufactures and markets technologically distinguished branded and
generic prescription pharmaceutical products. We conduct our branded
pharmaceutical operations through Ther-Rx Corporation, which began operations in
March 1999. Ther-Rx currently markets products focused on the women's health and
cardiovascular therapeutic areas, although its therapeutic focus may expand as
we continue to evaluate development and acquisition opportunities. We conduct
our generic pharmaceutical operations through ETHEX Corporation, which focuses
principally on technologically distinguished generic products in four
therapeutic areas: women's health; cardiovascular; pain management; and
respiratory. Through Particle Dynamics, Inc., we also develop, manufacture and
market technologically advanced, value-added raw material products for the
pharmaceutical, nutritional, food and personal care markets.

A key element of our strategy is to leverage our portfolio of drug delivery
technologies to create technologically distinguished brand name and generic
products. We have developed and patented 15 drug delivery and formulation
technologies in four principal areas: oral controlled release; tastemasking;
oral and topical site specific; and quick dissolving. We incorporate these
technologies in the products we market to improve and control the human body's
absorption and utilization of active pharmaceutical compounds. These
technologies provide several benefits, including reduced frequency of
administration, reduced side effects, improved drug efficacy and enhanced
patient compliance.

THER-RX -- OUR BRAND NAME PHARMACEUTICAL BUSINESS

We established the Ther-Rx business to market brand name pharmaceutical
products that we internally develop using our proprietary technologies and that
we acquire. In March 1999, Ther-Rx launched its first brand name product,
Micro-K(R), a prescription potassium supplement. We acquired Micro-K(R) from
Wyeth Ayerst Laboratories, the pharmaceutical division of American Home Products
Corporation, for $36.0 million. The Micro-K(R) product line had worldwide net
sales of approximately $18.5 million in 1998, of which $13.3 million were
branded product sales. Micro-K(R) competes in a market of more than $300
million. In August 1999, we acquired PreCare(R), a prescription prenatal
vitamin, from UCB Pharma for $8.5 million. PreCare(R) had net sales of
approximately $4.3 million in 1998 and competes in a market of more than $100
million.

Ther-Rx also has launched three internally developed products as product
line extensions to PreCare(R) since October 1999. The first product, PreCare(R)
Chewables, is the world's first prescription chewable prenatal vitamin.
Ther-Rx's second internally developed product, PremesisRx(TM), is an innovative
prenatal prescription product which incorporates our controlled release Vitamin
B(6) to help reduce pregnancy-related nausea. The third product, PreCare(R)
Conceive(TM), is the first single nutritional pre-conception supplement for both
men and women.

Ther-Rx has approximately 110 specialty sales representatives. Ther-Rx's
sales force focuses on physician specialists who are identified through
available market research as frequent prescribers of our prescription products.
We intend to continue to increase our sales force to accommodate our strategic
objectives.

1
<PAGE> 6

ETHEX -- OUR TECHNOLOGICALLY DISTINGUISHED GENERIC DRUG BUSINESS

We established the ETHEX business in 1990 to utilize our portfolio of drug
delivery systems to develop and market technologically enhanced generic
pharmaceuticals. ETHEX's current product line includes more than 65 products,
75% of which are identified by IMS America as the leading product in their
respective generic category. We believe many of our generic products enjoy
higher gross margins than those of other generic manufacturers due to the
benefits of our drug delivery systems, our marketing approach and our specialty
manufacturing capabilities which enable us to produce pharmaceuticals which are
difficult to replicate. For example, we have incorporated our METER RELEASE(R)
technology into the only generic equivalent to Norpace(R) CR (Searle), an
antiarrhythmic that is taken twice daily. Utilizing our specialty manufacturing
expertise and a sublingual delivery system, we also produce and market the first
generic alternative to Nitrostat(R) (Parke Davis), used to treat angina.

PARTICLE DYNAMICS, INC. -- OUR VALUE-ADDED RAW MATERIAL BUSINESS

Particle Dynamics develops and markets specialty raw material product lines
for the pharmaceutical, nutritional, food and personal care industries. Our
products, DESCOTE(R), DESTAB(TM) and MicroMask(TM), include value-added
chemical, vitamin or mineral raw materials that provide benefits such as
improved taste, enhanced product stability or a more efficient manufacturing
process.

STRATEGY

Our goal is to enhance our position as a leading specialty pharmaceutical
company that utilizes our expanding drug delivery expertise to bring
technologically distinguished brand name and generic products to market. Our
strategy incorporates the following key elements:

- CAPITALIZE ON ACQUISITION OPPORTUNITIES. Through Ther-Rx, we plan to
actively seek acquisition opportunities. We believe that consolidation
among large pharmaceutical companies, coupled with cost-containment
pressures, will lead to the divestiture of small or non-strategic product
lines, which can be profitable for specialty pharmaceutical companies
like us to manufacture and market.

- INTERNALLY DEVELOP BRAND NAME PRODUCTS. We plan to apply our existing
drug delivery technologies, research and development, and manufacturing
expertise to introduce new products which can expand our existing
franchises.

- PURSUE ATTRACTIVE GROWTH OPPORTUNITIES WITHIN THE GENERIC INDUSTRY. We
intend to continue to introduce generic counterparts to drugs whose
patents have expired. When patents no longer protect a branded product,
opportunities exist for ETHEX to introduce generic counterparts. We
believe we are uniquely positioned to capitalize on this dynamic given
our suite of proprietary drug delivery technologies and our ability to
bring value-added products to market.

- FOCUS SALES EFFORTS ON HIGH VALUE NICHE MARKETS. We focus our sales
efforts on niche markets where we believe we can target a relatively
narrow physician audience. We plan to continue to build our sales force
significantly to expand our coverage of frequent prescribers of our
products and as we acquire additional branded pharmaceutical products.

- ADVANCE EXISTING AND DEVELOP NEW DRUG DELIVERY TECHNOLOGIES. We expect
to continue to develop our drug delivery technologies and have identified
various technologies with substantial growth potential, such as systems
for the oral delivery of bioactive peptides and proteins through the
mucosal tissues of the esophagus and upper lung.

We were incorporated in Delaware in 1971 as a successor to a business
originally founded in 1942. Our principal executive offices are located at 2503
South Hanley Road, St. Louis, Missouri 63144, and our phone number is (314)
645-6600.

2
<PAGE> 7

THE OFFERING

Class A common stock offered by the
Company............................. 3,335,000 shares

Class A common stock offered by the
selling stockholders................ 665,000 shares

Class A common stock to be
outstanding after the offering...... 15,546,908 shares

Class B common stock to be
outstanding after the offering...... 6,560,961 shares

Total............................... 22,107,869 shares

Use of proceeds..................... For general corporate purposes,
including expansion of our Ther-Rx
sales and marketing infrastructure,
funding potential acquisitions,
research and development, and repayment
of debt. We will not receive any of the
proceeds from the sale of shares of
Class A common stock by the selling
stockholders.

New York Stock Exchange symbol...... KV.A

3
<PAGE> 8

SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
---------------------------- ------------------
1997 1998 1999 1998 1999
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(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................ $57,891 $98,486 $114,860 $79,097 $107,596
Manufacturing costs..................... 29,478 56,483 61,415 43,306 48,459
------- ------- -------- ------- --------
Gross profit............................ 28,413 42,003 53,445 35,791 59,137
------- ------- -------- ------- --------
Research and development................ 4,835 5,752 6,884 4,934 6,040
Selling and administrative.............. 13,818 19,104 22,201 15,918 28,880
Amortization of intangible assets....... 188 254 243 124 1,680
------- ------- -------- ------- --------
Total operating expenses...... 18,841 25,110 29,328 20,976 36,600
------- ------- -------- ------- --------
Operating income........................ 9,572 16,893 24,117 14,815 22,537
Other income (expense):
Arbitration award..................... -- -- 12,723 -- --
Interest and other income............. 147 550 1,291 1,077 545
Interest expense...................... (411) (452) (498) (332) (1,569)
------- ------- -------- ------- --------
Total other income (expense)............ (265) 98 13,516 745 (1,024)
------- ------- -------- ------- --------
Income before income taxes.............. 9,307 16,991 37,633 15,560 21,513
Provision for income taxes.............. 383 5,687 14,293 5,907 8,172
------- ------- -------- ------- --------
Net income.................... $ 8,924 $11,304 $ 23,340(1) $ 9,653 $ 13,341
======= ======= ======== ======= ========
Basic net income per share(2)........... $ 0.48 $ 0.60 $ 1.26(1) $ 0.51 $ 0.70
Basic weighted average number of
shares(2)............................. 17,759 18,094 18,201 18,187 18,609
Diluted net income per share(2)......... $ 0.47 $ 0.58 $ 1.17(1) $ 0.48 $ 0.66
Diluted weighted average number of
shares(2)............................. 19,022 19,641 19,972 19,991 20,146
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1999
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ACTUAL AS ADJUSTED
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(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 3,337 $ 86,278
Working capital............................................. 37,526 120,467
Total assets................................................ 136,439 219,830
Total long-term debt, including current portion............. 25,527 7,527
Total stockholders' equity.................................. 86,765 187,706
</TABLE>

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(1) Results for the year ended March 31, 1999 include a nonrecurring gain
associated with an arbitration award. Pursuant to the award, we received a
net payment of $7,956 in fiscal 1999, or $0.40 per common share on a diluted
basis.

(2) See note 15 of notes to our consolidated financial statements for an
explanation of the determination of the number of shares used in calculating
basic and diluted net income per share.

The as adjusted balance sheet data as of December 31, 1999 gives effect to
the net proceeds from the sale of 3,335,000 shares of Class A common stock
offered by us at an estimated offering price of $32.1875 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses. We plan to use a portion of the net proceeds of this offering to repay
borrowings under our revolving line of credit. See "Use of Proceeds" and
"Capitalization."

4
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RISK FACTORS

Before you buy our Class A common stock, you should know that making such
an investment involves some risks, including the risks described below. You
should carefully consider the factors described below in addition to the
remainder of this prospectus before purchasing our shares. The risks that we
have highlighted here are not the only ones that we face. Additional risks
presently unknown to us or that we currently consider immaterial or unlikely to
occur could also impair our operations. If any of the risks actually occur, our
business, financial condition or results of operations could be negatively
affected. In that case, the trading price of our stock could decline, and you
could lose all or part of your investment.

RISKS RELATED TO OUR BUSINESS

OUR ACQUISITION STRATEGY MAY NOT BE SUCCESSFUL.

We intend to acquire pharmaceutical products, novel drug delivery
technologies and/or companies that fit into our research, manufacturing,
distribution or sales and marketing operations or that could provide us with
additional products, technologies or sales and marketing capabilities. We may
not be able to successfully identify, evaluate and acquire any such products,
technologies or companies or, if acquired, we may not be able to successfully
integrate such acquisitions into our business. We compete with many specialty
pharmaceutical companies for product and product line acquisitions. These
competitors may have substantially greater financial and managerial resources
than we have.

WE NEED TO INTERNALLY DEVELOP NEW PRODUCTS TO ACHIEVE OUR STRATEGIC OBJECTIVES.

We need to continue to develop and commercialize new brand name products
and generic products utilizing our proprietary drug delivery systems to maintain
the growth of Ther-Rx, ETHEX and Particle Dynamics. To do this we will need to
identify, develop, and commercialize technologically enhanced branded products
and identify, develop and commercialize drugs that are either off patent or
approaching patent expiration and that can be produced and sold by us as generic
products. If we are unable to identify, develop and commercialize new products,
we may need to license additional rights to branded or generic products,
assuming they would be available for licensing, which could decrease our
profitability. We cannot assure you that we will be successful in pursuing these
strategies.

WE MAY NOT BE ABLE TO COMMERCIALIZE PRODUCTS UNDER DEVELOPMENT.

Certain products we are developing will require significant additional
development and investment, including preclinical and clinical testing where
required, prior to their commercialization. We expect that many of the products
will not be commercially available for several years, if at all. We cannot
assure you that such products or future products will be successfully developed,
prove to be safe and effective in clinical trials (if required), meet applicable
regulatory standards, or be capable of being manufactured in commercial
quantities at reasonable cost.

WE DEPEND ON OUR PATENTS AND PROPRIETARY RIGHTS.

Our success depends, in large part, on our ability to protect our current
and future technologies and products, to defend our intellectual property rights
and to avoid infringing on the proprietary rights of others. We have been issued
numerous patents in the United States and in certain foreign countries which
cover our technologies, and have filed, and expect to continue to file, patent
applications seeking to protect newly developed technologies and products.
Because the pharmaceutical field is crowded and a substantial number of patents
have been issued and because the patent position of pharmaceutical companies can
be highly uncertain and frequently involve complex legal and factual questions,
the breadth of claims allowed in patents relating to pharmaceutical applications
or their enforceability cannot be predicted.

5
<PAGE> 10

The coverage claimed in a patent application can be significantly reduced
before a patent is issued, either in the United States or abroad. Consequently,
we do not know whether any of our pending or future patent applications will
result in the issuance of patents or, to the extent patents have issued or will
issue, whether the patents will be subjected to further proceedings limiting
their scope, and whether they will provide significant proprietary protection or
competitive advantage, or will be circumvented or invalidated. In addition,
because patent applications in the United States are currently maintained in
secrecy until patents issue and patent applications in certain other countries
generally are not published until more than 18 months after they are first
filed, and because publication of discoveries in scientific or patent literature
often lags behind actual discoveries, we cannot be certain that we or any
licensor was the first creator of inventions covered by pending patent
applications or that we or any licensor were the first to file patent
applications on such inventions. Furthermore, patents already issued to us or
our pending applications may become subject to dispute, and any dispute could be
resolved against us. For example, we may become involved in interference
proceedings in the U.S. Patent Office, or opposition proceedings in a foreign
country. In addition, statutory differences in patentable subject matter may
limit the protection we can obtain on some of our inventions outside of the
United States. For example, methods of treating humans are not patentable in
many countries outside of the United States. These and other issues may prevent
us from obtaining patent protection outside of the United States.

We also rely on trade secrets, unpatented proprietary know-how and
continuing technological innovation that we seek to protect, in part by
confidentiality agreements with licensees, suppliers, employees and consultants.
We cannot assure you that these agreements will not be breached. We also cannot
be certain that we will have adequate remedies for any breach. Disputes may
arise concerning the ownership of intellectual property or the applicability or
enforceability of our confidentiality agreements and there can be no assurance
that any such disputes would be resolved in our favor. Furthermore we cannot be
sure that our trade secrets and proprietary technology will not otherwise become
known or be independently developed by our competitors or, if patents are not
issued with respect to products arising from research, that we will be able to
maintain the confidentiality of information relating to such products.
Litigation also may be necessary to enforce our patents against others or to
protect our know-how or trade secrets. Such litigation could result in
substantial expense and there can be no assurance that any litigation will be
resolved in our favor.

THIRD PARTIES MAY CLAIM THAT WE INFRINGE ON THEIR PROPRIETARY RIGHTS.

We may be required to defend against charges of infringement of patent or
proprietary rights of third parties. Such defense could require us to incur
substantial expense and to divert significant effort of our technical and
management personnel, and could result in our loss of rights to develop or make
certain products or require us to pay monetary damages or royalties to license
proprietary rights from third parties. Although patent and intellectual property
disputes in the pharmaceutical product area often have been settled through
licensing or similar arrangements, costs associated with such arrangements may
be substantial and could include ongoing royalties. Furthermore, we cannot be
certain that the necessary licenses would be available to us on acceptable
terms, if at all. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
us from manufacturing and selling certain of our products.

WE MAY BE UNABLE TO MANAGE OUR GROWTH.

Recently, our businesses and product offerings have grown substantially.
This growth and expansion have placed, and are expected to continue to place, a
significant strain on our management, operational and financial resources. To
manage our growth, we must (1) continue to expand our operational, customer
support and financial control systems and (2) hire, train and retain qualified
personnel. We cannot assure you that we will be able to adequately manage our
growth. If we are unable to manage our growth effectively, our business, results
of operations and financial condition could be materially adversely affected.

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<PAGE> 11

WE MAY HAVE FUTURE CAPITAL NEEDS AND ANY FUTURE ISSUANCES OF EQUITY SECURITIES
WILL RESULT IN DILUTION.

We anticipate that the funds generated from this offering and funds
generated internally, together with funds available under our credit facility,
will be sufficient to implement our business plan for the foreseeable future,
subject to such additional needs as may arise if substantial acquisition
opportunities become available. We may need additional capital if unexpected
events occur or opportunities arise. Such additional capital might be raised
through the public or private sale of debt or equity securities. If we sell
equity securities, your percentage ownership of our company will decrease and
you could experience dilution. Furthermore, such securities could have rights,
preferences and privileges more favorable than those of the Class A common
stock. We cannot assure you that additional funding will be available, or
available on terms favorable to us. If funding is not available, we may not be
able to fund our expansion, take advantage of acquisition opportunities or
respond to competitive pressures.

WE MAY NOT OBTAIN REGULATORY APPROVAL FOR OUR NEW PRODUCTS ON A TIMELY BASIS, OR
AT ALL.

Some of our new products will require U.S. Food and Drug Administration
approval. FDA approval typically involves lengthy, detailed and costly
laboratory and clinical testing procedures, as well as the FDA's review and
approval of the information submitted. We cannot assure you that the products we
are developing will be determined to be safe and effective in these testing
procedures, or that they will be approved by the FDA.

OUR BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION.

Our business is subject to extensive regulation by numerous governmental
authorities in the United States and other countries, particularly the FDA.
Failure to comply with applicable FDA or other regulatory requirements may
result in criminal prosecution, civil penalties, injunctions, recall or seizure
of products and total or partial suspension of production, as well as other
regulatory actions against our products and us.

We market certain drug products in the United States without FDA approval
under certain "grandfather" clauses and statutory and regulatory exceptions to
the pre-market approval requirement for "new drugs" under the Federal Food, Drug
and Cosmetic Act. A determination as to whether a particular product does or
does not require FDA pre-market review and approval can involve consideration of
numerous complex and imprecise factors. If a determination is made by the FDA
that any product marketed without approval requires pre-market approval, the FDA
may institute enforcement actions, including product seizure, or an action
seeking an injunction against further marketing. As a consequence of such
actions, we could be required or could decide to cease distribution of a product
until such pre-market approval is obtained. In addition, we may not be able to
obtain any such approval or such approvals may not be obtained on a timely
basis.

If we should need to obtain pre-market "new drug" approval from the FDA for
any of our products, the process for obtaining such approval is generally
lengthy, expensive and uncertain. Securing FDA approvals often requires
applicants to submit extensive clinical data and supporting information to the
FDA. We cannot assure investors that we will be able to obtain necessary
regulatory approvals on a timely basis, if at all, for any of our potential
products. The FDA also has the authority to revoke for cause drug approvals
previously granted.

In addition to compliance with current Good Manufacturing Practices
requirements, drug manufacturers must register each manufacturing facility with
the FDA. Manufacturers also must be registered with the Drug Enforcement
Administration and similar state and local regulatory authorities if they handle
controlled substances, and with the Environmental Protection Agency and similar
state and local regulatory authorities if they generate toxic or dangerous
wastes. We are currently in material compliance with Good Manufacturing
Practices and are registered with the appropriate agencies. Non-compliance with
applicable Good Manufacturing Practices requirements or the rules and
regulations of these agencies can result in fines, recall or seizure of
products, total or partial suspension of production and/or distribution, refusal
of government agencies to grant pre-market approval or other product
applications and criminal prosecution.

7
<PAGE> 12

Approximately seven years ago, following an FDA inspection, we were found
not to be in compliance with current Good Manufacturing Practice requirements.
Part of our inventory was subjected to seizure, and shipment of certain products
was stopped. In addition, we were placed on the FDA's Application Integrity
Policy, or AIP, list. As long as a company remains on this list, FDA defers
substantive review of any abbreviated new drug application, or ANDA, or new drug
application, or NDA, submitted by the company. Also, an investigation of our
company by U.S. prosecutors was started.

Prior to and in connection with these actions, we made substantial changes
in the facilities and procedures used to make and test our products. We entered
into a consent decree in June 1993 which provided for the release of the seized
products and for FDA review and release of newly manufactured products for sale.

In 1995, our facilities were re-inspected by the FDA and found to be in
substantial compliance with Good Manufacturing Practice. Also, in 1995 the U.S.
attorney's investigation of us ended with a plea agreement whereby we agreed to
plead guilty to four misdemeanor violations of the FDCA and to pay a $600,000
fine. The misdemeanor plea agreement was not based on any evidence of fraud or
felony.

In 1998, we were removed from the AIP list and FDA resumed substantive
review of our newly submitted ANDAs and NDAs. In March 2000, we received our
first approval of an ANDA submitted in 1998.

Good Manufacturing Practice requirements are complex, are subject to
interpretation and can change over time. We believe that we now have in place
all procedures necessary to comply with Good Manufacturing Practice
requirements, and to quickly spot and correct any deviations from those
requirements. However, there can be no assurance that such deviations will not
occur in the future.

RISKS RELATED TO OUR INDUSTRY

OUR BUSINESS MAY BE ADVERSELY AFFECTED BY CHANGES IN THIRD PARTY REIMBURSEMENT
PRACTICES AND RELATED PRICING PRESSURES.

The market for our products may be limited by actions of third party
payors, such as government and private health insurers and managed care
organizations. For example, many managed health care organizations are now
controlling the pharmaceuticals that appear on their lists of reimbursable
medications. The resulting competition among pharmaceutical companies to place
their products on these formulary lists has created a trend of downward pricing
pressure in the industry. In addition, many managed care organizations are
pursuing various ways to reduce pharmaceutical costs and are considering
formulary contracts primarily with those pharmaceutical companies that can offer
a full line of products for a given therapeutic category or disease state. Our
products might not be included in the formulary lists of managed care
organizations. Also, downward pricing pressure in the industry generally may
negatively impact our results of operations.

Furthermore, a number of legislative and regulatory proposals aimed at
changing the health care system have been proposed. We cannot predict whether
any such proposals will be adopted or the effect such proposals may have on our
business. The fact that such proposals are pending, the nature of such
proposals, and the adoption of any such proposal are likely to increase
industry-wide pricing pressures.

OUR INDUSTRY IS SUSCEPTIBLE TO PRODUCT RELATED LIABILITIES.

Like all pharmaceutical companies, we face the risk of loss related to the
use of products we market from lawsuits and administrative proceedings. We
cannot assure you that we can avoid such claims. We cannot be sure that our
product liability insurance will be adequate to cover claims or that we will be
able to get adequate insurance coverage in the future at acceptable costs. We
currently have product liability insurance coverage in the aggregate amount of
$10.0 million per year. However, a successful product liability claim in excess
of our coverage could require us to pay substantial sums and adversely affect
our results of operations and financial condition.

8
<PAGE> 13

OUR INDUSTRY IS HIGHLY COMPETITIVE.

Our branded pharmaceutical business is subject to competition from larger
companies with greater financial resources that can support larger sales forces.
The ability of a sales force to compete is affected by the number of physician
calls it can make, which is directly related to its size, the brand name
recognition it has in the marketplace and its advertising and promotional
efforts. We are in the start-up phase of our branded sales initiative and could
be adversely affected by competition from companies with larger, more
established sales forces.

Our generic pharmaceutical business is subject to competitive pressures
from a number of companies, some of which have greater financial resources and
broader product lines. Competition is generally on price, which can have an
adverse effect on profitability as falling prices erode margins. In addition,
the continuing consolidation of the customer base (wholesale distributors and
retail drug chains) will increase competition as suppliers compete for fewer
customers. Consolidation of competitors will increase competitive pressures as
larger suppliers are able to offer broader product lines.

Many pharmaceutical companies have invested, and are continuing to invest,
significant resources in the development of proprietary drug delivery systems.
Such business is highly competitive, and we believe that competition will
continue to increase in the future. In addition, several companies have been
formed to develop specific advanced drug delivery systems. Many of these
pharmaceutical and other companies who may develop drug delivery systems have
greater financial, research and development and other resources than we do, as
well as more experience in commercializing pharmaceutical and drug delivery
products. Such companies may develop products using their drug delivery systems
more rapidly than we do or develop drug delivery systems that are more effective
than ours and thus may represent significant potential competitors.

OUR INDUSTRY EXPERIENCES RAPID TECHNOLOGICAL CHANGE.

The pharmaceutical industry is a rapidly evolving field. The first branded
or generic pharmaceutical product to reach the market in a therapeutic area
often obtains and maintains significant market share relative to later entrants
to the market. Our products also compete with drugs marketed not only in similar
delivery systems but also in traditional dosage forms. New drugs, new
therapeutic approaches or future developments in alternative drug delivery
technologies may provide advantages over the drug delivery systems and products
that we are marketing, have developed or are developing. A number of companies,
including major pharmaceutical companies, are developing and marketing advanced
delivery systems for the controlled delivery of drugs. Products currently on the
market or under development by competitors may deliver the same drugs, or other
drugs to treat the same indications, as many of the products we market or are
developing.

Changes in drug delivery technology may require substantial investments by
companies to maintain their competitive position and may provide opportunities
for new competitors to enter the industry. We cannot assure you that
developments by others will not render our products and technologies
uncompetitive or obsolete. If others develop drugs which are cheaper or more
effective or which are first to market, sales or prices of our products could
decline.

RISKS RELATED TO THIS OFFERING

MANAGEMENT STOCKHOLDERS CONTROL OUR COMPANY.

After completion of this offering, our directors and executive officers
will beneficially own approximately 15.5% of our Class A common stock and 54.0%
of our Class B common stock. As a result, these persons will control
approximately 49.9% of the combined voting power represented by our outstanding
securities. These persons will retain effective voting control of our company
and will continue to have the ability to effectively determine the outcome of
any matter being voted on by our stockholders, including the election of
directors and any merger, sale of assets or other change in control of our
company.

9
<PAGE> 14

WE HAVE ENACTED CHARTER PROVISIONS THAT MAY HAVE ANTI-TAKEOVER EFFECTS.

Our Certificate of Incorporation authorizes the issuance of common stock in
two classes, Class A common stock and Class B common stock. Each share of Class
A common stock entitles the holder to a one-twentieth vote on all matters to be
voted upon by stockholders, while each share of Class B common stock entitles
the holder to one full vote on each matter considered by the stockholders. In
addition, our directors have the authority to issue shares of preferred stock
and to determine the price, rights, preferences, privileges and restrictions of
those shares without any further vote or action by the stockholders. The rights
of the holders of common stock will be subject to, and may be adversely affected
by, the rights of the holders of any preferred stock that may be issued in the
future. The existence of two classes of common stock with different voting
rights and the ability of our directors to issue additional shares of preferred
stock could make it more difficult for a third party to acquire a majority of
our voting stock. Other provisions of our Certificate of Incorporation and
Bylaws, such as a classified board of directors, also may have the effect of
discouraging, delaying or preventing a merger, tender offer or proxy contest,
which could have an adverse effect on the market price of our Class A common
stock.

THE MARKET PRICE OF OUR STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE.

The market prices of securities of companies engaged in pharmaceutical
development and marketing activities historically have been highly volatile. In
addition, any or all of the following may have a significant impact on the
market price of our Class A common stock: announcements by us or our competitors
of technological innovations or new commercial products, delays in the
development or approval of products, developments or disputes concerning patent
or proprietary rights, publicity regarding actual or potential medical results
relating to products under development, regulatory developments in both the
United States and foreign countries, publicity regarding actual or potential
acquisitions, public concern as to the safety of drug technologies, financial
results which are different from securities analysts' forecasts and economic and
other external factors, as well as period-to-period fluctuations in financial
results.

USE OF PROCEEDS

We estimate that the net proceeds from the sale of the 3,335,000 shares of
our Class A common stock offered will be approximately $100.9 million ($119.2
million if the underwriters' over-allotment option is exercised in full). Our
estimate is based upon an assumed public offering price of $32.1875 per share
(the closing sale price of our Class A common stock on the New York Stock
Exchange on March 24, 2000) after deducting the underwriters' discount and
estimated offering expenses. We will not receive any proceeds from the sale of
Class A common stock by the selling stockholders.

We expect to use the net proceeds of this offering to finance general
corporate purposes, including:

- expansion of our Ther-Rx sales and marketing infrastructure;

- acquisition of products, product rights, technologies or companies that
are complementary to our business;

- funding of research and development of existing and new drug delivery
technologies and products; and

- repayment of debt under our credit facility with LaSalle National Bank
N.A. We used the amounts borrowed under our credit facility to fund
product development, acquisitions and working capital. The credit
facility matures in October 2002 and bears interest at LIBOR plus 2.0%
per annum, which aggregated 8.1% per annum on a weighted average basis as
of the date of this prospectus. At March 24, 2000, our outstanding
borrowings under the credit facility were $11.0 million.

The precise allocation of the proceeds and the timing of expenditures may
vary significantly depending upon numerous factors, including the number, timing
and size of potential acquisitions, if any, and the method by which such
acquisitions are financed, research and development progress, the results of
preclinical and clinical studies, the timing of regulatory approvals, the timing
and impact of new product introductions and the outcome of strategic partnering
or licensing activities. Pending the use of proceeds, we will invest our
proceeds in short-term, interest-bearing, investment-grade securities,
certificates of deposit or direct or guaranteed obligations of the United
States.
10
<PAGE> 15

PRICE RANGE OF COMMON STOCK

Our Class A common stock and Class B common stock have both been traded on
the New York Stock Exchange under the symbols "KV.A" and "KV.B," respectively,
since March 25, 1999. Before that date, our Class A common stock and Class B
common stock were traded on the American Stock Exchange. The following table
sets forth the high and low closing sale prices per share of the Class A common
stock and Class B common stock, as reported on the American Stock Exchange and
the New York Stock Exchange, for the periods indicated.

<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
---------------- ----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
1997
First Quarter......................................... $11.92 $ 7.50 $11.92 $ 7.67
Second Quarter........................................ 11.66 9.47 11.75 9.50
Third Quarter......................................... 15.75 9.91 15.09 10.00
Fourth Quarter........................................ 15.66 12.41 15.60 12.84
1998
First Quarter......................................... $18.78 $13.09 $18.66 $13.03
Second Quarter........................................ 22.75 17.19 23.06 17.09
Third Quarter......................................... 23.13 14.38 23.31 14.50
Fourth Quarter........................................ 23.13 17.25 23.25 17.38
1999
First Quarter......................................... $21.50 $14.50 $21.31 $14.00
Second Quarter........................................ 17.63 13.00 17.56 13.13
Third Quarter......................................... 19.13 14.69 18.94 15.00
Fourth Quarter........................................ 21.94 15.25 21.44 15.81
2000
First Quarter (through March 24, 2000)................ $32.31 $19.75 $32.50 $19.81
</TABLE>

All per share data reflects the three-for-two stock split effected in the
form of a 50% stock dividend to shareholders of record as of April 3, 1998.

On March 24, 2000, the closing sale prices for our Class A common stock and
Class B common stock, as reported on the New York Stock Exchange, were $32.1875
and $32.3875 per share, respectively. As of March 24, 2000, the number of
holders of record of our Class A common stock and Class B common stock were 638
and 522, respectively.

DIVIDEND POLICY

Since 1980 we have not declared or paid any cash dividends on our common
stock and we do not plan to do so in the near future. No dividends may be paid
on Class A or Class B common stock unless all dividends on our 7% cumulative
convertible preferred stock have been declared and paid. Undeclared and
unaccrued cumulative preferred dividends were $2,203,644 or $9.14 per share, at
March 31, 1999 and $2,194,500 or $9.14 per share, at December 31, 1999. Also,
under the terms of our credit agreement we may not pay cash dividends in excess
of 25% of the prior fiscal year's consolidated net income. We plan to use cash
generated from operations for general corporate purposes, including expansion of
our Ther-Rx sales and marketing infrastructure, funding potential acquisitions,
research and development, and repayment of debt.

11
<PAGE> 16

CAPITALIZATION

The following table sets forth our capitalization as of December 31, 1999:

- on an actual basis; and

- on an adjusted basis to reflect our sale of 3,335,000 shares of Class A
common stock offered by us hereby at an assumed public offering price of
$32.1875 per share and the application of the estimated net proceeds from
the sale.

This information should be read in conjunction with our financial
statements and notes thereto appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C>
Long-term debt, including current portion:
Revolving line of credit.................................. $ 18,000 $ --
Mortgages and other obligations........................... 7,527 7,527
-------- --------
Total long-term debt, including current portion... $ 25,527 $ 7,527
-------- --------
Stockholders' equity:
7% cumulative convertible preferred stock, $0.01 par
value; 841,000 shares authorized, 240,000 shares issued
and outstanding, actual and as adjusted................ 2 2
Class A common stock and Class B common stock, $0.01 par
value; 150,000,000 and 75,000,000 shares authorized,
respectively:
Class A common stock, 12,126,919 shares issued actual;
15,541,919 shares issued as adjusted(1)............... 122 155
Class B common stock, 6,607,589 shares issued and as
adjusted(1)........................................... 66 66
Additional paid-in capital................................ 40,693 141,601
Retained earnings......................................... 45,937 45,937
Less: treasury stock, 35,619 shares each of Class A and
Class B common stock, at cost.......................... (55) (55)
-------- --------
Total stockholders' equity........................ 86,765 187,706
-------- --------
Total capitalization.............................. $112,292 $195,233
======== ========
</TABLE>

- ---------------
(1) Excludes (a) 971,530 shares of Class A common stock and 1,107,297 shares of
Class B common stock reserved for issuance upon the exercise of outstanding
options (having a weighted average exercise price of $11.84 and $11.18 per
share, respectively) and an additional 528,470 shares of Class A common
stock and 392,703 shares of Class B common stock reserved for issuance under
future grants under our stock-based compensation plans, (b) 900,000 shares
of Class A common stock reserved for issuance upon conversion of our
outstanding 7% cumulative convertible preferred stock, and (c) 6,607,589
shares of Class A common stock reserved for issuance upon conversion of the
Class B common stock.

12
<PAGE> 17

SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Below we have presented information from our statements of operations and
balance sheets. Our financial statements for the five years in the period ended
March 31, 1999 have been audited by BDO Seidman LLP, independent certified
public accountants. The information as of and for the nine months ended December
31, 1998 and 1999 was derived from our unaudited consolidated financial
statements. These unaudited financial statements include all adjustments,
consisting of normal recurring accruals that we consider necessary for a fair
presentation of our financial position and results of operations for these
periods. The information from our statement of operations for the nine-month
period ended December 31, 1999 is not necessarily indicative of operating
results that we expect for the full year ending March 31, 2000. You should read
the following information in conjunction with our consolidated financial
statements and related notes, as well as "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------------------------ ------------------
1995 1996 1997 1998 1999 1998 1999
------- ------- ------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................. $39,743 $49,729 $57,891 $98,486 $114,860 $79,097 $107,596
Manufacturing costs.......... 26,066 26,259 29,478 56,483 61,415 43,306 48,459
------- ------- ------- ------- -------- ------- --------
Gross profit................. 13,677 23,470 28,413 42,003 53,445 35,791 59,137
------- ------- ------- ------- -------- ------- --------
Research and development..... 4,525 4,559 4,835 5,752 6,884 4,934 6,040
Selling and administrative... 11,979 12,749 13,818 19,104 22,201 15,918 28,880
Amortization of intangible
assets..................... 673 711 188 254 243 124 1,680
------- ------- ------- ------- -------- ------- --------
Total operating
expenses......... 17,177 18,019 18,841 25,110 29,328 20,976 36,600
------- ------- ------- ------- -------- ------- --------
Operating income (loss)...... (3,500) 5,451 9,572 16,893 24,117 14,815 22,537
Other income (expense):
Arbitration award.......... -- -- -- -- 12,723 -- --
Interest and other
income.................. -- 60 147 550 1,291 1,077 545
Interest and other
expense................. (1,875) (1,378) (411) (452) (498) (332) (1,569)
------- ------- ------- ------- -------- ------- --------
Total other income
(expense).................. (1,875) (1,318) (265) 98 13,516 745 (1,024)
------- ------- ------- ------- -------- ------- --------
Income (loss) before income
taxes...................... (5,375) 4,133 9,307 16,991 37,633 15,560 21,513
Provision for income taxes... -- 90 383 5,687 14,293 5,907 8,172
------- ------- ------- ------- -------- ------- --------
Net income
(loss)........... $(5,375) $ 4,043 $ 8,924 $11,304 $ 23,340(1) $ 9,653 $ 13,341
======= ======= ======= ======= ======== ======= ========
Basic net income (loss) per
share(2)................... $ (0.35) $ 0.21 $ 0.48 $ 0.60 $ 1.26(1) $ 0.51 $ 0.70
Basic weighted average number
of shares(2)............... 16,768 17,283 17,759 18,094 18,201 18,187 18,609
Diluted net income (loss) per
share(2)................... $ (0.35) $ 0.21 $ 0.47 $ 0.58 $ 1.17(1) $ 0.48 $ 0.66
Diluted weighted average
number of shares(2)........ 18,029 18,745 19,022 19,641 19,972 19,991 20,146
</TABLE>

(2) See note 15 of notes to our consolidated financial statements for an
explanation of the determination of the number of shares used in calculating
basic and diluted net income (loss) per share.

13
<PAGE> 18

<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------------ DECEMBER 31,
1995 1996 1997 1998 1999 1999
------- ------- ------- ------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents................. $ 1,076 $ 2,038 $ 7,628 $18,157 $ 2,617 $ 3,337
Working capital...................... 8,927 14,053 25,017 35,403 43,112 37,526
Total assets......................... 27,975 27,948 41,362 68,361 127,990 136,439
Long-term debt, including current
portion............................ 13,048 3,253 2,509 5,460 32,203 25,527
Stockholders' equity................. 9,974 20,550 33,048 44,164 67,548 86,765
</TABLE>

14
<PAGE> 19

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the financial condition and
results of operations should be read in conjunction with "Selected Consolidated
Financial Data" and our consolidated financial statements and notes thereto
appearing elsewhere in this prospectus.

BACKGROUND

Our company develops, acquires, manufactures and markets technologically
distinguished branded and prescription pharmaceutical products. We also enter
into licensing agreements with pharmaceutical marketing companies to develop and
commercialize additional brand name products. Until the mid 1990's, we derived
most of our revenues from our manufacturing and licensing activities. Today, we
derive most of our revenues from our product sales. Furthermore, while we expect
to continue to enter into new licensing agreements, we strategically emphasize
the development or acquisition and marketing of technologically distinguished
branded prescription products through Ther-Rx and generic products through ETHEX
as well as specialty raw materials through Particle Dynamics.

In 1990, we established our ETHEX business to market and distribute
technologically distinguished generic drugs that use our proprietary
technologies. Beginning in 1994, we implemented strategic initiatives to
increase revenues derived from ETHEX's sales of new and existing generic
products. Net revenues from ETHEX increased from $13.5 million in fiscal 1994 to
$24.9 million during fiscal 1995, $34.5 million in fiscal 1996, $40.2 million in
fiscal 1997, $79.2 million in fiscal 1998 and $91.8 million in fiscal 1999.

We launched our Ther-Rx business in 1999 to market branded pharmaceutical
products. We acquired and introduced our first two of five Ther-Rx branded
products, Micro-K(R) and PreCare(R) in March and August 1999, respectively.
Ther-Rx has also introduced three additional internally developed products since
October 1999 and we expect to introduce four new products during fiscal 2001.
Net revenues from Ther-Rx increased from $1.8 million in fiscal 1999 to $14.8
million in the nine months ended December 31, 1999.

RESULTS OF OPERATIONS

In the following tables, we have summarized our historical results of
operations as a percentage of revenues. You should read this information in
conjunction with our consolidated financial statements and related notes.

15
<PAGE> 20

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------------
1997 1998 1999
------------------ ------------------ -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
COSTS AND EXPENSES
Manufacturing costs............... $29,478 50.9% $56,483 57.3% $ 61,415 53.5%
Research and development.......... 4,835 8.3 5,752 5.8 6,884 6.0
Selling and administrative........ 13,818 23.8 19,104 19.4 22,201 19.3
Other (income) expense, net....... 265 0.5 (98) (0.1) (13,516) (11.8)
Amortization...................... 188 0.4 254 0.3 243 0.2
------- ----- ------- ----- -------- -----
Total costs and
expenses.............. $48,584 83.9% $81,495 82.7% $ 77,227 67.2%
------- ----- ------- ----- -------- -----
Earnings before taxes............. 9,307 16.1 16,991 17.3 37,633 32.8
Provision for income taxes........ 383 0.7 5,687 5.8 14,293 12.4
------- ----- ------- ----- -------- -----
Net income........................ $ 8,924 15.4% $11,304 11.5% $ 23,340 20.4%
======= ===== ======= ===== ======== =====
</TABLE>

<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
-----------------------------------------
1998 1999
------------------ -------------------
AMOUNT PERCENT AMOUNT PERCENT
------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
NET REVENUES
Generic products..................................... $65,808 83.2% $ 77,133 71.7%
Branded products..................................... -- -- 14,812 13.8
Contract services/licenses........................... 3,462 4.4 2,926 2.7
Specialty materials.................................. 9,827 12.4 12,725 11.8
------- ----- -------- -----
Total net revenues......................... $79,097 100.0% $107,596 100.0%
------- ----- -------- -----
COSTS AND EXPENSES
Manufacturing costs.................................. $43,306 54.8% $ 48,459 45.0%
Research and development............................. 4,934 6.2 6,040 5.6
Selling and administrative........................... 15,918 20.1 28,880 26.8
Other (income) expense, net.......................... (745) (0.9) 1,024 1.0
Amortization......................................... 124 0.2 1,680 1.6
------- ----- -------- -----
Total costs and expenses................... $63,537 80.4% $ 86,083 80.0%
------- ----- -------- -----
Earnings before taxes................................ 15,560 19.6 21,513 20.0
Provision for income taxes........................... 5,907 7.5 8,172 7.6
------- ----- -------- -----
Net income........................................... $ 9,653 12.1% $ 13,341 12.4%
======= ===== ======== =====
</TABLE>

NINE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1998

REVENUES. Net revenues for the nine months ended December 31, 1999
increased $28.5 million, or 36%, over the corresponding period of the prior
fiscal year. The increase in revenues, after elimination of inter-segment
revenues, was due to higher sales in our three businesses.

Branded product sales through Ther-Rx were incremental to the prior year
given the start-up of the business late in the fourth quarter of fiscal year
1999. This branded business has been built by acquiring products with
established brand name recognition and existing distribution and through the
introduction of internally developed products. Acquired products include
Micro-K(R) Extencaps and the PreCare(R) prenatal caplet that were acquired in
August 1999. Ther-Rx also introduced three internally developed products since
October 1999 under the PreCare(R) family of women's health care pharmaceuticals.
These products include PreCare(R) Chewables, a chewable prenatal vitamin;
PremisisRx(TM), a product designed for use along

16
<PAGE> 21

with a physician-supervised program to reduce pregnancy-related nausea; and
PreCare(R) Conceive(TM), a nutritional supplement specifically designed for use
by both men and women prior to conception.

Of the $11.3 million increase in specialty generic net sales by ETHEX,
volume increases contributed $5.1 million, $3.5 million was from price increases
and $2.7 million was due to new product introductions.

Specialty materials sales by Particle Dynamics increased by $2.9 million,
or 29%, due primarily to higher volume on an expanded customer base.

COSTS AND EXPENSES. Manufacturing costs as a percentage of revenue
declined from 54.8% to 45.0% due to the effects of favorable pricing and product
mix. The improvement in product mix reflected the increase in the relative
contribution of higher margin brand sales and the decrease in lower margin
generic pain management sales. Of the 9.8 percentage-point net decrease, changes
in product mix and volume accounted for 7.7% and pricing accounted for 3.1%, and
were offset by a 1.0% increase in costs.

Research and development expense increased $1.1 million, or 22%, compared
to the prior year period. The increase in expense was due primarily to an
increase in the number of clinical testing programs in which we were involved.

Selling and administrative expenses increased $13.0 million, or 81%,
compared to the corresponding period of the prior year. The increase was due
primarily to our investment in establishing the sales force for Ther-Rx. Selling
expenses associated with this effort were $9.2 million. Selling and marketing
expenses in ETHEX increased $1.7 million.

Amortization expense increased $1.6 million due to the amortization of
product rights acquired in March 1999 and August 1999.

Interest expense, net of interest income, increased $1.8 million due to
higher borrowings incurred to finance product acquisitions.

NET INCOME. As a result of the factors described above, net income
improved $3.7 million, or 38%, to $13.3 million compared to the prior year
period.

FISCAL 1999 COMPARED TO FISCAL 1998

REVENUES. Net revenues increased $16.4 million, or 16.6%, during fiscal
1999. The increase in net sales was due to higher sales of generic products and
specialty materials, and branded product sales resulting from the acquisition of
the Micro-K(R) product line during the fourth quarter of fiscal 1999, which were
partially offset by lower contract services sales and licensing revenues.

Generic product sales increased $12.6 million, or 16%, during fiscal 1999
due to the introduction of ten new products and higher sales volumes across the
majority of the existing products. Existing products contributed $16.1 million
of the increase and new products contributed $5.8 million; however, such
increases were partially offset by price declines of $9.3 million compared to
total sales for the prior year. The increase in sales on existing products
reflected increased market share on an expanded customer base, increased generic
substitution rates and a full year's sales impact of products introduced in the
prior year across several product categories. The price decline was confined
largely to a single product category where increased competition on revenue
sharing products -- based on sales and gross margin -- adversely affected
prices.

Brand name product sales represented a partial month's sales of the
Micro-K(R) product line which was acquired from American Home Products in March
1999. The product line had annual sales of approximately $18.5 million at the
time of the acquisition.

Sales of specialty materials increased $2.4 million, or 21.8%, during
fiscal 1999 due primarily to a full year's sales impact of two products
introduced in the prior year by Particle Dynamics, which contributed $2.1
million, or 19.1%, of the increase. Particle Dynamics also increased its
customer base during fiscal 1999, primarily for its line of calcium carbonate
products, which accounted for approximately 51% of its total sales for the
fiscal year. Calcium carbonate sales increased 28.6%.
17
<PAGE> 22

Contract services and licensing revenues decreased $.5 million, or 5.6%,
due to lower volume, reflecting a smaller customer base as we de-emphasized
lower margin contract manufacturing in our business strategy.

COSTS AND EXPENSES. Manufacturing costs increased $4.9 million, or 8.7%,
to $61.4 million during fiscal 1999 from $56.5 million in fiscal 1998 due to
increased volume. Manufacturing costs as a percentage of revenues declined to
53.5% from 57.3%, due primarily to a favorable shift in the mix of products sold
toward higher margin products, which was partially offset by lower average
pricing.

The price decline and improvement in product mix were due primarily to
changes in the generic business. Lower pricing due to increased competition
eroded margins on certain products. The improvement in product mix reflected a
decrease in volume on the lower margin business and increases in sales of higher
margin new products introduced in fiscal 1999 and 1998.

Research and development costs increased $1.1 million, or 19.7%, to $6.9
million during fiscal 1999 from $5.8 million in fiscal 1998. The increase was
due to higher personnel costs of $.4 million, increased usage of R&D materials
and laboratory supplies of $.3 million, and higher levels of clinical testing of
$.2 million. We increased the level of our R&D activity in fiscal 1999.

Selling and administrative expenses increased $3.1 million, or 16.2%, to
$22.2 million during fiscal 1999 from $19.1 million in fiscal 1998. As a
percentage of revenues, selling and administrative expenses remained relatively
flat with the prior year, decreasing nominally to 19.3% from 19.4%. The increase
in expenses was related primarily to higher costs associated with additional
personnel to support our continued growth of $1.3 million, the branded sales
initiative of $.7 million and increased marketing activities associated with
sales of generic products of $1.1 million.

Amortization expenses decreased nominally in fiscal 1999 due primarily to
lower expense associated with amortization of financing fees of $.1 million,
partially offset by one-half month's amortization of the Micro-K(R) product
rights acquired near the end of the fourth quarter of fiscal 1999. The product
rights are being amortized over 20 years at an annual rate of $1.8 million.

Other income, net, increased $13.4 million to $13.5 million during fiscal
1999 due to a non-recurring gain related to an arbitration award of $13.3
million in connection with a supplier who was unable to supply product.

Income taxes were provided at an effective rate of 38.0% in fiscal 1999
compared to 33.5% in fiscal 1998. The lower effective rate in fiscal 1998
reflected the utilization of the deferred tax asset valuation reserve.

NET INCOME. As a result of the factors described above, net income
improved $12.0 million, or 106.5%, to $23.3 million for fiscal 1999 from net
income of $11.3 million in fiscal 1998.

FISCAL 1998 COMPARED TO FISCAL 1997

REVENUES. Net revenues increased $40.6 million, or 70%, to $98.5 million
during fiscal 1998 from $57.9 million in fiscal 1997. This sales growth was
primarily due to an increase in the volume of ETHEX's sales of new and existing
generic products, increased licensing revenues and higher volume in contract
services and Particle Dynamics. Net revenues from ETHEX increased $39.0 million,
or 97%, to $79.2 million during fiscal 1998 from $40.2 million in 1997. This
increase was primarily due to the launch of new generic products during fiscal
1998, in addition to increased sales of products introduced in the prior year.
Net revenues derived from Particle Dynamics' sales of specialty pharmaceutical
raw materials increased $2.3 million, or 27%, to $11.0 million during fiscal
1998. This increase was attributable to the increased sales volumes related to
the prior year's introduction of DESCOTE(R) and DESTAB(TM) products for use in
over-the-counter markets. As expected, contract services revenues decreased $.7
million, or 8%, to $8.3 million in fiscal 1998 from $8.9 million in fiscal 1997.
This decrease was attributable to reduced sales volumes to third parties as our
manufacturing facilities are increasingly utilized for the manufacture of
products sold by our marketing subsidiaries.

18
<PAGE> 23

COSTS AND EXPENSES. Manufacturing costs increased $27 million, or 93%, to
$56.5 million during fiscal 1998 from $29.5 million in fiscal 1997 due to
increased volume. Manufacturing costs as a percentage of revenues increased to
57% from 51%, primarily due to a change in the mix of products sold and the
effect of competitive pricing in the generic pharmaceutical industry. With
respect to the 6% increase in costs, as a percentage of revenues, 4% of the
increase was due to the change in the mix of products sold and 2% was
attributable to the effect of competitive pricing in the generic pharmaceutical
industry.

Research and development costs increased $.9 million, or 19%, to $5.8
million during fiscal 1998 from $4.8 million in fiscal 1997. Nine percent was
due to higher personnel expenses and 10% was due to higher raw material and
clinical expenses.

Selling and administrative expenses increased $5.3 million, or 38%, to
$19.1 million during fiscal 1998 from $13.8 million in fiscal 1997. Of the 38%,
13% was due to personnel expenses, 14% was due to outside professional services,
5% was due to advertising and promotion costs and 7% was due to various other
expenses. As a percentage of revenue, selling and administrative expenses
decreased to 20% from 24%. The dollar increase in selling and administrative
expenses was primarily related to our selling and promotional activities
associated with the significant growth experienced in the sales of new and
existing products marketed by ETHEX and Particle Dynamics, and additional
personnel to support our continued growth.

INCOME TAX EXPENSE. Income taxes were provided at an effective rate of
33.5% in fiscal 1998 compared to 4.1% in fiscal 1997. The increase was
attributable to the utilization of loss carry forwards generated in prior years
during fiscal 1997. No loss carryforwards were available in fiscal 1998.

NET INCOME. As a result of the factors described above, net income
improved $2.4 million, or 27%, to $11.3 million for fiscal 1998 from net income
of $8.9 million in 1997.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow from operations of $9.5 million for fiscal 1999 was primarily
from net income enhanced by an increase in accounts payable and accrued
liabilities, partially offset by increases in accounts receivable and
inventories. The increases in accounts payable and inventories were due to
higher levels of raw material and packaging inventories acquired to support
increased sales of generic products and higher finished goods inventories
associated with the acquisition of Micro-K(R). Receivables also increased due to
the higher sales and a $13.3 million arbitration award. Accrued liabilities
increased due to an increase in salaries, wages, benefits and income taxes.
These changes in the components of current assets and liabilities, partially
offset by a decline in cash and marketable securities, resulted in a $7.7
million increase in working capital in fiscal 1999.

Cash flow from operations was $13.6 million for the first nine months of
fiscal 2000, an increase of $6.0 million, or 80%, compared to the first nine
months of fiscal 1999. The increase in operating cash flow compared with the
prior year was due to an increase in net income before depreciation and
amortization of $5.6 million and the receipt of a $13.3 million arbitration
award. These increases were partially offset by a $12.6 million increase in the
net use of working capital compared to the corresponding prior year. The
increase in our working capital requirement relates primarily to greater
accounts receivable of $9.6 million associated with sales growth and the effect
of new product introductions in Ther-Rx and ETHEX. In addition, our accrued
income tax liability declined by $5.3 million from the fiscal year-end due to
the taxes paid in the first quarter of fiscal 2000 in connection with the
arbitration award recorded in fiscal 1999.

Long-term liabilities as of March 31, 1999 increased to $34.0 million from
$7.0 million at March 31, 1998 as a result of $25.0 million in borrowings
incurred to finance the acquisition of the Micro-K(R) product line and the
partial financing of the purchase of a new facility of $2.3 million. The new
facility was acquired to provide additional distribution and office space for
our branded and generic pharmaceutical businesses. Long-term liabilities as of
December 31, 1999 declined to $26.6 million.

Financing activities during the nine months ended December 31, 1999
included a reduction of long-term debt of $9.6 million and additional borrowings
of $2.0 million to fund working capital requirements and additional capital
expenditures.
19
<PAGE> 24

Investing activities for fiscal 1999 included capital expenditures of $5.8
million, the investment of $7.6 million of cash in marketable securities and a
cash payment of $11.1 million in connection with the acquisition of the
Micro-K(R) product line. Capital expenditures related primarily to the
acquisition of the new facility and equipment to expand production capacity for
generic products. In addition, we had capital projects in progress at March 31,
1999 that we estimate will require $1.3 million to complete in the next fiscal
year. The majority of this amount relates to the cost to complete the upgrade of
our business software and network systems which is estimated at $0.6 million.

Investing activities for the first nine months of fiscal 2000 included cash
outlays for capital expenditures of $11.1 million and product acquisitions of
$3.0 million, partially offset by cash provided by the sale of $7.5 million of
marketable securities. Capital expenditures were primarily for production
equipment, laboratory improvements and the upgrade of our business software and
network systems. We acquired the worldwide rights to Precare(R) in August 1999
for approximately $8.5 million, consisting of $3.0 million in cash, $4.5 million
of Class A common stock and a $.9 million note. Marketable securities were sold
to pay down long-term debt and fund these expenditures.

We believe that existing cash and securities balances, cash generated from
operating activities, funds available under our credit facility and the proceeds
of this offering will be adequate to fund operating activities in the short- and
long-term, including near and long-term debt obligations, capital improvements,
product development activities and expansion of marketing capabilities for the
branded pharmaceutical business for the presently foreseeable future. We have a
line of credit agreement with LaSalle National Bank which expires in October
2002. The agreement provides for a revolving line of credit for borrowings up to
$40.0 million. We had cash borrowings of $25.0 million and $4.2 million in open
letters of credit issued under this facility as of March 31, 1999 and cash
borrowing of $18.0 million and $4.8 million in open letters of credit issued
under this facility as of December 31, 1999.

INFLATION

Although at reduced levels in recent years, inflation continues to apply
upward pressure on the cost of goods and services used by us. However, we
believe that the net effect of inflation on our operations has been minimal
during the past three years. In addition, changes in the mix of products sold
and the effect of competition has made a comparison of changes in selling prices
less meaningful relative to changes in the overall rate of inflation over the
past three years.

EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENT

In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. SFAS No. 133 is effective for years beginning after June 15, 2000
and requires comparative information for all fiscal quarters of fiscal years
beginning after June 15, 2000. We do not expect the adoption of this statement
to have a significant impact on our results of operations, financial position or
cash flows.

20
<PAGE> 25

BUSINESS

OVERVIEW

We have a long history of developing drug delivery technologies. In the
1950's, we received what we believe to be the first patents for sustained
release delivery systems which enhance the convenience and effectiveness of
pharmaceutical products. In the past, we have developed products for other drug
marketers. Our technologies have been used in several well known products
including Actifed(R) 12-hour and Sudafed(R) SA (Burroughs-Wellcome Co.), Centrum
Jr.(R) (American Home Products Corporation) and Kaopectate(R) Chewable
(Pharmacia & Upjohn). More recently, we have chosen to focus our drug
development expertise on internally developed products for our branded and
generic pharmaceutical businesses. For example, over the past year our Ther-Rx
business launched three internally developed branded pharmaceutical products,
all of which incorporate our drug delivery technologies. In addition, most of
the internally developed generic products marketed by our ETHEX business
incorporate one or more of our drug delivery technologies.

THER-RX -- OUR BRAND NAME PHARMACEUTICAL BUSINESS

We established the Ther-Rx business to market brand name pharmaceutical
products that we internally develop using proprietary technologies and that we
acquire. In March 1999, Ther-Rx launched its first brand name product,
Micro-K(R), a prescription potassium supplement. We acquired Micro-K(R) from
Wyeth Ayerst Laboratories, the pharmaceutical division of American Home Products
Corporation, for $36.0 million. The Micro-K(R) product line had worldwide net
sales of approximately $18.5 million in 1998, of which $13.3 million were
branded product sales. Micro-K(R) competes in a market of more than $300
million. In August 1999, we acquired PreCare(R), a prescription prenatal
vitamin, from UCB Pharma for $8.5 million. PreCare(R) had net sales of
approximately $4.3 million in 1998 and competes in a market of more than $100
million. Ther-Rx generated approximately $14.8 million of net sales during the
nine months ended December 31, 1999.

Ther-Rx also has launched three internally developed products as product
line extensions to PreCare(R) since October 1999. The first product, PreCare(R)
Chewables, is the world's first prescription chewable prenatal vitamin.
PreCare(R) Chewables address a longstanding challenge to improve pregnant
women's compliance with prenatal vitamin regimens by alleviating the difficulty
that patients experience in swallowing large prenatal pills. Ther-Rx's second
internally developed product, PremesisRx(TM), is an innovative prenatal
prescription product which incorporates our controlled release Vitamin B(6) to
help reduce pregnancy-related nausea. This product is designed for use in
conjunction with a physician-supervised program to reduce pregnancy-related
nausea, which is experienced in 50% to 70% of women.
21
<PAGE> 26

The third product, PreCare(R) Conceive(TM), is the first single nutritional
pre-conception supplement for both men and women. PreCare(R)Conceive(TM)
contains 1 mg. of folic acid, which has been shown to reduce the incidence of
neural tube defects by at least 50%.

Ther-Rx has approximately 110 specialty sales representatives who focus on
physician specialists who are identified through available market research as
frequent prescribers of our prescription products. We also have a corporate
sales and marketing management team that includes managed care and trade sales
management staff. We intend to continue to increase our sales force to
accommodate our strategic objectives.

ETHEX -- OUR TECHNOLOGICALLY DISTINGUISHED GENERIC DRUG BUSINESS

We established the ETHEX business in 1990 to utilize our portfolio of drug
delivery systems to develop and market technologically enhanced generic
pharmaceuticals. We believe many of our generic products enjoy higher gross
margins than those of other generic manufacturers due to the benefits of our
drug delivery systems, our marketing approach and our specialty manufacturing
capabilities which enable us to produce pharmaceuticals which are difficult to
replicate. For example, we have incorporated our METER RELEASE(R) technology
into the only generic equivalent to Norpace(R) CR (Searle), an antiarrhythmic
that is taken twice daily. Utilizing our specialty manufacturing expertise and a
sublingual delivery system, we also produce and market the first generic
alternative to Nitrostat(R) (Parke Davis), used to treat angina. On March 16,
2000 we received FDA approval for the marketing of a generic version of
IMDUR(R), which is prescribed for people who may suffer from angina pectoris due
to coronary artery disease. We are the first company to receive FDA approval to
market all three strengths of this product. According to IMS America, 1999
annual sales for IMDUR(R) were approximately $180 million.

ETHEX's current product line includes more than 65 products, 75% of which
are identified by IMS America as the leading product in their respective generic
category. ETHEX's net sales were $77.1 million during the nine months ended
December 31, 1999, which represented 71.7% of our total net sales, and have
grown at a compounded annual rate of 46.7% from fiscal 1994 to 1999. ETHEX
focuses on the therapeutic categories of women's health, cardiovascular, pain
management and respiratory.

WOMEN'S HEALTH CARE. ETHEX currently markets 12 products in its women's
health care line, all of which are prescription prenatal vitamins. ETHEX is
currently the leading provider of prescription prenatal vitamins in the United
States in terms of number of units sold. Included in this line is our Ultra
NatalCare(R), which is a generic alternative to the most prescribed prenatal
vitamin currently on the market. The women's health care line accounted for
approximately 19% of ETHEX's net revenues for the nine months ended December 31,
1999. Products include:

<TABLE>
<CAPTION>
WOMEN'S HEALTH CARE PRODUCT BRANDED ALTERNATIVE
<S> <C>
NatalCare(R) CFe 60 NataFort(R) (Warner Chilcott)
NatalCare(R) PIC Tablets Niferex(R) PN (Schwarz Pharma)
NatalCare(R) PIC Forte Tablets Niferex(R) PN Forte (Schwarz Pharma)
NatalCare(R) Plus Tablets Stuartnatal(R) Plus Tablets (Wyeth-Ayerst)
NatalCare(R) Rx Enfamil(R) Natalins(R) Rx
NataTab(TM) CFe Nestabs(R) CBF (Fielding)
NataTab(TM) FA Nestabs(R) FA (Fielding)
Prenatal MR 90 Fe(TM) Tablets Prenate(R) 90 (Sanofi Phafrmaceuticals)
Prenatal MTR with Selenium Tablets Materna(R) (Lederle)
Prenatal Rx Tablets Natalins(R) Rx (Mead Johnson)
Prenatal Z New Advanced Formula Tablets Advanced Formula ZENATE(R) (Solvay
Pharmaceuticals)
Ultra NatalCare(R) Tablets Prenate(R) Ultra(TM) (Sanofi
Pharmaceuticals)
</TABLE>

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<PAGE> 27

CARDIOVASCULAR. ETHEX currently markets seven products in its
cardiovascular line, including products for anti-angina, antiarrhythmia and
potassium supplementation. Included in this category is the generic equivalent
to IMDUR(R) Tablets, which was approved by the FDA and launched in March 2000.
Our product incorporates our proprietary KV/24(R) technology, which allows it to
be administered only once daily. This category also includes our nitroglycerin
sublingual tablet, NitroQuick(TM), which was introduced in November 1998 and is
the first generic alternative to Nitrostat(R) (Parke-Davis). The cardiovascular
line accounted for approximately 39% of ETHEX's net revenues for the nine months
ended December 31, 1999. Products include:

<TABLE>
<CAPTION>
CARDIOVASCULAR PRODUCT BRANDED ALTERNATIVE
<S> <C>
Disopyramide Phosphate Extended-Release Bioequivalent to Norpace(R) CR (Searle)
Capsules
Isosorbide 5 Mononitrate Extended-Release Bioequivalent to IMDUR(R) Tablets (Key
Tabs Pharmaceuticals)
Nitroglycerin Extended-Release Caps(2.5 mg.) Nitrobid(R) (Marion Merrell Dow)
Nitroglycerin Extended-Release Caps(6.5 mg.) Nitrobid(R) (Marion Merrell Dow)
Nitroglycerin Extended-Release Caps(9.0 mg.) Nitrobid(R) (Marion Merrell Dow)
NitroQuick(TM) Sublingual Tablets Nitrostat(R) (Parke-Davis)
Potassium Chloride Extended-Release Caps Bioequivalent to Micro-K 10 Extencaps(R)
(Ther-Rx Corporation)
</TABLE>

PAIN MANAGEMENT. ETHEX currently markets 13 products in its pain
management line. Included in this line are several controlled substance drugs,
such as morphine, hydromorphone and oxycodone capsules, which is the exclusive
alternative to OXYIR(TM) capsules (Purdue Pharma). The pain management line

23
<PAGE> 28

accounted for approximately 13% of ETHEX's net revenues for the nine months
ended December 31, 1999. Products include:

<TABLE>
<CAPTION>
PAIN MANAGEMENT PRODUCT BRANDED ALTERNATIVE
<S> <C>
Enteric Coated Naproxen Delayed-Released Tabs EC Naprosyn(R) (Hoffmann La Roche, Inc.)
(375 mg.)
Enteric Coated Naproxen Delayed-Release Tabs EC Naprosyn(R) (Hoffmann La Roche, Inc.)
(500 mg.)
Hydromorphone HCl 2 mg Tablets Dilaudid(R) 2 mg (Knoll Laboratories)
Hydromorphone HCl 4 mg Tablets Dilaudid(R) 4 mg (Knoll Laboratories)
Ketorolac Tromethamine Tablets Toradol(R)(Hoffmann La Roche, Inc.)
Meperdine HCl and Promethazine HCl Caps Mepergan(R) Fortis Capsules (Wyeth-Ayerst)
Morphine Sulfate Concentrated Oral Solution Roxanol(TM)/Roxanol(TM) 100 (Roxane
(30 mL) Laboratories); MSIR(R) Oral Solution
Concentrate (Purdue Pharma)
Morphine Sulfate Concentrated Oral Solution Roxanol(TM)/Roxanol(TM) 100 (Roxane
(120 mL) Laboratories); MSIR(R) Oral Solution
Concentrate (Purdue Pharma)
Morphine Sulfate Concentrated Oral Solution Roxanol(TM)/Roxanol(TM) 100 (Roxane
(240 mL) Laboratories); MSIR(R) Oral Solution
Concentrate (Purdue Pharma)
Morphine Sulfate IR Tablets (15 mg.) Roxanol(TM)/Roxanol(TM) 100 (Roxane
Laboratories); MSIR(R) Oral Solution
Concentrate (Purdue Pharma)
Morphine Sulfate IR Tablets (30 mg.) Roxanol(TM)/Roxanol(TM) 100 (Roxane
Laboratories); MSIR(R) Oral Solution
Concentrate (Purdue Pharma)
Oxycodone HCl Tablets Roxicodone(TM) Tablets (Roxane Laboratories)
Oxycodone HCl Capsules OXYIR(TM) (Purdue Pharma)
</TABLE>

RESPIRATORY. ETHEX currently markets 24 products in its respiratory line,
which consists primarily of cough/cold products. ETHEX is the leading provider
on a unit basis of prescription cough/cold products in the United States today.
ETHEX markets products in tablet, capsule and liquid form. Two of our current
products, Histinex(R) DM, a generic alternative to Polyhistine(R) DM (Sanofi
Pharmaceuticals), and Guaifenex(R) G, a generic alternative to DuraTuss(TM) G
(UCB Pharma), sell more units than each of

24
<PAGE> 29

their branded counterparts. The cough/cold line accounted for approximately 18%
of ETHEX's net revenues for the nine months ended December 31, 1999. Products
include:

<TABLE>
<CAPTION>
RESPIRATORY PRODUCT BRANDED ALTERNATIVE
<S> <C>
Codeine Phosphate & Guaifenesin Tablets, CIII Brontex(R) Tablets (Kenwood Therapeutics)
Guaifenex(R) DM Extended-Release Tablets Humibid(R) DM (Medeva Pharmaceutical);
Fenesin(TM) DM (DJ Pharma)
Guaifenex(R) G Extended-Release Tablets Duratuss(TM) G (UCB Pharma)
Guaifenex(R) LA Extended-Release Tablets Humibid(R) LA (Medeva Pharmaceutical);
Fenesin(TM) (DJ Pharma)
Guaifenex(R) PSE 120 Extended-Release Tabs Duratuss(TM) (UCB Pharma); Zephrex(R) LA
(Sanofi); Entex(R) PSE (DJ Pharma);
Guaimax(R)-D
(Schwarz Pharma)
Guaifenex(R) PPA 75 Extended-Release Tabs Dura-Vent(R) (DJ Pharma); Sinuvent(TM) (WE
Pharmaceutical)
Guaifenex(R) PSE 60 Extended-Release Tabs Deconsal(R) II (Medeva Pharmaceutical)
Guaifenex(R) Rx Tablets Syn(TM)-Rx Tablets (Medeva Pharmaceutical)
Guaifenex(R) Rx DM Tablets Syn(TM)-Rx DM Tablets (Medeva
Pharmaceuticals)
Hista-Vent(R) DA Extended-Release Tablets Dura-Vent(R)/DA (DJ Pharma); Omnihist(R) LA
(WE Pharmaceutical)
Histinex(R) D Liquid, CIII Histussin(R) D (Sanofi Pharmaceuticals)
Histinex(R) DM Liquid Poly-Histine(R) DM (Sanofi Pharmaceuticals)
Histinex(R) HC Liquid, CIII Histussin(R) HC (Sanofi Pharmaceuticals)
Histinex(R) PV Liquid, CIII P-V Tussin(R) (Solvay Pharmaceuticals);
Tussend (Monarch)
Hydrocodone Bitartrate & Guaifenesin Liquid, Vicodin Tuss(R) (Knoll Pharmaceutical);
CIII CodiClear(R) DH (Schwarz Pharma); Hycotuss(R)
(Endo Labs)
Hydro-Tussin(TM) DM Duratuss(TM) DM Elixir (UCB Pharma)
Hydro-Tussin(TM) HD Liquid, CIII Duratuss(TM) HD Elixir (UCB Pharma)
Pseudovent(TM) Immediate-Release Capsules Guaifed(R) Capsules (Muro Pharmaceuticals)
Pseudovent(TM)-PED Immediate-Release Caps Guaifed(R)-PD Capsules (Muro Pharmaceuticals)
Bromfenex(TM) PD Extended-Release Capsules Bromfed PD(R) Capsules (Muro Pharmaceuticals)
Bromfenex(TM) Extended-Release Capsules Bromfed(R) Capsules (Muro Pharmaceuticals)
Hista-Vent(R) DA Tablets Dura-Vent(R)/DA (Dura Pharmaceuticals);
Omnihist(R) LA (WE Pharmaceuticals)
Quadra-Hist(TM) D Extended-Release Capsules Poly-Histine-D(R) (Sanofi Pharmaceuticals)
Quadra-Hist(TM) D PED Extended-Release Caps Poly-Histine-D(R) Ped (Sanofi
Pharmaceuticals)
</TABLE>

OTHER THERAPEUTICS. In addition to our core therapeutic lines, ETHEX
markets 11 products in the gastrointestinal, dermatological and general
nutritional categories. These categories accounted for

25
<PAGE> 30

approximately 11% of ETHEX's net revenues for the nine months ended December 31,
1999. Products include:

<TABLE>
<CAPTION>
PRODUCT BRANDED ALTERNATIVE
<S> <C>
GASTROINTESTINAL PRODUCTS
- -------------------------
Hyoscyamine Sulfate Extended-Release Tabs Levbid(TM) (Schwarz Pharma)
(.375 mg)
Hyoscyamine Extended-Release Capsules (.375 Levsinex(R) (Schwarz Pharma)
mg.)
Hyoscyamine Sulfate Oral Tablets (.125 mg.) Levsin(R) (Schwarz Pharma)
Hyoscyamine Sulfate Sublingual Tablets (.125 Levsin(R)/SL (Schwarz Pharma)
mg.)

DERMATOLOGICAL PRODUCTS
- -------------------------
Hydrocortisone and Iodoquinol 1% Cream Vytone(R) Cream (Dermik Labs)
Hydroquinone 4% Cream Eldoquin Forte(R) Cream (ICN Pharmaceuticals)
Hydroquinone 4% Cream with Sunscreen Solaquin Forte(R) Cream (ICN Pharmaceuticals)

GENERAL NUTRITIONAL PRODUCTS
- ------------------------------
Anemagen(TM) Soft Gelatin Capsules Chromagen(R) Soft Gelatin Capsules (Savage
Laboratories)
Anemagen(TM) FA Soft Gelatin Capsules Chromagen(R) FA Soft Gelatin Capsules (Savage
Laboratories)
Fe-Tinic(TM) 150 Capsules Niferex(R)-150 Capsules (Schwarz Pharma)
Fe-Tinic(TM) Forte Capsules Niferex(R)-150 Forte Capsules (Schwarz
Pharma)
</TABLE>

ETHEX has a dedicated sales and marketing team. Its outside sales team
operates at a national level through six regional account managers and two
national account managers. The outside sales force calls on wholesalers and
distributors, and national drugstore chains, as well as hospitals, nursing
homes, and mail order firms. This outside sales team is supported by an
18-member inside sales force that calls independent pharmacies to create
pull-through at the wholesale level. ETHEX's goal is to provide customers with a
broad product line of quality products at competitive prices with high levels of
customer service.

PARTICLE DYNAMICS, INC. -- OUR VALUE-ADDED RAW MATERIAL BUSINESS

Particle Dynamics develops and markets specialty raw material product lines
for the pharmaceutical, nutritional, food and personal care industries. Its
products include value-added chemical, vitamin or mineral raw materials that
provide benefits such as improved taste, enhanced product stability or a more
efficient manufacturing process. Particle Dynamics currently offers three
distinct lines of specialty raw material products:

DESCOTE(R) is a family of microencapsulated tastemasked vitamins and
minerals for use in chewable nutritional products and children's vitamins.
This product is incorporated in Centrum(R) and Centrum Jr.(R) vitamins
(American Home Products Corporation); and Flintstones(R), Bugs Bunny(R) and
One-a-Day(R) vitamins (Bayer Consumer Products).

DESTAB(TM) is a family of direct compression products that enables
pharmaceutical manufacturers to produce tablets and caplets more
efficiently. This product is incorporated in Di-gel(R) (Schering Consumer
Health); Maalox Quick Dissolve(R) (Novartis Consumer Health); Tylenol
P.M.(R) and Mylanta(R) gelcaps (Johnson & Johnson Merck Consumer Products);
Centrum(R) and Centrum Jr.(R) vitamins (American Home Products
Corporation); and Flintstones(R), Bugs Bunny(R) and One-a-Day(R) vitamins
(Bayer Consumer Products).

MicroMask(TM) is a family of products designed to alleviate problems
associated with swallowing tablets. This is accomplished by offering
superior tasting chewable or quick dissolving dosage forms of medication.
This product is incorporated in Triaminic Soft Chew(R) (Novartis Consumer
Health); Children's Sudafed(R) (Warner Lambert). In addition, we use
MicroMask(TM) technology in PreCare(R)

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<PAGE> 31

Prenatal caplet, PreCare(R) Chewables, and PreCare(R) Conceive(TM), all of
which are marketed by Ther-Rx.

STRATEGY

CAPITALIZE ON ACQUISITION OPPORTUNITIES. Ther-Rx plans to actively seek
acquisition opportunities similar to Micro-K(R) and PreCare(R) around which we
can build franchises. We believe that consolidation among large pharmaceutical
companies, coupled with cost-containment pressures, has increased the level of
sales necessary for an individual product to justify active marketing and
promotion. This has led large pharmaceutical companies to focus their marketing
efforts on drugs with higher volume sales, newer or novel drugs which have the
potential for high volume sales and products which fit within core therapeutic
or marketing priorities. As a result, major pharmaceutical companies
increasingly have sought to divest small or non-strategic product lines, which
can be profitable for specialty pharmaceutical companies like us to manufacture
and market.

In making acquisitions, we apply several important criteria in our decision
making process. We seek products with the following attributes:

- maintenance drugs which require continual use over a long period of time,
as opposed to more limited use products for acute indications;

- products which we believe have relevance for treatment of significant
clinical needs;

- products which are predominantly prescribed by physician specialists,
which can be cost effectively marketed by our focused sales force; and

- products which we believe have potential for technological enhancements
and line extensions.

INTERNALLY DEVELOP BRAND NAME PRODUCTS. We apply our existing drug
delivery technologies, research and development and manufacturing expertise to
introduce new products which can expand our existing franchises. In making
internal product development decisions, we apply similar criteria as we do with
acquisition opportunities. Since October 1999, we have successfully introduced
three internally developed brand name products, including PreCare(R) Chewables,
PremesisRx(TM) and PreCare(R) Conceive(TM). These products incorporate our
proprietary oral extended release and tastemasking technologies. We plan to
continue to use our research and development, manufacturing and marketing
expertise to create unique brand name products within our core therapeutic
areas.

PURSUE ATTRACTIVE GROWTH OPPORTUNITIES WITHIN THE GENERIC INDUSTRY. We
intend to continue to introduce generic counterparts to drugs whose patents have
expired. When patents no longer protect a branded product, opportunities exist
for ETHEX to introduce generic counterparts to branded products. Such generic or
off-patent pharmaceutical products are therapeutically equivalent to their
branded counterparts and are generally sold at significantly lower prices than
the branded product. Accordingly, off-patent pharmaceuticals provide a safe,
effective and cost-efficient alternative to users of branded products. We
believe the health care industry will continue to support growth in the generic
pharmaceutical market. Over the next five years patent protected pharmaceuticals
with sales of more than $20 billion will lose patent protection. We believe that
industry trends also favor generic product expansion into the managed care,
long-term care and government contract markets. We further believe that our
competitively priced, technologically distinguished generic products can fulfill
the increasing need of these markets to contain costs and improve patient
compliance.

FOCUS SALES EFFORTS ON HIGH VALUE NICHE MARKETS. We focus our sales
efforts on niche markets where we believe we can target a relatively narrow
physician audience. Because our products are sold to specialty physician groups
that can be reached with a smaller sales force, we believe we will be able to
staff adequately for these needs. We plan to continue to build our sales force
significantly to expand our coverage of frequent prescribers of our products and
as we acquire additional branded pharmaceutical products. We currently have
approximately 110 sales representatives marketing our branded pharmaceuti-

27
<PAGE> 32

cal products in the United States. Our sales force is highly experienced in
marketing branded pharmaceutical products, with at least two-thirds of the sales
force having previous sales experience in the pharmaceutical industry. We
believe it is unique for a specialty pharmaceutical company to hire experienced
pharmaceutical sales representatives as the substantial majority of its sales
force, but we believe it is an important strategy for us to employ, as it
increases sales representative effectiveness at an earlier stage. We expect to
add approximately 50 sales representatives over the next several months, which
will enhance our national coverage.

ADVANCE EXISTING AND DEVELOP NEW DRUG DELIVERY TECHNOLOGIES. We expect to
continue to develop our drug delivery technologies and have identified various
technologies with substantial growth potential, such as systems for the oral
delivery of bioactive peptides and proteins through the mucosal tissues of the
esophagus and upper lung. Existing delivery technologies for bioactive peptides
and proteins are limited to injection or infusion. We believe our delivery
platform technology has unique breadth and depth, with 15 proprietary drug
delivery systems in four distinct delivery areas. These technologies have
enabled us to create innovative products, such as our tastemasking and
controlled release systems which are incorporated into our prenatal vitamins,
providing them with attributes superior to other products on the market.

OUR PROPRIETARY DRUG DELIVERY TECHNOLOGIES

We have a long history of developing drug delivery technologies. In the
1950's, we received what we believe to be the first patents for sustained
release delivery systems which enhance the effectiveness of pharmaceutical
products. We have developed and patented 15 drug delivery and formulation
technologies in four principal areas: oral controlled release; tastmasking; oral
and topical site specific; and quick dissolving. We will continue to invest our
resources in the development of new technologies. The following describes our
principal drug delivery technologies.

ORAL EXTENDED/DELAYED RELEASE TECHNOLOGIES. Our oral extended/delayed
release technologies are tailored to the desired release profile for a given
drug. The release profile is dependent on many parameters, such as drug
solubility, protein binding and site of absorption. We utilize and apply our
extended/delayed release technologies to develop and apply the appropriate
delivery system. Our technologies include:

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
ORAL
EXTENDED/DELAYED COMMERCIALIZED STAGE OF
RELEASE TECHNOLOGY FUNCTIONALITY PRODUCTS DEVELOPMENT
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
KV/24(R) Multi-particulate drug Isosorbide-5 Commercialized;
delivery system that Mononitrate Extended patents issued
encapsulates one or Release Tablets
more compounds into
particles that release
over an 18-to 24-hour
period
METER RELEASE(R) Drug delivery system Utilized in 27 ETHEX Commercialized
for products that products; Pain
require release over an Management product
8- to 12-hour period (marketed in Canada)
MICRO RELEASE(R) Drug delivery system Utilized in 10 ETHEX Commercialized
that employs smaller products
particles than KV/24(R)
or Meter Release(R),
where precise release
profiles are less
important
- -----------------------------------------------------------------------------------------
</TABLE>

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<PAGE> 33

TASTEMAKING TECHNOLOGIES. Our tastemaking technologies improve the taste
of unpleasant drugs. We have developed numerous platforms for our technologies,
including liquid, chewable and dry powder formulations. Our technologies
include:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
TASTEMASKING COMMERCIALIZED STAGE OF
TECHNOLOGY FUNCTIONALITY PRODUCTS DEVELOPMENT
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LIQUETTE(R) Liquid suspension Signal Green (marketed in Commercialized;
applications for both Japan) patents issued
immediate and extended
release requirements
Flavor Tastemasking system for Utilized in 12 ETHEX Commercialized;
Tech(TM) liquid dosage forms Cough/Cold liquid patent issued
preparations
Tastemasking system for PreCare(R) Chewables; Commercialized;
MicroMask(TM) sachets and chewable, PreCare(R) Conceive(TM) patents issued
quick dissolving or
effervescent tablets
- -------------------------------------------------------------------------------------------
</TABLE>

SITE RELEASE(R) TECHNOLOGIES. Our SITE RELEASE(R) drug delivery systems
rely on bioadhesion to body tissues, coupled with controlled release of the drug
agent. Products incorporating SITE RELEASE(R) technologies are designed to
adhere to wet living tissues yet are minimally affected by the presence of
moisture. Each of the SITE RELEASE(R) technologies is individually tailored to
optimize drug delivery for oral, topical or a specific orificial use. Our
technologies include:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
SITE
RELEASE(R) COMMERCIALIZED STAGE OF
TECHNOLOGY FUNCTIONALITY PRODUCTS DEVELOPMENT
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DermaSite(TM) Delivery of drugs Dermarin-L (marketed Commercialized; patent
through topical in Japan) issued
applications to the
skin
VagiSite(TM) Delivery of Expect to begin Developed; patents
one-dose-to-cure marketing 2nd quarter issued
dosage forms to the 2000
vaginal vault
OraSite(R) Localized delivery of -- Under development;
solid oral dosage patents issued
form applications
OraSert(TM) Continued delivery of -- Under development;
solid oral dosage patents issued
form applications
BioSert(R) Local and systemic -- Developed; patent issued
delivery of drugs for
vaginal or rectal
administration
Trans-EP(TM) Delivery of drug -- Under development;
substance via patents issued
bioadhesive film
deposited on the
surface of the
esophagus, oral
mucosa or pharnyx
PulmoSite(TM) Delivery through -- Under development;
inhalation of drugs patent pending
that are destroyed by
stomach pH or enzymes
- -------------------------------------------------------------------------------------------
</TABLE>

(table continued on next page)

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<PAGE> 34

QUICK DISSOLVING TECHNOLOGY. Our OraQuick(TM) system is a quick-dissolving
tablet technology that exhibits the ability to tastemask, yet dissolves in the
mouth in a matter of seconds. Most other quick-dissolving technologies offer
either quickness at the expense of poor tastemasking or excellent tastemasking
at the expense of quickness. Our technologies include:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
QUICK DISSOLVING COMMERCIALIZED STAGE OF
TECHNOLOGY FUNCTIONALITY PRODUCTS DEVELOPMENT
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OraQuick(TM) Quick dissolving -- Under development;
tablet that utilizes patent pending
the FlavorTech(TM) and
MicroMask(TM)
technologies
- --------------------------------------------------------------------------------------------
</TABLE>

SALES AND MARKETING

Ther-Rx has a national sales and marketing infrastructure which includes
more than 110 sales representatives dedicated to promoting and marketing our
branded pharmaceutical products to targeted physician specialists, such as
obstetricians for our PreCare(R) products and cardiologists for our Micro-K(R)
product. By targeting physician specialists, we can compete successfully without
the need to build a large sales force. We also have a national sales management
team, as well as a sales team dedicated to managed care and trade accounts. In
addition, we expect to add approximately 50 sales representatives over the next
several months, which will enhance our national coverage.

We seek to increase the sales of our branded pharmaceutical products
through physician sales calls and promotional efforts, including sampling,
advertising and direct mail. For acquired branded products, we generally
increase the level of physician sales calls and promotion relative to the
previous owner. For example, with Micro-K(R) we have significantly increased our
sales effort with cardiologists and high potassium-prescribing internists. We
have applied a similar strategy to the PreCare(R) prenatal sales efforts, where
we have increased the level of physician sales calls and sampling to the highest
prescribers of prenatal vitamins. We also have enhanced our PreCare(R) brand
franchise by launching three more line extensions to address unmet needs,
including the launch of PreCare(R) Chewables, Premesis Rx(TM) and
PreCare(R)Conceive(TM). By offering multiple products to the same group of
physician specialists, we are able to maximize the effectiveness of our
experienced sale force.

ETHEX has a 26-member sales and marketing team, which includes an outside
sales team of six regional account managers, two national account managers and
an 18-member inside sales team. The eight outside sales managers call on
wholesalers and distributors and national drugstore chains, as well as
hospitals, nursing homes, independent pharmacies and mail order firms. The
inside sales team calls independent pharmacies to create pull-through at the
wholesale level. ETHEX's marketing strategy is to provide customers with a broad
product line of quality products at competitive prices with high levels of
customer service.

Particle Dynamics has a specialized technical sales group of four managers
who call on the leading companies in the pharmaceutical, nutritional, food and
personal care markets in the United States. We also have a network of
international distributors that provide additional sales coverage in more than
50 countries in Europe, the Pacific Rim, South America and North America.

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<PAGE> 35

RESEARCH AND DEVELOPMENT

Our research and development activities include the development of new and
next generation drug delivery technologies, the formulation of brand name
proprietary products and the development of technologically distinguished
generic versions of previously approved brand name pharmaceutical products. As
of March 24, 2000, approximately 60 of our employees were engaged in research
and development activities. In fiscal 1997, 1998 and 1999, and the nine months
ended December 31, 1999, total research and development expenses were $4.8
million, $5.8 million, $6.9 million and $6.0 million, respectively.

Ther-Rx currently has nine products focused on women's health in its
research and development pipeline at various stages of development. We believe
we have the technological expertise required to develop unique products that
provide benefits to meet currently unmet needs in the area of women's health.
Four of these products are expected to be marketed in fiscal 2001. The products
presently under development are targeted to markets which are estimated to
exceed $500 million annually.

ETHEX currently has more than 35 products in its research and development
pipeline at various stages of development and exploration. Our development
process consists of formulation, development and laboratory testing, and where
required (1) preliminary bioequivalency studies of pilot batches of the
manufactured product, (2) full scale bioequivalency studies using commercial
quantities of the manufactured product and (3) submission of an abbreviated new
drug application, or ANDA, to the FDA. We believe, unlike many generic drug
companies, we have the technical expertise required to develop generic
substitutes to the hard-to-copy branded pharmaceutical products. The products
presently under development are targeted to markets which are estimated to
exceed $4.2 billion annually. We currently have five ANDAs and one new drug
application, or NDA, filed with the FDA awaiting approval.

Particle Dynamics currently has more than 15 products in its research and
development pipeline at various stages of development. Particle Dynamics applies
its technologies to a diverse number of active and inactive chemicals for more
efficient processing of materials to achieve benefits such as prolonged action
of release, tastemasking, making materials more site specific for use and other
benefits. Typically, the finished products into which the specialty raw
materials are incorporated do not require FDA approval. We expect to market a
number of new specialty raw material products in fiscal 2001.

We continually apply our scientific and development expertise to refine and
enhance our existing drug delivery systems and formulation technologies and to
create new technologies that may be used in our drug development programs.
Certain of these technologies, which currently are in the developmental stage,
include advanced oral controlled-release systems, quick dissolving oral delivery
systems (with and without tastemasking characteristics) and transesophageal and
intrapulmonary delivery technologies.

PATENTS AND PROPRIETARY RIGHTS

Our policy is to file patent applications in appropriate situations to
protect and preserve, for our own use, technology, inventions and improvements
that we consider important to the development of our business. We currently hold
domestic and foreign issued patents expiring 2001 through 2018 relating to our
controlled release, site-specific, quick dissolve and tastemasking technologies.
A substantial portion of our patents begin to expire after 2007. We have been
granted 22 U.S. patents and have 15 U.S. patent applications pending. In
addition, we have 28 foreign issued patents and a total of 11 patent
applications pending in Canada, Europe, Australia, Japan and South Korea.

Our success will also depend to a significant extent on our ability to
obtain and enforce patents, maintain trade secret protection and operate without
infringing on the proprietary rights of third parties. Because the
pharmaceutical field is crowded and a substantial number of patents have been
issued and because the patent position of pharmaceutical companies can be highly
uncertain and frequently involves complex legal and factual questions, the
breadth of claims allowed in patents relating to pharmaceutical applications or
their enforceability cannot be predicted. To the extent we endeavor to protect
our inventions outside the United States, statutory differences in patentable
subject matter may limit the protection we can obtain. For example, methods of
treating humans are not patentable in many countries

31
<PAGE> 36

outside of the United States. These and other issues may prevent us from
obtaining patent protection outside of the United States.

We also rely upon trade secrets, unpatented proprietary know-how and
continuing technological innovation to develop and maintain our competitive
position. We enter into confidentiality agreements with each of our employees
and consultants upon the commencement of an employment or consulting
relationship. These agreements generally provide that all inventions, ideas,
discoveries, improvements and copyrightable material made or conceived by the
individual arising out of the employment or consulting relationship and all
confidential information developed or made known to the individual during the
term of the relationship is our exclusive property. We cannot assure that these
agreements will not be breached. We also cannot be certain that we will have
adequate remedies for any breach. Disputes may arise concerning the ownership of
intellectual property or the applicability or enforceability of our
confidentiality agreements, and there can be no assurance that any such disputes
would be resolved in our favor. Others may acquire or independently develop
similar technology or, if patents are not issued with respect to products
arising from research, we may not be able to maintain information pertinent to
such research as proprietary technology or trade secrets.

We currently hold 48 trademarks and have also applied for trademark
protection for the trade names of our proprietary controlled-release,
tastemasking, site-specific and quick dissolve technologies. We intend to
continue to trademark new technology and product names as they are developed.

We may be required to defend against charges of infringement of patent or
proprietary rights of third parties. Such defense could require us to incur
substantial expense and to divert significant effort of our technical and
management personnel, and could result in our loss of rights to develop or make
certain products or require us to pay monetary damages or royalties to license
proprietary rights from third parties. Although patent and intellectual property
disputes in the pharmaceutical product area have often been settled through
licensing or similar arrangements, costs associated with such arrangements may
be substantial and could include ongoing royalties. Furthermore, we cannot be
certain that the necessary licenses would be available to us on acceptable
terms, if at all. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
us from manufacturing and selling certain of our products. Litigation may also
be necessary to enforce our patents against others or to protect our know-how or
trade secrets. Such litigation could result in substantial expense and there
cannot be assurance that any litigation will be resolved in our favor.

MANUFACTURING AND FACILITIES

We believe that our administrative, research, manufacturing and
distribution facilities are an important factor in achieving our long-term
growth objectives. All facilities, aggregating approximately 400,000 square
feet, are located in the St. Louis area. We own approximately 300,000 square
feet, with the balance under various leases at pre-determined rates under
agreements expiring from 2001 through 2012,

32
<PAGE> 37

subject in most cases to renewal at our option. We believe the facilities are
suitable for the purposes for which they are used and adequate to meet our needs
for at least the next 18 months.

COMPETITION

We compete with many specialty pharmaceutical companies for product and
product line acquisitions. These competitors include King Pharmaceuticals, Inc.,
Jones Medical Industries, Inc., ICN Pharmaceuticals, Inc., Watson
Pharmaceuticals, Inc. and other companies that also acquire branded
pharmaceutical product lines from other pharmaceutical companies. These
competitors may have substantially greater financial and managerial resources
than we do. Accordingly, our competitors may succeed in product line
acquisitions that we desire.

Our branded pharmaceutical products may also be subject to competition from
alternate therapies during the period of patent protection and thereafter from
generic equivalents. In addition, our generic pharmaceutical products may be
subject to competition from pharmaceutical companies engaged in the development
of alternatives to the generic products we offer or of which we undertake
development. Our competitors may develop generic products that are more
effective or commercially attractive than our current or future products,
thereby rendering our corresponding products less attractive. In our specialty
pharmaceutical businesses, we compete primarily on the basis of product
efficacy, breadth of product line and price.

We also compete with drug delivery companies engaged in the development of
alternative drug delivery systems. We are aware of a number of companies
currently seeking to develop new non-invasive drug delivery systems, including
oral delivery and transmucosal systems. Many of these companies may have greater
research and development capabilities, experience, manufacturing, marketing,
financial and managerial resources than we do. Accordingly, our competitors may
succeed in developing competing technologies, obtaining FDA approval for
products or gaining market acceptance more rapidly than we do.

GOVERNMENT REGULATION

All pharmaceutical manufacturers are subject to extensive regulation by the
federal government, principally the FDA, and, to a lesser extent, by state,
local and foreign governments. The Federal Food, Drug and Cosmetic Act, or FDCA,
and other federal statutes and regulations govern or influence, among other
things, the development, testing, manufacture, safety, labeling, storage,
recordkeeping, approval, advertising, promotion, sale and distribution of
pharmaceutical products. Pharmaceutical manufacturers are also subject to
certain record keeping and reporting requirements, establishment registration
and product listing, and FDA inspections.

With respect to any non-biological "new drug" product with active
ingredients not previously approved by the FDA, a prospective manufacturer must
submit a full NDA, including complete reports of preclinical, clinical and other
studies to prove the product's safety and efficacy. A full NDA may also need to
be submitted for a drug product with a previously approved active ingredient if,
among other things, the drug will be used to treat an indication for which the
drug was not previously approved, or if the abbreviated procedure discussed
below is otherwise not available. A manufacturer intending to conduct clinical
trials in humans for a new drug may be required first to submit a Notice of
Claimed Investigational Exception for a New Drug, or IND, to the FDA containing
information relating to preclinical. and clinical studies. INDs and full NDAs
may be required to be filed to obtain approval of certain of our products,
including those that do not qualify for abbreviated application procedures. The
full NDA process, including clinical development and testing, is expensive and
time consuming.

The Drug Price Competition and Patent Restoration Act of 1984, known as the
Waxman-Hatch Act, established ANDA procedures for obtaining FDA approval for
generic versions of many non-biological drugs for which patent or marketing
exclusivity rights have expired and which are bioequivalent to previously
approved drugs. "Bioequivalence" for this purpose, with certain exceptions,
generally means that the proposed generic formulation is absorbed by the body at
the same rate and extent as a previously approved "reference drug." Approval to
manufacture these drugs is obtained by filing abbreviated
33
<PAGE> 38

applications, such as ANDAs. As a substitute for clinical studies, the FDA
requires data indicating the ANDA drug formulation is bio-equivalent to a
previously approved reference drug among other requirements. Analogous
abbreviated application procedures apply to antibiotic drug products that are
bio-equivalent to previously approved antibiotics. The advantage of the ANDA
approval mechanism, compared to an NDA, is that an ANDA applicant is not
required to conduct preclinical and clinical studies to demonstrate that the
product is safe and effective for its intended use and may rely, instead, on
studies demonstrating bio-equivalence to a previously approved reference drug.

In addition to establishing ANDA approval mechanisms, the Waxman-Hatch Act
fosters pharmaceutical innovation through such incentives as non-patent
exclusivity and patent restoration. The Act provides two distinct exclusivity
provisions that either preclude the submission or delay the approval of an
abbreviated new drug application. A five-year exclusivity period is provided for
new chemical compounds, and a three-year marketing exclusivity period is
provided for changes to previously approved drugs which are based on new
clinical investigations essential to the approval. The three-year marketing
exclusivity period may be applicable to the approval of a novel drug delivery
system. The marketing exclusivity provisions apply equally to patented and
non-patented drug products. These provisions do not delay or otherwise affect
the approvability of full NDAs even when effective ANDA approvals are not
available. For drugs covered by patents, patent extension may be provided for up
to five years as compensation for reduction of the effective life of the patent
resulting from time spent in conducting clinical trials and in FDA review of a
drug application.

There has been substantial litigation in the biomedical, biotechnology and
pharmaceutical industries with respect to the manufacture, use and sale of new
products that are the subject of conflicting patent rights. One or more patents
cover most of the proprietary products for which we are developing generic
versions. When we file an ANDA for such drug products, we will, in most cases,
be required to certify to the FDA that any patent which has been listed with the
FDA as covering the product is invalid or will not be infringed by our sale of
our product. Alternatively, we could certify that we would not market our
proposed product until the applicable patent expires. A patent holder may
challenge a notice of noninfringement or invalidity by filing suit for patent
infringement, which would prevent FDA approval until the suit is resolved or
until at least 30 months has elapsed (or until the patent expires, whichever is
earlier). Should any entity commence a lawsuit with respect to any alleged
patent infringement by us, the uncertainties inherent in patent litigation would
make the outcome of such litigation difficult to predict.

In addition to marketing drugs which are subject to FDA review and
approval, we market products under (a) certain "grandfather" clauses of the FDCA
that exempt certain categories of drugs from some or all pre-market approval
requirements, and (b) additional statutory and regulatory exceptions from pre-
market approval requirements that apply to certain drug products that fall
outside of the legal definition of a "new drug". A determination as to whether a
particular product does or does not require pre-market NDA or ANDA approval can
involve numerous complex considerations. The FDA has published a Compliance
Policy Guide that recognizes the marketing of certain categories of drug
products without an approved NDA or ANDA as long as those products are not
significantly different in formulation than products marketed before November
13, 1984. With respect to such products, any enforcement action initiated by the
FDA would typically affect all similarly situated products at the same time and
in a similar manner. If a product is significantly different from all products
marketed before November 13, 1984 or falls outside of the scope of the
Compliance Guide or raises significant new questions of safety or effectiveness,
however, the FDA could make a determination whether or not the new drug
provisions are applicable to it without first implementing the procedures called
for by the policy guide and could single out the product for immediate
regulatory action, including seizure or injunction against further marketing. We
list all of our marketed drug products, as required, with the FDA. We believe
that each of our generic products which has been marketed without FDA approval
qualifies for deferral of regulatory action under the Compliance Policy Guide or
under other agency policies. The FDA has initiated no regulatory or judicial
proceeding to prevent the marketing of any of these products. However, if a
determination is made by the FDA that a particular drug requires an approved NDA
or ANDA, we may be required to cease distribution of the product until such
approval is obtained.

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<PAGE> 39

In addition to obtaining pre-market approval of our products, we are
required to maintain all facilities in compliance with the FDA's current Good
Manufacturing Practices, or cGMP. In addition to compliance with cGMP each
pharmaceutical manufacturer's facilities must be registered with the FDA.
Manufacturers must also be registered with the Drug Enforcement Administration,
or DEA, and similar state and local regulatory authorities if they handle
controlled substances, and with the Environmental Protection Agency, or EPA, and
similar state and local regulatory authorities if they generate toxic or
dangerous wastes. Noncompliance with applicable requirements can result in
fines, recall or seizure of products, total or partial suspension of production
and distribution, refusal of the government to enter into supply contracts or to
approve NDA's, ANDA's or other applications and criminal prosecution. The FDA
also has the authority to revoke for cause drug approvals previously granted.

Approximately seven years ago, following an FDA inspection, we were found
not to be in compliance with current cGMP requirements. Part of our inventory
was subjected to seizure, and shipment of certain products was stopped. In
addition, we were placed on the FDA's Application Integrity Policy, or AIP list.
As long as a company remains on this list, FDA defers substantive review of any
ANDA or NDA submitted by the company. Also, an investigation of K-V by United
States prosecutors was started.

In 1995, our facilities were re-inspected by the FDA and found to be in
substantial compliance with cGMP. Also, in 1995 the U.S. attorney's
investigation of us ended with a plea agreement, whereby we agreed to plead
guilty to 4 misdemeanor violations of the FDCA and to pay a $600,000 fine. The
misdemeanor plea agreement was not based on any evidence of fraud or felony.

In 1998 we were removed from the AIP list and FDA resumed substantive
review of our newly submitted ANDAs and NDAs. In March 2000, we received our
first approval of an ANDA submitted in 1998.

The requirements of cGMP are complex, are subject to interpretation and can
change over time. We believe that we now have in place all procedures necessary
to comply with cGMP requirements, and to quickly spot and correct any deviations
from those requirements. However, there can be no assurance that such deviations
will not occur in the future.

The Prescription Drug Marketing Act, or PDMA, which amended various
sections of the FDCA, requires, among other things, state licensing of wholesale
distributors of prescription drugs under federal guidelines that include minimum
standards for storage, handling and record keeping. It also imposes detailed
requirements on the distribution of prescription drug samples as those
distributed by the Ther-Rx sales force. The PDMA sets forth substantial civil
and criminal penalties for violations of these and other provisions.

For international markets, a pharmaceutical company is subject to
regulatory requirements, inspections and product approvals substantially the
same as those in the United States. In connection with any future marketing,
distribution and license agreements that we may enter, our licensees may accept
or assume responsibility for such foreign regulatory approvals. The time and
cost required to obtain these international market approvals may be greater or
lesser than those required for FDA approval.

Product development and approval within this regulatory framework takes a
number of years, involves the expenditure of substantial resources and is
uncertain. Many drug products ultimately do not reach the market because they
are not found to be safe or effective or cannot meet the FDA's other regulatory
requirements. In addition, there can be no assurance that the current regulatory
framework will not change or that additional regulation will not arise at any
stage of our product development that may affect approval, delay the submission
or review of an application or require additional expenditures by us. There can
be no assurance that we will be able to obtain necessary regulatory clearances
or approvals on a timely basis, if at all, for any of our products under
development, and delays in receipt or failure to receive such

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<PAGE> 40

clearances or approvals, the loss of previously received clearances or
approvals, or failure to comply with existing or future regulatory requirements
could have a material adverse effect on our business.

EMPLOYEES

As of March 27, 2000, we employed a total of 637 employees. We are party to
a collective bargaining agreement that expires on May 1, 2001 and covers 111
employees. We believe that our relations with our employees are good.

LEGAL PROCEEDINGS

From time to time, we become involved in various legal matters that we
consider to be in the ordinary course of business. While we are not presently
able to determine the potential liability, if any, related to such matters, we
believe none of such matters, individually or in the aggregate, will have a
material adverse effect on our financial position.

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<PAGE> 41

MANAGEMENT

The following table sets forth certain information with respect to our
directors, executive officers and certain key employees:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Victor M. Hermelin........................ 86 Chairman of the Board
Marc S. Hermelin.......................... 58 Vice Chairman of the Board and Chief Executive
Officer
Alan G. Johnson........................... 65 Senior Vice President, Strategic Planning and
Corporate Growth, Secretary and Director
Michael S. Anderson....................... 51 President and Chief Executive Officer, Ther-Rx
Corporation
Philip J. Vogt............................ 48 President, ETHEX Corporation
Raymond F. Chiostri....................... 64 Chairman, President and Chief Executive Officer,
PDI
Gerald R. Mitchell........................ 60 Vice President and Treasurer
Richard H. Chibnall....................... 44 Vice President, Finance
Mitchell I. Kirschner..................... 53 Vice President, New Business Development
R. Saul Levinson, Ph.D.................... 57 Vice President, Discovery Research
Sarah R. Weltscheff....................... 47 Vice President, Investor Relations
Catherine M. Biffignani................... 44 Investor Relations Director
Garnet E. Peck, Ph.D...................... 69 Director
Norman D. Schellenger..................... 70 Director
</TABLE>

Victor M. Hermelin is the father of Marc S. Hermelin and father-in-law of
Mitchell I. Kirschner.

The following paragraphs contain biographical information about our
directors, executive officers and certain key employees.

Victor M. Hermelin, our founder, served as our President from 1942 until
1972, at which time he assumed the position of Chairman of the Board. In 1978,
Mr. Hermelin retired from full-time employment and entered into a consulting
arrangement with us. Mr. Hermelin holds a Bachelor of Science degree in Chemical
Engineering from Washington University.

Marc S. Hermelin joined us in 1973 and served as our Vice President,
Planning until 1975 when he assumed the position of Vice Chairman of the Board
and Chief Executive Officer. Mr. Hermelin attended Washington University School
of Business.

Alan G. Johnson joined us as our Secretary and a member of our Board of
Directors in 1975. In 1999, Mr. Johnson became our Senior Vice President,
Strategic Planning and Corporate Growth. Prior to joining us in 1999, Mr.
Johnson was Chairman and Chief Executive Officer of Johnson Research and
Capital, Inc., an investment banking firm. From 1976 through 1998, Mr. Johnson
was a senior member of the law firm of Gallop, Johnson & Neuman, L.C. and its
predecessor partnerships. Mr. Johnson is a Chartered Financial Analyst and holds
a J.D. from St. Louis University Law School and B.S. and M.S. degrees in Finance
from the University of Illinois. Mr. Johnson is also a director of Siboney
Corporation.

Michael S. Anderson joined us in 1994 and served as President and Chief
Executive Officer of ETHEX until February 2000 when he assumed the position of
President and Chief Executive Officer, Ther-Rx Corporation. From 1988 to 1994,
Mr. Anderson served as Vice President of Sales of Schein Pharmaceutical, a
marketer of generic pharmaceutical products. From 1971 to 1988, Mr. Anderson was
employed by A. H. Robins, a pharmaceutical company, where he was promoted to the
position of Vice President Sales, Medical Instruments Division. Mr. Anderson
holds a Bachelor of Arts degree from the University of Georgia.

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<PAGE> 42

Philip J. Vogt joined us in 1995 as National Sales Manager for ETHEX
Corporation and served in that position until 1996 when he was promoted to Vice
President, Marketing for ETHEX Corporation. Since February 2000, Mr. Vogt has
served as the President of ETHEX Corporation. Before that, Mr. Vogt held sales,
sales management and marketing positions for Schein Pharmaceutical. Mr. Vogt
holds a Bachelor of Science degree in Business from Louisiana State University.

Raymond F. Chiostri joined us in 1987 and served as our Group President,
Pharmaceutical Division until 1995 when he assumed the position of President and
Chief Executive Officer of PDI. He also serves as the Chairman of PDI. Mr.
Chiostri holds a Bachelor of Science degree in Chemistry from the University of
Illinois.

Gerald R. Mitchell joined us in 1981 and became our Vice President,
Treasurer in March 2000. Prior to that time, he served as our Vice President,
Finance. Mr. Mitchell holds a Bachelor of Science degree in Commerce and Finance
from St. Louis University, and he received his CPA certification in 1970.

Richard H. Chibnall joined us in 1996 as Corporate Controller and was
appointed Vice President, Finance in March 2000. Before that, he served as the
Director of Finance for the sales and marketing division of Pet, Inc. Mr.
Chibnall holds a Bachelor of Arts degree in Economics and a Masters of Business
Administration degree from Washington University.

Mitchell I. Kirschner joined us in 1976 and since 1983 has served as our
Vice President, New Business Development. Before that he served the Company in a
variety of research and business development positions. Mr. Kirschner holds a
Bachelors degree in Zoology and Microbiology from Tel Aviv University.

R. Saul Levinson, Ph.D., joined us in 1991 and has served as our Vice
President, Discovery Research since that time. From 1987 to 1991, Dr. Levinson
was a Principal in Medi-Ventures, a venture capital firm specializing in
investments in health care companies. From 1982 to 1987, Dr. Levinson served as
Manager, Drug Delivery Ventures for Abbott Laboratories, a pharmaceutical
company. Dr. Levinson holds a Bachelor of Science degree in Pharmacy, a Master
of Science degree in Physical Pharmacy and a Doctorate in Physical Pharmacy from
the University of Illinois at Chicago.

Sarah R. Weltscheff joined us in 1978 and served as the Director of
Recruitment and Training. She has served as the Vice President of Investor
Relations and Corporate Communications since 1986. Prior to joining us, Ms.
Weltscheff worked in education, politics and government. She holds a Bachelor of
Arts degree in History from Iowa State University and a Masters of Education
degree in Counseling and Personnel Services from the University of Missouri.

Catherine M. Biffignani joined us in 1983 and has served as our Manager and
most recently as the Director of Investor Relations and Corporate
Communications. Prior to joining us, Ms. Biffignani held positions in the
marketing area of the Anheuser-Busch Companies.

Garnet E. Peck, Ph.D., joined us as a member of our Board of Directors in
1994. Dr. Peck has served as a Professor of Industrial Pharmacy and as the
Director of the Industrial Pharmacy Laboratory for the Purdue University School
of Pharmacy and Pharmacal Sciences since 1967. Dr. Peck has also served as an
expert consultant to the FDA and as a Consultant to the pharmaceutical industry
for approximately 26 years. Dr. Peck received his Bachelor of Science degree in
Pharmacy from Ohio Northern University and his Masters of Science and Doctorate
degrees in Industrial Pharmacy from Purdue University.

Norman D. Schellenger joined us as a member of our Board of Directors in
1998. Mr. Schellenger brings to our Board over 35 years of sales, marketing and
general management experience and expertise in the pharmaceutical industry. This
includes 29 years with A. H. Robins, a pharmaceutical company where, among other
positions, he served as General Manager of its prescription pharmaceutical
businesses and as President of Whitby Pharmaceuticals. He retired in 1997. Mr.
Schellenger has also been a member of the Board of Directors of the National
Pharmaceutical Council. Mr. Schellenger holds a Bachelor of Arts degree from
Duke University.

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<PAGE> 43

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding beneficial
ownership of our Class A common stock and Class B common stock as of March 24,
2000 and as adjusted to reflect the sale by our company and the selling
stockholders of the shares of common stock offered by this prospectus by:

- each person we know to be the beneficial owner of more than 5% of our
common stock;

- each named executive officer;

- each of our directors;

- all executive officers and directors as a group; and

- each selling stockholder.

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. The following are deemed to be beneficially
owned and outstanding for purposes of calculating the number of shares and the
percentage beneficially owned by that person or entity:

- shares of common stock issuable pursuant to options which may be
exercised within 60 days after the date of this prospectus; and

- shares of common stock issuable pursuant to warrants which may be
exercised within 60 days after the date of this prospectus.

However, these shares are not deemed to be beneficially owned and
outstanding for purposes of computing the percentage beneficially owned by any
other person or entity.

Except as otherwise indicated, each stockholder named in the table has sole
voting investment power with respect to the shares set forth opposite the
stockholder's name. For purposes of calculating the percentage beneficially
owned by an individual, the number of shares deemed outstanding includes:

- the 12,211,908 shares of Class A common stock and 6,560,961 shares of
Class B common stock outstanding as of March 24, 2000;

- the 15,546,908 shares of Class A common stock which will be outstanding
immediately after this offering; and

- the presently exercisable options and presently exercisable warrants held
by that person.

Our directors and certain of our officers and stockholders have agreed that
they will not offer, sell, contract to sell, pledge or otherwise dispose of any
shares of our common stock for a period of 90 days after the date of this
prospectus.

39
<PAGE> 44

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED CLASS A COMMON
SHARES BENEFICIALLY
NUMBER OF
PRIOR TO OFFERING
----------------------------------------- OWNED
CLASS A COMMON CLASS B COMMON CLASS A COMMON AFTER OFFERING
------------------- ------------------- SHARES TO BE -------------------
NAME OF BENEFICIAL OWNER(1) NUMBER(2) PERCENT NUMBER(2) PERCENT OFFERED NUMBER PERCENT
- --------------------------- --------- ------- --------- ------- -------------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Lawrence Brody, Minnette
Hermelin and Marc S.
Hermelin, Trustees of the
following trusts(3):
f.b.o. Anne Kirschner
u.t.a. 12/22/73.......... 793,250 6.5% 923,250 14.1% 200,000 593,250 3.8%
f.b.o. Arnold Hermelin
u.t.a. 12/22/73.......... 885,500 7.3 925,500 14.1 200,000 685,500 4.4
f.b.o. Minnette Hermelin
u.t.a.12/22/73........... 404,500 3.3 454,500 6.9 200,000 204,500 1.3
The Jacob Trust u.t.a.
10/17/91..................... 190,100 1.6 202,500 3.1 50,000 140,100 *
Minnette Hermelin.............. 13,218(4) * 13,218(4) * -- 13,218(4) *
Victor M. Hermelin............. 16,043 * 162,300 2.4 15,000 1,043 *
Marc S. Hermelin............... 57,673(5) * 591,340(5) 8.7 -- 57,673(5) *
Alan G. Johnson................ 235,750(6) 1.9 229,750(6) 3.5 -- 235,750(6) 1.5
Raymond F. Chiostri............ 24,000 * 24,000 * -- 24,000 *
Mitchell I. Kirschner.......... 22,500(7) * 46,500(7) * -- 22,500(7) *
Gerald R. Mitchell............. 29,250 * 29,250 * -- 29,250 *
Garnet E. Peck, Ph.D. ......... 45 * 7,545 * -- 45 *
Norman D. Schellenger.......... -- * 3,000 * -- -- *
All current directors and
executive officers as a group
(8 persons).................. 3,042,729 24.9 3,971,153 56.8 -- 2,427,729 15.6
</TABLE>

- ---------------
* Less than one percent.

(1) Anne Kirschner, Arnold Hermelin and Marc Hermelin are the adult children of
Victor M. Hermelin, the Chairman of the Board and founder of our company.
Minnette Hermelin is the former spouse of Victor Hermelin. Anne Kirschner is
the spouse of Mitchell Kirschner.

(2) Includes the following shares that were not owned by the persons listed but
which could be purchased under options exercisable currently or within 60
days after the date of this prospectus:

<TABLE>
<CAPTION>
SHARES OF SHARES OF
CLASS A CLASS B
COMMON STOCK COMMON STOCK
------------ ------------
<S> <C> <C>
Victor M. Hermelin........................................ -- 122,500
Marc S. Hermelin.......................................... -- 255,000
Alan G. Johnson........................................... 13,000 10,000
Raymond F. Chiostri....................................... -- --
Mitchell I. Kirschner..................................... -- 24,000
Gerald R. Mitchell........................................ 8,550 8,550
Garnet E. Peck, Ph.D...................................... -- 7,500
Norman D. Schellenger..................................... -- 3,000
</TABLE>

(3) The address of Lawrence Brody, Minnette Hermelin and Marc S. Hermelin
Trustees is One Metropolitan Square, St. Louis, Missouri 63101.

(4) Does not include 2,657,468 shares of Class A common stock and 2,877,468
shares of Class B common stock held by the trusts referenced above, over
which Minnette Hermelin shares voting and investment power as one of three
trustees.

(5) Does not include 176,250 shares each of Class A common stock and Class B
common stock held by Alan G. Johnson as trustee of an irrevocable trust
created by another party for the benefit of Marc S. Hermelin, who has no
voting or investment power over such shares. Also does not include 2,657,468
shares of Class A common stock and 2,877,468 shares of Class B common stock
held by the trusts

(footnotes continued on next page)
40
<PAGE> 45

referenced above, over which Marc S. Hermelin is one of three trustees who
shares voting and investment power.

(6) Includes 176,250 shares each of Class A common stock and Class B common
stock held as trustee of an irrevocable trust created by another party for
the benefit of Marc S. Hermelin.

(7) Does not include 793,250 shares of Class A common stock and 923,250 shares
of Class B common stock held by the trusts referenced above, which are held
by an irrevocable trust in favor of Anne S. Kirschner, wife of Mitchell I.
Kirschner. Neither Mitchell I. Kirschner nor Anne S. Kirschner holds any
voting or investment power over such shares.

Although 12,211,908 shares of the Class A common stock were outstanding as
of March 24, 2000, holders of the 240,000 outstanding shares of 7% cumulative
convertible preferred stock have the current right to convert such shares into
3.75 shares of Class A common stock for each share of 7% cumulative convertible
preferred stock or 900,000 shares of Class A common stock in the aggregate. Each
share of the 7% cumulative convertible preferred stock is convertible into Class
A common stock at a conversion price of $6.67 per share. If all such shares of
Class A common stock were issued, the aggregate voting power thereof would be
equivalent to the voting power of 45,000 shares of Class B common stock.

In addition, all holders of Class B common stock have the right, at any
time, to convert their Class B common stock into Class A common stock on a
share-for-share basis. If all shares of 7% cumulative convertible preferred
stock and all shares of Class B common stock were converted into Class A common
stock, 19,672,869 shares of Class A common stock would be outstanding and each
person included in the previous table would hold the number of shares of Class A
common stock equal to the number of shares of Class B common stock listed in
such table plus the number of shares of Class A common stock listed in such
table.

DESCRIPTION OF CAPITAL STOCK

AUTHORIZED AND OUTSTANDING CAPITAL STOCK

Our Amended Certificate of Incorporation provides for an authorized capital
of 230,000,000 shares, consisting of 5,000,000 shares of preferred stock, $0.01
par value per share of which 841,000 shares have been designated 7% cumulative
convertible preferred, 150,000,000 shares of Class A common stock, $0.01 par
value per share, and 75,000,000 shares of Class B common stock, $0.01 par value
per share (the Class A common stock and the Class B common stock are referred to
collectively as the "common stock"). Based on shares outstanding as of March 27,
2000, upon the consummation of this offering, we will have outstanding 240,000
shares of preferred stock, 15,546,908 shares of Class A common stock (16,146,908
if the underwriter's over-allotment option is exercised in full) and 6,560,961
shares of Class B common stock. The following summary description of our capital
stock is qualified in its entirety by reference to our Amended Certificate of
Incorporation.

CLASS A COMMON STOCK

Holders of Class A common stock are entitled to receive dividends when, and
if declared and distributed by our company on the Class B common stock, provided
that no dividend shall be payable with respect to Class A common stock so long
as any dividends which have accrued on the shares of 7% cumulative convertible
preferred stock, or any other shares of preferred stock which have a preference
as to the payment of dividends and which may be outstanding at any time, remain
unpaid. The amount of the dividend paid on Class A common stock shall be 120% of
any non-stock dividend per share declared and paid on each share of Class B
common stock. No stock dividends may be paid or stock splits issued on the Class
A common stock other than stock dividends or stock splits of Class A common
stock which are in the same proportion as simultaneous stock dividends to
holders of Class B common stock or stock splits of Class B common stock. Each
share of Class A common stock entitles the holder thereof to one-twentieth
( 1/20) vote with respect to all matters to be voted upon by stockholders. The
holders of Class A common

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<PAGE> 46

stock do not have any preemptive, subscription, redemption or conversion rights.
Upon liquidation, the holders of Class A common stock, together with the holders
of Class B common stock, are entitled to share ratably, share-for-share, in the
net assets of our company available far distribution after payment of all debts
and liabilities and the liquidation preference of any outstanding shares of
preferred stock. The issued and outstanding shares of Class A common stock and
those to be issued pursuant to the conversion of the Class B common stock and
the 7% cumulative convertible preferred stock will, upon issuance thereof, be
validly issued, fully paid and non-assessable.

CLASS B COMMON STOCK

Holders of Class B common stock are entitled to receive dividends when, and
if, declared by the board of directors, provided that no dividends shall be
payable with respect to Class B common stock so long as any dividends which have
accrued on the shares of 7% cumulative convertible preferred stock, or any other
shares of preferred stock, which have a preference as to the payment of
dividends and which may be outstanding at any time remain unpaid. No stock
dividends may be paid or stock splits issued on the Class B common stock other
than stock dividends or stock splits of Class B common stock which are in the
same proportion as simultaneous stock dividends to the holders of Class A common
stock or stock splits of Class A common stock. Each share of Class B common
stock entitles the holder thereof to one vote with respect to all matters
required to be voted upon by stockholders. The holders of Class B common stock
do not have any preemptive, subscription or redemption rights. The holders of
Class B common stock have the right, at any time, to convert their Class B
common stock into Class A common stock on a share-for-share basis. Upon
liquidation, the holders of Class B common stock, together with the holders of
Class A common stock, are entitled to share ratably, share-for-share, in the net
assets of the company available for distribution after payment of all debts and
liabilities and the liquidation preference of any outstanding shares of
preferred stock. The shares of Class B common stock presently outstanding are
validly issued, fully paid and non-assessable.

7% CUMULATIVE CONVERTIBLE PREFERRED STOCK

The holders of the 7% cumulative convertible preferred stock are entitled
to receive an annual dividend, from funds legally available for such purpose, of
$1.75 per share, which is payable quarterly on March 31, June 30, September 30
and December 31 of each year. Such dividends are cumulative. As of December 31,
1999, dividends on the 7% cumulative convertible preferred stock in the
aggregate amount of $2.2 million were undeclared and unpaid. Each share of the
7% cumulative convertible preferred stock is convertible into 3.75 shares of
Class A common stock at any time at the option of the holders. The conversion
rate is subject to adjustment in certain events, including the payment of stock
dividends, reclassifications, the issuance of certain rights to purchase Class A
common stock, the distribution of evidences of indebtedness or assets by the
company to all holders of Class A common stock; provided, however, that no
adjustment will be made by reason of the issuance of Class A common stock upon
the conversion of Class B common stock, which is convertible share-for-share
into Class A common stock at any time. We presently have no commitments to issue
or sell stock that would require an adjustment in the conversion rate. No
adjustment will be made for accrued dividends on either the 7% cumulative
convertible preferred stock converted or Class A common stock issued upon such
conversion. No fractional shares of Class A common stock will be issued upon
conversion of the 7% cumulative convertible preferred stock, but in lieu thereof
a cash adjustment will be made based on the market value of the fractional
interest.

The 7% cumulative convertible preferred stock is redeemable by us, in whole
or in part, at any time. The per share redemption price is equal to $25.00, plus
any accrued and unpaid dividends.

In the event our company is liquidated or dissolved, the amount to be
distributed to each holder of the 7% cumulative convertible preferred stock will
be the fixed amount of $25.00 per share, plus any accrued and unpaid dividends.
Such amount shall be prior and in preference to any distribution of any of the
assets or surplus funds of our company to the holders of the Class A common
stock or the Class B common stock or any other series of capital stock junior to
the 7% cumulative convertible preferred stock.
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<PAGE> 47

Upon payment in full of such amounts, holders of the 7% cumulative convertible
preferred stock will not be entitled to any further participation in any
distribution of assets by our company.

The 7% cumulative convertible preferred stock does not have voting rights.
However, the affirmative vote of the holders of at least 60% of the outstanding
7% cumulative convertible preferred stock is required before we may create
senior or parity preference shares, amend the Certificate of Incorporation in
any manner which adversely affects the 7% cumulative convertible preferred
stock, or merge, consolidate or sell substantially all of the assets of our
company in a manner which adversely affects the 7% cumulative convertible
preferred stock or wherein the holders of the 7% cumulative convertible
preferred stock do not receive a substantially similar security. In addition,
the holders of 7% cumulative convertible preferred stock have the right to elect
one additional director to our board of directors in the event that accrued
dividends on the outstanding 7% cumulative convertible preferred stock have not
been paid in an aggregate amount equal to or greater than eight quarterly
dividends. The 7% cumulative convertible preferred stock has no preemptive or
other rights to subscribe for additional securities. The shares of a 7%
cumulative convertible preferred stock presently outstanding are validly issued,
fully paid and non-assessable.

SPECIAL PROVISIONS OF THE CERTIFICATE AND DELAWARE LAW

Our company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined in general as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years following
the date such person became an interested stockholder unless: (1) before such
person became an interested stockholder, the board of directors of the
corporation approved the transaction in which the interested stockholder became
an interested stockholder or approved the business combination; (2) upon
consummation of the transaction that resulted in the interested stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding stock held by directors who are also officers
of the corporation and by employee stock plans that do not provide employees
with the rights to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer), or (3) on or following the
transaction in which such person became an interested stockholder, the business
combination is approved by the board of directors of the corporation and
approved at a meeting of stockholders by the affirmative vote of the holders of
at least two-thirds of the outstanding voting stock of the corporation not owned
by the interested stockholder. Under Section 203, the restrictions described
above also do not apply to certain business combinations proposed by an
interested stockholder following the earlier of the announcement or notification
of one of certain extraordinary transactions involving the corporation and a
person who had not been an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the corporation's directors, if such extraordinary transaction is approved or
not opposed by a majority of the directors who were directors prior to any
person becoming an interested stockholder during the previous three years or
were recommended for election or elected to succeed such directors by a majority
of such directors.

The board of directors is permitted by the Certificate of Incorporation to
issue preferred stock without further stockholder action and establish various
rights, preferences, privileges and restrictions of such preferred stock.
Furthermore, the Certificate of Incorporation provides that our directors shall
be classified into three classes with staggered three-year terms. These
provisions could delay or frustrate the removal of incumbent directors or a
change in control of our company. These provisions could also discourage or make
more difficult a merger, tender offer or proxy contest, even if these actions
would be favorable to the interests of stockholders.

Section 102(b)(7) of the Delaware General Corporation Law authorizes
corporations to limit or eliminate the personal liability of directors to
corporations and their stockholders for monetary damages for breach of
directors' fiduciary duty of care. The duty of care requires that when acting on
behalf of the corporation, directors must exercise an informed business judgment
based on all material information reasonably available to them. Absent the
limitations now authorized by this legislation, directors are
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<PAGE> 48

accountable to corporations and their stockholders for monetary damages for
conduct constituting gross negligence in the exercise of their duty of care.
Although Section 102(b) does not change directors' duty of care, it enables
corporations to limit available relief to equitable remedies such as injunction
or rescission.

The Certificate of Incorporation limits the liability of our directors to
us (in their capacity as directors but not in their capacity as officers).
Specifically, our directors will not be personally liable for monetary damages
for breach of a director's fiduciary duty as a director, except for liability:

- for any breach of the director's duty of loyalty to our company or our
stockholders;

- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

- under Section 174 of the Delaware General Corporation Law; or

- for any transaction from which the director derived an improper personal
benefit.

TRANSFER AGENT

The Transfer Agent and registrar for the Class A common stock, Class B
common stock and the 7% cumulative convertible preferred stock is the United
Missouri Bank, Kansas City, Missouri.

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<PAGE> 49

UNDERWRITING

Under the terms and subject to the conditions contained in the underwriting
agreement dated , 2000, we and the selling stockholders have
agreed to sell to the underwriters named below, for whom Credit Suisse First
Boston Corporation, Deutsche Bank Securities Inc., Banc of America Securities
LLC and Warburg Dillon Read LLC are acting as representatives, the following
respective number of shares of common stock:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Deutsche Bank Securities Inc................................
Banc of America Securities LLC..............................
Warburg Dillon Read LLC.....................................
---------
Total............................................. 4,000,000
=========
</TABLE>

The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.

We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 600,000 additional shares from us at the public offering price
less the underwriting discounts and commissions. This option may be exercised
only to cover any over-allotments of common stock.

The underwriters propose to offer the shares of common stock to the public
initially at the public offering price on the cover page of this prospectus and
to selling group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $
per share on sales to other broker/dealers. After this offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.

The following table summarizes the compensation and estimated expenses we
and the selling stockholders will pay.

<TABLE>
<CAPTION>
PER SHARE TOTAL
-------------------------------- --------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions paid by us............. $ $ $ $
Expenses payable by us............... $ $ $ $
Underwriting discounts and
commissions paid by selling
stockholders....................... $ $ $ $
Expenses payable by the selling
stockholders....................... $ $ $ $
</TABLE>

We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933
relating to, any additional shares of our common stock or securities convertible
into or exchangeable or exercisable for any shares of our common stock, or
publicly disclose the intention to make any such offer, sale, pledge,
disposition or filing, without the prior written consent of Credit Suisse First
Boston Corporation for a period of 90 days after the date of this prospectus,
except issuances pursuant to the exercise of employee stock options outstanding
on the date hereof.

Our officers, directors, the selling stockholders and certain other
stockholders have agreed that they will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, any shares of our common
stock or securities convertible into or exchangeable or exercisable for any
shares of our common
45
<PAGE> 50

stock, enter into a transaction which would have the same effect, or enter into
any swap, hedge or other arrangement that transfers, in whole or in part, any of
the economic consequences of ownership of our common stock, whether any such
aforementioned transaction is to be settled by delivery of our common stock or
such other securities, in cash or otherwise, or publicly disclose the intention
to make any such offer, sale, pledge, or disposition, or enter into any such
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of 90
days after the date of this prospectus.

We and the selling stockholders have agreed to indemnify the underwriters
against liabilities under the Securities Act of 1933 or to contribute to
payments which the underwriters may be required to make in that respect.

Our Class A common stock is listed on The New York Stock Exchange under the
symbol "KV.A".

The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934.

- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.

- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.

- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.

- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
New York Stock Exchange or otherwise and, if commenced, may be discontinued at
any time.

A prospectus in electronic format may be made available on websites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the Underwriters that will make Internet distributions on the same
basis as other allocations.

NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of the Class A common stock in Canada is being made only
on a private placement basis exempt from the requirement that we prepare and
file a prospectus with the securities regulatory authorities in each province
where trades of the Class A common stock are effected. Accordingly, any resale
of the common stock in Canada must be made in accordance with applicable
securities laws which will vary depending on the relevant jurisdiction, and
which may require resales to be made in accordance with available statutory
exemptions or pursuant to a discretionary exemption granted by the applicable
Canadian securities regulatory authority. Purchasers are advised to seek legal
advice prior to any resale of the Class A common stock.

REPRESENTATIONS OF PURCHASERS

Each purchaser of Class A common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i) such
46
<PAGE> 51

purchaser is entitled under applicable provincial securities laws to purchase
such common stock without the benefit of a prospectus qualified under such
securities laws, (ii) where required by law, such purchaser is purchasing as
principal and not as agent, and (iii) such purchaser has reviewed the text above
under "Resale Restrictions."

RIGHTS OF ACTION (ONTARIO PURCHASERS)

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.

ENFORCEMENT OF LEGAL RIGHTS

All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.

NOTICE TO BRITISH COLUMBIA RESIDENTS

A purchaser of Class A common stock to whom the Securities Act (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any common stock acquired by such purchaser pursuant to this offering. Such
report must be in the form attached to British Columbia Securities Commission
Blanket Order BOR #95/17, a copy of which may be obtained from us. Only one such
report must be filed in respect of common stock acquired on the same date and
under the same prospectus exemption.

TAXATION AND ELIGIBILITY FOR INVESTMENT

Canadian purchasers of Class A common stock should consult their own legal
and tax advisors with respect to the tax consequences of an investment in the
common stock in their particular circumstances and with respect to the
eligibility of the common stock for investment by the purchaser under relevant
Canadian legislation.

LEGAL MATTERS

Our attorneys, Thompson Coburn LLP, St. Louis, Missouri, will opine as to
the validity of the Class A common stock offered by us and our stockholders, as
well as certain other legal matters related to the sale of the shares. Certain
legal matters relating to the offering will be passed upon for the underwriters
by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York.

EXPERTS

The consolidated balance sheets as of March 31, 1998 and 1999 and the
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended March 31, 1999 included in this
registration statement have been included herein in reliance upon the report of
BDO Seidman, LLP, independent accounts, given on the authority of that firm as
experts in accounting and auditing.

The financial statement of the Micro-K(R) product line acquired by us
included in our Form 8-K/A filed June 4, 1999, incorporated by reference in this
registration statement, have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report dated May 27, 1999, included

47
<PAGE> 52

in our Form 8-K/A, for the years ended December 31, 1998 and 1997, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You can read and obtain
a copy of any document we file:

At the Public Reference Room of the Commission at Judiciary Plaza,
Room 1024, 450 Fifth Street, N. W., Washington, D.C. 20549;

At the public reference facilities of the Commission's regional
offices at Seven World Trade Center, Suite 1300, New York, New York 10049;
or Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois
60661;

At the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005; or

From the Commission's web site at www.sec.gov.

Some of these locations may charge a prescribed or modest fee for copies.

We have filed with the Commission a registration statement on Form S-3
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended, covering
the shares of Class A common stock offered hereby. This prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information, you should examine the Registration
Statement that can be obtained at the locations listed above. Statements
contained in this prospectus concerning the contents of contracts and other
documents are not necessarily complete. You should refer to the contract or
other document for all the details.

INFORMATION INCORPORATED BY REFERENCE

The Commission permits us to "incorporate by reference" the information
that we have filed with it. This means that important information, not presented
in this prospectus, may be contained elsewhere. We incorporate by reference the
documents listed below and any future filings made with the Commission until we
and our stockholders sell all stock offered:

- Our Annual Report on Form 10-K for the fiscal year ended March 31, 1999;

- Our Quarterly Reports on Form 10-Q for the fiscal quarters ended June 30,
1999, September 30, 1999 and December 31, 1999;

- Our Current Reports on Form 8-K and Form 8-K/A filed April 15, 1999 and
June 4, 1999, respectively; and

- The description of our Class A common stock set forth in the registration
statement on Form 8-A filed March 22, 1999.

You may obtain a copy of any or all documents referred to above, without
charge, by making a written or telephone request to Director, Investor
Relations, 2503 South Hanley Road, St. Louis, Missouri 63144, telephone (314)
645-6600.

48
<PAGE> 53

K-V PHARMACEUTICAL COMPANY

INDEX TO CONSOLIDATED FINANCIALS STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... F-2

Consolidated Balance Sheets at March 31, 1998 and 1999 and
December 31, 1999 (unaudited)............................. F-3

Consolidated Statement of Operations for each of the years
in the three-year period ended March 31, 1999 and for the
nine months ended December 31, 1998 and 1999
(unaudited)............................................... F-4

Consolidated Statement of Stockholders' Equity for each of
the years in the three-year period ended March 31, 1999
and for the nine months ended December 31, 1999
(unaudited)............................................... F-5

Consolidated Statement of Cash Flows for each of the years
in the three-year period ended March 31, 1999 and for the
nine months ended December 31, 1998 and 1999
(unaudited)............................................... F-6

Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 54

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors
of KV Pharmaceutical Company

We have audited the consolidated balance sheets of KV Pharmaceutical
Company and Subsidiaries as of March 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended March 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted the 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 at March 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1999, in conformity with generally accepted
accounting principles.
/s/ BDO Seidman, LLP

St. Louis, Missouri
May 14, 1999

F-2
<PAGE> 55

K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
MARCH 31,
------------------ DECEMBER 31,
1998 1999 1999
------- -------- ------------
(UNAUDITED)
(IN THOUSANDS EXCEPT
SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................... $18,158 $ 2,617 $ 3,337
Marketable securities, available-for-sale................... -- 7,523 --
Receivables less allowance for doubtful accounts of $332 and
$631 in March, 1998 and 1999, respectively, and $1,083 in
December, 1999............................................ 15,304 18,988 26,111
Receivables, arbitration award.............................. -- 13,253 --
Inventories................................................. 15,606 23,653 27,651
Deferred income taxes....................................... 2,949 3,379 3,379
Prepaid and other current assets............................ 542 168 172
------- -------- --------
Total Current Assets.............................. 52,559 69,581 60,650
Property and equipment, less accumulated depreciation....... 12,437 18,967 28,528
Intangibles and other assets, net of amortization........... 3,365 39,442 47,261
------- -------- --------
TOTAL ASSETS...................................... $68,361 $127,990 $136,439
======= ======== ========
LIABILITIES
Current Liabilities:
Accounts payable............................................ $ 4,281 $ 8,667 $ 8,609
Accrued liabilities......................................... 12,317 17,090 12,863
Current maturities of long-term debt........................ 558 712 1,652
------- -------- --------
Total Current Liabilities......................... 17,156 26,469 23,124
Long-term debt.............................................. 4,902 31,491 23,875
Deferred income taxes....................................... 535 379 379
Other long-term liabilities................................. 1,604 2,104 2,296
------- -------- --------
TOTAL LIABILITIES................................. $24,197 $ 60,443 $ 49,674
------- -------- --------
STOCKHOLDERS' EQUITY
7% cumulative convertible Preferred Stock, $.01 par value,
$25 stated and liquidation value; 840,000 shares
authorized; shares issued and outstanding -- 241,000 at
March 31, 1998 and March 31, 1999 and 240,000 at December
31, 1999, respectively.................................... 2 2 2
Class A and Class B Common Stock, $.01 par value;
150,000,000 and 75,000,000 shares authorized,
respectively;
Class A -- issued 11,760,078 and 11,923,319 at March 31,
1998 and 1999, respectively, and 12,226,919 at December
31, 1999............................................... 118 119 122
Class B -- issued 6,442,914 and 6,393,867 at March 31,
1998 and 1999, respectively, and 6,607,589 at December
31, 1999............................................... 64 64 66
Additional paid-in-capital.................................. 34,042 34,531 40,693
Retained earnings........................................... 9,993 32,911 45,937
Accumulated comprehensive loss, net......................... -- (25) --
Less: Treasury Stock, 35,619 shares each of Class A and
Class B Common Stock, at cost............................. (55) (55) (55)
------- -------- --------
TOTAL STOCKHOLDERS' EQUITY........................ 44,164 67,547 86,765
------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $68,361 $127,990 $136,439
======= ======== ========
</TABLE>

See Accompanying Notes to Consolidated Financial Statements
F-3
<PAGE> 56

K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

See Accompanying Notes to Consolidated Financial Statements
F-4
<PAGE> 57

K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------------------------------
CLASS A CLASS B ADDITIONAL RETAINED ACCUMULATED TOTAL
PREFERRED COMMON COMMON PAID IN TREASURY EARNINGS COMPREHENSIVE STOCKHOLDERS'
STOCK STOCK STOCK CAPITAL STOCK (DEFICIT) LOSS, NET EQUITY
--------- ------- ------- ---------- -------- --------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1996..... $2 $ 71 $48 $30,236 $(55) $(9,752) $ -- $20,550
Net income.................... -- -- -- -- -- 8,923 -- 8,923
Sale of 200,000 Class A
shares...................... -- 2 -- 3,498 -- -- -- 3,500
Stock Options issued as
compensation................ -- -- -- 114 -- -- -- 114
Stock Options exercised,
13,125 shares of Class A.... -- -- -- 50 -- -- -- 50
13,195 shares of Class B.... -- -- -- 52 -- -- -- 52
Less 177 shares of each
class repurchased
Conversion of 383,925 shares
of Class B shares to Class A
shares...................... -- 4 (4) -- -- -- -- --
Dividends paid on preferred
stock....................... -- -- -- (105) -- -- -- (105)
-- ---- --- ------- ---- ------- ---- -------
BALANCE AT MARCH 31, 1997..... 2 77 44 33,845 (55) (829) -- 33,084
Net income.................... -- -- -- -- -- 11,304 -- 11,304
Stock Options exercised,
24,165 shares of Class A.... -- 1 -- 128 -- -- -- 129
17,206 shares of Class B.... -- -- -- 69 -- -- -- 69
Conversion of 98,500 shares of
Class B shares to Class A
shares...................... -- 1 (1) -- -- -- -- --
Dividends paid on preferred
stock....................... -- -- -- -- -- (422) -- (422)
Three for two stock split
effected in the form of 50%
stock dividend.............. -- 39 21 -- -- (60) -- --
-- ---- --- ------- ---- ------- ---- -------
BALANCE AT MARCH 31, 1998..... 2 118 64 34,042 (55) 9,993 -- 44,164
Comprehensive income
Net income.................... -- -- -- -- -- 23,340 -- 23,340
Other comprehensive loss,
net of tax:
Net unrealized loss on
available-for-sale
securities.............. -- -- -- -- -- -- (25) (25)
---------------------
Total Comprehensive
Income.................... 25 23,315
Dividends paid on preferred
stock....................... -- -- -- -- -- (422) -- (422)
Conversion of 123,000 shares
of Class B shares to Class A
shares...................... -- 1 -- -- -- -- -- 1
Stock Options exercised,
40,332 shares of Class A
less 88 shares of Class A
repurchased................. -- -- -- 260 -- -- -- 260
and 74,129 of Class B....... -- -- -- 229 -- -- -- 229
Stock Split -- payment of
partial shares from 1998.... -- -- -- -- -- -- -- (292)
-- ---- --- ------- ---- ------- ---- -------
BALANCE AT MARCH 31, 1999..... 2 119 64 34,531 (55) 32,911 (25) 67,547
(Nine months ended December
31, 1999, unaudited)
Product Acquisition........... -- 3 -- 4,497 -- -- -- 4,500
Stock Options exercised,
234,537 shares of Class B... -- -- 2 1,665 -- -- -- 1,667
Dividends paid on preferred
stock....................... -- -- -- -- -- (315) -- (315)
Net income.................... -- -- -- -- -- 13,341 13,341
Other comprehensive income,
net of tax:
Unrealized loss on
available-for-sale
securities................ -- -- -- -- -- -- (38) (38)
Reclassification adjustment
for losses on available-
for-sale securities
included in net income.... -- -- -- -- -- -- 63 63
---------------------
Total Comprehensive
Income.................. 25 13,366
-- ---- --- ------- ---- ------- ---- -------
BALANCE AT DECEMBER 31, 1999
(Unaudited)................. $2 $122 $66 $40,693 $(55) $45,937 $ -- $86,765
== ==== === ======= ==== ======= ==== =======
</TABLE>

See Accompanying Notes to Consolidated Financial Statements

F-5
<PAGE> 58

K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------ -------------------
1997 1998 1999 1998 1999
------- ------- -------- ------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income....................................... $ 8,924 $11,304 $ 23,340 $ 9,653 $ 13,341
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and other
non-cash charges.......................... 1,594 1,888 1,875 1,317 3,223
Loss on sale of marketable securities....... -- -- -- -- 102
Stock options issued as compensation........ 114 -- -- -- --
Changes in deferred taxes................... (890) (1,524) (586) -- --
Changes in deferred compensation............ 152 690 501 389 192
Changes in operating assets and liabilities:
(Increase) decrease in receivables............. (1,298) (6,725) (3,684) 2,515 (7,123)
(Increase) decrease in receivables arbitration
award....................................... -- -- (13,253) -- 13,253
Increase in inventories........................ (4,335) (2,821) (8,047) (6,474) (3,998)
(Increase) decrease in prepaid and other
assets...................................... (992) (800) 193 200 (1,038)
Increase (decrease) in accounts payable and
accrued liabilities......................... 1,471 11,743 9,160 (75) (4,285)
------- ------- -------- ------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES........ 4,740 13,755 9,499 7,525 13,667
------- ------- -------- ------- --------
INVESTING ACTIVITIES
Purchase of property and equipment, net.......... (1,903) (2,452) (5,846) (3,917) (11,104)
Sale (purchase) of marketable securities......... -- -- (7,564) -- 7,446
Product acquisition.............................. -- -- (36,140) -- (3,033)
------- ------- -------- ------- --------
NET CASH USED IN INVESTING ACTIVITIES............ (1,903) (2,452) (49,550) (3,917) (6,691)
------- ------- -------- ------- --------
FINANCING ACTIVITIES
Principal payments on long-term debt............. (744) (549) (558) (500) (9,608)
Proceeds from credit facility.................... -- -- 25,000 -- 2,000
Proceeds from sale of common stock............... 3,500 -- -- -- --
Dividends paid on preferred stock................ (105) (422) (422) (316) (315)
Exercise of Common Stock options................. 102 198 490 444 1,667
------- ------- -------- ------- --------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES..................................... 2,753 (773) 24,510 (372) (6,256)
------- ------- -------- ------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 5,590 10,530 (15,541) 3,236 720
CASH AND CASH EQUIVALENTS AT:
BEGINNING OF PERIOD............................ 2,038 7,628 18,158 18,158 2,617
------- ------- -------- ------- --------
END OF PERIOD.................................. $ 7,628 $18,158 $ 2,617 $21,394 $ 3,337
======= ======= ======== ======= ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Portion of building acquired through proceeds
from a term loan............................ $ 3,500 $ 2,300
Portion of product acquisition acquired through
issuance of:
Short-term debt............................. $ 933
Common Stock................................ $ 4,500
</TABLE>

See Accompanying Notes to Consolidated Financial Statements
F-6
<PAGE> 59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1999 AND FOR THE PERIODS ENDED
DECEMBER 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

1. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of K-V
Pharmaceutical Company (the "Company") and is wholly-owned subsidiaries. All
material intercompany accounts and transactions have been eliminated in
consolidation.

Nature of Operations

The Company and its subsidiaries develop, manufacture and market
technologically distinguished pharmaceuticals and pharmaceutical compounds.
Prescription pharmaceuticals are sold primarily to domestic wholesalers,
drugstore chains, distributors and independent pharmacies nationwide. Contract
manufactured products and pharmaceutical compounds are sold to major domestic
drug, nutritional and food companies

Cash Equivalents

Cash equivalents consist of highly liquid instruments that have an original
maturity of three months or less. Cash equivalents consist primarily of
government backed securities aggregating $10,000 at March 31, 1998, $1,778 at
March 31, 1999 and $0 at December 31, 1999.

Accounts Receivable-Trade

The Company extends unsecured credit to its customers. Sales to a single
company aggregated 15%, 12%, 19% for the years ended March 31, 1997, 1998 and
1999, respectively, and 20% and 19% for the nine months ended December 31, 1998
and 1999, respectively. In addition, the balance due from this company
represented approximately 18%, 30% and 25% of consolidated accounts receivable
as of March 31, 1998 and 1999 and December 31, 1999.

Marketable Securities

Marketable securities are stated at fair market value or historical cost in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," and consist of
investments in U.S. government agency securities and corporate bonds maturing
through 2001.

Available-for-sale securities, which include any security for which the
Company has no immediate plan to sell but which may be sold in the future, are
valued at fair value. Realized gains and losses, based on the amortized cost of
the specific security, are included in other income as investment gains
(losses). Unrealized gains and losses are recorded, net of related income tax
effects, as a separate component of equity.

Inventories

Inventories are stated at the lower of cost or market, with the cost
determined on the first-in, first-out (FIFO) basis.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed over
the estimated useful life using the straight-line method.

Intangibles and Other Assets

The excess of cost over the fair value of the net assets of the Company's
Particle Dynamics subsidiary at the time of acquisition is being amortized on a
straight-line basis of 40 years. All other intangible assets and
F-7
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

deferred charges are being amortized over periods varying from 5 to 20 years on
a straight-line basis. The Company reviews intangible assets for possible
impairment if there is a significant event that detrimentally affects
operations. Impairment is assessed using estimates of the non-discounted future
earnings potential of the entity or assets acquired. The Company has estimated
that no impairment losses have accrued through December 31, 1999.

Revenue Recognition

The Company recognizes revenue from product sales upon shipment to its
customers. Provisions for estimated sales allowances, returns and losses are
accrued at the time revenues are recognized. The Company also enters into
long-term agreements under which it assigns marketing rights for the products it
has developed to pharmaceutical marketers. Royalties are earned based on sale of
products. Other non-refundable payments specified in the agreements, for which
there are no future obligations, such as milestone payments and research and
development reimbursements, are recognized as income when earned.

Research and Development

Research and development costs, including costs funded by third parties,
are expensed in the period incurred. Payments received from third parties for
research and development are offset against expenses when the parties are
billed.

Earnings Per Share

Basic earnings per share is calculated by dividing net income for the
period by the weighted average number of shares of common stock outstanding
during the period. The assumed exercise of stock options and the assumed
conversion of preferred stock are included in the calculation of diluted
earnings per share.

Income Taxes

Income taxes are accounted for under the asset and liability method in
which deferred income taxes are recognized as a result of temporary differences
between the financial reporting basis and tax basis of the assets and
liabilities.

Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

Stock-Based Compensation

The Company grants stock options for a fixed number of shares to employees
with an exercise price greater than or equal to the fair value of the shares at
the date of grant. The Company accounts for stock options in accordance with
Accounting Principle Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25"). That Opinion requires that compensation cost
related to fixed stock option plans be recognized only to the extent that the
fair value of the shares at the grant date exceeds the exercise price.
Accordingly, the Company recognizes no compensation expense for stock option
grants.

In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 allows
companies to continue to account for

F-8
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

their stock option plans in accordance with APB Opinion No. 25, but encourages
the adoption of a new accounting method based on the estimated fair value of
employee stock options. Pro forma net income and income per share, determined as
if the Company has applied the new method, are disclosed in Note 12.

Fair Value of Financial Instruments

The carrying amounts of all short-term asset and liability financial
instruments are reasonable estimates of their fair value because of the short
maturity of these items. The carrying amount of a long-term financial instrument
approximates their fair value because their terms are similar to those which can
be obtained for similar financial instruments in the current marketplace.

New Accounting Pronouncements

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for years beginning after June 15, 2000
and requires comparative information for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company does not expect the adoption of this
statement to have significant impact on its results of operations, financial
position or cash flows.

Reclassification

Certain amounts from the prior years' financial statements have been
reclassified to conform to the current year presentation.

Unaudited Interim Financial Information

The interim financial information as of December 31, 1999 and for the
nine-month periods ended December 31, 1998 and 1999 is unaudited. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. The interim
results are not necessarily indicative of results of any future period.

2. ACQUISITIONS

In the fourth quarter of fiscal 1999, the Company acquired the world-wide
rights and trademark to Micro-K(R) from Wyeth-Ayerst Laboratories, the
pharmaceutical division of America Home Products Corporation for a cash payment
of $36,000, consisting of an $11,000 payment from available cash and $25,000
drawn on its revolving line of credit. The intangible asset (product rights)
related to the acquisition is being amortized on the straight-line basis over a
period of 20 years.

The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisition of Micro-K(R) had occurred on April 1, 1997,
after giving effect to certain adjustments for interest expense, amortization
and income taxes. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of what would have occurred
had the acquisition been made on April 1, 1997, nor are they indicative of
future results. The Company intends to pursue a strategy designed to increase
sales of the Micro-K(R) product line through promotion to physicians. In
connection with the implementation of such strategy, the Company expects to
incur additional selling and administrative costs, which cannot be included as
"pro forma" adjustments under Regulation S-X of the Securities Act because the
amount of these costs are not reliably determinable. As a result, the unaudited
pro forma net income and pro forma per share amounts do not purport to represent
what the Company's results of operations would have been if the acquisition of
the Micro-K(R) product line had occurred on April 1, 1997, and is not intended
to project the Company's results of operations for any future period.

F-9
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1998 1999
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Total revenues as reported.................................. $ 98,486 $114,860
Total revenues -- pro forma (unaudited)..................... 124,322 133,372
Net income as reported...................................... 11,304 23,340
Net income -- pro forma (unaudited)......................... 18,437 26,591
Earnings per share:
Basic as reported......................................... $ 0.60 $ 1.26
======== ========
Diluted as reported....................................... $ 0.58 $ 1.17
======== ========
Basic -- pro forma (unaudited)............................ $ 1.00 $ 1.44
======== ========
Diluted -- pro forma (unaudited).......................... $ 0.94 $ 1.33
======== ========
</TABLE>

On August 2, 1999, the Company acquired the worldwide rights and trademark
for the prescription prenatal, PreCare(R), from UCB Pharma for $8,500. The
purchase price was funded by $3,000 in cash payments, a $933 note and $4,500 in
Class A common stock.

3. INVENTORIES

Inventories consist of:

<TABLE>
<CAPTION>
MARCH 31,
------------------ DECEMBER 31,
1998 1999 1999
------- ------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Finished goods..................................... $ 8,954 $11,733 $12,600
Work-in-process.................................... 1,884 2,283 3,795
Raw materials...................................... 5,130 10,185 12,490
------- ------- -------
15,968 24,201 28,885
Reserves for obsolescence.......................... (362) (548) (1,234)
------- ------- -------
$15,606 $23,653 $27,651
======= ======= =======
</TABLE>

4. MARKETABLE SECURITIES

The composition of the available-for-sale investments portfolio at March
31, 1999 was (in thousands):

<TABLE>
<CAPTION>
AMORTIZED UNREALIZED MARKET
COST LOSSES VALUE
--------- ---------- ------
<S> <C> <C> <C>
U.S. Government agency securities..................... $1,000 $ (2) $ 998
Corporate bonds....................................... 6,564 (39) 6,525
------ ---- ------
$7,564 $(41) $7,523
====== ==== ======
</TABLE>

All securities mature in one to three years. Management does not intend to
hold these securities to maturity and expects to liquidate them during fiscal
year 2000, and accordingly they are classified as current assets. There were no
marketable securities at March 31, 1998 or December 31, 1999.

F-10
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. COMPREHENSIVE INCOME

Effective April 1, 1998 the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This Statement establishes standards for reporting of all
changes in equity from non-shareholder sources. There was no effect on prior
year financial statements.

Changes in accumulated comprehensive loss, net for the year end March 31,
1999 are as follows (in thousands):

<TABLE>
<CAPTION>
BEFORE-TAX TAX NET-OF-TAX
AMOUNT BENEFIT AMOUNT
---------- ------- ----------
<S> <C> <C> <C>
Unrealized losses on securities
Unrealized losses arising during period............ $(41) $16 $(25)
Less: reclassification adjustment for losses
realized in net income.......................... -- -- --
---- --- ----
Net unrealized losses.............................. $(41) $16 $(25)
==== === ====
</TABLE>

Changes in accumulated comprehensive income, net for the period ended
December 31, 1999 are as follows (in thousands):

<TABLE>
<CAPTION>
BEFORE-TAX TAX NET-OF-TAX
AMOUNT BENEFIT/EXPENSE AMOUNT
---------- --------------- ----------
<S> <C> <C> <C>
Unrealized losses arising during period...... $(61) $ 23 $(38)
Reclassification adjustments for losses on
the sale of securities included in net
income.................................... 102 (39) 63
---- ---- ----
Net unrealized gains......................... $ 41 $(16) $ 25
==== ==== ====
</TABLE>

6. PROPERTY AND EQUIPMENT

Property and equipment consist of:

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------- DECEMBER 31,
1998 1999 1999
-------- -------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Land and improvements............................ $ 1,491 $ 2,056 $ 2,056
Building and building improvements............... 6,861 9,626 10,292
Machinery and equipment.......................... 13,267 14,990 17,661
Office furniture and equipment................... 3,324 3,830 4,377
Leasehold improvements........................... 2,527 2,874 3,047
Construction-in-process (estimated costs to
complete at December 31, 1999 were $2,370)..... 601 2,840 9,886
-------- -------- --------
28,071 36,216 47,319
Less accumulated depreciation and amortization... (15,634) (17,249) (18,791)
-------- -------- --------
Net property and equipment....................... $ 12,437 $ 18,967 $ 28,528
======== ======== ========
</TABLE>

F-11
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Estimated useful lives:

<TABLE>
<S> <C>
Land improvements........................ 10 years
Building................................. 25 to 40 years
Building improvements.................... 10 years
Machinery and equipment.................. 3 to 15 years
Leasehold improvements................... Lease life plus renewal period or 10
years
Office furniture and equipment........... 3 to 10 years
</TABLE>

Purchases of property and equipment were $5,952 and $8,146 for fiscal years
1998 and 1999, respectively, and $11,104 for the nine months ended December 31,
1999. Depreciation and amortization of property and equipment was $1,407, $1,634
and $1,616 for fiscal 1997, 1998 and 1999, respectively, and $1,192 and $1,488
for the nine months ended December 31, 1998 and 1999, respectively.

7. INTANGIBLE AND OTHER ASSETS

Intangibles and other assets consist of:

<TABLE>
<CAPTION>
MARCH 31,
------------------ DECEMBER 31,
1998 1999 1999
------- ------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill........................................... $ 2,138 $ 2,138 $ 2,138
Product rights..................................... -- 36,140 44,573
Financing charges.................................. 587 401 434
Cash surrender value of life insurance and
split-dollar life insurance...................... 852 943 1,365
Trademarks and patents............................. 865 1,047 1,495
Deposits........................................... 447 341 504
Other.............................................. 351 291 291
------- ------- -------
5,240 41,301 50,800
Less accumulated amortization...................... (1,875) (1,859) (3,539)
------- ------- -------
Net intangibles and other assets......... $ 3,365 $39,442 $47,261
======= ======= =======
</TABLE>

OAmortization of goodwill is being charged to operations at $55 per year.
Amortization of product rights and all other deferred charges was $132, $199 and
$188 for fiscal 1997, 1998 and 1999, respectively, and $125 and $1,639 for the
nine months ended December 31, 1998 and 1999, respectively.

F-12
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. ACCRUED LIABILITIES

Accrued liabilities consist of:

<TABLE>
<CAPTION>
MARCH 31,
------------------ DECEMBER 31,
1998 1999 1999
------- ------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Salaries, wages, incentives and benefits........... $ 2,215 $ 3,482 $ 3,389
Interest........................................... 73 125 115
Income taxes....................................... 2,885 7,855 2,589
Professional fees.................................. 876 764 1,223
Revenue sharing (see Note 16)...................... 4,912 3,300 2,176
Other.............................................. 1,356 1,564 3,371
------- ------- -------
$12,317 $17,090 $12,863
======= ======= =======
</TABLE>

9. LONG TERM DEBT

Long-term debt consists of:

<TABLE>
<CAPTION>
MARCH 31,
----------------- DECEMBER 31,
1998 1999 1999
------ ------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Precare -- UCB...................................... $ -- $ -- $ 940
Revolving credit line............................... -- 25,000 18,000
Industrial revenue bonds............................ 2,155 1,830 1,505
Building mortgages.................................. 3,305 5,373 5,082
------ ------- -------
5,460 32,203 25,527
Less current portion................................ (558) (712) (1,652)
------ ------- -------
Long-term debt...................................... $4,902 $31,491 $23,875
====== ======= =======
</TABLE>

As of December 31, 1999, the Company has a loan agreement expiring October
15, 2002 with LaSalle National Bank. The agreement provides for a revolving line
of credit for borrowing up to $40,000. The credit facility is unsecured and
interest is currently charged at the LIBOR rate of 6.46% plus 200 basis points
or 8.46% at December 31, 1999. At December 31, 1999, the Company had cash
borrowing of $18,000 and $4,800 in open letters of credit issued under this
facility. The agreement includes covenants that impose a minimum level of
earnings before interest, taxes, depreciation and amortization, a maximum funded
debt ratio, and limit capital expenditures and dividend payments.

The industrial revenue bonds, which bear interest at 7.35% per annum,
mature serially through 2004 and are collateralized by certain property and
equipment, as well as through a letter of credit, which may only be accessed in
case of default on the bonds. The bonds do not allow the holder to require the
Company to redeem the bonds.

The building mortgages bear interest at 8.53% and 7.95% with monthly
principal payments of $19 and $13 plus interest through June 30, 2002 and March
11, 2004 with final payments of the remaining principal balances outstanding
plus accrued and unpaid interest due on June 18, 2002 and March 11, 2004,
respectively.

F-13
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The aggregate maturities of long-term debt as of March 31, 1999 are as
follows (in thousands):

<TABLE>
<S> <C>
2000....................................................... $ 712
2001....................................................... 25,712
2002....................................................... 712
2003....................................................... 2,851
2004....................................................... 2,012
Later years................................................ 203
-------
$32,202
=======
</TABLE>

The Company paid interest of $482, $465 and $446 during the years ended
March 31, 1997, 1998 and 1999, respectively, and $379 and $1,551 for the nine
months ended December 31, 1998 and 1999, respectively.

10. COMMITMENTS AND CONTINGENCIES

Leases

The Company has non-cancelable 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
non-cancelable operating leases as of March 31, 1999 are as follows (in
thousands):

<TABLE>
<S> <C>
2000........................................................ $1,264
2001........................................................ 1,154
2002........................................................ 1,123
2003........................................................ 1,031
2004........................................................ 994
Later Years................................................. 940
------
$6,506
======
</TABLE>

Total rent expense for the years ended March 31, 1997, 1998 and 1999 was
$1,189, $1,077 and $1,457, respectively, and $1,035 and $1,543 for the nine
months ended December 31, 1998 and 1999, respectively.

Contingencies

The Company currently carries product liability coverage of ten million per
occurrence and ten million in the aggregate on a "claims made" basis. There is
no assurance that its present insurance will cover any potential claims that may
be asserted in the future.

The Company is subject to legal proceedings and claims which arise 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 or operations.

Employment Agreements

The Company has employment agreements with certain officers and key
employees which extend for one to five years. These agreements provide for base
levels of compensation and, in certain instances, also provide for incentive
bonuses and separation benefits. Also, the agreement with one officer contains
provisions for partial salary continuation under certain conditions contingent
upon noncompete restrictions and providing consulting services to the Company as
specified in the agreement. The Company expensed $152, $690 and $501, under this
agreement in March 31, 1997, 1998 and 1999, respectively, and $389 and $192 for
the nine months ended December 31, 1998 and 1999, respectively.

F-14
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. INCOME TAXES

The fiscal 1999 and fiscal 2000 provisions were based on the estimated
federal and state taxable income using the statutory rates. The fiscal 1998
provision was based on the estimated federal and state taxable income using
statutory rates, as well as utilization of its general business credit carry
forwards generated in prior years, while the fiscal 1997 provision was based on
an estimate of state taxable income using statutory rates. No loss carry
forwards were available for fiscal 2000, 1999 or 1998.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
---------------------------- ----------------
1997 1998 1999 1998 1999
------ ------- ------- ------ ------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
PROVISION
Current
Federal..................................... $ 804 $ 6,233 $13,373 $5,309 $7,346
State....................................... 469 978 1,506 598 826
------ ------- ------- ------ ------
1,273 7,211 14,879 5,907 8,172
------ ------- ------- ------ ------
Deferred
Federal..................................... (804) (1,365) (528) -- --
State....................................... (86) (159) (58) -- --
------ ------- ------- ------ ------
(890) (1,524) (586) -- --
------ ------- ------- ------ ------
$ 383 $ 5,687 $14,293 $5,907 $8,172
====== ======= ======= ====== ======
</TABLE>

The reasons for the differences between the provision for income taxes and
the expected federal income taxes at the statutory rate are as follows:

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------------- ----------------
1997 1998 1999 1998 1999
------- ------- ------- ------ ------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Computed income tax expense at statutory
rate....................................... $ 3,164 $ 5,947 $13,171 $5,445 $7,530
Change in valuation allowance................ (3,392) (1,568) -- -- --
State income taxes, less federal income tax
benefit.................................... 383 696 1,070 452 619
Other........................................ 228 612 52 10 23
------- ------- ------- ------ ------
Provisions for income taxes.................. $ 383 $ 5,687 $14,293 $5,907 $8,172
======= ======= ======= ====== ======
</TABLE>

F-15
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of March 31, 1999 and December 31, 1999, the tax effect of temporary
differences between the tax basis of assets and liabilities and their financial
reporting amount are as follows:

<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1999
---------------------- ----------------------
CURRENT NON-CURRENT CURRENT NON-CURRENT
------- ----------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed asset basis differences................... $ -- $(1,167) $ -- $(1,167)
Reserve for inventory and receivables........... 2,281 -- 2,281 --
Vacation pay reserve............................ 469 -- 469 --
Deferred compensation........................... -- 788 -- 788
Other........................................... 629 -- 629 --
------ ------- ------ -------
Net deferred tax asset (liability).............. $3,379 $ (379) $3,379 $ (379)
====== ======= ====== =======
</TABLE>

The Company paid income taxes of $846, $4,754 and $9,213 during the years
ended March 31, 1997, 1998 and 1999, respectively, and $6,494 and $13,635 during
the nine months ended December 31, 1998 and 1999, respectively.

12. EMPLOYEE BENEFITS

Stock Option Plan

The Company established the K-V Pharmaceutical Company Incentive Stock
Option Plan for key employees and reserved 3.0 million shares of common stock
for such plan. Under the plan, the Stock Option Committee may grant stock
options to key employees at not less than one hundred percent (100%) of the fair
market value of its common stock at the date of grant. The durations and
exercisability of the grants vary over a period of up to ten years from the date
of grant.

The following summary shows the transactions for the fiscal years 1997,
1998 and 1999 and the nine months ended December 31, 1999 under option
arrangements:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------- ----------------------
AVERAGE AVERAGE
NO. OF PRICE PER NO. OF PRICE PER
SHARES SHARE SHARES SHARES
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance, March 31, 1996.......................... 763,718 $ 4.47 283,064 $ 4.17
Options granted................................ 587,898 8.00 -- --
Options becoming exercisable................... -- -- 308,294 7.06
Options exercised.............................. (39,660) 2.61 (39,660) 2.61
Options canceled............................... (69,825) 5.44 (38,213) 5.26
--------- ---------

Balance March 31, 1997........................... 1,242,131 6.14 513,485 5.94
Options granted................................ 523,500 11.59 -- --
Options becoming exercisable................... -- -- 483,750 9.85
Options exercised.............................. (62,057) 3.21 (62,057) 3.21
Options canceled............................... (47,820) 8.95 (8,352) 7.56
--------- ---------

Balance March 31, 1998........................... 1,655,754 7.89 926,826 8.15
Options granted................................ 423,398 15.77 -- --
Options becoming exercisable................... -- -- 234,136 8.61
Options exercised.............................. (120,607) 5.22 (120,607) 5.22
Options canceled............................... (103,370) 11.31 (19,946) 9.57
--------- ---------
</TABLE>

F-16
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------- ----------------------
AVERAGE AVERAGE
NO. OF PRICE PER NO. OF PRICE PER
SHARES SHARE SHARES SHARES
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance March 31, 1999........................... 1,855,175 9.67 1,020,409 8.58
Options granted................................ 514,725 15.97 -- --
Options becoming exercisable................... -- -- 394,961 12.51
Options exercised.............................. (254,673) 6.56 (254,673) 6.56
Options canceled............................... (36,400) 14.23 (6,564) 13.58
--------- ---------

Balance December 31, 1999........................ 2,078,827 $11.49 1,154,133 $10.38
========= =========
</TABLE>

As discussed in the Summary of Accounting Policies, the Company applies APB
Opinion No. 25 and related interpretations in accounting for this plan.
Accordingly, no compensation cost has been recognized for its incentive stock
option plan.

The weighted-average grant date fair value per share of stock options
granted during the year was $5.23 for A options, $4.02 for B options, $9.17 for
A options, $5.29 for B options, $3.48 for A options and $2.21 for B options in
fiscal 1997, 1998 and 1999, respectively, and $10.18 for A options and $11.11
for B options for the nine months ended December 31, 1999. The weighted-average
significant assumptions used to determine those values using the Black-Scholes
option pricing model for fiscal 1997, 1998 and 1999, and the nine months ended
December 31, 1999, respectively, were: volatility of .6212, .6700, .6630 and
.6630; dividend yield of 0% in all four periods; average risk-free interest rate
of return of 6.6%, 6.3%, 5.0% and 6.5%; expected option lives ranging from 3 to
10 years.

The following table summarizes information about stock options outstanding
at December 31, 1999:

<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING ------------------------------
------------------------------------------------- NUMBER
RANGE OF NUMBER EXERCISABLE
EXERCISE OUTSTANDING WEIGHTED AVERAGE WEIGHTED AVERAGE AT WEIGHTED AVERAGE
PRICES AT 12/31/99 LIFE REMAINING EXERCISE PRICE 12/31/99 EXERCISE PRICE
- ------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.84-$ 4.00 74,654 3 Years $ 2.78 56,441 $ 2.46
$ 4.01-$ 7.00 301,614 3 Years $ 5.30 221,468 $ 5.36
$ 7.01-$11.00 467,407 4 Years $ 8.32 286,898 $ 8.46
$11.01-$15.00 640,294 5 Years $13.22 346,679 $12.21
$15.01-$20.88 594,859 7 Years $16.34 242,647 $16.45
</TABLE>

The pro-forma effect on earnings for the years ended March 31, 1997, 1998
and 1999 and for the nine months ended December 31, 1999 of the method
consistent with SFAS No. 123 would be to reduce reported net income by
approximately $1,700, $2,200, $800 and $900, respectively, to approximately
$7,200, $9,100, $22,500 and $12,400.

The pro-forma effect on basic earnings per share for the years ended March
31, 1997, 1998 and 1999 and for the nine months ended December 31, 1999 of this
method would be to reduce net income per share by $.10 per share, $.12 per
share, $.05 per share and $.05 per share, respectively, to $.38 per share, $.48
per share, $1.21 per share and $.64 per share.

The pro-forma effect on diluted earnings per share for the years ended
March 31, 1997, 1998 and 1999 and for the nine months ended December 31, 1999 of
this method would be to reduce net income per share by $.09 per share, $.12 per
share, $.04 per share and $.04 per share, respectively, to $.38 per share, $.46
per share, $1.13 per share and $.62 per share.

F-17
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Profit Sharing Plan

The Company has a qualified trustee profit sharing plan (the "Plan")
covering substantially all non-union employees. The Company's annual
contribution to the Plan, as determined by the Board of Directors, is
discretionary and was $50 for fiscal 1997 and $100 in 1998 and 1999. The Plan
includes features as described under Section 401(k) of the Internal Revenue
Code.

The Plan was amended as of April 1, 1997, to change the Company's
contributions to the 401(k) investment funds to fifty percent (50%) of the first
7% of the salary contributed by each participant. Contributions to the 401(k)
investment funds of approximately $78, $222 and $421 were made in 1997, 1998 and
1999, respectively.

Contributions are also made to multi-employer defined benefit plans
administered by labor unions for certain union employees. Amounts charged to
pension expense and contributed to these plans were $64, $80 and $86 in 1997,
1998 and 1999, respectively, and $295 and $414 for the nine months ended
December 31, 1998 and 1999, respectively.

Health and Medical Insurance Plan

The Company contributes to health and medical insurance programs for its
non-union and union employees. For non-union employees, the Company self insures
the first $50 of each employee's covered medical claims. The Company has
recorded $225 of accrued health insurance expense reserves as of March 31, 1999
and December 31, 1999 and $125 as of March 31, 1998, for claims incurred but not
reported. For union employees, the Company participates in a fully funded
insurance plan sponsored by the union. Expenses related to both plans charged to
operations were approximately $1,100, $1,100 and $1,400 in fiscal 1997, 1998 and
1999, respectively, and $1,000 and $1,900 for the nine months ended December 31,
1998 and 1999, respectively.

13. RELATED PARTY TRANSACTIONS

A director of the Company was formerly associated with a law firm that
rendered various legal services to the Company. The Company paid the firm
approximately $257, $239 and $221 during the years ended March 31, 1997, 1998
and 1999, respectively, and $161 and $202 for the nine months ended December 31,
1998 and 1999, respectively.

In addition, the Company currently leases certain real property from an
affiliated partnership of another director of the Company. Lease payments made
for this property during the years ended March 31, 1997, 1998 and 1999 totaled
$232, $237 and $241, respectively, and $180 and $181 for the nine months ended
December 31, 1998 and 1999, respectively.

14. EQUITY TRANSACTIONS

The Company had 241,000 shares and 240,000 shares of 7% Cumulative
Convertible preferred stock (par value $.01 per share) outstanding as of March
31, 1999 and December 31, 1999, respectively, 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 $6.67 per
share. The preferred stock has a liquidation preference of $25 per share plus
all accrued but unpaid dividends prior to any liquidation distributions to
holders of Class A or Class B common stock. No dividends may be paid on Class A
or Class B common stock unless all dividends on the Cumulative Convertible
preferred stock have been declared and paid. Undeclared and unaccrued cumulative
preferred dividends at both March 31, 1999 and 1998 were $2,200 or $9.14 per
share. Also, under the terms of its credit agreement, the Company may not pay
cash dividends in excess of 25% of the prior fiscal year's consolidated net
income.

F-18
<PAGE> 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Holders of Class A common stock are entitled to receive dividends per share
equal to 120% of the dividends per share paid on the Class B common stock and
have one-twentieth vote per share in the election of directors and on other
matters.

Under the terms of the Company's current loan agreement (see Note 9), the
Company has limitations on paying dividends, except in stock, on its Class A and
B common stock. Payment of dividends may also be restricted under Delaware
Corporation law.

On March 23, 1998, the Company's Board of Directors declared a
three-for-two stock split in the form of a 50% stock dividend of its common
stock to shareholders of record on April 3, 1998, payable on April 17, 1998.
common stock was credited and retained earnings was charged for the aggregate
par value of the shares issued. The stated par value of each share was not
changed from $.01.

All per share data in this report has been restated to reflect the
aforementioned three-for-two stock split in the form of a 50% stock dividend.

15. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------------- ------------------
1997 1998 1999 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income............................. $ 8,924 $11,304 $23,340 $ 9,653 $13,341
Preferred stock dividends.............. (422) (422) (422) (316) (315)
------- ------- ------- ------- -------
Numerator for basic earnings per
share -- income available to common
shareholders........................ 8,502 10,882 22,918 9,337 13,026
Effect of dilutive securities:
preferred stock dividends........... 422 422 422 316 315
------- ------- ------- ------- -------
Numerator for diluted earnings per
share -- income available to common
shareholders after assumed
conversions......................... $ 8,924 $11,304 $23,340 $ 9,653 $13,341
======= ======= ======= ======= =======
Denominator:
Denominator for basic earnings per
share -- weighted-average shares.... 17,759 18,094 18,201 18,187 18,609
------- ------- ------- ------- -------
Effect of dilutive securities:
Employee stock options.............. 359 643 866 900 637
Convertible preferred stock......... 904 904 904 904 900
------- ------- ------- ------- -------
Dilutive potential Common Shares....... 1,263 1,547 1,770 1,804 1,537
------- ------- ------- ------- -------
Denominator for diluted earnings per
share -- adjusted weighted-average
shares and assumed conversions...... 19,022 19,641 19,971 19,991 20,146
======= ======= ======= ======= =======
Basic Earnings per Share(1):........... $ 0.48 $ 0.60 $ 1.26 $ 0.51 $ 0.70
======= ======= ======= ======= =======
Diluted Earnings per Share(1,2,3):..... $ 0.47 $ 0.58 $ 1.17 $ 0.48 $ 0.66
======= ======= ======= ======= =======
</TABLE>

- ---------------
(1) The two-class method for Class A and Class B common stock is not presented
because the earnings per share are 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.

F-19
<PAGE> 72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) Employee stock options to purchase 58,838 shares of Class A common stock at
March 31, 1998 and 28,350 shares of Class A common stock at March 31, 1997
are not presented because these options are anti-dilutive. The exercise
prices of these options exceeded the average market prices of the shares
under option in each respective period. There were no anti-dilutive employee
stock options as of March 31, 1999.

Options to purchase 500,000 shares of Class A common stock in each of the
three years ended March 31, 1999, sold in connection with an agreement
entered into in January 1996, are not presented because the minimum exercise
prices of these options exceeded the average market prices of the shares
under option in each respective period. As of March 31, 1999, all options
sold under this agreement had expired.

(3) Employee stock options to purchase 123,250 shares at December 31, 1999 and
500 shares at December 31, 1998 of Class A and Class B common stock are not
included in the computation of diluted earnings per share because their
exercise price was greater than the average market price during the quarter
and as such are considered anti-dilutive.

16. AGREEMENTS

In January 1997, the Company concluded a broad-based agreement with Roche
Holdings, Ltd. of Basel, Switzerland ("Roche"), which provides for the marketing
by Roche, or its licensee, of a prescription, one dose cure vaginal antifungal
product. The product received FDA approval in February 1997. The agreement also
gave KV the right to market the product in North America and the exclusive right
to market or license the prescription product in the rest of the world.

The agreement included cash payments of $3,000 to be made in January 1997,
1998 and 1999, respectively. All of these non-refundable payments were received
and recorded as licensing revenue in the fourth quarter of each of the
respective fiscal years.

As part of a further collaboration under the agreement, KV's wholly-owned
subsidiary, ETHEX Corporation, began marketing in fiscal 1998 two of Roche's
brand name products generically under a revenue sharing arrangement based on
sales and gross margin.

17. QUARTERLY FINANCIAL RESULTS (UNAUDITED)

<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER YEAR
----------- ----------- ----------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
FISCAL 1998
Net Sales....................... $18,202 $21,887 $28,434 $29,963 $ 98,486
Gross Profit.................... 7,984 9,459 11,393 13,167 42,003
Pretax Income(1)................ 2,761 3,556 4,030 6,644 16,991
Net Income(1)................... 1,841 2,182 2,763 4,518 11,304
Earnings Per Share-Basic(2)..... 0.10 0.11 0.15 0.24 0.60
Earnings Per Share-Diluted(2)... 0.09 0.11 0.14 0.23 0.58
FISCAL 1999
Net Sales....................... 25,670 26,406 27,022 35,762 114,860
Gross Profit.................... 10,515 11,759 13,517 17,655 53,446
Pretax Income(1)................ 4,150 4,956 6,454 22,073 37,633
Net Income(1)................... 2,570 3,062 4,020 13,688 23,340
Earnings Per Share-Basic(2)..... 0.14 0.16 0.21 0.75 1.26
Earnings Per Share-Diluted(2)... 0.13 0.15 0.20 0.69 1.17
</TABLE>

- ---------------
(1) The fourth quarter of fiscal 1999 includes a non-recurring gain associated
with a $7,900 arbitration award net of expenses and taxes (see Note 19) and
a $3,000 non-refundable payment associated with an

F-20
<PAGE> 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

agreement with Roche Holdings, Ltd. (see Note 16). A $3,000 non-refundable
payment was also received in the fourth quarter of fiscal 1998.

(2) All earnings per share amounts have been restated to reflect a 3 for 2 stock
split in the form of a 50% stock dividend, declared by the Board of
Directors on March 23, 1998 and distributed April 17, 1998 to shareholders
of record as of April 3, 1998.

18. SEGMENT REPORTING

In fiscal 1999, the Company adopted SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," which revises reporting and
disclosure requirements for operating segments. The following information is
provided in accordance with requirements of this statement.

The reportable segments of the Company as of December 31, 1999, are branded
products, specialty generics, specialty materials and manufacturing and contract
services. Segment profits are measured based on income before taxes and are
determined based on each segment's direct revenues and expenses. The majority of
research and development, corporate general and administrative expenses,
amortization and interest expense, as well as interest and other income, are
managed as separate cost centers and are not allocated to segments. The majority
of revenues in manufacturing and contract services are intersegment revenues
between that segment and the branded products and specialty generics segments.

Revenues and profits for these segments are as follows:

<TABLE>
<CAPTION>
MFG. & CORPORATE
BRANDED SPECIALTY SPECIALTY CONTRACT ALL EXPENSES AND
PRODUCTS GENERICS MATERIALS SERVICES OTHER ELIMINATIONS CONSOLIDATED
-------- --------- --------- -------- ------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED MARCH 31,
Total Revenues............ 1999 $ 1,795 $ 91,834 $13,730 $33,234 $3,445 $(29,178) $114,860
1998 -- 79,193 11,257 27,063 8,839 (27,866) 98,486
1997 -- 40,225 9,156 24,173 3,638 (19,301) 57,891
Segment Profits........... 1999 (58) 36,351 1,211 1,390 4,310 (5,571) 37,633
1998 -- 25,090 330 817 8,812 (18,058) 16,991
1997 -- 17,509 237 946 3,638 13,023 9,307
Identifiable Assets....... 1999 2,372 133,649 8,341 40,431 69,014 (125,817) 127,990
1998 -- 95,152 5,706 37,193 16,234 (85,924) 68,361
1997 -- 63,254 4,332 20,861 4,996 (52,081) 41,362
Property and Equipment
Additions............... 1999 -- 93 498 4,433 -- 3,122 8,146
1998 -- 24 72 1,486 65 4,305 5,952
1997 -- 227 73 1,640 -- -- 1,940
Depreciation and
Amortization............ 1999 -- 74 86 1,457 30 213 1,860
1998 -- 78 77 1,479 27 227 1,888
1997 -- 54 72 1,280 -- 188 1,594
NINE MONTHS ENDED DECEMBER 31,
Total Revenues............ 1999 14,812 77,133 13,014 34,049 239 (31,651) 107,596
1998 -- 65,808 10,116 22,035 294 (19,156) 79,097
Segment Profits........... 1999 2,310 35,300 2,819 926 225 (20,067) 21,513
1998 (434) 28,178 1,520 (605) 225 (13,324) 15,560
Identifiable Assets....... 1999 7,305 162,572 6,662 45,793 19,210 (105,103) 136,439
1998 129 121,026 6,557 49,230 9,828 (108,813) 77,957
</TABLE>

F-21
<PAGE> 74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Elimination of intersegment revenues consists of revenues reported in the
internal management system which are not reportable as revenues under generally
accepted accounting principles. Consolidated revenues are principally derived
from customers in North America.

Property and equipment is all located in and around St. Louis, Missouri.

19. NONRECURRING GAIN

Under a contract that the Company has with a supplier, issues arose with
respect to the timing of supply of a product and the supplier's failure to
pursue another product. The terms of the contract provided for binding private
arbitration between the parties which resulted in the Company receiving notice
of an award in December, 1998 of $13,300. The Arbitration Panel subsequently
directed the parties to have further discussions including possible replacement
products. Payment of the award was deferred pending the outcome of these
discussions. Subsequent attempts to obtain replacement products were
unsuccessful and the Company expects to be paid the arbitration award on or
before June 15, 1999. The award, net of related expenses of $530, is reflected
in Other Income in the Statement of Income and as an account receivable in the
Balance Sheet at March 31, 1999, and, net of applicable income taxes, represents
$.40 per common share on a diluted basis.

20. SUBSEQUENT EVENT (UNAUDITED)

Subsequent to December 31, 1999, the Company received an arbitration award
related to a breach of contract. The terms of the contract provided for private
binding arbitration between the parties which resulted in the Company receiving
an award of approximately $3,700, net of applicable taxes and related
expenses/reimbursements. The award will be reflected in the financial statements
for the fourth quarter and fiscal year ending March 31, 2000.

F-22
<PAGE> 75

KV PHARMACEUTICAL LOGO
<PAGE> 76

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the expenses in connection with the issuance
and distribution of the shares offered hereby, all of which will be paid by the
Company (all amounts other than the SEC, NASD and NYSE fees are estimated):

<TABLE>
<S> <C>
SEC registration fee........................................ $ 38,861
NASD review fee............................................. 15,220
New York Stock Exchange listing fee......................... 16,100
Transfer agent's fees and expenses.......................... 5,000
Legal fees and expenses (other than Blue Sky fee and
expenses)................................................. 150,000
Accounting fees and expenses................................ 75,000
Printing and engraving expenses............................. 75,000
Blue Sky fees and expenses.................................. 7,500
Miscellaneous............................................... 117,319
--------
Total............................................. $500,000
========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the General Corporation Law of the State of Delaware permits
indemnification by a corporation of certain officers, directors, employees and
agents. Consistent therewith, Article IX of the Company's Bylaws requires that
the Company indemnify all persons whom it may indemnify pursuant thereto to the
fullest extent permitted by Section 145. Article IX also provides that expenses
incurred by an officer or director of the Company or any of its direct or
indirect wholly-owned subsidiaries, in defending a civil or criminal action,
suit or proceeding, will be paid by the Company in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of such officer, director, employee or agent or repay such amount
if it shall ultimately be determined that he is not entitled to be indemnified
by the Company as authorized. Such expenses incurred by other employees and
agents may be so paid upon such terms and conditions, if any, as the Board of
Directors deems appropriate.

In addition, Article 12 of the Company's Certificate of Incorporation
provides that directors of the Company shall not be personally liable for
monetary damages to the Company or its stockholders for a breach of fiduciary
duty as a director, except for liability as a result of (i) a breach of the
director's duty of loyalty to the Company or its stockholders; (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) an act related to the unlawful stock repurchase or
payment of a dividend under Section 174 of Delaware General Corporation Law; and
(iv) transactions from which the director derived an improper personal benefit.

The Company maintains a policy of insurance under which the directors and
officers of the Company are insured, subject to the limits of the policy against
certain losses arising from claims made against such directors and officers by
reason of any acts or omissions covered under such policy in their respective
capacities as directors or officers.

The Underwriting Agreement provides for certain customary indemnification
of our directors and officers for certain liabilities.

II-1
<PAGE> 77

ITEM 16. EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
1 Underwriting Agreement*
5 Opinion of Thompson Coburn LLP*
23(a) Consent of BDO Seidman, LLP
23(b) Consent of Thompson Coburn LLP (included in Exhibit 5)
23(c) Consent of Arthur Andersen LLP
24(a) Power of Attorney (set forth on signature page)
</TABLE>

- ---------------
* To be filed by amendment.

ITEM 17. UNDERTAKINGS

(a) The undersigned registrant hereby undertakes, that for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's Annual Report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an Employee Benefit
Plan's Annual Report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and this Offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

(b) The undersigned registrant hereby undertakes that:

(1) For purposes of determining liability under the Securities Act of
1933 the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(b) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post effective amendment that contains a form of
Prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and this Offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.

(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
undersigned registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

II-2
<PAGE> 78

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the County of St. Louis and State of Missouri on the 27th day of
March, 2000.

K-V PHARMACEUTICAL COMPANY
(Registrant)

By: /s/ MARC S. HERMELIN
------------------------------------
Marc S. Hermelin
Vice Chairman of the Board and
Chief Executive Officer

Each of the undersigned hereby appoints Gerald R. Mitchell and Alan G.
Johnson, and each of them (with full power to act alone), as attorneys and
agents for the undersigned, with full power of substitution, for and in the
name, place and stead of the undersigned, to signed and file with the Securities
and Exchange Commission under the Securities Act of 1933 any and all amendments
and exhibits to this Registration Statement and any abbreviated Registration
Statement filed pursuant to Rule 462(b) and any and all applications,
instruments and other documents to be filed with the Securities and Exchange
Commission pertaining to the registration of the securities covered hereby, with
full power and authority to do and perform any and all acts and things
whatsoever requisite or desirable.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons and in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ VICTOR M. HERMELIN Director and Chairman of the March 27, 2000
- --------------------------------------------------- Board
Victor M. Hermelin

/s/ MARC S. HERMELIN Director, Vice Chairman of the March 27, 2000
- --------------------------------------------------- Board and Chief Executive
Marc S. Hermelin Officer (principal executive
officer)

/s/ ALAN G. JOHNSON Director, Secretary and Senior March 27, 2000
- --------------------------------------------------- Vice President, Strategic
Alan G. Johnson Planning and Corporate Growth

Director
- ---------------------------------------------------
Garnet E. Peck, Ph.D.

/s/ NORMAN D. SCHELLENGER Director March 27, 2000
- ---------------------------------------------------
Norman D. Schellenger

/s/ GERALD R. MITCHELL Vice President and Treasurer March 27, 2000
- --------------------------------------------------- (principal financial and
Gerald R. Mitchell accounting officer)
</TABLE>

II-3

<PAGE> 1
EXHIBIT 23(a)

[BDO SEIDMAN, LLP LETTERHEAD]

CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS

K-V Pharmaceutical Company
St. Louis, Missouri

We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form S-3 of our reports dated May 14, 1999, relating
to the consolidated financial statements and schedule of K-V Pharmaceutical
Company.

We also consent to the reference to us under the caption "Experts" in the
Prospectus.

/s/ BDO Seidman, LLP
St. Louis, Missouri
March 28, 2000

<PAGE> 1
EXHIBIT 23(c)

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

To K-V Pharmaceutical Company:

As independent public accountants, we hereby consent to the incorporation
by reference in this Form S-3 of our report dated May 27, 1999, included in KV
Pharmaceutical Company's Form 8-K/A for the years ended December 31, 1998 and
1997 and to all references to our Firm included in this registration statement.

/s/ Arthur Andersen LLP
March 24, 2000
Roseland, New Jersey