-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KFxK+uESW+wrPrvt0GvP87Dy32837AsXZ7W7/94Ofa6hseTc9e1qxscnr1DS8h8L LfilR80DDe4TCRmGd1pLJw== 0001011240-99-000041.txt : 19990608 0001011240-99-000041.hdr.sgml : 19990608 ACCESSION NUMBER: 0001011240-99-000041 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990607 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KV PHARMACEUTICAL CO /DE/ CENTRAL INDEX KEY: 0000057055 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 430618919 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09601 FILM NUMBER: 99641682 BUSINESS ADDRESS: STREET 1: 2503 S HANLEY RD CITY: ST LOUIS STATE: MO ZIP: 63144 BUSINESS PHONE: 3146456600 MAIL ADDRESS: STREET 1: 2503 S HANLEY RD CITY: ST LOUIS STATE: MO ZIP: 63144 10-K 1 FORM 10-K FOR THE FISCAL YEAR ENDED 03/31/99 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Mark One [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the Transition period from to Commission file number 1-9601 K-V PHARMACEUTICAL COMPANY 2503 SOUTH HANLEY ROAD ST. LOUIS, MISSOURI 63144 (314) 645-6600 Incorporated in Delaware I.R.S. Employer Identification No. 43-0618919 Securities registered pursuant to Section 12(b) of the Act: Class A Common Stock par value New York Stock Exchange $.01 per share Class B Common Stock par value New York Stock Exchange $.01 per share 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 8,808,787 shares of Class A and 2,966,697 shares of Class B Common Stock held by nonaffiliates of the Registrant as of May 4, 1999, was $131,581,256 and $44,685,874, respectively. As of May 4, 1999, the Registrant had outstanding 11,889,604 and 6,360,215 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 1999 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. 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, including four controlled release, eight 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. 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. During fiscal 1999, the Company began the process of building the infrastructure necessary to support its expansion into the branded pharmaceuticals business with the establishment of Ther-Rx Corporation ("Ther-Rx"). Ther-Rx markets technology enhanced brand-name products 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, cosmetic, industrial and other 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 two industry segments, consisting of pharmaceutical, manufacturing and marketing. 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 manufacturing revenues, when marketing rights to products using its advanced drug delivery technologies are licensed. (see Note 18 to the Company's financial statements). (c) Narrative Description of Business For the fiscal year ended March 31, 1999, approximately 80% of the Company's net revenues were derived from the sale of technology distinguished generic products, approximately 7% from manufacturing and licensing, and approximately 12% from the sale of specialty value added pharmaceutical raw material compounds. The Company established its Ther-Rx subsidiary during fiscal 1999 and launched its first brand name prescription product with the acquisition of the Micro-K(R) product line in March 1999. Ther-Rx expects to launch internally developed products during fiscal 2000 that use the Company's proprietary drug delivery technologies. The products the Company has targeted to launch will be detailed to focused physician specialists through its own detail force. The Company has also developed generic drugs using its proprietary technologies. The Company markets and distributes its generic products under the ETHEX label. The Company continues to apply its technologies in the development of technologically distinguished generic pharmaceuticals and currently is developing an additional 25 products of which 10 are planned for launch during fiscal 2000. The development of generic versions of existing brand name products is typically less costly and time consuming than the development of new drug products because generic drugs that require FDA approval generally contain pharmaceutical compounds previously approved by the FDA and qualify for the use of an abbreviated testing and approval process. The Company's Particle Dynamics subsidiary has developed and currently markets lines of specialty value added raw material products to the pharmaceutical, nutritional, food, cosmetic and other industries. Two main franchises of Particle Dynamics are DESCOTE(R), which is a family of tastemasked vitamin, mineral, and drug products; and DESTAB(TM), a family of direct compression products which enable pharmaceutical manufacturers to produce tablets and caplets in a more efficient manner. The Company also develops pharmaceutical products for the prescription and OTC markets that its pharmaceutical marketing company licensees commercialize. Typically, the Company enters into development and licensing arrangements with companies that (i) hold patent or marketing exclusivity rights to existing pharmaceutical products that may benefit from the application of its proprietary drug delivery technologies, or (ii) are developing new therapeutic agents that require delivery systems or formulation capabilities such as those the Company offers to improve drug efficacy or enhance commercial value and (iii) can market and sell the products that the Company develops. To date, the Company has entered into agreements with various pharmaceutical marketers, including Pfizer Canada, Inc., Taisho Pharmaceutical Ltd. of Japan, SS Pharmaceutical of Japan, J. Uriach of Spain and others. Strategy The Company's strategy is to expand its position as a technology-driven specialty pharmaceutical marketer of specialty value added raw materials and finished dosage form drug products that are an outgrowth of its broad-based drug delivery technologies. As a recognized leading developer of innovative drug delivery technologies, the Company will continue to apply its technologies to the development and commercialization of its brand name and generic drugs. These products will be marketed through the broad pharmaceutical distribution system established by ETHEX, the generic division, Ther-Rx, the brand division calling on doctors, and Particle Dynamics, Inc., the special raw materials division. The Company also markets other products through pharmaceutical marketing licensees. Development of Brand Name Pharmaceuticals. The Company is applying its proprietary drug delivery technologies in the development of brand name prescription and OTC pharmaceutical products to improve the effectiveness, safety or commercial appeal of the drug compound. These products are developed for direct marketing by Ther-Rx (prescription only) or under license agreements with other pharmaceutical marketers (prescription or OTC). Under a licensing agreement, the Company generally applies drug delivery systems to the development of a product in return for license fees, milestone payments, research reimbursement and manufacturing and royalty revenues. The Company's licensee is generally responsible for clinical trials, regulatory approvals and marketing activities. In certain cases, the Company may develop a product, conduct clinical trials and seek regulatory approval before entering into a licensing arrangement. Development and Marketing of Technologically Distinguished Generic Drugs. The Company has successfully applied and will continue to apply its proprietary drug delivery systems and formulation capabilities to develop technologically distinguished generic drugs. The Company does this by (i) identifying and replicating brand name drugs that are either off patent or are approaching patent expiration and which require advanced drug delivery systems or (ii) applying its tastemasking formulations to an off patent drug in order to meaningfully increase patient compliance and the drug's commercial appeal. The Company believes that the potential profitability of its technologically distinguished generic drugs is higher than typical generic drugs because the technologies employed by the brand name innovator and the Company create barriers to entry for typical generic drug competitors. In addition, the development of generic drugs generally is less costly and time consuming than brand name drugs. A significant number of technologically distinguished brand name drugs are off patent or are approaching patent expiration, which the Company believes it is in a better position to market than generic pharmaceutical companies who do not have a strong drug delivery system technology base. Selective Acquisitions and In-licensing Opportunities. The Company actively seeks opportunities to acquire additional products, product rights, technologies and distribution channels that are complementary to its business and can be integrated into its research, manufacturing, marketing or distribution operations, or that can provide it with additional products, technologies or sales and marketing capabilities. In March 1999, the Company acquired the Micro-K(R) prescription potassium supplement product line for $36 million from American Home Product Corporation's Wyeth-Ayerst division. Micro-K(R) had worldwide 1998 sales of approximately $18 million and competes in a U.S. market for potassium supplements of approximately $315 million in annual sales. Development and Marketing of Technologically Differentiated Specialty Raw Materials. The Company combines its advanced technologies with its expertise in microencapsulation and particle coating to strategically develop new products that improve taste, tableting efficiencies and product stability, while reducing manufacturing costs and increasing product quality. 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 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 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 filed a patent application relating to its OraSite(TM) technology. 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 esophageal(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. Tastemasking 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 five 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 may be used in connection with such products as macrolide antibiotics, amino acids, vitamins and other unpleasant tasting drug compounds. Marketing and Distribution Through ETHEX, the Company directly markets and distributes its generic products to national drug store chains, wholesalers and distributors, as well as independent pharmacies and mail order firms. ETHEX's marketing strategy is to provide its customers with quality products, a broad product line, competitive prices and a high level of customer service. ETHEX's sales force targets national and regional buyers of pharmaceutical products, while its inside sales group targets the approximately 28,000 independent drug stores operating in the United States. During fiscal 1999, 1998 and 1997, the Company's largest customer, McKesson Drug Company, a wholesale distributor, accounted for 19%, 12% and 15%, respectively of its total revenue. 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 devote significant marketing resources to the penetration of such markets. Ther-Rx has established a direct sales force dedicated to the marketing and distribution of brand name products through selling efforts focused on physician specialists. The Company licenses the right to market and distribute brand name pharmaceutical products incorporating its drug delivery technologies to licensees in the U.S. and internationally. The Company has also executed several agreements, and intends to pursue additional development and licensing arrangements, under which it is granted the right to market and distribute such products using its own marketing subsidiaries along with its licensee. The Company currently 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. In connection with proprietary products to be licensed to its corporate marketing licensees, the Company develops the product utilizing its formulation expertise and proprietary delivery systems, and the licensee is typically responsible for the performance of any required clinical studies and the submission of the product for governmental approval. However, the Company participates in all phases of the development process. In general, corporate licensees reimburse the Company for a portion of its development expenses incurred in connection with the formulation, clinical supply and validation of the technologically enhanced drug product. In fiscal 1999, 1998 and 1997, total research and development expenses were $6.9 million, $5.8 million and $4.8 million, respectively. Spending for research and development is funded primarily from operations and was 6% of revenues during fiscal 1999. Patents and Proprietary Rights The Company's policy is to file patent applications in appropriate situations to protect and preserve, for its own use, technology, inventions and improvements that the Company considers important to the development of its business. The Company has been granted patent protection for certain of its proprietary technologies and products in the United States, Europe and Australia, and is currently seeking patent protection for certain of its technologies and products in the United States, Canada, Europe, Australia, Japan and South Korea. The Company currently holds 54 domestic and foreign issued patents expiring through 2016 relating to its controlled release, site-specific, quick dissolve and tastemasking technologies. The Company also relies upon trade secrets, unpatented proprietary know-how and continuing technological innovation to develop and maintain its competitive position. The Company enters into confidentiality agreements with each of its employees and consultants upon the commencement of an employment or consulting relationship. These agreements generally provide that all inventions, ideas, discoveries, improvements and copyrightable material made or conceived by the individual arising out of the employment or consulting relationship and all confidential information developed or made known to the individual during the term of the relationship are the Company's exclusive property. The Company cannot guarantee, however, that others may not acquire or independently develop similar technology or, if patents are not issued with respect to products arising from research, that the Company will be able to retain information pertinent to such research as proprietary technology or trade secrets. The Company currently holds 27 trademarks expiring through 2017 (which are renewable subject to continuous use) and has also applied for trademark protection for the trade names of its proprietary controlled-release, site-specific, quick dissolve and tastemasking technologies. The Company intends to continue to trademark new technology and product names as they are developed. Manufacturing and Facilities The Company conducts its brand name, generic and raw material manufacturing in an aggregate of 164,000 square feet of manufacturing space located on two St. Louis area campuses. 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 1999, the Company encountered no serious shortage of any particular raw materials and has no indication that significant shortages will occur. The Company's administrative offices and research facilities occupy approximately 57,612 square feet and an additional 142,207 square feet is devoted to product warehousing. 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 November 30, 1999 through September 30, 2002 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 their products more rapidly than the Company does, and the selling prices of such products typically decline as competition increases. 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 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, 1999, the Company employed a total of 455 employees. The Company is party to a collective bargaining agreement that expires in May 2001 and covers 80 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 foreign countries. 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. 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. 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, 2005, with one five-year option to renew. In addition, the Company leases or owns the facilities shown in the following table: SQ. FT. LEASE RENEWAL FACILITY USAGE LEASED EXPIRES OPTIONS - -------------------------------------------------------------------------------- 2629 S. Hanley Road Mfg. Oper. 18,000 09/30/02 5 years(1) 821 Hanley Industrial Mfg. Oper. 5,000 11/30/99 2 years Court 8046-50 Litzsinger Road Mfg. Oper. 17,000 10/31/01 5 years(1) 8056 Litzsinger Road Office/Maint. 3,000 10/31/01 5 years(1) 2635 S. Hanley Road Mfg. Oper. 12,150 09/30/02 5 years(1) 819 Hanley Industrial Mfg. Oper. 5,000 11/30/99 2 years Court 2525 S. Hanley Road Mfg. Oper. 16,800 06/30/02 5 years 8054 Litzsinger Road Office 3,000 10/31/01 5 years(1) 2601 S. Hanley Road PDI Office 1,480 09/30/02 5 years(1) 10888 Metro Court Office/Warehouse 81,810 Owned N/A 2303 Schuetz Road Mfg. Oper. 90,000 Owned N/A 10850 Metro Court Rental Property 40,540 Owned N/A 13622 Lakefront Drive Office/Warehouse 87,020 Owned N/A 11880 Lackland Office/Warehouse 14,260 01/25/00 --- - ------------------------- (1) Two five-year options. Properties used in the Company's operations are considered suitable for the purposes for which they are used and are believed to be adequate to meet the Company's needs for the reasonably foreseeable future. However, the Company 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 expects to be paid the arbitration award on or before June 15, 1999. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 4(a). Executive Officers of the Registrant1 The following is a list of the current executive officers and directors of the Company, their ages, their positions with the Company and their principal occupations for at least the past five years. NAME AGE POSITION HELD AND PAST EXPERIENCE - -------------------------------------------------------------------------------- Victor M. Hermelin 85 Director, Chairman of the Board and Treasurer of the Company.2 Marc S. Hermelin 57 Director, Vice-Chairman of the Board and Chief Executive Officer.2 Alan G. Johnson 64 Director and Secretary of the Company; Attorney at Law and Chairman of Pauli, Johnson Capital & Research Incorporated, an investment banking and institutional research boutique, since January, 1999; Member of the law firm Gallop, Johnson & Neuman, L.C. 1976 to 1998; Director, Siboney Corporation. Garnet E. Peck, Ph.D. 68 Director of the Company since 1994; Professor of Industrial Pharmacy and Director of Industrial Pharmacy for Purdue University School of Pharmacy and Pharmacal Sciences since 1967. Norman Schellenger 67 Director of the Company since November 1998; Retired since January 1997; President of Whitby Pharmaceuticals 1992 to 1997. Raymond F. Chiostri 65 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 60 Vice President of Finance and Chief Financial Officer since 1981. Mitchell I. Kirschner 53 Corporate Vice President of Business Development since 1989.2 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. - ----------------------- (1) This information is included in Part I as a separate item in accordance with Instruction 3 to Item 401(b) of Regulation S-K and General Instruction G to Form 10-K. (2) Victor M. Hermelin is the father of Marc S. Hermelin and father-in-law of Mitchell I. Kirschner. 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 during each quarter of fiscal 1999 and 1998 were as follows: CLASS A COMMON STOCK FISCAL 1999 FISCAL 1998 --------------------------- --------------------------------- QUARTER High Low High Low - ----------- ---------- ------------- ------------- ---------------- First 22 3/4 17 3/16 11 21/32 9 15/32 Second 23 1/8 14 3/8 15 3/4 9 29/32 Third 23 1/8 17 1/4 15 21/32 12 13/32 Fourth 21 1/2 14 1/2 18 25/32 13 3/32 CLASS B COMMON STOCK FISCAL 1999 FISCAL 1998 ---------------------------- --------------------------------- QUARTER High Low High Low - ------------ ----------- ------------- ---------------- ------------ First 23 1/16 17 3/32 11 3/4 9 1/2 Second 23 5/16 14 1/2 15 3/32 10 Third 23 1/4 17 3/8 15 5/8 12 27/32 Fourth 21 5/16 14 18 21/32 13 1/32 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, 1999 and 1998 were $2,203,644 or $9.14 per share on 241,000 shares of Preferred Stock. 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 $421,751 were paid during fiscal 1999 and 1998. c) Approximate Number of Holders of Common Stock The number of holders of record of Class A and Class B Common Stock as of May 4, 1998 was 1,164 and 1,241, respectively (not separately counting shareholders whose shares are held in "nominee" or "street" names, which are estimated to represent approximately 6,000 additional shareholders for each class of common stock).
Item 6. Selected Financial Data ($ in 000's, except per share data) Years Ended March 31, ----------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- BALANCE SHEET DATA: Total assets $ 127,990 $ 68,361 $ 41,362 $ 27,948 $27,975 Long-term debt $ 31,491 $ 4,902 $ 2,158 $ 2,541 $11,233 Shareholders' equity $ 67,548 $ 44,164 $ 33,084 $ 20,550 $ 9,974 INCOME STATEMENT DATA: Revenues $ 114,860 $ 98,486 $ 57,891 $ 49,729 $39,743 % Change 16.6 70.1 16.4 25.1 4.1 Net income (loss)(a) $ 23,340 $ 11,304 $ 8,924 $ 4,043 $(5,375) Net income (loss) per common share-diluted (b) (c) $ 1.17 $ 0.58 $ 0.47 $ 0.21 $ (0.35) (a) Net income in fiscal 1999 includes a non-recurring gain associated with a $13.3 million arbitration award. The award net of related expenses of $530,000 and net of applicable income taxes, represents $7.9 million in net income or $.40 per common share on a diluted basis (see Note 19 of Notes to Consolidated Financial Statements) as follows: Per diluted Net Income share ----------- ----------- KV net income without nonrecurring gain $15,384,633 $0.77 KV nonrecurring gain $ 7,955,568 $0.40 ----------- ----- Total KV net income $23,340,201 $1.17 (b) Dividends were paid on the Preferred Stock during fiscal 1999 and 1998 in the amount of $421,751 and $105,437 during the fourth quarter of fiscal 1997, but no other cash dividends were paid on any shares of Common or Preferred Stock during the five years ended March 31, 1999. (c) 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).
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 and consolidated costs and expenses as a percent of total revenue. This information should be read in conjunction with the Company's financial statements and related notes.
Fiscal Year Ended March 31, 1999 1998 1997 ---- ---- ---- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (Dollars in thousands) Net Revenues Generic Products $ 91,833 80.0% $79,193 80.4% $40,225 69.5% Brand Products 1,795 1.6 - - - - Contract Services/Licenses 7,827 6.8 8,290 8.4 8,978 15.5 Specialty Materials 13,405 11.6 11,003 11.2 8,688 15.0 -------- ------ ------ ----- ------- ------ Total Net Revenues 114,860 100.0 98,486 100.0 57,891 100.0 ======= ===== ====== ===== ====== ===== Costs and Expenses Manufacturing Costs 61,415 53.5 56,483 57.3 29,478 50.9 Research and Development 6,884 6.0 5,752 5.8 4,835 8.3 Selling and Administrative 22,201 19.3 19,104 19.4 13,818 23.8 Other (Income) Expense, net (13,516) (11.8) (98) (0.1) 265 0.5 Amortization 244 0.2 254 0.3 188 0.4 -------- ----- -------- ----- -------- ----- Total Costs and Expenses 77,228 67.2 81,495 82.7 48,584 83.9 ====== ==== ====== ==== ====== ===== Earnings before Taxes 37,632 32.8 16,991 17.3 9,307 16.1 Provision for Income Taxes 14,292 12.4 5,687 5.8 383 0.7 ------ ---- ------- ----- ------ ----- Net Income 23,340 20.4 11,304 11.5 8,924 15.4 ====== ==== ====== ==== ===== =====
FISCAL 1999 COMPARED TO FISCAL 1998 Revenues. Net revenues increased $16.4 million, or 16.6%, during fiscal 1999. The increase in net sales is due to higher sales of generic products and specialty materials, and brand product sales resulting from the acquisition of the Micro-K(R) product line during the fourth quarter (see Note 2 of Notes to Consolidated Financial Statements), which were partially offset by lower contract services' sales and licensing revenues, as shown in the following table ($ in 000's): Increase (Decrease) vs Prior Year ------------------- Amount Percent ------ ------- Generic Products $ 12,640 16.0% Brand Products 1,795 nm Specialty Materials 2,402 21.8 Contract Services/Licensing Revenues (463) (5.6) -------- Total Increase $ 16,374 16.6% ======== Generic product sales increased $12.6 million, or 16%, during fiscal 1999 due to the introduction of 10 new products and higher sales volume across the majority of the existing products. New products contributed $5.8 million (7%) and existing products contributed $16.1 million (21%) of the increase; however, such increases were partially offset by price declines of $9.3 million (12%) against 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 lines 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 and will be marketed by the Company's Ther-Rx subsidiary. The Company is in the process of completing the building of the sales, marketing and administrative infrastructure to support its direct marketing of brand name products. This effort supports the Company's plan to directly market and distribute technology enhanced, brand name pharmaceuticals in specific niche therapeutic areas. Micro-K(R) is the first product to be marketed in support of this strategy. 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 the Company's Particle Dynamics subsidiary, 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 total sales for the fiscal year. Calcium carbonate sales were up 28.6% for the fiscal year. 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. While the Company anticipates continued overall growth in sales of the products the Company markets, there are no assurances that the annual percentage rate of sales growth will continue at past levels. 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, as shown in the following table: % Revenues ---------- FY 1998 Manufacturing Costs 57.3 Change due to: Price decline 4.1 Product mix (7.9) ---- FY 1999 Manufacturing Costs 53.5 ==== The price decline and improvement in product mix was 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 $5.8 million in fiscal 1998. The increase was due to higher personnel costs ($.4 million, or 7%), increased usage of R&D materials and laboratory supplies ($.3 million, or 5%) and higher levels of clinical testing ($.2 million, or 3%). The Company increased its R&D activity in fiscal 1999 and is currently developing more than 25 drug compounds in its development pipeline. The Company expects to continue a relatively high level of expenditures and investment for research, clinical and regulatory efforts relating to the development of proprietary new products and advanced technology products and their approval for marketing. 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 Company's continued growth ($1.3 million, or 7%), the branded sales initiative ($.7 million, or 4%) and increased marketing activities associated with sales of generic products ($1.1 million, or 6%). Amortization expense decreased nominally in fiscal 1999 due primarily to lower expense associated with amortization of financing fees ($.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 twenty 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. (See Note 19 of Notes to Consolidated Financial Statements.) Income taxes were provided at an effective rate of 38.0% in fiscal 1999 compared to 33.5% in fiscal 1998. The lower effective rate in fiscal 1998 reflected the utilization of the deferred tax asset valuation reserve. Net Income. As a result of the factors described above, net income improved $12.0 million, or 106.5% to $23.3 million for fiscal 1999 from net income of $11.3 million in fiscal 1998. FISCAL 1998 COMPARED TO FISCAL 1997 Revenues. Net revenues increased $40.6 million, or 70%, to $98.5 million during fiscal 1998 from $57.9 million in fiscal 1997. This sales growth was primarily due to an increase in the volume of new (64%) and existing (7%) generic products sold by ETHEX and pharmaceutical compounds sold by Particle Dynamics, partially offset by lower Contract Services sales (-1%). Net revenues from ETHEX increased $39.0 million, or 97%, to $79.2 million during fiscal 1998 from $40.2 million in fiscal 1997. This increase was primarily due to the launch of twelve new generic products during fiscal 1998 which contributed $34.9 million of the sales increase. The remainder of the sales increase ($4.1 million) was due to higher volume across the existing ETHEX product line. Net revenues derived from the sale of specialty pharmaceutical compounds increased $2.3 million, or 27%, to $11 million during fiscal 1998. This increase was attributable entirely to the increased sales volumes related to the introduction of new products for the DESCOTE(R) and DESTAB(TM) product lines. Contract Services revenues decreased $.5 million, or 10%, to $4.8 million in fiscal 1998 from $5.3 million in fiscal 1997 due to reduced sales volume. Costs and Expenses. Manufacturing costs increased $27 million, or 92%, to $56.5 million during fiscal 1998 from $29.5 million in fiscal 1997 due to increased volume. Manufacturing costs as a percentage of revenues increased to 57% from 51% primarily due to an unfavorable change in the mix of products sold and lower prices as shown in the following table: % Revenues ---------- FY1997 Manufacturing Costs 50.9% Change due to: Lower prices 2.0 Product mix 4.4 ----- FY1998 Manufacturing Costs 57.3% ===== Research and development costs increased $.9 million, or 19%, to $5.8 million during fiscal 1998 from $4.9 million in fiscal 1997. This increase was due to higher personnel costs ($.4 million, or 9%), increased usage of R&D materials ($.1 million, or 1%) and higher levels of clinical testing ($.4 million, or 9%). Selling and administrative expenses increased $5.3 million, or 38%, to $19.1 million during fiscal 1998 from $13.8 million in the same period in fiscal 1997. As a percentage of revenue, selling and administrative expenses decreased to 19% from 24%. The increase in selling and administrative expenses was primarily related to selling and promotional activities associated with the significant growth experienced in the sales of new and existing generic products marketed by ETHEX and Particle Dynamics ($.7 million, or 5%), higher outside professional services ($1.8 million, or 13%) and additional personnel to support its continued growth ($1.7 million, or 13%). The income tax provision was $5.7 million for fiscal 1998, compared to $.4 million in fiscal 1997. The increase is attributable to the utilization of loss carry forwards generated in prior years during fiscal 1997. No loss carryforwards were available in fiscal 1998. (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 remained relatively constant for a substantial period of time. 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 $250,000 annually on the principal balance of the Company's credit facility at March 31, 1999. (d) Year 2000 Project The Company utilizes computer technologies throughout its business to effectively carry out its day-to-day operations. Computer technologies include both information technology in the form of hardware and software, as well as embedded technology in the Company's facilities and equipment. Similar to most companies, the Company must determine whether its systems are capable of recognizing and processing date-sensitive information properly as the year 2000 ("Y2K") approaches. The Company is utilizing a multi-phased concurrent approach to address this issue. The phases included in its approach are the awareness, assessment, remediation, validation and implementation phases. The Company has completed the awareness and assessment phases and are very active in the remediation phase. The Company has initiated formal communications and has developed a monitoring program with all of its significant suppliers and critical business partners to determine Y2K compliance and is implementing contingency plans to minimize interruptions in business in the event a third party is unable to perform. An interruption of the Company's ability to conduct business due to a Y2K readiness problem could have a material adverse effect on the Company. The Company is continuing to assess such third-party risks. The Company is not presently aware of any such significant exposure; but, there can be no guarantee that the systems of third parties on which the Company relies will be converted in a timely manner or that a failure to properly convert by another company would not have a material adverse effect on the Company. The Company currently intends to substantially complete the remaining phases of the Y2K project, including the finalization of contingency plans in the event of disruptions in obtaining needed supplies and services, prior to June 30, 1999. The costs associated with the project are not expected to exceed $766,000 (of which approximately $580,766 had been incurred as of March 31, 1999), and are not deemed to materially impact the Company's consolidated financial position, results of operations or cash flows in future periods. The Company is actively correcting and replacing the identified systems which are not Y2K ready in order to ensure its ability to continue to meet its internal needs and those of its customers and suppliers. The Company believes that the most reasonably likely worst-case scenarios that it might confront with respect to Y2K issues have to do with third parties not being Y2K compliant. The Company has evaluated vendor and customer compliance and will implement contingency plans, such as alternate vendor opportunities, after examining compliance evaluations. Based upon the planning and implementation completed to date, the Company believes that, with modifications to existing software, conversions to new software, and appropriate remediation of embedded chip equipment, the Y2K issue is not reasonably likely to pose significant operational problems for the Company's information technology systems and embedded chip equipment. (e) Liquidity and Capital Resources The following table lists selected cashflow and balance sheet data for fiscal years 1999, 1998 and 1997: ($ in 000's) 1999 1998 1997 --------------------------------------- Cashflow from operations $ 9,499 $13,755 $ 4,740 Quick assets 42,381 33,462 16,207 Working Capital 43,112 35,403 25,017 Long-Term Liabilities 33,973 7,040 3,071 Shareholders' Equity 67,548 44,164 33,084 Cashflow from operations of $9.5 million for fiscal 1999 was primarily from net income enhanced by an increase in accounts payable and accrued liabilities, partially offset by increases in accounts receivable and inventories. The increases in accounts payable and inventories are due to higher levels of raw material and packaging inventories acquired to support increased sales of generic products and higher finished goods inventories associated with the acquisition of Micro-K(R). Receivables also increased due to the higher sales and the $13.3 million arbitration award (See Note 19 of Notes to Consolidated Financial Statements). Accrued liabilities increased due to an increase in salaries, wages, benefits and income taxes. These changes in the components of current assets and liabilities, partially offset by a decline in cash and marketable securities, resulted in a $7.7 million increase in working capital in fiscal 1999. Long-term liabilities increased to $34 million in fiscal 1999 from $7 million as a result of $25 million in borrowings incurred to finance the acquisition of the Micro-K(R) product line and the partial financing of the purchase of a new facility of $2.3 million. The new facility was acquired to provide additional distribution and office space for the Company's branded and generic pharmaceutical businesses. Investing activities for fiscal 1999 included capital expenditures of $5.8 million, the investment of $7.6 million of cash in marketable securities and a cash payment of $11.1 million in connection with the acquisition of the Micro-K(R) product line. Capital expenditures relate primarily to the acquisition of the new facility and equipment to expand production capacity for generic products. In addition, the Company had capital projects in progress at March 31, 1999 that it estimates will require $1.3 million to complete in the next fiscal year. The majority of this amount relates to the cost to complete the upgrade of the Company's business software and network systems which is estimated at $0.6 million. The Company believes that existing cash and securities balances, 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, 1999 the Company has a loan agreement expiring June 18, 2000 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 $25 million and $4.2 million in open letters of credit issued under this facility. Ratios. The following table lists selected financial ratios for the fiscal years 1999, 1998 and 1997: 1999 1998 1997 --------------- --------------- -------------- Working Capital Ratio 2.6 to 1 3.1 to 1 5.8 to 1 Quick Ratio 1.6 to 1 2.0 to 1 3.1 to 1 Debt to Equity .48 to 1 .12 to 1 .08 to 1 Total Liabilities to Equity .89 to 1 .55 to 1 .25 to 1 The Company's working capital ratio declined in fiscal 1999 as a result of a decrease in the year end cash and marketable securities balance to $10.2 million from $18.2 million at the end of fiscal 1998. The decrease relates primarily to the $11.1 million cash payment made in connection with the acquisition of the Micro-K(R) product line. The Company's debt to equity and total liabilities to equity ratios increased due to the $25 million increase in long term debt associated with increased borrowings from its credit facility to finance the Micro-K(R) acquisition and $2.3 million in mortgage debt incurred to purchase the new office and distribution facility. 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. SOP 98-5 "Reporting on the Costs of Start-up Activities," requires that costs be expensed as incurred. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1998. The Company believes that the adoption of SOP 98-5 will have no material effect on its financial statements. Item 8. Financial Statements and Supplementary Data. 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, 1999 and 1998, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended March 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted the audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of KV Pharmaceutical Company and Subsidiaries at March 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1999, in conformity with generally accepted accounting principles. BDO SEIDMAN, LLP St. Louis, Missouri May 14, 1999 KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, 1999 and 1998 ASSETS 1999 1998 - ------ ---------------- --------------- Current Assets: Cash and cash equivalents $ 2,616,857 $ 18,157,595 Marketable securities, available-for-sale 7,523,380 - Receivables, less allowance for doubtful accounts of $631,006 and $332,244 in 1999 and 1998, respectively 18,988,162 15,304,340 Receivable, arbitration award 13,253,000 - Inventories 23,652,712 15,606,037 Deferred income taxes 3,379,434 2,949,434 Prepaid and other current assets 167,736 541,989 --------------- --------------- Total Current Assets 69,581,281 52,559,395 Property and equipment, less accumulated depreciation 18,966,483 12,436,533 Intangibles and other assets, net of amortization 39,442,396 3,364,899 =============== =============== TOTAL ASSETS $127,990,160 $ 68,360,827 =============== =============== LIABILITIES Current Liabilities: Accounts payable $ 8,667,394 $ 4,280,492 Accrued liabilities 17,090,215 12,317,432 Current maturities of long-term debt 711,669 558,333 --------------- --------------- Total Current Liabilities 26,469,278 17,156,257 Long-term debt 31,490,553 4,902,222 Deferred income taxes 379,000 535,000 Other long-term liabilities 2,103,696 1,603,131 --------------- --------------- TOTAL LIABILITIES 60,442,527 24,196,610 --------------- --------------- SHAREHOLDERS' EQUITY 7% Cumulative Convertible Preferred Stock, $.01 par value; $25.00 stated and liquidation value; 840,000 shares authorized; issued and outstanding - 241,000 shares in 1999 and 1998 2,410 2,410 Class A and Class B Common Stock, $.01 par value; 150,000,000 and 75,000,000 shares authorized, respectively; Class A-issued 11,923,319 and 11,760,078 in 1999 and 1998 119,233 117,601 Class B-issued 6,393,867 and 6,442,914 in 1999 and 1998 - 63,939 64,429 (convertible into Class A shares on a one-for-one basis) Additional paid-in capital 34,531,297 34,042,044 Retained earnings 32,910,844 9,992,686 Accumulated comprehensive loss, net (25,137) - Less: Treasury Stock, 35,619 shares each of Class A and Class B Common Stock, at cost (54,953) (54,953) -------------- -------------- TOTAL SHAREHOLDERS' EQUITY 67,547,633 44,164,217 -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $127,990,160 $ 68,360,827 ============== ============== See Accompanying Notes to Consolidated Financial Statements KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Years Ended March 31, 1999, 1998 and 1997 1999 1998 1997 -------------------------------------------- Net Revenues $ 114,860,315 $ 98,486,060 $ 57,890,678 ------------- ------------- ------------ Costs and Expenses: Manufacturing costs 61,414,775 56,482,539 29,478,372 Research and development 6,883,642 5,751,995 4,835,478 Selling and administrative 22,201,114 19,104,051 13,817,802 Amortization of intangible assets 243,550 254,261 187,758 ------------- ------------- ------------- Total costs and expenses 90,743,081 81,592,846 48,319,410 ------------- ------------- ------------- Operating income 24,117,234 16,893,214 9,571,268 ------------- ------------- ------------- Other income (expense): Arbitration award, net of expenses 12,722,956 - - Interest and other income 1,290,892 550,186 146,481 Interest expense (498,335) (452,262) (411,237) ------------- ------------- ------------- Total other income (expense) 13,515,513 97,924 (264,756) ------------- ------------- ------------- Income before income taxes 37,632,747 16,991,138 9,306,512 Provision for income taxes 14,292,546 5,687,382 383,000 ------------- ------------- ------------- Net Income $ 23,340,201 $ 11,303,756 $ 8,923,512 ============= ============= ============= Net Income per Common Share-Basic (after deducting preferred dividends of $421,751 in 1999, 1998 and 1997, respectively) $ 1.26 $ 0.60 $ 0.48 ============= ============ ============= Net Income per Common Share-Diluted $ 1.17 $ 0.58 $ 0.47 ============= ============ ============= See Accompanying Notes to Consolidated Financial Statements
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended March 31, 1999, 1998 and 1997 Class A Class B Additional Retained Accumulated Total Preferred Common Common Paid In Treasury Earnings Comprehensive Shareholders' Stock Stock Stock Capital Stock (Deficit) Loss, Net Equity --------------------------------------------------------------------------------------------------- Balance at March 31, 1996 $2,410 $71,207 $47,474 $30,235,926 $(54,953) $(9,752,154) $ - $20,549,910 Net income - - - - - 8,923,512 - 8,923,512 Sale of 200,000 Class A shares - 2,000 - 3,498,000 - - - 3,500,000 Stock Options issued as compensation - - - 114,300 - - - 114,300 Stock Options exercised, 13,125 shares of Class A - 130 - 50,188 - - - 50,318 13,195 shares of Class B - - 130 51,708 - - - 51,838 Less 177 shares of each class repurchased Conversion of 383,925 shares of Class B shares to Class A shares - 3,838 (3,838) - - - - - Dividends paid on preferred stock - - - (105,437) - - - (105,437) ------------------------------------------------------------------------------------------------ Balance at March 31, 1997 2,410 77,175 43,766 33,844,685 (54,953) (828,642) - 33,084,441 Net income - - - - - 11,303,756 - 11,303,756 Stock Options exercised, 24,165 shares of Class A - 240 - 127,930 - - - 128,170 17,206 shares of Class B - - 172 69,429 - - - 69,601 Conversion of 98,500 shares of - Class B shares to Class A shares - 985 (985) - - - - - Dividends paid on preferred stock - - - - - (421,751) - (421,751) Three for two stock split effected in the form of a 50% stock dividend - 39,201 21,476 - - (60,677) - - ------------------------------------------------------------------------------------------------ Balance at March 31, 1998 2,410 117,601 64,429 34,042,044 (54,953) 9,992,686 - 44,164,217 Comprehensive income Net income - - - - - 23,340,201 - 23,340,201 Other comprehensive loss, net of tax: Net unrealized loss on available-for-sale securities - - - - - - (25,137) (25,137) -------- ----------- Total comprehensive income - - - - - - (25,137) 23,315,064 Dividends paid on preferred stock - - - - - (421,751) - (421,751) Conversion of 123,000 shares of Class B shares to Class A shares - 1,231 (1,231) - - - - - Stock Options exercised, 46,478 shares of Class A - 462 - 260,301 - - - 260,763 And 74,129 of Class B Less 88 shares of Class A repurchased - - 741 228,952 - - - 229,693 Class A shares canceled - 6,146 shares - (61) - - - - - (61) Stock Split - payment of partial shares from 1998 - - - - - (292) - (292) ------------------------------------------------------------------------------------------------ Balance at March 31, 1999 $2,410 $119,233 $63,939 $34,531,297 $(54,953) $32,910,844 $(25,137) $67,547,633 ================================================================================================
See Accompanying Notes to Consolidated Financial Statements
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended March 31, 1999, 1998 and 1997 1999 1998 1997 ---- ---- ---- OPERATING ACTIVITIES Net Income $23,340,201 $11,303,756 $ 8,923,512 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and other non-cash charges 1,875,322 1,887,996 1,594,300 Stock options issued as compensation - - 114,300 Changes in deferred taxes (586,000) (1,524,434) (890,000) Changes in deferred compensation 500,565 689,812 152,089 Changes in operating assets and liabilities: Increase in receivables (3,683,822) (6,724,742) (1,298,139) Increase in receivable arbitration award (13,253,000) - - Increase in inventories (8,046,675) (2,820,449) (4,335,426) Decrease (increase) in prepaid and other assets 193,206 (799,947) (991,412) Increase in accounts payable and accrued liabilities 9,159,685 11,743,305 1,470,848 ------------------- ----------------- ------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 9,499,482 13,755,297 4,740,072 ------------------- ----------------- ------------------ INVESTING ACTIVITIES Purchase of property and equipment, net (5,846,313) (2,452,459) (1,903,134) Purchase of marketable securities (7,563,926) - - Product acquisition (36,140,000) - - ------------------- ----------------- ------------------ NET CASH (USED IN) INVESTING ACTIVITIES (49,550,239) (2,452,459) (1,903,134) ------------------- ----------------- ------------------ FINANCING ACTIVITIES Principal payments on long-term debt (558,333) (548,786) (744,203) Proceeds from credit facility 25,000,000 - - Proceeds from sale of Common Stock - - 3,500,000 Dividends paid on Preferred Stock (421,751) (421,751) (105,437) Exercise of Common Stock options 490,103 197,771 102,156 ------------------- ----------------- ------------------ NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 24,510,019 (772,766) 2,752,516 ------------------- ----------------- ------------------ (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (15,540,738) 10,530,072 5,589,454 CASH AND CASH EQUIVALENTS AT: BEGINNING OF YEAR 18,157,595 7,627,523 2,038,069 ------------------- ----------------- ------------------ END OF YEAR $ 2,616,857 $18,157,595 $ 7,627,523 =================== ================= ================== Non-cash investing and financing activities: Portion of building acquired through proceeds from a term loan $ 2,300,000 $ 3,500,000
See Accompanying Notes to Consolidated Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of KV Pharmaceutical Company (the "Company") and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Nature of Operations The Company and its subsidiaries develop, manufacture and market 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. 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 $1,778,000 at March 31, 1999 and $10,000,000 at March 31, 1998. Accounts Receivable-Trade The Company extends unsecured credit to its customers. Sales to a single company aggregated 19%, 12% and 15% for the years ended March 31, 1999, 1998 and 1997, respectively. In addition, the balance due from this company represented approximately 30% and 18% of consolidated accounts receivable as of March 31, 1999 and 1998. 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) product acquisition is 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, 1999. Revenue Recognition The Company recognizes revenue from product sales upon shipment to its customers. Provisions for estimated sales allowances, returns and losses are accrued at the time revenues are recognized. The Company also enters into long-term agreements under which it assigns marketing rights for the products it has developed to pharmaceutical marketers. Royalties are earned based on sale of products. Other non-refundable payments specified in the agreements, for which there are no future obligations, such as milestone payments and research and development reimbursements, are recognized as income when 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 asset and liability method, in which deferred income taxes are recognized as a result of temporary differences between the financial reporting basis and tax basis of the assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Stock-Based Compensation The Company grants stock options for a fixed number of shares to employees with an exercise price greater than or equal to the fair value of the shares at the date of grant. The Company accounts for stock 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 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 12. Fair Value of Financial Instruments The carrying amounts of all short-term asset and liability financial instruments are reasonable estimates of their fair value because of the short maturity of these items. The carrying amount of 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. SOP 98-5 "Reporting on the Costs of Start-up Activities," requires that costs be expensed as incurred. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1998. Management believes that the adoption of SOP 98-5 will have no material effect on its financial statements. Reclassifications Certain amounts from the prior years' financial statements have been reclassified to conform to the current year presentation. 2. Acquisition In the fourth quarter of fiscal 1999, the Company acquired the world-wide rights and trademark to Micro-K(R) from Wyeth-Ayerst Laboratories, the pharmaceutical division of 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): Year Ended March 31, 1999 1998 ---- ---- Total Revenues as reported $114,860 $ 98,486 Total Revenues - Pro forma (unaudited) 133,372 124,322 Net Income as reported 23,340 11,304 Net Income - Pro forma (unaudited) 26,591 18,437 Earnings Per Share: Basic as reported $ 1.26 $ 0.60 ====== ====== Diluted as reported $ 1.17 $ 0.58 ====== ====== Basic - Pro forma (unaudited) $ 1.44 $ 1.00 ====== ====== Diluted - Pro forma (unaudited) $ 1.33 $ 0.94 ====== ====== 3. Inventories Inventories as of March 31, consist of: 1999 1998 ---- ---- Finished goods $11,732,630 $ 8,954,290 Work-in-process 2,283,110 1,883,395 Raw materials 10,185,260 5,130,103 ------------ ------------ 24,201,000 15,967,788 Reserves for obsolescence (548,288) (361,751) -------------- -------------- $23,652,712 $15,606,037 =========== =========== 4. Marketable Securities The composition of the available-for-sale investments portfolio at March 31, 1999 was: Amortized Unrealized Market Cost Losses Value --------- ---------- ------ U.S. Government agency securities $ 1,000,000 $(1,934) $ 998,066 Corporate bonds 6,563,926 (38,612) 6,525,314 ------------ --------- ----------- $ 7,563,926 $(40,546) $7,523,380 =========== ========= ========== All securities mature in one to three years. Management does not intend to hold these securities to maturity and expects to liquidate them during fiscal year 2000, accordingly they are classified as current assets. There were no marketable securities in fiscal 1998. 5. Comprehensive Income Effective April 1, 1998 the Company adopted SFAS No. 130, "Reporting Comprehensive Income". This Statement establishes standards for reporting of all changes in equity from non-shareholder sources. There was no effect on prior year financial statements. Changes in accumulated comprehensive loss for the year end March 31, 1999 are as follows: Before-Tax Tax Net-of-Tax Amount Benefit Amount -------------------------------------- Unrealized losses on securities: Unrealized losses arising during the period $ (40,546) $ 15,409 $ (25,137) Less: reclassification adjustment for losses realized in net income - - - ---------- --------- ---------- Net unrealized losses $ (40,546) $ 15,409 $ (25,137) ========= ======== ========== 6. Property and Equipment Property and equipment as of March 31, consist of: 1999 1998 ---- ---- Land and improvements $ 2,055,567 $ 1,490,567 Building and building improvements 9,625,596 6,860,735 Machinery and equipment 14,989,656 13,267,562 Office furniture and equipment 3,830,360 3,323,955 Leasehold improvements 2,873,788 2,526,950 Construction-in-progress (estimated costs to complete at March 31, 1999 - $1,258,000) 2,840,330 600,618 ------------ ----------- 36,215,297 28,070,387 Less accumulated depreciation and amortization (17,248,814) (15,633,854) ------------ ----------- Net property and equipment $18,966,483 $12,436,533 =========== =========== 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 $8,146,313 and $5,952,459 for fiscal years 1999 and 1998, respectively. Depreciation and amortization of property and equipment was $1,616,363, $1,633,735 and $1,406,542 for 1999, 1998 and 1997, respectively. 7. Intangibles and Other Assets Intangibles and other assets as of March 31, consist of: 1999 1998 ---- ---- Goodwill $2,138,561 $2,138,561 Product rights 36,140,000 - Financing charges 400,689 586,656 Cash surrender value of life insurance and split-dollar life insurance 942,787 850,989 Trademarks and patents 1,047,249 865,206 Deposits 341,015 446,807 Other 291,200 351,200 ---------- --------- 41,301,501 5,239,419 Less accumulated amortization (1,859,105) (1,874,520) ---------- ---------- Net intangibles and other assets $39,442,396 $3,364,899 =========== ========== Amortization of goodwill is being charged to operations at $55,404 per year. Amortization of product rights and all other deferred charges was $188,146, $198,857 and $132,354 for 1999, 1998 and 1997, respectively. 8. Accrued Liabilities Accrued liabilities as of March 31, consist of: 1999 1998 ---- ---- Salaries, wages, incentives and benefits $3,481,503 $2,214,662 Interest 125,424 72,999 Income taxes 7,855,331 2,884,522 Professional fees 763,530 875,891 Revenue sharing (see Note 16) 3,300,000 4,911,634 Other 1,564,427 1,357,724 ---------- ----------- $17,090,215 $12,317,432 9. Long-Term Debt Long-term debt as of March 31, consists of: 1999 1998 ---- ---- Revolving credit line $25,000,000 $ - Industrial revenue bonds 1,830,000 2,155,000 Building mortgages 5,372,222 3,305,555 ----------- ----------- 32,202,222 5,460,555 Less current portion (711,669) (558,333) ----------- ----------- Long-term debt $31,490,553 $4,902,222 =========== ========== As of March 31, 1999, the Company has a loan agreement expiring June 18, 2000 with LaSalle National Bank. The agreement provides for a revolving line of credit for borrowing up to $40,000,000. The credit facility is unsecured and interest is currently charged at the LIBOR rate of 4.94% plus 200 basis points or 6.94% at March 31, 1999. At March 31, 1999, the Company had cash borrowing of $25,000,000 and $4,149,746 in open letters of credit issued under this facility. The agreement includes covenants that impose minimum levels of tangible net worth and earnings before interest, taxes, depreciation and amortization, a maximum leverage ratio, and limit capital expenditures and dividend payments. The industrial revenue bonds, which bear interest at 7.35% per annum, mature serially through 2004 and are collateralized by certain property and equipment, as well as through a letter of credit, which may only be accessed in case of default on the bonds. The bonds do not allow the holder to require the Company to redeem the bonds. The building mortgages bear interest at 8.53% and 7.95% with monthly principal payments of $19,444 and $12,778 plus interest through June 30, 2002 and March 11, 2004 with final payments of the remaining principal balances outstanding plus accrued and unpaid interest due on June 18, 2002 and March 11, 2004, respectively. The aggregate maturities of long-term debt as of March 31, 1999 are as follows: 2000 $ 711,669 2001 25,711,669 2002 711,669 2003 2,850,559 2004 2,011,656 Later Years 205,000 ------------- $ 32,202,222 ============= The Company paid interest of $445,910, $465,040, and $482,471 during the years ended March 31, 1999, 1998 and 1997, respectively. 10. Commitments and Contingencies Leases The Company has non-cancelable commitments for rental of office space, plant and warehouse facilities, transportation equipment and other personal property under operating leases. Future minimum lease commitments under all non-cancelable operating leases are as follows: 2000 $ 1,264,269 2001 1,153,955 2002 1,123,391 2003 1,030,555 2004 993,728 Later Years 939,831 ------------ $ 6,505,729 ============ Total rent expense for the years ended March 31, 1999, 1998 and 1997 was $1,456,540, $1,076,628 and $1,189,349, respectively. Contingencies The Company currently carries product liability coverage of $10,000,000 per occurrence and $10,000,000 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 $500,565, $689,812 and $152,089 under this agreement in 1999, 1998 and 1997, respectively. 11. Income Taxes The fiscal 1999 provision was based on the estimated federal and state taxable income using the statutory rates. The fiscal 1998 provision was based on the estimated federal and state taxable income using statutory rates, as well as utilization of its general business credit carry forwards generated in prior years, while the fiscal 1997 provision was based on an estimate of state taxable income using statutory rates. No loss carry forwards were available for fiscal 1999 or 1998. Years Ended March 31, ------------------- 1999 1998 1997 ---- ---- ---- Provision Current Federal $ 13,373,000 $ 6,233,000 $ 804,000 State 1,506,000 978,000 469,000 ------------ ----------- ---------- 14,879,000 7,211,000 1,273,000 ------------ ----------- ---------- Deferred Federal (528,000) (1,365,000) (804,000) State (58,000) (159,000) (86,000) ------------ ----------- ---------- (586,000) (1,524,000) (890,000) ------------ ----------- ---------- $14,293,000 $ 5,687,000 $ 383,000 ============ =========== ========== The reasons for the differences between the provision for income taxes and the expected federal income taxes at the statutory rate are as follows: 1999 1998 1997 ---- ---- ---- Computed income tax expense at statutory rate $13,171,000 $5,947,000 $3,164,000 Change in valuation allowance - (1,568,000) (3,392,000) State income taxes, less federal income tax benefit 1,070,000 696,000 383,000 Other 52,000 612,000 228,000 ----------- ---------- ----------- Provisions for income taxes $14,293,000 $5,687,000 $ 383,000 =========== ========== =========== As of March 31, 1999, and 1998, the tax effect of temporary differences between the tax basis of assets and liabilities and their financial reporting amount are as follows:
1999 1998 Current Non-Current Current Non-Current ------- ----------- ------- ----------- Fixed asset basis differences $ - $(1,167,000) $ - $(1,136,000) Reserve for inventory and receivables 2,281,000 - 2,506,000 - Vacation pay reserve 469,000 - 381,000 - Deferred compensation - 788,000 - 601,000 Other 629,000 - 62,000 - ---------- -------------- ------------ -------------- Net deferred tax asset (liability) $3,379,000 $ (379,000) $ 2,949,000 $ (535,000) ========== ============= =========== =============
The Company paid income taxes of $9,213,000, $4,754,088 and $846,000 during the years ended March 31, 1999, 1998 and 1997, respectively. 12. Employee Benefits Stock Option Plan The Company established the KV Pharmaceutical Company Incentive Stock Option Plan for key employees and reserved 3,000,000 shares of Common Stock for such plan. Under the plan, the Stock Option Committee may grant stock options to key employees at not less than one hundred percent (100%) of the fair market value of its Common Stock at the date of grant. The durations and exercisability of the grants vary over a period of up to ten years from the date of grant. The following summary shows the transactions for the fiscal years 1999, 1998 and 1997 under option arrangements: Options Outstanding Options Exercisable -------------------- -------------------- Average Average No. of Price Per No. of Price Per Shares Share Shares Share ------ --------- ------ --------- Balance, March 31, 1996 763,718 $ 4.47 283,064 $ 4.17 Options granted 587,898 8.00 - - Options becoming exercisable - - 308,294 7.06 Options exercised (39,660) 2.61 (39,660) 2.61 Options canceled (69,825) 5.44 (38,213) 5.26 --------- -------- Balance, March 31, 1997 1,242,131 6.14 513,485 5.94 Options granted 523,500 11.59 - - Options becoming exercisable - - 483,750 9.85 Options exercised (62,057) 3.21 (62,057) 3.21 Options canceled (47,820) 8.95 (8,352) 7.56 --------- --------- Balance, March 31, 1998 1,655,754 7.89 926,826 8.15 Options granted 423,398 15.77 - - Options becoming exercisable - - 234,136 8.61 Options exercised (120,607) 5.22 (120,607) 5.22 Options canceled (103,370) 11.31 (19,946) 9.57 --------- --------- Balance, March 31, 1999 1,855,175 $ 9.67 1,020,409 $ 8.58 ========= ========= 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 $3.48 for A options, $2.21 for B options, $9.17 for A options, $5.29 for B options, $5.23 for A options and $4.02 for B options in 1999, 1998 and 1997, respectively. The weighted-average significant assumptions used to determine those values using the Black-Scholes option pricing model for 1999, 1998 and 1997, respectively, were: volatility of .6630, .6700 and .6212; dividend yield of 0% in all three years; average risk-free interest rate of return of 5.0%, 6.3% and 6.6%; expected option lives ranging from 3 to 10 years. The following table summarizes information about stock options outstanding at March 31, 1999:
Options Outstanding Options Exercisable ----------------------------------------------- ----------------------------- Range of Number Weighted Average Weighted Number Weighted Exercise Outstanding Life Average Exercisable Average Prices at 3/31/99 Remaining Exercise Price at 3/31/99 Exercise Price - ------------------------------ ---------------------------------- --------------- ----------------- $ 1.84 - $ 3.00 52,667 2 Years $ 2.22 42,829 $ 2.21 $ 3.01 - $ 6.00 470,346 3 Years $ 4.88 300,223 $ 4.88 $ 6.01 - $ 9.00 465,545 5 Years $ 8.17 272,856 $ 8.37 $ 9.01 - $12.00 413,325 2 Years $11.47 339,150 $11.71 $12.01 - $20.88 452,938 9 Years $15.37 64,996 $15.32
The pro-forma effect on earnings for the year ended March 31, 1999, 1998 and 1997 of the method consistent with SFAS No. 123 would be to reduce reported net income by approximately $0.8 million, $2.2 million and $1.7 million, respectively, to approximately $22.5 million, $9.1 million and $7.2 million. The pro-forma effect on basic earnings per share for the years ended March 31, 1999, 1998 and 1997 of this method would be to reduce net income per share by $.05 per share, $.12 per share and $.10 per share, respectively, to $1.21 per share, $.48 per share and $.38 per share. The pro-forma effect on diluted earnings per share for the years ended March 31, 1999, 1998 and 1997 of this method would be to reduce net income per share by $.04 per share, $.12 per share and $.09 per share, respectively, to $1.13 per share, $.46 per share and $.38 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 $100,000 for fiscal 1999 and 1998 and $50,000 in 1997. 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 $421,000, $222,000 and $78,000 were made in 1999, 1998 and 1997, 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 $86,218, $79,560 and $63,770 in 1999, 1998 and 1997, 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 $50,000 of each employee's covered medical claims. The Company has recorded $225,000 of accrued health insurance expense reserves as of March 31, 1999 and $125,000 as of March 31, 1998, for claims incurred but not reported. For union employees, the Company participates in a fully funded insurance plan sponsored by the union. Expenses related to both plans charged to operations were approximately $1,390,000, $1,095,000, and $1,090,000 in fiscal 1999, 1998 and 1997, respectively. 13. 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 $221,460, $239,000 and $257,000 during the years ended March 31, 1999, 1998 and 1997, 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, 1999, 1998 and 1997 totaled $241,143, $237,164 and $231,885, respectively. 14. Equity Transactions As of March 31, 1999, the Company had 241,000 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, 1999 and 1998 were $2,203,644 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 9), the Company has limitations on paying dividends, except in stock, on its Class A and B Common Stock. Payment of dividends may also be restricted under Delaware Corporation law. On March 23, 1998, the Company's Board of Directors declared a three-for-two stock split in the form of a 50% stock dividend of its Common Stock to shareholders of record on April 3, 1998, payable on April 17, 1998. Common Stock was credited and retained earnings was charged for the aggregate par value of the shares issued. The stated par value of each share was not changed from $.01. All per share data in this report has been restated to reflect the aforementioned three-for-two stock split in the form of a 50% stock dividend. 15. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
1999 1998 1997 ---- ---- ---- Numerator: Net income $23,340,201 $11,303,756 $ 8,923,512 Preferred Stock dividends (421,751) (421,751) (421,751) ------------- -------------- -------------- Numerator for basic earnings per share--income available to common shareholders 22,918,450 10,882,005 8,501,761 Effect of dilutive securities: Preferred Stock dividends 421,751 421,751 421,751 ------------- ------------- ------------- Numerator for diluted earnings per share-income available to common share- holders after assumed conversions $23,340,201 $11,303,756 $ 8,923,512 ============ ============= ============ Denominator: Denominator for basic earnings per share--weighted-average shares 18,201,287 18,093,896 17,758,992 ------------ ------------- ------------- Effect of dilutive securities: Employee stock options 866,490 642,912 359,055 Convertible Preferred Stock 903,750 903,750 903,750 ------------ ------------- ------------- Dilutive potential Common Shares 1,770,240 1,546,662 1,262,805 ------------ ------------ ------------- Denominator for diluted earnings per share--adjusted weighted-average shares and assumed conversions 19,971,527 19,640,558 19,021,797 =========== ============ ============ Basic Earnings per Share (1): $ 1.26 $ 0.60 $ 0.48 ========== ========== ========== Diluted Earnings per Share (1)(2) $ 1.17 $ 0.58 $ 0.47 ========== ========== ========== (1) The two-class method for Class A and Class B Common Stock is not presented because the earnings per share are equivalent to the if converted method since dividends were not declared or paid and each class of common stock has equal ownership of the Company. (2) Employee stock options to purchase 58,838 shares of Class A Common Stock at March 31, 1998 and 28,350 shares of Class A Common Stock at March 31, 1997 are not presented because these options are anti-dilutive. The exercise prices of these options exceeded the average market prices of the shares under option in each respective period. There were no anti-dilutive employee stock options as of March 31, 1999. Options to purchase 500,000 shares of Class A Common Stock in each of the three years ended March 31, 1999, sold in connection with an agreement entered into in January 1996, are not presented because the minimum exercise prices of these options exceeded the average market prices of the shares under option in each respective period. As of March 31, 1999, all options sold under this agreement had expired.
16. Agreements In January 1997, the Company concluded a broad-based agreement with Roche Holdings, Ltd. of Basel, Switzerland ("Roche"), which provides for the marketing by Roche, or its licensee, of a prescription, one dose cure vaginal antifungal product. The product received FDA approval in February 1997. The agreement also gave KV the right to market the product in North America and the exclusive right to market or license the prescription product in the rest of the world. The agreement included cash payments of $3,000,000 to be made in January 1997, 1998 and 1999, respectively. All of these non-refundable payments were received and recorded as licensing revenue in the fourth quarter of each of the respective fiscal years. As part of a further collaboration under the agreement, KV's wholly-owned subsidiary, ETHEX Corporation, began marketing in fiscal 1998 two of Roche's brand name products generically under a revenue sharing arrangement based on sales and gross margin.
17. Quarterly Financial Results (Unaudited) ($ in 000's, except per share data) FISCAL 1999 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year - ------------ ----------- ----------- ----------- ----------- ---- 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 (a) 4,150 4,956 6,454 22,073 37,633 Net Income (a) 2,570 3,062 4,020 13,688 23,340 Earnings Per Share-Basic (b) 0.14 0.16 0.21 0.75 1.26 Earnings Per Share-Diluted (b) 0.13 0.15 0.20 0.69 1.17 FISCAL 1998 - ------------ Net Sales 18,202 21,887 28,434 29,963 98,486 Gross Profit 7,984 9,459 11,393 13,167 42,003 Pretax Income (a) 2,761 3,556 4,030 6,644 16,991 Net Income (a) 1,841 2,182 2,763 4,518 11,304 Earnings Per Share-Basic (b) 0.10 0.11 0.15 0.24 0.60 Earnings Per Share-Diluted (b) 0.09 0.11 0.14 0.23 0.58 Note: - ---- (a) 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 19) and a $3.0 million non-refundable payment associated with an agreement with Roche Holdings, Ltd. (see Note 16). A $3.0 million non-refundable payment was also received in the fourth quarter of fiscal 1998. (b) All earnings per share amounts have been restated to reflect a 3 for 2 stock split in the form of a 50% stock dividend, declared by the Board of Directors on March 23, 1998 and distributed April 17, 1998 to shareholders of record as of April 3, 1998.
18. Segment Reporting In fiscal 1999, the Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which revises reporting and disclosure requirements for operating segments. The following information is provided in accordance with the requirements of this statement. The Company's operations are principally managed on a products and services basis and are comprised of two reportable segments: Contract Services and Generic Drugs. Contract Services sales are primarily inter-segment sales to the Generic Drugs segment with sales to outside customers contributing 13% of its revenues. The generic business sells prescription pharmaceuticals to major wholesalers, chains and buying groups. All other includes the pharmaceutical compound, licensing and branded businesses which do not meet the required quantitative thresholds for reportability. Segment profits are comprised of segment revenues less cost of materials, production costs, depreciation and operating expenses. Only selling, general and administrative expenses directly identifiable with a segment's operations are included in profits. The majority of research and development, general and administrative, amortization and interest expense, as well as interest and other income, are not allocated to segments.
Revenues and profits for these segments are as follows: Fiscal Year Corporate Ended Contract Generic All Expenses and March 31 Services Drugs Other Eliminations Consolidated ----------- -------- ------- ----- ------------ ------------ (Thousands of Dollars) Total Revenues 1999 $33,234 $91,834 $18,970 $(29,178) $114,860 1998 27,063 79,193 20,096 (27,866) 98,486 1997 24,173 40,225 12,794 (19,301) 57,891 - ---------------------------- ---------------- --------------- -------------- ---------------- ------------------ ---------------- Segment Profits 1999 1,390 36,351 5,463 (5,571) 37,633 1998 817 25,090 9,142 (18,058) 16,991 1997 946 17,509 3,875 (13,023) 9,307 - ---------------------------- ---------------- --------------- -------------- ---------------- ------------------ ---------------- Identifiable Assets 1999 40,431 133,649 79,727 (125,817) 127,990 1998 37,193 95,152 21,940 (85,924) 68,361 1997 20,861 63,254 9,328 (52,081) 41,362 - ---------------------------- ---------------- --------------- -------------- ---------------- ------------------ ---------------- Property and equipment additions 1999 4,433 93 498 3,122 8,146 1998 1,486 24 137 4,305 5,952 1997 1,640 227 73 - 1,940 - ---------------------------- ---------------- --------------- -------------- ---------------- ------------------ ---------------- Depreciation and Amortization 1999 1,457 74 116 213 1,860 1998 1,479 78 104 227 1,888 1997 1,280 54 72 188 1,594
Elimination of intersegment revenues consists of revenues reported in the internal management system which are not reportable as revenues under generally accepted accounting principles. Consolidated revenues are principally derived from customers in North America. Property and equipment is all located in St. Louis, Missouri. 19. Nonrecurring Gain Under a contract that the Company has with a supplier, issues arose with respect to the timing of supply of a product and the supplier's failure to pursue another product. The terms of the contract provided for binding private arbitration between the parties which resulted in the Company receiving notice of an award in December, 1998 of $13,253,000. 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 expects to be paid the arbitration award on or before June 15, 1999. The award, net of related expenses of $530,000, is reflected in Other Income in the Statement of Income and as an account receivable in the Balance Sheet at March 31, 1999, and, net of applicable income taxes, represents $.40 per common share on a diluted basis. 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 1999 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 1999 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 1999 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 1999 Annual Meeting of Shareholders, which involves the election of a director, is incorporated herein by this reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Financial Statements: Page The following consolidated financial statements of the Company are included in Part II, Item 8: Report of Independent Certified Public Accountants 36 Consolidated Balance Sheets as of March 31, 1999 and 1998 18 Consolidated Statements of Income for the Years Ended March 31, 1999, 1998 and 1997 19 Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 1999, 1998 and 1997 20 Consolidated Statements of Cash Flows for the Years Ended March 31, 1999, 1998 and 1997 21 Notes to Financial Statements 22 2. Financial Statement Schedules: Report of Independent Certified Public Accountants regarding financial statement schedules Schedule II - Valuation and Qualifying Account (b) Reports on Form 8-K. A report on Form 8-K dated April 5, 1999 reporting KV Pharmaceutical Company's acquisition of the world-wide rights and trademark to Micro-K(R) from Wyeth Ayerst Laboratories, the pharmaceutical division of American Home Products Corporation. 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 14, 1999 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 14, 1999
2. Financial Statement Schedules: ----------------------------- Schedule II Valuation and Qualifying Accounts Balance at Additions charged Amounts charged Balance beginning to costs and to at end of year expenses reserves of year --------- ----------------- --------------- ------- Year Ended March 31, 1997: Allowance for doubtful accounts $ 570,498 $ 440,911 $ 882,355 $ 129,054 Inventory obsolescence 225,000 1,180,516 1,109,194 296,322 ------- --------- --------- --------- $ 795,498 $ 1,621,427 $ 1,991,549 $ 425,376 ======= ========= ========= ========= 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 ======= ========= ========= =========
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 47 through 52 of this Report. Management contracts and compensatory plans are designated on the Exhibit Index. 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 4, 1999 By /s/ Marc S. Hermelin ---------------------------------- Vice Chairman of the Board (Principal Executive Officer) Date: June 4, 1999 By /s/ Gerald R. Mitchell ---------------------------------- Vice President, Finance (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the dates indicated by the following persons on behalf of the Company and in their capacities as members of the Board of Directors of the Company: Date: June 4, 1999 By /s/ Marc S. Hermelin --------------------------------- Marc S. Hermelin Date: June 4, 1999 By /s/ Victor M. Hermelin --------------------------------- Victor M. Hermelin Date: By --------------------------------- Garnet E. Peck, Ph.D. Date: June 4, 1999 By /s/ Norman D. Schellenger --------------------------------- Norman D. Schellenger Date: June 4, 1999 By /s/ Alan G. Johnson --------------------------------- Alan G. Johnson EXHIBIT INDEX ------------- Exhibit No. Description ----------- ----------- 3(a) The Company's Certificate of Incorporation, which was filed as Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended March 31, 1981, is incorporated herein by this reference. 3(b) Certificate of Amendment to Certificate of Incorporation of the Company, effective March 7, 1983, which was filed as Exhibit 3(c) to the Company's Annual Report on Form 10-K for the year ended March 31, 1983, is incorporated herein by this reference. 3(c) Certificate of Amendment to Certificate of Incorporation of the Company, effective June 9, 1987, which was filed as Exhibit 3(d) to the Company's Annual Report on Form 10-K for the year ended March 31, 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 hereby 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. 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 or 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 or 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, filed herewith. 4(i) Second Amendment, dated as of March 11, 1999, to Loan Agreement between the Company and its subsidiaries and LaSalle, filed herewith. 10(a)* 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)* 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)* 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)* 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)* 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. 10(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)* 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)* 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)* 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)* KV Pharmaceutical Company 1991 Incentive Stock Option Plan, adopted as of October 7, 1991, which was filed as Exhibit 4 to the Company's Form S-8 Registration Statement No. 33-44927, filed January 6, 1992, is incorporated herein by this reference. 10(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)* 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)* 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)* 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)* 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)* 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)* 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. 10(w)* 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)* 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)* 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)* 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)* Stock Option Agreement dated as of January 3, 1997, granting a stock option to Marc S. Hermelin, filed herewith. 10(cc)* Stock Option Agreement dated as of May 15, 1997, granting a stock option to Marc S. Hermelin, filed herewith. 10(dd) Asset Purchase Agreement by and between K-V 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. 10(ee)* Amendment, dated as of October 30, 1998, to Employment Agreement between the Company and Marc S. Hermelin, Vice Chairman, filed herewith. 10(ff) Exclusive License Agreement, dated as of April 1, 1999 between Victor M. Hermelin as licensor and the Company as licensee, filed herewith. 21 List of Subsidiaries, filed herewith. 23 Consent of BDO Seidman, LLP, filed herewith. 27 Financial Data Schedule, filed herewith. * Management contract or compensation plan. EX-4 2 EXHIBIT 4(H) - FIRST AMENDMENT TO LOAN AGREEMENT FIRST AMENDMENT TO LOAN AGREEMENT THIS FIRST AMENDMENT TO LOAN AGREEMENT (this "Amendment") is entered into as of the 28th day of October, 1998 by and among LaSalle National Bank, a national banking association ("Bank"); and K-V Pharmaceutical Company, a Delaware corporation, Particle Dynamics, Inc., a New York corporation, and Ethex Corporation, a Missouri corporation (collectively, the "Borrowers"). W I T N E S S E T H: WHEREAS, Bank and Borrowers entered into a Loan Agreement dated as of June 18, 1997 (the "Agreement"), and now desire to amend such Agreement pursuant to this Amendment to, among other things, increase the amount of the Revolving Credit Commitment (as defined in the Agreement) to Forty Million Dollars ($40,000,000) and modify certain covenants. NOW, THEREFORE, for and in consideration of the premises and mutual agreements herein contained and for the purposes of setting forth the terms and conditions of this Amendment, the parties, intending to be bound, hereby agree as follows: 1. Incorporation of the Agreement. All capitalized terms which are not defined hereunder shall have the same meanings as set forth in the Agreement, and the Agreement, to the extent not inconsistent with this Amendment, is incorporated herein by this reference as though the same were set forth in its entirety. To the extent any terms and provisions of the Agreement are inconsistent with the amendments set forth in Paragraph 2 below, such terms and provisions shall be deemed superseded hereby. Except as specifically set forth herein, the Agreement shall remain in full force and effect and its provisions shall be binding on the parties hereto. 2. Amendment of the Agreement. The Agreement is hereby amended as follows: (a) The definition of the term "EBITDA" appearing in Paragraph 1.1 of the Agreement is hereby amended by adding the following sentence at the end of such definition: In the event any Borrower consummates an acquisition (whether via stock purchase, asset purchase, merger or otherwise) (the Person or assets so acquired being referred to herein as the "Acquired Asset"), EBITDA of Borrowers for the fiscal period during which such acquisition occurred and all other relevant "trailing" measuring periods shall be calculated to include the EBITDA of the Acquired Asset on a pro-forma basis, for the relevant measuring periods as if such Acquired Asset was a Borrower hereunder at all such times, to the extent the results of operations of such Acquired Asset are not reflected in Borrower's Financials. 1 (b) The definition of the term "Funded Debt Ratio" is hereby appended to the Agreement in Paragraph 1.1 as follows: "Funded Debt Ratio" means, as of any date, the ratio of (i) Funded Debt to (ii) EBITDA. It is understood and agreed that if Borrower consummates an acquisition (whether via stock purchase, asset purchase, merger or otherwise), Funded Debt of Borrowers for the fiscal period during which such acquisition occurred and all other relevant measuring periods shall be calculated to include the Funded Debt of the Acquired Assets, if applicable, for the relevant "trailing" measuring periods as if such Acquired Asset was owned hereunder at all such times. (c) The definition of the term "Leverage Ratio" appearing in Paragraph 1.1 of the Agreement is hereby deleted in its entirety. (d) The definition of the term "Revolving Note" appearing in Paragraph 1.1 of the Agreement is hereby amended and restated to read in its entirety as follows: "Revolving Note" means that certain Substitute Revolving Note dated as of October 28, 1998 in the aggregate maximum principal amount of Forty Million Dollars ($40,000,000), as the same may be amended, modified or supplemented from time to time, and together with any renewals thereof or exchanges or substitutes therefor. (e) Paragraph 2.1 is hereby amended and restated to read in its entirety as follows: 2.1 Revolving Credit Commitment. On the terms and subject to the conditions set forth in this Agreement, Bank agrees to make revolving credit available and Letters of Credit available to Borrowers from time to time prior to the Revolving Credit Termination Date with respect to Revolving Loans and the Letter of Credit Termination Date with respect to Letters of Credit in such aggregate amounts as Borrowers may from time to time request but in no event exceeding FORTY MILLION DOLLARS ($40,000,000) (the "Revolving Credit Commitment"). The Revolving Credit Commitment shall be available to Borrowers by means of Revolving Loans and Letters of Credit, it being understood that Revolving Loans may be repaid and used again during the period from the date hereof to and including the Revolving Credit Termination Date, at which time the Revolving Credit Commitment shall expire. 2 (f) Paragraph 5.10 is hereby amended and restated to read in its entirety as follows: 5.10 Unused Portion Fee. To compensate Bank for the cost of reserving funds to be made available to Borrowers under this Agreement, Borrowers shall pay to Bank, on the last day of each calendar quarter an unused revolving line fee (the "Unused Portion Fee") equal to the sum of the daily amounts by which the maximum aggregate principal amount of the Revolving Credit Commitment exceeds the actual principal amount of Revolving Loans made hereunder. The Unused Portion Fee is calculated for each applicable day of such quarter in an amount equal to the excess of the maximum aggregate principal amount of the Revolving Credit Commitment over the principal amount of all outstanding advances under the Revolving Loans on such day, multiplied by the percentage fee determined in accordance with the table set forth below (the "Percentage Fee") and divided by three hundred sixty (360). All fees and charges imposed on Borrowers pursuant to this Agreement including, without limitation, the Unused Portion Fee accrued through the date of termination, shall be nonrefundable to Borrowers, notwithstanding any prepayment and termination by Borrowers of this Agreement. Amount of principal outstanding under the Percentage Fee for First Percentage Fee for Second Revolving Credit $20,000,000 of Revolving $20,000,000 of Revolving Commitment Credit Commitment Credit Commitment - --------------------- ------------------------ ------------------------- Up to $5,000,000 one-quarter of one percent one-quarter of one percent (1/4%) (1/4%) Over $5,000,000 one-eighth of one percent one-quarter of one percent (1/8%) (1/4%) (g) A new Paragraph 8.1(z) is hereby appended to the Loan Agreement as follows: (z) Each Borrower and each of their Subsidiaries have reviewed the areas within their business and operations which could be adversely affected by, and have developed or are developing a program to address on a timely basis, the "Year 2000 Problem" (that is, the risk that computer applications used by each Borrower and each of their Subsidiaries may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date on or after December 31, 1999), and have made related appropriate inquiry of material suppliers and vendors. Based on such 3 review and program, each Borrower believes that the "Year 2000 Problem" will not have a material adverse effect on any Borrower. From time to time, at the request of Bank, each Borrower and each of their Subsidiaries shall provide to Bank such updated information or documentation as is requested regarding the status of their efforts to address the Year 2000 problem. (h) Paragraph 8.2(g)(i) is hereby deleted in its entirety and the following paragraph is hereby added to the Agreement in its place and stead: (i) Maintain a Funded Debt Ratio, at all times, of not greater than 1.50 to 1.0. (i) Paragraph 8.2(g)(ii) is hereby amended and restated in its entirety to read as follows: (ii) Maintain EBITDA, at all times, of not less than the amounts set forth below, calculated quarterly for the preceding twelve-month period on a trailing twelve month basis: Period Amount ------ ------ October 28, 1998 through $17,500,000 March 30, 1999 March 31, 1999 through $22,500,000 March 30, 2000 March 31, 2000 and $35,000,000 thereafter (j) Paragraph 8.2(g)(iii) is hereby deleted in its entirety and Paragraph 8.2(g)(iv) is hereby re-referenced as Paragraph 8.2(g)(iii) to account for such deletion. (k) Paragraph 8.3(b) is hereby amended by adding the following sentence to the end of such Paragraph: Notwithstanding the foregoing, so long as an Event of Default is not then in existence, Borrower may make acquisitions of assets or properties in an aggregate amount not to exceed (i) the amount of cash on hand as reflected on Borrowers' most recent Financials delivered to Bank at the time of such acquisition, plus (ii) no more than Ten Million Dollars ($10,000,000) of proceeds of the Revolving Credit Commitment. 4 3. Representations, Covenants and Warranties; No Default. The representations, covenants and warranties set forth in Paragraph 8 of the Agreement shall be deemed remade as of the date hereof by each Borrower, except that any and all references to the Agreement in such representations and warranties shall be deemed to include this Amendment. No Event of Default has occurred and is continuing and no event has occurred and is continuing which, with the lapse of time, the giving of notice, or both, would constitute such an Event of Default under the Agreement. 4. Fees and Expenses. The Borrowers agree to pay on demand all costs and expenses of or incurred by Bank in connection with the evaluation, negotiation, preparation, execution and delivery of this Amendment and the other instruments and documents executed and delivered in connection with the transactions described herein (including the filing or recording thereof), including, but not limited to, the fees and expenses of counsel for the Bank and any future amendments to the Agreement. Borrowers also agree to pay to Bank, on demand, a closing fee equal to one-quarter of one percent (0.25%) of the net aggregate increase in the Revolving Credit Commitment of $20,000,000, amounting to $50,000. 5. Delivery of Documents. Notwithstanding any of the foregoing, prior to or contemporaneously with the making of the Substitute Revolving Note, Bank shall have received from Borrowers the following fully executed documents, in form and substance satisfactory to Bank, and all of the transactions contemplated by each such document shall have been consummated or each condition contemplated by each such document shall have been satisfied: (a) First Amendment to Loan Agreement; (b) Substitute Revolving Note; (c) Certificate of Secretary of each Borrower certifying to board resolutions evidencing each Borrower's authorization of the Amendment, the Substitute Revolving Note and incumbency of each Borrower; and (d) Such other documents, opinions or certificates as Bank may reasonably request. 6. Effectuation. The amendments to the Agreement contemplated by this Amendment shall be deemed effective immediately upon the full execution of this Amendment and without any further action required by the parties hereto. There are no conditions precedent or subsequent to the effectiveness of this Amendment. 7. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. 5 IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of the date first above written. LASALLE NATIONAL BANK K-V PHARMACEUTICAL COMPANY By: By: ---------------------------------- --------------------------------- Its: Its: ---------------------------------- --------------------------------- PARTICLE DYNAMICS, INC. By: --------------------------------- Its: --------------------------------- ETHEX CORPORATION By: --------------------------------- Its: --------------------------------- 6 EX-4 3 EXHIBIT 4(I) - SECOND AMENDMENT TO LOAN AGREEMENT SECOND AMENDMENT TO LOAN AGREEMENT THIS SECOND AMENDMENT TO LOAN AGREEMENT (this "Amendment") is entered into as of the 11th day of March, 1999 by and among LaSalle National Bank, a national banking association ("Bank"), and each of K-V Pharmaceutical Company, a Delaware corporation ("K-V"), Particle Dynamics, Inc., a New York corporation, and Ethex Corporation, a Missouri corporation (collectively, the "Borrowers"). W I T N E S S E T H: WHEREAS, Bank and Borrowers entered into that certain Loan Agreement dated as of June 18, 1997, as amended by that certain First Amendment to Loan Agreement dated as of October 28, 1998 (collectively, the "Agreement"), and now desire to amend such Agreement pursuant to this Amendment to, among other things, advance a new secured term loan to K-V in the original principal amount of Two Million Three Hundred Thousand Dollars ($2,300,000) and (ii) modify certain financial covenants. NOW, THEREFORE, for and in consideration of the premises and mutual agreements herein contained and for the purposes of setting forth the terms and conditions of this Amendment, the parties, intending to be bound, hereby agree as follows: 1. Incorporation of the Agreement. All capitalized terms which are not defined hereunder shall have the same meanings as set forth in the Agreement, and the Agreement, to the extent not inconsistent with this Amendment, is incorporated herein by this reference as though the same were set forth in its entirety. To the extent any terms and provisions of the Agreement are inconsistent with the amendments set forth in Paragraph 2 below, such terms and provisions shall be deemed superseded hereby. Except as specifically set forth herein, the Agreement shall remain in full force and effect and its provisions shall be binding on the parties hereto. 2. Amendment of the Agreement. The Agreement is hereby amended as follows: (a) The definitions of the terms "Lakefront Drive Property", "Metro Court Properties", "Term Loan A", "Term Loan B", "Term Loan Commitment A", "Term Loan Commitment B", "Term Note A", "Term Note B" and "Term Notes" are hereby added to the Agreement in Paragraph 1.1 to read in their entirety as follows: "Lakefront Drive Property" means that certain parcel of real property owned by K-V located at 13622 Lakefront Drive, St. Louis, Missouri. "Metro Court Properties" means those certain parcels of real property owned by K-V located at 10850-10862 Metro Court and 10876-10888 Metro Court, respectively, in the City of Maryland Heights, St. Louis County, Missouri. 1 "Term Loan A" means all Loans made under Term Loan Commitment A. "Term Loan B" means all Loans made under Term Loan Commitment B. "Term Loan Commitment A" shall have the meaning assigned to such term in Paragraph 2.2(a) hereof. "Term Loan Commitment B" shall have the meaning assigned to such term in Paragraph 2.2(b) hereof. "Term Note A" means that certain Term Note dated as of June 28, 1997 in the original principal amount of THREE MILLION FIVE HUNDRED THOUSAND DOLLARS ($3,500,000), payable by K-V to Bank, as the same may be amended, modified or supplemented from time to time, and together with any renewals thereof or exchanges or substitutes therefor. "Term Note B" means that certain Term Note B dated as of March 11, 1999 in the original principal amount of TWO MILLION THREE HUNDRED THOUSAND DOLLARS ($2,300,000), payable by K-V to Bank, as the same may be amended, modified or supplemented from time to time, and together with any renewals thereof or exchanges or substitutes therefor. "Term Note" or "Term Notes" means collectively, Term Note A and Term Note B, unless the context shall otherwise require. (b) The definition of the terms "Assignment of Rents", "Environmental Indemnity Agreement", "Fixed Rate", "Mortgaged Properties", "Mortgages", "Notes", "Term Loan" and "Term Loan Maturity Date" appearing in Paragraph 1.1 of the Agreement are hereby amended and restated to read in their entirety as follows: "Assignment of Rents" means those certain Assignments of Rents and Leases between K-V and Bank for each of the Mortgaged Properties, each dated as of June 28, 1997 in the case of the Metro Court Properties and March 11, 1999 in the case of the Lakefront Property, as each of the same may be amended, modified or restated from time to time. "Environmental Indemnity Agreement" means those certain Environmental Indemnity Agreements between K-V and Bank for each of the Mortgaged Properties, dated as of June 28, 1997 in the case of the Metro Court Properties and March 11, 1999 in the case of the Lakefront Property, as the same may be amended, modified or restated from time to time. "Fixed Rate" means (a) eight and 53/100 percent (8.53%) with respect to Term Note A and (b) seven 95/100 percent (7.95%) with respect to Term Note B. 2 "Mortgaged Properties" means the Metro Court Properties and the Lakefront Property in which K-V has granted a first priority security interest to Bank pursuant to each of the Mortgages. "Mortgages" means each of those certain Deeds of Trust made by K-V in favor of Bank for each of the Mortgaged Properties dated as of June 28, 1997 with respect to the Metro Court Properties and that certain Deed of Trust dated as of March 11, 1999 with respect to the Lakefront Property, as each of the same may be amended, restated or modified from time to time. "Notes" means, collectively, the Revolving Note, Term Note A and Term Note B. "Term Loan" means, collectively, Term Loan A and Term Loan B, unless the context in which such term is used shall otherwise require. "Term Loan Maturity Date" means: (i) with respect to Term Loan A, the earlier to occur of (A) ninety (90) days after Bank has indicated in writing to K-V that it is unwilling to renew the Revolving Credit Commitment at the maturity thereof, (B) ninety (90) days after Borrowers refinance the Revolving Loans with any other Person, and (C) June 18, 2002; and (ii) with respect to Term Loan B, the earlier to occur of (A) ninety (90) days after Bank has indicated in writing to K-V that it is unwilling to renew the Revolving Credit Commitment at the maturity thereof, (B) ninety (90) days after Borrowers refinance the Revolving Loans with any other Person, and (C) March 11, 2004. (c) Paragraph 2.2 is hereby amended and restated to read in its entirety as follows: 2.2 Term Loan Commitments. (a) Term Loan Commitment A. On the terms and subject to the conditions set forth in this Agreement, Bank has made Term Loan A to K-V in the original principal amount of THREE MILLION FIVE HUNDRED THOUSAND DOLLARS ($3,500,000) (the "Term Loan Commitment A"). Amounts borrowed in respect of Term Loan A and repaid may not be reborrowed. Term Loan A was used to purchase the Metro Court Properties and for no other purpose. (b) Term Loan Commitment B. On the terms and subject to the conditions set forth in this Agreement, Bank agrees to make Term Loan B to K-V in the original principal amount of TWO MILLION THREE HUNDRED THOUSAND DOLLARS ($2,300,000) ("Term Loan Commitment B"). Amounts borrowed in respect of Term Loan B and repaid may not be reborrowed. Term Loan B shall be used to purchase the Lakefront Drive Property and for no other purpose. (d) Paragraph 2.5 is hereby deleted in its entirety. 3 (e) Paragraph 3.2 is hereby amended and restated to read in its entirety as follows: 3.2 Term Notes. (a) Term Note A. Term Loan A made by Bank under Term Loan Commitment A is evidenced by Term Note A, payable to the order of Bank in the original principal amount of THREE MILLION FIVE HUNDRED THOUSAND DOLLARS ($3,500,000). The unpaid principal amount of Term Loan A shall bear interest and be due and payable as provided in this Agreement and Term Note A. Payments to be made by K-V under Term Note A shall be made at the time, in the amounts and upon the terms set forth herein and therein. (b) Term Note B. Term Loan B made by Bank under the Term Loan Commitment B shall be evidenced by Term Note B, payable to the order of Bank in the original principal amount of TWO MILLION THREE HUNDRED THOUSAND DOLLARS ($2,300,000). The unpaid principal amount of Term Loan B shall bear interest and be due and payable as provided in this Agreement and Term Note B. Payments to be made by K-V under Term Note B shall be made at the time, in the amounts and upon the terms set forth herein and therein. (f) Paragraph 4.1(b) is hereby amended and restated to read in its entirety as follows: (b) K-V hereby promises to pay interest on the unpaid principal amount of each Term Loan at a rate per annum equal to the applicable Fixed Rate for Term Loan A or Term Loan B, as the case may be, for the period commencing on the date of such Term Loan until such Fixed Rate Loan is paid in full. Accrued interest and principal on the outstanding principal amount of each Term Loan shall be payable monthly in arrears on the last Business Day of each calendar month commencing immediately in the case of Term Loan A and April 30, 1999 in the case of Term Loan B, with a final payment of accrued and unpaid interest due on the applicable Term Loan Maturity Date. After the applicable Term Loan Maturity Date, accrued interest and principal on each such Term Loan shall be payable on demand. (g) Paragraph 5.11(a) is hereby amended and restated as follows: 5.11 Prepayment. (a) Term Loan Prepayments. K-V may, from time to time, prepay the Loan evidenced by either Term Note A or Term Note B in whole or in part prior to the date of maturity thereof and the same shall pay, subject to Paragraph 5.7 hereof, the Make-Whole Amount (as defined below) plus a prepayment fee for each Term Loan to be pre-paid equal to (i) two percent (2%) of the unpaid principal balance of the Term Loan to be pre-paid prior to the first (1st) anniversary of 4 the date of the applicable Term Note to be pre-paid, and (ii) one percent (1%) of the unpaid principal balance of the applicable Term Loan to be pre-paid prior to the second (2nd) anniversary of the date of the applicable Term Note to be pre-paid; provided, however, that, prior to the occurrence of an Event of Default, such prepayment fee shall not be due and payable upon prepayment under circumstances where Bank has been requested by Borrowers to renew the Revolving Credit Commitment at the expiration or maturity thereof and either (a) Bank has refused to do so or (b) Bank has offered such renewal upon terms materially different and adverse to Borrowers. For the purposes hereof, the "Make-Whole Amount" shall be the amount calculated as follows: i. There shall first be determined, as of the date fixed for prepayment (the "Prepayment Date"), the amount, if any, by which (A) the applicable Fixed Rate of the Term Loan to be prepaid exceeds (B) the yield to maturity percentage for the United States Treasury Note (the "Treasury Note") maturing June, 2002 in the case of Term Note A and March, 2004 in the case of Term Note B, as published in The Wall Street Journal on the fifth business day preceding the Prepayment Date, plus (i) Two Hundred Twenty-Five basis points (2.25%) in the case of Term Note A, or (ii) Two Hundred Fifty basis points (2.50%) in the case of Term Note B ((i) and (ii) above are referred to as the "Current Yield"). If (A) publication of The Wall Street Journal is discontinued, or (B) publication of the Treasury Note in The Wall Street Journal is discontinued, Bank, in its sole discretion, shall designate another daily financial or governmental publication of national circulation to be used to determine the applicable Current Yield; ii. The difference calculated pursuant to clause (i) above shall be multiplied by the outstanding principal balance on such Term Note to be prepaid hereof as of the Prepayment Date; iii. The product calculated pursuant to clause (ii) above shall be multiplied by the quotient, rounded to the nearest one-hundredth of one percent, obtained by dividing (A) the number of days from and including the Prepayment Date to and including the applicable Maturity Date on such Term Note to be prepaid, by (B) 365; and iv. The sum calculated pursuant to clause (iii) above shall be discounted at the annual rate of the applicable Current Yield on such Term Note to be prepaid to the present value thereof as of the applicable Prepayment Date, on the assumption that said sum would be received in equal monthly installments on each monthly anniversary of the applicable Prepayment Date prior to the Maturity Date on such Term Note to be prepaid, with the final such installment to be deemed received on the Maturity 5 Date on such Term Note to be prepaid; provided that Borrowers shall not be entitled in any event to a credit against, or a reduction of, the Debt being prepaid if the applicable Current Yield on such Term Note to be prepaid exceeds the Fixed Rate or for any other reason. (h) The proviso at the conclusion of Paragraph 8.2(g)(iv) is amended and restated to read in its entirety as follows: provided, however, that the amount of Capital Expenditures may exceed the limits set forth above on a cumulative basis so long as the aggregate amount of Capital Expenditures are (a) made with funds other than proceeds of Funded Debt classified as current liabilities under GAAP and (b) at all times not in excess of $7,900,000 plus 75% of Borrower's net income, in accordance with GAAP, for the period from the Closing Date and thereafter. (i) Any and all references to the "Term Note" shall refer to the "Term Notes," unless the context in which such term is used shall otherwise require. 3. Consent Regarding Proposed Acquisition. Notwithstanding the provisions of Paragraph 8.3(b) of the Agreement to the contrary, Bank hereby consents to the acquisition by K-V of certain of the assets of Wyeth-Ayerst Laboratories, a division of American Home Products, a Delaware corporation, in accordance with the terms and conditions of that certain Asset Purchase Agreement dated as of February 11, 1999 (the "Acquisition") and waives compliance with the provisions of Paragraphs 8.3(b) and 8.2(g)(iv) for the Acquisition only, provided (i) no Event of Default exists or would exist with the passage of time, the giving of notice or both; (ii) no more than Thirty Million Dollars ($30,000,000) of proceeds of the Revolving Credit Commitment are utilized for the Acquisition; and (iii) the Borrowers repay at least Ten Million Dollars ($10,000,000) of outstanding principal under the Revolving Credit Commitment within forty-five (45) days of the date of the initial borrowing for the Acquisition under the Revolving Credit Commitment. 4. Representations, Covenants and Warranties; No Default. The representations, covenants and warranties set forth in Paragraph 8 of the Agreement shall be deemed remade as of the date hereof by each Borrower, except that any and all references to the Agreement in such representations and warranties shall be deemed to include this Amendment. No Event of Default has occurred and is continuing and no event has occurred and is continuing which, with the lapse of time, the giving of notice, or both, would constitute such an Event of Default under the Agreement. 5. Fees and Expenses. The Borrowers agree to pay on demand all costs and expenses of or incurred by Bank in connection with the evaluation, negotiation, preparation, execution and delivery of this Amendment and the other instruments and documents executed and delivered in connection with the transactions described herein (including the filing or recording thereof), including, but not limited to, the fees and expenses of counsel for the Bank and any future amendments to the Agreement. Borrowers also agree to pay to Bank, on demand, a closing fee equal to one percent (1.0%) of the original principal amount of Term Loan Commitment B of $2,300,000, amounting to $23,000. 6 6. Delivery of Documents. Notwithstanding any of the foregoing, prior to entering into this Amendment, Bank shall have received from Borrowers the following fully executed documents, in form and substance satisfactory to Bank, and all of the transactions contemplated by each such document shall have been consummated or each condition contemplated by each such document shall have been satisfied: (a) Second Amendment to Loan Agreement; (b) Term Note B; (c) Missouri Future Advance Deed of Trust and Security Agreement for the Lakefront Drive Property; (d) Assignment of Rents and Leases for the Lakefront Drive Property; (e) Environmental Indemnity Agreement for the Lakefront Drive Property; (f) Certificate of Secretary of each Borrower certifying to board resolutions evidencing each Borrower's authorization of the Amendment, Term Note B, the real property collateral documents and incumbency of each Borrower; (g) Lender's Title Policy for the Lakefront Drive Property; (h) ALTA survey for the Lakefront Drive Property; (i) Gap-Personal Undertaking for the Lakefront Drive Property; (j) Officer's Certificate of each Borrower; (k) Officer's Certificate with respect to (i) the purchase of the Lakefront Drive Property, (ii) consummation of the Acquisition of certain of the assets of Wyeth-Ayerst Laboratories, a division of American Home Products and (iii) true and correct copies of all documentation relating to the Acquisition; (l) Legal opinion of Borrowers' counsel; and (m) Such other documents, opinions or certificates as Bank may reasonably request. 7 7. Effectuation. The amendments to the Agreement contemplated by this Amendment shall be deemed effective immediately upon the full execution of this Amendment and without any further action required by the parties hereto. There are no conditions precedent or subsequent to the effectiveness of this Amendment. 8. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. [SIGNATURE PAGE FOLLOWS] 8 IN WITNESS WHEREOF, the parties hereto have duly executed this Second Amendment to Loan Agreement as of the date first above written. LASALLE NATIONAL BANK K-V PHARMACEUTICAL COMPANY By: By: -------------------------------- -------------------------------- Its: Its: -------------------------------- -------------------------------- PARTICLE DYNAMICS, INC. By: -------------------------------- Its: -------------------------------- ETHEX CORPORATION By: -------------------------------- Its: -------------------------------- EX-10 4 EXHIBIT 10(EE) - AMENDMENT TO EMPLOYMENT AGREEMENT AMENDMENT TO EMPLOYMENT AGREEMENT BETWEEN KV PHARMACEUTICAL COMPANY AND MARC S. HERMELIN This Amendment to the Employment Agreement dated December 16, 1996 (the "Employment Agreement") by and between KV Pharmaceutical Company ("Employer") and Marc S. Hermelin ("Employee") is hereby entered into as of the 30th day of October, 1998. Whereas, the Employment Agreement contemplated certain death benefits in the event the Employee's employment is terminated by Employer involuntarily, or if the Employee's employment is terminated; voluntarily by virtue of retirement, pre-retirement or succession, and; Whereas, Employer has deemed it desirable to also contemplate and protect such said death benefits for the Employee during his continued service to Employer for the remaining term of this Agreement; and Whereas, Employer desires to assure itself of the continued availability of the services of the Employee; and Whereas, it is deemed desirable to provide assurances to Employee with respect to death benefits that shall be provided to the Employee and his estate in the event his employment should be terminated with Employer by reason of death. Now therefore, Employer hereby agrees with Employee that: 1. Section 4 of the Employment Agreement is hereby amended by adding the following paragraph at the end thereof to henceforth be read as paragraph (j): (j) In the event the Employee's employment with Employer is terminated as a result of the Employee's death, and the Employee has not elected pre-retirement, retirement or succession, as contemplated under paragraphs 6, 7 and 13 respectively then Employer shall pay Employee's designated beneficiary or beneficiaries the sum of 60% of the Employee's then Final Average Compensation for a period of ten (10) years in equal monthly installments. Such payments shall be made in lieu of any death benefits that otherwise would have been payable to the Employee's designated beneficiary or beneficiaries under paragraphs 6, 7 and 13 herein, but in no way can be construed so as to prevent or preclude the payment of life insurance benefits to the Employee's designated beneficiary or beneficiaries as defined in paragraph 5(a). Notwithstanding the foregoing, at such time as the Employee elects pre-retirement, retirement or succession, as defined in paragraphs 6, 7 and 13 respectively, the Employee's death benefits as defined herein paragraph 4(j) shall lapse. 2. Except as amended hereby, the Employment Agreement shall remain in full force and effect. IN WITNESS WHEREOF, Employer and Employee have agreed to amend the Employment Agreement, as hereinabove provided, as of the date set forth above. KV PHARMACEUTICAL COMPANY By: --------------------------- Marc S. Hermelin Title: EX-10 5 EXHIBIT 10(FF) - EXCLUSIVE LICENSE AGREEMENT EXCLUSIVE LICENSE AGREEMENT THIS AGREEMENT, made as of the 1st day of April, 1999 by and between: VICTOR M. HERMELIN, a United States citizen; having a residence at 1722 Baxter Forest Valley Court, Chesterfield. Missouri, 63005 ("LICENSOR"); and K.V. PHARMACEUTICAL COMPANY, a Delaware corporation, United States of America whose principal place of business is 2503 South Hanley Road, St- Louis, Missouri 63144 ("LICENSEE"). WITNESSTH that: WHEREAS, LICENSOR is the sole owner of Licensed Patent Rights (hereinafter defined) and has developed and is the sole owner of Technical Information (hereinafter defined), all of which cover and relate to Licensed Products (hereinafter defined); and WHEREAS, LICENSEE wishes to obtain exclusive licenses (exclusive even as to the LICENSOR) in and to the Licensed Patent Rights and the Technical Information throughout the world, and LICENSOR is willing to grant such licenses to LICENSEE, all subject to the terms and conditions of this Agreement; THEREFORE, in consideration of the foregoing premises, which are hereby made a part of the terms and conditions of this Agreement, and the mutual covenants recited hereinafter, it is agreed as follows: ARTICLE 1: DEFINITIONS As used throughout this Agreement, each of the following terms shall have the meaning set forth in this Article I 1.01 "Effective Date" means the date first written above. 1.02. "Licensed Patent Rights" means the patents and applications for patent, and any patents issuing on such applications, which LICENSOR has filed or hereafter files in any country of the world and patents issuing thereon which relate to Licensed Products and the method of use or manufacture of Licensed Products, including (but not limited to) the patents and patent applications listed in Appendix A, and any continuations or reissues thereof, including any prior continuation-in-part or divisional patent application thereof, and any patent granted upon any of such patent applications and all foreign counterparts and extensions thereof. 1.03. "Licensed Products" means products incorporating uneven dosing technology developed by LICENSOR which fall within the scope of any one or more valid and enforceable Licensed Patent Rights. 1.04. "Technical Information" means all LICENSOR know-how, data, including raw data and other information or improvements, in existence on the date hereof which is pertinent to the Licensed Patent Rights and the development, testing, registration, manufacture, use or sale of Licensed Products. 1.05. "Territory" means the United States of America and every country in the world or such lesser number of countries as am designated in writing at the sole election of LICENSEE. ARTICLE 2: GRANT OF LICENSE 2.01. Licensed Patent Mitts: LICENSOR hereby grants and agrees to grant to LICENSEE an exclusive license (exclusive even as to LICENSOR), with the right to grant sub-licenses, under the Licensed Patent Rights. 2.02. Technical Information: LICENSOR hereby grants and agrees to grant to LICENSEE an exclusive license (exclusive even as to LICENSOR), with the right to grant sub-licenses, to use the Technical Information to make, have made, use. sell and/or distribute Licensed Products throughout the Territory. ARTICLE 3: ROYALTIES 3.01. Ongoing Royalty: Subject to the terms and conditions of this Article 3, LICENSEE shall pay or cause to the paid to LICENSOR during the term of this Agreement royalties equal to: (a) 10% of all royalties and/or milestone payments actually paid to LICENSEE by any unaffiliated sub-licensee of the Licensed Patent Rights; and (b) 2% of all net sales (after all discounts, rebates, chargebacks, returns, credits and allowances) of Licensed products by Licensee and its affiliates. 3.02. Invalidity of Patent: Should any patent licensed hereunder be declared invalid or limited in scope or rendered unenforceable by a decision of a court or other tribunal of competent jurisdiction in the country in which the patent was granted which is binding on all persons in all parts of said country and from which no appeal is or can be taken, then the construction placed upon said patent by said court or other tribunal shall be followed by the parties hereto from and after the date of entry of said decision and royalties shall thereafter be payable to LICENSOR in accordance with such construction for the country in which the decision was rendered. ARTICLE 4: RECORDS AND PAYMENTS 4.01. Quarterly Reports and Payments: Not later than sixty (60) days after the first calendar quarter with respect to which royalties are first payable to LICENSOR by LICENSEE under Section 3.01 and sixty (60) days after the end of any subsequent calendar quarter during the term of this Agreement, LICENSEE shall deliver or cause to be delivered to LICENSOR a written report showing all royalties and milestone payments received by LICENSEE and all sales of Licensed Products by LICENSEE during the preceding quarterly period and the amount payable as royalties to LICENSOR thereon under Section 3.01. Concurrently with the submission of each such written report, LICENSEE shall pay or cause to be paid to LICENSOR the amount of royalties shown to be due thereon under this Agreement at the address of LICENSOR first set forth above or such other address as shall be specified to LICENSEE in writing by LICENSOR. 4.02. Currency of Payment: Unless otherwise agreed to by the parties hereto, royalties shall be remitted in the currency of the United States. Such royalties shall be first determined in the currency of the country in which they are earned and then converted to its equivalent in the currency of the United States. 4.03. Taxes Withhold: Any income or other tax that LICENSEE is legally required to withhold and pay on behalf of LICENSOR with respect to the royalties payable to LICENSOR under this Agreement shall be deducted from said royalties prior to remittance to LICENSOR. 4.04. Records: LICENSEE shall keep or cause to be kept accurate records in sufficient detail to enable the royalties payable hereunder to be determined. ARTICLE 5: PATENT PROSECUTION AND MAINTENANCE 5.01. Prosecution: LICENSEE agrees that it will file and prosecute, at its own expense, any applications, reissue applications, divisionals, contributions and continuations-in-part as are determined by LICENSEE, in its sole and absolute discretion, to be necessary or desirable for patent protection with respect to the Licensed Patent Rights in the United States and in such foreign countries as LICENSEE determines, in its sole and absolute discretion, to be necessary or desirable. LICENSOR shall have the right to file and prosecute, at his own expense, any applications, reissue applications, divisionals, continuations and continuations-in-part with respect to the Licensed Patent Rights as are determined by LICENSOR to be necessary or desirable but which are not filed or prosecuted by LICENSEE. 5.02. Expenses: LICENSEE shall pay the governmental fees and charges necessary to maintain in force all issued patents within the Licensed Patent Rights as are filed or prosecuted by LICENSEE. LICENSOR shall pay the governmental fees and charges applicable to file and prosecute such patent rights by LICENSOR. ARTICLE 6: CONFIDENTIALITY 6.01. Obligation of Confidentiality: All Technical Information of LICENSOR disclosed to LICENSEE shall be held in confidence and not disclosed by LICENSEE to any third party, except that LICENSEE may disclose such information to its officers and employees, sub-licensees, advisors, governmental authorities, and consultants who are under a similar obligation of secrecy in furtherance of the purposes of this Agreement and otherwise as may be determined by LICENSEE, in its sole and absolute judgment to be necessary or desirable to achieve the purposes contemplated by this Agreement; provided, however, that the foregoing obligation of confidentiality assumed by LICENSEE hereunder shall not apply to: any of the Technical Information that: (i) was known by LICENSEE prior to its disclosure by LICENSOR; (ii) is or becomes available to the public through no breach of this Agreement by LICENSEE; or (iii) is received by LICENSEE or its sub-licensees in good faith from a third party who has a right to disclose the same. 6.02 Term of Obligation of Confidentiality: The obligations of confidentiality in this Article 6 shall remain in effect during the term of this Agreement. ARTICLE 7: INFRINGEMENT 7.01. Infringement Actions: LICENSEE and LICENSOR shall each promptly notify the other of any infringement of the Licensed Patent Rights or unauthorized use of the Technical Information which may come to its or his attention LICENSEE may undertake such efforts as are determined by LICENSEE to be appropriate to obtain a discontinuance of the aforesaid infringement or unauthorized use. If LICENSEE does not undertake to obtain a discontinuance of the or unauthorized use or is not successful in its efforts to do so, LICENSOR may at his option bring suit against such infringer or unauthorized user. With respect to any legal action that may be taken in accordance with this Article 7, it is understood and agreed that the party to this Agreement that takes such action shall bear solely all costs and expenses associated therewith. 7.02. Infringement of Third Party Patent; Alleged Invalidity: Each party hereto shall notify the other promptly in the event of the receipt of notice of any action, suit or claim alleging infringement by any Licensed Product of any patent held by a third party or claiming the invalidity of any Licensed Patent Right. LICENSEE may elect to control any legal action or claim so instituted. If, as a result of any judgment or settlement, it is determined that a claim or claims by a third party dominate the manufacture, use or sale of the Licensed Product and LICENSEE or its sub-licensees is required to make any payments to any third party as a result thereof, LICENSEE may offset all such payments against any present and/or future payment obligations it may have to LICENSOR. ARTICLE 8: TERMINATION 8.01 Term: This Agreement is effective as of the Effective Date and shall unless terminated earlier by one of the parties in accordance with its terms, expire as to each country in the Territory 25 years from the Effective Date. 8.02 Right to Terminate for Breach: This Agreement may be terminated by either party to this Agreement if the other party commits a material breach of any of the terms or conditions hereof and does not remedy such breach within ninety (90) days after receipt of a written demand therefor. 8.03. Right to Royalties: The termination of this Agreement for any reason shall not prejudice LICENSOR's rights to royalties due it hereunder and unpaid of the effective date of termination, or to any examination of LICENSEE's records for any period as herein provided. ARTICLE 9: GENERAL 9.01. Assignability: Neither LICENSOR nor LICENSEE shall assign this Agreement or its rights and obligations under this Agreement without the prior written consent of the other party, which consent shall not be unreasonably withheld; provided however, either party shall be allowed to assign this Agreement and its rights under this Agreement in whole or in part to any of its respective Affiliates and LICENSOR may assign this Agreement to a purchaser of substantially all of the business of LICENSOR to which it relates. 9.02. Non-Waiver: The waiver by either of the parties to this Agreement of any breach of any provision hereof by the other party shall not be construed to be a waiver of any succeeding breach of such provision or a waiver of the provision itself. 9.03. Governing Law: This Agreement shall be governed by and construed and interpreted under the laws of the State of Delaware. 9.04. Notices: Notices required or otherwise given hereunder shall be given by hand delivery or by posting registered, certified or Express mail postage prepaid, or by telefax, confirmed by certified mail, postage prepaid, or by next business day delivery service to the third party at its or his address set forth at the beginning of this Agreement or otherwise at the address as to which the party has given such notice thereof to the other. Such notices shall be deemed given upon receipt. 9.05. Force Majeure: No failure or omission by the parties hereto in the performance of any obligation of this Agreement shall be deemed a breach of this Agreement nor shall it create any liability, if the same shall arise from any cause or causes beyond the reasonable control of the affected party, whether or not foreseeable, including, but not limited to, the following, which for purposes of this Agreement shall be regarded as beyond the control of the party in question: acts of God; acts or omissions of any government; any rules, regulations or orders issued by any governmental authority or by any officer, department agency or instrumentality thereof; fire; storm; flood; earthquake; accident; war; rebellion; insurrection; riot; invasion; strikes; and lockouts or the like; provided that the party so affected shall use its reasonable commercial efforts to avoid or remove such causes of nonperformance (but shall not be required to incur any extraordinary expense or commence or continue any legal action) and shall continue performance hereunder whenever such causes are removed. 9.06. Headings: The headings appearing herein have been inserted solely for the convenience of the parties hereto and shall not affect the construction, meaning or interpretation of this Agreement of any of its terms and conditions. 9.07. Integration: The terms and provisions contained in this Agreement, including the Appendix, constitute the entire agreement and understanding between the parties to this Agreement with respect to the Licensed Patent Rights and the Licensed Products. Neither party has relied or will rely on any representation or agreement of the other except to the extent set forth herein, and neither party shall be bound by or charged with any oral, written or implied agreements, representations, warranties, understandings, commitments or obligations not specifically set forth herein. This Agreement may not be released, discharged, abandoned, changed or modified in any manner except by an instrument in writing in which this Agreement is specifically referenced signed by a duly authorized officer or representative of each of the parties hereto. IN WITNESS WHEREOF, each of the parties hereto has caused this instrument to be executed by it or its respective duly authorized representative as of the day and year first above written. KV Pharmaceutical Company By: ------------------------------------ Victor M. Hermelin Exhibit A U.S. Patent Application entitled "Maximizing Effectiveness of Substances Used To Improve Health and Well Being, to be filed April 2, 1999, by Victor M. Hermelin. EX-21 6 EXHIBIT 21 - LIST OF SUBSIDIARIES ETHEX Corporation, a Missouri corporation Ther-Rx Corporation, a Missouri corporation Particle Dynamics, Inc., a New York corporation DrugTech Corporation, a Delaware corporation SPI - Sub, Inc., a Delaware corporation EX-23 7 EXHIBIT 23 - CONSENT OF ACCOUNTANTS Consent of Independent Certified Public Accountants KV Pharmaceutical Company St. Louis, Missouri We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Numbers 2-56793, 2-76173, 33-46400, 33-44927 and 333-199) of our report dated May 14, 1999 relating to the consolidated financial statements of KV Pharmaceutical Company appearing in the Company's Annual Report on Form 10-K for the year ended March 31, 1999. /s/ BDO SEIDMAN, LLP St. Louis, Missouri June 2, 1999 EX-27 8 FDS --
5 1 12-MOS MAR-31-1999 APR-01-1998 MAR-31-1999 2,616,857 7,523,380 18,988,162 631,006 23,652,712 69,581,281 18,966,483 0 127,990,160 26,469,278 31,490,553 0 2,410 183,172 0 127,990,160 114,860,315 0 0 61,414,775 29,084,756 0 498,335 37,632,747 14,292,546 23,340,201 0 0 0 23,340,201 1.26 1.17
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