-----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, I9LJQWi8VslPrTm0f1MR2apbveKIxX0b5sHePLcph+jwxilW/0sZw+fGtROBlV08 Uih7N4MkXevm32gYDcr+Wg== 0001011240-97-000065.txt : 19970702 0001011240-97-000065.hdr.sgml : 19970702 ACCESSION NUMBER: 0001011240-97-000065 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970630 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: KV PHARMACEUTICAL CO /DE/ CENTRAL INDEX KEY: 0000057055 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 430618919 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09601 FILM NUMBER: 97633550 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 (3-31-97) 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, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the Transition period from to Commission file number 1-9601 K-V PHARMACEUTICAL COMPANY 2503 SOUTH HANLEY ROAD ST. LOUIS, MISSOURI 63144 (314) 645-6600 Incorporated in Delaware I.R.S. Employer Identification No. 43-0618919 Securities registered pursuant to Section 12(b) of the Act: Class A Common Stock par value $.01 per share American Stock Exchange Class B Common Stock par value $.01 per share American Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: 7% Cumulative Convertible Preferred, par value $.01 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the 5,554,663 shares of Class A and 2,164,366 shares of Class B Common Stock held by nonaffiliates of the Registrant as of June 6, 1997 was $90,957,607 and $36,253,131 respectively. As of June 6, 1997, the Registrant had outstanding 7,709,147 and 4,338,950 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 1997 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. K-V Pharmaceutical Company ("KV") was incorporated under the laws of Delaware in 1971 as a successor to a business originally founded in 1942. Victor M. Hermelin, KV's Chairman and founder, obtained initial patents for early controlled release and enteric coated technologies in the early 1950's. KV is a pioneer in the area of advanced drug delivery technologies which enhance the effectiveness of new therapeutic agents, existing pharmaceutical products and nutritional supplements. The Company has developed a diverse portfolio of ten technologies, including three oral controlled release technologies, four site-specific oral and topical delivery technologies, and three tastemasking technologies. These systems, which are used in the Company's products and the products of its marketing licensees, are designed to improve and control the absorption and utilization by the human body of active pharmaceutical compounds, allowing the compounds to be administered less frequently with potentially reduced side effects, improved drug efficacy and/or enhanced patient compliance. Additionally, the Company continually applies its scientific expertise and development experience to refine and enhance its existing drug delivery systems and formulation technologies and to create new technologies that may be used in its drug development programs. KV licenses the marketing rights for products developed with these drug delivery technologies to major domestic and international brand name pharmaceutical marketers in return for license fees, milestone payments, research reimbursement and manufacturing and royalty revenues. In February, 1990, KV established a generic marketing capability through a wholly-owned subsidiary, ETHEX Corporation ("ETHEX"), which makes KV one of the only drug delivery research and development companies that also markets "technology distinguished" generic products. KV's other wholly-owned subsidiary, Particle Dynamics, Inc. ("PDI"), formerly known as Desmo Chemical Corporation, was incorporated in New York in 1948 and acquired by KV in 1972. Through PDI, the Company develops and markets specialty pharmaceutical compounds, including directly compressible and microencapsulated ingredients used in pharmaceutical processing, and tastemasked vitamins and minerals for the pharmaceutical, nutritional and food industries. (Hereinafter, KV, ETHEX and PDI are sometimes referred to collectively as "KV" or the "Company.") 2 (b) Industry Segments The Company operates principally in one industry segment, consisting of pharmaceutical development, manufacturing and marketing. Revenues are received from customers for the development, manufacture and sale of drug products to pharmaceutical marketers and from directly marketing its own technology distinguished generic products. Revenues may be received in the form of licensing revenues and/or royalty payments to KV based upon a percentage of the licensee's sales of the product, in addition to manufacturing revenues, when marketing rights to products using KV's advance drug delivery technologies are licensed. (c) Narrative Description of Business The Company is engaged in the formulation and commercialization of brand name prescription, generic prescription and over-the-counter ("OTC") products utilizing the Company's proprietary drug delivery technologies. The Company develops generic drugs using its proprietary technologies that it markets and distributes through its wholly-owned subsidiary, ETHEX Corporation. ETHEX currently sells 40 products, 20 of which were launched over the past two fiscal years and many of which utilize KV's drug delivery systems. Approximately 10 additional products are expected to be launched during fiscal 1998. ETHEX Corporation distributes and markets these technology distinguished generic products directly to various markets and classes of trade customers, including wholesalers, chains, distributors, mail order houses, independent pharmacies, large HMOs and PPOs. ETHEX has achieved a 100% penetration in the 25 largest wholesalers and chains. Development of generic versions of existing brand name products is typically less costly and time consuming than the development of new drug products, because generic drugs typically contain pharmaceutical compounds previously approved by the FDA and generally qualify for the use of an abbreviated testing and approval process. The Company also enters into development and licensing arrangements with companies that (i) hold patent or marketing exclusivity rights to existing pharmaceutical products that may benefit from the application of KV's proprietary drug delivery technologies, (ii) are developing new therapeutic agents that require delivery systems or formulation capabilities such as those offered by the Company, and/or (iii) can market and sell the products developed by the Company. To date, KV has entered into agreements with various pharmaceutical marketers, including Roche Holding Ltd., Sandoz (Novartis), Janssen Pharmaceutical (Johnson & Johnson) and Taisho Ltd. of Japan. Under these agreements, KV generally develops a product which utilizes its drug delivery system in return for license fees, milestone payments, research reimbursement and manufacturing and royalty revenues. The Company's licensee is generally responsible for clinical trials, regulatory approvals and marketing activities. In certain cases, the Company may develop a product, conduct clinical trials and seek regulatory approval before entering into a licensing arrangement. Particle Dynamics, Inc. has developed and markets to the pharmaceutical, nutritional and food industries four distinct lines of specialty raw material products. DESCOTE(R) is a family of tastemasked vitamin and mineral products particularly applicable to chewable children's vitamins. DESTAB(TM) is a family of direct compression products which enable pharmaceutical manufacturers to produce tablets and caplets in a more efficient manner. DESTRIT(TM) is a family of low dose vitamin products for direct compression into vitamin tablets and VITACOTE(TM) is a line of stabilized vitamins for use in the pharmaceutical and food industries. 3 During the mid-1990's, the Company implemented an integrated business strategy to commercialize its drug delivery technologies in a variety of ways, principally through the development and marketing of both brand name and generic pharmaceutical products. During fiscal 1997, 1996 and 1995, revenues from the implementation of these strategies were approximately 91%, 90% and 84%, respectively, of the Company's total net revenues. The Company's strategy is to maintain its position as a leading developer of innovative drug delivery systems and to apply its technologies to the formulation and commercialization of brand name and generic drugs and specialty raw materials. This strategy is comprised of four main components: The Development and Marketing of Technologically Distinguished Generic Drugs. The Company applied and continues to apply its drug delivery systems and formulation capabilities to develop and market technologically distinguished generic drugs. The Company does so by (i) identifying and replicating brand name drugs that are either off patent or are approaching patent expiration and which require or can utilize advanced drug delivery systems, or (ii) applying the Company's tastemasking formulations to an off patent drug in order to meaningfully increase patient compliance and the drug's commercial appeal. The Development of Brand Name Pharmaceuticals. The Company applies its proprietary drug delivery technologies in the formulation and development of brand name prescription and OTC pharmaceutical products. The Company plans to continue to enter into long term licensing agreements with pharmaceutical marketing companies under which the Company develops products which utilize its drug delivery systems in return for license fees, milestone payments, research reimbursement and manufacturing and royalty revenues on sales of the products. Selective Acquisitions and In-Licensing Opportunities. The Company is actively seeking opportunities to acquire additional products, product rights, technologies, and distribution channels that complement the Company's business and which can be integrated into the Company's existing research, manufacturing, marketing and distribution capabilities. Development and Marketing of Technologically Differentiated Specialty Raw Materials. The Company combines its advanced technologies with the utilization of its expertise in micro encapsulation and particle coating to strategically develop new products that improve taste, tableting efficiencies and stability while reducing manufacturing costs and increasing product quality. DRUG DELIVERY TECHNOLOGIES KV's proprietary drug delivery and formulation technologies enhance the effectiveness of new therapeutic agents, existing pharmaceutical products and nutritional supplements, such as vitamins and minerals. During the 1990's, KV has continued to develop and introduce important new generations of technologies which represent significant advancements in the field of drug delivery systems. These drug delivery systems are generally organized in the areas of "controlled release", "tastemasking" and "site specific" technologies. Many of these technologies have been used successfully for the commercialization of products currently being marketed by the Company and its pharmaceutical marketing licensees. The following describes the Company's principal drug delivery technologies. 4 Controlled Release Technologies The Company has developed a number of controlled release drug delivery systems and formulation techniques that tailor the drug release profiles of certain orally administered pharmaceuticals and nutritional supplements. These systems, which provide for a single oral dose that releases the active ingredient over periods ranging from 12 to 24 hours, are designed to improve patient compliance, improve drug effectiveness and reduce potential side effects. These technologies have been used to formulate tablets, capsules and caplets that deliver single therapeutic compounds, as well as multiple active compounds, each requiring different release patterns within a single dosage form. KV/24(R) is a precisely controlled drug delivery system that can be taken orally once every 24 hours, affording the patient a reduced dosing regimen and dramatically reducing commonly reported side effects. KV/24(R) is also a multi-particulate technology that can combine several different drug compounds, each requiring its own unique release profile, in a single dosage form. KV/24(R) systems have been developed in capsule and tablet form for a number of prescription and OTC products. METER RELEASE(R) is a twice a day dosing, polymer-based drug delivery system which offers different release characteristics than KV/24(R) and is used for products that require a drug release rate of between eight and 12 hours. METER RELEASE(R) systems have been developed in tablet, capsule and caplet form and have been commercialized in the cardiovascular, gastrointestinal and upper respiratory categories through products marketed by ETHEX Corporation and under licensing agreements in various therapeutic categories. MICRO RELEASE(R) is a micro-particulate formulation that employs smaller particles than KV/24(R) and METER RELEASE(R). MICRO RELEASE(R) encapsulates therapeutic agents which improve a drug's absorption in the body where precise release profiles are less important. MICRO RELEASE(R) has been commercialized in prescription and OTC nutritional products, including various prescription prenatal vitamins marketed through ETHEX Corporation. Site Specific Technologies KV's site specific technologies use advanced polyphasic principles that result in a complex emulsion which adheres to the desired tissue and controls the release of the drug. The Company has developed a number of site specific systems and formulations that it tailors to the desired route of administration. To date, the Company has applied its site specific technologies in cream, lotion, lozenge and suppository form to deliver therapeutic agents to vaginal, rectal, oral, skin, pharyngeal and esophageal tissues. SITE RELEASE(R) is a patented, controlled release bioadhesive delivery system which incorporates advanced polyphasic principles to create a bio-emulsion system capable of delivering therapeutic agents in oral, topical and vaginal forms. To the Company's knowledge, SITE RELEASE(R) is the only bioadhesive delivery system that is clinically proven. SITE RELEASE(R) is the subject of licensing and development agreements with such companies as Roche Holding Ltd., Taisho Ltd. of Japan, J. Uriach & Cia of Spain and others, to develop products for the treatment of topical and vaginal fungal infections. 5 OraSite(R) is a controlled released mucoadhesive delivery system administered orally in a solid or liquid form. A drug formulated with the OraSite(R) technology may be formulated as a liquid or as a lozenge in which the dosage form liquefies upon insertion and adheres to the mucosal surface of the mouth, throat and esophagus. OraSite(R) possesses characteristics particularly advantageous to therapeutic areas such as oral hygiene, sore throat and periodontal and upper gastrointestinal tract disorders. Trans-E(TM) (for transesophageal) is a new and novel bio-adhesive, controlled release delivery system which may permit oral delivery of compounds that normally would be degraded if administered orally, such as growth hormone, calcitonin and other protein/peptides and other complex compounds. Trans-E(TM) was specifically designed to provide an oral delivery alternative for biotechnology and other compounds that currently are injected or infused. BioSert(R) is a patented, bio-adhesive, controlled release system which at room temperature is a solid rectal or vaginal suppository and after insertion becomes a bioadhesive long acting cream. BioSert(R) has particular applications to therapeutic areas such as antifungals, narcotic analgesics and anti-arthritics. Tastemasking Technologies KV has been at the forefront in the development of pharmaceutical formulations capable of improving the flavor of unpleasant tasting drugs. The Company has developed numerous platforms for its tastemasking technologies, including liquid, chewable and dry powder formulations. FlavorTech(R) is a liquid formulation technology designed to reduce bad tasting therapeutic products. FlavorTech(R) has been commercialized in cough/cold syrup products marketed through ETHEX Corporation and has special application to other products, such as antibiotic, geriatric and pediatric pharmaceuticals. FlavorTech(R) has also been commercialized through a licensing agreement with Sandoz (Novartis) for a liquid cough cold product. TASTELESSE(R) is a tastemasking technology which incorporates a dry powder, microparticulate approach to reducing objectionable tastes by sequestering the unpleasant drug agent in a specialized matrix. The TASTELESSE(R) technology can be formulated into chewable tablets or into packets that can be sprinkled on food, taken directly into the mouth, or stirred into water or other liquid before swallowing. This formulation technique has the effect of "shielding" the drug from the taste receptors without interfering with the dissolution and ultimate absorption of the agent within the gastrointestinal tract. TASTELESSE(R) may be used in connection with such products as macrolide antibiotics, amino acids, vitamins and other unpleasant tasting drug compounds. LIQUETTE(R) is a tastemasking system which incorporates unpleasant tasting drugs into a hydrophilic and lipophilic polymer matrix to suppress the taste of a drug. This technology is used for mildly to moderately distasteful drugs. The LIQUETTE(R) technology has been successfully commercialized in Japan through a licensing agreement with SS Pharmaceutical. 6 COMPETITION Competition in the development and marketing of pharmaceutical products is intense and characterized by extensive research efforts and rapid technological progress. Many companies, including those with financial and marketing resources and development capabilities substantially greater than those of the Company, are engaged in developing, marketing and selling products that compete with those offered by the Company. There are also a few companies, including KV, which specialize in drug delivery technology and the development of products derived from those technologies for sale/licensing to pharmaceutical marketers. The Company believes that its patents, proprietary trade secrets, technological expertise, and product development and manufacturing capabilities position it to continue to develop products to compete effectively in the marketplace and maintain a leadership position in the field of advanced drug technologies. The Company also markets, sells and distributes generic products directly to various markets and classes of customers through ETHEX Corporation. ETHEX is subject to active competition from numerous firms. The primary competitive factors in this area are customer service, quality of products and price. The nature and level of competition varies among products, markets and classes of customers. The Company is subject to potential additional competition from firms who are able to obtain the necessary governmental approvals to manufacture and distribute similar products. REGULATION The design, development and marketing of pharmaceutical compounds are intensively regulated by the Federal Food and Drug Administration ("FDA") and comparable agencies in foreign countries. For example, The Federal Food, Drug and Cosmetic Act, the Controlled Substances Act and other United States federal statutes and regulations impose requirements on the testing, manufacturing and approval of the Company's products before a drug can be marketed in the United States. Obtaining FDA approvals is a costly, time-consuming process and there is no guarantee that such approval will be obtained with respect to an individual product. All companies in the pharmaceutical industry are subject to FDA inspections for compliance with current Good Manufacturing Practice ("cGMP"), which encompasses all aspects of the production process as interpreted by the FDA and involves changing and evolving standards. FDA inspections are a part of a continuing effort by the FDA to 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. Since 1992, the Company has implemented new programs to ensure full compliance with all of the FDA's regulatory requirements and their increasingly vigorous interpretation by the government. In addition, KV has agreed with the FDA in a June 1993 Consent Decree to operate in compliance with FDA requirements and, in the event of violations of FDA requirements, has agreed to certain procedures with respect to corrective actions that may be warranted. With respect to potential new products, there are two principal ways for the Company to satisfy the FDA's safety and efficacy requirements for a new drug product, a new drug application (an "NDA") and an abbreviated new drug application (an "ANDA"). In recent years, the Company has experienced delays in obtaining FDA approvals. In certain instances, KV's customers have been responsible for obtaining such FDA approvals and have been similarly delayed. A number of products KV anticipated would be introduced to the pharmaceutical 7 market by KV or its client pharmaceutical companies in fiscal 1992 through 1997 were delayed. The Company follows a policy of not disclosing information on the specific products covered by its FDA applications in order to protect the confidentiality and competitive position of the Company and its customers with respect to products which it has developed and expects to be the subject of future market introductions. As a consequence of the uncertainties inherent in the drug approval process, an applicant is not in the position to predict in advance all of the substantive and procedural requirements for FDA approval of a particular product. In addition, the Company believes that under the agency's invocation of its "Application Integrity Policy", the FDA will not process the Company's applications until the Company has satisfied the FDA with respect to data previously submitted and has implemented any additional procedures necessary to assure the accuracy of information furnished by the Company. However, the FDA has specifically advised the Company that the Application Integrity Policy does not adversely delay any of its clients' NDA and ANDA submissions for products KV has developed and will manufacture for such clients. Currently, it is the applications of KV's clients which have the greatest value to the Company. Therefore, the Company believes that any delay in processing the Company's own applications will not have a material adverse effect on the Company. The Company also cannot predict whether future legislative or regulatory developments might have an adverse effect on the Company. It is the Company's belief that generic drugs and drug delivery products can provide cost savings opportunities which the Company could benefit from in its ETHEX Corporation subsidiary's growth as well as in its drug delivery research business. During fiscal 1997, the Company encountered no serious shortages of any particular raw materials and has no indications that significant shortages will occur. However, a serious shortage of certain raw materials could have a material adverse effect upon the Company. The Company regards its drug delivery technologies as proprietary and maintains an extensive trade secret and patent protection program based on patent laws, trade secret laws and restrictions on disclosure and transferability contained in its product license agreements. Internal safeguards incorporated in its technologies also serve to protect the proprietary nature of its programs. In addition, employees with access to proprietary information and potential customers who evaluate KV's products are required to execute non-disclosure agreements. The Company intends to maintain and enforce the proprietary nature of its technologies. In addition to its patent and trade secret protection, KV believes that the collective knowledge and experience of its management and personnel and their ability to develop and enhance drug delivery technologies and products developed from such technologies are also of competitive significance. The Company presently owns 38 domestic and foreign patents expiring through 2013 and 24 trademarks expiring through 2012 (which are renewable assuming continuous use), none of which is considered material to the continuing operations and success of the Company. The Company considers its proprietary know-how and processing techniques to be of greater importance to its continuing operations than such patents. In order to protect its goodwill, the Company has applied for trademark protection for its technology names such as SITE RELEASE(R), KV/24(R), FlavorTech(TM) , OraSite(R), METER RELEASE(R), MICRO RELEASE(R), DESCOTE(R), and others. The Company intends to continue to trademark new technology and product names as they are developed. 8 The business of the Company is generally not seasonal, although a number of new cough/cold products marketed through ETHEX Corporation can be subject to seasonal demand. The nature of the Company's business does not involve unusual working capital requirements. Inventories are maintained at sufficient levels to support current production and sales levels. Customers of the Company consist of large and small pharmaceutical marketing companies, drug chains and wholesalers. During fiscal 1997 and 1996, one unaffiliated customer, McKesson Drug Company, accounted for 15% of the Company's consolidated revenues. During fiscal 1996, no one customer accounted for 10% or more of consolidated revenues. The majority of the Company's sales are related to directly marketed generic products through ETHEX Corporation where backlog measurements are not meaningful, due to the short lead time required (days) in filling orders at any point in time relative to sales or income for a full 12-month period. Research and development spending, including overhead, spent by KV on research activities relating to the development of new products or services or the improvement of existing products or services was approximately $4,835,000 in fiscal 1997, $4,559,000 in fiscal 1996, and $4,525,000 in fiscal 1995. The estimated dollar amount contributed by customers to these amounts was $4,000 in fiscal 1997, $70,000 in fiscal 1996 and $271,000 in fiscal 1995. Spending for KV products comes from KV internal funding and from its major drug Company customers who have licensed marketing rights to KV-developed products. KV's internally funded research and development spending, which does not include licensing partners sponsored sources of funds, is approximately 8% of current revenues. The Company does not expect that compliance with federal, state or local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment will have a material effect on the Company's capital expenditures, earnings or competitive position. As of May 25, 1997, the Company had 333 employees. The Company is subject to a new five year collective bargaining agreement which was ratified in July, 1996 and covers 61 employees. The Company believes that its relations with its employees are good. The Company presently does not have material operations or sales in foreign countries and its domestic sales are not subject to unusual geographic concentration. Item 2. Properties. The Company's corporate headquarters is located in a two-story brick building at 2503 South Hanley Road in St. Louis County, Missouri, containing approximately 25,000 square feet of floor space. The Company has a lease on the building for a period of ten years expiring December 31, 2005, with one five-year option to renew. 9 In addition, the Company has the leases and the owned facility shown in the following table: SQ FT LEASE RENEWAL FACILITY USAGE LEASED EXPIRES OPTIONS ============================== =========== ======== ========= ======= 2629 S. Hanley Road Mfg. Oper. 18,000 11/30/97 5 years(1) 821 Hanley Industrial Court Mfg. Oper. 5,000 11/30/97 3 years 8046-50 Litzsinger Road Mfg. Oper. 17,000 12/31/96 5 years(1) 8056 Litzsinger Road Office/Maint. 3,000 12/31/96 5 years(1) 2635 S. Hanley Road Mfg. Oper. 12,150 11/30/97 5 years(1) 819 Hanley Ind'l Ct. Mfg. Oper. 5,000 11/30/97 3 years 2525 S. Hanley Road Mfg. Oper. 16,800 06/30/97 5 Years 8054 Litzsinger Road Office 3,000 12/31/96 5 years(1) 2601 S. Hanley Road PDI Office 1,480 04/30/97 5 years(1) 10888 Metro Court Office/ 81,810 Owned N/A Warehouse 2303 Schuetz Rd. Mfg. Oper. 90,000 Owned N/A - ------------------------------------------------------ 1 Three five-year options. Properties used in the Company's operations are considered suitable for the purposes for which they are used and are believed to be adequate to meet the Company's needs for the reasonably foreseeable future. However, the Company has considered leasing additional facilities from time to time when attractive facilities appeared to be available to accommodate the consolidation of certain operations and to meet future expansion plans. Item 3. Legal Proceedings. On April 6, 1995, the Company entered into a plea agreement with the U.S. Department of Justice under which the Company agreed to plead guilty to (1) two misdemeanor violations of the Federal Food, Drug and Cosmetic Act involving the failure to file certain required reports with the FDA in 1991 with respect to two lots of an erythromycin oral suspension product previously manufactured by the Company and (2) two misdemeanor counts involving the shipment of two lots of the same product, inappropriately labeled as to their shelf life. Under the plea agreement, the Company agreed to pay a fine of $500,000 and costs of $100,000 in installments of $75,000 every six months over 3 and one-half years, beginning in July 1995 and was placed on probation during the payment period. 10 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 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 83 Director, Chairman of the Board and Treasurer of the Company. Marc S. Hermelin 55 Director, Vice-Chairman of the Board and Chief Executive Officer(2). Alan G. Johnson 62 Director and Secretary of the Company. Attorney at Law and Member in the law firm of Gallop, Johnson & Neuman, L.C. since 1976; Director of MRL, Inc.; and Siboney Corporation. Garnet E. Peck, Ph.D. 66 Director of the Company since 1994. Professor of Industrial Pharmacy and Director of Industrial Pharmacy for Purdue University School of Pharmacy and Pharmacal Sciences since 1967. Raymond F. Chiostri 63 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 58 Vice President of Finance since 1981. Mitchell I. Kirschner 51 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. 11 PART II Item 5. Market for the Company's Common Stock and Related Security Holder Matters a) Principal Market The Company's Class A Common Stock and Class B Common Stock are traded on the American Stock Exchange under the symbols KV.A and KV.B, respectively. b) Stock Price and Dividend Information High and low closing sales prices on the American Stock Exchange of the Company's Class A and Class B Common Stock during each quarter of fiscal 1997 and 1996 were as follows: CLASS A COMMON STOCK FISCAL 1997 FISCAL 1996 ------------------------ ------------------------ QUARTER High Low High Low ------- ---------- ----------- ----------- ---------- First 15 7/8 11 7/8 8 1/2 5 3/8 Second 14 3/8 7 5/8 10 1/8 6 3/4 Third 12 7/8 10 3/4 13 3/8 7 3/4 Fourth 21 1/8 11 5/8 17 7/8 11 1/4 CLASS B COMMON STOCK FISCAL 1997 FISCAL 1996 ------------------------ ------------------------- QUARTER High Low High Low ------- --------- ----------- ----------- ---------- First 15 3/4 12 8 1/2 5 5/8 Second 14 1/4 7 1/2 10 7 1/2 Third 12 3/4 10 3/4 13 3/8 7 3/4 Fourth 21 11 1/2 17 7/8 11 1/2 No cash dividends were paid on the Company's Class A or Class B Common Stock in fiscal 1997 or 1996. Dividends on Preferred Stock in the amount of $105,437 were paid during the fourth quarter of fiscal 1997, but no other dividends were paid during the above periods. See Note 8 to the Financial Statements regarding limitations on the payment of dividends. (c) Approximate Number of Holders of Common Stock The number of holders of record of the Company's Class A and Class B Common Stock as of June 6, 1997 was 689 and 621, respectively (not separately counting shareholders whose shares are held in "nominee" or "street" names, which are estimated to represent approximately 4,000 additional shareholders for each class of common stock). 12 Item 6. Selected Financial Data
($ in 000's, except per share data) Years Ended March 31, --------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Revenues $58,037 $49,789 $39,743 $38,171 $43,496 % Change 16.6 25.3 4.1 (12.2) 3.5 Net income (loss) 8,924 4,043 (5,375) (8,181) 1,055 Net income (loss) per common share (a) (b) 0.70 0.31 (.52) (.78) .06 Total assets 41,362 27,948 27,975 31,802 39,331 Long-term debt and other 3,071 3,452 12,153 13,323 11,886 Shareholders' Equity 33,084 20,550 9,974 13,343 21,631 NOTES: (a) After deducting preferred dividends of $421,750 or $.04 per common share in 1997, 1996, 1995, 1994 and 1993. (b) Dividends were paid on the Preferred Stock in the fourth quarter of fiscal 1997 in the amount of $105,437, but no other cash dividends were paid on any shares of common or preferred stock during the five years ended March 31, 1997.
13 Item 7. Management's Discussion and Analysis of Results of Operations, and Liquidity and Capital Resources (a) Results of Operations The following table summarizes the Company's historical results of operations as a percentage of revenues for fiscal years 1997, 1996 and 1995.
Fiscal Year Ended 1997 1996 1995 -------------------------- ------------------------- --------------------------- Amount Percent Amount Percent Amount Percent (Dollars in thousands) ETHEX (generic products) $40,225 69% $34,498 69% $24,939 63% KV (manufacturing & licensing) 9,124 16 7,430 15 7,729 19 PDI (pharmaceutical compounds) 8,688 15 7,861 16 7,075 18 -------- -- ------- --- ------- ---- Net Revenues $58,037 100% $49,789 100% $39,743 100% Costs and Expenses: Manufacturing costs $29,478 51% $26,260 53% $26,066 66% Research and development 4,835 8 4,559 9 4,525 11 Selling and administrative 13,818 24 12,749 25 11,979 30 Other, Net 599 1 2,088 4 2,548 6 -------- --- ------- ---- ------- --- Total costs & expenses 48,730 84% $45,656 91% $45,118 113% Income (loss) before income taxes 9,307 16 4,133 9 (5,375) (13) Net income (loss) $8,924 15% $4,043 8% $(5,375) (13)% ====== === ====== == ======== =====
FISCAL 1997 COMPARED TO FISCAL 1996 Revenues. Net revenues increased $8.2 million, or 17%, to $58 million during fiscal 1997 from $49.8 million in fiscal 1996. This sales growth was primarily due to an increase in the volume of new and existing generic products sold by ETHEX, increased licensing revenues as well as increased sales volume in contract services and Particle Dynamics. Net revenues from ETHEX increased $5.7 million, or 17%, to $40.2 million during fiscal 1997 from $34.5 million in fiscal 1996. This increase was primarily due to the launch of ten new generic products during fiscal 1997, in addition to increased sales in products introduced in the prior year. Net revenues derived from the sale of pharmaceutical compounds by PDI increased $.8 million, or 11%, to $8.7 million during fiscal 1997. This increase was attributable to increased sales volumes related to the prior years' introduction of new products for the over-the-counter DESCOTE(R) and DESTAB(TM) product lines. Contract services increased $1.7 million or 23% to $9.1 million in fiscal 1997 from $7.4 million in fiscal 1996, primarily due to increased licensing revenues of $1.3 million resulting from an agreement concluded with Roche Holding Ltd. 14 Costs and Expenses. Manufacturing costs increased $3.2 million, or 12%, to $29.5 million during fiscal 1997 from $26.3 million in fiscal 1996. Manufacturing costs as a percentage of revenues decreased to 51% from 53%. This percentage decrease was primarily due to the continued growth in sales of higher margin products by ETHEX and increased margins in the Contract manufacturing business. Research and development costs increased $.2 million, or 6%, to $4.8 million during fiscal 1997 from $4.6 million in fiscal 1996. This increase was due to higher personnel costs. The Company expects to continue spending for research and development in the future, emphasizing the development of additional products for sale by ETHEX, as well as new drug delivery technologies. Selling and administrative expenses increased $1.1 million, or 8%, to $13.8 million during fiscal 1997 from $12.7 million in the same period in fiscal 1996. However, as a percentage of revenue, selling and administrative expenses decreased to 24% from 25%. The increase in selling and administrative expenses was primarily related to the Company's selling and promotional activities associated with the significant growth experienced in the sales of new and existing generic products marketed by ETHEX and additional personnel to support the Company's continued growth. Interest expense decreased $1 million, or 70%, to $.4 million during fiscal 1997 from $1.4 million in fiscal 1996. This decrease resulted from lower effective interest rates and lower levels of average borrowing during the fiscal 1997 period. The income tax provision was $383,000 for fiscal 1997 compared to $90,000 in fiscal 1996. The tax provision of $383,000 is for state income taxes, while the $90,000 in 1996 was due to the effect of the alternative minimum tax. Net Income. As a result of the factors described above, net income improved $4.9 million or 121%, to $8.9 million for fiscal 1997 from net income of $4.0 million in fiscal 1996. FISCAL 1996 COMPARED TO FISCAL 1995 Revenues. Net revenues increased $10.1 million, or 25%, to $49.8 million during fiscal 1996 from $39.7 million in fiscal 1995. This sales growth was primarily due to an increase in the volume of new and existing generic products sold by ETHEX and increased licensing revenue. Net revenues from ETHEX increased $9.6 million, or 39%, to $34.5 million during fiscal 1996 from $24.9 million in fiscal 1995. This increase was primarily due to the launch of ten new generic products during fiscal 1996, in addition to increased sales of products introduced in the prior year. Licensing revenues increased $1.5 million to $2.3 million during fiscal 1996 due to an agreement concluded with a major pharmaceutical manufacturer to explore the development of products utilizing KV's drug delivery technologies. The Company recognized $1.7 million of licensing revenue from this transaction. Net revenues derived from the sale of pharmaceutical compounds by PDI increased $.8 million, or 11%, to $7.9 million during fiscal 1996. This increase is attributable to the introduction of new products for the over-the-counter DESCOTE(R) and DESTAB(TM) product lines. Those increases were partially offset by an expected decrease in revenues derived from contract services to $5.1 million in fiscal 1996 from $7 million in fiscal 1995 primarily due to the Company's continued de-emphasis of its lower margin contract manufacturing business in order to develop and market higher margin technologically distinguished generic products through ETHEX. 15 Costs and Expenses. Manufacturing costs increased $.2 million, or less than 1%, to $26.3 million during fiscal 1996 from $26.1 million in fiscal 1995. Manufacturing costs as a percentage of revenues decreased to 53% from 66%. This percentage decrease was primarily due to the continued growth in sales of higher margin generic products by ETHEX. Research and development costs increased $34,000, or less than 1%, to $4.6 million during fiscal 1996 from $4.5 million in fiscal 1995. This increase was due to higher personnel costs. The Company expects to continue spending for research and development in the future, emphasizing the development of additional generic products for sale by ETHEX as well as new drug delivery technologies. Selling and administrative expenses increased $.7 million, or 6%, to $12.7 million during fiscal 1996 from $12 million in the same period in fiscal 1995. However, as a percentage of revenue, selling and administrative expenses decreased to 25% from 30%. The increase in selling and administrative expenses was primarily related to the Company's selling and promotional activities associated with the significant growth experienced in the sales of new and existing generic products marketed by ETHEX. Interest expense increased $.1 million, or 8%, to $1.4 million during fiscal 1996 from $1.3 million in fiscal 1995. Such increase resulted from higher effective interest rates and higher levels of average borrowing to support growth in the fiscal 1996 period. The income tax provision was $90,000 for fiscal 1996 compared to zero in fiscal 1995. The tax provision of $90,000 was due to the effect of the alternative minimum tax. Otherwise, no provision was made for income taxes as a result of available net operating loss carryforwards. As of March 31, 1996, the Company's net operating loss carryforwards were $8.9 million. Net Income (Loss). As a result of the factors described above, net income improved $9.4 million to $4 million for fiscal 1996 from a net loss of $5.4 million in fiscal 1995. 16 (b) Liquidity and Capital Resources The following table sets forth selected balance sheet data and ratios for fiscal years 1997, 1996 and 1995.
At March 31, ($ in 000's) ------------ 1997 1996 1995 ------------------- -------------------- ------------------- Working Capital Ratio 5.8 to 1 4.6 to 1 2.5 to 1 Quick Ratio 3.1 to 1 2.4 to 1 1.4 to 1 Debt to Debt Plus Equity .07 to 1 .14 to 1 .57 to 1 Total Liabilities to Equity .25 to 1 .36 to 1 1.80 to 1 Cash and Equivalents $ 7,628 $ 2,038 $ 1,076 Working Capital 25,017 14,053 8,927 Long Term Liabilities 3,071 3,452 12,153 Stockholders' Equity 33,084 20,550 9,974
Working capital for fiscal 1997 increased $11 million, or 78%, to $25 million due to an increase in current assets of $12.2 million and an increase in current liabilities of $1.3 million. Net cash provided by operating activities for fiscal 1997 included increases in receivables of $1.3 million and inventories of $4.3 million to improve service levels, which resulted primarily from increased sales volume of ETHEX products, and an increase in accounts payable and accrued liabilities of $1.6 million. These changes in receivables, inventories and payables were more than offset by net income and non-cash charges aggregating $10.6 million, resulting in cash provided by operating activities of $5.6 million for fiscal 1997. At the end of fiscal 1997, the Company's "quick assets", cash, cash equivalents and accounts receivable increased $6.9 million (74%) from the prior year, while current liabilities increased $1.3 million (32%) resulting in a "quick ratio" of 3.1 to 1 compared to 2.4 to 1 at the end of 1996. The debt to debt plus equity and total liabilities to equity ratios for fiscal 1997 decreased because of the impact of the net income for the year, the repayment of debt and $3.5 million proceeds from the private placement sale of 200,000 shares of Class A Common Stock to Roche Holding Ltd., completed in March, 1997. Investing activities in fiscal 1997 reflected capital expenditures of $2 million and net expenditures for other assets of $.8 million, which were provided for through operations. In January, 1996 the Company concluded an agreement with a major pharmaceutical marketer whereby the Company received $5,000,000 and certain other considerations, plus $5,000,000 for the sale of certain Class A common stock options exercisable in various periods through September, 1998 (See Note 12). Under the transaction, which was entered into between the parties partially in consideration of and replacing certain other products, the two companies entered into an agreement for future royalties and product opportunities. The Company gave the marketer the right to explore the Company's drug delivery technologies with the possibility of entering into future agreements for individual products. The transaction (other than the sale of the options) was recorded as a reimbursement to the Company for, and thus the removal from its balance sheet, of approximately $2,500,000 of Deferred Improved Drug 17 Entities(TM), receivables and inventory of approximately $400,000, and patents and trademarks relating to the Company's technologies of approximately $200,000. As a result, approximately $1,700,000 was included in licensing revenues and $200,000 as a reimbursement of expenses. In January, 1997, the Company concluded a broad-based agreement with Roche Holding Ltd. of Basel, Switzerland. (Roche). As part of the agreement, Roche purchased 200,000 shares of Common Class A stock for $3,500,000. In addition, the agreement included an initial cash payment of $3 million on January 1, 1997. Two additional payments of $3 million annually will be received through January 1, 1999, unless regulatory approval of a potential follow on product in the same therapeutic area is received prior to these dates. The initial $3,000,000 payment has been included in revenue, while the future payments will be similarly treated, when received. Upon approval, KV will receive royalties on sales of the product. The Company's cash and cash equivalents on hand at year-end were $7.6 million. The Company also had in place at March 31, 1997, a secured credit facility aggregating $17.5 million, which is in the process of being replaced by an unsecured revolving line of credit and letter of credit facility aggregating $22,600,000 with LaSalle National Bank. Completion of the transition in credit facilities occurred as of June 18, 1997. The Company's capital equipment commitments at year-end totaled approximately $1.7 million and a planned expansion of its corporate headquarters approximating $1.8 million is expected to occur in fiscal 1998. On June 15, 1997, the Company exercised its right of first refusal to purchase for $4,300,000 the facility it had been renting at 10888 Metro Court and a separate long-term financing of the purchase has been arranged with LaSalle National Bank in the amount of $3,500,000. This transaction was completed on June 24, 1997. Although the Company generally has been able to pass along to its customers at least a portion of cost increases in labor, manufacturing and raw material costs under its agreements, in certain instances no increases have been effected due to market conditions. It is not meaningful to compare changing prices over the past three years because the products, product formulas, product mix and sources of raw materials have varied substantially. The Company has transitioned its revenue structure from one based on lower margin, highly competitive, short-term contract manufacturing to focusing on higher margin, drug delivery product marketing through ETHEX Corporation and Particle Dynamics, Inc., its wholly-owned subsidiaries, as well as advanced technology drug delivery products to be marketed and co-marketed under long-term licensing agreements. These advanced technology drug delivery products and systems are the subject of a number of long-term business arrangements and provide differentiated and/or improved benefits derived from incorporating KV's drug delivery system technologies. For the most part, these products can be produced with existing manufacturing processes. The Company expects to continue a relatively high level of expenditures and investment for research, clinical and regulatory efforts relating to the development and commercialization of proprietary new products and advanced technology products and their approval for marketing. The implementation of these strategies of focusing on drug delivery technology distinguished product marketing capabilities through its ETHEX and Particle Dynamics, Inc. subsidiaries and drug delivery licensing arrangements 18 with brand pharmaceutical marketing clients has allowed the Company to de-emphasize contract services. Consequently, the Company has shifted its future growth internally, with drug delivery product marketing capabilities and drug delivery licensing activities constituting 91% of KV's total business The Company believes funds generated from operating activities and existing cash, together with the funds available under its new credit facility and the funds provided from licensing agreements will be adequate to fund the Company's requirements for short term needs due to the continued sales growth being experienced. (c) New Accounting Standards In March 1997, the Financial Accounting Standards Board issued Statement Number 128, Earnings Per Share. This pronouncement provides for a different method of calculating earnings per share than is currently used. Management feels that the adoption of this pronouncement will not have a significant effect on its earnings per share. Item 8. Financial Statements and Supplementary Data. 19 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of KV Pharmaceutical Company: We have audited the consolidated balance sheets of KV Pharmaceutical Company and Subsidiaries as of March 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended March 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of KV Pharmaceutical Company and Subsidiaries as of March 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1997, in conformity with generally accepted accounting principles. BDO SEIDMAN, LLP St. Louis, Missouri June 18, 1997 20 KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, 1997 and 1996
ASSETS 1997 1996 - ------ ------------------- ------------------ Current Assets: Cash and cash equivalents $ 7,627,523 $ 2,038,069 Receivables, less allowance for doubtful accounts of $129,055 and $570,498 in 1997 and 1996, respectively 8,579,598 7,281,459 Inventories 12,785,588 8,450,162 Prepaid and other current assets 1,230,193 229,358 ------------------ ----------------- Total Current Assets 30,222,902 17,999,048 ------------------ ----------------- Net Property and Equipment 8,117,809 7,621,217 ------------------ ----------------- Goodwill and other assets 3,021,009 2,328,190 ------------------ ----------------- TOTAL ASSETS $ 41,361,720 $ 27,948,455 =================== ================= LIABILITIES Current Liabilities: Current maturities of long-term debt $ 351,316 $ 712,328 Accounts payable 2,045,048 2,068,265 Accrued liabilities 2,809,571 1,165,506 ------------------- ------------------ Total Current Liabilities 5,205,935 3,946,099 Long-term debt 2,158,025 2,541,216 Other long-term liabilities 913,319 911,230 ------------------- ------------------ TOTAL LIABILITIES 8,277,279 7,398,545 ------------------- ------------------ Commitments and Contingencies SHAREHOLDERS' EQUITY Preferred stock, $.01 par value; $25.00 stated and liquidation value; 840,000 shares authorized; issued and outstanding - 241,000 shares in 1997 and 1996 2,410 2,410 Class A and Class B Common Stock, $.01 par value; 60,000,000 shares of each authorized; Class A-issued 7,717,487 and 7,120,614 in 1997 and 1996 77,175 71,207 Class B-issued 4,376,570 and 4,747,357 in 1997 and 1996 43,766 47,474 Additional paid-in capital 33,844,685 30,235,926 Retained deficit (828,642) (9,752,154) Less: Treasury stock, 23,746 shares each of Class A and Class B common stock, at cost (54,953) (54,953) -------------------- ------------------- TOTAL SHAREHOLDERS' EQUITY 33,084,441 20,549,910 ------------------- ------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 41,361,720 $ 27,948,455 =================== ==================
See Accompanying Notes to Consolidated Financial Statements 21 KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended March 31, 1997 1996 and 1995 1997 1996 1995 ---------------------- ------------------------ ----------------------- Net Revenues $ 58,037,159 $ 49,788,635 $ 39,742,554 Costs and Expenses: Manufacturing costs 29,478,372 26,259,638 26,065,642 Research and development 4,835,478 4,559,360 4,524,956 Selling and administrative 13,817,802 12,748,726 11,978,564 Interest expense 411,237 1,377,604 1,275,622 Amortization of intangible assets 187,758 710,647 672,571 Litigation settlement - - 600,000 ---------------------- ------------------------ ----------------------- Total costs and expenses 48,730,647 45,655,975 45,117,355 ---------------------- ------------------------ ----------------------- Income (Loss) before income taxes 9,306,512 4,132,660 (5,374,801) Provision for income taxes 383,000 90,000 - ---------------------- ------------------------ ----------------------- Net Income (Loss) $ 8,923,512 $ 4,042,660 $ (5,374,801) ===================== ======================== ======================= Net Income (Loss) per Common Share (after deducting preferred dividends of $421,750 in 1997, 1996 and 1995): $ 0.70 $ 0.31 (0.52) ===================== ======================== =======================
See Accompanying Notes to Consolidated Financial Statements 22 PHARMACEUTICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended March 31, 1997, 1996 and 1995
Class A Class B Additional Retained Total Preferred Common Common Paid-In Earnings Treasury Shareholders' Stock Stock Stock Capital (Deficit) Stock Equity ------------------------------------------------------------------------------------------ Balance at March 31, 1994 $2,410 $63,050 $48,011 $21,704,514 $(8,420,013) $(54,953) $13,343,019 Stock Options exercised, 420 shares of Class A and 370 shares of Class B, less 150 shares of each class repurchased - 3 2 (239) - - (234) Sale of 375,000 shares of Class A - 3,750 - 2,002,448 - - 2,006,198 Conversion of 826,000 shares of Class B Shares to Class A shares - 826 (826) - - - - Net Loss for 1995 - - - - (5,374,801) - (5,374,801) ---------- ------------ --------- ------------- -------------- ----------- ------------- Balance at March 31, 1995 2,410 67,629 47,187 23,706,723 (13,794,814) (54,953) 9,974,182 ---------- ------------ --------- ------------- -------------- ----------- ------------- Stock Options issued - - - 5,000,000 - - 5,000,000 Stock Options exercised, 194,242 shares of Class A - 1,943 - 772,107 - - 774,050 192,122 shares of Class B - - 1,922 757,096 759,018 Conversion of 163,475 shares of Class B shares to Class A shares - 1,635 (1,635) - - - - Net Income for 1996 - - - - 4,042,660 - 4,042,660 ---------- ------------ --------- ------------- -------------- ----------- ------------- Balance at March 31, 1996 2,410 71,207 47,474 30,235,926 (9,752,154) (54,953) 20,549,910 ---------- ------------ --------- ------------- -------------- ----------- ------------- 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) Net income for 1997 - - - - 8,923,512 - 8,923,512 ---------- ------------ --------- ------------- ------------- --------- -------------- Balance at March 31, 1997 $2,410 $77,175 $43,766 $33,844,685 $(828,642) $(54,953) $33,084,441 ---------- ------------ --------- ------------- -------------- ---------- -------------
See Accompanying Notes to Consolidated Financial Statements 23 KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended March 31, 1997, 1996, and 1995
1997 1996 1995 ---- ---- ---- OPERATING ACTIVITIES Net Income (Loss) $ 8,923,512 $ 4,042,660 $ (5,374,801) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, amortization and other non-cash charges 1,594,300 1,961,975 Stock options issued as compensation 114,300 2,098,622 - - Changes in operating assets and liabilities: (Increase) in receivables (1,298,139) (440,836) (448,347) (Increase) decrease in inventories and other current assets (5,336,261) (1,820,982) 3,212,927 (Increase) decrease in accounts payable and accrued liabilities 1,620,848 483,761 (799,676) Other 2,089 (7,861) 574,991 ------------------ ------------------ ----------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 5,620,649 3,071,927 410,506 ------------------ ----------------- ----------------- INVESTING ACTIVITIES Purchase of property and equipment (1,903,134) (841,318) (334,404) Decrease in Deferred Improved Drug Entities - 2,450,241 - Other (880,577) (457,006) (315,840) ------------------- ------------------ ------------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (2,783,711) 1,151,917 (650,244) ------------------- ----------------- ------------------ FINANCING ACTIVITIES Proceeds from credit facilities - 28,311,372 6,086,046 Repayment of credit facilities - (34,130,635) (6,800,000) Proceeds from term loan facility - 6,820,189 - Principal payments on long-term debt (744,203) (10,795,482) (483,541) Proceeds from sale of common stock 3,500,000 - 2,006,198 Dividends paid on preferred stock (105,437) - - Exercise (repurchase) of common stock options 102,156 1,533,068 (234) Proceeds from sale of stock options - 5,000,000 - ------------------ ----------------- ----------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,752,516 (3,261,488) 808,469 ------------------ ------------------ ----------------- INCREASE IN CASH AND CASH EQUIVALENTS 5,589,454 962,356 568,731 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,038,069 1,075,713 506,982 ------------------ ----------------- ----------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,627,523 $ 2,038,069 $ 1,075,713 ================== ================= =================
See Accompanying Notes to Consolidated Financial Statements 24 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. Cash Equivalents Cash equivalents consist of highly liquid instruments that have an original maturity of three months or less. 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 lives using the straight line method. Goodwill and other assets The excess of cost of investment over the fair value of net assets of the subsidiaries at the time of acquisition is being amortized on a straight line basis over 40 years. All other deferred charges are being amortized over periods varying from 5 to 17 years on a straight line basis. Revenue Recognition The Company recognizes revenue from product sales upon shipment to its customer. 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. The Company recognizes royalties and other payments specified in the agreements as income when the earnings process is completed. Earnings Per Share Earnings (Loss) per share after deducting/adding preferred dividends are based on the weighted average number of common and common equivalent share outstanding during each year. Common equivalent shares consist of the dilutive effect of unissued shares that would be issued upon the exercise of outstanding stock options. The weighted average number of shares aggregated 12,106,992, 11,814,097 and 11,178,495 in 1997, 1996 and 1995, respectively. 25 Income Taxes The Company accounts for income taxes on the liability method. Deferred income taxes are provided on the differences between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax rates. These temporary differences relate primarily to depreciation, accounts receivable and inventory reserves, deferred compensation, net operating loss carryforward and various tax credits. 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. Long-Lived Assets Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable through the estimated un-discounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to fair value in accordance with Statement of Financial Accounting Standards No 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." No impairment losses have been necessary through March 31, 1997. 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, "Accounting for Stock Issued to Employees "(APB Opinion No. 25"). That Opinion requires that compensation cost related to fixed stock options 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 its stock option grants. In October 1995, the Financial Accounting Standards Board, issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). 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 had applied the new method, are disclosed within Note 10. 26 New Accounting Standards In March 1997, the Financial Accounting Standards Board issued Statement Number 128, Earnings Per Share. This pronouncement provides for a different method of calculating earnings per share than is currently used. Management feels that the adoption of this pronouncement will not have a significant effect on its earnings per share. Reclassifications Certain amounts from the prior years' financial statements have been reclassified to conform to the current year presentation. 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 similiar to those which can be obtained for similar financial instruments in the current marketplace. 2. 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 manufacturing and pharmaceutical compounds are sold to major domestic drug, nutritional and food companies. Sales to a single company aggregated 15% for the year ended March 31, 1997. No single customer accounted for 10% or more of consolidated revenues in fiscal 1996. In addition, the balance due from this company represented approximately 23% and 15% of consolidated accounts receivables as of March 31, 1997 and 1996, respectively. The Company extends unsecured credit to its customers. 3. Inventories Inventories as of March 31 consist of the following: 1997 1996 ---- ---- Finished goods $ 6,941,864 $ 4,087,636 Work-in-process 1,645,879 1,772,711 Raw materials 4,494,167 2,814,815 ----------- ------------ 13,081,910 8,675,162 Reserves for obsolescence (296,322) (225,000) ------------- ------------ $12,785,588 $ 8,450,162 =========== =========== 27 4. Property and Equipment Property and equipment as of March 31 consists of: 1997 1996 ---- ---- Land and improvements $ 499,567 $ 499,567 Building and building improvements 3,482,812 3,439,159 Machinery and equipment 11,792,688 11,386,962 Office furniture and equipment 3,403,378 3,053,811 Leasehold improvements 2,363,555 2,281,162 Construction-in-progress (estimated costs to complete at March 31, 1997 - $1,700,000) 1,114,837 176,026 --------- ------- 22,656,837 20,836,687 Less accumulated depreciation and amortization (14,539,028) (13,215,470) ------------ ------------ Net property and equipment $ 8,117,809 $ 7,621,217 ============ ============ Depreciation of property and equipment was $1,406,542, $1,390,790 and $1,259,922 for 1997, 1996 and 1995, respectively. 5. Other Assets Other assets include goodwill, deferred financing charges, cash surrender value of life insurance, deposits, trademarks and patents. As of March 31, 1997 and 1996, the unamortized excess of purchase price over net assets acquired, net of accumulated amortization of $1,305,092 and $1,249,688, was $833,469 and $888,873, respectively. Amortization of goodwill is being charged to operations at $55,404 per year. Amortization of all other deferred charges was $132,354, $655,244 and $646,439 for 1997, 1996 and 1995, respectively. 6. Accrued Liabilities Accrued liabilities as of March 31, consist of the following: 1997 1996 ---- ---- Salaries, wages and benefits $1,352,951 $ 279,385 Interest 85,777 153,159 Income Taxes 476,000 - Other 894,843 732,962 ----------- ------------ $ 2,809,571 $ 1,165,506 =========== ============ 28 7. Long Term Debt Long-term debt at March 31 consists of the following: 1997 1996 ---- ---- Industrial revenue bonds 2,480,000 2,805,000 Capital lease 29,341 448,544 ---------- --------- Total 2,509,341 3,253,544 Less current portion 351,316 712,328 ---------- --------- Long-term debt $2,158,025 $2,541,216 ========== ========== 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. The capital lease at March 31, 1997, which bears interest at 11%, is payable monthly over the next two years. The aggregate maturities of long-term debt as of March 31, 1997 are as follows: 1998 $ 351,316 1999 328,025 2000 325,000 2001 325,000 2002 325,000 Later Years 855,000 ---------- $2,509,341 ========== The Company paid interest of $482,471, $1,352,823, and $1,420,581 during the years ended March 31, 1997, 1996 and 1995, respectively. 8. Commitments and Contingencies Leases The Company has noncancelable commitments for rental of office space, plant and warehouse facilities, transportation equipment and other personal property under operating leases. Future minimum lease commitments under all noncancelable operating leases are as follows: 1998 $ 744,206 1999 625,679 2000 578,811 2001 543,685 2002 514,366 Later Years 2,676,236 ---------- $5,682,983 ========== 29 Total rent expense for the years ended March 31, 1997, 1996 and 1995 was $1,189,349, $1,229,881 and $1,260,026, respectively. On June 15, 1997, the Company exercised its right of first refusal to purchase for $4,300,000 the facility it had been renting at 10888 Metro Court and a separate long-term financing of the purchase has been arranged with LaSalle National Bank in the amount of $3,500,000. This transaction was completed on June 24, 1997. 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 the Company's present insurance will cover any potential claims that may be asserted in the future. In addition, the Company is subject to legal proceedings and claims which arise in the ordinary course of business. 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 accrued $152,089 and $142,139 for this liability in 1997 and 1996, respectively. Credit Facility As of March 31, 1997, the Company had a loan agreement expiring in May 1998. The agreement provided for (1) a revolving line of credit for borrowings up to $17,500,000, subject to certain collateral requirements, (2) a term loan which was fully amortized as of March 31, 1997, and (3) letters of credit up to $6,000,000. The aggregate amount of outstanding debt under this agreement cannot exceed $17,500,000. At March 31, 1997 there was no outstanding debt under this agreement. Interest charged has been renegotiated to its current level of prime plus 1/2 percent. Accounts receivable, inventories, equipment, real estate and intangibles are pledged as collateral on the agreement. Certain covenants require minimum levels of operating ratios, working capital, capital expenditures, net worth and restrict payment of dividends. As of March 31, 1997, the Company had approximately $4,500,000 of open letters of credit under this agreement that reduced the total available to $13,000,000. The Company's current credit facility is being replaced by an unsecured revolving line of credit and letter of credit facility aggregating $22,600,000 with LaSalle National Bank, with a three-year term and interest charged at the prime rate. Closing of this transaction occurred as of June 18, 1997. 9. Income Taxes The provision for income taxes consists of state taxes for 1997 and alternative minimum tax for 1996. No provision for income taxes was required for 1995. 30 The reasons for the differences between the provision for income taxes and the expected federal income taxes at the statutory rate are as follows:
1997 1996 1995 ---- ---- ---- Computed income tax expense (benefit) at statutory rate $3,164,000 $1,536,211 $(2,062,000) Change in valuation allowance (3,392,000) (1,596,200) 1,926,100 Alternative minimum tax - 90,000 - State income taxes, less federal income tax benefit 383,000 - - Other 228,000 59,989 135,900 ----------- ------------- ---------- Provision for income taxes $ 383,000 $ 90,000 $ 0 =========== ============ ================
31 As of March 31, 1997, and 1996, the tax effect of temporary differences between the tax basis of assets and liabilities and their financial reporting amount are as follows:
1997 1997 1996 1996 Current Non-Current Current Non-Current ------- ----------- ------- ----------- Fixed asset basis differences $ - $(1,132,000) $ - $(1,052,400) Reserve for inventory and receivables 775,000 - 302,300 - Capitalized inventory costs 228,000 - 163,600 - Vacation pay reserve 203,000 - - - Deferred compensation - 290,000 - 232,300 Reserve for medical self insurance 47,500 - 34,300 - Net operating loss carryforward - - - 3,369,300 Research and development credit - 958,000 - 1,594,000 Minimum tax credit - 963,000 - 129,000 Other 125,500 - - 187,700 ------------ ----------- -------------- ----------- 1,379,000 1,079,000 500,200 4,459,900 Valuation allowance (1,379,000) (189,000) (500,200) (4,459,900) ----------- ----------- --------- ----------- Net deferred taxes $ 0 $ 890,000 $ 0 $ 0 ================= =========== ============== ============
The components of deferred taxes are as follows as of March 31, 1997 and 1996: 1997 1996 ---- ---- Deferred tax liability $(1,132,000) $(1,052,400) Deferred tax asset 3,590,000 6,012,500 Valuation allowance (1,568,000) (4,960,100) ---------- ----------- $ 890,000 $ 0 =========== =========== The valuation allowance decreased by approximately $3,392,100 and $1,596,200 during 1997 and 1996 respectively. At March 31, 1997, the Company has the following income tax carryforwards available: Amount Expiration Dates ------ ---------------- Regular tax credit carryforwards (primarily research & development credits) $958,000 1998-2010 AMT credit carryforwards $963,000 N/A The Company paid income taxes of $846,000, $90,000 and $0, during the years ended March 31, 1997, 1996 and 1995 respectively. 32 10. Employee Benefits Stock Option Plan The Company has established the KV Pharmaceutical Company Incentive Stock Option Plan for key employees and reserved 1,965,000 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 the Company's 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. During 1997 the Company granted options for 391,932 shares, but had 46,550 shares forfeited. As of March 31, 1997, options with remaining contractual lives of up to ten years to purchase 828,087 shares at the fair market value at the grant date were outstanding, 342,323 of which were exercisable. The following summary shows the transactions for the fiscal years 1997, 1996, and 1995 under option arrangements:
Options Outstanding Options Exercisable ------------------- ------------------- Average Average No. of Price Per No. Price per Shares Share of Shares Share ------ ----- --------- ----- Balance, March 31, 1994 753,876 5.29 461,731 4.33 Options granted 52,500 6.94 Options becoming exercisable 64,573 5.13 Options exercised (790) 2.65 (790) 2.65 Options canceled (125,870) 7.99 (26,267) 5.71 ------------- ------------- Balance, March 31, 1995 679,716 4.92 499,247 4.36 Options granted 239,825 7.29 Options becoming exercisable 86,599 6.75 Options exercised (386,364) 3.97 (386,364) 3.97 Options canceled (24,032) 6.35 (10,773) 4.66 ------------- ------------- Balance, March 31, 1996 509,145 6.70 188,709 6.25 Options granted 391,932 12.00 Options becoming exercisable 205,529 10.58 Options exercised (26,440) 3.91 (26,440) 3.91 Options canceled (46,550) 8.44 (25,475) 7.89 ------------- ------------- Balance, March 31, 1997 828,087 9.20 342,323 8.91 ======= =======
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. 33 The weighted-average grant date fair value per share of stock options granted during the year was $5.23 for A options, $4.02 for B options, and $2.79 for A options, and $1.78 for B options in 1997 and 1996, respectively. The weighted-average significant assumptions used to determine those values using the Black-Sholes option pricing model for 1997 and 1996, respectively, were: Volatility of .6212 and .4972; dividend yield of 0% in both years; risk-free interest rate of return of 6.6% and 6.0% and expected option lives of 5 or 10 years. The following table summarizes information about stock options outstanding at March 31, 1997:
Options Outstanding Options Exercisable ---------------------------------------------------------- ---------------------------------- Range of Exercise Number Weighted Average Weighted Number Weighted Prices Outstanding Remaining Average Exercisable Average at 3/31/97 Contractual Life Exercise Price at 3/31/97 Exercise Price - ---------------------------------------------------------------------------------------- --------------------------------- $3.00 to $6.00 103,405 4 years $4.09 86,860 $3.65 $6.00 to $9.00 349,470 6 years $7.30 144,946 $7.26 $9.00 to $12.00 356,712 7 years $12.03 32,023 $10.52 $12.00 to $16.43 18,500 10 years $16.43 78,494 $12.89 ------- ------- 828,087 342,323
The fair market value of options granted during the years ended March 31, 1997 and 1996 was $1,754,000 and $467,000, respectively. The pro-forma effect on earnings for the year ended March 31, 1997 and 1996 of the method consistent with SFAS No. 123 would be to reduce reported net income by approximately $1.7 million and $.4 million, respectively, to approximately $7.2 million and $3.7 million. The pro-forma effect on earnings per share for the years ended March 31, 1997 and 1996 of this method was to reduce net income per share by $.13 per share and $.03 per share, respectively, to $.57 per share and $.28 per share. 34 Profit Sharing Plan The Company has a qualified trustee profit sharing plan (the "Plan") covering substantially all non-union employees. The Company's annual contribution to the Plan, as determined by the Board of Directors, is discretionary and was $50,000 for fiscal 1997. No profit sharing contribution was made in fiscal years 1996 and 1995. The Plan includes features as described under Section 401(k) of the Internal Revenue Code. The Company is required to make contributions to the 401(k) investment funds quarterly in an amount equal to twenty-five (25%) of the first 4% of the salary amount contributed by each participant. Contributions to the 401(k) investment funds of approximately $78,000, $71,000 and $103,000 were made in 1997, 1996 and 1995, respectively. The Plan was amended as of April 1, 1997, to require the Company to make contributions to the 401(k) investment funds quarterly in an amount equal to fifty percent (50%) of the first 7% of the salary contributed by each participant. 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 annually. The Company has recorded approximately $125,000 and $90,000 of accrued health insurance expense reserves as of March 31, 1997 and 1996, respectively, for incurred but not reported claims. For union employees, the Company participates in a fully funded insurance plan sponsored by the union. Expenses related to both plans charged to operations was approximately $1,200,840, $1,058,000, and $1,375,000 in fiscal 1997, 1996 and 1995, respectively. 11. Related Party Transactions A director of the Company is associated with a law firm that rendered various legal services for the Company. The Company paid the firm, in the aggregate, approximately $257,216, $243,512 and $122,000 during the years ended March 31, 1997, 1996 and 1995, respectively. In addition, the Company currently leases certain real property from an affiliated partnership of another director of the Company. Lease payments made for this property during the years ended March 31, 1997, 1996 and 1995 totaled approximately $231,885, $222,910 and $199,000, respectively. 12. Equity Transactions As of March 31, 1997, the Company has outstanding 241,000 shares of 7% Cumulative Convertible preferred stock (par value $.01 per share) at a stated value of $25 per share. The preferred stock is non-voting with dividends payable quarterly. The preferred stock is redeemable at its stated value. Each share of preferred stock is convertible into Class A Common Stock at a conversion price of $10 per share. The preferred stock has a liquidation preference of $25 per share plus all accrued but unpaid dividends prior to any liquidation distributions to holders of Class A or Class B Common Stock. Undeclared and unaccrued cumulative preferred dividends at March 31, 1997 and 1996 were $2,203,644 and $1,887,331, respectively. 35 Holders of Class A Common Stock are entitled to receive dividends per share equal to 120% of the dividends per share paid on the Class B Common Stock and have one-twentieth vote per share. No dividends may be paid on Class A or Class B Common Stock unless all dividends on the convertible preferred stock have been declared and paid. Under the terms of the Company's current loan and replacement loan agreements (See Note 8), 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. In connection with an agreement entered into in January, 1996 (See Note 14), the Company received $5,000,000 for the purchase of Class A Common Stock options exercisable through September 29, 1998. Options valued at $1,150,000 expired at March 31, 1997. Of the funds received for the common stock purchase options, $1,250,000 was allocated to an option to purchase shares of Class A Common Stock at a minimum price of $40 per share, exercisable for a 30 day period ending September 29, 1997. An additional $1,300,000 was allocated to an option to purchase Class A Common Stock at a minimum purchase price of $45 per share, exercisable for a 30 day period ending March 30, 1998. The final $1,300,000 was allocated to an option to purchase Class A Common Stock at a minimum price of $50 per share, exercisable for a 30 day period ending September 29, 1998. The actual exercise price and number of shares of Class A Common Stock to be purchased are dependent on the fair market value of the stock for a ten day period prior to exercise. In January 1997, the Company entered into an agreement under which it agreed to sell 200,000 shares of Class A Common Stock (par value $.01 per share). The sale was completed in March of 1997, with proceeds aggregating $3,500,000 (See note 14). 13. Litigation In April, 1995, a plea agreement was entered into with the U.S. Department of Justice. Under the agreement, the Company agreed to plead guilty to certain misdemeanor violations and to pay a fine of $500,000 and cost reimbursements of $100,000. Payments are to be made in eight semi-annual, interest free installments of $75,000 beginning in July 1995. The Company was also placed on probation by the FDA during the payment period. The full amount of all costs associated with the plea agreement was also recorded in the Company's statement of operations for the fiscal year ended March 31, 1995. From time to time, the Company becomes involved in various legal matters which it considers to be in the ordinary course of business. While the Company is not presently able to determine the potential liability, if any, related to such matters, the Company believes none of the matters, individually or in the aggregate, will have a material adverse effect on its financial position. 14. Agreements In January, 1996 the Company concluded an agreement with a major pharmaceutical marketer whereby the Company received $5,000,000 and certain other considerations, plus $5,000,000 for the sale of certain Class A common stock options exercisable in various periods through September, 1998 (See Note 12). Under the transaction, which was entered into between the parties partially in consideration of and replacing certain other products, the two companies entered into an agreement for future royalties and product opportunities. The Company gave the marketer the right to explore the Company's drug delivery technologies with the possibility of entering into future agreements for individual products. The transaction (other than the sale of the options) was 36 recorded as a reimbursement to the Company for, and thus the removal from its balance sheet, of approximately $2,500,000 of Deferred Improved Drug Entities(TM), receivables and inventory of approximately $400,000, and patents and trademarks relating to the Company's technologies of approximately $200,000. As a result, approximately $1,700,000 was allocated to licensing revenues and $200,000 as a reimbursement of expenses. In January, 1997, the Company concluded a broad-based agreement with Roche Holding, Ltd. Of Basel, Switzerland (Roche). Included in the terms of the agreement, Roche purchased 200,000 shares of Common Class A Stock for $3,500,000. The agreement also provides for the marketing by Roche, or its licensee, of a prescription, one dose cure vaginal antifungal product. The product combines Roche's proprietary butoconazole nitrate with KV's proprietary SITE RELEASE(R) drug delivery technology. The product was originally developed by KV for Syntex (U.S.A.), Inc., which was acquired by a Roche affiliate in 1995. The product received FDA approval in February, 1997. The agreement also gives 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 an initial cash payment of $3 million made in January 1997. Two additional payments of $3 million annually will be received through January 1, 1999, unless regulatory approval of a potential follow-on product in the same therapeutic area is received prior to these dates. The initial $3,000,000 payment has been included in revenue, while the future payments will be similarly treated, when received. Upon approval, KV will receive royalties on the sales of the follow-on product. Under the agreement, KV also has the exclusive right to market or license the follow-on product outside of North America. Also, as part of the agreement, three additional products will be developed for Roche using KV's proprietary drug delivery technologies. KV would receive manufacturing revenues and royalties at the time the products are marketed under separate agreements for each product. As part of a further collaboration under the agreement, KV's wholly-owned subsidiary, ETHEX Corporation, will market two of Roche's brand name products generically. 15. Industry Segments The Company operates in one industry segment, "Pharmaceutical Development, Manufacturing and Marketing." 37 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The information contained in Registrant's Report on [Form 8-K-A (Amendment No. 1) filed June 18, 1996] under Item 4, entitled "Changes in Registrant's Certified Accountant," is incorporated herein by this reference. PART III Item 10. Directors and Executive Officers of the Registrant. The information contained under the caption "INFORMATION CONCERNING NOMINEE AND DIRECTORS CONTINUING IN OFFICE" in the Company's definitive proxy statement to be filed pursuant to Regulation 14(a) for the Company's 1997 annual meeting of shareholders, which involves the election of directors, is incorporated herein by this reference. Also see Item 4(a) of Part I hereof. Item 11. Executive Compensation. The information contained under the captions "EXECUTIVE COMPENSATION" and "INFORMATION AS TO STOCK OPTIONS" in the Company's definitive proxy statement to be filed pursuant to Regulation 14(a) for the Company's 1997 annual meeting of shareholders, which involves the election of directors, is incorporated herein by this reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information contained under the caption "SECURITY OWNERSHIP OF PRINCIPAL HOLDERS AND MANAGEMENT" in the Company's definitive proxy statement to be filed pursuant to Regulation 14(a) for the Company's 1997 annual meeting of shareholders, which involves the election of directors, is incorporated herein by this reference. Item 13. Certain Relationships and Related Transactions The information contained under the caption "TRANSACTIONS WITH ISSUER" in the Company's definitive proxy statement to be filed pursuant to Regulation 14(a) for the Company's 1997 annual meeting of shareholders, which involves the election of directors, is incorporated herein by this reference. 38 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 20 Consolidated Balance Sheets as of March 31, 1997 and 1996 21 Consolidated Statements of Operations for the Years Ended March 31, 1997, 1996 and 1995 22 Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 1997, 1996 and 1995 23 Consolidated Statements of Cash Flows for the Years Ended March 31, 1997, 1996 and 1995 24 Notes to Financial Statements 25-38 39 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of KV Pharmaceutical Company: The audits referred to in our report dated June 18, 1997 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 June 18, 1997 40 2. Financial Statement Schedules:
Schedule II Valuation and Qualifying Accounts Balance at Additions charged Amounts Balance beginning to costs and charged to at end of year expenses reserves of year ------- -------- -------- ------- Year Ended March 31, 1995: Allowance for doubtful accounts $ 83,633 $ 135,000 $ 49,446 $ 169,187 Inventory obsolescence 710,089 2,735,154 1,559,672 1,885,571 ------- --------- --------- --------- 793,722 2,870,154 1,609,118 2,054,758 ======= ========= ========= ========= Year Ended March 31, 1996: Allowance for doubtful accounts 169,187 736,757 335,446 570,498 Inventory obsolescence 1,885,571 1,399,966 3,060,537 225,000 --------- --------- --------- -------- 2,054,758 2,136,723 3,395,983 795,498 ========= ========= ========= ======= 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 ======== ========= ========= =======
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 43 through 49 of this Report. Management contracts and compensatory plans are designated on the Exhibit Index. (b) Reports on Form 8-K: One report on Form 8-K was filed on March 20, 1997 disclosing the sale of 200,000 Class A shares. 41 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 27, 1997 By /s/ Marc S. Hermelin --------------------- Vice Chairman of the Board (Principal Executive Officer) Date: June 27, 1997 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 27, 1997 By /s/ Marc S. Hermelin --------------------- Marc S. Hermelin Date: June 27, 1997 By /s/ Victor M. Hermelin ----------------------- Victor M. Hermelin /s/ Garnet E. Peck, Ph.D. ------------------------- Garnet E. Peck, Ph.D. Date: June 27, 1997 By /s/ Alan G. Johnson -------------------- Alan G. Johnson EXHIBIT INDEX Exhibit No. Description Page ----------- ----------- ---- 3(a) The Company's Certificate of Incorporation, which was filed as Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended March 31, 1981, is incorporated herein by this reference. 3(b) Certificate of Amendment to Certificate of Incorporation of the Company, effective March 7, 1983, which was filed as Exhibit 3(c) to the Company's Annual Report on Form 10-K for the year ended March 31, 1983, is incorporated herein by this reference. 3(c) Certificate of Amendment 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 From 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 and Security Agreement, dated as of April 27, 1995, between the Company and its subsidiaries and Foothill Capital Corporation, which was filed as Exhibit 4(n) to the Company's Annual Report on Form 10-K for the year ended March 31, 1995, is incorporated herein by this reference. 4(d) Revolving Loan Note, dated as of April 27, 1995, by the Company and its subsidiaries in favor of Foothill Capital Corporation, which was filed as Exhibit 4(c) to the Company's Annual Report on Form 10-K for the year ended March 31, 1995, is incorporated herein by this reference. 4(e) Term Note, dated as of April 27, 1995, by the Company and its subsidiaries in favor of Foothill Capital Corporation, which was filed as Exhibit 4(d) to the Company's Annual Report on Form 10-K for the year ended March 31, 1995, is incorporated herein by this reference. 4(f) Form of Capital Equipment Note to be executed by the Company and its subsidiaries in favor of Foothill Capital Corporation, which was filed as Exhibit 4(e) to the Company's Annual Report on Form 10-K for the year ended March 31, 1995, is incorporated herein by this reference. 4(g) Deed of Trust and Security Agreement, dated as of April 27, 1995, in favor of Foothill Capital Corporation, which was filed as Exhibit 4(f) to the Company's Annual Report on Form 10-K for the year ended March 31, 1995, is incorporated herein by this reference. 4(h) First Amendment to Loan and Security Agreement, dated as of April 27, 1995, between the Company and its subsidiaries and Foothill Capital Corporation, dated as of March 29, 1996, which was filed as Exhibit 4(s) to the Company's Annual Report on Form 10-K for the year ended March 31, 1996, is incorporated herein by this reference. 4(i) Loan Agreement dated June 18, 1997 between the Company and its subsidiaries and LaSalle National Bank, filed herewith. 4(j) Revolving Note, dated June 18, 1997, by the Company and its subsidiaries in favor of LaSalle National Bank, filed herewith. 4(k) Term Note, dated June 24, 1997, by the Company and its subsidiaries in favor of LaSalle National Bank, 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. - -------- * Management contract or compensation plan. 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 From 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 From 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. - -------- * Management contract or compensation plan. 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. - -------- * Management contract or compensation plan. 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 From 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. - -------- * Management contract or compensation plan. 10(u)* Amendment to and Restatement of the KV Pharmaceutical Company's 1991 Incentive Stock Optation 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. 10(y)* Fourth Amendment to and Restatement, dated as of January 2, 1997, of the KV Pharmaceutical Company 1991 Incentive Stock Option Plan, filed herewith. 10(z)* Agreement between the Company Marc S. Hermelin, Vice Chairman, dated December 16, 1996, with supplemental letter attached, filed herewith. 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, filed herewith. 11 Computation of per share earnings, filed herewith. 21 List of Subsidiaries, filed herewith. 23 Consent of BDO Seidman, L.L.P., filed herewith. 27 Financial Data Schedule, filed herewith. - -------- * Management contract or compensation plan. EX-4 2 EXHIBIT 4(I) LOAN AGREEMENT Dated as of June 18, 1997 among K-V PHARMACEUTICAL COMPANY, PARTICLE DYNAMICS, INC. and ETHEX CORPORATION as Borrowers, and LASALLE NATIONAL BANK as Bank TABLE OF CONTENTS This Table of Contents is not part of the Agreement to which it is attached but is inserted for convenience only. 1. DEFINITIONS AND TERMS......................................................2 1.1 Certain Definitions......................................2 1.2 Certain UCC and Accounting Terms........................12 2. LOANS: BANK'S COMMITMENTS AND BORROWING PROCEDURES.......................13 2.1 Revolving Credit Commitment.............................13 2.2 Term Loan Commitment....................................13 2.3 Borrowing Procedures under the Revolving Credit Commitment..............................................13 2.4 Letters of Credit.......................................14 2.5 Borrowing Procedure Under the Term Loan Commitment......14 3. LOANS: NOTES EVIDENCING LOANS............................................14 3.1 Revolving Note..........................................14 3.2 Term Note...............................................15 3.3 Recordation.............................................15 4. LOANS: AMOUNTS; INTEREST; BALANCES.......................................15 4.1 Applicable Borrowing Amounts; Interest Rates; Default Rate....................................................15 4.2 Computation of Interest.................................16 4.3 Conversion and Reborrowing of Loans.....................16 4.4 Change of Law...........................................17 4.5 Unavailability of Deposits or Inability to Ascertain the LIBOR Rate or Adjusted LIBOR Rate...................17 4.6 Yield Protection, Etc...................................18 4.7 Funding Indemnity.......................................19 4.8 Discretion of Bank as to Manner of Funding..............19 4.9 Interest Laws...........................................20 4.10 Letter of Credit Fees...................................20 5. LOANS: GENERAL TERMS.....................................................21 5.1 Payments to Bank........................................21 5.2 Automatic Debit.........................................21 5.3 Application of Payment..................................21 5.4 Reserved................................................21 5.5 Conditions Precedent Events.............................21 5.6 Offset..................................................22 5.7 Credit Termination Date; Continuance of Obligations, Etc.....................................................22 5.8 Loan Evidence...........................................22 i 5.9 Over-Advances...........................................22 5.10 Unused Portion Fee......................................22 5.11 Prepayment..............................................23 5.12 Transaction Fee.........................................24 6. LOANS: CONDITIONS TO LENDING.............................................24 6.1 Initial Loan Conditions Precedent.......................24 7. COLLATERAL FOR TERM LOAN: GENERAL TERMS..................................27 7.1 Grant of Security Interest..............................27 7.2 Perfection of Security Interests........................28 7.3 Inspection of Collateral................................28 7.4 First Lien and Location of Collateral...................28 7.5 Constructive Trust......................................29 7.6 Application of Proceeds of Collateral...................29 7.7 Third Party Collateral Claims...........................29 7.8 Additional Collateral...................................29 7.9 No Custom or Waiver.....................................29 8. REPRESENTATIONS AND WARRANTIES; COVENANTS; INDEMNIFICATION; CONTINUING OBLIGATION....................................30 8.1 Representations and Warranties of Borrower..............30 8.2 Affirmative Covenants...................................35 8.3 Negative Covenants......................................42 8.4 Maintenance of Accounts.................................43 9. DEFAULT...................................................................44 9.1 Events of Default.......................................44 9.2 Cumulative Remedies.....................................45 9.3 Acceleration and Termination of Loans...................45 9.4 Rights of Creditor......................................45 9.5 Injunctive Relief.......................................45 10. GENERAL..................................................................45 10.1 Payment Application Date................................45 10.2 Statement of Account....................................45 10.3 Manner of Application; Waiver of Setoff Prohibition.....46 10.4 Survival of Representations and Warranties..............46 10.5 Integration; Amendment; Assignment; Participation.......46 10.6 No Waiver...............................................47 10.7 Severability............................................47 10.8 Successors and Assigns..................................47 10.9 Conflict with Other Agreements..........................47 10.10 No Impairment by Termination............................47 ii 10.11 Waivers.................................................48 10.12 Costs, Fees and Expenses Related to Agreement and Other Agreements........................................48 10.13 Environmental Indemnity.................................48 10.14 Release.................................................48 10.15 Governing Law...........................................49 10.16 Notices.................................................49 10.17 Forum; Bank; Venue; Jury Trial Waiver...................49 10.18 Other Costs, Fees and Expenses..........................49 10.19 Revival.................................................50 10.20 Acknowledgments.........................................50 10.21 Section Headings........................................50 10.22 Counterparts............................................50 10.23 Effectiveness...........................................50 10.24 Joint and Several Liability.............................50 iii LOAN AGREEMENT THIS LOAN AGREEMENT (this "Agreement") is made as of the 18th day of June, 1997, by and among K-V PHARMACEUTICAL COMPANY, a Delaware corporation ("K-V"), PARTICLE DYNAMICS, INC., a New York corporation ("PDI"), ETHEX CORPORATION, a Missouri corporation ("ETHEX"), jointly and severally (K-V, PDI and ETHEX are sometimes referred to herein collectively as the "Borrowers" and individually as "Borrower"), and LASALLE NATIONAL BANK, a national banking association ("Bank"). W I T N E S E T H: WHEREAS, K-V owns 100% of the issued and outstanding capital stock of PDI and 100% of the issued and outstanding capital stock of ETHEX; WHEREAS, Borrowers desire to borrow funds and obtain other financial accommodations from Bank for (i) working capital and (ii) to purchase two (2) real estate parcels located at 10876 Metro Court and 10850-62 Metro Court, Maryland Heights, Missouri, pursuant to which K-V will be jointly and severally liable for the total amount of all borrowings hereunder and each of PDI and ETHEX shall be liable only to the extent of their applicable use of the borrowings hereunder; WHEREAS, K-V directly markets and distributes generic pharmaceutical products through Ethex, its wholly-owned subsidiary; WHEREAS, K-V develops and markets specialty pharmaceutical raw materials, including directly compressible and microencapsulated ingredients used in pharmaceutical processing through its other wholly-owned subsidiary, PDI; WHEREAS, K-V manufactures such pharmaceutical products for itself, for ETHEX and for PDI, and ETHEX and PDI purchase certain products from K-V; WHEREAS, K-V, PDI and Ethex each derive and shall all derive a material benefit from their respective relationships with each other and from the funds to be borrowed and the other financial accommodations from Bank to Borrowers; WHEREAS, neither K-V, PDI nor Ethex could borrow the necessary funds from the Bank on as favorable terms as herein set forth without the benefits of the co- obligations of the other entities; and WHEREAS, pursuant to Borrowers' request, Bank is willing to lend monies to Borrowers under the terms and conditions set forth herein; 1 NOW, THEREFORE, in consideration of the premises, the mutual covenants and agreements set forth herein, Borrowers agree to borrow from Bank, and Bank agrees to lend to Borrowers, subject to and upon the following terms and conditions: 1. DEFINITIONS AND TERMS 1.1 Certain Definitions. The following words, terms and/or phrases shall have the meanings set forth thereafter and such meanings shall be applicable to the singular and plural form thereof, giving effect to the numerical difference. "Adjusted LIBOR Rate" shall mean a rate per annum determined pursuant to the following formula: Adjusted LIBOR Rate = LIBOR 100% - Reserve Percentage "Affiliate" means any Person (a) that directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with any Borrower or one or more Affiliates, (b) that directly or beneficially owns or holds 10% or more of any equity interest in any Borrower or one or more Affiliates or (c) 10% or more of whose voting stock (or in the case of a Person which is not a corporation, 10% or more of any equity interest) is owned directly or beneficially or held by any Borrower or one or more Affiliates. For purposes of this definition and this Agreement, the term "control" shall mean, directly or indirectly, the power to direct or cause the direction of the management or policies of a Person, whether through ownership interest or otherwise, including without limitation the power to elect or appoint, directly or indirectly, a majority of the members of its governing board or body; provided, however, the term "Affiliate" shall not include ETHEX or PDI for purposes of this Agreement. "Applicable Lending Office" means the "Lending Office" of Bank (or an Affiliate thereof) designated on the signature pages hereof or such other office of Bank (or an Affiliate thereof) as Bank may from time to time specify to Borrowers as the office by which its Loans are to be made and maintained. "Assignment of Rents" means those certain Assignments of Rents and Leases to be delivered subsequent to the date hereof between K-V and Bank for each of the Mortgaged Properties, as the same may be amended, restated and modified from time to time. "Authorized Officer" means Victor M. Hermelin, Chairman of the Board of K-V, Marc S. Hermelin, Vice Chairman and CEO 2 of K-V, Gerald R. Mitchell, Vice President, Finance and CFO of K-V and Richard H. Chibnall, Corporate Controller of K-V. "Base Rate" means the rate of interest (expressed as a percentage per annum) most recently announced or published publicly from time to time by Bank as its prime lending rate of interest, which is not necessarily the lowest or most favorable rate of interest charged by Bank on commercial loans at any one time. The rate of interest shall change automatically and immediately as and when the Base Rate shall change, without notice to Borrower, and any notice to which it may be entitled is hereby waived, and any such change in the Bank's Base Rate shall not affect any of the terms and conditions of this Agreement, all of which shall remain in full force and effect. "Base Rate Loan" shall mean a Loan bearing interest as specified in Paragraph 4.1(a). "Borrowers' Liabilities" means all obligations and liabilities of each Borrower in the aggregate to Bank (including, without limitation, all debts, claims and indebtedness) whether primary, secondary, direct, contingent, fixed or otherwise, heretofore, now and/or from time to time hereafter owing, due or payable, however evidenced, created, incurred, acquired or owing and however arising, whether under this Agreement or the Other Agreements, or by oral agreement or operation of law or otherwise. "Business Day" means (i) for all purposes other than as covered by clause (ii) below, any day on which commercial banking institutions are open for the transaction of commercial banking business in Chicago, Illinois other than a Saturday or Sunday, and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, a LIBOR Loan, any day which is a Business Day described in clause (i) and which is also a day for trading by and between banks in U.S. dollar deposits in the interbank eurodollar market. "Capital Expenditures" means the cost of acquiring any fixed assets, or any improvements, replacements, substitutions, accessions or additions thereto or therefor which have a useful life of more than one year, including without limitation, the cost of direct or indirect acquisitions of such assets by way of purchase, capital lease or otherwise. "Charges" means all national, federal, state, county, city, municipal and/or other governmental (or any instrumentality, division, agency, body or department thereof, including, without limitation, the PBGC) taxes, levies, assessments, charges, liens, 3 claims or encumbrances upon and/or relating to Borrowers' Liabilities, Borrowers' businesses, Borrowers' ownership and/or use of Borrowers' assets, income and/or gross receipts. "Closing Date" means June 18, 1997. "Code" means the Internal Revenue Code of 1986, as amended from time to time and the regulations promulgated and the rulings issued thereunder. "Collateral" shall have the meaning assigned to such term in Paragraph 7.1 hereof. "Conversion Date" means the Business Day on which a Base Rate Loan is converted to a LIBOR Loan. "Debt" means all of a Person's liabilities, obligations and indebtedness to any Person of any and every kind and nature, whether primary, secondary, direct, indirect, absolute, contingent, fixed or otherwise, heretofore, now and/or from time to time hereafter owing, due or payable, however evidenced, created, incurred, acquired or owing and however arising, whether under written or oral agreement, by operation of law or otherwise. Without in any way limiting the generality of the foregoing, Debt specifically includes (i) Funded Debt and (ii) liabilities in respect of unfunded vested benefits under Plans and Multiemployer Plans covered by Title IV of ERISA. "Default Rate" shall have the meaning assigned to such term in Paragraph 4.1(d) hereof. "Early Termination Date" means the date, pursuant to Paragraph 9.3, upon which, whether by notice or by right hereunder, the Banks' obligation to extend credit hereunder is terminated. "EBITDA" means, with respect to any fiscal period of Borrowers, Borrowers' aggregate (a) net income for such period, plus (b) the aggregate amounts deducted in determining such net income in respect of (i) Interest Expense, (ii) income taxes, (iii) depreciation and (iv) amortization minus (c) extraordinary gains, each determined on a consolidated basis and in accordance with GAAP consistently applied. "Environmental Claim" means any notice of violation, claim, demand, abatement order or other order or direction (conditional or otherwise) by any Governmental Authority for any damage, including, without limitation, personal injury (including sickness, disease or death), tangible or intangible property damage, contribution, 4 indemnity, indirect or consequential damages, damage to the environment, nuisance, pollution, release of any Hazardous Material to the environment, contamination or other adverse effects on the environment, or for fines, penalties or restrictions, resulting from or based upon (i) the occurrence of a Release by any Borrower (whether sudden or non-sudden or accidental or non-accidental) of, or exposure to, any Hazardous Material, in, into or onto the environment at, in, by, from, onto or related to any Facility, (ii) the generation, use, handling, transportation, storage, treatment or disposal of Hazardous Materials by any Borrower in connection with the operation of any Facility, or (iii) the violation, or alleged violation, of any Environmental Laws or any Governmental Authorizations by any Borrower relating to environmental matters in connection with the Facilities. "Environmental Indemnity Agreement" means that certain Environmental Indemnity Agreement between K-V and Bank to be delivered subsequent to the date hereof, as the same may be amended, restated and modified from time to time. "Environmental Laws" means all applicable statutes, ordinances, orders, rules, regulations, or decrees and the like relating to (i) fines, injunctions, penalties, damages, contribution, cost recovery compensation, losses or injuries resulting from the Release or threatened Release of Hazardous Materials, (ii) the generation, use, handling, transportation, storage, treatment or disposal of Hazardous Materials or (iii) occupational safety and health, industrial hygiene, land use or the protection of human, plant or animal health or welfare related to Hazardous Materials, in any manner applicable to any Borrower or the Facilities, including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. ss.9601 et seq.), the Hazardous Materials Transportation Act (49 U.S.C. ss.1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. ss.6901 et seq.), the Federal Water Pollution Control Act (33 U.S.C. ss.1251 et seq.), the Clean Air Act (42 U.S.C. ss.7401 et seq.), the Toxic Substances Control Act (15 U.S.C. ss.2601 et seq.), the Occupational Safety and Health Act (29 U.S.C. ss.651 et seq.) and the Emergency Planning and Community Right-To-Know Act (42 U.S.C. ss.11001 et seq.), each as amended or supplemented. "ERISA" means the Employee Retirement Income Security Act of 1974, as the same may be amended from time to time and, unless the context otherwise requires, the regulations promulgated thereunder and any successor statute. "ERISA Affiliate" means each trade or business (whether or not incorporated) which together with any Borrower or an Affiliate would be deemed to be a "single employer" within the meaning 5 of Section 4001(b) of ERISA or, where applicable, would be treated as a "single employer" under Section 412(c)(11) of the Code. "ERISA Termination Event" means (i) a "Reportable Event" described in Section 4043 of ERISA (other than a "Reportable Event" not subject to the 30-day reporting requirement to the PBGC under applicable regulations), (ii) the withdrawal under Section 4063 or Section 4064 of ERISA of any Borrower or any Affiliate from a Plan during a plan year in which it was a "substantial employer," as defined in Section 4001(a)(2) of ERISA, including a cessation of operations that is treated as a withdrawal by a "substantial employer" under Section 4062(e) of ERISA, (iii) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, (iv) the institution of proceedings under Section 4042 of ERISA to terminate a Plan by the PBGC, (v) any other event or condition which in the reasonable judgment of any Borrower is likely to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to or any ERISA administer, any Plan, or (vi) the partial or complete withdrawal pursuant to Section 4203 or Section 4205 of ERISA of any Borrower or any ERISA Affiliate from a Multiemployer Plan. "ETHEX" means ETHEX Corporation, a Missouri corporation and wholly-owned Subsidiary of K-V. "Event of Default" shall have the meaning assigned to such term in Paragraph 9.1 hereof. "Excess Interest" shall have the meaning assigned to such term in Paragraph 4.9 hereof. "Facilities" means any and all real property (including, without limitation, all buildings, or other improvements located thereon) now, hereafter or heretofore, owned, leased, operated or used by Borrower or any of its respective successors and assigns, including, but not limited to, the Mortgaged Properties. "Financials" means those consolidated and internally-prepared consolidating financial statements of Borrowers heretofore or concurrently herewith delivered by or on behalf of Borrowers to Bank. "Fixed Rate" means the rate determined two (2) Business Days prior to the date of the execution and delivery by K-V of the Term Note, as set forth in the Term Note. 6 "Fixed Rate Loan" shall mean a Loan bearing interest at the Fixed Rate, as described in more detail in Paragraph 4.1(b) below. "Funded Debt" means, without duplication, (i) indebtedness for borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other similar instruments, (iii) the face amount of all letters of credit issued for the account of any Borrower and, without duplication, all drafts drawn thereunder, (iv) obligations to pay the deferred purchase price of property or services, (v) obligations as lessee under leases which have been or should be, in accordance with GAAP, recorded as capital leases, (vi) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of other of the kinds referred to in clauses (i) through (v) above, (vii) all net obligations under any interest rate swap agreements, any interest rate cap agreement, any interest rate collar agreement or other similar agreement or arrangement, and (viii) all obligations to pay a specified purchase price for goods or services whether or not delivered or accepted (i.e., take-or-pay and similar obligations). "GAAP" shall mean generally accepted accounting principles as in effect from time to time. "Governmental Authority" means any federal, state or local governmental authority, department, agency or court. "Governmental Authorization" means any permit, license, authorization, plan, directive, consent order or consent decree of or from any Governmental Authority. "Hazardous Materials" means (i) any chemical, material or substance defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous waste," "restricted hazardous waste," "infectious waste," "toxic substances" or any other formulations intended to define, list or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, toxicity, reproductive toxicity, "TCLP toxicity" or "EP toxicity" or words of similar import under any applicable Environmental Laws or publications promulgated pursuant thereto, (ii) any oil, petroleum or petroleum derived substance, (iii) any drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, natural gas or geothermal resources, (iv) any flammable substances or explosives, (v) any radioactive materials, (vi) asbestos in any form (which is or could become friable), (vii) urea formaldehyde foam insulation, (viii) electrical equipment which contains any oil or dielectric fluid containing levels of 7 polychlorinated biphenyls in excess of fifty parts per million, (ix) pesticides or (x) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority or which may or could pose a hazard to the health and safety of the owners, occupants or any Persons. "Interest Expense" means, for any period, the sum of all interest in respect of Debt of Borrowers accrued or capitalized during such period (whether or not actually paid during such period), determined on a consolidated basis and in accordance with GAAP. "Interest Period" means with respect to the LIBOR Loans, the period used for the computation of interest commencing on the date the relevant LIBOR Loan is effected by conversion or continued and concluding on the date thirty (30), sixty (60) or ninety (90) days thereafter, at Borrowers' option, with any subsequent Interest Period commencing on the last day of the immediately preceding Interest Period and concluding thirty (30), sixty (60) or ninety (90) days thereafter, at Borrowers' option; provided, however, that no Interest Period for any LIBOR Loan made under the Commitment may extend beyond the Revolving Credit Maturity Date or the Term Loan Maturity Date, as the case may be. Each Interest Period for a LIBOR Loan which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day (unless such next succeeding Business Day is the first Business Day of a calendar month, in which case such Interest Period shall end on the next preceding Business Day). "K-V" means K-V Pharmaceutical Company, a Delaware corporation. "Leases" means (a) that certain Metro Court Office/Warehouse Lease Agreement by and between Public Employee Retirement System of Nevada, as Landlord, and Designer Blinds of Omaha, Inc., as Tenant, dated August 14, 1993 for approximately 9,117 square feet of space at 10850 Metro Court, Maryland Heights, Missouri; (b) that certain Metro Court Office/Warehouse Lease Agreement by and between Metro Court Corporation, as Landlord, and Custom Floor Centre, Inc., as Tenant, dated March 18, 1994 for approximately 4,800 square feet of space at 10854 Metro Court, Maryland Heights, Missouri; (c) that certain Metro Court Office/Warehouse Lease Agreement by and between Metro Court Corporation, as Landlord, and Clean Harbors Environmental Services, Inc., as Tenant, dated June 1, 1994 for approximately 11,762 square feet of space at 10862 Metro Court, Maryland Heights, Missouri; (d) that certain Metro Court Office/Warehouse Lease Agreement by and between Public Employee Retirement System of Nevada, as Landlord, and American Remodeling, 8 Inc., as Tenant, dated July 1, 1991 for approximately 10,493 square feet at 10858 Metro Court, Maryland Heights, Missouri. "Letter of Credit" means a standby, commercial import or other letter of credit at any time issued by Bank for the account of any Borrower. "Letter of Credit Maturity Date" means June 18, 2000. "Letter of Credit Termination Date" means the earliest to occur of (i) the Letter of Credit Maturity Date or (ii) the Early Termination Date. "Leverage Ratio" means, as of any date, the ratio of (i) Liabilities to (ii) Tangible Net Worth. "Liabilities" means, as of any date, the aggregate amount of all liabilities of Borrowers, determined on a consolidated basis and in accordance with GAAP. "LIBOR" means for each Interest Period the rate of interest per annum as determined by Bank (rounded upward, if necessary, to the nearest whole multiple of one-sixteenth of one percent (1/16th of 1%) or such other integral multiple thereof at which interest rates for LIBOR-based loans are commonly quoted to major banks in the interbank eurodollar market) at which deposits of United States Dollars in immediately available and freely transferable funds would be offered at 11:00 a.m., Chicago time, three (3) Business Days prior to the commencement of such Interest Period by the principal offshore funding office of Bank to major banks in the interbank eurodollar market upon request by such major banks for a period equal to such Interest Period and in an amount equal to the principal amount of the LIBOR Loan to be outstanding from Bank during such Interest Period. Each determination of LIBOR made by Bank in accordance with this paragraph shall be conclusive and binding on Borrowers except in the case of manifest error. "LIBOR Loan" means all or a portion of a Loan bearing interest with respect to the Adjusted LIBOR Rate as specified in Paragraph 4.1(c). "LIBOR Margin" means two percent (2.00%). "Lien" means, with respect to any asset of Borrower, any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof and the filing of or agreement to give any financing statement under the Uniform Commercial Code in effect in any jurisdiction). 9 "Loan" or "Loans" means and includes Letters of Credit issued and all Base Rate Loans, Fixed Rate Loans and LIBOR Loans made hereunder, unless the context in which such term is used shall otherwise require. "Make Whole Amount" shall have the meaning assigned to such term in Paragraph 5.11 hereof. "Maximum Rate" shall have the meaning assigned to such term in Paragraph 4.9 hereof. "Mortgages" means those certain Deeds of Trust made by K-V in favor of Bank to be delivered subsequent to the date hereof for each of the Mortgaged Properties, as the same may be amended, restated or modified from time to time. "Mortgaged Properties" means those certain parcels of real estate located at 10876-10888 Metro Court and 10850-10862 Metro Court, in the City of Maryland Heights, St. Louis County, Missouri, in which K-V has granted a first priority security interest to Bank pursuant to the Mortgage. "Multiemployer Plan" means a plan defined as such in Section 4001(a)(3) of ERISA to which contributions have been made by Borrower or an ERISA Affiliate. "Net Worth" means, as of any date of determination thereof, the total stockholders' equity of Borrowers, all as determined on a consolidated basis and in accordance with GAAP. "Notes" means the Revolving Note and the Term Note. "Other Agreements" means all agreements, instruments and documents, including, without limitation, letters of credit, mortgages, deeds of trust, guaranties, pledges, powers of attorney, consents, assignments, contracts, notices, security agreements, leases, financing statements and all other written matter heretofore, now and/or from time to time hereafter executed by and/or on behalf of Borrowers and delivered to Bank including, without limitation, the Revolving Note, the Term Note, the Mortgage, the Assignment of Rents and the Environmental Indemnity Agreement. "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "PDI" means Particle Dynamics, Inc., a New York corporation and wholly-owned Subsidiary of K-V. 10 "Permitted Debt" means (a) Debt incurred pursuant to this Agreement or the Other Agreements, (b) Debt incurred pursuant to purchase money mortgages (including, without limitation, capitalized lease obligations) not to exceed $750,000.00 at any time outstanding in the aggregate, (c) trade payables, accrued expenses and obligations not yet due and payable incurred in the ordinary course of business, and (d) Subordinated Debt. "Permitted Investments" shall have the meaning assigned to such term in Paragraph 8.3(d) hereof. "Permitted Liens" shall have the meaning assigned to such term in Paragraph 8.3(a) hereof. "Person" means and includes an individual, a partnership, a joint venture, a corporation (whether or not for profit), a trust, an unincorporated organization, any Governmental Authority or any other entity or organization. "Plan" means, at any time, any single-employer plan, as defined in Section 4001(a)(15) and subject to Title IV of ERISA, which is maintained, or at any time during the five calendar years preceding the time in question was maintained, for employees of any Borrower or an ERISA Affiliate. "Release" means any actual release, spill, emission, leaking, pumping, pouring, injection, escaping, deposit, disposal, discharge, dumping, leaching, or migration of Hazardous Materials into the indoor or outdoor environment (including, without limitation, the abandonment or disposal of any barrels, containers or other closed receptacles containing any Hazardous Materials in violation of any Environmental Laws), or into or out of any Facility. "Representative" shall have the meaning assigned to such term in Paragraph 2.3 hereof. "Reserve Percentage" means, for the purpose of computing the Adjusted LIBOR Rate, the reserve requirement imposed by the Board of Governors of the Federal Reserve System (or any successor) under Regulation D on Eurocurrency liabilities (as such term is defined in Regulation D) for the applicable Interest Period as of the first day of such Interest Period, but subject to any amendments of such reserve requirement by such Board or its successor, and taking into account any transitional adjustments thereto becoming effective during such Interest Period. For purposes of this definition, LIBOR Loans shall be deemed to be Eurocurrency liabilities as defined in Regulation D without benefit of or credit for prorations, exemptions or offsets under Regulation D. 11 "Revolving Credit Commitment" shall have the meaning assigned to such term in Paragraph 2.1 hereof. "Revolving Credit Maturity Date" means June 18, 2000. "Revolving Credit Termination Date" means the earliest to occur of (i) the Revolving Credit Maturity Date or (ii) the Early Termination Date. "Revolving Loan" means and includes all Loans made under the Revolving Credit Commitment, unless the context in which such term is used shall otherwise require. "Revolving Note" means that certain Revolving Note of even date herewith in the original aggregate maximum principal amount of TWENTY MILLION DOLLARS ($20,000,000), as the same may be amended, modified or supplemented from time to time, and together with any renewals thereof or exchanges or substitutes therefor. "Subordinated Debt" means, as of any date, the amount of Debt which is subordinated in right of payment to Borrowers' Liabilities on terms satisfactory to Bank in each particular case. "Subsidiary" means any corporation of which a Person owns, directly or indirectly through one or more intermediaries, more than 50% of the voting stock at the time of determination. "Tangible Net Worth" means as of any date, Net Worth minus intangible assets (as defined in accordance with GAAP). "Term Loan Commitment" shall have the meaning assigned to such term in Paragraph 2.2 hereof. "Term Loan" means and includes all Loans made under the Term Loan Commitment, unless the context in which such term is used shall otherwise require. "Term Loan Maturity Date" means the earlier to occur of (i) 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, (ii) ninety (90) days after Borrowers refinance the Revolving Loans with any other Person, and (iii) June 18, 2002. "Term Loan Termination Date" means the earliest to occur of the (i) Term Loan Maturity Date or (ii) Early Termination Date. 12 "Term Note" means that certain Term Note to be delivered subsequent to the date hereof in accordance with the terms of this Agreement 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. "Transaction Fee" shall have the meaning assigned to such term in Paragraph 5.12 below. "Unused Portion Fee" shall have the meaning assigned to such term in Paragraph 5.10 below. 1.2 Certain UCC and Accounting Terms. Except as otherwise defined in this Agreement or the Other Agreements, all words, terms and/or phrases used herein and therein shall be defined by the applicable definition therefor (if any) in the Uniform Commercial Code as adopted by the State of Illinois. Notwithstanding the foregoing, any accounting terms used in this Agreement which are not specifically defined herein shall have the meaning customarily given to them in accordance with GAAP. All financing computations hereunder shall be computed, unless otherwise specifically provided herein, in accordance with GAAP as consistently applied. 2. LOANS: BANK'S COMMITMENTS AND BORROWING PROCEDURES 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 credit 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 TWENTY MILLION DOLLARS ($20,000,000) (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. 2.2 Term Loan Commitment. On the terms and subject to the conditions set forth in this Agreement, Bank agrees to make the Term Loan to K-V in the principal amount of THREE MILLION FIVE HUNDRED THOUSAND DOLLARS ($3,500,000) (the "Term Loan Commitment"). Amounts borrowed in respect of the Term Loan and repaid may not be reborrowed. The Term Loan Commitment shall be used to purchase the Mortgaged Properties and for no other purpose. 13 2.3 Borrowing Procedures under the Revolving Credit Commitment. Representative shall give Bank irrevocable telephonic notice, written notice or telecopied notice by no later than 11:00 a.m., Chicago time, on the date it requests Bank to make a Base Rate Loan hereunder. Representative shall give Bank irrevocable telephonic notice (which notice shall be promptly confirmed in writing) no later than 10:00 a.m., Chicago time, three (3) Business Days prior to the date that it requests Bank to make a LIBOR Loan hereunder or effect a conversion from a Base Rate Loan to a LIBOR Loan, including a reborrowing as provided in Paragraph 4.3 below. Each such notice shall be effective upon receipt by Bank and shall specify the date of the Loan (which shall be a Business Day), the amount of such Loan, whether the Loan is a Base Rate Loan or LIBOR Loan and, with respect to a LIBOR Loan, the Interest Period applicable thereto. Representative agrees that Bank may rely on any notice given by any person it reasonably believes to be an Authorized Officer of Representative without the necessity of independent investigation. Each borrowing shall be on a Business Day. Notwithstanding anything contained in this Agreement to the contrary, the Borrowers hereby appoint K-V (the "Representative") to act as their sole and exclusive representative under this Agreement for all purposes, including without limitation, to receive funds advanced hereunder, to receive notices and other communications from the Bank hereunder, to make requests for advances of funds hereunder and to amend this Agreement. The Bank shall have (i) no obligation to communicate with any Borrower other than the Representative concerning this Agreement, any note or any matter related to Borrowers' Liabilities and (ii) no responsibility with respect to the allocation among Borrowers of the funds advanced hereunder. 2.4 Letters of Credit. (a) Subject to all of the terms and conditions of this Agreement, if requested to do so by any Borrower, Bank shall issue its, or cause to be issued, Letters of Credit for the account of such Borrower; provided that the aggregate face amount of all Letters of Credit outstanding at any time shall not exceed the availability under the Revolving Credit Commitment. No Letter of Credit may have an expiration date that is either greater than one (1) year from the date of issuance of such Letter of Credit or later than the Letter of Credit Termination Date. Any amounts paid by Bank in connection with any Letter of Credit (i) shall become part of Borrowers' Liabilities, (ii) shall be paid from the proceeds of a Revolving Loan requested pursuant to Paragraph 2.1 above, to the extent Bank is required to make a Revolving Loan pursuant to the terms hereof, and (iii) otherwise, shall be payable on demand. In no event shall Bank be required to issue or cause to be issued Letters of Credit at any time there exists an Event of Default or an event which with passage of time or giving of notice or both would mature into an Event of Default. (b) K-V and any Subsidiary for whose account a Letter of Credit is issued, jointly and severally, agree to unconditionally, irrevocably and absolutely pay immediately to Bank the amount drawn under a Letter of Credit. If any Borrower at any time fails to make such payment, Borrowers shall 14 be deemed to have elected to borrow from Bank on such date Revolving Loans equal in aggregate amount to the amount paid by Bank under such Letter of Credit. 2.5 Borrowing Procedures Under the Term Loan Commitment. Provided that all of the conditions precedent to making the Term Loan described in Paragraph 5.5 and 6.1(B) are satisfied, K-V shall give Bank irrevocable telephonic notice (which notice shall promptly be confined in writing) no later than 10:00 a.m., Chicago time, two (2) Business Days prior to the date K-V requests Bank to make the Term Loan hereunder. K-V agrees that Bank may rely on any notice given by any person Bank reasonably believes to be an Authorized Officer of K-V, without the necessity of independent investigation. 3. LOANS: NOTES EVIDENCING LOANS 3.1 Revolving Note. The Revolving Loans made by Bank under the Revolving Credit Commitment shall be evidenced by the Revolving Note substantially in the form set forth in Exhibit 3.1 dated the date hereof (or such other date prior thereto as shall be satisfactory to Bank), payable to the order of Bank in the maximum principal amount of TWENTY MILLION DOLLARS ($20,000,000). The unpaid principal amount of the Revolving Loan shall bear interest and be due and payable as provided in this Agreement and the Revolving Note. Payments to be made by Borrowers under the Revolving Note shall be made at the time, in the amounts and upon the terms set forth herein and therein. 3.2 Term Note. The Term Loan made by Bank under the Term Loan Commitment shall be evidenced by the Term Note substantially in the form set forth in Exhibit 3.2 dated the date hereof (or such other date subsequent hereto as shall be satisfactory to Bank), payable to the order of Bank in the principal amount of THREE MILLION FIVE HUNDRED THOUSAND DOLLARS ($3,500,000). The unpaid principal amount of the Term Loan shall bear interest and be due and payable as provided in this Agreement and the Term Note. Payments to be made by K-V under the Term Note shall be made at the time, in the amounts and upon the terms set forth herein and therein. 3.3 Recordation. The type, date and amount of each Loan made by Bank, the interest rate, and the date and amount of each repayment of principal received by Bank shall be recorded by Bank in its records. The aggregate unpaid principal amount so recorded shall be prima facia evidence of the principal amount owing and unpaid on the Revolving Note and the Term Note. The failure to so record any such amount or any error in so recording any such amount shall not limit or otherwise affect the obligations of Borrowers hereunder or under the Revolving Note and the Term Note to repay the principal amount of the Loans together with all interest accrued thereon. 15 4. LOANS: AMOUNTS; INTEREST; BALANCES 4.1 Applicable Borrowing Amounts; Interest Rates; Default Rate (a) Borrowers hereby promise to pay interest on the unpaid principal amount of each Revolving Loan at a rate per annum equal to the Base Rate from time to time in effect (the "Base Rate Loan") for the period commencing on the date of such Loan until such Base Rate Loan is (A) converted to a LIBOR Loan pursuant to Paragraph 4.3 hereof, or (B) paid in full. Accrued interest on the outstanding principal amount of Loans shall be payable (i) monthly in arrears on the last Business Day of each calendar month in the case of a Base Rate Loan, (ii) on the last day of the applicable Interest Period in the case of a LIBOR Loan, (iii) upon conversion of any Loan into a LIBOR Loan (such amount of accrued interest then coming due to be calculated based on the principal amount of the Loan so converted) and (iv) upon the Revolving Credit Termination Date (in the case of a Revolving Loan), which payments shall commence with the last Business Day of June, 1997 in the case of a Base Rate Loan. After the Revolving Credit Termination Date (in the case of a Revolving Loan) or the Conversion Date (with respect to accrued interest coming due as a result of the conversion), as applicable, accrued interest on such Loans shall be payable on demand. (b) K-V hereby promises to pay interest on the unpaid principal amount of the Term Loan at a rate per annum equal to the Fixed Rate for the period commencing on the date of such Loan until such Fixed Rate Loan is paid in full. Accrued interest and principal on the outstanding principal amount of the Term Loan shall be payable monthly in arrears on the last Business Day of each calendar month which payments shall commence with the last Business Day of the calendar month in which such Loan is made, with a final payment of accrued and unpaid interest due on the Term Loan Maturity Date. After the Term Loan Maturity Date, accrued interest and principal on such Loan shall be payable on demand. (c) Each LIBOR Loan shall be in a minimum amount of $1,000,000 or such greater amount which is an integral multiple of $100,000 and shall bear interest (computed on the basis of a year of 360 days and actual days elapsed) on the unpaid principal amount thereof from the date such LIBOR Loan is effected by conversion or continued until maturity (whether by acceleration or otherwise) at a rate per annum equal to the sum of the LIBOR Margin plus the Adjusted LIBOR Rate, with such interest payable in accordance with Paragraph 4.1(a) above. (d) If an Event of Default shall have occurred and be continuing hereunder, the Loans shall bear interest from the date of such Event of Default, payable on demand, at a rate per annum (the "Default Rate") equal to the sum of two percent (2%) plus the applicable interest rate from time to time in effect (computed on the basis of a 360 day year and actual days elapsed). 16 4.2 Computation of Interest. Interest on each Loan shall be computed for the actual number of days elapsed on the basis of a 360-day year. The interest rate applicable to each Base Rate Loan shall change simultaneously with each change in such Base Rate. Upon conversion of less than all the aggregate principal amount of Base Rate Loans outstanding at any one time to a LIBOR Loan, interest on the remaining principal amount of Base Rate Loans shall continue to bear interest at the Base Rate. 4.3 Conversion and Reborrowing of Loans. (a) Provided that no Event of Default has occurred and is continuing, Base Rate Loans may, subject to Paragraphs 2.3 and 4.1(a) hereof, at any time be converted by any Borrower to LIBOR Loans, which LIBOR Loans shall mature and become due and payable on the last day of the Interest Period applicable thereto. Provided that no Event of Default has occurred and is continuing, Borrower shall have the right, subject to the terms and conditions of this Agreement, to reborrow through a new LIBOR Loan in whole or in part, subject to Paragraph 4.1(c), any LIBOR Loan from any current Interest Period into a subsequent Interest Period, provided that Borrower shall give Bank notice of the reborrowing of any such LIBOR Loan as provided in Paragraph 2.3 hereof. (b) In the event that (i) Representative fails to give notice pursuant to Paragraph 2.3 hereof of the reborrowing of any LIBOR Loan or fails to specify the Interest Period applicable to such reborrowing or (ii) an Event of Default has occurred and is continuing at the time any such LIBOR Loan is to be reborrowed hereunder, then such LIBOR Loan shall be automatically reborrowed as a Base Rate Loan, subject to Paragraphs 4.1(d) (in the case of subpart (ii) of this Paragraph 4.3(b)) and 9.3 hereof if an Event of Default has occurred and is continuing, whichever is applicable, unless the relevant LIBOR Loan is paid in full on the last day of the then applicable Interest Period. (c) Notwithstanding anything contained herein to the contrary, Borrowers may not have outstanding at any one time more than four (4) LIBOR Loans. 4.4 Change of Law. Notwithstanding any other provisions of this Agreement or the Notes, if at any time Bank shall determine in good faith that any change in applicable law or regulation or in the interpretation thereof makes it unlawful or impossible for Bank to effect a conversion of a Base Rate Loan into a LIBOR Loan or to continue to maintain any LIBOR Loan, Bank shall promptly give notice thereof (together with an explanation of the reasons therefor) to Borrowers, and the obligation of Bank to effect by conversion or continue such LIBOR Loan under this Agreement shall terminate until it is no longer unlawful or impossible for Bank to effect by conversion or maintain such LIBOR Loan. Upon the receipt of such notice, Borrowers may elect to either (i) 17 pay or prepay, as the case may be, the outstanding principal amount of any such LIBOR Loan, together with all interest accrued thereon and all other amounts payable to Bank under this Agreement, or (ii) convert the principal amount of such affected LIBOR Loan to a Base Rate Loan available hereunder, subject to the terms and conditions of this Agreement. 4.5 Unavailability of Deposits or Inability to Ascertain the LIBOR Rate or Adjusted LIBOR Rate. Notwithstanding any other provision of this Agreement or the Notes to the contrary, if prior to the commencement of any Interest Period Bank shall determine in good faith (i) that deposits in the amount of any LIBOR Loan scheduled to be outstanding are not available to Bank in the relevant market or (ii) by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the LIBOR rate or Adjusted LIBOR Rate, then Bank shall promptly give notice thereof to Borrowers, and the obligation of Bank to effect by conversion or continue any such LIBOR Loan in such amount and for such Interest Period shall terminate until deposits in such amount and for the Interest Period selected by Borrower shall again be readily available in the relevant market and adequate and reasonable means exist for ascertaining the LIBOR rate or Adjusted LIBOR Rate, as the case may be. Upon the giving of such notice, Borrowers may elect to either (i) pay or prepay, as the case may be, the outstanding principal amount of any such LIBOR Loan, together with all interest accrued thereon and all other amounts payable to Bank under this Agreement or (ii) convert the principal amount of such affected LIBOR Loan to a Base Rate Loan available hereunder, subject to all the terms and conditions of this Agreement. 4.6 Yield Protection, Etc. (a) Increased Costs. If (x) Regulation D of the Board of Governors of the Federal Reserve System, or (y) the adoption of any applicable law, treaty, rule, regulation or guideline, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank or its lending branch with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency, (i) shall subject Bank, its lending branch or any Loan to any tax, duty, change, stamp tax, fee, deduction, withholding or other charge in respect of this Agreement, any Loan, the Notes or the obligation of Bank to make or maintain any Loan, or shall change the basis of taxation of payments to Bank of the principal of or interest on any Loan or any other amounts due under this Agreement in respect of any Loan or its obligation to make or maintain any Loan (except for changes in the rate of tax on the overall net income of Bank imposed by the federal, state or local jurisdiction in which Bank's principal executive office or its lending branch is located); 18 (ii) shall impose, modify or deem applicable any reserve (including, without limitation, any reserve imposed by the Board of Governors of the Federal Reserve System), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, Bank; or (iii) shall impose on Bank any penalty with respect to the foregoing or any other condition affecting this Agreement, any Loan, the Notes or the obligation of Bank to make or maintain any Loan; and the result of any of the foregoing is to increase the cost to (or to impose a cost on) Bank of making or maintaining any Loan, or to reduce the amount of any sum received or receivable by Bank under this Agreement or under the Notes with respect thereto, then Bank shall notify Borrowers after it receives final notice of any of the foregoing and, within forty-five (45) days after demand by Bank (which demand shall be accompanied by a statement setting forth the basis of such demand), Borrowers shall pay directly to Bank for such additional amount or amounts as will compensate Bank for such increased cost or such reduction. (b) Capital Adequacy. If, after the date hereof, either (i) the introduction of or any change in or change in the interpretation of any law or regulation or (ii) compliance by Bank with any guideline or request from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by Bank or any corporation controlling Bank and Bank determines that the amount of such capital is increased solely by or solely based upon the existence of Bank's commitment to lend hereunder and other commitments of this type, then, upon demand by Bank, Borrower shall immediately pay to Bank, from time to time as specified by Bank, additional amounts sufficient to compensate Bank in the light of such circumstances, to the extent that Bank reasonably determines such increase in capital to be allocable to the existence of Bank's commitment to lend hereunder. 4.7 Funding Indemnity. In the event Bank shall incur any loss, cost or expense (including, without limitation, any loss of profit and any loss, cost or expense incurred by reason of the liquidation or re-employment of deposits or other funds acquired by Bank to fund or maintain any LIBOR Loan or the relending or reinvesting of such deposits or amounts paid or prepaid to Bank) as a result of: (a) any payment of a LIBOR Loan on a date other than the last day of the then applicable Interest Period; (b) any failure by any Borrower to effect by conversion or continue any LIBOR Loan on the date specified in the notice given pursuant to Paragraph 2.3 hereof; 19 (c) any failure by any Borrower to make any payment of principal or interest when due on any LIBOR Loan, whether at stated maturity, by acceleration or otherwise; or (d) the occurrence of any Event of Default; then, upon the demand by Bank, Borrowers shall pay to Bank such amount as will reimburse Bank for such loss, cost or expense. If Bank makes such a claim for compensation under this Paragraph 4.7, Bank shall provide to Borrower a certificate setting forth the amount of such loss, cost or expense in reasonable detail. 4.8 Discretion of Bank as to Manner of Funding. Notwithstanding any provision of this Agreement to the contrary other than Paragraph 4.7, Bank shall be entitled to fund and maintain its funding of all or any part of the Loans in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if Bank had actually funded and maintained each LIBOR Loan during each Interest Period for such LIBOR Loan through the purchase of deposits in the London Interbank Market having a maturity corresponding to such Interest Period and bearing an interest rate equal to the Adjusted LIBOR Rate for such Interest Period. 4.9 Interest Laws. Notwithstanding any provision to the contrary contained in this Agreement or the Other Agreements, Borrowers shall not be required to pay, and Bank shall not be permitted to collect, any amount of interest in excess of the maximum amount of interest permitted by law ("Excess Interest"). If any Excess Interest is provided for or determined by a court of competent jurisdiction to have been provided for in this Agreement or in any of the Other Agreements, then in such event: (a) the provisions of this Paragraph shall govern and control; (b) Borrowers shall not be obligated to pay any Excess Interest; (c) any Excess Interest that Bank may have received hereunder shall be, at Bank's option, (i) applied as a credit against the outstanding principal balance of Borrowers' Liabilities or accrued and unpaid interest (not to exceed the maximum amount permitted by law), (ii) refunded to the payor thereof, or (iii) any combination of the foregoing; (d) the interest rate(s) provided for herein shall be automatically reduced to the maximum lawful rate allowed from time to time under applicable law (the "Maximum Rate"), and this Agreement and the Other Agreements shall be deemed to have been and shall be reformed and modified to reflect such reduction; and (e) Borrowers shall not have any action against Bank for any damages arising out of the payment or collection of any Excess Interest. Notwithstanding the foregoing, if for any period of time interest on any Borrowers' Liabilities is calculated at the Maximum Rate rather than the applicable rate under this Agreement, and thereafter such applicable rate becomes less than the Maximum Rate, the rate of interest payable on such Borrowers' Liabilities shall remain at the Maximum Rate until Bank shall have 20 received the amount of interest which Bank would have received during such period on such Borrowers' Liabilities had the rate of interest not been limited to the Maximum Rate during such period. 4.10 Letter of Credit Fees. As additional consideration for issuing, or causing to be issued, Letters of Credit for Borrowers at Borrowers' request pursuant to Paragraph 2.4 hereof, Borrower agrees to pay fees in respect to each Letter of Credit so issued. Said fees shall be payable on the date which such Letter of Credit is issued and (a) for "standby" Letters of Credit shall be in an amount equal to one percent (1.0%) per annum of the amount of the Letter of Credit multiplied by a fraction, the numerator of which is the number of days in the term of the applicable Letter of Credit and the denominator of which is 360, payable quarterly in advance, and (b) for "trade" or other Letters of Credit, in accordance with Bank's published fee schedule then in effect. In the event a Letter of Credit is renewed or extended, a fee calculated in the manner provided above shall be payable for any such renewal or extended period. Further, Borrowers shall pay and/or reimburse Bank for all fees and charges paid by Bank on account of any Letter of Credit, and Borrowers shall pay to Bank its usual and customary charges in respect to the issuance, or renewal, of Letters of Credit. 5. LOANS: GENERAL TERMS 5.1 Payments to Bank. That portion of Borrowers' Liabilities consisting of: (a) principal payable on account of the Loans made by Bank to Borrowers pursuant to this Agreement shall be payable by Borrowers to Bank (i) as provided in the Revolving Note or any Letter of Credit in respect of the Revolving Loans and (ii) as provided in the Term Note in respect of the Term Loan; (b) costs, fees and expenses payable pursuant to this Agreement shall be payable by Borrowers to Bank on demand (except the Unused Portion Fee which shall be payable as described in Paragraph 5.10 below); (c) interest payable pursuant to this Agreement shall be payable by Borrowers to Bank as provided in Paragraph 4.1; and (d) the balance of Borrowers' Liabilities, if any, shall be payable by Borrowers to Bank as and when provided in this Agreement. 5.2 Automatic Debit. In order to cause timely payment to be made to Bank, for the account of Bank, of all Borrowers' Liabilities as and when due, Borrowers hereby authorize and direct Bank, at Bank's option, to debit the amount of such Borrowers' Liabilities to any ordinary deposit account of Borrowers (including, without limitation, by increasing the principal balance due under the Revolving Loan). 5.3 Application of Payment. Each Borrower shall, at the time of making each payment under this Agreement or any Note (whether by account debit or otherwise), specify to Bank the Loan or other amounts payable by Borrowers hereunder to which such payment is to be applied (and in the event that it fails to so specify, or if an Event of Default has occurred and is continuing, Bank may distribute such payment in such manner as Bank may determine to be appropriate. 21 5.4 Reserved. 5.5 Conditions Precedent Events. Each Loan made by Bank to Borrowers at the request of Borrowers pursuant to this Agreement or the Other Agreements shall in any event be subject to the following conditions precedent: (a) there shall not then exist an Event of Default (as hereinafter defined) or any event or condition which with notice, lapse of time and/or the making of such Loan would constitute an Event of Default; (b) the representations, warranties and covenants of each Borrower contained in this Agreement shall be true and correct as of the date of such Loan except for those made as of a particular date with the same effect as though made on such date; (c) all of the covenants and agreements of each Borrower in this Agreement, and all of the requirements of this Agreement with respect to such Loan, shall have been complied with; and (d) there shall not have occurred, since the date of this Agreement, any material adverse change in the financial condition, results of operations or business of any Borrower. Each borrowing by any Borrower hereunder shall be deemed a representation and warranty by such Borrower that the foregoing conditions have been fulfilled as of the date of such borrowing. Bank shall have received upon request a certificate signed by an Authorized Officer of such Borrower dated the date of such requested Loan certifying satisfaction of the conditions specified in clauses (a)-(d) of this Paragraph 5.5. 5.6 Offset. Each Borrower agrees that, in addition to (and without limitation of) any right of set-off, bankers' lien or counterclaim Bank may otherwise have, Bank shall be entitled, at its option, to offset balances held by it for account of such Borrower at any of its offices, in United States Dollars or in any other currency, against any principal of or interest on any of its Loans, or any other amount payable to Bank hereunder, which is not paid when due (regardless of whether such balances are then due to such Borrower). 5.7 Credit Termination Date; Continuance of Obligations, Etc. This Agreement, Bank's obligation to loan monies to Borrowers, and each Borrower's ability to borrow monies from Bank shall be in effect until the Revolving Credit Termination Date or Term Loan Termination Date, as applicable. Notwithstanding the foregoing and until such date when Borrowers' Liabilities shall be paid in full, each Borrower's obligations hereunder and under the Other Agreements shall continue, interest shall continue to be paid in accordance with the foregoing and Bank shall retain all of its rights and remedies under this Agreement. 5.8 Loan Evidence. Loans made by Bank to Borrowers pursuant to this Agreement may or may not (at Bank's sole and absolute discretion) be evidenced by notes or other instruments issued or made by Borrowers to Bank. Where such loans are not so evidenced, such loans shall be evidenced solely by entries upon the ledgers, books, records and/or computer records of Bank maintained for that 22 purpose, which entries shall be rebuttably presumptive evidence of such loans in the absence of manifest error. 5.9 Over-Advances. If, at any time and for any reason, the aggregate amount of Borrowers' Liabilities outstanding hereunder in respect of the Revolving Loans exceeds the Revolving Credit Commitment (an "Over-Advance"), then Borrowers shall immediately pay to Bank, in cash, the amount of such Over-Advance. If such Over-Advance remains outstanding for more than three (3) Business Days until such Over-Advance is so repaid to Bank, the amount of such Over-Advance shall bear interest at the applicable Default Rate. 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 one-eighth of one percent (1/8%) 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. 5.11 Prepayment. (a) Term Loan Prepayment. K-V may, from time to time, prepay the Loan evidenced by the Term Note in whole or in part and the same shall pay, subject to Section 5.7 hereof, the Make-Whole Amount (as defined below) plus a prepayment fee equal to (i) two percent (2%) of the unpaid principal balance of the Term Loan prior to the first (1st) anniversary of the Closing Date, and (ii) one percent (1%) of the unpaid principal balance of the Term Loan prior to the second (2nd) anniversary of the Closing Date; 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 Fixed Rate exceeds (B) the yield to maturity percentage for the United States Treasury Note maturing June, 2002 (the "Treasury Note") as published in 23 The Wall Street Journal on the fifth business day preceding the Prepayment Date plus Two Hundred and Twenty-Five basis points (2.25%) (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 Current Yield; (ii) The difference calculated pursuant to clause (i) above shall be multiplied by the outstanding principal balance hereof as of 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 Maturity Date, by (B) 365; and (iv) The sum calculated pursuant to clause (iii) above shall be discounted at the annual rate of the Current Yield to the present value thereof as of the Prepayment Date, on the assumption that said sum would be received in equal monthly installments on each monthly anniversary of the Prepayment Date prior to the Maturity Date, with the final such installment to be deemed received on the Maturity Date; provided that Borrowers shall not be entitled in any event to a credit against, or a reduction of, the Debt being prepaid if the Current Yield exceeds the Fixed Rate or for any other reason. (b) Revolving Loan Prepayment. The Revolving Loan may be prepaid in full, and the Revolving Credit Commitment extinguished, if and only if the Term Loan has been paid in full in accordance with Paragraph 5.11(a) above. 5.12 Transaction Fee. On or prior to the Closing Date, Borrowers shall pay an aggregate fee of $85,000, comprised of a fee of $50,000 in respect of the Revolving Loan and $35,000 in respect of the Term Loan (the "Transaction Fee") to Bank, of which $25,000 in respect of the Revolving Loan has been previously paid by K-V. 6. LOANS: CONDITIONS TO LENDING 6.1 Initial Loan Conditions Precedent. In addition to those conditions set forth in Paragraph 5.5 above with respect to all Loans and advances hereunder, prior to or contemporaneously with the making of the initial advance of funds, Bank's obligation to make any Loan is subject to the satisfaction of the following conditions precedent: (a) Fees and Expenses. Borrowers shall have paid all fees owed to Bank and reimbursed Bank for all expenses due and payable hereunder on or before the date hereof including, but not limited to, counsel fees provided 24 for in Paragraph 10.12 hereof and the Transaction Fee provided for in Paragraph 5.12 hereof. (b) Documents. (A) Bank shall have received the following documents with respect to the closing of the Revolving Loan on the Closing Date, 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 (with the exception of transactions and conditions associated with the closing of the Term Loan, which will close at a later date as provided in Subparagraph (B) below): (i) Related Documents. Copies of this Agreement as required by Bank and one copy of the Revolving Note payable to Bank conforming to the requirements hereof duly executed by each Borrower, as applicable. (ii) Legal Opinion. The Revolving Loan legal opinion of Borrowers' counsel. (iii) Officer's Certificate. A certificate executed by an Authorized Officer of each Borrower stating that (A) no default or Event of Default has occurred and is continuing, (B) no material adverse change in the financial condition or operations of the business of any Borrower has occurred since December 31, 1996, (C) the representations, warranties and covenants of each Borrower contained herein are true and correct, and (D) each condition precedent of each Borrower to the consummation of the Loans contemplated hereby has been met or satisfied. (iv) Insurance Policies. Certificates from each Borrower's insurance carriers evidencing that all insurance policies and coverage required by Paragraph 8.2(h) below is in effect. (v) Certificate of Incorporation and Bylaws. A copy of each Borrower's Articles or Certificate of Incorporation, and all amendments, certified by the Secretary of State of the applicable jurisdiction of incorporation and a copy of each of Borrower's Bylaws certified by an Authorized Officer. (vi) Good Standing Certificate. A Good Standing Certificate for each Borrower from the applicable jurisdiction of incorporation and each state in which each Borrower is required to be qualified to transact business as a foreign corporation. (vii) Board Resolutions. Certified copies of resolutions of the Board of Directors of each Borrower authorizing the execution and delivery of and the consummation of the transactions 25 contemplated by this Agreement and the Other Agreements and all other documents or instruments to be executed and delivered in conjunction herewith and therewith on behalf of each Borrower. (viii) Incumbency Certificates. A certificate of the Secretary or an Assistant Secretary of each Borrower certifying the names of the officer or officers of each Borrower authorized to sign this Agreement and the Other Agreements on behalf of each Borrower together with a sample of the true signature of each such officer. (ix) Pay-Off Letter. Pay-off letter with respect to all Debt of Borrower previously owed to Foothill Capital Corporation and a Form UCC-3 Termination Statement with respect to Liens granted in favor of such lender. (x) Lender's Loss Payable Endorsement. A Lender's Loss Payable Endorsement in favor of Bank for each insurance policy of each Borrower naming Bank as loss payee and additional insured. (xi) Other Documents. Such other documents as Bank may reasonably request. (B) Bank shall have received the following documents on or before June 30, 1997 with respect to the closing of the Term Loan, 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: (i) Mortgages. A Deed of Trust duly executed by K-V in favor of Bank for each Mortgaged Property. (ii) Assignment of Rents. An Assignment of Rents and Leases duly executed by K-V in favor of Bank for each Mortgaged Property. (iii) Environmental Indemnity Agreement. An Environmental Indemnity Agreement duly executed by K-V in favor of Bank. (iv) Collateral Assignments of Leases. Collateral Assignments of leasehold interests and leases from each lessee under the Lease of each Mortgaged Property; (v) Estoppel Letters and Leases. A fully executed original copy by each lessor and lessee under the Leases of an estoppel letter, and a true and correct copy of each Lease of Borrower related to each Mortgaged Property. 26 (vi) Title Policy. A loan policy for each Mortgaged Property issued by a title insurance company acceptable to Bank in the amount of $3,500,000, which policies shall be in form and substance acceptable to Bank. (vii) Form UCC-1 and Form UCC-2 Financing Statements for each Mortgaged Property to be filed with the Secretary of State of Missouri and the Recorder of Deeds of St. Louis County, Missouri. (viii) Survey. ALTA Survey for each Mortgaged Property in form and substance acceptable to Bank. (ix) Appraisal and Environmental Report. Appraisal and Phase I Environmental Assessment covering each Mortgaged Property, satisfactory in each case to Bank. (x) ALTA Statement. An ALTA Statement acceptable to Chicago Title Insurance Company ("Title Company") duly executed by K-V. (xi) Purchase Contract. Purchase contract for the purchase of each of the Mortgaged Properties, together with evidence of transfer of each Mortgaged Property to K-V. (xii) Environmental Reports. Environmental Reports for each of the Mortgaged Properties. (xiii) Gap-Personal Undertaking. A statement by K-V that, among other things, it shall be liable to Title Company and Bank for any liens or other title defects placed on the Mortgaged Properties between the date of the title commitment issued by Title Company and the date of the recording of the Mortgages. (xiv) Officer's Certificate. A certificate executed by an Authorized Officer of K-V stating that (A) no default or Event of Default has occurred and is continuing, (B) no material adverse change in the financial condition or operations of the business of K-V has occurred since December 31, 1996, (C) the representations, warranties and covenants of K-V contained herein are true and correct, and (D) each condition precedent of K-V to the consummation of the Term Loan contemplated hereby has been met or satisfied. (xv) Good Standing Certificate. A Good Standing Certificate for K-V from the Secretary of State of Delaware and each state in which K-V is required to be qualified to transact business as a foreign corporation. 27 (xiv) Other Documents. Such other documents as Bank may reasonably request. 7. COLLATERAL FOR TERM LOAN: GENERAL TERMS 7.1 Grant of Security Interest. To secure the prompt payment of Borrowers' Liabilities in respect of the Term Loan and the prompt, full and faithful performance by K-V of all of the provisions to be kept, observed or performed by K-V under the Term Loan, K-V does hereby pledge, assign, transfer and deliver to Bank, for the benefit of Bank, and grant to Bank, for the benefit of Bank, a security interest in and to and a first mortgage on each parcel of Mortgaged Property pursuant to the Mortgage and Assignment of Rents. (All of the foregoing personal property and real property securing Borrowers' Liabilities in respect of the Term Loan hereunder, in addition to all rents and proceeds thereof including, without limitation, proceeds of insurance policies insuring the same, is hereinafter sometimes individually and sometimes collectively referred to as "Collateral"). K-V shall make appropriate entries upon its financial statements and books and records disclosing Bank's security interest in the Collateral. 7.2 Perfection of Security Interests. K-V shall execute and/or deliver to Bank, at any time and from time to time hereafter at the request of Bank, all agreements, instruments, financing statements, documents and other written matter (sometimes hereinafter individually and collectively referred to as "Supplemental Documentation") that Bank reasonably may request, in form and substance acceptable to Bank, to perfect and maintain perfected Bank's security interest in the Collateral and to consummate the transactions contemplated in or by this Agreement and the Other Agreements. After an Event of Default, K-V, irrevocably, hereby makes, constitutes and appoints Bank (and all Persons designated by Bank for that purpose) as K-V's true and lawful attorney and agent-in-fact to sign the name of K-V on the Supplemental Documentation and to deliver the Supplemental Documentation to such Persons as Bank may reasonably elect. K-V agrees that a carbon, photographic or photostatic copy or other reproduction of this Agreement or of any financing statement shall be sufficient as a financing statement. 7.3 Inspection of Collateral. Bank (by any of its officers, employees and/or agents) shall have the right to inspect the Collateral and all related records (and the premises upon which it is located) and to verify the amount and condition of or any other matter relating to the Collateral. After an Event of Default, all costs, fees and expenses incurred by Bank, or for which Bank has become obligated, in connection with such inspection and/or verification shall constitute part of Borrowers' Liabilities, payable by each Borrower to Bank on demand. Notwithstanding any other provision hereof, the provisions of this Paragraph 7.3 shall govern and control with respect to matters concerning inspection and verification of the Collateral. 28 7.4 First Lien and Location of Collateral. K-V warrants and represents to and covenants with Bank that: (a) as of the Closing Date, Bank's security interest in the Collateral is and at all times hereafter shall be perfected and have a first priority; (b) the offices and/or locations where K-V keeps the Collateral consisting of personal property, and the books and records concerning the Collateral, consisting of books and records with respect to both real and personal property, are at the locations specified on Exhibit 7.4 and K-V shall not remove such books and records and/or the Collateral therefrom and shall not keep any of such books and records and/or the Collateral at any other office or location without the prior written consent of Bank; and (c) the addresses specified on Exhibit 7.4 include and designate K-V's executive offices, chief place of business and other offices and places of business and are K-V's sole offices and places of businesses. K-V, by written notice delivered to Bank at least thirty (30) days prior thereto, shall advise Bank of K-V's opening of any new office or place of business or its closing of any existing office or place of business and any new office or place of business shall be within the continental United States of America. There are no liens on the Collateral other than the lien of Bank pursuant hereto. 7.5 Constructive Trust. Borrowers shall receive, as the sole and exclusive property of Bank, and as trustee for Bank, all monies, checks, notes, drafts and all other payment for and/or proceeds of Collateral which come into the possession or under the control of Borrowers (or any of its partners, officers, employees, agents or those Persons acting for or in concert with Borrowers) and immediately upon receipt thereof, Borrowers shall remit the same (or cause the same to be remitted), in kind, to Bank at the address described herein. 7.6 Application of Proceeds of Collateral. Bank, at any time or times in its sole and absolute discretion, may take control of, in any manner, and may endorse any Borrower's name, as appropriate, to any of the items of payment or proceeds described in Paragraph 7.5 above and, pursuant to the provisions of this Agreement, Bank may, in its sole and absolute discretion, apply the same to and on account of Borrowers' Liabilities in respect of the Term Loan. For the purposes of this Paragraph, each Borrower, irrevocably, hereby makes, constitutes and appoints Bank (and all persons designated by Bank for that purpose) as each Borrower's true and lawful attorney and agent-in-fact with power, without notice to any Borrower, to take any such actions. 7.7 Third Party Collateral Claims. Bank, in its sole and absolute discretion, without waiving or releasing any Event of Default or obligation, liability, or duty of any Borrower under this Agreement or the Other Agreements, may at any time or times hereafter, but shall be under no obligation to, pay, acquire and/or accept an assignment of any security interest, lien, encumbrance, or claim asserted by any Person against the Collateral. All sums paid by Bank in respect thereof and all costs, fees and expenses, including reasonable 29 attorney's fees, court costs, expenses and other charges relating thereto that are incurred by Bank on account thereof shall be part of Borrowers' Liabilities payable by Borrower to Bank on demand. 7.8 Reserved. 7.9 No Custom or Waiver. No authorization given by Bank pursuant to this Agreement or the Other Agreements to sell any specified portion of Collateral or any items thereof, and no waiver by Bank in connection therewith shall establish a custom or constitute a waiver of the limitation contained in this Agreement against such sales, with respect to any portion of the Collateral or any item thereof not covered by said authorization. 8. REPRESENTATIONS AND WARRANTIES; COVENANTS; INDEMNIFICATION; CONTINUING OBLIGATION 8.1 Representations and Warranties of Borrower. Each Borrower hereby represents and warrants to Bank as of the date hereof and with respect to subsections (a) through (d) and subsections (f) through (y) below, the date of disbursement of each Loan or advance hereunder, as follows: (a) Corporate Existence and Authority. Each of K-V, PDI and ETHEX are corporations duly organized, validly existing and in good standing under the laws of the State of Delaware, New York and Missouri, respectively, and each is duly qualified to do business and is in good standing under the laws of each state in which the ownership of its properties and the nature and extent of the activities transacted by it makes such qualification necessary except where the failure to be so qualified could not reasonably be expected to have a material adverse effect on its performance, business, assets, liabilities, operations, properties, financial condition or prospects. Each Borrower has the requisite corporate power and authority to conduct its activities as presently conducted, to own its properties and to perform its obligations under this Agreement. (b) Authorization; No Conflict. The execution, delivery and performance by each Borrower of this Agreement and the Other Agreements to which each is a party are within each Borrower's corporate powers, have been duly authorized by all necessary corporate action and do not contravene (i) any Borrower's Certificate or Articles of Incorporation or Bylaws or (ii) any law or any contractual restriction binding on or affecting each of K-V, PDI and ETHEX or their respective properties, and do not result in or require the creation of any Lien (except as may be created under this Agreement or the Other Agreements) upon or with respect to any of its properties. (c) No Approval. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory 30 body is required for the due execution, delivery and performance by each Borrower of this Agreement or any Other Agreement to which each Borrower is a party. (d) Validity and Binding Nature. This Agreement is, and the Other Agreements to which each Borrower is a party when delivered hereunder will be, legal, valid and binding obligations of each Borrower, enforceable against each Borrower in accordance with their respective terms, except as such enforcement is limited by bankruptcy, insolvency, rehabilitation or moratorium laws or general principles of equity. (e) Financial Statements and Condition. The balance sheet (including the notes thereto) of K-V and its Subsidiaries on a consolidated basis as at March 31, 1997, and the related statements of operations and stockholders' equity and statements of cash flows of K-V and its consolidated Subsidiaries for the fiscal year then ended, have been audited by BDO Seidman, LLP and are complete and correct, in accordance with GAAP, and fairly present the financial condition of K-V and its Subsidiaries on a consolidated basis as at such date and the results of the operations of Borrower for the period ended on such date and since March 31, 1997, there has been no material adverse change in any Borrower's financial condition, business, properties or operations. The interim balance sheet (including the notes thereto) of K- V and its Subsidiaries on a consolidated basis as at April 30, 1997, and the related statements of operations and stockholders' equity and statements of cash flows for the period then ended, are complete and correct and fairly present the financial condition of K-V and its Subsidiaries on a consolidated basis at such date, in accordance with GAAP (subject to normal year-end audit adjustments and except as specified in the notes thereto). No Borrower has on the date hereof, nor will have on the date of any Loan or advance made by Bank hereunder, any material contingent obligations, long-term leases or material forward or long-term commitments, which are required to be reflected in the foregoing statements (and the related notes thereto) and are not so reflected. (f) Litigation. There is no pending or, to the best knowledge of each Borrower, threatened action, suit, inquiry, investigation, or proceeding affecting, directly or indirectly, any Borrower before any court, governmental agency or arbitrator, which, in any case, (i) is reasonably likely to materially and adversely affect the financial condition or operations of any Borrower, (ii) seeks to restrain or would otherwise have a material adverse effect on the transactions contemplated herein, or (iii) would affect the validity or enforceability of this Agreement or the Other Agreements. (g) Securities Transaction. No proceeds of any Loan or advance made by Bank to any Borrower hereunder will be used to acquire any security in any transaction which is subject to Section 13 or 14 of the Securities Exchange Act of 1934, as amended. 31 (h) Regulation U. No Borrower is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of any Loan or advance made by Bank to any Borrower hereunder will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. (i) ERISA Termination Event and Funding. No ERISA Termination Event has occurred with respect to any Plan and all Plans, to the extent governed by ERISA, meet the minimum funding standards of Section 302 of ERISA. (j) Withdrawal Liability and Reportable Events. No Borrower or any ERISA Affiliate has incurred, or expects to incur, any withdrawal liability under Section 4201 of ERISA to any Multiemployer Plan. No Reportable Event (as defined in ERISA Section 4043, other than a Reportable Event not subject to the 30-day reporting requirement to the PBGC under applicable regulations) has occurred with respect to any Plan. (k) Taxes. Each Borrower has filed all tax returns (Federal, state and local) required to be filed and paid all taxes shown thereon to be due, including interest and penalties, other than such taxes that a Borrower is contesting in good faith by appropriate legal proceedings and as to which proper reserves therefor have been established on the books of each Borrower. (l) Liens. There are no Liens upon or with respect to any of the properties of any Borrower or the Collateral or any right to receive revenues of any Borrower or the Collateral other than Permitted Liens. (m) Conflicts. No Borrower or any Subsidiary thereof is a party to any indenture, loan or credit agreement or any lease or other agreement or instrument (including corporate charters) which is likely to have a material adverse effect on the ability of any Borrower to perform its obligations under this Agreement or the Other Agreements or which would restrict or otherwise limit the incurring of the Debt represented by this Agreement and the Other Agreements. (n) Environmental Matters. Except as disclosed on Exhibit 8.1(n) hereto, (i) the operations of each Borrower and each Subsidiary, (including, without limitation, all operations and conditions at or in the Facilities) and the Mortgaged Properties comply with all Environmental Laws; 32 (ii) Each Borrower and each Subsidiary have obtained or have timely applied for all Governmental Authorizations under Environmental Laws necessary to their respective operations, if any, and all such Governmental Authorizations as have been obtained are in good standing, and each Borrower and each Subsidiary is in compliance with all terms and conditions of such Governmental Authorizations; (iii) No Borrower nor any Subsidiary has received from any Person (A) any notice or claim to the effect that it is or may be liable to any Person as a result of the Release or threatened Release of any Hazardous Materials or (B) any letter or request for information under Section 104 of the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. ss.9604) or comparable state laws, and none of the operations of any Borrower or any Subsidiary is the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a Release or threatened Release of any Hazardous Materials at any Facility, the Mortgaged Properties or at any other location; (iv) no operations of any Borrower or any Subsidiary are subject to any investigation or judicial or administrative proceeding alleging the violation of or liability under any Environmental Laws; (v) no Borrower nor any Subsidiary or any of their respective Facilities or operations or the Mortgaged Properties are subject to any outstanding written order or agreement with any governmental authority or private party relating to (a) any Environmental Laws or (b) any Environmental Claims; (vi) no Borrower nor any Subsidiary has any contingent liability in connection with any Release or threatened Release of any Hazardous Materials; (vii) no Borrower nor any Subsidiary or any of their respective predecessors has filed any notice under any Environmental Law indicating past or present treatment, storage, disposal or Release of Hazardous Materials at any Facility or the Mortgaged Properties except in accordance with Environmental Laws, and no Borrower's nor any Subsidiary's operations involve the generation, transportation, treatment, storage or disposal of hazardous waste, as defined under 40 C.F.R. Parts 260-270 or any state equivalent; (viii) no Hazardous Material exists on, under or about any Facility or the Mortgaged Properties in a manner that is reasonably likely to give rise to an Environmental Claim no Borrower 33 nor any Subsidiary has filed any notice or report of a Release of any Hazardous Materials that is reasonably likely to give rise to an Environmental Claim; (ix) no Borrower nor any Subsidiary or any of their respective predecessors has disposed of any Hazardous Materials in a manner that is reasonably likely to give rise to an Environmental Claim; (x) no underground storage tanks or surface impoundments are on or at any Facility or the Mortgaged Properties; and (xi) no lien in favor of any Person for (a) any liability under any Environmental Laws or (b) damages arising from or costs incurred by such Person in response to a Release or threatened Release has been filed or has been attached to any Facility or the Mortgaged Properties. (o) Investment Company Act. No Borrower nor any Subsidiary is an "investment company" or a company "controlled by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. (p) Compliance with Laws. Each Borrower is in compliance with all laws, orders, regulations and ordinances of all federal, foreign, state and local governmental authorities binding upon or affecting the business, operation or assets of each Borrower including, without limitation, zoning or other ordinances relating to permissive non-conforming uses of property, except where the failure to be in compliance could not reasonably be expected to have a material adverse effect on the business, financial condition or operations of each Borrower. (q) Other Agreements. Each Borrower makes each of the representations and warranties of Borrower contained in the Other Agreements to which each Borrower is a party operative and applicable for the benefit of Bank as if the same were set forth at length herein. (r) Subsidiaries. Except as disclosed on Exhibit 8.1(r), no Borrower has any Subsidiaries. (s) Labor. Except as disclosed on Exhibit 8.1(s), none of the employees of any Borrower is subject to any collective bargaining agreement, and there are no strikes, work stoppages, election or decertification petitions or proceedings pending or, to any Borrower's knowledge, threatened involving any Borrower and any of its employees and no Borrower has received notice of unfair labor charges, equal employment opportunity proceedings, wage payment or material unemployment compensation proceedings, material workmen's compensation proceedings or other material labor or employee-related controversies pending or threatened involving any Borrower and any of its employees, except for any of 34 of foregoing which would not in the aggregate have a material adverse effect on the financial condition, results of operations or business of any Borrower. (t) Solvency. Each Borrower has capital sufficient to carry on its business and transactions and all businesses and transactions in which it is about to engage and is solvent and able to pay its debts as they mature, and each Borrower owns property the fair saleable value of which is greater than the amount required to pay each Borrower's Debt. No transfer of property is being made and no Debt is being incurred in connection with the transactions contemplated by this Agreement with the intent to hinder, delay or defraud either present or future creditors of any Borrower or any Affiliate. (u) Title. Each Borrower has good and merchantable title to and ownership of its assets, free and clear of all Liens, claims, security interests and other encumbrances except for Permitted Liens. (v) Credit Agreements. Exhibit 8.1(v) hereto is a complete and correct list, as of the date of this Agreement, of each credit agreement, loan agreement, indenture, guarantee or other arrangement providing for or otherwise relating to any Debt or any extension of credit (or commitment for any extension of credit) to, or guarantee by, each Borrower (other than this Agreement) in each case involving, in the aggregate, more than $250,000, and the aggregate principal or face amount outstanding or which may become outstanding under each such arrangement is correctly described in such exhibit. (w) Debt. As of the date of this Agreement, no Borrower has any Debt except for the Permitted Debt or Debt otherwise permitted by this Agreement. (x) Insurance. Each Borrower is adequately insured under its policies of insurance currently in effect, no notice of cancellation has been received with respect to such policies and each Borrower is in material compliance with all conditions contained in such policies. (y) Accuracy of Information. All factual information heretofore or contemporaneously furnished by or on behalf of each Borrower to Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby (excluding projections referred to below in this Paragraph and factual information superseded or replaced prior to the date hereof) is, and all other factual information (taken as a whole) hereafter furnished by or on behalf of each Borrower to Bank will be true and accurate in every material respect on the date as of which such information is dated or certified, and no Borrower has omitted and nor will omit any material fact necessary to prevent such information from being false or misleading. 35 8.2 Affirmative Covenants. At all times prior to the later of the Term Loan Termination Date or the Revolving Credit Termination Date and thereafter for so long as any amounts are due or owing to Bank hereunder, each Borrower hereby covenants that it will, unless Bank otherwise consents in writing: (a) Existence, Etc. Do or cause to be done all things necessary to preserve and maintain each Borrower's corporate existence in good standing. (b) Compliance with Laws, Etc. Comply with all applicable present and future laws, rules, ordinances, regulations and orders including, without limitation, laws, rules, ordinances, regulations and orders regarding the operation and maintenance of each Borrower's business. (c) Payment of Taxes and Other Claims. Pay or discharge or cause to be paid or discharged, before the same shall become delinquent, all material Charges levied or imposed upon any Borrower or upon the income, profits or property of any Borrower, provided, however, that Borrowers shall not be required to pay or discharge or cause to be paid or discharged any such Charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings to the extent adequate reserves have been established on the books of Borrowers. (d) Reporting Requirements. Maintain a system of accounting in accordance with GAAP consistently applied and shall furnish to Bank: (i) as soon as possible and in any event within ten (10) days after the occurrence of an Event of Default or any event which, with the giving of notice, lapse of time, or both, would constitute an Event of Default, the statement of an Authorized Officer setting forth details of such Event of Default or event and the action which Borrowers have taken or propose to take to cure the same; (ii) as soon as available, copies of the periodic Form 10-Q quarterly report or comparable successor report filed by K-V with the Securities and Exchange Commission or any successor agency; provided, that if such report is not made available within forty-five (45) days after the end of each of the first three quarterly accounting periods in each fiscal year of K-V beginning with the quarter ending June 30, 1997, K-V shall immediately deliver to Bank an internally-prepared balance sheet of K-V and its Subsidiaries on a consolidated basis as at the end of such quarter and the related statements of operations and statements of cash flows of K-V and its Subsidiaries on a consolidated basis for such quarter and for the portion of the fiscal year ended at the end of such quarter, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of the previous fiscal year, all in reasonable detail and certified (subject to normal 36 year-end adjustments) as to fairness of presentation, in accordance with GAAP (other than footnotes thereto), by an Authorized Officer or Controller (if such Controller is a corporate officer) of K-V; (iii) as soon as available, copies of the Form 10-K Annual Report or comparable successor report filed by K-V with the Securities and Exchange Commission or any successor agency; provided, that if such report is not made available within ninety (90) days after the close of each fiscal year of K-V, K-V shall immediately deliver to Bank a balance sheet and the related consolidated statements of operations and stockholders' equity and statements of cash flows of Borrower and its Subsidiaries on a consolidated basis as of the end of such fiscal year, fairly and accurately presenting the financial condition of K-V and its Subsidiaries on a consolidated basis as at such date and the results of operations of Borrower and its Subsidiaries for such fiscal year and setting forth in each case in comparative form the corresponding figures for the corresponding period of the preceding fiscal year, all in reasonable detail, prepared in accordance with GAAP consistently applied, and audited by BDO Seidman, LLP or such other independent certified public accountants acceptable to Bank (the "Accountants"); (iv) Together with each delivery of the Annual Reports or financial statements required by subsection (v) above, K-V shall deliver to Bank a certificate executed by the President or Chief Financial Officer of each Borrower stating whether any Event of Default, or event which, with the passage of time or giving of notice or both, would constitute such an Event of Default, currently exists and is continuing and what activities, if any, Borrowers are taking or proposing to take with respect thereto; (v) concurrently with the delivery of the reports and/or financial statements referred to in Sub-paragraphs (ii) and (iii), a compliance certificate duly completed and executed by both the Chairman of the Board or President and the Chief Financial Officer of each Borrower (a) stating that Borrower has observed and performed all of its covenants and other agreements and satisfied every condition, contained in this Agreement, the Term Note, the Revolving Note and all Other Agreements to which Borrower is a party to be observed, performed or satisfied by it and that such officer has no knowledge of any Event of Default except as specified in such certificate, (b) stating that, to the best of such officer's knowledge, all such financial statements are complete and correct in all respects and have been prepared in accordance with GAAP consistently applied throughout the periods reflected therein, and (c) showing calculations of compliance with the financial covenants set forth in Paragraph 8.2(g) below; 37 (vi) promptly upon receipt and, in any event, within fifteen (15) days after receipt thereof, copies of all auditors' letters to management and management's response thereto pertaining to the balance sheet and related financial statements of K-V and its Subsidiaries; (vii) (A) as soon as possible and in any event (i) within thirty (30) days after any Borrower or any ERISA Affiliate knows or has reason to know that any ERISA Termination Event described in clause (i) of the definition of ERISA Termination Event with respect to any Plan has occurred and (ii) within ten (10) days after any Borrower or any ERISA Affiliate knows or has reason to know that any other ERISA Termination Event with respect to any Plan has occurred, a statement of the Chief Financial Officer (or designee) of such Borrower describing such ERISA Termination Event and the action, if any, which Borrower, or any such ERISA Affiliate proposes to take with respect thereto; (B) promptly and in any event within fifteen (15) Business Days after receipt thereof by any Borrower or any ERISA Affiliate from the PBGC, copies of each notice received of the PBGC's intention to terminate any Plan or to have a trustee appointed to administer any Plan; and (C) promptly and in any event within fifteen (15) Business Days after receipt thereof by any Borrower or any ERISA Affiliate from a Multiemployer Plan sponsor, a copy of each notice received concerning the imposition or amount of withdrawal liability which has been assessed pursuant to Section 4202 of ERISA; (viii) within fifteen (15) Business Days after notice to any Borrower of the commencement thereof, notice, in writing, of any action, suit, arbitration or other proceeding instituted, commenced or threatened against or affecting any Borrower with an amount in controversy in excess of $750,000; (ix) at Bank's request, each Borrower's federal, state and local tax returns as soon as said returns are completed in the form said returns will be filed with the Internal Revenue Service and any state or local department of revenue or taxing authority; (x) promptly upon their becoming available, copies of (A) all registration statements and regular periodic reports which K-V shall have filed with the Securities and Exchange Commission (or any governmental agency substituted therefor) or any national securities exchange and (B) all financial statements, reports and proxy statements so mailed; and 38 (xi) such other information respecting the condition or operations, financial or otherwise, of any Borrower or any Affiliate as Bank may from time to time reasonably request. (e) Visitation Rights. At least once annually, at any time or times during the regular business hours of Borrowers, permit Bank or any agents or representatives thereof to perform a field audit with respect to the records and books of account of and visit and inspect the properties and assets of each Borrower, and to discuss the affairs and finances and the Mortgaged Properties of Borrowers with each Borrower's officers or directors. (f) Environmental Disclosure and Inspection. (i) Exercise due diligence in order to comply with all Environmental Laws. (ii) Permit Bank, from time to time and in their sole and absolute discretion, to retain, at Bank's expense, an independent professional consultant to review any report relating to Hazardous Materials prepared by or for any Borrower and at reasonable times and subject to reasonable conditions to conduct their own investigation at Bank's expense of any Facility currently owned, leased, operated or used by Borrowers or any Subsidiary, and each Borrower agrees to use its respective best efforts to obtain permission for Bank's professional consultant to conduct its own investigation of any Facility previously owned, leased, operated or used by Borrowers or any Subsidiary. Borrowers hereby grant to Bank, its agents, employees, consultants, and contractors the right to enter into or on to, at reasonable times, the Facilities currently owned, leased, operated or used by Borrowers or any Subsidiary to perform such tests on such property as are reasonably necessary to conduct such a review and/or investigation. (iii) Promptly advise Bank in writing and in reasonable detail upon obtaining knowledge of (i) any Release of any Hazardous Materials required to be reported to any federal, state or local governmental or regulatory agency under any applicable Environmental Laws, (ii) any and all written communications with respect to Environmental Claims or any Release of Hazardous Material required to be reported to any federal, state or local governmental or regulatory agency, (iii) any remedial action taken by Borrowers or any other person in response to (1) any Hazardous Material on, under or about any Facility, the existence of which is reasonably likely to give rise to an Environmental Claim, or (2) any Environmental Claim that could have a material adverse effect on Borrowers or any Subsidiary, (iv) any Borrower's discovery of any occurrence or condition on any real property adjoining or in the vicinity of any Facility that could 39 cause such Facility or any part thereof to be subject to any restrictions on the ownership, occupancy, transferability or use there of under any Environmental Laws, and (v) any request for information from any governmental agency indicating that such agency has initiated an investigation as to whether Borrower or any Subsidiary may be potentially responsible for a Release or threatened Release of Hazardous Materials. (iv) Promptly notify Bank of (i) any acquisition of stock, assets, or property by any Borrower or any Subsidiary that reasonably could be expected to expose such Borrower to, or result in, Environmental Claims that could have a material adverse effect or that could be expected to have a material adverse effect on any Governmental Authorization then held by any Borrower or any Subsidiary, and (ii) any proposed action outside of the normal course of business to be taken by any Borrower or any Subsidiary to commence industrial or other operations that could subject any Borrower or such Subsidiary to additional laws, rules or regulation, including, without limitation, laws, rules and regulations requiring additional environmental permits or licenses. (v) At its own expense, provide copies of such documents or information as Bank may reasonably request in relation to any matters disclosed pursuant to this Paragraph 8.2(f). (vi) Promptly take any and all necessary remedial action in connection with the presence, storage, use, disposal, transportation, Release or threatened Release of any Hazardous Materials on, under or about any Facility in order to comply with all applicable Environmental Laws and Governmental Authorizations. In the event any Borrower or any Subsidiary undertakes any remedial action with respect to any Hazardous Material on, under or about any Facility, such Borrower or such Subsidiary shall conduct and complete such remedial action in compliance with all applicable Environmental Laws and in accordance with the policies, orders and directives of all federal, state and local governmental authorities. (g) Financial Covenants. Each Borrower warrants and represents to and covenants with Bank that they shall maintain the following financial covenants on a consolidated basis: 40 (i) Maintain, at all times, a Tangible Net Worth of not less than the amounts set forth below, during the following periods: Fiscal Year Ended Amount 1997 $23,000,000 1998 $23,500,000 1999 $32,000,000 2000 and thereafter $40,000,000 (ii) Maintain EBITDA, at all times, of not less than the amounts set forth below, calculated each month for the preceding twelve-month period on a trailing twelve month basis: Fiscal Year Ended Amount 1997 $10,000,000 1998 $13,000,000 1999 $25,000,000 2000 and thereafter $40,000,000 (iii) Maintain a Leverage Ratio, at all times, of not greater than 1.10 to 1.0. (iv) Not permit Capital Expenditures to exceed the following amounts for the periods set forth below: Fiscal Year Ended Amount 1997 $6,500,000 1998 $7,000,000 1999 $14,000,000 2000 and thereafter $17,000,000 41 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 Loan proceeds or other Funded Debt and (b) at all times do not exceed $7,900,000 plus 75% of Borrower's net income, in accordance with GAAP, for the period from the Closing Date and thereafter. Notwithstanding the foregoing, to the extent that the proceeds of the Term Loan are used to purchase the Mortgaged Properties, the amount of such proceeds shall not be included within the calculation of Capital Expenditures hereunder. (h) Insurance. (i) At its sole cost and expense, keep and maintain business interruption insurance and public liability and property damage insurance relating to its business and properties and its ownership and use of its assets. All such policies of insurance shall be in form and with insurers recognized as adequate by prudent business persons and all such policies shall be in amounts as may be reasonably satisfactory to Bank. Each Borrower shall deliver to Bank a certificate of insurance, and evidence of payment of all premiums then due and owing for each such policy on or prior to the date of this Agreement. Such policies shall: (A) contain a lender's loss payable clause naming Bank as loss payee and additional insured as its interest may appear; and (B) provide that the insurance companies will give Bank at least thirty (30) days written notice before any such policy or policies of insurance shall be altered or canceled. (ii) In the event any Borrower at any time or times hereafter shall fail to obtain or maintain any of the policies of insurance required above or to pay any premium in whole or in part relating thereto, then Bank, without waiving or releasing any obligation or Event of Default by any Borrower hereunder, may at any time or times thereafter (but shall be under no obligation to) obtain and maintain such policies of insurance and pay such premium and take any other action with respect thereto which Bank deems advisable. All sums so disbursed by Bank, including reasonable attorneys fees, court costs, expenses and other charges relating thereto, shall be part of Borrowers' Liabilities, payable by Borrowers to Bank on demand. Borrowers authorize Bank, in Bank's sole discretion, to cause such sums to be paid by making an advance in the amount thereof to the applicable Borrower under the Revolving Loan. 8.3 Negative Covenants. Prior to the later of the Term Loan Termination Date or the Revolving Credit Termination Date and thereafter for so long as any amount is due or owing to Bank hereunder, unless Bank shall otherwise consent in writing, no Borrower nor any Subsidiary shall: 42 (a) Liens, Etc. Create or suffer to exist any Lien or any other type of preferential arrangement, upon or with respect to any of its assets or properties, whether now owned or hereafter acquired, or assign any right to receive income, except for Permitted Liens in each case to secure or provide for the payment of any Debt of any Person, except for the permitted Liens set forth on Exhibit 8.3(a) ("Permitted Liens"). (b) Maintain Existence, Merger, Etc. (i) dissolve or liquidate or amend or modify its Articles or Certificate of Incorporation, as applicable, or the Articles or Certificate of Incorporation of any Affiliate or Subsidiary; or (ii) convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions) any assets (whether now owned or hereafter acquired) to any Person except in the ordinary course of business; or (iii) together with one or more Affiliates convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of the assets of any Borrower and such Affiliates (whether now owned or hereafter acquired) to any Person; or (iv) purchase, lease or otherwise acquire all or substantially all of the assets or properties of, or acquire any capital stock, equity interests, debt or other securities of any Person, or enter into any joint venture or become a partner in any partnership; (v) engage in any transaction out of the ordinary course of business; or (vi) merge or consolidate with any Person, except as permitted under Exhibit 8.3(b). (c) Debt. Incur, create, assume, become or be liable in any manner with respect to or permit to exist, any Debt except for Permitted Debt. (d) Investments or Loans. Make or permit to exist investments or loans in or to any other Person, except for (i) salaries and reasonable advances of money to its employees in payment of reasonable expenses incurred by such employees in the ordinary course of business and consistent with past practices, (ii) investments in certificates of deposits of a banking institution having a net worth in excess of $100,000,000 or in securities of the United States of America or commercial paper with a P1 rating (all of the foregoing maturing within one year) and (iii) investments already made as of the Closing Date as set forth or as otherwise listed on Exhibit 8.3(d) ("Permitted Investments"). (e) Guaranties. Guaranty, endorse or otherwise in any way directly, indirectly or contingently become liable for the obligations or liabilities of any other Person, except endorsements of negotiable instruments for collection in the ordinary course of business. (f) Stock and Dividends. Redeem, retire, purchase or otherwise acquire, directly or indirectly, any common capital stock of any Borrower or other evidence of ownership interest, or declare or pay dividends upon any common capital stock of any Borrower or make any distribution of 43 Borrowers' property or assets to any stockholders except Ethex and PDI may declare and pay dividends to K-V. Notwithstanding the foregoing, if no Event of Default has occurred and is continuing, K-V may pay dividends or make distributions up to an amount not to exceed twenty-five percent (25%) of K-V's prior fiscal year's consolidated net income, determined in accordance with GAAP, in any one fiscal year. (g) Transactions with Affiliates or Insiders. Enter into, or be a party to, any transaction with any Affiliate of any Borrower, except in the ordinary course of and pursuant to the reasonable requirements of Borrowers' businesses and upon fair and reasonable terms which are fully disclosed to Bank and are no less favorable to Borrower than would obtain in a comparable arm's length transaction with a Person not an Affiliate of such Borrower. 8.4 Maintenance of Accounts. Each Borrower agrees to maintain its primary operational accounts with Bank and shall maintain an average balance of collected, available funds in a non-interest bearing demand deposit account with Bank (the "Operating Account") in an amount at least equal to that amount required to compensate Bank for its services in maintaining such account. Borrowers acknowledge that Bank will charge Borrowers standard service charges in effect from time to time for various services performed by Bank in connection with any aspect of the relationship between Borrowers and Bank, and Borrowers hereby agree that if such service charges exceed the credit to Borrowers arising from earnings attributable to funds on deposit with Bank in the applicable Operating Account, such service charge deficiency shall be deducted by Bank from any Borrower's Operating Account, monthly, in arrears, within ten (10) days following the end of each month. Bank may cause interest and other amounts payable on the obligations of Borrowers to Bank hereunder to be paid by making a direct charge to the applicable Operating Account in accordance with the terms hereof. 9. DEFAULT 9.1 Events of Default. The occurrence of any one of the following events shall constitute a default (an "Event of Default") under this Agreement: (a) if any Borrower fails or neglects to perform, keep or observe any covenant or agreement contained in this Agreement or in the Other Agreements which is required to be performed, kept or observed by any Borrower and such failure continues for thirty (30) days thereafter; (b) any representation or warranty made by any Borrower herein or in any Other Agreement is untrue in any material respect, or any exhibit or certificate furnished by any Borrower or any of its Affiliates, directors, officers, employees, or agents to Bank is untrue in any material respect on the date as of which the facts therein set forth are stated or certified; (c) if any Borrower fails to pay Borrower's Liabilities when due and payable or declared due and payable; (d) if a material portion of any Borrower's assets or the Collateral is attached, seized, subjected to a writ or distress warrant or is levied upon, or come within the possession of any 44 receiver, trustee, custodian or assignee for the benefit of creditors and the same is not terminated or dismissed within thirty (30) days thereafter; (e) if a petition under any section or chapter of the Bankruptcy Reform Act of 1978, as amended, or any similar law or regulation shall be filed by Borrower or if Borrower shall make an assignment for the benefit of its creditors or if any case or proceeding is filed by Borrower for its dissolution or liquidation; (f) if a petition under any section or chapter of the Bankruptcy Reform Act of 1978, as amended, or any similar law or regulation is filed against any Borrower or if any case or proceeding is filed against Borrower for its dissolution or liquidation and the same is not terminated or dismissed within forty-five (45) days of filing; (g) if an application is made by any Borrower for the appointment of a receiver, trustee or custodian for any of Borrowers' assets or the Collateral; (h) if an application is made by any Person other than such Borrower for the appointment of a receiver, trustee or custodian for the assets of any Borrower or the Collateral and the same is not dismissed within forty-five (45) days after the application therefor; (i) if any Borrower is adjudicated insolvent or admits its inability to pay its debts as they become due; (j) if any Borrower is in default in the payment of Debt in an amount in excess of $750,000; (k) if Borrower is in default in the payment of any Debt to Bank including, without limitation, any reimbursement obligations for letters of credit issued or to be issued by Bank subsequent to the date hereof in connection with the Industrial Development Authority of the County of St. Louis, Missouri, Private Activity Refunding and Revenue Bonds, Series 1989(f) (K-V Pharmaceutical Company Project); or (l) if a conservator is appointed for all or any material portion of the assets of any Borrower or the Collateral. 9.2 Cumulative Remedies. All of Bank's rights and remedies under this Agreement and the Other Agreements are cumulative and non-exclusive. 9.3 Acceleration and Termination of Loans. Upon the occurrence and during the continuance of an Event of Default, (a) upon notice by Bank to Borrowers, Borrowers' Liabilities shall be immediately due and payable, unless there shall have occurred an Event of Default under subparagraphs 9.1(d), (e), (f), (g), (h), (i) or (l), in which case Borrowers' Liabilities shall automatically become due and payable without notice or demand, and (b) without notice by Bank to or demand by Bank of Borrowers, Bank shall have no further obligation to and may then forthwith cease advancing monies or extending credit to or for the benefit of Borrowers under this Agreement and the Other Agreements. 9.4 Rights of Creditor. Upon an Event of Default, Bank, in its sole and absolute discretion, may exercise any one or more of the rights and remedies accruing (a) under applicable law upon default by a debtor, (b) under any instrument, including, without limitation, the Mortgage and the Assignment of Rents, or (c) under any document or agreement. Nothing contained herein shall interfere with Bank's right under law to set-off the balances of any deposit accounts maintained by any Borrower with Bank against Borrowers' Liabilities. 45 9.5 Injunctive Relief. Each Borrower recognizes that in the event any Borrower fails to perform, observe or discharge any of its obligations or liabilities under this Agreement or the Other Agreements, no remedy of law will provide adequate relief to Bank, and agrees that Bank shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages or the posting of bond, surety or other security. 10. GENERAL 10.1 Payment Application Date. Any check, draft, or similar item of payment by or for the account of any Borrower delivered to Bank on account of Borrowers' Liabilities shall be applied by Bank on account of Borrowers' Liabilities on the date final settlement thereof is reflected by irrevocable credit to Bank. 10.2 Statement of Account. Each statement of account by Bank delivered to any Borrower relating to Borrowers' Liabilities shall be presumed correct and accurate, absent manifest error, and shall constitute an account stated between Borrowers and Bank unless, within ninety (90) days after Borrowers' receipt of said statement, Borrowers deliver to Bank, by registered or certified mail addressed to Bank at its Address for Notices specified on the signature pages hereto, written objection thereto specifying the error or errors, if any, contained in any such statement. 10.3 Manner of Application; Waiver of Setoff Prohibition. Upon the occurrence and during the continuance of an Event of Default, each Borrower waives the right to direct the application of any and all payments at any time or times hereafter received by Bank on account of Borrowers' Liabilities and Borrower agrees that Bank shall have the right, in its absolute and sole discretion, to apply and re-apply any and all such payments toward Borrowers' Liabilities in such manner as Bank may deem advisable, notwithstanding any entry by Bank upon any of its books and records. Each Borrower further waives any right under or benefit of any law that would restrict or limit the right or ability of Bank to obtain payment of Borrowers' Liabilities, including any law that would restrict or limit Bank in the exercise of its right to appropriate any indebtedness owing from Bank to Borrower and any deposits or other property of Borrower in the possession or control of Bank and apply the same toward or setoff the same against the payment of Borrowers' Liabilities. 10.4 Survival of Representations and Warranties. Each Borrower covenants, warrants and represents to Bank that all representations and warranties of Borrower contained in this Agreement and the Other Agreements shall be true at the time of each Borrower's execution of this Agreement and the Other Agreements and shall survive the execution, delivery and acceptance thereof by the parties thereto and the closing of the transactions described therein or related thereto. 46 10.5 Integration; Amendment; Assignment; Participation. (a) This Agreement and the Other Agreements constitute the entire agreement and understanding between the parties relating to the subject matter hereof and supersede all prior agreements, whether oral or written. This Agreement and the Other Agreements may not be modified, altered or amended except by an agreement in writing signed by each Borrower and Bank, and no provision of this Agreement may be waived except with the consent in writing of Bank. (b) Bank shall have the right to assign to one or more banks or other financial institutions all or a portion of its rights and obligations under this Agreement (including, without limitation, the Loans and the Other Agreements). Upon any such assignment, (i) the assignee shall become a party hereto and, to the extent of such assignment, have all rights and obligations of Bank hereunder and under the Other Agreements and (ii) Bank shall, to the extent of such assignment, relinquish its rights and be released from its obligations hereunder and under the Other Agreements; provided, however, in the event Bank assigns all or a portion of its rights and obligations hereunder pursuant to a transaction in which Bank (including successors thereto) is not the lead agent, Borrowers will not be subject to the prepayment fee provided for in Paragraph 5.11 hereof as long as K-V has paid in full all Borrowers' Liabilities due and owing in respect of the Term Loan within ninety (90) days of the date of such assignment. Each Borrower hereby agrees to execute and deliver such documents, and to take such other actions, as Bank may reasonably request to accomplish the foregoing. (c) In addition to the assignments permitted in subsection (b) of this Paragraph 10.5, Bank and any assignee pursuant to subsection (b) above shall have the right to grant participations to one or more banks or other financial institutions in or to any Loan hereunder (and the Other Agreements) without notice to or consent from any Borrower. 10.6 No Waiver. Bank's failure at any time or times hereafter to require strict performance by Borrowers of any provision of this Agreement shall not waive, affect or diminish any right of Bank thereafter to demand strict compliance and performance therewith. Any suspension or waiver by Bank of an Event of Default by Borrowers under this Agreement or the Other Agreements shall not suspend, waive or affect any other Event of Default by Borrowers under this Agreement or the Other Agreements, whether the same is prior or subsequent thereto and whether of the same or of a different type. None of the undertakings, agreements, warranties, covenants or representations of Borrowers contained in this Agreement or the Other Agreements and no Event of Default by Borrowers under this Agreement or the Other Agreements shall be deemed to have been suspended or waived by Bank unless such suspension or waiver is by an instrument in writing by Bank specifying such suspension or waiver and given pursuant to the requirements of Paragraph 10.16 hereof. 47 10.7 Severability. If any provision of this Agreement or the Other Agreements or the application thereof to any Person or circumstance is held invalid or unenforceable, the remainder of this Agreement and the Other Agreements and the application of such provision to other Persons or circumstances will not be affected thereby and the provisions of this Agreement and the Other Agreements shall be severable in any such instance. 10.8 Successors and Assigns. This Agreement and the Other Agreements shall be binding upon and inure to the benefit of the successors and assigns of each Borrowers and Bank. This provision, however, shall not be deemed to modify Paragraph 10.5 hereof. 10.9 Conflict with Other Agreements. The provisions of the Other Agreements are incorporated in this Agreement by this reference thereto. Except as otherwise provided in the Other Agreements by specific reference to the applicable provision of this Agreement, if any provision contained in this Agreement is in conflict with, or inconsistent with, any provision in the Other Agreements, the provision contained in this Agreement shall govern and control. 10.10 No Impairment by Termination. Except to the extent provided to the contrary in this Agreement and in the Other Agreements, no termination or cancellation (regardless of cause or procedure) of this Agreement or the Other Agreements shall in any way affect or impair the powers, obligations, duties, rights and liabilities of Borrowers or Bank in any way or respect relating to (a) any transaction or event occurring prior to such termination or cancellation and/or (b) any of the undertakings, agreements, covenants, warranties and representations of Borrowers contained in this Agreement or the Other Agreements. All such undertakings, agreements, covenants, warranties and representations shall survive such termination or cancellation. 10.11 Waivers. Except as otherwise specifically provided in this Agreement, Borrowers waive any and all notice or demand which Borrowers might be entitled to receive with respect to this Agreement or the Other Agreements by virtue of any applicable statute or law and waives presentment, demand and protest and notice of presentment, protest, default, dishonor, non-payment, maturity, release, compromise, settlement, extension or renewal of any or all commercial paper, accounts, contract rights, documents, instruments, chattel paper and guaranties at any time held by Bank on which Borrowers may in any way be liable and hereby ratifies and confirms whatever Bank may do in this regard. 10.12 Costs, Fees and Expenses Related to Agreement and Other Agreements. In accordance with this Agreement on or prior to the date hereof and thereafter upon demand by Bank therefor, Borrowers shall pay or reimburse Bank for all reasonable costs, fees and expenses incurred by Bank, or for which Bank 48 becomes obligated, in connection with the negotiation, preparation and consummation of this Agreement and the Other Agreements, including but not limited to, attorneys' fees, costs and expenses; search fees, costs and expenses; and all taxes payable in connection with this Agreement or the Other Agreements. That portion of Borrowers' Liabilities consisting of costs, expenses or advances to be reimbursed by Borrowers to Bank pursuant to this Agreement or the Other Agreements which are not paid on or prior to the date hereof shall be payable by Borrower to Bank on demand. 10.13 Environmental Indemnity. Borrowers agree to indemnify and save Bank, its officers, directors, employees and agents, harmless of, from and against any liability, loss, damage or expense (including reasonable attorneys' fees) to which Bank or any of such persons may become subject, arising from or based upon (a) any violation, or claim of violation, by Borrowers of any laws, regulations or ordinances relating to Hazardous Materials, or (b) any Hazardous Materials located or disposed of on or released or transported from any property owned, leased or operated by Borrowers, or any claim of any of the foregoing. 10.14 Release. Borrowers release Bank from any and all causes of action, claims or rights which Borrowers may now or hereafter have for, or which may arise from, any loss or damage caused by or resulting from any act or omission to act on the part of Bank, its officers, agents or employees, except in each instance for willful misconduct and gross negligence. 10.15 Governing Law. This Agreement and the Other Agreements shall be governed and controlled by the internal laws of the State of Illinois without regard to principles of conflicts of laws as to interpretation, enforcement, validity, construction, effect, and in all other respects including, but not limited to, the legality of the interest rate and other charges. 10.16 Notices. All notices, consents, requests, demands and other communications hereunder shall be in writing and shall be deemed duly given to any party or parties (a) upon delivery to the address of the party or parties as specified in the "Address for Notices" below such party or parties' name on the signature pages hereof if delivered in person or by courier or if sent by certified or registered mail (return receipt requested), or (b) upon dispatch if transmitted by telecopy or other means of facsimile transmission, in any case to the party or parties at the telecopy numbers specified on the same, or to such other address or telecopy number as any party may hereafter designate by written notice in the aforesaid manner. 10.17 FORUM; BANK; VENUE; JURY TRIAL WAIVER. TO INDUCE BANK TO ACCEPT THIS AGREEMENT AND THE OTHER AGREEMENTS, BORROWERS, IRREVOCABLY AGREE THAT ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER, OR RESPECT, ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT OR THE OTHER AGREEMENTS SHALL BE LITIGATED ONLY IN 49 COURTS HAVING SITUS WITHIN CHICAGO, ILLINOIS. BORROWERS HEREBY CONSENT AND SUBMIT TO THE JURISDICTION OF ANY LOCAL, STATE, OR FEDERAL COURT LOCATED WITHIN SAID CITY AND STATE. BORROWERS HEREBY IRREVOCABLY APPOINT AND DESIGNATE KURTIS B. REEG OF GALLOP, JOHNSON & NEUMAN, L.C. WHOSE ADDRESS IS 33 BRONZE POINT, SUITE 1D, BELLEVILLE, ILLINOIS, OR ANY OTHER PERSON HAVING AND MAINTAINING A PLACE OF BUSINESS IN SUCH STATE, WHOM BORROWERS MAY FROM TIME TO TIME HEREAFTER DESIGNATE (HAVING GIVEN FIVE (5) DAYS' WRITTEN NOTICE THEREOF TO BANK) AS BORROWERS' TRUE AND LAWFUL ATTORNEY AND DULY AUTHORIZED BANK FOR ACCEPTANCE OF SERVICE OF LEGAL PROCESS. BORROWERS AGREE THAT SERVICE OF SUCH PROCESS UPON SUCH PERSON SHALL CONSTITUTE PERSONAL SERVICE OF SUCH PROCESS UPON EACH BORROWER. BORROWERS HEREBY WAIVE ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST BORROWERS BY BANK IN ACCORDANCE WITH THIS PARAGRAPH. BORROWERS HEREBY IRREVOCABLY WAIVE THE RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY ACTION IN WHICH A BORROWER IS A PARTY. 10.18 Other Costs, Fees and Expenses. If at any time or times hereafter Bank: (a) employs counsel for advice or other representation (i) with respect to this Agreement or the Other Agreements, (ii) to represent Bank in any litigation, contest, dispute, suit or proceeding or to commence, defend, or intervene or to take any other action in or with respect to any litigation, contest, dispute, suit, or proceeding (whether instituted by Bank, any Borrower, or any other Person) in any way or respect relating to this Agreement or the Other Agreements or (iii) to enforce any rights of Bank against Borrowers or any other Person which may be obligated to Bank by virtue of this Agreement or the Other Agreements; and/or (b) attempts to or enforces any of Bank's rights or remedies under the Agreement or the Other Agreements, the reasonable costs and expenses incurred by Bank in any manner or way with respect to the foregoing, shall be part of Borrowers' Liabilities, payable by Borrower to Bank on demand. 10.19 Revival. To the extent that Bank receives any payment on account of Borrowers' Liabilities and any such payment(s) and/or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, subordinated and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy act, state or federal law, common law or equitable cause, then, to the extent of such payment(s) and/or proceeds received, Borrowers' Liabilities or part thereof intended to be satisfied shall be revived and continue in full force and effect, as if such payment(s) and/or proceeds had not been received by Bank and applied on account of Borrowers' Liabilities. 10.20 Acknowledgments. Each Borrower acknowledges that (i) it has been advised by counsel of its choice with respect to this Agreement and the 50 transactions contemplated hereby, (ii) each of the waivers set forth herein was knowingly and voluntarily made; and (iii) the obligations of Bank hereunder, including the obligation to advance and lend funds to Borrowers in accordance herewith, shall be strictly construed and shall be expressly subject to each Borrower's compliance in all respects with the terms and conditions herein set forth. 10.21 Section Headings. Section headings used in this Agreement are for convenience only and shall not effect the construction or interpretation of this Agreement. 10.22 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which taken together shall constitute one and the same instrument. 10.23 Effectiveness. This Agreement shall become effective upon the execution and delivery to Bank of counterparts of this Agreement by each Borrower and Bank. 10.24 Joint and Several Liability. The liability of each Borrower for Borrowers' Liabilities in respect of the Revolving Loan under this Agreement and the Other Agreements in general shall be joint and several, and each reference to Borrowers herein shall be deemed to refer to each such Borrower. In furtherance and not in limitation of Bank's rights and remedies hereunder or at law, Bank may proceed under this Agreement and the Other Agreements against one or more of the Borrowers in its absolute and sole discretion for any of Borrowers' Liabilities in respect of the Revolving Loan. 51 IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and year specified at the beginning hereof. ATTEST: K-V PHARMACEUTICAL COMPANY By:/s/ Gerald R. Mitchell Title: Vice-President, Finance Address for Notices: 2503 South Hanley St. Louis, Missouri 63144-2555 Telephone No.: (314) 645-6600 Telecopier No.: (314) 645-6732 Attention: President With a copy to: Title: Secretary Address for Notices: 2503 South Hanley St. Louis, Missouri 63144-2555 Telephone No.: (314) 645-6600 Telecopier No.: (314) 645-6732 Attention: President 52 With a copy to: John P. Walsh, Esq. Gallop, Johnson & Neuman, L.C. Interco Corporate Tower 101 South Hanley St. Louis, Missouri 63105 Telephone No.: (314) 862-1200 Telecopier No.: (314) 862-1219 ATTEST: ETHEX CORPORATION By: /s/ Gerald R. Mitchell Title: Vice-President Address for Notices: 2503 South Hanley St. Louis, Missouri 63144-2555 Telephone No.: (314) 645-6600 Telecopier No.: (314) 645-6732 Attention: President With a copy to: John P. Walsh, Esq. Gallop, Johnson & Neuman, L.C. Interco Corporate Tower 101 South Hanley St. Louis, Missouri 63105 Telephone No.: (314) 862-1200 Telecopier No.: (314) 862-1219 53 LASALLE NATIONAL BANK By: Title: Vice President Address for Notices: LaSalle National Bank 135 South LaSalle Street Chicago, Illinois 60603 Telecopier No.: (312) 904-6546 Telephone No.: (312) 904-2766 Attention: Mr. Charles E. Schroeder, Jr. Vice President With a copy to: Michael A. Nemeroff, Esq. Vedder, Price, Kaufman & Kammholz 222 N. LaSalle Street Chicago, Illinois 60601-1003 Telecopy No.: (312) 609-5005 Telephone No.: (312) 609-7500 54 LIST OF EXHIBITS Exhibit 3.1 Form of Revolving Note Exhibit 3.2 Form of Term Note Exhibit 7.4 Location of Collateral Exhibit 8.1(n) Environmental Matters Exhibit 8.1(r) Subsidiaries Exhibit 8.1(s) Labor Exhibit 8.1(v) Credit Agreements Exhibit 8.3(a) Permitted Liens Exhibit 8.3(b) Permitted Acquisitions Exhibit 8.3(d) Permitted Investments EXHIBIT 3.1 to Loan Agreement REVOLVING NOTE $20,000,000 Chicago, Illinois June 18, 1997 FOR VALUE RECEIVED, on or before June 18, 2000 (or, if such day is not a Business Day, on the next following Business Day), the undersigned, K-V PHARMACEUTICAL COMPANY, a Delaware corporation; PDI DYNAMICS, INC., a New York corporation; and ETHEX CORPORATION, a Missouri corporation, jointly and severally (herein, collectively and together with their successors and assigns, called "Borrowers"), promise to pay to the order of LASALLE NATIONAL BANK, a national banking association (herein, together with its successors and assigns, called the "Bank"), the maximum principal sum of TWENTY MILLION and 00/100 DOLLARS ($20,000,000) or, if less, the aggregate unpaid principal amount of all Revolving Loans made by Bank to the undersigned pursuant to that certain Loan Agreement of even date herewith between Borrowers and Bank (herein, as the same may be amended, modified or supplemented from time to time, called the "Loan Agreement") as shown in Bank's records. The Borrower further promises to pay to the order of Bank interest on the aggregate unpaid principal amount hereof from time to time outstanding from the date hereof until paid in full at such rates and at such times as shall be determined in accordance with the provisions of the Loan Agreement. Accrued interest shall be payable on the dates specified in the Loan Agreement. Payments of both principal and interest are to be made in the lawful money of the United States of America in immediately available funds at Bank's principal office at 135 South LaSalle Street, Chicago, Illinois 60603; or at such other place as may be designated by Bank to the Borrower in writing. This Note is the Revolving Note referred to in, evidences indebtedness incurred under, and is subject to the terms and provisions of, the Loan Agreement. The Loan Agreement, to which reference is hereby made, sets forth said terms and provisions, including those under which this Note may or must be paid prior to its due date or may have its due date accelerated. Terms used but not otherwise defined herein are used herein as defined in the Loan Agreement. 1 In addition to, and not in limitation of, the foregoing and the provisions of the Loan Agreement hereinabove referred to, the Borrower further agrees, subject only to any limitation imposed by applicable law, to pay all expenses, including attorneys' fees and expenses, incurred by the holder of this Note in seeking to collect any amounts payable hereunder which are not paid when due, whether by acceleration or otherwise. All parties hereto, whether as makers, endorsers or otherwise, severally waive presentment, demand, protest and notice of dishonor in connection with this Note. The liability of each Borrower under this Note in general shall be joint and several, and each reference herein to the Borrowers shall be deemed to refer to each such Borrower. In furtherance and not in limitation of Bank's rights and remedies hereunder or at law, Bank may proceed under this Note against any one or more of the Borrowers in its absolute and sole discretion for any of Borrowers' Liabilities or any other liability or obligation of the Borrowers arising hereunder. This Note is binding upon the undersigned and its successors and assigns, and shall inure to the benefit of Bank and its successors and assigns. This Note is made under and governed by the laws of the State of Illinois without regard to conflict of laws principles. ATTEST: K-V PHARMACEUTICAL COMPANY, a Delaware Corporation By: Secretary Borrower's Address: By: Title: 2503 South Hanley St. Louis, Missouri 63144-2555 2 ATTEST: PARTICLE DYNAMICS, INC., a New York corporation By: Secretary By: Borrower's Address: Title: 2503 South Hanley St. Louis, Missouri 63144-2555 ATTEST: ETHEX CORPORATION, a Missouri corporation By: Secretary Borrower's Address: By: 2503 South Hanley Title: St. Louis, Missouri 63144-2555 3 EXHIBIT 3.2 to Loan Agreement TERM NOTE $3,500,000 Chicago, Illinois June __, 1997 FOR VALUE RECEIVED, the undersigned, K-V PHARMACEUTICAL COMPANY, a Delaware corporation (herein, together with its successors and assigns, called the "Borrower"), promises to pay to the order of LASALLE NATIONAL BANK, a national banking association (herein, together with its successors and assigns, called the "Bank"), the principal sum of THREE MILLION FIVE HUNDRED THOUSAND DOLLARS ($3,500,000), plus interest at the rate of ___________ percent (___%) per annum, payable in monthly installments commencing June ___, 1997 of principal of [NINETEEN THOUSAND FOUR HUNDRED FORTY-FOUR AND 44/100 DOLLARS ($19,444.44),] on the last Business Day of each month through ___________, _____, with a final payment of the entire principal balance outstanding hereunder due on ____________, _____, pursuant to that certain Loan Agreement of even date herewith between the Borrower, Particle Dynamics, Inc., a New York corporation, ETHEX Corporation, a Missouri corporation, and Bank (herein, as the same may be amended, modified or supplemented from time to time, called the "Loan Agreement") as shown in Bank's records, plus interest as described below. The Borrower further promises to pay to the order of Bank interest on the aggregate unpaid principal amount hereof from time to time outstanding from the date hereof until paid in full at the Fixed Rate described above and at such times as shall be determined in accordance with the provisions of the Loan Agreement. Accrued interest shall be payable on the dates specified in the Loan Agreement. Payments of both principal and interest are to be made in the lawful money of the United States of America in immediately available funds at Bank's principal office at 135 South LaSalle Street, Chicago, Illinois 60603, or at such other place as may be designated by Bank to the Borrower in writing. This Note is the Term Note referred to in, evidences indebtedness incurred under, and is subject to the terms and provisions of, the Loan Agreement. The Loan Agreement, to which reference is hereby made, sets forth said terms and provisions, including those under which this Note may or must be paid prior to its due date or may have its due date accelerated. Terms used but not otherwise defined herein are used herein as defined in the Loan Agreement. 1 In addition to, and not in limitation of, the foregoing and the provisions of the Loan Agreement hereinabove referred to, the Borrower further agrees, subject only to any limitation imposed by applicable law, to pay all expenses, including attorneys' fees and expenses, incurred by the holder of this Note in seeking to collect any amounts payable hereunder which are not paid when due, whether by acceleration or otherwise. All parties hereto, whether as makers, endorsers or otherwise, severally waive presentment, demand, protest and notice of dishonor in connection with this Note. This Note is binding upon the undersigned and its successors and assigns, and shall inure to the benefit of Bank and its successors and assigns. This Note is made under and governed by the laws of the State of Illinois without regard to conflict of laws principles. K-V PHARMACEUTICAL COMPANY, a Delaware corporation ATTEST: By: By: Secretary Title: Borrower's Address: 2503 South Hanley St. Louis, Missouri 63144-2555 2 EX-4 3 EXHIBIT 4(J) REVOLVING NOTE $20,000,000 Chicago, Illinois June 18, 1997 FOR VALUE RECEIVED, on or before June 18, 2000 (or, if such day is not a Business Day, on the next following Business Day), the undersigned, K-V PHARMACEUTICAL COMPANY, a Delaware corporation; PARTICLE DYNAMICS, INC., a New York corporation; and ETHEX CORPORATION, a Missouri corporation, jointly and severally (herein, collectively and together with their successors and assigns, called "Borrowers"), promise to pay to the order of LASALLE NATIONAL BANK, a national banking association (herein, together with its successors and assigns, called the "Bank"), the maximum principal sum of TWENTY MILLION and 00/100 DOLLARS ($20,000,000) or, if less, the aggregate unpaid principal amount of all Revolving Loans made by Bank to the undersigned pursuant to that certain Loan Agreement of even date herewith between Borrowers and Bank (herein, as the same may be amended, modified or supplemented from time to time, called the "Loan Agreement") as shown in Bank's records. The Borrower further promises to pay to the order of Bank interest on the aggregate unpaid principal amount hereof from time to time outstanding from the date hereof until paid in full at such rates and at such times as shall be determined in accordance with the provisions of the Loan Agreement. Accrued interest shall be payable on the dates specified in the Loan Agreement. Payments of both principal and interest are to be made in the lawful money of the United States of America in immediately available funds at Bank's principal office at 135 South LaSalle Street, Chicago, Illinois 60603; or at such other place as may be designated by Bank to the Borrower in writing. This Note is the Revolving Note referred to in, evidences indebtedness incurred under, and is subject to the terms and provisions of, the Loan Agreement. The Loan Agreement, to which reference is hereby made, sets forth said terms and provisions, including those under which this Note may or must be paid prior to its due date or may have its due date accelerated. Terms used but not otherwise defined herein are used herein as defined in the Loan Agreement. In addition to, and not in limitation of, the foregoing and the provisions of the Loan Agreement hereinabove referred to, the Borrower further agrees, subject only to any limitation imposed by applicable law, to pay all expenses, including attorneys' fees and expenses, incurred by the holder of this Note in seeking to collect any amounts payable hereunder which are not paid when due, whether by acceleration or otherwise. All parties hereto, whether as makers, endorsers or otherwise, severally waive presentment, demand, protest and notice of dishonor in connection with this Note. 1 The liability of each Borrower under this Note in general shall be joint and several, and each reference herein to the Borrowers shall be deemed to refer to each such Borrower. In furtherance and not in limitation of Bank's rights and remedies hereunder or at law, Bank may proceed under this Note against any one or more of the Borrowers in its absolute and sole discretion for any of Borrowers' Liabilities or any other liability or obligation of the Borrowers arising hereunder. This Note is binding upon the undersigned and its successors and assigns, and shall inure to the benefit of Bank and its successors and assigns. This Note is made under and governed by the laws of the State of Illinois without regard to conflict of laws principles. ATTEST: K-V PHARMACEUTICAL COMPANY, a Delaware Corporation By: /s/ John P. Walsh Assistant Secretary Borrower's Address: By: /s/ Gerald R. Mitchell Title: Vice-President, Finance 2503 South Hanley St. Louis, Missouri 63144-2555 ATTEST: PARTICLE DYNAMICS, INC., a New York corporation By: /s/ John P. Walsh Secretary Borrower's Address: By: /s/ Gerald R. Mitchell Title: Vice-President 2503 South Hanley St. Louis, Missouri 63144-2555 ATTEST: ETHEX CORPORATION, a Missouri corporation By: /s/ John P. Walsh Secretary Borrower's Address: By: /s/ Gerald R. Mitchell Title: Vice-President 2503 South Hanley St. Louis, Missouri 63144-2555 2 EX-4 4 EXHIBIT 4(K) TERM NOTE $3,500,000 Chicago, Illinois June 24, 1997 FOR VALUE RECEIVED, the undersigned, K-V PHARMACEUTICAL COMPANY, a Delaware corporation (herein, together with its successors and assigns, called the "Borrower"), promises to pay to the order of LASALLE NATIONAL BANK, a national banking association (herein, together with its successors and assigns, called the "Bank"), the principal sum of THREE MILLION FIVE HUNDRED THOUSAND DOLLARS ($3,500,000), plus interest at the rate of Eight and 53/100 Percent (8.53%) per annum, payable in monthly installments commencing June 18, 1997 of principal of NINETEEN THOUSAND FOUR HUNDRED FORTY-FOUR AND 44/100 DOLLARS ($19,444.44), plus interest as described below, on the last Business Day of each month through May, 2002, with a final payment of the entire principal balance outstanding, plus accrued and unpaid interest, hereunder due on June 18, 2002. This Note is made pursuant to that certain Loan Agreement dated June 18, 1997 between the Borrower, Particle Dynamics, Inc., a New York corporation, ETHEX Corporation, a Missouri corporation, and Bank (herein, as the same may be amended, modified or supplemented from time to time, called the "Loan Agreement"). The Borrower further promises to pay to the order of Bank interest on the aggregate unpaid principal amount hereof from time to time outstanding from the date hereof until paid in full at the Fixed Rate described above and at such times as shall be determined in accordance with the provisions of the Loan Agreement. Accrued interest shall be payable on the dates specified in the Loan Agreement. Payments of both principal and interest are to be made in the lawful money of the United States of America in immediately available funds at Bank's principal office at 135 South LaSalle Street, Chicago, Illinois 60603, or at such other place as may be designated by Bank to the Borrower in writing. This Note is the Term Note referred to in, evidences indebtedness incurred under, and is subject to the terms and provisions of, the Loan Agreement. The Loan Agreement, to which reference is hereby made, sets forth said terms and provisions, including those under which this Note may or must be paid prior to its due date or may have its due date accelerated. Terms used but not otherwise defined herein are used herein as defined in the Loan Agreement. This Note is further secured by those certain Missouri Future Advance Deed of Trust and Security Agreements and those certain Assignment of Rents and Leases, each of even date herewith made by Borrower to Bank, encumbering the 1 property commonly known as 10876 Metro Court and 10862 Metro Court, each as legally described therein. In addition to, and not in limitation of, the foregoing and the provisions of the Loan Agreement hereinabove referred to, the Borrower further agrees, subject only to any limitation imposed by applicable law, to pay all expenses, including attorneys' fees and expenses, incurred by the holder of this Note in seeking to collect any amounts payable hereunder which are not paid when due, whether by acceleration or otherwise. All parties hereto, whether as makers, endorsers or otherwise, severally waive presentment, demand, protest and notice of dishonor in connection with this Note. This Note is binding upon the undersigned and its successors and assigns, and shall inure to the benefit of Bank and its successors and assigns. This Note is made under and governed by the laws of the State of Illinois without regard to conflict of laws principles. K-V PHARMACEUTICAL COMPANY, a Delaware corporation ATTEST: By: /s/ John P. Walsh By: /s/ Gerald R. Mitchell Assistant Secretary Title: Vice-President, Finance Borrower's Address: 2503 South Hanley St. Louis, Missouri 63144-2555 2 EX-10 5 EXHIBIT 10(Y) FOURTH AMENDMENT to AND RESTATEMENT OF K-V PHARMACEUTICAL COMPANY 1991 INCENTIVE STOCK OPTION PLAN 1. Purpose of the Plan The K-V Pharmaceutical Company Amended and Restated 1991 Stock Option Plan ("Plan") is intended to provide additional incentive to certain valued and trusted employees of K-V Pharmaceutical Company, a Delaware corporation, and its subsidiaries (the "Company"), by encouraging them to acquire shares of the $.01 par value Class B common stock of the Company (the "Stock") through options to purchase Stock granted pursuant to the Plan ("Options"), thereby increasing such employees' proprietary interest in the business of the Company and providing them with an increased personal interest in the continued success and progress of the Company, the result of which will promote both the interests of the Company and its shareholders. Options granted under the Plan will be intended to qualify as "incentive stock options" ("1505") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). Each employee granted an Option shall enter into an agreement with the Company (the "Option Agreement") setting forth the terms and conditions of the Option, as determined in accordance with this Plan. 2. Administration of Plan This Plan shall be administered by the Compensation and Stock Option Committee appointed by the Board of Directors of the Company (the "Committee"), to be composed of at least two (2) members of the Board of Directors of the Company. Members of the Committee shall not be eligible to receive Options under this Plan. The Committee shall have the sole power: (a) Subject to the provisions of the Plan, to determine the terms and conditions of all Options; to construe and interpret the Plan and Options granted under it; to determine the time or times an Option may be exercised, the number of shares as to which an Option may be exercised at any one time, and when an Option may terminate; to establish, amend and revoke rules and regulations relating to the Plan and its administration; and to correct any defect, supply any omission, or reconcile any inconsistency in the Plan, or in any Option Agreement, in a manner and to the extent it shall deem necessary, all of which determinations and interpretations made by the Committee shall be conclusive and binding on all Optionees and on their legal representatives and beneficiaries; and (b) To determine all questions of policy and expediency that may arise in the administration of the Plan and generally exercise such powers and perform such acts as are deemed necessary or expedient to promote the best interests of the Company. 3. Shares Subject to the Plan (a) Subject to the provisions of paragraph 13 below, the Stock which may be issued pursuant to Options granted under the Plan shall not exceed in the aggregate seven hundred fifty thousand (750,000) shares of Class A Common Stock of the Company and six hundred seventy-five thousand (675,000) shares of Class B Common Stock of the Company. If any Options granted under the Plan terminate, expire or are surrendered without having been exercised in full, the number of shares of Stock not purchased under such Options shall be available again for the purpose of the Plan. (b) At any time that the Committee determines that there exists a public market for Class A Common Stock of the Company, it may designate that an Option to purchase shares of Class B Common Stock of the Company shall be exercisable to purchase shares of Class A Common stock of the Company instead of Class B Common Stock. Such redesignation of an Option shall not affect the purchase price under such Option or the number of shares with respect to which such Option has been granted. Notwithstanding the foregoing, no redesignation of an Option shall be effective if such redesignation constitutes a modification of such Option within the meaning of Section 424(h) of the Code. 4. Persons Eligible for Options All employees of the Company who are not members of the Committee shall be eligible to receive the grant of Options under the Plan. The Committee shall determine the employees to whom Options shall be granted, the time or times such Options shall be granted, the number of shares to be subject to each Option and the times when each Option may be exercised. The Committee shall seek information, advice and recommendations from management to assist the Committee in its independent determination as to the employees to whom Options shall be granted. An employee who has been granted an Option (an "Optionee"), if he or she is otherwise eligible, may be granted additional Options. 5. Purchase Price The purchase price of each share of Stock covered by each ISO ("Purchase Price") shall not be less than one hundred percent (100%) of the Fair Market Value Per Share (as defined below) of the Stock on the date the ISO is granted; provided, however, if when an ISO is granted the Optionee receiving the ISO owns or will be considered to own by reason of Section 424(d) of the Code more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, the purchase price of the Stock covered by such ISO shall not be less than one hundred and ten percent (110%) of the Fair Market Value Per Share of the Stock on the date the ISO is granted. -2- "Fair Market Value Per Share" of the Stock shall mean: (i) if the Stock is not publicly traded, the amount determined by the Committee on the date of the grant of the Option; (ii) if the Stock is traded only otherwise than on a securities exchange and is not quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), the closing quoted selling price of the Stock on the date of grant of the Option as quoted in "pink sheets" published by the National Daily Quotation Bureau; (iii) if the Stock is traded only otherwise than on a securities exchange and is quoted on NASDAQ, the closing quoted selling price of the Stock on the date of grant of the Option, as reported by the Wall Street Journal; or (iv) if the Stock is admitted to trading on a securities exchange, the closing quoted selling price of the Stock on the date of grant of the Option, as reported in the Wall Street Journal. For purposes of Items (i) through (iv) of this paragraph, if there were no sales on the date of the grant of an Option, the Fair Market Value Per Share shall be determined by the Committee in accordance with Section 20.2031-2 of the Federal Estate Tax Regulations. 6. Duration of Options Any outstanding Option and all unexercised rights thereunder shall expire and terminate automatically upon the earliest of: (i) the cessation of the employment or engagement of the Optionee by the Company for any reason other than retirement (as provided by contract between the Company any such person or otherwise under normal Company policies), death or disability; (ii) the date which is three months following the effective date of the Optionee's retirement from the Company's service; (iii) the date which is one year following the date on which the Optionee's service with the Company ceases due to disability (or due to the death with respect to Options issued prior to the date of this amendment); (iv) the date of expiration of the Option determined by the Committee at the time the Option is granted and specified in such Option; and (v) in any event, the tenth annual anniversary date of the granting of the Option, or, if when an ISO is granted the Optionee owns (or would be considered to own by reason of Section 424(d) of the Code) more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, then on the fifth such anniversary; provided, however, that the Committee shall have the right, but not the obligation, to extend the expiry of the Options held by an Optionee whose service with the Company has ceased for any reason to the end of their original terms (either upon issuance of the Option or at such time as the Option would otherwise terminate), notwithstanding that such Options may no longer qualify as ISOs under the Code. 7. Exercise of Options (a) An Option may be exercisable in installments or otherwise upon such terms as the Committee shall determine when the Option is granted. In the event that an Option is exercisable only in installments and the Optionee has been employed by the Company for five or more years as of the date such Option was granted, such Option shall become fully exercisable upon the termination of -3- employment of the Optionee by reason of death or disability, if and to the extent that such acceleration would not cause a violation of the limitations contained in Section 422(b)(7) of the Code. If acceleration by reason of termination because of disability would cause a violation of the limitations contained in Section 422(b)(7) of the Code, acceleration shall occur only in amount such that such acceleration does not cause a violation of Section 422(b)(7) of the Code and the acceleration of the exercisability of any portion of the Option which would be in violation of such limitation shall be deferred until January 1 of the year following that in which termination of employment occurs. In the event termination of employment occurs by reason of death, acceleration of the exercisability of any portion of the Option shall occur only as and to the extent that such acceleration will not cause a violation of the limitations contained in Section 422(b)(7) of the Code. Notwithstanding anything to the contrary contained in this Plan, the Committee at any time may accelerate the time at which any Option granted hereunder is exercisable. (b) No Option will be exercisable (and any attempted exercise will be deemed null and void) if such exercise would create a right of recovery for "short-swing profits" under Section 16(b) of the Securities Exchange Act of 1934, unless the Optionee pays the Company the amount of such "short-swing profits" at the time of the exercise of the Option. (c) In the event that a portion of an ISO which first becomes exercisable exceeds the limitations contained in Section 422(b)(7) of the Code, the shares purchased pursuant to Options in excess of such limitation shall be deemed to be non-qualified stock options and shall be identified accordingly on the certificates representing such shares and in the stock transfer records of the Company. 8. Method of Exercise (a) When the right to purchase shares accrues, Options may be exercised by giving written notice to the Company stating the number of shares for which the Option is being exercised, accompanied by payment in full by cash, or its equivalent, acceptable to the Company, of the purchase price for the shares being purchased. The Company shall issue a separate certificate or certificates of Stock for each Option exercised by an Optionee. (b) In the Committee's discretion, determined at the time the Option is granted, payment of the purchase price for the shares may be made in whole or in part with other shares of Stock of the Company which are free and clear of all liens and encumbrances. The value of the shares of Stock tendered in payment for the shares being purchased shall be the Fair Market Value Per Share on the date of the Optionee's notice of exercise. (c) Notwithstanding the foregoing, the Company shall have the right to postpone the time of delivery of the shares for such period as may be required for the Company, with reasonable diligence, to comply with any applicable listing requirements of any national securities exchange or the National Association of Securities Dealers, Inc. or any Federal, state or local law. If -4- the Optionee, or other person entitled to exercise the Option, fails to timely accept delivery of and pay for the shares specified in such notice, the Committee shall have the right to terminate the Option with respect to such shares. 9. Nontransferability of Options No Option granted under the Plan shall be assignable or transferable by the Optionee, either voluntarily or by operation of law, other than by will or the laws of descent and distribution, and, during the lifetime of the Optionee, shall be exercisable only by the Optionee. 10. Continuance of Employment Nothing contained in the Plan or in any Option granted under the Plan shall confer upon any Optionee any rights with respect to the continuation of employment by the Company or interfere in any way with the right of the Company (subject to the terms of any separate employment agreement to the contrary) at any time to terminate such employment or to increase or decrease the compensation of the Optionee from the rate in existence at the time of the granting of any Option. 11. Restrictions on Shares If the Company shall be advised by counsel that certain requirements under the Federal or state securities laws must be met before Stock may be issued under this Plan, the Company shall notify all persons who have been issued Options, and the Company shall have no liability for failure to issue Stock under any exercise of Options because of delay while such requirements are being met or the inability of the Company to comply with such requirements. 12. Privilege of Stock Ownership No person entitled to exercise any Option granted under the Plan shall have the rights or privileges of a stockholder of the Company for any shares of Stock issuable upon exercise of such Option until such person has become the holder of record of such shares. No adjustment shall be made for dividends or other rights for which the record date is prior to the date on which such person becomes the holder of record, except as provided in paragraph 13 below. 13. Adjustment (a) If the number of outstanding shares of Stock are Increased or decreased, or such shares are exchanged for a different number or kind of shares or securities of the Company through reorganization, merger, recapitalization, reclassification, stock dividend, stock split, combination of shares, or other similar transaction, the aggregate number of shares of Stock subject to the Plan -5- as provided in paragraph 3 above, and the shares of Stock subject to issued and outstanding Options under the Plan shall be appropriately and proportionately adjusted by the Committee. Any such adjustment in an outstanding Option shall be made without change in the aggregate purchase price applicable to the unexercised portion of the Option but with an appropriate adjustment in the price for each share or other unit of any security covered by the Option. (b) Notwithstanding paragraph (a), upon: (i) the dissolution or liquidation of the Company, (ii) a reorganization, merger or consolidation of the Company with one or more corporations in which the Company is not the surviving corporation, (iii) a sale of substantially all of the assets of the Company, or (iv) the transfer of more than 80% of the then outstanding Stock of the Company to another entity or person in a single transaction or series of transactions, the Plan shall terminate, and any outstanding Options granted under the Plan shall terminate on the day before the consummation of the transaction; provided that the Board shall have the right, but shall not be obligated, to accelerate the time in which any Options may be exercised prior to such a termination. However, the termination of such Options shall not occur if provision is made in writing in connection with the transaction, in a manner acceptable to the Board, for: (A) the continuance of the Plan and assumption of outstanding Options, or (B) the substitution for such Options of new options to purchase the stock of a successor corporation (or parent or subsidiary thereof), with appropriate adjustments as to number and kind of shares and option price. The Board of Directors shall have the authority to amend this paragraph to provide for a requirement that a successor corporation assume any outstanding Options. (c) Adjustments under this paragraph 13 shall be made by the Committee whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of Stock shall be issued under the Plan or in connection with any such adjustment. 14. Holding Period and Forfeiture of Stock (a) All Stock purchased pursuant to the exercise of an Option shall be held by the Company for a period of two (2) years from the date of exercise (the "Holding Period"). Notwithstanding anything contained herein to the contrary, if an Optionee leaves the employ of the Company during the Holding Period for any reason other than the retirement (under normal Company policies), death or disability of such Optionee, the Optionee's purchase of such Stock shall be voidable at the Committee's sole option and discretion. If any purchase of Stock is voided by reason of the provisions of this paragraph 14, an amount determined as provided in paragraph 14(d) shall thereupon be returned in full to the Optionee. Notwithstanding the foregoing, the Committee at any time may waive the Holding Period requirement set forth herein with respect to any outstanding options. (b) At any time within the Holding Period that the Committee determines that there exists a public market for Class A Common Stock of the Company, it -6- may cancel an Optionee's Class B Common Stock of the Company then being held, and issue in lieu thereof an equivalent number of Class A Common Stock of the Company. (c) In the event that an Optionee incurs a financial hardship within the Holding Period, which is determined by the Committee in its sole discretion upon written application by the Optionee and after review of the facts and circumstances to be of an immediate and heavy nature, the Committee may authorize the repurchase of the Optionee's Stock by the Company at a price as determined under paragraph 14(d) and payment of the proceeds of such repurchase to the Optionee. (d) In the event that a purchase of Stock is voided by reason of the provisions of this paragraph 14(a) or repurchased by the Company by reason of the financial hardship of an Optionee, the amount paid to such Optionee by reason of the voided transaction or the repurchase of such Stock shall be the least of: (i) the funds paid by the Optionee in connection with the voided transaction; (ii) the value in cash of Stock used to purchase such Stock, determined as of the date of such purchase, less any amount which would have been forfeited by reason of this paragraph 14 relative to Stock used to purchase the forfeited Stock if such Stock had not been so used and the Holding Period relative to such Stock had not expired; or (iii) the Fair Market Value Per Share, as determined in accordance with the provisions of paragraph 5 hereof, on the termination date of the Optionee's employment with the Company or the date of the repurchase made pursuant to paragraph 14(b), as the case may be. (e) In order to facilitate the repurchase of Stock by the Company in accordance with the terms of paragraph 14(a) hereof, if an Optionee leaves the employ of the Company during the Holding Period and the Company rescinds the purchase of Stock by such Optionee, each Optionee who exercises any Option or portion thereof shall, at the time of payment thereof, as provided in paragraph 7(a) hereof, deliver to the Company a form of stock power and assignment signed by such Optionee in form and substance satisfactory to the Company, rendering the certificate representing the shares purchased negotiable to the Company. An Optionee may at any time request delivery of Stock in payment of the Purchase Price for additional Stock pursuant to paragraph 8(b) hereof notwithstanding the fact that such Stock has not been held for two (2) years from the date of exercise of the Option pursuant to which it was purchased. 15. Optionee's Right to Pledge (a) Notwithstanding the provisions of paragraph 14(a) hereof, if any Optionee who exercises an Option demonstrates to the Committee a need to obtain financing for the purchase of Stock pursuant to such exercise and indicates his good faith intention to remain in the employ of the Company during the Holding Period, the Committee, in its sole discretion, may permit delivery of any Stock purchased pursuant to the exercise of any Option to a financial institution for use by such Optionee as collateral security for the purchase of the Stock, -7- subject to any necessary or appropriate restrictions with respect thereto as may be required to comply with applicable Federal and state securities laws and/or the listing requirements of any national securities exchange. (b) If Stock is delivered to an Optionee in order to facilitate a pledge described in paragraph 15(a), the Company shall have the right to cancel said Stock upon the exercise of the Company's election to void the purchase of such Stock pursuant to the provisions of paragraph 14(a). Upon the cancellation of such Stock and application by the holder thereof, the Company shall pay to the holder the amount payable for such Stock as calculated under the provisions of paragraph 14(c) hereof. (c) Any Stock delivered to an Optionee pursuant to the provisions of this paragraph 15 shall contain a legend stating that the Stock is subject to cancellation pursuant to the terms of this Plan and that upon cancellation the amount payable to the holder thereof shall be limited as provided in the Plan. 16. Delivery of Certificates If the Optionee remains in the employ of the Company throughout the Holding Period, or leaves the employ of the Company by reason of retirement (under normal Company policies), death or disability, the Company shall deliver to the Optionee or his personal representative (as the case may be), as soon as practicable thereafter, certificates representing the Stock purchased by the Optionee under the Option free and clear of restriction except for the restrictions which are necessary to assure compliance by the Company and the Optionee with applicable Federal and state securities laws and/or the listing requirements of any national securities exchange (the "Certificates"). If the Company fails or declines to exercise its right to void any purchase pursuant to the terms of paragraph 14 hereof, the Company shall deliver the Certificates to those Optionees as soon as practicable after the expiration of two (2) years from the date of exercise of the applicable Option. In the event an Option is exercised using Stock as consideration for the Purchase Price, the Company shall issue separate certificates for each block of shares delivered in payment of the Option Price and for the balance of shares purchased at such exercise. 17. Investment Purpose Each Option granted hereunder may be issued on the condition that any purchase of Stock pursuant to the exercise of an Option which shall not be the subject of a registration statement permitting the sale or other distribution thereof shall be for investment purposes and not with a view to resale or distribution (the "Restricted Stock"). If requested by the Company, each Optionee must agree, at the time of the purchase of any Restricted Stock, to execute an "investment letter" setting forth such investment intent in the form acceptable to the Company and must consent to any stock certificate issued to him thereunder bearing a restrictive legend setting forth the restrictions applicable to the further resale, transfer or other conveyance thereof without -8- registration under the Securities Act of 1933, as amended, and under the applicable securities or blue sky laws of any other jurisdiction (together, the "Securities Laws"), or the availability of exemptions from registration thereunder and to the placing of transfer restrictions on the records of the transfer agent for such Stock. No Restricted Stock may thereafter be resold, transferred or otherwise conveyed unless: (1) an opinion of the Optionee's counsel is received, in form and substance satisfactory to counsel for the Company, that registration under the applicable Securities Laws is not required; or (2) such Stock is registered under the applicable Securities Laws; or (3) "no action" letters are received from the staff of the Securities and Exchange Commission and from the administrative agencies administering all other applicable securities or blue sky laws, based on the option of counsel for Optionee in form and substance reasonably satisfactory to counsel for the Company, advising that registrations under the Securities Laws are not required. 18. Amendment and Termination of Plan (a) The Board of Directors of the Company may, from time to time, with respect to any shares at the time not subject to Options, suspend or terminate the Plan or amend or revise the terms of the Plan; provided that any amendment to the Plan shall be approved by a majority of the shareholders of the Company if the amendment would (i) materially increase the benefits accruing to participants under the Plan; (ii) increase the number of shares of Stock which may be issued under the Plan, except as permitted under the provisions of paragraph 13 above; or (iii) materially modify the requirements as to eligibility for participation in the Plan. (b) Subject to the provisions in paragraph 13 above, the Plan shall terminate ten (10) years from the earlier of the adoption of the Plan by the Board of Directors or its approval by the shareholders. (c) Subject to the provisions in paragraph 13 above, no amendment, suspension or termination of this Plan shall, without the consent of the Optionee, alter or impair any rights or obligations under any Option granted to such Optionee under the Plan. 19. Effective Date of Plan The Plan shall become effective upon adoption by the Board of Directors of the Company and approval by the Company's shareholders; provided, however, that prior to approval of the Plan by the Company's shareholders but after adoption by the Board of Directors, Options may be granted under the Plan subject to obtaining such approval. -9- 20. Term of Plan No Option shall be granted pursuant to the Plan after ten (10) years from the earlier of the date of adoption of the Plan by the Board of Directors of the Company or the date of approval by the Company's shareholders. -10- EX-10 6 EXHIBIT 10(Z) AGREEMENT THIS AGREEMENT ("Agreement") is effective as of the 16Th day of December, 1996 (the "Effective Date"), by and between K-V PHARMACEUTICAL COMPANY, 2503 South Hanley Road, St. Louis, Missouri 63144, a Delaware corporation ("Employer"), and MARC S. HERMELIN ("Employee"). WHEREAS, Employee has been employed by Employer for twenty-three (23) years and continues to serve as the Vice Chairman and Chief Executive Officer of Employer and has made significant contributions to Employer during the term of his employment; WHEREAS, Employer desires to assure itself of the continued availability of the services of Employee and Employee desires to be employed by Employer; WHEREAS, Employer and Employee executed an agreement of employment dated November 15, 1991, which agreement amended and restated certain prior agreements (collectively, the "Employment Agreement"); WHEREAS, Employer and Employee desire to amend and restate the terms of the Employment Agreement and believe that it is to their mutual benefit to enter into this Agreement. NOW, THEREFORE, in consideration of the mutual promises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Employer and Employee agree as follows: 1. Affiliates. Employer has or may in the future have one or more subsidiaries and/or affiliated companies (hereafter collectively referred to as the "Companies"). From time to time, Employer and the Companies may exchange or use facilities, technology and/or Confidential Information (as that term is defined below) of the other. 2. Services. Employer hereby agrees to employ Employee and Employee agrees to be employed by Employer for the term of this Agreement in the capacity of Vice Chairman and Chief Executive Officer or in such other capacity as Employer and Employee shall mutually agree. Employee shall be employed at Employer's offices in St. Louis, Missouri, or such other location as shall be mutually agreeable to Employee and Employer. During the term of this Agreement, Employee agrees to devote his best efforts to the performance of such reasonable duties, commensurate with his position(s), as shall be mutually agreed to by Employer and Employee. 3. Term. The initial term of the Agreement shall begin on the Effective Date, and shall extend through March 31, 2002, and shall thereafter be automatically renewed for successive twelve (12) month periods, unless and until terminated by either Employee or Employer upon written notice to the other given not less than ninety (90) calendar days prior to the expiration of the initial term of this Agreement or any such renewal term. Notwithstanding the foregoing, Employee may terminate this Agreement at any time and for any reason, and Employer may terminate this Agreement at any time for Cause. For purposes of this Agreement, "Cause" shall mean that (i) Employee has committed a breach of a fiduciary duty, embezzlement, larceny, or has willfully failed to perform his duties to Employer, and in so doing has acted with full knowledge of all pertinent facts; and (ii) such act has had a material and demonstrable adverse effect on Employer. For purposes of this Agreement, the phrase "term of this Agreement" shall include the initial term and any and all renewal terms. 4. Compensation. (a) Base Salary. For the fiscal year ending March 31, 1997, (the "Base Year") Employee is being paid a base salary (the "Base Salary") at the annual rate of Five Hundred Ninety Three Thousand Sixty-Eight Dollars ($593,068). As compensation for his services under Paragraph 2, and in consideration of the obligations undertaken by Employee, Employee shall receive annual compensation in an amount equal to the Base Salary, increased, cumulatively, as of April 1 of each year during the term of this Agreement subsequent to the Base Year by the greater of eight percent (8%) or the percentage increase in the cost of living for the preceding calendar year, as measured by the U.S. Department of Labor Consumer Price Index for All Urban Consumers, U.S. City Average, All Items, or comparable index then in use (the "C.P.I."), or at such other rate as shall be mutually agreed to by Employer and Employee. For purposes of this Agreement, Base Salary at any time shall mean Base Salary as adjusted annually in accordance with the preceding sentence. All salary payments (whether under this Paragraph or another Paragraph of this Agreement) shall be paid at such intervals as Employer pays its other executive employees, unless otherwise specifically agreed to by Employer and Employee. (b) Annual Bonus. Employee shall receive an annual bonus equal to the following percentage of the Employer's net income, calculated on and payable with respect to each incremental level of net income: Employer's Net Income Employee's Bonus Percentage Below $200,000 0% $200,000 - $600,000 5% $600,000 - $3,000,000 7% $3,000,000 -$5,000,000 6% $5,000,000 - $10,000,000 5% Over $10,000,000 4% Employer and Employee agree to negotiate in advance of the final determination of the bonus, mutually acceptable terms and conditions under which Employer pays Employee the bonus, in one or more of the following forms: 2 (i) Incentive Stock Options granted under Employer's existing option plan or a similar plan applying the Black-Scholes option pricing model to determine the number of options equivalent in value to the Bonus to be paid by the delivery of Incentive Stock Options; (ii) Shares of Restricted Stock equal in number to the portion of the Bonus to be paid by the delivery of Restricted Stock, divided by the fair market value of the same class of unrestricted shares of Employer's common stock to be so delivered; (iii) Discounted Stock Options applying a discount negotiated by Employer and Employee and using the Black-Scholes option pricing model to determine the number of discounted options equivalent in value to the portion of the Bonus to be paid by the delivery of Discounted Stock Options; and/or (iv) Cash For purposes of this Agreement, calculations based on the Black-Scholes option pricing model shall be made in the same manner, applying the same assumptions used in Employer's most recent annual proxy statement. Should Employer and Employee fail to reach an agreement regarding the form of the Bonus after negotiating in good faith, the Bonus as finally determined by the formula provided in this Paragraph shall be paid in cash. For purposes of calculating Employer's net income to determine the amount of the annual bonus, the consolidated net income after taxes of Employer and the Companies shall be calculated by the Independent Certified Public Accountants regularly in the employ of Employer, based on generally accepted accounting principles consistently applied, without regard to the payment of such bonus. Employer shall promptly provide Employee with a written copy of all calculations hereunder. Employee's bonus, if any, shall be payable within ninety (90) calendar days following the end of each fiscal year of Employer during the term of this Agreement. Funds for the exercise of stock options under Paragraphs 4(b)(i) and (iii) may be loaned by the Employer to Employee, at the agreement of Employer. Such loans shall bear interest at the long-term federal rate published by the Internal Revenue Service ("AFR") as of the date of the loan. Notwithstanding the foregoing, consistent with his historical practice, Employee may in his sole discretion elect to receive a lesser bonus based on consideration for Employer. (c) Expenses. Employer agrees to reimburse Employee for all reasonable business expenses incurred by Employee in the performance of his services hereunder, including, but not be limited to, business travel, association membership dues and fees, subscriptions, and the maintenance of an office in his home(s) for business use which expenses shall be substantiated to the reasonable satisfaction of Employer. 3 (d) Vacation. Employee shall be entitled to not less than eight (8) weeks vacation during each fiscal year of Employer, during which time Employee's compensation shall be paid in full. Vacations need not be taken over a consecutive eight (8) week period or at any specific time or times during the course of any fiscal year. If Employee takes less than eight (8) weeks vacation during any fiscal year, he shall be entitled to carry over such days or to receive a cash payment at such time as he elects equal to the pro rata amount of his Base Salary for the portion of his vacation period not taken. (e) Automobile. So long as Employee continues to fulfill the position as Vice Chairman of the Board, Employer agrees to provide Employee with an automobile (or comparable allowance) similar to the automobile presently provided for Employee's use plus a reasonable estimate of the average expenses of its operation, insurance, maintenance and repair. (f) Financial Services. During the term of Employee's employment by Employer under this Agreement, Employer agrees to provide Employee with an annual allowance of up to Ten Thousand Dollars ($10,000) to be used for tax preparation, estate planning and other similar financial services provided to Employee by qualified consultants chosen by and in the sole discretion of Employee. (g) Deferred Compensation. During the term of Employee's employment by Employer under this Agreement, Employee shall be entitled to participate in the same qualified or nonqualified deferred compensation plans made available generally to other executive employees of Employer. In addition, Employer agrees to implement concurrent with this Agreement the Deferred Compensation Plan effective January 1, 1997, providing Employee with the opportunity to defer up to fifty percent (50%) of Base Salary and up to one hundred percent (100%) of Employee's bonus during the term of Employee's employment by Employer. (h) Charitable Contribution. In addition to any benefits that may be payable to Employee on death pursuant to this Agreement, Employer shall make a charitable gift at the time of Employee's death to the charity elected by Employee in the amount of Five Hundred Thousand Dollars ($500,000). However, such amount shall be reduced if Employee terminates employment under the terms of Paragraph 2 prior to attaining age sixty (60) by twenty percent (20%) for each complete twelve (12) month period between the retirement date and the date that Employee attains age sixty (60). The charity selected by Employee shall be a registered public charity, university or other organization approved by Employer (which approval shall not be unreasonably withheld) and to which contributions are tax deductible to Employer for federal income tax purposes. (i) Miscellaneous. During the term of Employee's employment by Employer under this Agreement, Employer agrees to provide Employee with all other fringe benefits as are from time to time available generally to other executive employees of Employer. 4 5. Insurance Benefits. (a) Life Insurance. Employee shall be entitled to the same group term life insurance coverage provided by Employer to other executive employees of Employer. In addition, Employer shall continue and maintain two (2) life insurance policies on Employee's life (the "Policies") subject to that certain split dollar agreement dated July 1, 1990 and that certain split dollar agreement dated November 8, 1991 as each agreement may be amended from time to time by the mutual consent of the parties (the "Split Dollar Agreements"). In this connection, Employer agrees to continue to make the premium payments contemplated by the Split Dollar Agreements except that such agreements shall be amended to provide that Employee shall pay that portion of the annual premiums due on the Policies equal to the economic benefit that would otherwise be attributable to Employee by reason of the death benefits payable to Employee under the Split Dollar Agreements (the "Economic Benefit"). The balance of the annual premiums contemplated by the Split Dollar Agreements shall be paid by Employer. Employer further agrees to pay Employee an additional amount equal to the Economic Benefit to Employee grossed up to offset the federal and state marginal income tax to Employee generated by this additional payment. Such additional amount shall be paid to Employee in each year and at the same time Employee is required to make an annual premium payment under the revised Split Dollar Agreements. Upon the death of Employee or upon cancellation of the Policies with the mutual consent of Employee and Employer, Employer shall be entitled to recover the greater of all premiums paid by Employer, net of reimbursements, or the cash surrender value of the Policies as of the date of Employee's retirement, net of any Employer loans or withdrawals. To assure the repayment of such amounts, the owner(s) of the Policies shall collaterally assign the Policies to Employer as security for Employer's interest in the Policies. In the event Employer fails to make the premium payments required by the revised Split Dollar Agreements or the additional bonus described in this paragraph, within sixty (60) days of the date the premium is due, Employee shall be entitled to submit a thirty (30) day demand letter to Employer requesting payment of such amounts. If Employer fails to make such payments within the thirty (30) day notice period, the Split Dollar Agreements shall terminate and the Policies shall be distributed to Employee as provided in the Split Dollar Agreements. However, Employer shall continue to be obligated to pay to Employee the amount of the premium payments and additional bonus which would otherwise be required by this Agreement and the Split Dollar Agreements for the period contemplated by the Split Dollar Agreements. (b) Disability. If and to the extent obtainable by Employer, Employer shall provide Employee with one or more noncancellable policies of disability insurance or a mutually acceptable equivalent thereof which provides for the 5 payment, in the event of the disability of Employee in accordance with the terms of such policies, of monthly installments equal to sixty percent (60%) of the Base Salary of Employee, as in effect under Paragraph 4, for the longer of: (A) the benefit period provided under the insurance contracts, or (B) until Employee reaches (or would have reached) sixty-five (65) years of age, which amounts shall continue to be payable to such beneficiary or beneficiaries as are designated by Employee in the event of Employee's death during the period provided for the payment thereof. The value of the disability protection provided to Employee shall be imputed to Employee currently in order that the ultimate disability benefits shall be income tax free. (c) Medical. Employer shall provide Employee, at Employer's expense, with health, accident, major medical and such other insurance coverage of a kind and in amounts not less than those presently being provided Employee and no less than those provided by Employer to other executive employees during the term of this Agreement. (d) Continuation of Coverage. After Employee is no longer in the active employ of Employer, to the extent permitted by Employer's insurer, Employee shall continue to participate in Employer's regular life and health insurance programs at Employer's expense. Such continued insurance shall continue for so long as permitted by Employer's insurer but in no event for longer than Employee is receiving payments under this Agreement or under any other employment of consulting agreement between Employer and Employee, or, if earlier, in the event of Employee's voluntary retirement or permanent disability, until Employee reaches age seventy (70). 6. Pre-retirement Voluntary Termination. If Employee voluntarily terminates his employment prior to attaining age sixty-five (65), Employee may elect to provide consulting services in the areas described in Paragraph 7(a) between the date of such voluntary termination and thereafter until not later than the age of sixty-five (65), provided that such services may be terminated by Employer upon not less than ninety (90) days' notice at any time: (i) after such services have been provided by Employee for five (5) years, or (ii) if Employee is terminated under Paragraph 3 during the initial five (5) years, or (iii) if Employee is unwilling to devote the minimum hours under Paragraph 6(a), when and if needed, at mutually agreed upon times, and Employee has not elected to retire and receive payments under Paragraph 7 (such period is hereinafter referred to as the "Pre-retirement Period"), then during such Pre-retirement Period, Employee's employment shall be subject to the following terms and conditions: (a) Employee shall devote a minimum of three hundred (300) hours annually, on an as-needed basis as Employer and Employee shall agree, for the benefit of Employer. Additional hours worked over three hundred (300) shall be compensated on a pro-rata basis. Employee shall be compensated in an amount equal to fifty percent (50%) of the Base Salary being paid to Employee at the time of his voluntary termination, adjusted annually, as of April 1 of each year during the Pre-retirement Period, by the greater of eight percent (8%) or the 6 C.P.I. Employee shall also be compensated in an amount equal to fifty percent (50%) of the annual bonus under Paragraph 4(b) or on a pro-rata basis for hours worked in excess of three hundred (300). (b) Additionally, during the Pre-retirement Period, Employee shall be entitled to participate in and continue to vest in all benefits he was entitled to and was receiving during his employment period. (c) Employee's termination under this Paragraph shall be considered voluntary only if such termination is by Employee without duress from Employer, its directors, officers, or shareholders, or any federal or state agency, its officers, agents, employees or directors. 7. Retirement Benefits and Continued Services. Any time after reaching age fifty-five (55), Employee may, as this sole option, retire from performing services under the terms of Paragraph 2 or 6, and shall (except in the case of complete disability discussed in Paragraph 7(c)) perform services as provided under this Paragraph 7. (a) Consulting Services. After retirement, Employee agrees to perform consulting services at the request of Employer for a ten (10) year period in the following areas: (i) Industry and customer relations; (ii) Strategic and financial planning and commercial business development; (iii)Mergers, Acquisitions and Divestitures; (iv) Application of Employer and Industry knowledge; (v) Assistance in respect of the continuity of Employer's operations; (vi) Investment community relations. Employee agrees to devote up to three hundred (300) hours annually for the benefit of Employer and to serve on the Board of Directors, at the request of Employer. Additional hours worked over three hundred (300) shall be compensated on a pro-rata basis. To assist Employee in the performance of his duties, Employer shall provide Employee with internal support services consisting of one (1) full-time employee as Project Coordinator, and administrative and secretarial services as needed. Employee shall have final approval with respect to the selection of the Project Coordinator. (b) Consulting Compensation. Employee shall be entitled to compensation for his consulting services to be paid in the form of a single life annuity equal to fifteen percent (15%) of Employee's Base Salary for the year in which retirement occurs ("Final Base Salary") payable each year beginning at age sixty-five (65) and continuing for the longer of ten (10) years or the life of Employee. Such payments shall continue to be payable to such beneficiary or beneficiaries as are designated by Employee in the event of Employee's death during the period provided for the payment thereof. In addition, for each additional complete year of employment under the terms of Paragraph 2 or 6 after attaining age fifty- five (55), Employee shall be entitled to an increased annual benefit based on the following percentage (the "Vested Percentage") of 7 the difference between (i) fifteen percent (15%) of Employee's Final Average Compensation, and (ii) fifteen percent (15%) of Employee's Base Salary. Post 55 years of Employment Vested % -------------------------------------------- 1 40% 2 60% 3 80% 4 90% 5 or More 100% In addition, each annual benefit shall be increased by the C.P.I. as defined in Paragraph 4(a). For purposes of this Agreement, "Final Average Compensation" shall mean Employee's average annual compensation (including bonuses and other non-regular forms of compensation and adding back voluntary deferrals under any Employer benefit plans) earned from Employer during the highest three (3) consecutive years of the five (5) year period ending coincident with or immediately prior to the retirement date. If, prior to retirement under this Paragraph 7, Employee was performing services under Paragraph 6, "Final Average Compensation" shall be calculated using one hundred percent (100%) of the Employee's Base Salary plus bonuses as if Employee was performing services on a full-time basis during such years. (c) Disability. In the event of Employee's retirement from performing services under Paragraph 2 or 6 as a result of disability, Employee shall continue to perform the consulting services specified in Paragraph 7(a) to the extent Employee is able to do so. In the event of Employee's complete disability on or after retirement, Employee shall nevertheless be entitled to the consulting compensation provided in Paragraph 7(b). In the event of Employee's disability on or after retirement, Employee shall continue to be entitled to the benefits provided under Paragraphs 7(d) and (e) below. Notwithstanding the foregoing, the total annual benefits for any year payable under Paragraphs 7(c), (d) and (e) shall be offset by the amount of any disability benefits payable for such year under Paragraph 5(b). (d) Restrictive Covenants. After retirement, in consideration for complying with the restrictive covenants described in Paragraph 12, Employee shall receive additional compensation in the form of a single life annuity equal to fifteen percent (15%) of Employee's Final Base Salary payable each year beginning at age sixty-five (65) and continuing for the longer of ten (10) years or the life of Employee. Such payments shall continue to be payable to such beneficiary or beneficiaries as are designated by Employee in the event of Employee's death during the period provided for the payment thereof. In addition, for each additional complete year of employment under the terms of Paragraph 2 or 6 after attaining age fifty-five (55), Employee shall be entitled 8 to an increased annual benefit based on the Vested Percentage of the difference between (i) fifteen percent (15%) of Employee's Final Average Compensation, and (ii) fifteen percent (15%) of Employee's Final Base Salary. In addition, each annual benefit shall be increased cumulatively by the C.P.I. (e) Retirement Compensation. In addition to the compensation provided for in (b) and (c) above, Employee shall be entitled to receive retirement compensation paid in the form of a single life annuity equal to thirty percent (30%) of Employee's Final Base Salary payable each year beginning at retirement and continuing for the longer of ten (10) years or the life of Employee. Such payments shall continue to be payable to such beneficiary or beneficiaries as are designated by Employee in the event of Employee's death during the period provided for the payment thereof. In addition, for each additional complete year of employment under the terms of Paragraph 2 or 6 after attaining age fifty- five (55), Employee shall be entitled to an increased annual benefit based on the Vested Percentage of the difference between (i) thirty percent (30%) of Employee's Final Average Compensation, and (ii) thirty percent (30%) of Employee's Final Base Salary. In addition, each annual benefit shall be increased cumulatively by the C.P.I. (f) Election of Alternative Form of Payment. Notwithstanding the foregoing, for each of the above pieces of compensation payable over the life of Employee, Employee shall be entitled to elect an earlier start date after retirement or an alternative form (such as joint and survivor) of annuity which shall be actuarially adjusted to equate to the original benefit provided for in this Paragraph 7. Such actuarial calculations shall be performed by a qualified actuary based on generally accepted actuarial principles. 8. Termination Benefits. (a) Triggering Event. A "Triggering Event" shall mean (i) termination of this Agreement by its terms and with no renewal, or (ii) termination of Employee's employment with Employer in the capacity described in Paragraph 2 during the term of this Agreement for any reason whatsoever other than Employee's voluntary termination of employment or retirement, as contemplated under Paragraph 6 or 7, respectively, or Employee's death or disability, or (iii) even if this Agreement is still in force and Employee has not been terminated, failure of Employer to maintain the Letter of Credit required by Paragraph 9. (b) Termination Payments. Employer shall pay Employee, on the date of the Triggering Event, a lump sum cash payment (the "Lump Sum Payment") equal to one (1) times Employee's Base Salary as in effect on the date of the Triggering Event; and Employer shall make monthly cash payments to Employee or his assigns, on the first day of each of the thirty-six (36) calendar months following the date of the Triggering Event, equal to seventy-five percent (75%) of the Lump Sum Payment divided by twelve (12). If Employee shall die during the thirty-six (36) month period, any payments remaining due hereunder shall be accelerated and 9 shall become immediately due and payable to Employee's beneficiaries, or if none have been designated by Employee, to the estate of Employee. (c) Adjustment of Stock Options and Restricted Stock. With respect to any stock options or restricted stock held by Employee at the occurrence of the Triggering Event, such options or restricted stock agreements shall be amended by Employer, as of such time, provided that the provisions of the applicable stock optionor restricted stock plans or agreements provide for such amendment and the employment record of Employee over the full tenure of such Employee's employment so justifies (the determination of which shall be made by the Board of Directors of Employer, but shall not be unreasonably withheld) and provided Employee has not been terminated for Cause, to provide that upon the occurrence of the Triggering Event: (i) Employee shall have the right to exercise such options for up to a two (2) year period following the Triggering Event, (ii) all such stock options and restricted stock shall become immediately fully vested, and (iii) any Holding Period requirement with regard to any restricted stock or shares purchased pursuant to the exercise of a stock option shall be waived and shall be inapplicable to such shares. (d) Payments Not Conditioned on Services. Employer's obligations under his Paragraph 8, including the making of any monetary payments, shall be independent of, and not conditioned upon, Employee's rendering services under Paragraph 6 or 7. 9. Letter of Credit. (a) Terms. Employer has delivered to Employee and will continue to maintain in effect during the term of Employee's employment under Paragraph 2 and for the period of any unfilled obligation of Employer to make payments to Employee under Paragraph 8 an irrevocable letter of credit (the "Letter of Credit"), form a bank mutually acceptable to Employer and Employee (the "Bank") for an amount which at all times during the term thereof shall be equal to the lesser of: (A) three (3) times Employee's Base Salary, or (B) the amount payable by Employer under Paragraph 8 after deducting any amounts actually paid to Employee thereunder. Employer shall provide Employee with a copy of any amended, extended or replacement Letter of Credit not later than ten (10) business days prior to the effective date thereof and shall notify Employee in writing of any impending expiration of the Letter of Credit, as in effect at any time, no later than forty-five (45) days prior to the expiration date of the Letter of Credit. The Letter of Credit shall provide that Employee may draw upon the Letter of credit the aggregate amount of all payments to be made by Employer to Employee under Paragraph 8 and not previously paid, in lieu of such payments, if the following conditions exist: (A) (I) Employee's employment with Employer has been terminated during the term of this agreement for any reason whatsoever (other than voluntary retirement, death, or permanent disability); or 10 (II) This Agreement has not been renewed upon the expiration of the initial term or any renewal term; or (III) Employer has ceased operations; and (B) Employer shall have failed, refused, or been unable to make the Lump Sum Payment or any monthly payment to Employee required by Paragraph 8, for any reason whatsoever. Notwithstanding the foregoing, whether or not a condition described in subparagraph (A) or (B) exists, and whether or not Employee's employment has been terminated, if the Letter of Credit is not renewed by the Bank or replaced by Employer within twenty (20) days prior to the expiration of the Letter of Credit at any time during the term of Employee's employment under Paragraph 2, Employee shall be entitled to draw upon the Letter of Credit the aggregate amount of all payments to be made by Employer to Employee under Paragraph 8. The Letter of Credit shall further provide that funds represented by the Letter of Credit shall be available to Employee thereunder against: (A) Employee's sight draft drawn on the bank, bearing the number of the Letter of Credit; and (B) Employee's signed certificate, in one of the forms attached to the Letter of Credit, stating that one or more of the event(s) specified in Paragraph 9(a) has occurred and the date of such occurrence. Payment of the Letter of Credit shall not require any other documentation or the fulfillment of any other conditions of any kind. (b) Limitation on Use. Notwithstanding anything to the contrary contained in this Paragraph 9, Employee agrees that if a Triggering Event, as defined in Paragraph 8, has occurred and Employer has not employed a replacement chief executive officer, Employee will not exercise his rights to draw against the Letter of Credit for a period not to exceed four (4) months from the date of such Triggering Event. Provided, however, that Employee shall not be prohibited from exercising his right to draw against the Letter of Credit during the four (4) month period if: (i) the Letter of credit will expire in less than twenty (20) days or is in jeopardy of not being maintained for any reason, and is not scheduled to be renewed or replaced by Employer; (ii) Employer is adjudicated a bankrupt or makes an assignment for the benefit of creditors; 11 (iii) Bankruptcy, insolvency, reorganization, arrangement, debt adjustment, liquidation or receivership proceedings, in which Employer is alleged to be insolvent or unable to pay its debts as they mature, are instituted by or against Employer, and Employer consents thereto or admits in writing the material allegations of the petitions filed in said proceedings or said proceedings remain undismissed for sixty (60) days; (iv) There is an entry of a decree or order for relieve by a court having jurisdiction with respect to Employer in an involuntary case under the federal bankruptcy laws against Employer, or Employer commences voluntary proceedings under federal bankruptcy laws; (v) A significant portion of the assets of Employer is attached; (vi) A judgment is obtained in a legal or equitable proceeding against Employer and the sale of a significant portion of Employer's assets is contemplated or threatened under legal process as a result of such judgment; or (vii) an execution process is issued against Employer which affects a significant portion of Employer's assets or the existence or operation of the Letter of Credit, which is not removed or satisfied within twenty (20) days. (c) Employee's Election. If at any time Employee: (i) has exercised his right to draw against the Letter of Credit provided for under this Paragraph 9, and (ii) there is a Change of Control and Employee becomes eligible for benefits under Paragraph 10 of this Agreement, then the benefits which Employee would be entitled to receive under Paragraph 10 shall be reduced by the proceeds Employee received when Employee exercised his rights to draw against the Letter of Credit; provided, however, that if the proceeds received from the Letter of Credit exceed the benefits to be received under Paragraph 10, this Paragraph shall not be construed to require Employee to repay any amounts to Employer. 10. Change of Control. (a) Definition. For purposes of this Agreement, a "Change of Control" of Employer shall mean the occurrence of any one of the following events: (i) any "person," as such term is used in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934, becomes a "beneficial owner," as such term is used in Rule 13d-3 promulgated under that Act, of twenty percent (20%) or more of the voting stock of Employer. (ii) the majority of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board on the date of this Agreement; provided that any person becoming a director subsequent to 12 such date whose election or nomination for election was supported by two-thirds (2/3) of the directors who then comprised the Incumbent Directors shall be considered to be an Incumbent Director; (iii) Employer adopts any plan of liquidation providing for the distribution of all or substantially all of its assets; (iv) all or substantially all of the assets or business of Employer is disposed of pursuant to a merger, consolidation or other transaction (unless the shareholders of Employer immediately prior to such merger, consolidation or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned the voting stock of the company, all of the voting stock or other ownership interests of the entity or entities, if any; that succeed to the business of Employer); or (v) Employer combines with another company and is the surviving corporation but, immediately after the combination, the shareholders of Employer, immediately prior to the combination hold, direct or indirectly, fifty percent (50%) or less of the voting stock of the combined company (there being excluded from the number of shares held by such shareholders, but not from the voting stock of the combined company, any shares received by affiliates of such other company in exchange for stock of such other company). (b) Termination After Change in Control. In the event of a Change of Control of Employer, if (i) immediately preceding such Change of Control, Employee was providing services under Paragraph 2, 6, or 13, and (ii) Employee's employment in such capacity terminates within three (3) years after such Change of Control ("Termination"), voluntarily or involuntarily, with or without cause, for any reason whatsoever, except for the death or disability of Employee, Employee shall be entitled to the benefits provided in Paragraph 10(c). For purposes of this Agreement, "Date of Termination" shall mean the date on which a Notice of Termination is given, unless the parties agree to another date, and "Notice of Termination" shall mean a written notice communicated by either party to the other party which indicates that Employee's employment with Employer is being terminated. (c) Payments on Termination After Change in Control. (i) Employee's Base Salary through the Date of Termination at the rate in effect on the date Notice of Termination is given, including expenses, vacation pay, allowances and other compensation and benefits under Paragraphs 4 and 5, and (ii) the amount, if any, of any bonus for a past fiscal year (and pro rata for any portion of the then current fiscal year through the Date of Termination) which has not been awarded or paid under any bonus plans in which Employee is entitled to participate at the time of the Change of Control or under other bonus plans at least as beneficial to Employee. In addition, Employer shall continue in full force and effect for the benefit of Employee through the Date of Termination all stock ownership, purchase or option plans, 13 employee benefit or compensation plans, and insurance or disability plans in effect immediately preceding the Change of Control or plans substantially similar thereto. (ii) In lieu of any further payments or benefits to be paid or otherwise provided under Paragraph 4 (excluding any stock option or restricted stock grants and any deferred compensation benefits payable under Paragraphs 4(b) and (g)) for any period subsequent to the Date of Termination, Employer shall pay as severance pay ("Severance Pay") to Employee a lump sum payment equal to the sum of: (A) two and one-half (2-1/2) times the greater of: (x) Employee's Base Salary immediately prior to the Date of Termination, or (y) Employee's Base Salary in effect immediately prior to the date on which the Change of Control occurred, and (B) Employee's bonus, if any, which would be payable in respect of the thirty (30) month period beginning on the Date of Termination as if Employee had continued his position, computed based upon the formula in Paragraph 4(b). Such Severance Pay shall be subject to all applicable federal and state income taxes. The portion of the Severance Pay based upon Employee's Base Salary shall be paid on or before the fifth (5th) day following the Date of Termination, and the portion of the Severance Pay based upon any bonus plan shall be paid to Employee as and when payable under the terms of the applicable plan had Employee's employment continued. Employee, by written notice to Employer at any time prior to a Change of Control of Employer or the Date of Termination, may elect, in his sole discretion, to receive said Severance Pay interest-free at a future time, but in no event any later than twenty-four (24) months after the Date of Termination. (iii) To the extent not otherwise provided for under the terms of any of Employer's stock option agreements, all stock options and restricted stock granted by Employer or any predecessor of Employer to Employee shall vest and be exercisable or transferable as of the Date of Termination and, except for "incentive stock options" within the meaning of 26 U.S.C. ss.422, all options shall remain fully exercisable for six (6) months following the Date of Termination. In addition, any holding period for the underlying shares specified under any of Employer's stock option agreements or restricted stock agreements with Employee shall automatically be amended and deemed to be the earlier of: (i) two (2) years from the date of exercise of the stock option, or (ii) the Date of Termination. (iv) Employer shall maintain in full force and effect, for the continued benefit of Employee and members of Employee's family, for a period of thirty (30) months after the Date of Termination, all employee benefit plans and programs, including, but not limited to plans and programs provided under Paragraphs 4, 5, 6, and 7 concerning profit-sharing, retirement, life insurance, medical, health and accident, automobile and disability plans or programs in which he or such family members were entitled to participate immediately prior to: (i) the Date of Termination, or (ii) the date of Change of Control, whichever plans provide greater benefits, provided that continued participation is possible under the general terms and provisions of such plans and programs. To the extent the terms of the individual agreements or policies contemplated by Paragraph 5 require benefits to be provided for a period which would be less 14 than thirty (30) months after the Date of Termination, then notwithstanding the terms of Paragraph 5 to the contrary, Employer shall provide benefits for a period of time no less than thirty (30) months from and after the date of Termination. If Employee's participation in any such plan or program is barred, Employer shall arrange to provide Employee with benefits substantially similar to those which Employee would be entitled to receive under such plans and programs as if Employee's participation was not barred. (v) In lieu of the compensation and retirement benefits provided under Paragraph 7, Employee shall be entitled to receive an annual retirement benefit equal to sixty percent (60%) of Employee's Final Average Compensation (as defined in Paragraph 7) payable in the form of a single life annuity over the life of Employee beginning at age sixty-five (65). Such benefit shall not be conditioned on the covenants described in Paragraph 7. If Employee has elected an actuarially reduced alternative form of benefit as provided in Paragraph 7(e), the retirement benefit shall be paid in such alternative form. (d) Coordination with Paragraph 8. The benefits provided under this Paragraph 10 shall be in lieu of the benefits provided under Paragraph 8. Notwithstanding the foregoing, the Employee may elect, by written notice to Employer given within thirty (30) days after the date of the Notice of Termination to receive the benefits provided under Paragraph 8 in lieu of the benefits provided under this Paragraph 10. (e) Mitigation. Employee shall not be required to mitigate the amount of any payment provided for in this Paragraph 10 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Paragraph 10 be reduced by any compensation earned by Employee as a result of employment by another employer after the Date of Termination, or otherwise. (f) Application of Section 280G. (i) If it shall be determined that any payment or distribution by Employer to or for the benefit of Employee (whether paid or payable or distributable pursuant to the terms of this Paragraph 10, but determined without regard to any additional payments required under subparagraph (c) above) (a "Payment"), would be subject to the payment by Employee of the excise tax imposed by Section 280G(b)(2) of the Internal Revenue Code of 1987, as amended (the "Code"), or any interest or penalties is alleged to be due from Employee with respect to such excise tax (such excise tax, together with any interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then Employee shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by Employee of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes and excise tax imposed upon the Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise Tax payable by Employee upon the Payment. 15 (ii) Subject to the provisions of subparagraph (c)(1) above, all determinations required to be made under subparagraph (c), including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a nationally recognized accounting firm mutually acceptable to Employee and Employer (the "Accounting Firm"), which shall provide detailed supporting calculations both to Employer and Employee within fifteen (15) business days of the receipt of notice from Employee that there has been a Payment, or such earlier time as is requested by Employer. All fees and expenses of the Accounting Firm shall be borne solely by Employer. Any Gross-Up Payment, as determined pursuant to subparagraph (c), shall be paid by Employer to Employee within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by Employee, it shall furnish Employee with a written opinion that failure to report the Excise Tax on Employee's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon Employer and Employee. As a result of the uncertainty in the application of Code Section 280G at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by Employee should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. If Employer exhausts its remedies pursuant to subparagraph (c)(3) and Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by Employer to or for the benefit of Employee. (iii) Employee shall notify Employer in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by Employer of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after Employee is informed in writing of such claim, and shall apprise Employer of the nature of such claim and the date on which such claim is requested to be paid. Employee shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which Employee gives such notice to Employer (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If Employer notifies Employee in writing prior to the expiration of such period that it desires to contest such claim, Employee shall: (A) give Employer any information reasonably requested by Employer relating to such claim; (B) take such action in connection with contesting such claim as Employer shall reasonably request in writing from time to time, including without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by Employer; (C) cooperate with Employer to contest such claim; and 16 (D) permit Employer to participate in any proceedings relating to such claim; provided, however, that Employer shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Employee harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this subparagraph (c)(3), Employer shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings or conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Employee to pay the tax claimed and sue for a refund, or contest the claim in any permissible manner. Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as Employer shall determine; provided, however, that if Employer directs Employee to pay such claim and sue for a refund, Employer shall advance the amount of such payment to Employee, interest-free, and shall indemnify and hold Employee harmless on an after-tax basis) from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to the payment of taxes for the taxable year of Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, Employer's control of a contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (iv) If, after the receipt by Employee of an amount advanced by Employer pursuant to subparagraph (c)(3). Employee becomes entitled to receive any refund with respect to such claim, Employee shall (subject to Employer's complying with the requirements of subparagraph (c)(3) promptly pay to Employer the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Employee of an amount advanced by Employer pursuant to subparagraph (c)(3), a determination is made that Employee shall not be entitled to any refund with respect to such claim and Employer does not notify Employee in writing of its intent to contest such denial or refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (g) Adjustment of Index. In the event of a Change of Control of Employer has occurred and Employee is providing services under Paragraph 2 or 6, then notwithstanding anything herein to the contrary, annual adjustments to continuing payments due under Paragraph 4, shall thereafter be the greater of 17 ten percent (10%) or the percentage increase in the costs of living based on the U.S. Department of Labor Consumer Price Index for All Urban Consumers, U.S. City Average, All Items, or comparable successor index. 11. Indemnity. Upon the termination of Employee's employment hereunder by any party and for any reason, Employer shall immediately, to the fullest extent permitted by applicable law, indemnify and hold Employee and Employee's estate, heirs, personal representatives, successor and assigns, harmless from and against any and all losses, costs, expenses, claims, damages, demands, liabilities, derivative and other suits, actions and/or judgments of any nature and description (including, without limitation, attorneys' fees) arising in connection with any of Employee's past or present services as a director, officer and/or employee of Employer or the Companies. Immediately upon such termination, Employer shall obtain a rider to its errors and omissions insurance policy covering Employer's obligations pursuant to the Paragraph 11. 12. Restrictive Covenants. During the term of Employee's employment under this Agreement (including, for the purposes of this Paragraph 12, any period during which Employee is providing services to Employer under Paragraph 7, and for a period of three (3) years after the termination of such employment, unless Employer experiences a Change of Control or fails to make the payments required to be made to Employee by Employer under Paragraph 8 for reasons other than the breach of the Agreement by Employee, Employee covenants and agrees that Employee will not, in any manner directly or indirectly: (a) Except as required in his duties to Employer or as required by law (in which case Employee shall give Employer notice in advance of such disclosure in sufficient time to permit Employer to take such legal action as may be necessary to prevent such disclosure, unless the circumstances under which such disclosure is required make it impracticable for Employee to give such notice to Employer ), disclose or divulge to any person, entity, firm or company, directly or indirectly, any privileged knowledge, formulae, devices, confidential information, proprietary business methods, unique techniques, customer lists, supplier lists or other data of Employer ("Confidential Information"). (b) Solicit, divert, take away or interfere with: (i) any of the employees or agents of Employer, or (ii) any customer of or supplier to Employer with respect to any area of business which is competitive with the business of Employer at the date of such termination of employment. (c) Engage, directly or indirectly, either personally or as an employee, partner, associate partner, manager, agent, advisor, consultant or otherwise, or by means of any corporate or other device, in any business which is competitive with the business of Employer at the date of such termination of employment; provided nothing contained herein shall restrict Employee from owning securities of a competitor of Employer which are listed on any National Securities Exchange or actively traded over the counter, if Employee has no other connection or relationship, direct or indirect, with the issuer o such securities. 18 (d) It is the intention of the parties to restrict the activities of Employee under Paragraphs 11(a), (b) and (c) only to the extent necessary, after a review of all facts and circumstances, for the protection of legitimate business interests of Employer, and the parties specifically covenant and agree that should any of the provisions set forth herein, under any set of circumstances not now foreseen by the parties, be deemed too board for that purpose, said provisions will nevertheless be valid and enforceable to the extent necessary for such protection. It is also agreed that Employee may engage in activities which would be covered by Paragraph 12(c), with the written consent of Employer. (e) To the extent that Employer Patent and Confidential Information Agreement and Agreement to assign Inventions with Employer, entered into between Employer and Employee, which shall remain in full force and effect, shall impose any other or greater obligations on Employee (and/or any obligations of greater duration) than those set forth in this Paragraph 12, then such greater (and/or longer) obligations: (i) shall prevail (in addition to those set forth in this Paragraph 12); and (ii) shall survive any expiration or termination of this Agreement for any reason whatsoever. (f) If Employee breaches any of the terms of this Paragraph 12, in addition to any other rights which Employer may have against Employee, any amounts due Employee under Paragraph 6 or 7 shall be suspended for so long as such violation continues and are forfeited if the violation is not cured within six (6) months, or waived, at Employer's option, based on a review of the facts and circumstances. 13. Succession. If Employee shall voluntarily terminate his employment under Paragraph 2, as provided in Paragraph 6 and 7, and a period of transition is needed for a successor chief executive officer, Employee may, at his election, provide services, in his position as Vice Chairman of the Board to assist the successor chief executive officer in the transition, for a period of one (1) year or such lesser period as Employee shall agree. If Employee provides such services, then he shall receive compensation for such period, in accordance with Paragraph 4, instead of Paragraph 6 or 7, as the case may be, and only thereafter the provisions of Paragraphs 6 and 7 shall apply. 14. Miscellaneous. (a) Remedies. Employee acknowledges and agrees that any breach or evasion of any of the terms of Paragraph 12 of this Agreement by Employee will result in immediate and irreparable injury to Employer for which Employer cannot be adequately protected or compensated by the payment of damages and therefore shall authorize recourse by Employer to injunction and/or specific performance as well as to all other legal or equitable remedies to which Employer may be entitled. No remedy conferred by any of the specific provisions of this Agreement is intended to be exclusive of any other remedy, and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity, by statute or 19 otherwise. The election of any one or more remedies by either party shall not constitute a waiver of the right to pursue other available remedies. (b) Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof. Any provision which is invalid or unenforceable (whether generally or limited to one or more individual jurisdictions) shall be modified in its scope and/or application in such a manner and to such an extent (either generally or in such individual jurisdictions as is necessary) as to be valid and enforceable as nearly as possible consistent with its stated purpose and intent or, if such modification is not possible, shall be construed (generally or in such jurisdiction(s)) as if such invalid or unenforceable provisions were omitted. (c) Waiver. No waiver, modification or amendment of this Agreement or of any covenant, condition or limitation herein contained shall be effective unless in writing specifically referring thereto, and duly executed by the parties hereto. The failure of either party to exercise or otherwise act with respect to any of its rights hereunder in the event of a breach of any of the terms or conditions hereof by the other party shall not be construed as a waiver of such breach, nor prevent the nonbreaching party from thereafter enforcing strict compliance with any and all of the terms and conditions hereof. (d) Complete Agreement. Except for the agreements specifically referred to in this Agreement, and the provisions contained in Employer's profit sharing, stock option and other employee benefit plans, this Agreement contains the complete agreement concerning the employment arrangement between the parties and shall, as of the effective date hereof, supersede all other agreements, oral or written, between the parties. The parties stipulate that neither of them has made any representations or warranties with respect to the subject matter of this Agreement, including the execution and delivery hereof, except as are specifically set forth herein. (e) Controlling Law. This Agreement shall be governed by, construed and interpreted according to the laws of the State of Missouri, notwithstanding the place of execution hereof, nor the performance of any acts in connection herewith or hereunder in any other jurisdiction. (f) Successors; Binding Agreement. (i) Employer shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of Employer, by agreement in form and substance satisfactory to Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Employer would be required to perform if no such succession had taken place. As used in this Agreement, "Employer" shall mean Employer, as hereinbefore defined, and any successor to its business or assets as aforesaid which executes and delivers the 20 agreement provided for in this Paragraph 14 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (ii) This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die while any amount would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there be no such designee, to his estate. (g) Notice. Any notice given by either party hereunder shall be in writing and shall be personally delivered or shall be mailed, Express, certified or registered mail, or sent by a generally recognized next business day courier, postage or other charges prepaid, as follows: To Employer: K-V Pharmaceutical Company 2503 South Hanley Road St. Louis, Missouri 63144 Attention: Director, Human Resources To Employee: At his address as set forth on the payroll records of Employer, or to such other address as may have been furnished to the other party by written notice. Notice shall be deemed given on the date personally delivered, or if sent by Express Mail or next business day courier on the business day following the date sent, or if otherwise mailed, two calendar days after the date postmarked. (h) Accounting. If Employee does not agree with any calculation by Employer hereunder, within thirty (30) calendar days after Employee has received written notice of the calculation, Employee may notify Employer's Board of Directors of his disagreement and thereby cause an independent review to be made by an accountant selected by Employee. If such accountant determines that the calculation is in error and Employee is entitled to additional compensation and Employee's accountant cannot agree as to the amount, the two accountants shall select an independent third accountant to review the calculation and any payment made, whose decision shall be binding on both parties. If as a result of such review employee's payment is increased, Employer shall bear the expense of the review, including the cost of Employee's accountant and the third account. 21 (i) Headings. The headings herein are for convenience only and shall not affect the interpretation of this Agreement. (j) Stock Options. Except for "incentive stock options" within the meaning of 26 U.S.C. ss. 422, Employer agrees to continue in effect in accordance with the terms and conditions thereof (other than the requirement of Employee's continuing employment with Employer) during the term of this Agreement and subsequent to Employee's retirement and so long as Employee remains a director or a consultant to Employer, all stock options for the purchase of Employer's shares held by Employee at the date of his Agreement. In addition, upon Employee's retirement, any period provided for Employer to continue to hold shares subsequent to the prior exercise of any stock option shall terminate and be of no further force or effect, and any such shares then held by Employer shall be delivered to Employee, subject to Employee's agreement to comply with applicable securities laws and the provisions of any restrictive legend required to be included on any certificate(s) issued therefor under such securities laws. (k) Attorney's Fees. If Employee retains legal counsel as a result of the termination of his employment by Employer, or to enforce any term of this Agreement, by reason of Employer's alleged failure to perform or alleged breach of this Agreement, Employer shall pay to Employee all such attorneys' fees and costs associated with such legal counsel, whether or not litigation shall be commenced. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written. "EMPLOYEE" /s/ Marc S. Hermelin MARC S. HERMELIN "EMPLOYER" K-V PHARMACEUTICAL COMPANY By: /s/ Gerald R. Mitchell (Name) Vice-President, Finance (Title) 22 STATE OF MISSOURI ) ) ss. COUNTY OF ST. LOUIS ) I, Chris Lahar, do hereby certify that on this 16th day of December, 1996, before me personally appeared Marc S. Hermelin, to me known to be the person described in and who executed the foregoing instrument and who acknowledged that he executed the same as his free act and deed. IN WITNESS WHEREOF, I have hereunto set my hand and affixed by official seal in said County and State on the day and year above written. /s/ Chris Lahar My Commission Expires: STATE OF MISSOURI ) ) ss. COUNTY OF ST. LOUIS ) I, Chris Lahar, do hereby certify that on this 16th day of December, 1996, before me personally appeared Gerald R. Mitchell, to me known to be the VP, Finance of KV Pharmaceutical Company, a Delaware corporation, and known to me to be the same person whose name is subscribed to the foregoing instrument, who acknowledged that he signed and delivered said instrument pursuant to authority given by the Board of Directors of said corporation, as his free act and deed, as the free act and deed of said corporation for the uses and purposes therein set forth. IN WITNESS WHEREOF, I have hereunto set my hand and affixed by official seal in said County and State on the day and year above written. /s/ Chris Lahar My Commission Expires: 23 KV PHARMACEUTICAL COMPANY December 16, 1996 Mr. Marc S. Hermelin 2503 S. Hanley Road St. Louis, MO 63144 RE: Agreement between KV Pharmaceutical Company and Marc S. Hermelin, dated December 16, 1996 Dear Mr. Hermelin: This letter will confirm our understanding that your Annual Bonus for Fiscal Year 1997 will be calculated and paid to you under your old Agreement, dated November 15, 1993 and the Amendments attached thereto. Except as specifically modified by this letter, it is agreed that the Agreement will remain in full force and effect as originally written. If this accurately reflects our understanding, please sign one copy of this letter and return it to me for our files. Sincerely, KV PHARMACEUTICAL COMPANY /s/ Gerald R. Mitchell Gerald R. Mitchell Vice-President, Finance AGREED: /s/ Marc S. Hermelin DATE: 12/16/96 Marc S. Hermelin 24 EX-10 7 EXHIBIT 10(AA) KV PHARMACEUTICAL COMPANY February 17, 1997 Marc S. Hermelin General Partner Rosh Chodesh c/o KV Pharmaceutical Company 2503 South Hanley Road St. Louis, MO 63144 RE: Lease of 2503 South Hanley Road Dear Marc: Reference is hereby made to the Commercial Lease (the "Lease") dated March 11, 1971 for the premises located at 2503 South Hanley Road, Brentwood, MO 63144 (the "Premises"), as amended by the Supplement to the Lease, dated November 9, 1972, entered into by your predecessor-in-interest in the Premises, as Landlord and KV Pharmaceutical Company, as tenant, and by letter agreement dated November 12, 1979 and five (5) year extension dated November 20, 1986 to the term of the Lease through December 31, 1991 signed by you and KV Pharmaceutical Company and a five (5) year extension dated November 20, 1991 to the term of the lease signed by you and the Company, and a five (5) year extension to the term of the Lease through December 31, 2001. KV Pharmaceutical Company has a need for additional office and lab space at the 2503 South Hanley location. The Landlord is not currently in a position to finance such an expansion, but is willing to entertain a proposal to expand such facilities by the tenant and grant certain lease concessions to the tenant as consideration for the investment by KV. The cost of the expansion approximates $1,800,000. In consideration of the tenant investing in the proposed improvements, Landlord agrees to an addendum to the lease to reflect the following: 1. The expiration date of the lease extension effective January 1, 1997 shall be extended to December 31, 2006. 2. One additional five (5) year option to extend the term of the lease beginning January 1, 2007 shall be added under the same terms as the prior lease extensions. 3. KV shall have a right of first refusal to purchase the property upon notification of an offer to purchase the property by a bona fide third party. KV shall have 30 calendar days to match the bona fide third party offer. 4. Rentals for the first seven (7) years after the completion of the construction will be at the current rate, effective January 1, 1997 (adjusted for the Consumer Price Index, U.S. City Average, All Items) on 25,000 square feet. At the end of the seven (7) year period from completion of construction, rentals shall be increased to a fair market rate on the total expanded square footage of approximately 35,000 square feet, but not less than the rate per square foot being charged. 5. KV agrees that at the request of the lessor, an appraisal or third party real estate opinion may be requested and the lease rates adjusted to such higher rate as supported by the appraisal/opinion. Lessor may request such appraisal/third party real estate opinion not more frequently than once every four years. 6. If for any reason during the current lease extension or additional option period, KV elects to vacate the premises, KV will be responsible for remodeling the special use laboratory space up to a maximum liability of $300,000. Please indicate your acceptance and agreement of the terms of this letter by signing and returning the enclosed copy of this letter to the undersigned. Very truly yours, KV PHARMACEUTICAL COMPANY /s/ Gerald R. Mitchell ---------------------------- Gerald R. Mitchell Vice President, Finance Accepted and agreed: /s/ Marc S. Hermelin 2/17/97 - --------------------------- ------- Marc S. Hermelin Date EX-11 8 EXHIBIT 11 KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES EARNINGS (LOSS) PER SHARE CALCULATIONS
Year Ended March 31, 1997 1996 1995 ------------------- --------------------- --------------------- Calculation of Primary Earnings (Loss) per Share: Net Income (Loss) $ 8,923,512 $ 4,042,660 $ (5,374,801) (Less) plus dividends on preferred stock (421,750) (421,750) 421,750 -------------------- ---------------------- --------------------- Earnings (Loss) Attributed to Common Stock 8,501,762 3,620,910 (5,796,551) =================== ===================== ===================== Average Number of Common Shares and Common Share Equivalents Outstanding: Average common shares outstanding 11,839,328 11,521,884 11,178,495 Common share equivalents (after application of treasury stock method) 267,664 292,213 N/A ------------------- --------------------- --------------------- Average Common Shares and Common Share Equivalents Outstanding 12,106,992 11,814,097 11,178,495 =================== ===================== ===================== Primary Earnings (Loss) per Share(1) $ 0.70 $ 0.31 $ (0.52) =================== ===================== ===================== Calculations of Fully-Diluted Earnings (Loss) per Share: Earnings (Loss) per Share: Net income (Loss) $ 8,923,512 $ 4,042,660 $ (5,374,801) (Less) plus dividends on preferred stock (421,750) (421,750) 421,750 Plus (less) dividends not payable due to preferred stock conversion 421,750 421,750 (421,750) ------------------- --------------------- --------------------- Earnings (Loss) Attributed to Common Stock 8,923,512 4,042,660 (5,374,801) =================== ===================== ===================== Average Number of Shares Outstanding on a Fully-Diluted Basis: Average common shares outstanding 11,839,328 11,521,884 11,178,495 Shares issuable upon conversion of stock options 268,733 354,593 182,842 Common equivalent shares for preferred stock 602,500 602,500 602,500 ------------------- --------------------- --------------------- Average Number of Shares Outstanding on a Fully-Diluted Basis 12,710,561 12,478,977 11,963,837 =================== ===================== ===================== Fully-Diluted Earnings (Loss) per Share(2) $ 0.70 $ 0.32 $ (0.45) =================== ===================== ===================== (1) The two-class method for Class A and Class B Common Stock is not presented because the earnings (loss) per share is equivalent to the if-converted method since dividends were not declared or paid and each class of common stock has equal ownership of the Company. (2) This calculation is submitted although it is contrary to Paragraph 40 of APB Opinion No. 15 as it produces an anti-dilutive result. Also, the preferred stock would not qualify as a common share equivalent because the cash yield at issuance was not less than 66 2/3% of the then current average Aa corporate bond yield.
EX-21 9 EXHIBIT 21 LIST OF SUBSIDIARIES Particle Dynamics, Inc. (formerly known as Desmo Chemical Corporation), a New York Corporation, a wholly-owned subsidiary of KV Pharmaceutical Company. ETHEX Corporation, (formerly known as KV Pharmaceuticals International, Inc.) a Missouri Corporation, a wholly-owned subsidiary of KV Pharmaceutical Company. EX-23 10 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS KV Pharmaceutical Company St. Louis, Missouri We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Numbers 2-56793, 2-76173, 33-36400, 33-44927 and 333-199) of our report dated June 18, 1997, 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, 1997. BDO SEIDMAN, LLP St. Louis, Missouri June 18, 1997 EX-27 11 FDS --
5 1 US Dollars 12-MOS MAR-31-1997 APR-01-1996 MAR-31-1997 1.00 7,627,523 0 8,579,598 0 10,785,588 30,222,902 8,117,809 0 41,361,720 5,205,935 0 0 2,410 120,941 0 41,361,720 58,037,159 0 0 29,478,372 18,841,038 0 411,037 9,306,512 383,000 8,923,512 0 0 0 8,923,512 .70 .70
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