<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
----------------------------------
Washington, D.C. 20549
FORM 10-K
Mark One
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000 OR
--
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ____________ to ____________
Commission file number 1-9601
---------------------
K-V PHARMACEUTICAL COMPANY
2503 SOUTH HANLEY ROAD
ST. LOUIS, MISSOURI 63144
(314) 645-6600
Incorporated in Delaware I.R.S. Employer Identification No. 43-0618919
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock par value $.01 per share New York Stock Exchange
Class B Common Stock par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
7% Cumulative Convertible Preferred, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the 9,194,842 shares of Class A and
3,315,099 shares of Class B Common Stock held by nonaffiliates of the
Registrant as of May 11, 2000, was $197,689,103 and $79,147,989,
respectively. As of May 11, 2000, the Registrant had outstanding 12,246,739
and 6,886,920 shares of Class A and Class B Common Stock, respectively,
exclusive of treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated into this Report by reference:
Part III: Portions of the definitive proxy statement of the Registrant
(to be filed pursuant to Regulation 14(A) for Registrant's 2000 Annual
Meeting of Shareholders, which involves the election of directors), are
incorporated by reference into Items 10, 11, 12 and 13 to the extent stated
in such items.
<PAGE> 2
Any forward-looking statements set forth in this Report are
necessarily subject to significant uncertainties and risks. When used in
this Report, the words "believes," "anticipates," "intends," "expects," and
similar expressions are intended to identify forward-looking statements.
Actual results could be materially different as a result of various
possibilities. Readers are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
ITEM 1. DESCRIPTION OF BUSINESS
-----------------------
(A) GENERAL DEVELOPMENT OF BUSINESS
-------------------------------
KV Pharmaceutical Company ("KV", or the "Company") was
incorporated under the laws of Delaware in 1971 as a successor to a business
originally founded in 1942. Victor M. Hermelin, KV's Chairman and founder,
obtained initial patents for early controlled release and enteric coated
technologies in the early 1950's.
KV is a pioneer in the area of advanced drug delivery
technologies which enhance the effectiveness of new therapeutic agents,
existing pharmaceutical products and nutritional supplements. The Company
has developed and patented a wide variety of drug delivery and formulation
technologies in four principal areas; including controlled release, oral and
topical site-specific, one quick dissolving tablet and three tastemasking
systems. The Company uses these systems in the development of the products
KV markets as well as the products of its pharmaceutical marketing licensees
to improve and control the human body's absorption and utilization of the
active pharmaceutical compounds or provide some other benefit. This allows
the compounds to be administered less frequently with potentially reduced
side effects, improved drug efficacy and/or enhanced patient compliance.
In 1990, the Company established a generic marketing
capability through a wholly-owned subsidiary, ETHEX Corporation ("ETHEX"),
which makes it one of the only drug delivery research and development
companies that also markets "technology distinguished" generic products.
In 1999, the Company established a wholly-owned subsidiary,
Ther-Rx Corporation ("Ther-Rx") to market branded pharmaceuticals directly to
physician specialists.
KV's wholly-owned operating subsidiary, Particle Dynamics,
Inc. ("PDI"), was incorporated in New York in 1948 and acquired by KV in
1972. Through PDI, the Company develops and markets specialty value added
raw materials, including drugs, directly compressible and microencapsulated
products, and other products used in the pharmaceutical, nutritional, food
and personal care industries.
The Company also licenses the marketing rights for products
developed with KV drug delivery technologies to major domestic and
international brand name pharmaceutical marketers in return for license fees,
milestone payments, research reimbursement and manufacturing and royalty
revenues.
(Hereinafter, KV, ETHEX, PDI and Ther-Rx are sometimes
referred to collectively as "KV" or the "Company".)
(B) INDUSTRY SEGMENTS
-----------------
The Company operates principally in four industry segments,
consisting of pharmaceutical manufacturing and marketing of specialty
materials, branded and specialty generic products. Revenues are derived
primarily from directly marketing its own technology distinguished generic and
brand-name products. Revenues may also be received in the form of licensing
revenues and/or royalty payments based upon a percentage of the licensee's
sales of the product, in addition to
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manufacturing revenues, when marketing rights to products using its advanced
drug delivery technologies are licensed. (see Note 19 to the Company's
financial statements).
(C) NARRATIVE DESCRIPTION OF BUSINESS
---------------------------------
For the fiscal year ended March 31, 2000, approximately 85%
of the company's net revenues were derived from the sale of technology
distinguished branded and generic products, approximately 3% from
manufacturing and licensing, and approximately 12% from the sale of specialty
value added pharmaceutical raw material compounds.
The Company is a fully integrated specialty pharmaceutical
company that develops, acquires, manufacturers and markets technologically
distinguished branded and generic prescription pharmaceutical products. KV
conducts its 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. KV conducts 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., KV also develops, manufactures and markets technologically advanced,
value-added raw material products for the pharmaceutical, nutritional, food
and personal care markets.
KV established the Ther-Rx business to market brand name
pharmaceutical products that KV internally develops 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. KV
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
$8.4 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 third product
launched, PreCare(R) Conceive(TM), is the first single nutritional
pre-conception supplement for both men and women.
Ther-Rx has over 100 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.
ETHEX is the Company's technologically distinguished generic
drug business. KV 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, 64% of which are identified by IMS America as the leading
product in their respective generic category. KV believes 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, KV
has 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, KV also produced and marketed the first generic alternative
to Nitrostat(R) (Park Davis), used to treat angina.
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Particle Dynamics Inc. is the Company's value-added raw
material business. Particle Dynamics (PDI) develops and markets specialty
raw material product lines for the pharmaceutical, nutritional, food and
personal care industries. PDI 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
--------
The Company's goal is to enhance its position as a leading
specialty pharmaceutical company that utilizes its expanding drug delivery
expertise to bring technologically distinguished brand name and generic
products to market. The Company's strategy incorporates the following key
elements:
* Capitalize on Acquisition Opportunities. Through Ther-Rx, KV plans
to actively seek acquisition opportunities. KV believes that
consolidation among large pharmaceutical companies, coupled with
cost-containment pressures, will lead to the divestiture of small or
non-strategic products and product lines, which can be profitable for
specialty pharmaceutical companies like KV to manufacture and market.
* Internally Develop Brand Name Products. KV plans to apply its
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.
KV intends 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. KV believes it is uniquely positioned to capitalize
on this dynamic given our suite of proprietary drug delivery
technologies and ability to bring value-added products to market.
* Focus Sales Efforts on High Value Niche Markets. KV focuses its
sales efforts on niche markets where the Company believes it can
target a relatively narrow physician audience. KV plans to continue
to build its sales force significantly to expand the coverage of
frequent prescribers of its products.
* Advance Existing and Develop New Drug Delivery Technologies.
KV expects to continue to develop its drug delivery technologies
and has 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.
THE COMPANY'S PROPRIETARY DRUG DELIVERY TECHNOLOGIES
----------------------------------------------------
The Company is a pioneer in the development of proprietary
drug delivery systems and formulation technologies which enhance the
effectiveness of new therapeutic agents, existing pharmaceutical products
and nutritional supplements, such as vitamins and minerals. Many of these
technologies have been used successfully for the commercialization of
products that the Company and its pharmaceutical marketing company licensees
are currently marketing. Additionally, the Company continues to invest its
resources in the development of new technologies. The following describes
the Company's principal drug delivery technologies.
ORAL CONTROLLED RELEASE TECHNOLOGIES
------------------------------------
The Company has developed a number of controlled release drug
delivery systems and
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formulation techniques that tailor the drug release profiles of certain
orally administered pharmaceuticals and nutritional supplements. These
systems, which provide for single oral doses that release the active
ingredients over periods ranging from 6 to 24 hours, are designed to improve
patient compliance, improve drug effectiveness and reduce potential side
effects. The Company's technologies have been used to formulate tablets,
capsules and caplets that deliver single therapeutic compounds as well as
multiple active compounds, each requiring different release patterns, within
a single dosage form.
* KV/24(R) is a patented, multi-particulate drug delivery system that
encapsulates one or more drug compounds into spherical particles
which release the active drug or drugs systemically over an 18 to
24 hour period, permitting the development of once-a-day drug
formulations. The Company believes that its KV/24(R) oral dosing
system is the only commercialized 24 hour oral controlled release
system that successfully is able to incorporate more than one
active compound.
* METER RELEASE(R) is a polymer-based drug delivery system that offers
different release characteristics than KV/24(R) and is used for
products that require drug release rates of between 8 to 12 hours.
The Company has developed METER RELEASE(R) systems in tablet, capsule
and caplet form that have been commercialized in ETHEX products in
the cardiovascular, gastrointestinal and upper respiratory product
categories.
* MICRO RELEASE(R) is a microparticulate formulation that encapsulates
therapeutic agents, employing smaller particles than KV/24(R) and
METER RELEASE(R). This system is used to extend the release of drugs
in the body where precise release profiles are less important. MICRO
RELEASE(R) has been commercialized in prescription products marketed
by ETHEX as well as OTC nutritional products.
SITE-RELEASE(R) TECHNOLOGIES
----------------------------
The Company's SITE-RELEASE(R) technologies are based on the
concept that isolating a drug in a specific location for an extended period
of time offers the opportunity to meaningfully increase the drug's efficacy.
For example, a vaginal yeast infection may be effectively treated using a
single dose of an anti-fungal medication by developing a drug formulation
that will adhere the anti-fungal compound to the infected area over a period
of time sufficient to maximize the drug's efficacy. The Company's site
specific technologies use advanced polyphasic (hydrophilic and lipophilic)
principles that result in a complex emulsion which adheres to the desired
tissue and controls the release of the drug. The Company has developed a
number of site-specific systems and formulations that it tailors to the
desired route of administration. Of these technologies, only products using
DermaSite(TM) technology are currently being marketed. To date, the Company
has applied its site-specific technologies in cream, lotion, lozenge and
suppository form to deliver therapeutic agents to oral, skin, pharyngeal,
esophageal, vaginal and rectal tissues.
* VagiSite(TM) is a patented, controlled release bioadhesive delivery
system that incorporates advanced polyphasic principles to create a
bio-emulsion system capable of delivering therapeutic agents in oral,
topical and vaginal forms. VagiSite(TM) is the subject of licensing
and development agreements to develop products for the treatment
of topical and vaginal fungal infections.
* OraSite(TM) is a controlled release mucoadhesive delivery system
administered orally in a solid or liquid form. A drug formulated
with the OraSite(TM) technology may be formulated as a liquid or as
a lozenge in which the dosage form liquifies upon insertion and
adheres to the mucosal surface of the mouth, throat and esophagus.
OraSite(TM) possesses characteristics particularly advantageous
to therapeutic categories such as oral hygiene, sore throat and
periodontal and upper gastrointestinal tract disorders. The Company
has been issued patents relating to its OraSite(TM) technology.
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* DermaSite(TM) is a semi-solid SITE-RELEASE(R) configuration for
topical applications to the skin. The bioadhesive and controlled
release properties of the delivery platform have made possible the
development of products requiring a significantly reduced frequency
of application.
* Trans-EP(TM) (trans esophageal) is a novel bio-adhesive, controlled
release delivery system that may permit oral delivery of compounds
that normally would be degraded if administered orally, such as
growth hormones, calcitonin, other protein/peptides and other complex
compounds. Trans-EP(TM) was specifically designed to provide an oral
delivery alternative to biotechnology and other compounds that
currently are delivered as injections or infused. The Company has
received a patent relating to its Trans-EP(TM) technology.
TASTEMAKING TECHNOLOGIES
------------------------
The Company is a leader in the development of pharmaceutical
formulations capable of improving the flavor of unpleasant tasting drugs.
The Company first introduced tastemasking technologies in 1991 and has
employed them in the formulation of twelve commercially available products.
The Company has also developed numerous platforms for its tastemasking
technologies, including liquid, chewable and dry powder formulations.
* LIQUETTE(R) is a patented tastemasking system that incorporates
unpleasant tasting drugs into a hydrophilic and lipophilic polymer
matrix to suppress the taste of the drug. This technology is used
for mildly to moderately distasteful drugs where low manufacturing
costs are particularly important.
* FlavorTech(TM) is a liquid formulation technology designed to reduce
the objectionable taste of a wide variety of therapeutic products.
FlavorTech(TM) technology has been used in cough/cold syrup products
sold by ETHEX and has special application to other products, such as
antibiotic, geriatric and pediatric pharmaceuticals. The Company has
received a patent for its FlavorTech(TM) technology.
* MicroMask(TM) is a patented tastemasking technology that incorporates
a dry powder, microparticulate approach to reducing objectionable
tastes by sequestering the unpleasant drug agent in a specialized
matrix. This formulation technique has the effect of "shielding"
the drug from the taste receptors without interfering with the
dissolution and ultimate absorption of the agent within the
gastrointestinal tract. MicroMask(TM) is a more potent tastemasking
technology than LIQUETTE(R) and has been used in connection with two
Ther-Rx products.
MARKETING AND DISTRIBUTION
--------------------------
The Company directly markets and distributes its branded and
generic products to national drug store chains, wholesalers and distributors,
as well as independent pharmacies and mail order firms. During fiscal 2000,
1999 and 1998, the Company's two largest customers, McKesson Drug Company and
Cardinal Health, Inc., wholesale distributors, accounted for 30%, 36% and 26%,
respectively, of its total revenue.
SALES, MARKETING AND DISTRIBUTION
---------------------------------
Ther-Rx has a national sales and marketing infrastructure
which includes more than 100 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, the Company believes it 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.
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ETHEX has a sales and marketing team, which includes an
outside sales team of regional managers, national account managers and an
inside sales team. The outside sales team calls 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.
The Company believes that industry trends favor generic
product expansion into the managed care, long-term care and government
contract markets. The Company further believes that its competitively
priced, technologically distinguished generic products can fulfill the
increasing need of these markets to contain costs and improve patient
compliance. Accordingly, the Company intends to continue to devote
significant marketing resources to the penetration of such markets.
Particle Dynamics has a specialized technical sales group who
call on the leading companies in the pharmaceutical, nutritional, food and
personal care markets in the United States and internationally in 50
countries in Europe, the Pacific Rim, South America and North America.
Although the Company sells internationally, it does not have
material operations or sales in foreign countries and its sales are not
subject to unusual geographic concentration.
RESEARCH AND DEVELOPMENT
------------------------
The Company's 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.
The Company continually applies its scientific and
development expertise to redefine 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.
In fiscal 2000, 1999 and 1998, total research and development
expenses were $8.0 million, $6.9 million and $5.8 million, respectively.
Spending for research and development is funded primarily from operations and
was 6% of revenues during fiscal 2000.
PATENTS AND PROPRIETARY RIGHTS
-------------------------------
Our policy is to file patent applications in appropriate
situations to protect and preserve, for its own use, technology, inventions
and improvements that KV considers important to the development of its
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.
The Company's 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
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legal and factual questions, the breadth of claims allowed in patents
relating to pharmaceutical applications or their enforceability cannot be
predicted. To the extent KV endeavors to protect its inventions outside the
United States, statutory differences in patentable subject matter may limit
the protection it can obtain. For example, methods of treating humans are
not patentable in many countries outside of the United States. These and
other issues may prevent KV from obtaining patent protection outside of the
United States.
The Company also relies upon trade secrets, unpatented
proprietary know-how and continuing technological innovation to develop and
maintain its competitive position. KV enters into confidentiality agreements
with each of its employees and consultants upon the commencement of
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. KV cannot assure these agreements will not be breached. KV also
cannot be certain of intellectual property or the applicability or
enforceability of its confidentiality agreements, and there can be no
assurance that any such disputes would be resolved in KV's favor. Others may
acquire or independently develop similar technology or, if patents are not
issued with respect to products arising from research, KV may not be able to
maintain information pertinent to such research as proprietary technology or
trade secrets.
The Company currently holds 48 trademarks and has 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.
MANUFACTURING AND FACILITIES
----------------------------
The Company's administrative, research, manufacturing and
distribution facilities aggregate approximately 706,000 square feet of space
located on three St. Louis County areas. The Company manufactures drug
products in liquid, semi-solid, tablet, capsule and caplet forms for
distribution by ETHEX, Ther-Rx and its corporate licensees. The Company
believes that all of its facilities comply with applicable regulatory
requirements.
The Company's business is generally not seasonal, although a
number of cough/cold products marketed through ETHEX can be subject to
seasonal demand. The nature of its business does not include unusual working
capital requirements. Inventories are maintained at sufficient levels to
support current production and sales levels. During fiscal 2000, the Company
encountered no serious shortage of any particular raw materials and has no
indication that significant shortages will occur.
Other than four facilities totaling 299,000 square feet that
the Company owns, all facilities are leased at pre-determined annual rates
under agreements expiring from May 31, 2000 through November 30, 2012 subject
in most cases to renewal at its option.
COMPETITION
-----------
Competition in the development and marketing of
pharmaceutical products is intense and characterized by extensive research
efforts and rapid technological progress. Many companies, including those
with financial and marketing resources and development capabilities
substantially greater than the Company's, are engaged in developing,
marketing and selling products that compete with those the Company offers.
Competitors may develop or acquire products more rapidly than the Company
does. Further, other products now in use or under development by others may
be more effective than its current or future products. The Company believes
that
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its patents, proprietary trade secrets, technological expertise, product
development and manufacturing capabilities position it to continue to develop
products to compete effectively in the marketplace and to maintain a
leadership position in the field of advanced drug delivery technologies.
EMPLOYEES
---------
As of March 31, 2000, the Company employed a total of 637
employees. The Company is party to a collective bargaining agreement that
expires in May 2001 and covers 111 employees. The Company believes that its
relations with its employees are good.
ENVIRONMENT
-----------
The Company does not expect that compliance with federal,
state or local provisions regulating the discharge of materials into the
environment or otherwise relating to the protection of the environment will
have a material effect on its capital expenditures, earnings or competitive
position.
REGULATION
----------
The design, development and marketing of pharmaceutical
compounds are intensively regulated by the Federal Food and Drug
Administration ("FDA") and comparable agencies in state, local and foreign
governments. For example, The Federal Food, Drug and Cosmetic Act, the
Controlled Substances Act and other United States federal statutes and
regulations impose requirements on the testing, manufacturing and approval of
the Company's products before they can be marketed in the United States.
Obtaining FDA approval is a costly, time-consuming process and there is no
guarantee that such approval will be obtained with respect to an individual
product. All companies in the pharmaceutical industry are subject to FDA
inspections for compliance with current Good Manufacturing Practice ("cGMP"),
which encompasses all aspects of the production process as interpreted by the
FDA and involves changing and evolving standards. FDA inspections are a part
of a continuing effort by the FDA to oversee and upgrade the level of
industry-wide compliance with cGMP, with an emphasis on increased validation
of products and increased stringency of Standard Operating Procedures. The
Company undergoes FDA inspections at all of its facilities.
With respect to potential new products, there are two
principal ways the Company can satisfy the FDA's safety and efficacy
requirements for a new drug product: a new drug application (an "NDA") and an
abbreviated new drug application (an "ANDA"). The Company does not disclose
information on the specific products covered by its FDA applications in order
to protect its competitive position and that of its customers with respect to
products which the Company has developed and expects to market in the future.
The Company was informed by the FDA on April 22, 1998 that it
had satisfied all of the requirements of the agency's "Application Integrity
Policy." As a result, the FDA will process the Company's applications for
new NDA's and ANDA's. The Company has regulatory submissions filed with the
FDA for approval and received an ANDA product approval for the generic
alternative to IMDUR(R) from Schering in March 2000. As a consequence of the
uncertainties inherent in the drug approval process, an applicant is not in
the position to predict in advance all of the substantive and procedural
requirements for FDA approval of a particular product or to predict when or
if any particular product may be approved.
The Company cannot predict whether future legislative or
regulatory developments might have an adverse effect on the Company. It is
the Company's belief that generic and branded drugs enhanced by drug delivery
technologies can provide cost savings opportunities for the consumer, which
the Company could benefit from through the growth of ETHEX and Ther-Rx and in
its drug delivery research business.
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ITEM 2. PROPERTIES
----------
The Company's corporate headquarters is located at 2503 South
Hanley Road in St. Louis County, Missouri, and contains approximately 25,000
square feet of floor space. The Company has a lease on the building for a
period of ten years expiring December 31, 2006, with one five-year option to
renew.
In addition, the Company leases or owns the facilities shown
in the following table:
<TABLE>
<CAPTION>
SQ FT LEASE RENEWAL
LEASED USAGE EXPIRES OPTIONS
-------------------------------------------------------------------------
<S> <C> <C> <C>
31,630 PDI Office/Mfg./Whse. 09/30/02 5 Years<F1>
10,000 PDI/KV Lab/Whse. 11/30/01 None
23,000 KV Office/R&D/Mfg. 10/31/01 5 Years<F1>
16,800 KV Mfg. Oper. 06/30/02 None
122,350 KV Office/Whse./Lab Owned N/A
90,000 KV Mfg. Oper. Owned N/A
87,020 ETHEX/THER-RX Office/Whse. Owned N/A
260,160 ETHEX/THER-RX/PDI Distribution 04/30/12 5 Years<F1>
<FN>
_____________________________________
<F1> Two five-year options.
</TABLE>
Properties used in the Company's operations are considered
suitable for the purposes for which they are used and are believed to be
adequate to meet the Company's needs for the reasonably foreseeable future.
However, the Company will consider leasing or purchasing additional
facilities from time to time, when attractive facilities become available, to
accommodate the consolidation of certain operations and to meet future
expansion plans.
ITEM 3. LEGAL PROCEEDINGS
-----------------
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 $13,253,000. 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 was paid the
arbitration award in June 1999. In January 2000, the Company received an
additional award of $6,973,000 covering all open monetary issues.
From time to time, the Company is subject to litigation and
claims in the ordinary course of business. Other than as described above,
the Company currently is not a party to any pending legal proceedings, other
than ordinary routine litigation incidental to its business, which individually
or in the aggregate is not material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No such matters were submitted during the fourth quarter of
the Company's fiscal year ended March 31, 2000.
10
<PAGE> 11
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
The following is a list of the current executive officers
of the Company, their ages, their positions with the Company and their
principal occupations for at least the past five years.
<TABLE>
<CAPTION>
NAME AGE POSITION HELD AND PAST EXPERIENCE
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Victor M. Hermelin 86 Director, Chairman of the Board.<F1>
Marc S. Hermelin 58 Director, Vice-Chairman of the Board and Chief Executive Officer.
Alan G. Johnson 65 Director, Senior Vice President-Strategic Planning and Corporate Growth
since September 27, 1999 and Secretary of the Company; Chairman of
Pauli, Johnson Capital & Research, Inc., an investment banking and
institutional research firm from January to September 1999; Member of
the law firm Gallop, Johnson & Neuman, L.C. 1976 to 1998; Director of
SIBONEY Corporation.
Raymond F. Chiostri 66 Vice President and Group President of KV since 1986 and Chief Executive
Officer of Particle Dynamics, Inc. since 1995; President, Pharmaceutical
Division of KV 1986 to 1995.
Gerald R. Mitchell 61 Vice President, Treasurer and Chief Financial Officer since 1981.
Mitchell I. Kirschner 54 Corporate Vice President of Business Development since 1989.
The term of office for each executive officer of the Company
expires at the next annual meeting of the directors or at such time as his
successor has been elected and qualified.
<FN>
--------------------------
<F1> Victor M. Hermelin is the father of Marc S. Hermelin and father-in-law of
Mitchell I. Kirschner.
</TABLE>
11
<PAGE> 12
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY
----------------------------------------------------------
HOLDER MATTERS
--------------
A) PRINCIPAL MARKET
----------------
The Company's Class A Common Stock and Class B Common Stock are
traded on the New York Stock Exchange under the symbols KV.A and KV.B,
respectively. The Company's common stock moved to the New York Stock
Exchange from the American Stock Exchange on March 25, 1999.
B) STOCK PRICE AND DIVIDEND INFORMATION
------------------------------------
The high and low closing sales prices of the Company's Class A and
Class B Common Stock, as reported on the American Stock Exchange and New York
Stock Exchange, during each quarter of fiscal 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
CLASS A COMMON STOCK
--------------------
FISCAL 2000 FISCAL 1999
---------------- ---------------
QUARTER HIGH LOW HIGH LOW
-------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First 17 5/8 13 22 3/4 17 3/16
Second 19 1/8 14 3/4 23 1/8 14 3/8
Third 21 15/16 15 1/8 23 1/8 17 1/4
Fourth 32 5/16 19 3/4 21 1/2 14 1/2
CLASS B COMMON STOCK
--------------------
FISCAL 2000 FISCAL 1999
---------------- ---------------
QUARTER HIGH LOW HIGH LOW
-------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First 17 9/16 13 1/8 23 1/16 17 3/32
Second 18 15/16 15 23 5/16 14 1/2
Third 21 7/16 15 13/16 23 1/4 17 3/8
Fourth 32 3/4 19 13/16 21 5/16 14
</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.
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, 2000 and 1999 were approximately $2.2 million or $9.14 per
share on 240,000 and 241,000 shares of Preferred Stock, respectively. Also,
under the terms of the Company's credit agreement, the Company may not pay cash
dividends in excess of 25% of the prior year's consolidated net income. The
Company historically has not paid cash dividends on common stock and does not
plan to do so in the near future. The Company intends to use cash generated
from operations to support future growth. Dividends on Convertible Preferred
Stock in the amount of $420,000 and $421,000 were paid during fiscal 2000 and
1999, respectively.
12
<PAGE> 13
C) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
---------------------------------------------
The number of holders of record of Class A and Class B Common
Stock as of May 11, 2000 was 647 and 519, respectively (not separately
counting shareholders whose shares are held in "nominee" or "street" names,
which are estimated to represent approximately 6,000 additional shareholders
for each class of common stock).
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
<TABLE>
<CAPTION>
($ in 000's, except per share data)
Years Ended March 31,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $140,385 $127,990 $68,361 $41,362 $27,948
Long-term debt $ 16,779 $ 31,491 $ 4,902 $ 2,158 $ 2,541
Shareholders' equity $ 97,799 $ 67,548 $44,164 $33,084 $20,550
INCOME STATEMENT DATA:
Revenues $145,970 $114,860 $98,486 $57,891 $49,729
% Increase 27.1 16.6 70.1 16.4 25.1
Net income <Fa> $ 24,308 $ 23,340 $11,304 $ 8,924 $ 4,043
Net income
per common
share-diluted <Fb> $ 1.19 $ 1.17 $ 0.58 $ 0.47 $ 0.21
<FN>
<Fa> Net income in fiscal 2000 and 1999 includes non-recurring gains
associated with $7.0 million and $13.3 million arbitration awards,
respectively. The awards net of applicable income taxes and expenses
(see Note 20 of Notes to Consolidated Financial Statements) were as
follows:
<CAPTION>
Net Income Per Diluted Share
---------------- -----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income without nonrecurring gain $20,430 $15,385 $1.00 $0.77
Nonrecurring gain 3,878 7,955 0.19 0.40
------- ------- ----- -----
Total net income $24,308 $23,340 $1.19 $1.17
<Fb> Diluted common shares were restated to reflect a 3 for 2 stock split
effected 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. The Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" in fiscal 1998 and restated all prior-period earnings per share
data (see Note 1 of Notes to Consolidated Financial Statements).
</TABLE>
13
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS,
--------------------------------------------------------------
AND LIQUIDITY AND CAPITAL RESOURCES
-----------------------------------
(A) RESULTS OF OPERATIONS
---------------------
The following table summarizes the Company's historical
results of operations with revenue contribution by operating segment after
inter-company eliminations and consolidated costs and expenses as a percent of
total net revenue. This information should be read in conjunction with the
Company's financial statements and related notes.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
2000 1999 1998
---- ---- ----
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Revenues
------------
Generic Products $101,342 69.4% $ 91,833 80.0% $79,193 80.4%
Branded Products 23,469 16.1 1,795 1.6 -- --
Specialty Materials 17,181 11.8 13,405 11.6 11,003 11.2
Contract Services/Licenses 3,978 2.7 7,827 6.8 8,290 8.4
-------- ----- -------- ----- ------- -----
Total Net Revenues 145,970 100.0 114,860 100.0 98,486 100.0
-------- ----- -------- ----- ------- -----
Costs and Expenses
------------------
Manufacturing Costs 63,446 43.5 61,415 53.5 56,483 57.3
Research and Development 8,043 5.5 6,884 6.0 5,752 5.8
Selling and Administrative 37,982 26.0 22,201 19.3 19,104 19.4
Other Income, net (4,907) (3.4) (13,516) (11.8) (98) (0.1)
Amortization 2,307 1.6 244 0.2 254 0.3
-------- ----- -------- ----- ------- -----
Total Costs and Expenses 106,871 73.2 77,228 67.2 81,495 82.7
-------- ----- -------- ----- ------- -----
Earnings before Taxes 39,099 26.8 37,632 32.8 16,991 17.3
Provision for Income Taxes 14,791 10.1 14,292 12.4 5,687 5.8
-------- ----- -------- ----- ------- -----
Net Income $ 24,308 16.7% $ 23,340 20.4% $11,304 11.5%
======== ===== ======== ===== ======= =====
</TABLE>
FISCAL 2000 COMPARED TO FISCAL 1999
-----------------------------------
Revenues. Net revenues for fiscal 2000 increased $31.1
million, or 27%, over the prior fiscal year. The increase in revenues, after
elimination of inter-segment revenues, was due to higher sales in all three
marketing divisions (generic products, branded products and specialty
materials) as shown in the following table:
<TABLE>
<CAPTION>
Increase (Decrease)
vs Prior Year
AMOUNT PERCENT
----- -------
<S> <C> <C>
Net Revenues
Generic products $ 9,509 10.4%
Branded products 21,674 Nm
Specialty materials 3,776 28.2
Contract services/licenses (3,849) (49.2)
-------
Total net revenues $31,110 27.1%
=======
</TABLE>
14
<PAGE> 15
Branded product sales through Ther-Rx in its first full
marketing year grew to $23.5 million versus $1.8 million for the fourth
quarter of fiscal year 1999, when the business began operations. This
branded business was started by acquiring products with established brand
name recognition and existing distribution, and through the subsequent
introduction of internally developed products. Acquired products include
Micro-K(R) Extencaps acquired in March 1999 and the PreCare(R) prenatal
caplet that was 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 with a physician-supervised program to reduce pregnancy-related
nausea; and Pre-Care(R) Conceive(TM), a nutritional supplement specifically
designed for use by both men and women prior to conception.
Of the $9.5 million increase, or 10%, in specialty generic
net sales by ETHEX, volume increases in existing products and new products
contributed $6.7 million while $2.8 million was from price increases. ETHEX
introduced 7 new products during the year and in March, 2000 received ANDA
approval for the generic alternative to IMDUR(R) by Schering.
Specialty materials sales by Particle Dynamics increased by
$3.8 million, or 28%, due primarily to higher volume in existing product
lines on an expanded customer base.
Contract services and licensing revenues decreased $3.8
million, or 49%, since the prior fiscal year included a $3 million licensing
payment and due to lower volume, reflecting a smaller customer base as the
Company de-emphasized lower margin contract manufacturing in its business
strategy.
While the Company anticipates continued overall growth in
sales of the products it markets, there are no assurances that the annual
percentage rate of sales growth will continue at past levels.
Costs and Expenses. Manufacturing costs as a percentage of
revenue declined from 53.5% to 43.5% due to the effects of favorable pricing
and product mix. The improvement in product mix reflected an increase in the
relative contribution of higher margin brand sales and a decrease in lower
margin generic pain management sales. Of the 10 percentage-point net
decrease, changes in product mix and volume accounted for 7.3% and pricing
accounted for 3.3%, which were offset by a 1.1% increase in costs.
Research and development expense increased $1.2 million, or
17%, compared to the prior year period. The increase was due primarily to an
increase in the number of clinical testing programs conducted. The Company
expects to continue a high level of expenditures for research, clinical and
regulatory efforts.
Selling and administrative expenses increased $15.8 million,
or 71%, compared to the corresponding period of the prior year. The increase
was due primarily to the Company's investment in building the sales force for
Ther-Rx and related marketing expenses. Selling and marketing expenses
associated with this effort were $10.9 million. Selling and marketing
expenses of ETHEX increased $1.5 million.
Amortization expense increased $2.1 million due to the
amortization of product rights acquired in March 1999 and August 1999.
Other income, net, decreased $8.6 million to $4.9 million
during fiscal 2000 primarily due to a non-recurring gain related to an
arbitration award in fiscal 1999 being $6.7 million higher than the current
year's award (see Note 20 of Notes to the Consolidated Financial Statements)
and net interest expense increasing $1.4 million.
Net Income. As a result of the factors described above, net
income improved $1 million, or 4%, to $24.3 million compared to the prior
year period.
15
<PAGE> 16
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, branded product sales resulting from the acquisition of the
Micro-K(R) product line during the fourth quarter of fiscal 1999, and
specialty materials 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%.
Contract services and licensing revenues decreased $.5
million, or 5.6% due to lower volume, reflecting a smaller customer base as
the Company de-emphasized lower margin contract manufacturing in its 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.
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 the continued growth of $1.3
16
<PAGE> 17
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.
17
<PAGE> 18
(B) REGARDING COMMODITY PRICES
--------------------------
The Company utilizes various raw materials in its
manufacturing processes. Although the Company historically has not
encountered material fluctuations in pricing of such commodities, there is no
assurance that pricing of such commodities will remain relatively constant,
and the Company's manufacturing costs could increase significantly if raw
material commodity prices increase by amounts substantially above current
prices.
(C) VARIABLE RATE RISKS
-------------------
Advances to the Company under the Company's credit facility
bear interest at a rate which varies consistent with increases or decreases
in the publicly-announced prime rate [and/or the LIBOR rate with respect to
LIBOR-related loans, if any]. These rates have gradually increased over the
past several years. A material increase in such rates, however, could
significantly increase borrowing expenses. For example, an increase of 1% in
the prime rate would increase the borrowing expense to the Company by
approximately $110,000 annually on the principal balance of the Company's
credit facility at March 31, 2000.
(D) YEAR 2000 READINESS DISCLOSURE
------------------------------
Last year, the Company discussed the nature and progress of
its plans to become Year 2000 ready. In late 1999, the Company completed its
identification and testing of systems. As a result of those efforts, the
Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes
those systems successfully responded to the year 2000 date change. The
Company has not incurred any material expenditure in connection with
identifying or evaluating Year 2000 compliance issues. The Company estimates
it will not incur any material levels of expenditure on this issue during
2000 to support its compliance initiatives. The Company is not aware of any
material problems resulting from Year 2000 issues, either with its products,
its internal systems, or the products and services of third parties. The
Company plans to continue to monitor its computer systems and those of its
suppliers and vendors to ensure that any latent Year 2000 matters that may
arise are addressed promptly.
18
<PAGE> 19
(E) LIQUIDITY AND CAPITAL RESOURCES
The following table lists selected cashflow and balance sheet
data for fiscal years 2000, 1999 and 1998:
<TABLE>
<CAPTION>
($ IN 000'S) 2000 1999 1998
-----------------------------------
<S> <C> <C> <C>
Cashflow from Operations $24,938 $ 9,499 $13,756
Working Capital 37,566 43,112 35,403
Long-Term Liabilities 19,139 33,974 7,040
Shareholders' Equity 97,799 67,548 44,164
</TABLE>
Cashflow from operations of $24.9 million for fiscal 2000
was primarily due to net income before depreciation and amortization of
$28.8 million and the receipt of a $13.3 million arbitration award from
fiscal 1999, which was partially offset by increases in accounts receivable
($4.7 million), inventories ($6.5 million) and a net reduction in payable
accruals ($4.0 million). The increase in receivables and inventories is
associated with sales growth and the effect of new product introductions in
Ther-Rx and ETHEX. In addition, accrued income taxes decreased $5.0 million
due to taxes paid in fiscal 2000 in connection with the arbitration award
recorded in fiscal 1999.
Long term liabilities decreased to $19.1 million in fiscal
2000 from $34 million primarily as a result of a $14 million reduction in
borrowings incurred to finance the acquisition of the Micro-K(R) product
line.
Investing activities for fiscal 2000 included cash outlays
for capital expenditures of $15.4 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. Construction-in-progress at March 31, 2000 was estimated
to cost $1.6 million to complete. We acquired the worldwide rights to
PreCare(R) in August 1999 for approximately $8.4 million, consisting of $3.0
million in cash, $4.5 million of Class A common stock and a $.9 million note.
The Company believes that existing cash, cash generated from
operating activities and funds available under its credit facility 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. As of
March 31, 2000, the Company has a loan agreement expiring October 2002 with
LaSalle National Bank. The agreement provides for a revolving line of credit
for borrowing up to $40 million. The Company had cash borrowing of
$11 million and $2.6 million in open letters of credit issued under this
facility.
Ratios. The following table lists selected financial ratios for
the fiscal years 2000, 1999 and 1998:
<TABLE>
<CAPTION>
2000 1999 1998
---------------------------------------
<S> <C> <C> <C>
Working Capital Ratio 2.6 to 1 2.6 to 1 3.1 to 1
Debt to Equity .19 to 1 .48 to 1 .12 to 1
Total Liabilities to Equity .44 to 1 .89 to 1 .55 to 1
</TABLE>
The Company's working capital ratio remained the same in
fiscal 2000 while debt to equity and total liabilities to equity ratios
improved due to the $14 million decrease in long term debt associated with
the paying down of borrowings from its credit facility which were incurred to
finance the Micro-K(R) acquisition.
19
<PAGE> 20
Inflation. Although at reduced levels in recent years,
inflation continues to apply upward pressure on the cost of goods and
services used by the Company. However, the Company believes that the net
effect of inflation on its 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.
(F) NEW ACCOUNTING STANDARDS
------------------------
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 a significant
impact on its results of operations, financial position or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
20
<PAGE> 21
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders 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, 2000 and 1999, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the
three years in the period ended March 31, 2000. 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, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years
in the period ended March 31, 2000, in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
St. Louis, Missouri
May 10, 2000
21
<PAGE> 22
<TABLE>
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND 1999
(IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 3,443 $ 2,617
Marketable securities, available-for-sale -- 7,523
Receivables, less allowance for doubtful accounts of
$2,459 and $631 in 2000 and 1999, respectively 23,681 18,988
Receivable, arbitration award -- 13,253
Inventories 30,114 23,653
Deferred income taxes 3,138 3,379
Prepaid and other current assets 637 168
------------ ------------
Total Current Assets 61,013 69,581
Property and equipment, less accumulated depreciation 32,173 18,966
Intangibles and other assets, net of amortization 47,132 39,443
Deferred income taxes 67 --
------------ ------------
TOTAL ASSETS $140,385 $127,990
============ ============
LIABILITIES
-----------
Current Liabilities:
Accounts payable $ 10,843 $ 8,667
Accrued liabilities 10,945 17,090
Current maturities of long-term debt 1,659 712
------------ ------------
Total Current Liabilities 23,447 26,469
Long-term debt 16,779 31,491
Deferred income taxes -- 379
Other long-term liabilities 2,360 2,103
------------ ------------
TOTAL LIABILITIES 42,586 60,442
------------ ------------
SHAREHOLDERS' EQUITY
--------------------
7% Cumulative Convertible Preferred Stock, $.01 par value; $25.00 stated
and liquidation value; 840,000 shares authorized; issued and outstanding,
240,000 and 241,000 shares in 2000 and 1999, respectively 2 2
(convertible into Class A shares at a ratio of 3.75 to one)
Class A and Class B Common Stock, $.01 par value;
150,000,000 and 75,000,000 shares authorized, respectively;
Class A-issued 12,261,999 and 11,923,319 in 2000 and 1999 123 119
Class B-issued 6,607,112 and 6,393,867 in 2000 and 1999 -
(convertible into Class A shares on a one-for-one basis) 66 64
Additional paid-in capital 40,864 34,532
Retained earnings 56,799 32,911
Accumulated comprehensive loss, net -- (25)
Less: Treasury Stock, 35,619 shares each of
Class A and Class B Common Stock, at cost (55) (55)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 97,799 67,548
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $140,385 $127,990
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
22
<PAGE> 23
<TABLE>
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net Revenues $145,970 $114,860 $ 98,486
------------ ------------ ------------
Costs and Expenses:
Manufacturing costs 63,446 61,415 56,483
Research and development 8,043 6,884 5,752
Selling and administrative 37,982 22,201 19,104
Amortization of intangible assets 2,307 244 254
------------ ------------ ------------
Total costs and expenses 111,778 90,744 81,593
------------ ------------ ------------
Operating income 34,192 24,116 16,893
------------ ------------ ------------
Other income (expense):
Arbitration award, net of expenses 6,059 12,723 --
Interest and other income 780 1,291 550
Interest expense (1,932) (498) (452)
------------ ------------ ------------
Total other income 4,907 13,516 98
------------ ------------ ------------
Income before income taxes 39,099 37,632 16,991
Provision for income taxes 14,791 14,292 5,687
------------ ------------ ------------
Net Income $ 24,308 $ 23,340 $ 11,304
============ ============ ============
Net Income per Common Share-Basic $ 1.28 $ 1.26 $ 0.60
============ ============ ============
Net Income per Common Share-Diluted $ 1.19 $ 1.17 $ 0.58
============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
23
<PAGE> 24
<TABLE>
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED March 31, 2000, 1999 AND 1998
(IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION>
ACCUMU-
LATED TOTAL
PRE- CLASS A CLASS B ADDITIONAL RETAINED COMPRE- SHARE-
FERRED COMMON COMMON PAID IN TREASURY EARNINGS HENSIVE HOLDERS'
STOCK STOCK STOCK CAPITAL STOCK (DEFICIT) LOSS, NET EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 -- -- -- 128 -- -- -- 128
17,206 shares of Class B -- 1 -- 69 -- -- -- 70
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 a
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,
46,478 shares of Class A less
88 shares repurchased -- -- -- 261 -- -- -- 261
74,129 shares of Class B -- -- 1 229 -- -- -- 230
Class A shares canceled - 6,146 shares -- -- -- -- -- -- -- --
Stock Split - payment of partial
shares from 1998 -- -- -- -- -- -- -- --
---------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1999 2 119 64 34,532 (55) 32,911 (25) 67,548
Comprehensive income
Net income -- -- -- -- -- 24,308 -- 24,308
Other comprehensive income, net of tax:
Reclassification adjustment for
gains on available-for-sale
securities included in income -- -- -- -- -- -- 25 25
---------------------
Total comprehensive income 24,333
Dividends paid on preferred stock -- -- -- -- -- (420) -- (420)
Product acquisition -- 3 -- 4,497 -- -- -- 4,500
Conversion of 33,997 shares of
Class B shares to Class A shares -- -- -- -- -- -- -- --
Conversion of 1,000 shares
of Preferred -- -- -- -- -- -- -- --
Stock Options exercised,
42,422 shares of Class A less
599 shares repurchased -- 1 -- 232 -- -- -- 233
247,242 shares of Class B -- -- 2 1,603 -- -- -- 1,605
---------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2000 $ 2 $123 $66 $40,864 $(55) $56,799 $ -- $97,799
=======================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
24
<PAGE> 25
<TABLE>
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(IN THOUSANDS)
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 24,308 $ 23,340 $11,304
Adjustments to reconcile net income
To net cash provided by operating activities:
Depreciation, amortization and other non-cash charges 4,480 1,875 1,888
Change in deferred taxes (205) (586) (1,524)
Change in deferred compensation 257 501 690
Changes in operating assets and liabilities:
Increase in receivables, net (4,693) (3,684) (6,725)
Decrease (increase) in receivable arbitration award 13,253 (13,253) --
Increase in inventories (6,461) (8,047) (2,820)
(Increase) decrease in prepaid and other assets (2,032) 193 (800)
(Decrease) increase in accounts payable and
accrued liabilities (3,969) 9,160 11,743
-------- -------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 24,938 9,499 13,756
-------- -------- -------
INVESTING ACTIVITIES
Purchase of property and equipment, net (15,380) (5,846) (2,453)
Sale (Purchase) of marketable securities 7,548 (7,564) --
Product acquisition (3,000) (36,140) --
-------- -------- -------
NET CASH USED IN INVESTING ACTIVITIES (10,832) (49,550) (2,453)
-------- -------- -------
FINANCING ACTIVITIES
Principal payments on long-term debt (16,698) (558) (549)
Proceeds from credit facility 2,000 25,000 --
Dividends paid on Preferred Stock (420) (422) (422)
Exercise of Common Stock options 1,838 490 198
-------- -------- -------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (13,280) 24,510 (773)
-------- -------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 826 (15,541) 10,530
CASH AND CASH EQUIVALENTS AT:
BEGINNING OF YEAR 2,617 18,158 7,628
-------- -------- -------
END OF YEAR $ 3,443 $ 2,617 $18,158
======== ======== =======
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Portion of product acquisition financed through
issuance of:
Short-term debt $ 933
Common stock 4,500
Portion of building acquired through proceeds
from a term loan $ 2,300 $ 3,500
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
25
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated financial statements include the accounts of KV
Pharmaceutical Company and its wholly-owned subsidiaries (the "Company").
All material intercompany accounts and transactions have been eliminated in
consolidation.
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 $2,352 at March 31,
2000 and $1,778 at March 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 over 40 years. The Micro-K(R) and
PreCare(R) product acquisitions are being amortized on a straight line basis
over 20 years. All other intangible assets and deferred charges are being
amortized over periods varying from 5 to 17 years on a straight line basis.
The Company reviews intangible assets for possible impairment if there is a
significant event that detrimentally effects 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 occurred through March 31, 2000.
26
<PAGE> 27
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 due.
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 liability method, in which
deferred income taxes are recognized as a result of temporary differences
between the financial reporting basis and tax basis of 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 option
grants in accordance with Accounting Principles Board Opinion No. 25, ("APB
Opinion No. 25") "Accounting for Stock Issued to Employees". 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
27
<PAGE> 28
account for 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 13.
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 all long term
financial instruments approximates their fair value because their terms are
similar to those which can be obtained for similar financial instruments in
the current marketplace.
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.
RECLASSIFICATIONS
-----------------
Certain amounts from the prior years' financial statements have
been reclassified to conform to the current year presentation.
2. BUSINESS OPERATIONS
-------------------
The Company and its subsidiaries develop, manufacture and market
technology-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.
The Company extends unsecured credit to its customers. The Company
had sales to two customers that aggregated 30%, 36% and 26% for the years ended
March 31, 2000, 1999 and 1998, respectively. In addition, the balance due from
these customers represented approximately 27% and 36% of consolidated accounts
receivable as of March 31, 2000 and 1999.
3. ACQUISITIONS
------------
(a) On August 2, 1999, the Company acquired the world-wide rights
and trademark for the prescription prenatal product, PreCare(R) from UCB
Pharma for $8.4 million. The purchase price was funded by a $3 million cash
payment, a $0.9 million note and $4.5 million in Class A Common Stock. The
intangible asset (product rights) related to the acquisition is being
amortized on the straight-line basis over a period of 20 years. The "pro
forma" results related to the PreCare(R) product are not material to the
financial statements for comparative purposes.
28
<PAGE> 29
(b) In the fourth quarter of fiscal 1999, the Company acquired
the world-wide rights and trademark to Micro-K(R) Extendcaps from
Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home
Products Corporation for a cash payment of $36 million, consisting of an $11
million payment from available cash and $25 million 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 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 product line
had occurred on April 1, 1997, and is not intended to project the Company's
results of operations for any future period (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1999 1998
-------------------------
<S> <C> <C>
Total Revenues as reported $114,860 $ 98,486
Total Revenues - Pro forma 133,372 124,322
Net Income as reported 23,340 11,304
Net Income - Pro forma 26,591 18,437
Earnings Per Share:
Basic as reported $1.26 $0.60
===== =====
Diluted as reported $1.17 $0.58
===== =====
Basic - Pro forma $1.44 $1.00
===== =====
Diluted - Pro forma $1.33 $0.94
===== =====
</TABLE>
4. INVENTORIES
-----------
Inventories as of March 31, consist of:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Finished goods $15,990 $11,733
Work-in-process 2,544 2,283
Raw materials 12,642 10,185
------- -------
31,176 24,201
Reserves for obsolescence (1,062) (548)
------- -------
$30,114 $23,653
======= =======
</TABLE>
5. MARKETABLE SECURITIES
---------------------
There were no marketable securities at March 31, 2000.
The composition of the available-for-sale investments portfolio at
March 31, 1999 was:
<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>
6. 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.
29
<PAGE> 30
Changes in accumulated comprehensive income, net for the year ended
March 31, 2000 are as follows:
<TABLE>
<CAPTION>
TAX
BEFORE-TAX BENEFIT NET-OF-TAX
AMOUNT (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>
Changes in accumulated comprehensive loss, net for the year end
March 31, 1999 are as follows:
<TABLE>
<CAPTION>
TAX
BEFORE-TAX BENEFIT NET-OF-TAX
AMOUNT (EXPENSE) 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>
7. PROPERTY AND EQUIPMENT
----------------------
Property and equipment as of March 31, consist of:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Land and improvements $ 2,083 $ 2,056
Building and building improvements 10,504 9,626
Machinery and equipment 18,320 14,989
Office furniture and equipment 4,450 3,830
Leasehold improvements 3,145 2,874
Construction-in-progress (estimated costs
to complete at March 31, 2000 was $1,572) 13,093 2,840
-------- --------
51,595 36,215
Less accumulated depreciation and
amortization (19,422) (17,249)
-------- --------
Net property and equipment $ 32,173 $ 18,966
======== ========
</TABLE>
30
<PAGE> 31
Estimated useful lives:
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
Purchases of property and equipment were $15,380 and $8,146 for
fiscal years 2000 and 1999, respectively. Depreciation and amortization of
property and equipment was $2,173, $1,616 and $1,634 for 2000, 1999 and 1998,
respectively.
8. INTANGIBLES AND OTHER ASSETS
----------------------------
Intangibles and other assets as of March 31, consist of:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Goodwill $ 2,139 $ 2,139
Product rights 44,573 36,140
Financing charges 369 401
Cash surrender value of life insurance
and split-dollar life insurance 1,592 943
Trademarks and patents 1,721 1,047
Deposits 534 341
Other 291 291
------- -------
51,219 41,302
Less accumulated amortization (4,087) (1,859)
------- -------
Net intangibles and other assets $47,132 $39,443
======= =======
</TABLE>
Amortization of goodwill is being charged to operations at $55 per
year. Amortization of product rights and all other deferred charges was
$2,252, $188 and $199 for 2000, 1999 and 1998, respectively.
9. ACCRUED LIABILITIES
-------------------
Accrued liabilities as of March 31, consist of:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Salaries, wages, incentives
and benefits $ 4,451 $ 3,482
Interest 87 125
Income taxes 3,045 7,855
Professional fees 416 764
Revenue sharing (see Note 17) 1,142 3,300
Promotions 1,486 440
Other 318 1,124
------- -------
$10,945 $17,090
======= =======
</TABLE>
31
<PAGE> 32
10. LONG TERM DEBT
--------------
Long-term debt as of March 31, consists of:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Revolving credit line $11,000 $25,000
Industrial revenue bonds 1,505 1,830
Building mortgages 4,985 5,372
PreCare - UCB 948 --
------- -------
18,438 32,202
Less current portion (1,659) (711)
------- -------
Long-term debt $16,779 $31,491
======= =======
</TABLE>
As of March 31, 2000, 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 6.07% plus
200 basis points or 8.07% at March 31, 2000. At March 31, 2000, the Company
had cash borrowing of $11,000 and $2,623 in open letters of credit issued
under this facility. The agreement includes covenants that impose minimum
levels of earnings before interest, taxes, depreciation and amortization, a
maximum funded debt ratio, and limit capital expenditures and dividend
payments. As of March 31, 2000 the Company was in compliance with all of
its covenants.
The industrial revenue bonds, which bear interest at 7.35% per
annum, mature serially through 2005 and are collateralized by certain
property and equipment, as well as through a letter of credit, which may only
be accessed in case of default on the bonds. The bonds do not allow the
holder to require the Company to redeem the bonds.
The building mortgages bear interest at 8.53% and 7.95% with
monthly principal payments of $19 and $13 plus interest through June 18, 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.
The aggregate maturities of long-term debt as of March 31, 2000 are
as follows:
2001 $ 1,659
2002 11,712
2003 2,851
2004 2,012
2005 205
The Company paid interest of $1,954, $446, and $465 during the
years ended March 31, 2000, 1999 and 1998, respectively.
11. COMMITMENTS AND CONTINGENCIES
-----------------------------
LEASES
The Company leases manufacturing, office and warehouse facilities,
equipment and automobiles under operating leases expiring through 2012. Total
rent expense for the years ended March 31, 2000,
32
<PAGE> 33
1999 and 1998 was $2,185, $1,457 and $1,077, respectively. Future minimum
lease commitments under non-cancelable operating leases are as follows:
2001 $1,983
2002 2,246
2003 2,167
2004 1,027
2005 914
Later Years 324
CONTINGENCIES
The Company currently carries product liability coverage of ten
million dollars per occurrence and ten million dollars 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
$256, $501 and $690 under this agreement in 2000, 1999 and 1998,
respectively.
12. INCOME TAXES
------------
The fiscal 2000 and 1999 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.
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
PROVISION
Current
Federal $13,471 $13,373 $ 6,233
State 1,525 1,506 978
------- ------- -------
14,996 14,879 7,211
------- ------- -------
Deferred
Federal (184) (528) (1,365)
State (21) (58) (159)
------- ------- -------
(205) (586) (1,524)
------- ------- -------
$14,791 $14,293 $ 5,687
======= ======= =======
</TABLE>
33
<PAGE> 34
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>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Computed income tax expense
at statutory rate $13,684 $13,171 $ 5,947
Change in valuation allowance -- -- (1,568)
State income taxes, less
Federal income tax benefit 1,090 1,070 696
Other 17 52 612
------- ------- -------
Provisions for income taxes $14,791 $14,293 $ 5,687
======= ======= =======
</TABLE>
As of March 31, 2000, and 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>
2000 1999
CURRENT NON-CURRENT CURRENT NON-CURRENT
---------------------------- --------------------------
<S> <C> <C> <C> <C>
Fixed asset basis differences $ -- $(818) $ -- $(1,167)
Reserve for inventory and receivables 1,970 -- 2,281 --
Vacation pay reserve 383 -- 469 --
Deferred compensation -- 885 -- 788
Other 785 -- 629 --
------ ----- ------ -------
Net deferred tax asset (liability) $3,138 $ 67 $3,379 $ (379)
====== ===== ====== =======
</TABLE>
The Company paid income taxes of $19,754, $9,213 and $4,754 during
the years ended March 31, 2000, 1999 and 1998, respectively.
13. EMPLOYEE BENEFITS
-----------------
STOCK OPTION PLAN
The Company established the KV Pharmaceutical Company Incentive
Stock Option Plan for key employees and reserved 3 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.
34
<PAGE> 35
The following summary shows the transactions for the fiscal years
2000, 1999 and 1998 under option arrangements:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------- -------------------------
Average Average
No. of Price Per No. of Price Per
Shares Share Shares Share
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
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
--------- ------ --------- ------
Balance, March 31, 1999 1,855,175 9.67 1,020,409 8.58
Options granted 579,725 16.67 -- --
Options becoming exercisable -- -- 470,773 12.56
Options exercised (289,065) 6.37 (289,126) 6.37
Options canceled (87,405) 14.61 (15,880) 14.25
--------- ------ --------- ------
Balance, March 31, 2000 2,058,430 $11.85 1,186,176 $10.66
========= ====== ========= ======
</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 $3.66 for A options and $1.40 for B
options in fiscal 2000, $3.48 for A options and $2.21 for B options in fiscal
1999, and $9.17 for A options and $5.29 for B options in fiscal 1998. The
weighted-average significant assumptions used to determine those values using
the Black-Scholes option pricing model for fiscal 2000, 1999 and 1998,
respectively, were: volatility of .6630, .6630, .6700; dividend yield of 0%
in all three periods; average risk-free interest rate of return of 6.5%, 5.0%
and 6.3%; expected option lives ranging from 3 to 10 years:
35
<PAGE> 36
The following table summarizes information about stock
options outstanding at March 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- --------------------------------
Range of Number Weighted Average Weighted Number Weighted
Exercise Outstanding Life Average Exercisable Average
Prices at 3/31/00 Remaining Exercise Price at 3/31/00 Exercise Price
------ ---------- --------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.84 - $ 5.00 135,379 3 Years $ 3.92 91,876 $ 3.68
$ 5.01 - $ 10.00 658,697 3 Years $ 7.36 461,786 $ 7.41
$10.01 - $ 15.00 612,635 5 Years $13.07 365,368 $12.25
$15.01 - $ 20.00 603,159 7 Years $16.41 262,296 $16.39
$20.01 - $ 26.88 48,438 10 Years $23.05 4,850 $23.05
</TABLE>
The pro-forma effect on earnings for the year ended March 31,
2000, 1999 and 1998 of the method consistent with SFAS No. 123 would be to
reduce reported net income by approximately $1.0 million, $0.8 million and
$2.2 million, respectively, to approximately $23.3 million, $22.5 million and
$9.1 million.
The pro-forma effect on basic earnings per share for the
years ended March 31, 2000, 1999 and 1998 of this method would be to reduce
net income per share by $.05 per share, $.05 per share and $.12 per share,
respectively, to $1.23 per share, $1.21 per share and $.48 per share.
The pro-forma effect on diluted earnings per share for the
years ended March 31, 2000, 1999 and 1998 of this method would be to reduce
net income per share by $.05 per share, $.04 per share and $.12 per share,
respectively, to $1.14 per share, $1.13 per share and $.46 per share.
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 $175 for fiscal 2000 and $100 in 1999 and 1998. 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 $586, $421 and $222 were made
in 2000, 1999 and 1998, 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 $119, $86 and
$80 in 2000, 1999 and 1998, 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, 2000 and March 31, 1999, 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 $2,647, $1,390 and $1,095 in fiscal
2000, 1999 and 1998, respectively.
36
<PAGE> 37
14. RELATED PARTY TRANSACTIONS
--------------------------
A director of the Company was associated with a law firm
that rendered various legal services to the Company. The Company paid the firm
approximately $132, $221 and $239 during the years ended March 31, 2000, 1999
and 1998, 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, 2000, 1999 and
1998 totaled $246, $241 and $237, respectively.
15. EQUITY TRANSACTIONS
-------------------
As of March 31, 2000, the Company had 240,000 shares of 7%
Cumulative Convertible Preferred Stock (par value $.01 per share) outstanding
at a stated value of $25 per share. The Preferred Stock is non-voting with
dividends payable quarterly. The Preferred Stock is redeemable at its stated
value. Each share of Preferred Stock is convertible into Class A Common
Stock at a conversion price of $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, 2000 and 1999 were $2,204 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.
Holders of Class A Common Stock are entitled to receive
dividends per share equal to 120% of the dividends per share paid on the
Class B Common Stock and have one-twentieth vote per share in the election of
directors and on other matters.
Under the terms of the Company's current loan agreement (see
Note 10), the Company has limitations on paying dividends, except in stock, on
its Class A and 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.
37
<PAGE> 38
16. EARNINGS PER SHARE
------------------
The computation of basic and diluted earnings per share is
as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net income $24,308 $23,340 $11,304
Preferred Stock dividends
(420) (422) (422)
------- ------- -------
Numerator for basic earnings per
share--income available to common
shareholders 23,888 22,918 10,882
Effect of dilutive securities:
Preferred Stock dividends 420 422 422
------- ------- -------
Numerator for diluted earnings per
share--income available to common share-
holders after assumed conversions $24,308 $23,340 $11,304
======= ======= =======
Denominator:
Denominator for basic earnings per
share--weighted-average shares 18,650 18,201 18,094
------- ------- -------
Effect of dilutive securities:
Employee stock options 802 866 643
Convertible Preferred Stock 900 904 904
------- ------- -------
Dilutive potential Common Shares 1,702 1,770 1,547
------- ------- -------
Denominator for diluted earnings
per share--adjusted weighted-average
shares and assumed conversions 20,352 19,971 19,641
======= ======= =======
Basic Earnings per Share <F1>: $ 1.28 $ 1.26 $ 0.60
======= ======= =======
Diluted Earnings per Share <F1>,<F2>: $ 1.19 $ 1.17 $ 0.58
======= ======= =======
<FN>
<F1> 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.
<F2> Employee stock options to purchase 71,500 and 58,838 shares of Class A
Common Stock at March 31, 2000 and 1998, respectively 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
two 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.
</TABLE>
38
<PAGE> 39
17. AGREEMENTS
----------
In January 1997, the Company concluded an agreement with
Roche Holdings, Ltd. of Basel, Switzerland ("Roche"), which gave KV the right
to market a one dose vaginal anti-fungal product in North America and the
exclusive right to market or license the 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.
18. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
---------------------------------------
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year
----------- ----------- ----------- ----------- ----
<S> <C> <C> <C> <C> <C>
FISCAL 2000
-----------
Net Sales $32,794 $36,011 $38,792 $38,373 $145,970
Gross Profit 16,262 20,318 22,558 23,386 82,524
Pretax Income <Fa> 5,452 6,848 9,212 17,587 39,099
Net Income <Fa> 3,379 4,247 5,714 10,968 24,308
Earnings Per Share-Basic <Fb> 0.18 0.22 0.30 0.58 1.28
Earnings Per Share-Diluted <Fb> 0.17 0.21 0.28 0.53 1.19
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 <Fa> 4,150 4,956 6,454 22,073 37,633
Net Income <Fa> 2,570 3,062 4,020 13,688 23,340
Earnings Per Share-Basic <Fb> 0.14 0.16 0.21 0.75 1.26
Earnings Per Share-Diluted <Fb> 0.13 0.15 0.20 0.69 1.17
<FN>
NOTE:
-----
<Fa> The fourth quarter of fiscal 2000 includes a non-recurring gain
associated with a $3.9 million arbitration award net of expenses and
taxes (see Note 20). The fourth quarter of fiscal 1999 includes a
non-recurring gain associated with a $7.9 million arbitration award net
of expenses and taxes (see Note 20) and a $3.0 million non-refundable
payment associated with an agreement with Roche Holdings, Ltd. (see Note
17).
<Fb> 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.
</TABLE>
39
<PAGE> 40
19. 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 the requirements of this
statement.
The reportable segments of the Company as of March 31, 2000,
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 not allocated to segments. The
majority of revenues in contract services are intersegment revenues between
that segment and the branded products and specialty generics segments which are
not reportable as revenues under generally accepted accounting principles. All
intersegment revenues are recorded at cost, with no markup. Intersegment
receivables are excluded from identifiable assets within each segment.
Revenues and profits for these segments are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED BRANDED SPECIALTY SPECIALTY CONTRACT ALL
MARCH 31 PRODUCTS GENERICS MATERIALS SERVICES OTHER ELIMINATIONS CONSOLIDATED
(THOUSANDS
OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Revenues 2000 $23,469 $101,342 $17,534 $38,651 $ 257 $(35,283) $145,970
1999 1,795 91,833 13,730 33,235 3,445 (29,178) 114,860
1998 -- 79,193 11,257 27,063 3,517 (22,544) 98,486
-----------------------------------------------------------------------------------------------------------------------
Income before Taxes 2000 5,307 48,862 3,823 917 (19,810) -- 39,099
1999 (58) 36,351 2,149 1,390 (2,200) -- 37,632
1998 -- 29,126 1,118 1,204 (14,457) -- 16,991
-----------------------------------------------------------------------------------------------------------------------
Identifiable Assets 2000 9,237 27,927 6,939 32,605 64,835 (1,158) 140,385
1999 3,933 23,314 7,403 25,713 68,785 (1,158) 127,990
1998 -- 19,003 5,706 12,155 32,655 (1,158) 68,361
-----------------------------------------------------------------------------------------------------------------------
Property and
Equipment Additions 2000 119 338 208 13,172 1,542 -- 15,379
1999 1,561 1,654 498 1,355 3,078 -- 8,146
1998 -- 24 72 1,204 4,653 -- 5,953
-----------------------------------------------------------------------------------------------------------------------
Depreciation and
Amortization 2000 50 148 140 1,683 2,459 -- 4,480
1999 -- 74 86 1,457 243 -- 1,860
1998 -- 78 77 1,479 254 -- 1,888
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
Consolidated revenues are principally derived from customers
in North America.
Property and equipment is all located in St. Louis, Missouri.
20. NONRECURRING GAIN
-----------------
40
<PAGE> 41
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 $13,253. 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 was paid the
arbitration in June, 1999. In January 2000, the Company received an
additional award of $6,973 covering all open monetary issues related to the
contract. The awards, net of applicable income taxes and expenses represent
$.19 and $.40 per common share on a diluted basis for the years ended March
31, 2000 and 1999, respectively, and are reflected in Other Income in the
Statements of Income.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
-----------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information contained under the caption "INFORMATION
CONCERNING NOMINEE AND DIRECTORS CONTINUING IN OFFICE" in the Company's
definitive proxy statement to be filed pursuant to Regulation 14(a) for its
2000 Annual Meeting of Shareholders, which involves the election of a director,
is incorporated herein by this reference. Also see Item 4(a) of Part I
hereof.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information contained under the captions "EXECUTIVE
COMPENSATION" and "INFORMATION AS TO STOCK OPTIONS" in the Company's definitive
proxy statement to be filed pursuant to Regulation 14(a) for its 2000 Annual
Meeting of Shareholders, which involves the election of a director, is
incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT
----------
The information contained under the caption "SECURITY OWNERSHIP
OF PRINCIPAL HOLDERS AND MANAGEMENT" in the Company's definitive proxy
statement to be filed pursuant to Regulation 14(a) for its 2000 Annual Meeting
of Shareholders, which involves the election of a director is incorporated
herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information contained under the caption "TRANSACTIONS WITH
ISSUER" in its definitive proxy statement to be filed pursuant to Regulation
14(a) for its 2000 Annual Meeting of Shareholders, which involves the election
of a director, is incorporated herein by this reference.
41
<PAGE> 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
Page
(a) 1. Financial Statements:
---------------------
The following consolidated financial
statements of the Company are included
in Part II, Item 8:
Report of Independent Certified Public Accountants 21
Consolidated Balance Sheets as of
March 31, 2000 and 1999 22
Consolidated Statements of Income
for the Years Ended March 31, 2000, 1999 and 1998 23
Consolidated Statements of Shareholders'
Equity for the Years Ended March 31, 2000,
1999 and 1998 24
Consolidated Statements of Cash Flows
for the Years Ended March 31, 2000, 1999 and 1998 25
Notes to Financial Statements 26-41
2. Financial Statements Schedules:
-------------------------------
Report of Independent Certified Public Accountants
regarding Financial Statement Schedules 43
Schedule II - Valuation and Qualifying Account 44
(b) No reports on Form 8-K were filed by the Company
in the fourth quarter of fiscal 2000.
42
<PAGE> 43
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
of KV Pharmaceutical Company:
The audits referred to in our report dated May 10, 2000 relating to the
consolidated financial statements of KV Pharmaceutical Company which is
contained in Item 8 of this Form 10-K included the audit of the financial
statement schedule listed in the accompanying index. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based upon our audits.
In our opinion such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO SEIDMAN, LLP
St. Louis, Missouri
May 10, 2000
43
<PAGE> 44
2. Financial Statement Schedules:
------------------------------
<TABLE>
<CAPTION>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance at Additions charged Amounts Balance
beginning to costs and charged to at end
of year expenses reserves of year
------- -------- -------- -------
<S> <C> <C> <C> <C>
Year Ended March 31, 1998:
Allowance for doubtful accounts $ 129,054 $1,086,961 $ 883,771 $ 332,244
Inventory obsolescence 296,322 1,363,908 1,298,479 361,751
---------- ---------- ---------- ----------
$ 425,376 $2,450,869 $2,182,250 $ 693,995
========== ========== ========== ==========
Year Ended March 31, 1999:
Allowance for doubtful accounts $ 332,244 $ 412,566 $ 113,804 $ 631,006
Inventory obsolescence 361,751 1,031,569 845,032 548,288
---------- ---------- ---------- ----------
$ 693,995 $1,444,135 $ 958,836 $1,179,294
========== ========== ========== ==========
Year Ended March 31, 2000:
Allowance for doubtful accounts $ 631,006 $1,931,227 $ 103,195 $2,459,038
Inventory obsolescence 548,288 1,502,323 988,538 1,062,073
---------- ---------- ---------- ----------
$1,179,294 $3,433,550 $1,091,733 $3,521,111
========== ========== ========== ==========
</TABLE>
Financial Statements of KV Pharmaceutical Company (separately) are omitted
because KV is primarily an operating company and its subsidiaries included in
the Financial Statements are wholly-owned and are not materially indebted to
any person other than through the ordinary course of business.
3. Exhibits:
---------
See Exhibit Index on pages 46 through 52 of this Report. Management
contracts and compensatory plans are designated on the Exhibit Index.
44
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KV PHARMACEUTICAL COMPANY
Date: June 2, 2000 By /s/ Marc S. Hermelin
-------------------------------
Vice Chairman of the Board
(Principal Executive Officer)
Date: June 2, 2000 By /s/ Gerald R. Mitchell
-------------------------------
Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the dates indicated by the following persons
on behalf of the Company and in their capacities as members of the Board of
Directors of the Company:
Date: June 2, 2000 By /s/ Marc S. Hermelin
-------------------------------
Marc S. Hermelin
Date: June 2, 2000 By /s/ Victor M. Hermelin
-------------------------------
Victor M. Hermelin
Date: June 2, 2000 By /s/ Garnet E. Peck, Ph.D.
-------------------------------
Garnet E. Peck, Ph.D.
Date: June 5, 2000 By /s/ Norman D. Schellenger
-------------------------------
Norman D. Schellenger
Date: June 5, 2000 By /s/ Alan G. Johnson
-------------------------------
Alan G. Johnson
45
<PAGE> 46
<TABLE>
EXHIBIT INDEX
-------------
<CAPTION>
Exhibit No. Description
<C> <S>
3(a) The Company's Certificate of Incorporation, which was filed as
Exhibit 3(a) to the Company's Annual Report on Form 10-K for the
year ended March 31, 1981, is incorporated herein by this
reference.
3(b) Certificate of Amendment to Certificate of Incorporation of the
Company, effective March 7, 1983, which was filed as Exhibit 3(c)
to the Company's Annual Report on Form 10-K for the year ended
March 31, 1983, is incorporated herein by this reference.
3(c) Certificate of Amendment to Certificate of Incorporation of the
Company, effective June 9, 1987, which was filed as Exhibit 3(d)
to the Company's Annual Report on Form 10-K for the year ended
March 31, 1987, is incorporated herein by this reference.
3(d) Certificate of Amendment to Certificate of Incorporation of the
Company, effective September 24, 1987, which was filed as Exhibit
3(f) to the Company's Annual Report on Form 10-K for the year
ended March 31, 1988, is incorporated herein by this reference.
3(e) Certificate of Amendment to Certificate of Incorporation of the
Company, which was filed as Exhibit 3(e) to the Company's Annual
Report on Form 10-K for the year ended March 31, 1996, is
incorporated herein by this reference.
3(f) Certificate of Amendment to Certificate of Incorporation of the
Company, which was filed as Exhibit 3(f) to the Company's Annual
Report on Form 10-K for the year ended March 31, 1996, is
incorporated herein by this reference.
3(g) Bylaws of the Company, as amended through November 18, 1982, which
was filed as Exhibit 3(e) to the Company's Annual Report on Form
10-K for the year ended March 31, 1993, is incorporated herein by
this reference.
3(h) Amendment to Bylaws of the Company, which was filed as Exhibit
3(h) to the Company's Annual Report on Form 10-K for the year
ended March 31, 1996, is incorporated herein by this reference.
4(a) Certificate of Designation of Rights and Preferences of 7%
Cumulative Convertible preferred stock of the Company, effective
June 9, 1987, and related Certificate of Correction, dated June
17, 1987, which was filed as Exhibit 4(f) to the Company's Annual
Report on Form 10-K for the year ended March 31, 1987, is
incorporated herein by this reference.
46
<PAGE> 47
EXHIBIT INDEX
-------------
<CAPTION>
Exhibit No. Description
<C> <S>
4(b) Loan Agreement dated as of November 1, 1989, with the Industrial
Development Authority of the County of St. Louis, Missouri,
regarding private activity refunding and revenue bonds issued by
such Authority, including form of Promissory Note executed in
connection therewith, which was filed as Exhibit 4(b) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1989, is incorporated herein by this reference.
4(c) Loan Agreement dated June 18, 1997 between the Company and its
subsidiaries and LaSalle National Bank ("LaSalle"), which was
filed as Exhibit 4(i) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1997, is incorporated herein by this
reference.
4(d) Revolving Note, dated June 18, 1997, by the Company and its
subsidiaries in favor of LaSalle, which was filed as Exhibit 4(j)
to the Company's Annual Report on Form 10-K for the year ended
March 31, 1997, is incorporated herein by this reference.
4(e) Term Note, dated June 24, 1997, by the Company and its
subsidiaries in favor of LaSalle, which was filed as Exhibit 4(k)
to the Company's Annual Report on Form 10-K for the year ended
March 31, 1997, is incorporated herein by this reference.
4(f) Reimbursement Agreement dated as of October 16, 1997, between the
Company and LaSalle, which was filed as Exhibit 4(f) to the
Company's Annual Report on Form 10-K for the year ended March 31,
1998, is incorporated herein by this reference.
4(g) Deed of Trust and Security Agreement dated as of October 16, 1997,
between the Company and LaSalle, which was filed as Exhibit 4(g)
to the Company's Annual Report on Form 10-K for the year ended
March 31, 1998, is incorporated herein by this reference.
4(h) First Amendment, dated as of October 28, 1998, to Loan Agreement
between the Company and its subsidiaries and LaSalle, which was
filed as Exhibit 4(h) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1999, is incorporated herein by this
reference.
4(i) Second Amendment, dated as of March 11, 1999, to Loan Agreement
between the Company and its subsidiaries and LaSalle, which was
filed as Exhibit 4(i) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1999, is incorporated herein by this
reference.
4(j) Third Amendment, dated June 22, 1999, to Loan Agreement between
the Company and its subsidiaries and LaSalle, filed herewith.
47
<PAGE> 48
EXHIBIT INDEX
-------------
<CAPTION>
Exhibit No. Description
<C> <S>
4(k) Fourth Amendment, dated December 17, 1999, to Loan Agreement between
the Company and its subsidiaries and LaSalle, filed herewith.
10(a)<F*> Stock Option Agreement between the Company and Marc S. Hermelin,
Vice Chairman and Chief Executive Officer, dated February 18,
1986, is incorporated herein by this reference.
10(b)<F*> First Amendment to and Restatement of the KV Pharmaceutical 1981
Employee Incentive Stock Option Plan, dated March 9, 1987 (the
"Restated 1981 Option Plan"), which as filed as Exhibit 10(t) to
the Company's Annual Report on Form 10-K for the year ended March
31, 1988, is incorporated herein by this reference.
10(c)<F*> Second Amendment to the Restated 1981 Option Plan, dated June 12,
1987, which was filed as Exhibit 10(u) to the Company's Annual
Report on Form 10-K for the year ended March 31, 1988, is
incorporated herein by this reference.
10(d)<F*> Revised Form of Stock Option Agreement, effective June 12, 1987,
for the Restated 1981 Option Plan, which was filed as Exhibit
10(v) to the Company's Annual Report on Form 10-K for the year
ended March 31, 1988, is incorporated herein by this reference.
10(e)<F*> Consulting Agreement between the Company and Victor M. Hermelin,
Chairman of the Board, dated October 30, 1978, as amended October
30, 1982, and Employment Agreement dated February 20, 1974,
referred to therein (which was filed as Exhibit 10(m) to the
Company's Annual Report on Form 10-K for the year ended March 31,
1983) and subsequent Amendments dated as of August 12, 1986, which
was filed as Exhibit 10(f) to the Company's Annual Report on Form
10-K for the year ended March 31, 1987, and dated as of September
15, 1987 (which was filed as Exhibit 10(s) to the Company's Annual
Report on Form 10-K for the year ended March 31, 1988), and dated
October 25, 1988 (which was filed as Exhibit 10(n) to the
Company's Annual Report on Form 10-K for the year ended March 31,
1989), and dated October 30, 1989 (which was filed as Exhibit
10(n) to the Company's Annual Report on Form 10-K for the year
ended March 31, 1990), and dated October 30, 1990 (which was filed
as Exhibit 10(n) to the Company's Annual Report on Form 10-K for
the year ended March 31, 1991), and dated as of October 30, 1991
(which was filed as Exhibit 10(i) to the Company's Annual Report
on Form 10-K for the year ended March 31, 1992), are incorporated
herein by this reference.
<FN>
-----------------------------
<F*> Management contract or compensation plan.
48
<PAGE> 49
EXHIBIT INDEX
-------------
<CAPTION>
Exhibit No. Description
<C> <S>
10(f)<F*> Restated and Amended Employment Agreement between the Company and
Gerald R. Mitchell, Vice President, Finance, dated as of March 31,
1994, is incorporated herein by this reference.
10(g)<F*> Employment Agreement between the Company and Raymond F. Chiostri,
Corporate Vice-President and President-Pharmaceutical Division,
which was filed as Exhibit 10(l) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1992, is incorporated
herein by this reference.
10(h) Lease of the Company's facility at 2503 South Hanley Road, St.
Louis, Missouri, and amendment thereto, between the Company as
Lessee and Marc S. Hermelin as Lessor, which was filed as Exhibit
10(n) to the Company's Annual Report on Form 10-K for the year
ended March 31, 1983, is incorporated herein by this reference.
10(i) Amendment to the Lease for the facility located at 2503 South
Hanley Road, St. Louis, Missouri, between the Company as Lessee
and Marc S. Hermelin as Lessor, which was filed as Exhibit 10(p)
to the Company's Annual Report on Form 10-K for the year ended
March 31, 1992, is incorporated herein by this reference.
10(j) Amendment to Lease Agreement, dated as of September 30, 1985,
between the Industrial Development Authority of the County of St.
Louis, Missouri, as Lessor and KV Pharmaceutical Company as
Lessee, regarding lease of facility located at 2303 Schuetz Road,
St. Louis County, Missouri, which was filed as Exhibit 10(q) to
the Company's Report on Form 10-Q for the quarter ended December
31, 1985, is incorporated herein by this reference.
10(k)<F*> KV Pharmaceutical Company Fourth Restated Profit Sharing Plan and
Trust Agreement dated September 18, 1990, which was filed as
Exhibit 4.1 to the Company's Registration Statement on Form S-8
No. 33-36400, is incorporated herein by this reference.
10(l)<F*> First Amendment to the KV Pharmaceutical Company Fourth Restated
Profit Sharing Plan and Trust dated September 18, 1990, is
incorporated herein by this reference.
10(m)<F*> KV Pharmaceutical Company 1991 Incentive Stock Option Plan,
adopted as of October 7, 1991, which was filed as Exhibit 4 to the
Company's Form S-8 Registration Statement No. 33-44927, filed
January 6, 1992, is incorporated herein by this reference.
<FN>
-----------------------------
<F*> Management contract or compensation plan.
49
<PAGE> 50
EXHIBIT INDEX
-------------
<CAPTION>
Exhibit No. Description
<C> <S>
10(n) Consent Decree and Civil Actions Nos. 4:93CV00918 and 4:93CV00919
filed June 14, 1993, in connection with Complaint of Forfeiture on
behalf of FDA, which was filed as Exhibit 10(s) to the Company's
Annual Report on Form 10-K for the year ended March 31, 1993, is
incorporated herein by this reference.
10(o) Modification of Consent Decree of Condemnation and Permanent
Injunction filed December 13, 1993, which was filed as Exhibit
10(r) to the Company's Annual Report on Form 10-K for the year
ended March 31, 1994, is incorporated herein by this reference.
10(p) Second Modification of Consent Decree of Condemnation and
Permanent Injunction filed April 6, 1994, which was filed as
Exhibit 10(s) to the Company's Annual Report on Form 10-K for the
year ended March 31, 1994, is incorporated herein by this
reference.
10(q)<F*> Employment Agreement between the Company and Marc S. Hermelin,
Vice-Chairman, dated November 15, 1993, which was filed as Exhibit
10(u) to the Company's Annual Report on Form 10-K for the year
ended March 31, 1994, is incorporated herein by this reference.
10(r)<F*> Amendment to Consulting Agreement between the Company and Victor
M. Hermelin, Chairman of the Board, dated October 30, 1978, which
was filed as Exhibit 10(v) to the Company's Annual Report on Form
10-K for the year ended March 31, 1994, is incorporated herein by
this reference.
10(s)<F*> Stock Option Agreement dated June 1, 1995, granting stock option
to Marc S. Hermelin, which was filed as Exhibit 10(w) to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996, is incorporated herein by this reference.
10(t)<F*> Second Amendment dated as of June 1, 1995, to Employment Agreement
between the Company and Marc S. Hermelin, which was filed as
Exhibit 10(x) to the Company's quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, is incorporated herein by this
reference.
10(u)<F*> Amendment to and Restatement of the KV Pharmaceutical Company's
1991 Incentive Stock Option Plan dated as of November 1, 1995,
which was filed as Exhibit 10(y) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1996, is incorporated
herein by this reference.
10(v)<F*> Stock Option Agreement dated as of January 22, 1996, granting
stock options to MAC & Co., which was filed as Exhibit 10(z) to
the Company's Annual Report on Form 10-K for the year ended March
31, 1996, is incorporated herein by this reference.
<FN>
-----------------------------
<F*> Management contract or compensation plan.
50
<PAGE> 51
EXHIBIT INDEX
-------------
<CAPTION>
Exhibit No. Description
<C> <S>
10(w)<F*> Third Amendment dated as of November 22, 1995, to Employment
Agreement between the Company and Marc S. Hermelin, which was
filed as Exhibit 10(aa) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1996, is incorporated herein by
this reference.
10(x)<F*> Stock Option Agreement dated as of November 22, 1995, granting a
stock option to Victor M. Hermelin, which was filed as Exhibit
10(bb) to the Company's Annual Report on Form 10-K for the year
ended March 31, 1996, is incorporated herein by this reference.
10(y)<F*> Fourth Amendment to and Restatement, dated as of January 2, 1997,
of the KV Pharmaceutical Company 1991 Incentive Stock Option Plan,
which was filed as Exhibit 10(y) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1997, is incorporated
herein by this reference.
10(z)<F*> Agreement between the Company and Marc S. Hermelin, Vice Chairman,
dated December 16, 1996, with supplemental letter attached, which
was filed as Exhibit 10(z) to the Company's Annual Report on Form
10-K for the year ended March 31, 1997, is incorporated herein by
this reference.
10(aa) Amendment to Lease dated February 17, 1997, for the facility
located at 2503 South Hanley Road, St. Louis, Missouri, between the
Company as Lessee and Marc S. Hermelin as Lessor, which was filed
as Exhibit 10(aa) to the Company's Annual Report on Form 10-K for
the year ended March 31, 1997, is incorporated herein by this
reference.
10(bb)<F*> Stock Option Agreement dated as of January 3, 1997, granting a
stock option to Marc S. Hermelin, which was filed as Exhibit 10(bb)
to the Company's Annual Report on Form 10-K for the year ended
March 31, 1999, is incorporated herein by this reference.
10(cc)<F*> Stock Option Agreement dated as of May 15, 1997, granting a stock
option to Marc S. Hermelin, which was filed as Exhibit 10(cc) to
the Company's Annual Report on Form 10-K for the year ended March
31, 1999, is incorporated herein by this reference.
10(dd) Asset Purchase Agreement by and between KV Pharmaceutical Company
and American Home Products Corporation, acting through its Wyeth-
Ayerst Laboratories division, dated as of February 11, 1999, which
was filed as Exhibit 2.1 to the Company's Report on Form 8-K filed
April 5, 1999, is incorporated herein by this reference.
<FN>
-----------------------------
<F*> Management contract or compensation plan.
51
<PAGE> 52
EXHIBIT INDEX
-------------
<CAPTION>
Exhibit No. Description
<C> <S>
10(ee)<F*> Amendment, dated as of October 30, 1998, which was filed as Exhibit
10(ee) to the Company's Annual Report on Form 10-K for the year ended
March 31, 1999, is incorporated herein by this reference.
10(ff) Exclusive License Agreement, dated as of April 1, 1999 between
Victor M. Hermelin as licenser and the Company as licensee, which
was filed as Exhibit 10(ff) to the Company's Annual Report on Form
10-K for the year ended March 31, 1999 is incorporated herein by this
reference.
10(gg)<F*> Stock Option Agreement dated as of April 1, 1999, granting a stock
option to Marc S. Hermelin, filed herewith.
10(hh)<F*> Stock Option Agreement dated as of August 16, 1999, granting a stock
option to Marc S. Hermelin, filed herewith.
10(ii)<F*> Amendment, dated December 2, 1999, to Employment Agreement between the
Company and Marc S. Hermelin, Vice Chairman, filed herewith.
10(jj)<F*> Employment Agreement between the Company and Alan G. Johnson, Senior
Vice-President, Strategic Planning and Corporate Growth, dated
September 27, 1999, filed herewith.
10(kk)<F*> Consulting Agreement, dated as of May 1, 1999, between the Company and
Victor M. Hermelin, Chairman, filed herewith.
21 List of Subsidiaries, filed herewith.
23 Consent of BDO Seidman, LLP, filed herewith.
27 Financial Data Schedule, filed herewith.
<FN>
-----------------------------
<*> Management contract or compensation plan.
</TABLE>
52
