-----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, FVAzOSsrCIMBbltvnoaDL0W0NkkhMb2pGfNiRlRURxIDoZoLOnsDxgeis2PBbnAS sOAeRYzhDh6I7yT+cJtksg== 0001011240-98-000042.txt : 19980629 0001011240-98-000042.hdr.sgml : 19980629 ACCESSION NUMBER: 0001011240-98-000042 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980626 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: SEC FILE NUMBER: 001-09601 FILM NUMBER: 98654588 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 ANNUAL REPORT FOR 3/31/98 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, 1998 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 8,566,250 shares of Class A and 3,105,137 shares of Class B Common Stock held by nonaffiliates of the Registrant as of April 30, 1998, was $185,245,156 and $67,536,730, respectively. As of April 30, 1998, the Registrant had outstanding 11,733,323 and 6,404,877 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 1998 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", or the "Company") was incorporated under the laws of Delaware in 1971 as a successor to a business originally founded in 1942. Victor M. Hermelin, KV's Chairman and founder, obtained initial patents for early controlled release and enteric coated technologies in the early 1950's. KV is a pioneer in the area of advanced drug delivery technologies which enhance the effectiveness of new therapeutic agents, existing pharmaceutical products and nutritional supplements. The Company has developed a diverse portfolio of sixteen technologies, including three oral controlled release technologies, six site-specific oral and topical delivery technologies, three tastemasking technologies and a quick dissolve tablet technology. These technologies, 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 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 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 operating 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"). (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 advanced drug delivery technologies are licensed. (c) Narrative Description of Business The Company's business is the formulation and commercialization of pharmaceutical products, both prescription and over-the-counter, utilizing the Company's proprietary drug delivery technologies. An important profit center of the Company is the development of generic drugs using its proprietary technologies that it markets and distributes through its wholly-owned subsidiary, ETHEX Corporation. ETHEX currently sells 46 products, 22 of which were launched over the past two fiscal years and many of which utilize KV's drug delivery systems. Approximately 8 to 10 additional products are expected to be launched during fiscal 1999. 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 100% penetration in the 25 largest wholesalers and chains. The development of generic versions of existing brand name products is typically less costly and time consuming than the development of new drug products, because generic drugs 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 technologies 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., Taisho Pharmaceutical Ltd. of Japan, S.S. Pharmaceutical of Japan, J. Uriach of Spain and others. Under these agreements, KV generally develops a product which utilizes its drug delivery technologies 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 currently markets four distinct lines of specialty raw material products to the pharmaceutical, nutritional and food industries. 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. During the mid-1990's, the Company implemented an integrated business strategy to commercialize its drug delivery technologies in a variety of ways, principally by developing and marketing of both brand name and generic pharmaceutical products, and by licensing marketing rights to products to pharmaceutical clients. During fiscal 1998, 1997 and 1996, revenues from the implementation of these strategies were approximately 95%, 91% and 90%, 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 technologies 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 has applied and continues to apply its drug delivery technologies 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 technologies, 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 and Marketing 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 also plans to directly market and distribute enhanced technology branded products in specific niche therapeutic areas. 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 technologies 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 technology base and business and which can be integrated into the Company's existing research, manufacturing, marketing and distribution capabilities. The Company is also evaluating the acquisition of individual branded products and/or companies with branded products and marketing capability. Development and Marketing of Technologically Differentiated Specialty Raw Materials. The Company combines its advanced technologies with 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 technologies. These drug delivery technologies are generally organized in the areas of "controlled release", "site release", "tastemasking", and "quick dissolve" 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. Oral Controlled Release Technologies The Company has developed a number of controlled release drug delivery technologies and formulation techniques that tailor the drug release profiles of certain orally administered pharmaceuticals and nutritional supplements. These technologies, 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 technology 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. SYMATRIX(TM) is a micro-particulate formulation that employs smaller particles than KV/24(R) and METER RELEASE(R). SYMATRIX(TM) 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 Release Technologies KV's Site Release(R) 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 technologies 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. VAGISITE(TM) 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. 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-EP(TM) (for transesophageal) is a new and novel bioadhesive, controlled release delivery technology which may permit oral delivery of compounds that normally would be degraded if administered orally, such as growth hormones, calcitonin and other protein/peptides and other complex compounds. Trans-EP(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, bioadhesive, controlled release system which at room temperature is a solid rectal or vaginal suppository that after insertion becomes a bioadhesive long acting cream. BioSert(R) has particular applications to therapeutic areas such as antifungals, narcotic analgesics and anti-arthritics. DermaSite(TM) is a semi-solid SITE RELEASE(R) configuration for topical applications to the skin. The bioadhesive and controlled release properties of the delivery platform have made possible the development of products requiring a significantly reduced frequency of application. 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 the bad taste of 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. MICRO MASK(TM) 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 MICRO MASK(TM) 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. MICRO MASK(TM) 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 technology 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. 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 approval is a costly, time-consuming process and there is no guarantee that such approval will be obtained with respect to an individual product. All companies in the pharmaceutical industry are subject to FDA inspections for compliance with current Good Manufacturing Practice ("cGMP"), which encompasses all aspects of the production process as interpreted by the FDA and involves changing and evolving standards. FDA inspections are a part of a continuing effort by the FDA to oversee and upgrade the level of industry-wide compliance with cGMP, with an emphasis on increased validation of products and increased stringency of Standard Operating Procedures. The Company undergoes FDA inspections at all of its facilities. 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 agency. 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"). The Company does not disclose 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 market in the future. The Company was informed by the FDA on April 22, 1998 that it had satisfied all of the requirements of the agency's "Application Integrity Policy." This will now allow the FDA to process applications for new NDA's and ANDA's that the Company may submit. As a consequence of the uncertainties inherent in the drug approval process, an applicant is not in the position to predict in advance all of the substantive and procedural requirements for FDA approval of a particular product or to predict when or if any particular product may be approved. The Company cannot predict whether future legislative or regulatory developments might have an adverse effect on the Company. It is the Company's belief that generic drugs and drug delivery products can provide cost savings opportunities which the Company could benefit from in ETHEX Corporation's growth and in its drug delivery research business. During fiscal 1998, 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 66 domestic and foreign patents expiring through 2012 and 12 trademarks expiring through 2011 (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), SYMATRIX(TM), DESCOTE(R), and others. The Company intends to continue to trademark new technology and product names as they are developed. The business of the Company is generally not seasonal, although a number of cough/cold products marketed through ETHEX 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 1998 and 1997, one unaffiliated customer, McKesson Drug Company, a wholesale distributor, individually accounted for 12% and 15%, respectively, of the Company's 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 for activities relating to the development of new products or services or the improvement of existing products or services was approximately $5,752,000 in fiscal 1998, $4,835,000 in fiscal 1997, and $4,559,000 in fiscal 1996. Spending for research and development is funded internally from operations and also by major pharmaceutical companies who have licensed marketing rights to KV-developed products. KV's internally funded research and development spending is approximately 6% 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 April 26, 1998, the Company had 353 employees. The Company is subject to a five year collective bargaining agreement which expires in July 2001 and covers 64 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 at 2503 South Hanley Road in St. Louis County, Missouri, and contains approximately 25,000 square feet of floor space. The Company has a lease on the building for a period of ten years expiring December 31, 2005, with one five-year option to renew. In addition, the Company leases or owns the facilities shown in the following table: SQ FT LEASE RENEWAL FACILITY USAGE LEASED EXPIRES OPTIONS - -------- ----- ------ ------- ------- 2629 S. Hanley Road Mfg. Oper. 18,000 09/30/02 5 years1 821 Hanley Industrial Court Mfg. Oper. 5,000 11/30/99 - 8046-50 Litzsinger Road Mfg. Oper. 17,000 10/31/01 5 years1 8056 Litzsinger Road Office/Maint. 3,000 10/31/01 5 years1 2635 S. Hanley Road Mfg. Oper. 12,150 09/30/02 5 years1 819 Hanley Industrial Court Mfg. Oper. 5,000 11/30/99 - 2525 S. Hanley Road Mfg. Oper. 16,800 06/30/02 5 years 8054 Litzsinger Road Office 3,000 10/31/01 5 years1 2601 S. Hanley Road PDI Office 1,480 09/30/02 5 years1 10888 Metro Court Office/Warehouse 81,810 Owned N/A 2303 Schuetz Road Mfg. Oper. 90,000 Owned N/A 10858 Metro Court Rental Property 40,540 Owned N/A - ---------------------- 1 Two five-year options. Properties used in the Company's operations are considered suitable for the purposes for which they are used and are believed to be adequate to meet the Company's needs for the reasonably foreseeable future. However, the Company considers leasing additional facilities from time to time when attractive facilities appear to be available to accommodate the consolidation of certain operations and to meet future expansion plans. Item 3. Legal Proceedings Not applicable. 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 84 Director, Chairman of the Board and Treasurer of the Company. Marc S. Hermelin 56 Director, Vice-Chairman of the Board and Chief Executive Officer.2 Alan G. Johnson 63 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. 67 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 64 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 59 Vice President of Finance since 1981. Mitchell I. Kirschner 52 Corporate Vice President of Business Development since 1989.2 The term of office for each executive officer of the Company expires at the next annual meeting of the directors or at such time as his successor has been elected and qualified. - ----------------------- 1. This information is included in Part I as a separate item in accordance with Instruction 3 to Item 401(b) of Regulation S-K and General Instruction G to Form 10-K. 2. Victor M. Hermelin is the father of Marc S. Hermelin and father-in-law of Mitchell I. Kirschner. PART II Item 5. Market for the Company's Common Stock and Related Security Holder Matters a) Principal Market The Company's Class A Common Stock and Class B Common Stock are traded on the American Stock Exchange under the symbols KVA and KVB, 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 each quarter of fiscal 1998 and 1997 were as follows: CLASS A COMMON STOCK FISCAL 1998 FISCAL 1997 --------------------------- --------------------------- QUARTER High Low High Low ------------- ---------- -------------- ------------- ---------- First 11 21/32 9 15/32 10 19/32 7 29/32 Second 15 3/4 9 29/32 9 19/32 5 3/32 Third 15 21/32 12 13/32 8 19/32 7 5/32 Fourth 18 25/32 13 3/32 14 3/32 7 3/4 CLASS B COMMON STOCK FISCAL 1998 FISCAL 1997 ---------------------------- -------------------------- QUARTER High Low High Low -------------- ----------- ------------- ------------ ------------ First 11 3/4 9 1/2 10 1/2 8 Second 15 3/32 10 9 1/2 5 Third 15 5/8 12 27/32 8 1/2 7 5/32 Fourth 18 21/32 13 1/32 14 7 21/32 All per share data reflects the three-for-two stock split effected in the form of a 50% stock dividend. No cash dividends were paid on the Company's Class A or Class B Common Stock in fiscal 1998 or 1997. Dividends on Preferred Stock in the amount of $421,751 were paid during fiscal 1998, and $105,437 was paid during the fourth quarter of 1997. c) Approximate Number of Holders of Common Stock The number of holders of record of the Company's Class A and Class B Common Stock as of April 30, 1998 and June 6, 1997 was 1,241 and 1,310, respectively (not separately counting shareholders whose shares are held in "nominee" or "street" names, which are estimated to represent approximately 4,000 additional shareholders for each class of common stock). Item 6. Selected Financial Data
($ in 000's, except per share data) Years Ended March 31, ------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- INCOME STATEMENT DATA: Revenues $98,486 $57,891 $49,729 $39,743 $38,171 % Change 70.1 16.4 25.1 4.1 (12.2) Net income (loss) $11,304 $8,924 $ 4,043 $(5,375) $ (8,181) Net income (loss) per common share-diluted (a) (b) $0.58 $0.47 $0.21 $(.35) $(.52) BALANCE SHEET DATA: Total assets $68,361 $41,362 $ 27,948 $ 27,975 $ 31,802 Long-term debt, deferred taxes and other liabilities $7,040 $3,071 $ 3,452 $ 12,153 $ 13,323 Shareholders' equity $44,164 $33,084 $20,550 $ 9,974 $ 13,343 NOTES: (a) Dividends were paid on the Preferred Stock during fiscal 1998 in the amount of $421,751 and 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, 1998. (b) Fully diluted common shares were restated to reflect a 3 for 2 stock split effected in the form of a 50% stock dividend, declared by the Board of Directors on March 23, 1998 and distributed April 17, 1998 to shareholders of record as of April 3, 1998. The Company adopted SFAS No. 128, "Earnings Per Share" in fiscal 1998 and restated all prior-period earnings per share data. (see Note 1).
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 1998, 1997 and 1996.
Fiscal Year Ended 1998 1997 1996 ------------------ --------------------- ------------------- Amount Percent Amount Percent Amount Percent (Dollars in thousands) ETHEX (generic products) $79,193 80% $40,225 69% $34,498 69% KV (manufacturing and licensing) 8,290 9 8,978 16 7,370 15 PDI (pharmaceutical compounds) 11,003 11 8,688 15 7,861 16 -------- --- -------- --- -------- ---- Net revenues 98,486 100% 57,891 100% 49,729 100% Costs and expenses: Manufacturing costs 56,483 57% 29,478 51% 26,260 53% Research and development 5,752 6 4,835 8 4,559 9 Selling and administrative 19,104 20 13,818 24 12,749 26 Other, net 156 - 453 1 2,028 4 -------- ----- --------- --- ------- ---- Total costs & expenses 81,495 83% 48,584 84% 45,596 92% Income before income taxes 16,991 17 9,307 16 4,133 8 Net income $11,304 11% $8,924 15% $4,043 8% ======= === ====== === ====== ==
FISCAL 1998 COMPARED TO FISCAL 1997 Revenues. Net revenues increased $40.6 million, or 70%, to $98.5 million during fiscal 1998 from $57.9 million in fiscal 1997. This sales growth was primarily due to an increase in the volume of new and existing products sold by ETHEX and Particle Dynamics, partially offset by lower contract services sales. Net revenues from ETHEX increased $39 million, or 97%, to $79.2 million during fiscal 1998 from $40.2 million in fiscal 1997. This increase was primarily due to the launch of twelve new generic products during fiscal 1998, in addition to increased sales of products introduced in prior years. Net revenues derived from the sale of specialty pharmaceutical raw materials by PDI increased $2.3 million, or 27%, to $11 million during fiscal 1998. This increase was attributable to the increased sales volumes related to the introduction of new products for the over-the-counter DESCOTE(R) and DESTAB(TM) product lines. As expected, contract services revenues decreased $.7 million, or 8%, to $8.3 million in fiscal 1998 from $9 million in fiscal 1997 which is attributable to reduced sales volume. While the Company anticipates continued growth in sales of the products it markets, there are no assurances that the annual percentage rate of sales growth will continue at past levels. Costs and Expenses. Manufacturing costs increased $27 million, or 92%, to $56.5 million during fiscal 1998 from $29.5 million in fiscal 1997 due to increased volume. Manufacturing costs as a percentage of revenues increased to 57% from 51% primarily due to the change in the mix of products sold and the effect of the competitive pricing in the generic pharmaceutical industry. Research and development costs increased $.9 million, or 19%, to $5.8 million during fiscal 1998 from $4.8 million in fiscal 1997. This increase was due to higher personnel, raw material and clinical costs. The Company expects to continue spending for research and development in the future, emphasizing the development of additional products for sale by ETHEX, new branded products and new drug delivery technologies. Selling and administrative expenses increased $5.3 million, or 38%, to $19.1 million during fiscal 1998 from $13.8 million in fiscal 1997. As a percentage of revenue, selling and administrative expenses decreased to 20% from 24%. 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 products marketed by ETHEX and Particle Dynamics, and additional personnel to support the Company's continued growth. Income taxes were provided at an effective rate of 33.5% in fiscal 1998 compared to 4.1% in fiscal 1997. The increase is attributable to the utilization of loss carry forwards generated in prior years during fiscal 1997. No loss carryforwards were available in fiscal 1998. Net Income. As a result of the factors described above, net income improved $2.4 million, or 27%, to $11.3 million for fiscal 1998 from net income of $8.9 million in 1997. FISCAL 1997 COMPARED TO FISCAL 1996 Revenues. Net revenues increased $8.2 million, or 16%, to $57.9 million during fiscal 1997 from $49.7 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 and 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 1996. This increase was primarily due to the launch of ten new generic products during fiscal 1997, in addition to increased sales of products introduced in the prior year. Net revenues derived from the sale of specialty pharmaceutical raw materials by PDI increased $.8 million, or 11%, to $8.7 million during fiscal 1997. This increase was attributable to the 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 and licensing revenues increased $1.6 million, or 22%, to $9 million in fiscal 1997 from $7.4 million in fiscal 1996, primarily due to increased licensing revenues from an agreement concluded with Roche Holding, Ltd. 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. Selling and administrative expenses increased $1.1 million, or 8%, to $13.8 million during fiscal 1997 from $12.7 million in fiscal 1996. However, as a percentage of revenue, selling and administrative expenses decreased to 24% from 26%. 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. Other, net decreased $1.5 million, or 75%, to $.5 million during fiscal 1997 from $2 million in fiscal 1996. This was primarily attributable to increased interest income of $.1 million as a result of interest earned on increased average daily cash balances, decreased interest expense of $1 million as a result of lower effective interest rates as well as lower levels of average borrowing and reduced amortization cost. The tax provision of $383,000 for fiscal 1997 was 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 $4 million in fiscal 1996. (b) Year 2000 Readiness The Company's computer systems, software and related technologies are affected by the Year 2000 compliance issue. The Company has been identifying and correcting affected applications to ensure that all of its key computer systems will be Year 2000 compliant by early 1999, and has also been working with its vendors and suppliers to ensure their compliance. Costs to modify such applications have been, and are estimated to remain, immaterial to the Company's results of operations or financial condition. (c) Liquidity and Capital Resources The following table sets forth selected balance sheet data and ratios for fiscal years 1998, 1997 and 1996. At March 31, ($ in 000's) ------------ 1998 1997 1996 ---------- ---------- ---------- Working Capital Ratio 3.1 to 1 5.8 to 1 4.6 to 1 Quick Ratio 2.0 to 1 3.1 to 1 2.4 to 1 Debt to Debt Plus Equity .11 to 1 .07 to 1 .14 to 1 Total Liabilities to Equity .55 to 1 .25 to 1 .36 to 1 Cash and Cash Equivalents $ 18,158 $ 7,628 $ 2,038 Working Capital $ 35,403 $25,017 $14,053 Long-Term Liabilities $ 7,040 $ 3,071 $ 3,452 Shareholders' Equity $44,164 $33,084 $20,550 Working capital for fiscal 1998 increased $10.4 million, or 42%, to $35.4 million due primarily to the Company's net income in 1998. Net cash provided by operating activities for fiscal 1998 included increases in receivables of $6.7 million and inventories and other current assets of $5.1 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 $11.7 million. These changes in receivables, inventories and payables of $1.2 million combined with net income and non-cash charges aggregating $13.2 million, resulted in cash provided by operating activities of $14.4 million for fiscal 1998, an improvement of $8.7 million or 155%. At the end of fiscal 1998, the Company's "quick assets", (cash, cash equivalents and accounts receivable) increased $17.3 million (106%) from the prior year, while current liabilities increased $11.9 million (229%), resulting in a "quick ratio" of 2 to 1 compared to 3.1 to 1 at the end of 1997. The increase in current liabilities is due primarily to an increase in accounts payable and accruals for salaries and benefits, income taxes and revenue sharing, all associated with increased sales and earnings. The debt to debt plus equity and total liabilities to equity ratios for fiscal 1998 increased due to the addition of $3.5 million in debt used for the purchase of a facility which was previously leased, and an adjacent facility. Investing activities in fiscal 1998 reflected capital expenditures in cash of $2.5 million excluding the facility purchase which was financed with long-term debt, and net expenditures for other assets of $.6 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 million ($1.7 million of which was included in revenue) and certain other considerations, plus $5 million for the sale of certain Class A Common Stock options exercisable in various periods through September 1998 (See Notes 12 and 15). The transaction was entered into between the parties in consideration for giving the marketing company the right to explore the Company's drug delivery technologies and to replace certain other product agreements and to provide royalties and product opportunities. In January 1997, the Company concluded a broad-based agreement with Roche Holding Ltd. of Basel, Switzerland ("Roche") (See Notes 12 and 15). As part of the agreement, Roche purchased 200,000 shares of Common Class A Stock for $3.5 million. In addition, the agreement included cash payments of $3 million made in January 1997 and 1998, respectively, and one additional payment to be received in January 1999, unless regulatory approval of a potential follow-on product in the same therapeutic area is received prior to that date. Such payments have been included in revenue, and the last payment will be similarly treated when received. Upon marketing, KV would receive royalties on sales of the follow-on product. The Company's cash and cash equivalents on hand at year-end were $18.2 million. The Company had in place at March 31, 1998, an unsecured credit facility aggregating $20 million with LaSalle National Bank. As of March 31, 1998, the Company had no cash borrowings, however, $2.2 million of open letters of credit were issued under the facility. The Company's capital equipment commitments at year-end totaled approximately $1.1 million. 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 materials 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 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 Company believes funds generated from operating activities and existing cash, together with the funds available under its credit facility and funds provided from licensing agreements will be adequate to fund the Company's short term needs. (d) New Accounting Standards In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS No. 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the SFAS No. 128 requirements. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", which requires the reporting of comprehensive income and its components in the 1998 financial statements. Comprehensive income is defined as the change in equity from transactions and other events and circumstances from non-owner sources, and excludes investments by and distributions to owners. Comprehensive income includes net income and other items of comprehensive income meeting the above criteria. There is no impact on the Company's financial statements due to the issuance of this statement. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 is effective for fiscal years beginning after December 15, 1997 and requires reporting about operating segments, products and services, geographic areas and major customers. Its objective is to provide information about the different types of business activities and economic environments in which businesses operate. The first disclosures will be required in the Company's 1999 Annual Report. The Company does not expect substantial changes in its definition of segments. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which standardizes the disclosure requirements for pensions and other postretirement benefits and requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis. SFAS No. 132 is effective for years beginning after December 15, 1997, and requires comparative information for earlier years to be restated, unless such information is not readily available. The Company has no pensions or postretirement benefit plans in place at this time. There is no impact on the Company's financial statements due to the issuance of this statement. Item 8. Financial Statements and Supplementary Data. 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, 1998 and 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended March 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1998, in conformity with generally accepted accounting principles. BDO SEIDMAN, LLP St. Louis, Missouri May 21, 1998 KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, 1998 and 1997 ASSETS 1998 1997 - ------ ---- ---- Current Assets: Cash and cash equivalents $ 18,157,595 7,627,523 Receivables, less allowance for doubtful accounts of $332,244 and $129,054 in 1998 and 1997, respectively 15,304,340 8,579,598 Inventories 15,606,037 12,785,588 Deferred income taxes 2,949,434 890,000 Prepaid and other current assets 541,989 340,193 --------------- --------------- Total Current Assets 52,559,395 30,222,902 --------------- --------------- Net property and equipment 12,436,533 8,117,809 --------------- --------------- Goodwill and other assets 3,364,899 3,021,009 =============== =============== TOTAL ASSETS $ 68,360,827 $ 41,361,720 =============== =============== LIABILITIES Current Liabilities: Accounts payable $ 4,280,492 $ 2,045,048 Accrued liabilities 12,317,432 2,809,571 Current maturities of long-term debt 558,333 351,316 --------------- --------------- Total Current Liabilities 17,156,257 5,205,935 Long-term debt 4,902,222 2,158,025 Deferred income taxes 535,000 - Other long-term liabilities 1,603,131 913,319 --------------- --------------- TOTAL LIABILITIES 24,196,610 8,277,279 --------------- --------------- 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 1998 and 1997 2,410 2,410 Class A and Class B Common Stock, $.01 par value; 60,000,000 shares of each authorized; Class A-issued 11,760,078 and 11,576,231 in 1998 and 1997 117,601 116,376 Class B-issued 6,442,914 and 6,564,855 in 1998 and 1997 64,429 65,242 Additional paid-in capital 34,042,044 33,844,685 Retained earnings (deficit) 9,992,686 (889,319) Less: Treasury Stock, 35,619 shares each of Class A and Class B Common Stock, at cost (54,953) (54,953) --------------- -------------- TOTAL SHAREHOLDERS' EQUITY 44,164,217 33,084,441 -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 68,360,827 $ 41,361,720 ============== ============== See Accompanying Notes to Consolidated Financial Statements KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Years Ended March 31, 1998, 1997 and 1996 1998 1997 1996 ------------ ------------- ------------ Net Revenues $ 98,486,060 $ 57,890,678 $ 49,729,046 Costs and Expenses: Manufacturing costs 56,482,539 29,478,372 26,259,638 Research and development 5,751,995 4,835,478 4,559,360 Selling and administrative 19,104,051 13,817,802 12,748,726 Amortization of intangible assets 254,261 187,758 710,647 ------------- ---------- -------------- Total costs and expenses 81,592,846 48,319,410 44,278,371 ------------- --------- -------------- Operating income 16,893,214 9,571,268 5,450,675 ------------- ---------- -------------- Other income (expense): Interest expense (452,262) (411,237) (1,377,604) Interest and other income 550,186 146,481 59,589 ------------- ----------- ------------ Total other income (expense) 97,924 (264,756) (1,318,015) ------------- ------------ ------------- Income before income tax 16,991,138 9,306,512 4,132,660 Provision for income taxes 5,687,382 383,000 90,000 ------------- ----------- ------------- Net Income $ 11,303,756 $ 8,923,512 $ 4,042,660 ============ ============ ============ Net Income per Common Share-Basic (after deducting preferred dividends of $421,751 in 1998, 1997 and 1996) $ 0.60 $ 0.48 $ 0.21 ============ ========== ============ Net Income per Common Share-Diluted $ 0.58 $ 0.47 $ 0.21 ============ ========== ============ See Accompanying Notes to Consolidated Financial Statements
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended March 31, 1998, 1997 and 1996 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, 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 Stock Options exercised, 24,165 shares of Class A - 240 - 127,930 - - 128,170 17,206 shares of Class B - - 172 69,429 - - 69,601 Conversion of 98,500 shares of - Class B shares to Class A shares - 985 (985) - - - - Dividends paid on preferred stock - - - - (421,751) - (421,751) Net income for 1998 - - - - 11,303,756 - 11,303,756 Three for two stock split effected in the form of a 50% stock dividend - 39,201 21,476 - (60,677) - - ----------- -------- --------- ----------- ---------- ---------- ----------- Balance at March 31, 1998 $2,410 $117,601 $64,429 $34,042,044 $9,992,686 $(54,953) $44,164,217 ========== ======== ======= =========== ========== ========== =========== See Accompanying Notes to Consolidated Financial Statements
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended March 31, 1998, 1997 and 1996
1998 1997 1996 ---- ---- ---- OPERATING ACTIVITIES Net Income $11,303,756 $ 8,923,512 $ 4,042,660 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and other non-cash charges 1,887,997 1,594,300 2,098,622 Stock options issued as compensation - 114,300 - Changes in operating assets and liabilities: Increase in receivables (6,724,742) (1,298,139) (440,836) Increase in inventories and other current assets (5,081,678) (5,336,261) (1,820,982) Increase (decrease) in accounts payable and accrued liabilities 11,743,305 1,620,848 (799,676) Increase (decrease) other 1,224,811 2,089 (7,861) ----------- ---------- ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 14,353,449 5,620,649 3,071,927 ------------ ----------- ------------ INVESTING ACTIVITIES Purchase of property and equipment, net (2,452,459) (1,903,134) (841,318) Decrease in deferred improved drug entities - - 2,450,241 Other (598,153) (880,577) (457,006) ------------ ----------- ----------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (3,050,612) (2,783,711) 1,151,917 ------------- ------------ ----------- FINANCING ACTIVITIES Proceeds from credit facilities - - 28,311,372 Repayment of credit facilities - - (34,130,635) Proceeds from term loan facility - - 6,820,189 Principal payments on long-term debt (548,785) (744,203) (10,795,482) Proceeds from sale of Common Stock 3,500,000 - Dividends paid on Preferred Stock (421,751) (105,437) - Exercise of Common Stock options 197,771 102,156 1,533,068 Proceeds from sale of stock options - - 5,000,000 ------------ ----------- ------------ NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (772,765) 2,752,516 (3,261,488) ------------- ---------- ------------- INCREASE IN CASH AND CASH EQUIVALENTS 10,530,072 5,589,454 962,356 CASH AND CASH EQUIVALENTS AT: BEGINNING OF YEAR 7,627,523 2,038,069 1,075,713 ------------ ---------- ---------- END OF YEAR $18,157,595 $ 7,627,523 $ 2,038,069 ============ ============ ============ Non-cash investing and financing activities: Portion of building acquired through proceeds from a term loan $ 3,500,000 See Accompanying Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of KV Pharmaceutical Company (the "Company") and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Cash Equivalents Cash equivalents consist of highly liquid instruments that have an original maturity of three months or less. Cash equivalents consist primarily of government backed securities aggregating $10,000,000 at March 31, 1998 and $0 at March 31, 1997. 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. Management reviews intangible assets for possible impairment if there is a significant event that detrimentally effects operations. Impairment is measured using estimates of non-discounted future earnings potential of the entity or assets acquired. 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 Basic earnings per share is calculated by dividing net income for the period by the weighted average number of shares of Common Stock outstanding during the period. The assumed exercise of stock options and warrants is included in the calculation of diluted earnings per share. Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," was adopted in fiscal 1998 with all prior-period earnings per share data restated. The statement requires dual presentation of basic earnings per share and diluted earnings per share on the Consolidated Statements of Income and other computational changes. The adoption of SFAS No. 128 did not have a material effect on previously reported earnings per share. Income Taxes Income taxes are accounted for under the asset and liability method, in which deferred income taxes are recognized as a result of temporary differences between the financial reporting basis and tax basis of the assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Stock-Based Compensation The Company grants stock options for a fixed number of shares to employees with an exercise price greater than or equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25 ("APB Opinion No. 25"), "Accounting for Stock Issued to Employees". That Opinion requires that compensation cost related to fixed stock option plans be recognized only to the extent that the fair value of the shares at the grant date exceeds the exercise price. Accordingly, the Company recognizes no compensation expense for its stock option grants. In October 1995, the Financial Accounting Standards Board, ("FASB") issued SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123 allows companies to continue to account for their stock option plans in accordance with APB Opinion No. 25, but encourages the adoption of a new accounting method based on the estimated fair value of employee stock options. Pro forma net income and income per share, determined as if the Company had applied the new method, are disclosed within Note 10. Fair Value of Financial Instruments The carrying amounts of all short-term asset and liability financial instruments are reasonable estimates of their fair value because of the short maturity of these items. The carrying amount of all long term financial instruments approximates their fair value because their terms are similar to those which can be obtained for similar financial instruments in the current marketplace. New Accounting Pronouncements In June 1997, the FASB issued SFAS No. 130, which requires the reporting of comprehensive income and its components in the 1998 financial statements. Comprehensive income is defined as the change in equity from transactions and other events and circumstances from non-owner sources, and excludes investments by and distributions to owners. Comprehensive income includes net income and other items of comprehensive income meeting the above criteria. There is no impact on the Company's financial statements due to the issuance of this statement. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which requires reporting about operating segments, products and services, geographic areas and major customers. Its objective is to provide information about the different types of business activities and economic environments in which businesses operate. The first disclosures will be required in the Company's 1999 Annual Report. The Company does not expect substantial changes in its definition of segments. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which standardizes the disclosure requirements for pensions and other postretirement benefits and requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis. SFAS No. 132 is effective for years beginning after December 15, 1997 and requires comparative information for earlier years to be restated, unless such information is not readily available. The Company has no pension or postretirement benefit plans in place at this time. There is no impact on the Company's financial statements due to the issuance of this statement. Reclassifications Certain amounts from the prior years' financial statements have been reclassified to conform to the current year presentation. 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 manufactured products and pharmaceutical compounds are sold to major domestic drug, nutritional and food companies. Sales to a single company aggregated 12% and 15% for the years ended March 31, 1998 and 1997, respectively. In addition, the balance due from this company represented approximately 18% and 23% of consolidated accounts receivable as of March 31, 1998 and 1997, respectively. No single customer accounted for 10% or more of consolidated revenues in fiscal 1996. The Company extends unsecured credit to its customers. 3. Inventories Inventories as of March 31, consist of: 1998 1997 ---- ---- Finished goods $ 8,954,290 $ 6,941,864 Work-in-process 1,883,395 1,645,879 Raw materials 5,130,103 4,494,167 ----------- ------------- 15,967,788 13,081,910 Reserves for obsolescence (361,751) (296,322) ------------ -------------- $15,606,037 $12,785,588 =========== =========== 4. Property and Equipment Property and equipment as of March 31, consist of: 1998 1997 ---- ---- Land and improvements $ 1,490,567 $ 499,567 Building and building improvements 6,860,735 3,482,812 Machinery and equipment 13,267,562 11,792,688 Office furniture and equipment 3,323,955 3,403,378 Leasehold improvements 2,526,950 2,363,555 Construction-in-progress (estimated costs to complete at March 31, 1998 - $1,090,000) 600,618 1,114,837 ---------- ----------- 28,070,387 22,656,837 Less accumulated depreciation and amortization 15,633,854 14,539,028 ---------- ----------- Net property and equipment $12,436,533 $ 8,117,809 =========== ============== Depreciation and amortization of property and equipment was $1,633,736, $1,406,542 and $1,390,790 for 1998, 1997 and 1996, respectively. 5. Goodwill and Other Assets Goodwill and other assets as of March 31, consist of: 1998 1997 ---- ---- Goodwill $2,138,561 $2,138,561 Financing charges 586,656 370,934 cash surrender value of life insurance and split-dollar life insurance 850,989 759,624 Trademarks and patents 865,206 749,018 Deposits 446,807 448,899 Other 351,200 189,735 ---------- --------- 5,239,419 4,656,771 Less accumulated amortization 1,874,520 1,635,762 ---------- --------- Net goodwill and other assets $3,364,899 $3,021,009 ========== ========== Amortization of goodwill is being charged to operations at $55,404 per year. Amortization of all other deferred charges was $198,857, $132,354 and $655,244 for 1998, 1997 and 1996, respectively. 6. Accrued Liabilities Accrued liabilities as of March 31, consist of: 1998 1997 ---- ---- Salaries, wages, incentives and benefits $2,214,662 $ 1,522,951 Interest 72,999 85,777 Income taxes 2,884,522 476,000 Professional fees 875,891 273,464 Revenue sharing 4,911,634 - Other 1,357,724 451,379 --------- ------- $12,317,432 $ 2,809,571 =========== =========== 7. Long-Term Debt Long-term debt as of March 31, consists of: 1998 1997 ---- ---- Industrial revenue bonds $2,155,000 $2,480,000 Building mortgage 3,305,555 - Capital lease - 29,341 ---------- ---------- 5,460,555 2,509,341 Less current portion 558,333 351,316 ---------- ---------- Long-term debt $4,902,222 $2,158,025 ========== ========== 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 building mortgage bears interest at 8.53% with monthly principal payments of $19,444 plus interest through May 30, 2002, with a final payment of the remaining principal balance outstanding plus accrued and unpaid interest due on June 18, 2002. The aggregate maturities of long-term debt as of March 31, 1998 are as follows: 1999 $558,333 2000 558,333 2001 558,333 2002 558,332 2003 2,697,224 Later Years 530,000 ---------- $5,460,555 ========== The Company paid interest of $465,040, $482,471, and $1,352,823 during the years ended March 31, 1998, 1997 and 1996, respectively. 8. Commitments and Contingencies Leases The Company has non-cancelable commitments for rental of office space, plant and warehouse facilities, transportation equipment and other personal property under operating leases. Future minimum lease commitments under all non-cancelable operating leases are as follows: 1999 $1,111,919 2000 1,024,129 2001 994,692 2002 989,856 2003 905,643 Later Years 1,012,937 --------- $6,039,176 ========== Total rent expense for the years ended March 31, 1998, 1997 and 1996 was $1,076,628, $1,189,349 and $1,229,881, respectively. Contingencies The Company currently carries product liability coverage of $10,000,000 per occurrence and $10,000,000 in the aggregate on a "claims made" basis. There is no assurance that 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 expensed $839,812, $152,089 and $142,139 under this agreement in 1998, 1997 and 1996, respectively. Credit Facility As of March 31, 1998, the Company had a loan agreement expiring June 18, 2000 with LaSalle National Bank. The agreement provides for a revolving line of credit for borrowing up to $20,000,000. The credit facility is unsecured and interest is charged at the prime rate. As of March 31, 1998, the Company had no cash borrowing, however, $2,248,202 in an open letter of credit was issued under this facility. The agreement includes covenants that impose minimum levels of tangible net worth and earnings before interest, taxes, depreciation and amortization, set a maximum leverage ratio, and limit capital expenditures and dividend payments. 9. Income Taxes The fiscal 1998 provision was based on the estimated federal and state taxable income using statutory rates, as well as utilization of the Company's general business credit carry forwards generated in prior years, while the fiscal 1997 provision was based on an estimate of state taxable income using statutory rates. No loss carryforwards were available for fiscal 1998. For fiscal 1996, $90,000 provision for income taxes was required due to the effect of the alternative minimum tax. The reasons for the differences between the provision for income taxes and the expected federal income taxes at the statutory rate are as follows: 1998 1997 1996 ---- ---- ---- Computed income tax expense at statutory rate $5,947,000 $3,164,000 $1,536,211 Change in valuation allowance (1,568,000) (3,392,000) (1,596,200) Alternative minimum tax - - 90,000 State income taxes, less federal income tax benefit 696,000 383,000 - Other 612,000 228,000 59,989 ----------- ----------- ------------- Provision for income taxes $ 5,687,000 $ 383,000 $ 90,000 =========== =========== ============ As of March 31, 1998, and 1997, the tax effect of temporary differences between the tax basis of assets and liabilities and their financial reporting amount are as follows:
1998 1998 1997 1997 Current Non-Current Current Non-Current Fixed asset basis differences $ - $(1,136,000) $ - $(1,132,000) Reserve for inventory and receivables 2,506,000 - 1,003,000 - Vacation pay reserve 381,000 - 250,500 - Deferred compensation - 601,000 - 290,000 Research and development credit - - - 958,000 Minimum tax credit - - - 963,000 Other 62,000 - 125,500 - ------------ ---------- ------------ ---------- Gross deferred tax asset (liability) 2,949,000 (535,000) 1,379,000 1,079,000 Valuation allowance - - (489,000) (1,079,000) ------------ ---------- ------------ ------------ Net deferred taxes $ 2,949,000 $ (535,000) $ 890,000 - ============ =========== ============== $===========
The components of deferred taxes are as follows as of March 31, 1998 and 1997: 1998 1997 ---- ---- Deferred tax liability $(1,136,000) $(1,132,000) Deferred tax asset 3,550,000 3,590,000 Valuation allowance - (1,568,000) ------------- ---------- $ 2,414,000 $ 890,000 ============ ============ The Company paid income taxes of $4,754,088, $846,000 and $90,000 during the years ended March 31, 1998, 1997 and 1996, respectively. 10. Employee Benefits Stock Option Plan The Company established the KV Pharmaceutical Company Incentive Stock Option Plan for key employees and reserved 2,947,500 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 1998, the Company granted options for 523,500 shares, but had 47,820 shares forfeited. As of March 31, 1998, options with remaining contractual lives of up to ten years to purchase 1,655,754 shares at the fair market value at the grant date were outstanding, 926,826 of which were exercisable. The following summary shows the transactions for the fiscal years 1998, 1997 and 1996 under option arrangements (as restated, see Note 12):
Options Outstanding Options Exercisable -------------------- -------------------- Average Average No. of Price Per No. of Price Per Shares Share Shares Share ------- --------- ------- --------- Balance, March 31, 1995 1,019,574 3.28 748,871 2.90 Options granted 359,738 4.86 - - Options becoming exercisable - - 129,899 4.50 Options exercised (579,546) 2.65 (579,546) 2.65 Options canceled (36,048) 4.23 (16,160) 3.11 ------- ------- Balance, March 31, 1996 763,718 4.47 283,064 4.17 Options granted 587,898 8.00 - - Options becoming exercisable - - 308,294 7.06 Options exercised (39,660) 2.61 (39,660) 2.61 Options canceled (69,825) 5.44 (38,213) 5.26 ------- ------- Balance, March 31, 1997 1,242,131 6.14 513,485 5.94 Options granted 523,500 11.59 - - Options becoming exercisable - - 483,750 9.85 Options exercised (62,057) 3.21 (62,057) 3.21 Options canceled (47,820) 8.95 (8,352) 7.56 ------- ------ Balance, March 31, 1998 1,655,754 7.89 926,826 8.15 ========= =======
As discussed in the Summary of Accounting Policies, the Company applies APB Opinion No. 25 and related interpretations in accounting for this plan. Accordingly, no compensation cost has been recognized for its incentive stock option plan. The weighted-average grant date fair value per share of stock options granted during the year was $9.17 for A options, $5.29 for B options, $5.23 for A options, $4.02 for B options, $2.79 for A options and $1.78 for B options in 1998, 1997 and 1996 respectively. The weighted-average significant assumptions used to determine those values using the Black-Scholes option pricing model for 1998, 1997 and 1996, respectively, were: volatility of .6700, .6212 and .4972; dividend yield of 0% in all three years; risk-free interest rate of return of 6.3%, 6.6% and 6.0%; expected option lives of 3, 5 or 10 years. The following table summarizes information about stock options outstanding at March 31, 1998:
Options Outstanding Options Exercisable -------------------- -------------------- Range of Number Weighted Average Weighted Number Weighted Exercise Outstanding Life Average Exercisable Average Prices at 3/31/98 Remaining Exercise Price at 3/31/98 Exercise Price - ----------------------- ----------- --------------- -------------- ------------ -------------- $1.84 to $3.00 72,372 3 Years $2.23 47,900 $2.23 $3.01 to $6.00 537,494 4 Years $4.86 278,997 $4.83 $6.01 to $9.00 521,132 6 Years $8.04 268,298 $8.16 $9.01 to $12.00 465,543 4 Years $11.28 325,743 $11.75 $12.01 to $15.01 59,213 10 Years $14.03 5,888 $14.04 ------ ------ 1,655,754 926,826 ========= =======
The fair market value of options granted during the years ended March 31, 1998, 1997, and 1996 was $3,286,000, $1,754,000 and $467,000, respectively. The pro-forma effect on earnings for the year ended March 31, 1998, 1997 and 1996 of the method consistent with SFAS No. 123 would be to reduce reported net income by approximately $2.2 million, $1.7 million and $.4 million respectively, to approximately $9.1 million, $7.2 million and $3.6 million. The pro-forma effect on fully diluted earnings per share for the years ended March 31, 1998, 1997 and 1996 of this method would be to reduce net income per share by $.12 per share, $.09 per share and $.03 per share, respectively, to $.46 per share, $.38 per share and $.18 per share. Profit Sharing Plan The Company has a qualified trustee profit sharing plan (the "Plan") covering substantially all non-union employees. The Company's annual contribution to the Plan, as determined by the Board of Directors, is discretionary and was $100,000 for fiscal 1998. The profit sharing contribution for fiscal 1997 was $50,000. No contributions were made for fiscal 1996. The Plan includes features as described under Section 401(k) of the Internal Revenue Code. The Plan was amended as of April 1, 1997, to change the Company's contributions to the 401(k) investment funds to fifty percent (50%) of the first 7% of the salary contributed by each participant. Contributions to the 401(k) investment funds of approximately $222,000, $78,000 and $71,000 were made in 1998, 1997 and 1996, respectively. Contributions are also made to multi-employer defined benefit plans administered by labor unions for certain union employees. Amounts charged to pension expense and contributed to these plans were $79,560, $63,770 and $59,032 in 1998, 1997 and 1996, respectively. Health and Medical Insurance Plan The Company contributes to health and medical insurance programs for its non-union and union employees. For non-union employees, the Company self insures the first $50,000 of each employee's covered medical claims. The Company has recorded $125,000 of accrued health insurance expense reserves as of March 31, 1998 and 1997, respectively and $90,000 as of March 31, 1996 for claims 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 were approximately $1,180,000, $1,200,000, and $1,058,000 in fiscal 1998, 1997 and 1996, respectively. 11. Related Party Transactions A director of the Company is associated with a law firm that rendered various legal services to the Company. The Company paid the firm approximately $239,000, $257,000 and $243,000 during the years ended March 31, 1998, 1997 and 1996, 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, 1998, 1997 and 1996 totaled $237,164, $231,885 and $222,910, respectively. 12. Equity Transactions As of March 31, 1998, 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 $6.67 per share. The Preferred Stock has a liquidation preference of $25 per share plus all accrued but unpaid dividends prior to any liquidation distributions to holders of Class A or Class B Common Stock. Undeclared and unaccrued cumulative preferred dividends at both March 31, 1998 and 1997 were $2,203,644. Holders of Class A Common Stock are entitled to receive dividends per share equal to 120% of the dividends per share paid on the Class B Common Stock and have one-twentieth vote per share in the election of directors and one vote per share on other matters. 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 agreement (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 15), the Company received $5,000,000 for the sale of Class A Common Stock options exercisable through September 29, 1998. At March 31, 1998, all options had expired except an option valued at $1,300,000 to purchase Class A Common Stock at a minimum price of $33.33 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 connection with an agreement entered into in January 1997 (see Note 15), the Company sold 200,000 shares of Class A Common Stock (par value $.01 per share) in March of 1997 with proceeds aggregating $3,500,000. On March 23, 1998, the Company's Board of Directors declared a three-for-two stock split in the form of a 50% stock dividend of the Company's Common Stock to shareholders of record on April 3, 1998, payable on April 17, 1998. Common Stock was credited and retained earnings was charged for the aggregate par value of the shares issued. The stated par value of each share was not changed from $.01. All per share data in this report has been restated to reflect the aforementioned three-for-two stock split in the form of a 50% stock dividend. 13. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
1998 1997 1996 ---- ---- ---- Numerator: Net income $11,303,756 $ 8,923,512 $ 4,042,660 Preferred Stock dividends (421,751) (421,751) (421,751) ------------ -------------- ------------ Numerator for basic earnings per share--income available to common shareholders 10,882,005 8,501,761 3,620,909 Effect of dilutive securities: Preferred Stock dividends 421,751 421,751 - ----------- ------------- -------------- Numerator for diluted earnings per share-income available to common shareholders after assumed conversions $11,303,756 $ 8,923,512 $ 3,620,909 Denominator: Denominator for basic earnings per share--weighted-average shares 18,093,896 17,758,992 17,282,826 Effect of dilutive securities: Employee stock options 642,912 359,055 214,361 Convertible Preferred Stock 903,750 903,750 - ----------- ------------- ------------- Dilutive potential Common Shares 1,546,662 1,262,805 214,361 Denominator for diluted earnings per share--adjusted weighted-average shares and assumed conversions 19,640,558 19,021,797 17,497,187 ========== ========== ========== Basic Earnings per Share (1): $0.60 $0.48 $0.21 ===== ===== ===== Diluted Earnings per Share (1), (2): $0.58 $0.47 $0.21 ===== ===== ===== (1) The two-class method for Class A and Class B Common Stock is not presented because the earnings per share are equivalent to the if converted method since dividends were not declared or paid and each class of common stock has equal ownership of the Company. (2) The options to purchase Class A Common Stock sold in connection with an agreement entered into in January 1996 (see Note 12) are not included in the computation of diluted EPS because the options' minimum exercise price was greater than the average market price of the Class A Common shares.
14. Litigation In April 1995, the Company entered into a plea agreement with the U.S. Department of Justice in which the Company agreed to plead guilty to certain misdemeanor violations and to pay a fine of $500,000 and cost reimbursements of $100,000, payable in eight semi-annual, interest-free installments of $75,000 beginning in July 1995. The costs associated with the agreement were recorded in the Company's statement of income for 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. 15. Agreements In January 1996, the Company received $5,000,000 ($1,700,000 of which was allocated to licensing revenues, with the remaining $3,300,000 recorded primarily as a reimbursement of capitalized charges) in consideration for giving a marketing company the right to explore the Company's drug delivery technologies with the possibility of entering into future individual product agreements to replace certain other products, and to provide future royalties and product opportunities. In connection with this agreement, the Company received $5,000,000 for the sale of certain Class A Common Stock options exercisable in various periods through September 1998 (see Note 12). In January 1997, the Company concluded a broad-based agreement with Roche Holding, Ltd. of Basel, Switzerland ("Roche"), which provides for the marketing by Roche, or its licensee, of a prescription, one dose cure vaginal antifungal product. The product received FDA approval in February 1997. The agreement also gave KV the right to market the product in North America and the exclusive right to market or license the prescription product in the rest of the world. The agreement included cash payments of $3,000,000 made in January 1997 and 1998, respectively, with one additional payment of $3,000,000 to be received in January 1999, unless regulatory approval of a potential follow-on product in the same therapeutic area is received prior to that date. Such payments received have been included in revenue and the last payment will be similarly treated when received. Upon marketing, KV will receive royalties on the sales of the follow-on product. Under the agreement, KV also has the exclusive right to market or license the follow-on product outside of North America. Also, as part of the agreement, additional products are to be developed for Roche using KV's proprietary drug delivery technologies. KV would receive manufacturing revenues and royalties at the time the products are marketed under separate agreements for each product. As part of a further collaboration under the agreement, KV's wholly-owned subsidiary, ETHEX Corporation, began marketing two of Roche's brand name products generically under a revenue sharing arrangement in fiscal 1998.
16. Quarterly Financial Results (Unaudited) ($ in 000's, except per share data) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year ----------- ----------- ----------- ----------- ---- FISCAL 1998 Net Sales $18,202 $21,887 $28,434 $29,963 $98,486 Gross Profit $7,984 $9,459 $11,393 $13,167 $42,003 Pretax Income $2,761 $3,556 $ 4,030 $6,644 $16,991 Net Income $1,841 $2,182 $ 2,763 $4,518 $11,304 Earnings Per Share-Basic (a) $ 0.10 $ 0.11 $ 0.15 $ 0.24 $ 0.60 Earnings Per Share-Diluted (a) $ 0.09 $ 0.11 $ 0.14 $ 0.23 $ 0.58 FISCAL 1997 Net Sales $13,068 $13,094 $14,727 $17,002 $57,891 Gross Profit $5,930 $6,453 $6,546 $ 9,484 $28,413 Pretax Income $1,315 $1,628 $1,837 $ 4,527 $ 9,307 Net Income $1,285 $1,598 $1,807 $ 4,234 $ 8,924 Earnings Per Share-Basic (a) $ 0.07 $ 0.08 $ 0.10 $ 0.23 $ 0.48 Earnings Per Share-Diluted (a) $ 0.07 $ 0.08 $ 0.09 $ 0.22 $ 0.47 Note: (a) All earnings per share amounts have been restated to reflect a 3 for 2 stock split in the form of a 50% stock dividend, declared by the Board of Directors on March 23, 1998 and distributed April 17, 1998 to shareholders of record as of April 3, 1998.
17. Industry Segments The Company operates in one industry segment, "Pharmaceutical Development, Manufacturing and Marketing." 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 1998 Annual Meeting of Shareholders, which involves the election of a director, is incorporated herein by this reference. Also see Item 4(a) of Part I hereof. Item 11. Executive Compensation The information contained under the captions "EXECUTIVE COMPENSATION" and "INFORMATION AS TO STOCK OPTIONS" in the Company's definitive proxy statement to be filed pursuant to Regulation 14(a) for the Company's 1998 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 captions "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 1998 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 1998 Annual Meeting of Shareholders, which involves the election of directors, is incorporated herein by this reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Financial Statements: The following consolidated financial statements of the Company are included in Part II, Item 8: Report of Independent Certified Public Accountants Consolidated Balance Sheets as of March 31, 1998 and 1997 Consolidated Statements of Income for the Years Ended March 31, 1998, 1997 and 1996 Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the Years Ended March 31, 1998, 1997 and 1996 Notes to Financial Statements (a) 2. Financial Statement Schedule The following consolidated financial statement schedule of K-V Pharmaceutical Company and subsidiaries is included in Item 14(d): Schedule II - Valuation and Qualifying Accounts (a) 3. Exhibits: See Exhibit Index (b) Reports on Form 8-K: No Reports on Form 8-K were filed during the fourth quarter of the Registrant's fiscal year ended March 31, 1998. (c) Exhibits: See Exhibit Index
(d) Financial Statement Schedules: Schedule II Valuation and Qualifying Accounts Balance at Additions charged Amounts charged Balance beginning to costs and to at end of year expenses reserves of year Year Ended March 31, 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 ======= ========= ========= ======= Year Ended March 31, 1998: Allowance for doubtful accounts 129,054 1,086,961 883,771 332,244 Inventory obsolescence 296,322 1,363,908 1,298,479 361,751 ------------- ----------- ------------ ---------- $ 425,376 $ 2,450,869 $2,182,250 $ 693,995 ============ ========== =========== =========
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. 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 24, 1998 By /s/ Marc S. Hermelin --------------------- Vice Chairman of the Board (Principal Executive Officer) Date: June 24, 1998 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 24, 1998 By /s/ Marc S. Hermelin --------------------- Marc S. Hermelin Date: June 24, 1998 By /s/ Victor M. Hermelin ----------------------- Victor M. Hermelin Date: June 24, 1998 By /s/ Garnet E. Peck, Ph.D. ------------------------- Garnet E. Peck, Ph.D. Date: June 24, 1998 By /s/ Alan G. Johnson -------------------- Alan G. Johnson EXHIBIT INDEX Exhibit No. Description - ------- ----------- 3(a) The Company's Certificate of Incorporation, which was filed as Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended March 31, 1981, is incorporated herein by this reference. 3(b) Certificate of Amendment to Certificate of Incorporation of the Company, effective March 7, 1983, which was filed as Exhibit 3(c) to the Company's Annual Report on Form 10-K for the year ended March 31, 1983, is incorporated herein by this reference. 3(c) Certificate of Amendment to Certificate of Incorporation of the Company, effective June 9, 1987, which was filed as Exhibit 3(d) to the Company's Annual Report on 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 Agreement dated June 18, 1997 between the Company and its subsidiaries and LaSalle National Bank ("LaSalle"), which was filed as Exhibit 4(i) to the Company's Annual Report on Form 10-K for the year ended March 31, 1997, is incorporated herein by this reference. 4(d) Revolving Note, dated June 18, 1997, by the Company and its subsidiaries in favor of LaSalle, which was filed as Exhibit 4(j) to the Company's Annual Report on Form 10-K for the year ended March 31, 1997, is incorporated herein by this reference. 4(e) Term Note, dated June 24, 1997, by the Company and its subsidiaries in favor of LaSalle, which was filed as Exhibit 4(k) to the Company's Annual Report on Form 10-K for the year ended March 31, 1997, is incorporated herein by this reference. 4(f) Reimbursement Agreement dated as of October 16, 1997, between the Company and LaSalle, filed herewith. 4(g) Deed of Trust and Security Agreement dated as of October 16, 1997, between the Company and LaSalle, filed herewith. 10(a)* Stock Option Agreement between the Company and Marc S. Hermelin, Vice Chairman and Chief Executive Officer, dated February 18, 1986, is incorporated herein by this reference. 10(b)* First Amendment to and Restatement of the KV Pharmaceutical 1981 Employee Incentive Stock Option Plan, dated March 9, 1987 (the "Restated 1981 Option Plan"), which as filed as Exhibit 10(t) to the Company's Annual Report on Form 10-K for the year ended March 31, 1988, is incorporated herein by this reference. 10(c)* Second Amendment to the Restated 1981 Option Plan, dated June 12, 1987, which was filed as Exhibit 10(u) to the Company's Annual Report on Form 10-K for the year ended March 31, 1988, is incorporated herein by this reference. 10(d)* Revised Form of Stock Option Agreement, effective June 12, 1987, for the Restated 1981 Option Plan, which was filed as Exhibit 10(v) to the Company's Annual Report on 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. 10(h) Lease of the Company's facility at 2503 South Hanley Road, St. Louis, Missouri, and amendment thereto, between the Company as Lessee and Marc S. Hermelin as Lessor, which was filed as Exhibit 10(n) to the Company's Annual Report on Form 10-K for the year ended March 31, 1983, is incorporated herein by this reference. 10(i) Amendment to the Lease for the facility located at 2503 South Hanley Road, St. Louis, Missouri, between the Company as Lessee and Marc S. Hermelin as Lessor, which was filed as Exhibit 10(p) to the Company's Annual Report on Form 10-K for the year ended March 31, 1992, is incorporated herein by this reference. 10(j) Amendment to Lease Agreement, dated as of September 30, 1985, between the Industrial Development Authority of the County of St. Louis, Missouri, as Lessor and KV Pharmaceutical Company as Lessee, regarding lease of facility located at 2303 Schuetz Road, St. Louis County, Missouri, which was filed as Exhibit 10(q) to the Company's Report on Form 10-Q for the quarter ended December 31, 1985, is incorporated herein by this reference. 10(k)* KV Pharmaceutical Company Fourth Restated Profit Sharing Plan and Trust Agreement dated September 18, 1990, which was filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8 No. 33-36400, is incorporated herein by this reference. 10(l)* First Amendment to the KV Pharmaceutical Company Fourth Restated Profit Sharing Plan and Trust dated September 18, 1990, is incorporated herein by this reference. 10(m)* KV Pharmaceutical Company 1991 Incentive Stock Option Plan, adopted as of October 7, 1991, which was filed as Exhibit 4 to the Company's Form S-8 Registration Statement No. 33-44927, filed January 6, 1992, is incorporated herein by this reference. 10(n) Consent Decree and Civil Actions Nos. 4:93CV00918 and 4:93CV00919 filed June 14, 1993, in connection with Complaint of Forfeiture on behalf of FDA, which was filed as Exhibit 10(s) to the Company's Annual Report on Form 10-K for the year ended March 31, 1993, is incorporated herein by this reference. 10(o) Modification of Consent Decree of Condemnation and Permanent Injunction filed December 13, 1993, which was filed as Exhibit 10(r) to the Company's Annual Report on 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. 10(u)* Amendment to and Restatement of the KV Pharmaceutical Company's 1991 Incentive Stock Option Plan dated as of November 1, 1995, which was filed as Exhibit 10(y) to the Company's Annual Report on Form 10-K for the year ended March 31, 1996, is incorporated herein by this reference. 10(v)* Stock Option Agreement dated as of January 22, 1996, granting stock options to MAC & Co., which was filed as Exhibit 10(z) to the Company's Annual Report on Form 10-K for the year ended March 31, 1996, is incorporated herein by this reference. 10(w)* Third Amendment dated as of November 22, 1995, to Employment Agreement between the Company and Marc S. Hermelin, which was filed as Exhibit 10(aa) to the Company's Annual Report on Form 10-K for the year ended March 31, 1996, is incorporated herein by this reference. 10(x)* Stock Option Agreement dated as of November 22, 1995, granting a stock option to Victor M. Hermelin, which was filed as Exhibit 10(bb) to the Company's Annual Report on Form 10-K for the year ended March 31, 1996, is incorporated herein by this reference. 10(y)* Fourth Amendment to and Restatement, dated as of January 2, 1997, of the KV Pharmaceutical Company 1991 Incentive Stock Option Plan, which was filed as Exhibit 10(y) to the Company's Annual Report on Form 10-K for the year ended March 31, 1997, is incorporated herein by this reference. 10(z)* Agreement between the Company Marc S. Hermelin, Vice Chairman, dated December 16, 1996, with supplemental letter attached, which was filed as Exhibit 10(z) to the Company's Annual Report on Form 10-K for the year ended March 31, 1997, is incorporated herein by this reference. 10(aa) Amendment to Lease dated February 17, 1997, for the facility located at 2503 South Hanley Road, St. Louis, Missouri between the Company as Lessee and Marc S. Hermelin as Lessor, which was filed as Exhibit 10(aa) to the Company's Annual Report on Form 10-K for the year ended March 31, 1997, is incorporated herein by this reference. 10(bb)* Stock Option Agreement dated as of January 3, 1997, granting a stock option to Marc S. Hermelin, filed herewith. 10(cc)* Stock Option Agreement dated as of May 15, 1997, granting a stock option to Marc S. Hermelin, filed herewith. 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(F) - REIMBURSEMENT AGREEMENT REIMBURSEMENT AGREEMENT between K-V PHARMACEUTICAL COMPANY and LASALLE NATIONAL BANK dated as of October 16, 1997 $4,595,000.00 Industrial Development Authority of the County of St. Louis, Missouri Private Activity Refunding and Revenue Bonds Series 1989(F) (K-V Pharmaceutical Company Project) TABLE OF CONTENTS PAGE ARTICLE I DEFINED TERMS..................................................2 ARTICLE II REIMBURSEMENT OBLIGATION; OTHER PAYMENTS; LETTER OF CREDIT COMMISSION; SECURITY..........................8 Section 2.1. Reimbursement..................................................8 Section 2.2. Fees; Interest on Overdue Amounts..............................9 Section 2.3. Computation of Interest and Fees; Place and Manner of Payment....................................9 Section 2.4. Payments in Respect of Regulatory Changes......................10 Section 2.5. Security; Release of Pledged Bonds.............................11 Section 2.6. Loan in Respect of Certain Draws under the Letter of Credit.....................................12 Section 2.7. Substitute Letter of Credit....................................12 Section 2.8. Optional Redemption............................................12 Section 2.9. Required Deposits for Mandatory Redemption Under Section 302(g)................................13 ARTICLE III ISSUANCE OF LETTER OF CREDIT; CONDITIONS TO ISSUANCE.........................................13 Section 3.1. Issuance of Letter of Credit...................................13 Section 3.2. Conditions Precedent to Issuance of Letter of Credit...........13 ARTICLE IV REPRESENTATIONS AND WARRANTIES; COVENANTS; INDEMNIFICATION; CONTINUING OBLIGATION.........................16 Section 4.1. Representations and Warranties of the Borrower.................16 Section 4.2. Affirmative Covenants..........................................20 Section 4.3. Negative Covenants.............................................26 Section 4.4. Indemnification................................................28 Section 4.5. Continuing Obligation; Obligation Absolute.....................29 Section 4.6. Liability of the Bank..........................................30 ARTICLE V DEFAULTS AND REMEDIES..........................................32 Section 5.1. Events of Default; Remedies....................................32 Section 5.2. No Waiver; Remedies Cumulative.................................34 Section 5.3. Right of Set-Off...............................................34 ARTICLE VI MISCELLANEOUS..................................................34 Section 6.1. Costs, Expenses and Taxes......................................34 Section 6.2. Term of Letter of Credit and Agreement; Termination by Borrower........................................35 Section 6.3. Transfer of Letter of Credit...................................35 Section 6.4. Severability...................................................35 Section 6.5. Governing Law..................................................35 Section 6.6. Headings.......................................................36 Section 6.7. Notices........................................................37 Section 6.8. Participation..................................................38 Section 6.9. Counterparts...................................................38 Section 6.10. Notices and Payments..........................................38 Section 6.11. Modification..................................................38 EXHIBITS Schedule 1.0 Collateral Exhibit A to Schedule 1.0 Legal Description Exhibit A Form of Letter of Credit Exhibit B Form of Legal Opinion of Counsel to Borrower REIMBURSEMENT AGREEMENT This REIMBURSEMENT AGREEMENT ("Agreement"), dated as of October 16, 1997 is made by and between K-V PHARMACEUTICAL COMPANY, a Delaware corporation (the "Borrower"), and LASALLE NATIONAL BANK, a national banking association (the "Bank"). PREAMBLE WHEREAS, the Industrial Development Authority of the County of St. Louis, Missouri (the "Issuer") has issued its Private Activity Refunding and Revenue Bonds, Series 1989(F) (K-V Pharmaceutical Company Project), in the aggregate principal amount of $4,595,000.00 (the "Bonds") to provide funds to refund $3,200,000 of Industrial Development Revenue Bonds Series of 1981 previously issued by Issuer and to finance the acquisition of certain manufacturing equipment (the "Project") pursuant to the terms of an Indenture of Trust between the Issuer and Mercantile Bank National Association, formerly know as Mark Twain Bank, as trustee ("Trustee"), dated as of November 1, 1989, as the same may be amended, modified or supplemented from time to time; WHEREAS, the Issuer loaned the proceeds of the Bonds to the Borrower under the terms and conditions set forth in that certain Loan Agreement between Issuer and Borrower dated as of November 1, 1989, as the same may be amended, modified or supplemented from time to time (the "Loan Agreement"); WHEREAS, the Bonds are required to be secured by a direct pay Letter of Credit pursuant to Section 3.6 of the Loan Agreement for the account of the Borrower naming Trustee as the beneficiary thereof; WHEREAS, the Borrower has notified the Trustee that it intends to replace the existing Letter of Credit with an alternate Letter of Credit issued by the Bank; WHEREAS, the Bank has agreed to provide a direct pay Letter of Credit (the "Letter of Credit") in the stated amount of Two Million Five Hundred Eighty-Six Thousand Three Hundred Thirty and 00/100 Dollars ($2,586,330.00) for the account of the Borrower naming Trustee as the beneficiary thereof in the form attached hereto as Exhibit A; WHEREAS, to evidence its obligation to reimburse the Bank for any and all draws under the Letter of Credit and fees payable thereunder, the Borrower enters into this Reimbursement Agreement with the Bank; WHEREAS, to secure its obligations under this Reimbursement Agreement, the Borrower will execute concurrently herewith a Missouri Future Advance Deed of Trust and Security Agreement and an Assignment of Rents and Leases encumbering the real property described therein; WHEREAS, the Borrower, the Bank and the Trustee, as custodian (the "Custodian"), desire to enter into the Pledge Agreement (as defined herein) pursuant to which, among other things, the Bonds purchased from amounts drawn under the Letter of Credit due to a failure to remarket will be held by the Custodian for the benefit of the Bank in pledge as collateral security for the obligations of the Borrower hereunder and under the Letter of Credit; and NOW, THEREFORE, in consideration of the premises and the mutual promises set forth herein, the receipt and sufficiency of which are hereby acknowledged, in order to induce the Bank to issue the Letter of Credit and intending to be legally bound hereby, the Borrower and the Bank hereby agree as follows: ARTICLE I DEFINED TERMS The following terms shall, unless the context indicates otherwise, have the meanings provided below (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "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 the Borrower or one or more Affiliates of the Borrower, (b) that directly or beneficially owns or holds 10% or more of any equity interest in the Borrower or one or more Affiliates of the Borrower 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 the Borrower or one or more Affiliates of the Borrower. 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. "Agreement" means this Reimbursement Agreement. "Assignment of Rents" means the Assignment of Rents and Leases dated of even date herewith made by Borrower and Bank pursuant to Sections 2.5(a) and 3.2 (g) hereof. "Available Amount" means the "Maximum Available Credit" as defined in the Letter of Credit. "Bank" means LaSalle National Bank, a national banking association, the issuer of the Letter of Credit, its successors and assigns. "Bonds" means the Bonds defined in the Preamble to this Agreement. "Business Day" means any day other than a Saturday, Sunday or a day on which banking institutions in either the city of New York, New York or Chicago, Illinois are required or authorized by law to be closed or a day on which the New York Stock Exchange is closed. "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. "Code" means the Internal Revenue Code of 1986, as amended. "Collateral" means the property of the Borrower set forth in Schedule 1.0 hereto. "Date of Issuance" means the date of issuance of the Letter of Credit as provided in Section 3.1 hereof. "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 or 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) indebtedness for borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other similar instruments, (iii) obligations to pay the deferred purchase price of property or services, (iv) obligations as lessee under leases which shall have been or should be, in accordance with GAAP, recorded as capital leases, (v) 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 others of the kinds referred to in clauses (i) through (iv) above, and (vi) liabilities in respect of unfunded vested benefits under Plans and Multiemployer Plans covered by Title IV of ERISA. "Default Rate" shall mean the Prime Rate plus two percent (2%). "Documents" means this Agreement, the Letter of Credit, the Bonds, the Indenture, the Loan Agreement, the Remarketing Agreement, the Pledge Agreement, the Mortgage, the Assignment of Rents, the Environmental Agreement, and any instrument or agreement related thereto, and "Document" means any of the foregoing. "EBITDA" means with respect to any fiscal period of Borrower, Borrower's 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 Agreement" means the Environmental Indemnity Agreement dated of even date herewith between Borrower and Bank delivered pursuant to Sections 2.5(a) and 3.2(g) hereof. "Environmental Claim" means any accusation, allegation, notice of violation, claim, demand, abatement order or other order or direction (conditional or otherwise) by any governmental authority or any Person for any damage, including, without limitation, personal injury (including sickness, disease or death), tangible or intangible property damage, contribution, indemnity, indirect or consequential damages, damage to the environment, nuisance, pollution, contamination or other adverse effects on the environment or for fines, penalties or restrictions resulting from or based upon (i) the existence of a Release (whether sudden or non-sudden or accidental or non-accidental) of, or exposure to, any Hazardous Materials in, into or onto the environment at, in, by, from, onto or related to any Facility, (ii) the use, handling, transportation, storage, treatment or disposal of Hazardous Materials in connection with the operation of any Facility, or (iii) the violation, or alleged violation, of any Environmental Laws or any Governmental Authorizations relating to environmental matters in connection with the Facilities. "Environmental Laws" means all statutes, ordinances, orders, rules, regulations, plans, policies, or decrees and the like relating to (i) environmental matters, including, without limitation, those relating to 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, storage, transportation, 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, in any manner applicable to the Borrower or an Affiliate or any of their respective properties, 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, and any analogous present or future local, state and federal statutes and regulations promulgated pursuant thereto, each as in effect as of the date of determination. "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 the Borrower would be deemed to be a "single employer" within the meaning 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 provision for 30-day notice to the PBGC under ERISA or with respect to which the 30-day notice requirement has been waived by the PBGC), or (ii) the withdrawal of the Borrower or any ERISA Affiliate from a Plan during a plan year in which it was a "substantial employer," both of such terms as defined in Section 4001(a) of ERISA, including a cessation of operations that is treated as a withdrawal by a "substantial employer" under Section 4062(e) of ERISA, or (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, or (iv) the institution of proceedings to terminate a Plan by the PBGC or (v) any other event or condition which in the reasonable judgment of the Borrower is likely to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan or (vi) the partial or complete withdrawal of the Borrower or any ERISA Affiliate from a Multiemployer Plan. "ETHEX" means Ethex Corporation, a Missouri corporation and wholly-owned subsidiary of Borrower. "Event of Default" means an Event of Default as defined in Section 5.1 of this Agreement. "Facility" or "Facilities" means any and all real property (including, without limitation, all buildings, fixtures or other improvements located thereon) now, hereafter or heretofore, owned, leased, operated or used by the Borrower or any Affiliate or any of their respective successors and assigns including, without limitation, the real property legally described on Exhibit A to Schedule 1.0 hereto and the Project. "GAAP" means generally accepted accounting principles as pronounced by the Financial Accounting Standards Board and/or the American Institute of Certified Public Accountants, consistently applied and maintained throughout the periods indicated. "Governmental Authorization" means any permit, license, authorization, plan, directive, consent order or consent decree of or from any federal, state or local governmental authority, agency or court. "Governmental Obligations" means noncallable direct general obligations of, or obligations the payment of the principal of and interest on which are unconditionally guaranteed by, the United States of America. "Hazardous Materials" means any chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority or the Environmental Laws or which may or could pose a hazard to the health and safety of the owners, occupants or any persons in the vicinity of the Facilities, including, without limitation, to the extent so prohibited, limited or regulated (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 polychlorinated biphenyls in excess of fifty parts per million, or (ix) pesticides. "Indenture" means the Trust Indenture (pursuant to which the Bonds have been issued) constituting a trust agreement between the Issuer and Trustee dated as of November 1, 1989, as amended by that certain Amendment of Indenture of Trust and Loan Agreement dated as of November 1, 1994 among the Issuer, the Borrower, the Trustee and the Remarketing Agent. "Issuer" means the Industrial Development Authority of the County of St. Louis, Missouri, a public corporation organized and existing under the laws of the State of Missouri, its successors and assigns. "K-V Loan Agreement" means that certain Loan Agreement dated as of June 18, 1997 by and among Borrower, ETHEX and PDI and Bank, as the same may be amended, restated, supplemented or modified from time to time. "Letter of Credit" means the irrevocable, transferable direct pay letter of credit issued by the Bank for the account of the Borrower pursuant to this Agreement in the form of Exhibit A hereto with appropriate insertions, as amended. "Leverage Ratio" means, as of any date, the ratio of (i) Liabilities to (ii) Tangible Net Worth. "Lien" means, with respect to any asset, 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 of any jurisdiction). "Loan Agreement" means the Loan Agreement dated as of November 1, 1989, between the Issuer and the Borrower, as amended by that certain Amendment of Indenture of Trust and Loan Agreement dated as of November 1, 1994 among the Issuer, the Borrower, the Trustee and the Remarketing Agent. "Long-Term Debt" means all Debt which, at the time of incurrence, has a final maturity or term greater than one year or which is renewable at the option of the debtor for a term greater than one year from the date of original issuance. "Mortgage" means the Missouri Future Advance Deed of Trust and Security Agreement dated of even date herewith made by Borrower to Franklin D. Weike, Hillsboro Title Company, Highway 21 and 3rd Street, Hillsboro, Missouri 63050, as trustee, for the benefit of the Bank and delivered by the Borrower to the Bank pursuant to Sections 2.5(a) and 3.2 (g) hereof. "Multiemployer Plan" means a plan defined as such in Section 4001(a)(3) of ERISA to which contributions have been made by the Borrower or any ERISA Affiliate. "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 Borrower. "Person" means and includes an individual, a partnership, a joint venture, a corporation (whether or not for profit), a trust, an unincorporated organization, a government or any department or agency thereof or any other entity or organization. "Plan" means, at any time, any single-employer plan, as defined in Section 4001(a) 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 the Borrower or an ERISA Affiliate. "Pledge Agreement" means the Pledge Agreement dated as of even date herewith between the Bank and the Borrower delivered by the Borrower to the Bank pursuant to Section 2.5(a) hereof. "Prime Rate" means the rate of interest (expressed as a percentage per annum) most recently announced by the Bank from time to time as its U.S. dollar prime rate, which is not necessarily the Bank's lowest or most favorable rate of interest at any one time. The rate of interest shall change automatically and immediately as and when the Prime Rate shall change, without notice to the Borrower, and any notice to which it may be entitled is hereby waived, and any such change in the Bank's Prime Rate shall not affect any of the terms and conditions of this Agreement, all of which shall remain in full force and effect. "Project" means the land and the buildings, improvements, fixtures, furnishings, machinery and equipment and related support facilities described in Schedule 2 of the Loan Agreement, and any additions, modifications, improvements, replacements, repairs, reconstruction, restoration or substitutions made pursuant to Sections 5.1 or 5.6 of the Loan Agreement. "Release" means any 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), or into or out of any Facility. "Remarketing Agent" means A.G. Edwards & Sons or any Remarketing Agent appointed and at the time acting as such in accordance with the Indenture. "Remarketing Agreement" means the Remarketing Agreement, dated November 1, 1989, between A.G. Edwards and Sons and the Borrower and, with respect to any other Remarketing Agent, the agreement pursuant to which such Remarketing Agent agrees to act in the capacity of Remarketing Agent. "Stated Amount" means the maximum available amount of the Letter of Credit when issued of Two Million Five Hundred Eighty-Six Thousand Three Hundred Thirty Dollars (US $2,586,330.00), as the same may be reduced and reinstated as provided in the Letter of Credit. "Tangible Net Worth" means as of any date, Net Worth minus intangible assets (as defined in accordance with GAAP). "Termination Date" means the earliest date on which the Trustee's right to draw under the Letter of Credit terminates or expires which is referred to in the Letter of Credit as the "Stated Termination Date". "Trustee" means the Trustee appointed and at such time acting under the Indenture. The definition of any Document shall be deemed to include any and all further modifications, alterations, amendments and supplements thereto. The terms "hereof," "hereby," "hereto," "hereunder" and similar terms mean of, by, to, under and similarly to, respectively, this Agreement, and the term "heretofore" means before, and the term "hereafter" means after the effective date hereof. All accounting terms not specifically defined herein shall be construed in accordance with GAAP applied in the preparation of the financial statements referred to in Section 4.2(d). All capitalized terms herein not defined herein shall bear the same meanings of such terms in the Indenture. ARTICLE II REIMBURSEMENT OBLIGATION; OTHER PAYMENTS; LETTER OF CREDIT COMMISSION; SECURITY Section II.1. Reimbursement (a) The Borrower hereby agrees to pay to the Bank, not later than 2:00 p.m., Chicago, Illinois, time, on each date that any amount is drawn under the Letter of Credit a sum equal to the amount so drawn plus any fees outstanding. (b) Notwithstanding any provision to the contrary contained herein, as provided in the Letter of Credit, all payments made by the Bank under the Letter of Credit will be made with the Bank's own funds and not with any funds of the Borrower or the Issuer. Section II.2. Fees; Interest on Overdue Amounts (a) The Borrower agrees to pay to the Bank a non-refundable letter of credit fee in an amount equal to 1% per annum payable quarterly in advance of the Available Amount of the Letter of Credit as in effect from time to time. Such fee shall be payable to the Bank without any requirement of notice from the Bank in quarterly installments as follows: (i) on the Date of Issuance for the period ending September 30, 1997, and (ii) thereafter, quarterly in advance on the first Business Day of each January, April, July and October and on the Termination Date (to the extent an portion of the fee remains outstanding), in each instance prorated for any partial quarter. (b) The Borrower agrees to pay the Bank the greater of $250 or 1/4 of 1% of the amount of each drawing under the Letter of Credit, plus all customary incidental expenses, on the date of each such drawing. In addition, the Borrower agrees to pay the Bank $1,500 upon the transfer of the Letter of Credit to a successor Trustee under the Indenture. (c) The failure by the Borrower to pay when due any amounts under this Agreement, in addition to constituting an Event of Default hereunder, shall create an obligation of the Borrower to pay to the Bank, and the Borrower agrees to pay to the Bank, interest on any and all such amounts due and not paid under this Agreement from the date such payment becomes due until paid in full at a rate of interest equal to the Prime Rate plus two percent (2%). All such interest shall be payable upon demand. Section 11.3. Computation of Interest and Fees; Place and Manner of Payment. Letter of Credit fees and all interest payable hereunder shall be computed on the basis of a year of 360 days and actual days elapsed. All payments by the Borrower to the Bank hereunder shall be made in lawful currency of the United States and in immediately available funds on the date such payment is due at the Bank's principal office at 200 West Monroe Street, Suite 1100, Chicago, Illinois 60606 or as otherwise specified in writing by the Bank. Amounts received by the Bank from the Borrower after 2:00 p.m., Chicago time, shall be deemed to have been received on the next succeeding Business Day. Payments shall be made to the following account by wire transfer for direct debit by the Bank: LaSalle National Bank (ABA No.071000505) Chicago, Illinois For the account of K-V Pharmaceutical Company Account Number: 5590011846 Section II.4. Payments in Respect of Regulatory Changes (a) If any law, treaty regulation, guideline or directive (including, without limitation, regulations and guidelines with respect to capital adequacy and Regulation D promulgated by the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect), any change in any law, treaty regulation, guideline or directive or any interpretation thereof by any court or administrative or governmental authority charged or claiming to be charged with the administration thereof, or any change in GAAP applicable to the Bank shall (i) impose, modify, make or deem applicable any reserve, special deposit, insurance assessment or similar requirement against any assets held by, deposits with or for the account of, or loans, letters of credit or commitments by the Bank, (ii) change the basis of taxation of payments due the Bank under this Agreement or the Bonds (other than a change in taxation of the overall net income of the Bank), (iii) cause or deem letters of credit to be assets held by the Bank and/or as deposits on its books, (iv) subject the Bank to any tax (other than taxes based upon gross revenues or income), charge, fee, deduction or withholding of any kind whatsoever, or (v) impose on the Bank any other condition regarding this Agreement, the Letter of Credit or any other Document, and the result of any such event, or any similar measure shall be to increase the cost to the Bank of issuing or maintaining the Letter of Credit or making any advances hereunder or reduce the amount of any fee or compensation receivable by the Bank in respect of the Letter of Credit, this Agreement or any other Document, upon written notice by the Bank to the Borrower, the Borrower agrees to pay to the Bank, from time to time as specified by the Bank, such additional amounts as shall be sufficient to compensate the Bank for such increased costs or reductions. (b) If the Bank shall have determined that the adoption of any law, rule or regulation regarding capital adequacy (including but not limited to any United States law, rule or regulation), or any change in any applicable law, rule or regulation, as the case may be, or any change in the enforcement or interpretation or administration thereof by any court or any administrative or governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Bank's capital as a consequence of its obligations hereunder or under the Letter of Credit to a level below that which the Bank could have achieved but for such adoption, change or compliance (taking into consideration the Bank's policies with respect to capital adequacy) then, on notice and demand by the Bank given promptly after such determination is made by the Bank, the Borrower agrees to pay to the Bank from time to time such additional amount or amounts as will compensate the Bank for such reduction. (c) The protections of Sections 2.4(a) and (b) shall be available to the Bank regardless of any possible contention of invalidity or inapplicability of the law, regulation or condition which has been imposed; provided, however, if it shall later be determined by the Bank that any amount so paid by the Borrower pursuant to this Section 2.4 is in excess of the amount payable under the provisions hereof, the Bank shall promptly refund such excess amount to the Borrower. Notwithstanding the foregoing provisions of this Section 2.4 to the contrary, in the event that the Bank has (i) determined that an increase or reduction has occurred and (ii) provided notice to the Borrower of additional amounts payable to the Bank, in each case in accordance with Section 2.4(a) or (b), the Borrower shall have sixty (60) days after the receipt of such notice to replace the Letter of Credit and pay in full all outstanding obligations hereunder without liability to the Bank for such additional amount from the date of such notice or for the termination fee set forth in Section 2.7 hereof. Section II.5. Security; Release of Pledged Bonds (a) As security for the payment of all obligations of the Borrower under this Agreement, (i) the Borrower has entered into the Pledge Agreement under which it has pledged to the Bank, and granted to the Bank a security interest in its right, title and interest in and to Bonds delivered to the Bank or to the Trustee for the account of the Borrower in connection with certain drawings under the Letter of Credit (as defined in the Pledge Agreement, the "Pledged Bonds"), (ii) the Borrower hereby grants to the Bank a security interest and pledges, assigns, transfers and sets over to the Bank all of its right, title and interest in and to the Collateral, (iii) the Borrower shall enter into the Mortgage pursuant to which the Bank shall hold a first and prior mortgage lien on the real property legally described on Exhibit A to Schedule 1.0 hereof, (iv) the Borrower shall enter into the Assignment of Rents with the Bank and (v) the Borrower shall enter into the Environmental Agreement in favor of the Bank. The Borrower shall not transfer Pledged Bonds to any other person unless the Letter of Credit has been fully reinstated with respect to the drawing used to purchase such Bonds. (b) The Bank agrees to release from the Lien of the Pledge Agreement any Pledged Bonds to the extent that the Bank receives reimbursement in cash (whether under this Agreement or the Indenture) of an amount equal to the amount of any Tender Drawing (as defined in the Letter of Credit) related to the purchase of such Pledged Bonds in a manner that will permit the reinstatement of the Letter of Credit in respect of such Pledged Bonds in accordance with the terms thereof. (c) The Borrower shall make appropriate entries upon its financial statements and its books and records disclosing the Bank's security interest in the Collateral, the Mortgage and the Assignment of Rents. The Borrower shall execute and deliver to the Bank, at any time and from time to time hereafter at the request of the Bank, all agreements, instruments, documents and other written material that the Bank may reasonably request, in form and substance satisfactory to the Bank, to perfect and maintain perfected the Bank's security interest in the Collateral and the Mortgage and to consummate the transactions contemplated in or by this Agreement or the other Documents. The Borrower warrants and represents to and covenants with the Bank that: (a) the Bank's security interest in the Collateral and the Mortgage is now and at all times hereafter shall be perfected and have a first priority; and (b) there are no, and shall not be, Liens on the Collateral, the Project or any other property of the Borrower or its Affiliates other than (i) the Liens of the Bank, (ii) leases of Personalty or Fixtures (as defined in the Mortgage) used on the Project which according to generally accepted accounting principles consistently applied are capital leases ("Capital Leases"), (iii) purchase money security interests in Personalty and Fixtures (as defined in the Mortgage) used on the Project and (iv) leases, which are not Capital Leases, of Personalty and Fixtures (as defined in the Mortgage) used on the Project, provided that the liability for the Personalty and Fixtures (as defined in the Mortgage) so leased and so subject to security interests does not exceed One Million Five Hundred Thousand and 00/100 Dollars ($1,500,000.00). The foregoing shall not limit the right of tenants under Real Estate Leases (as defined in the Mortgage) to install removable fixtures subject to security interests on the Project which can be removed without damage to the Project and which pursuant to the Real Estate Leases (as defined in the Mortgage) and the written consent of Bank obtained prior to installation shall remain the property of such tenants and shall not be considered part of the Project. Section II.6. Loan in Respect of Certain Draws under the Letter of Credit. Unless an Event of Default has occurred and is continuing, notwithstanding Section 2.1 hereof, if an amount is drawn under the Letter of Credit as a result of (i) the occurrence of an Event of Taxability, as defined in the Indenture, pursuant to Section 302(c), (ii) an optional tender of Bonds pursuant to Section 302(a) of the Indenture, (iii) a redemption in the event of condemnation, deficiency of title, fire or other casualty pursuant to Section 302(b) of the Indenture, or (iv) redemption upon Certain Defaults (as defined in the Indenture) pursuant to Section 302(d), the Borrower shall pay immediately to the Bank, a sum equal to the amount so drawn and any fees outstanding hereunder plus interest at a rate per annum equal to the Prime Rate plus two percent (2%) until such payment is made in full. The proceeds of any remarketing of Pledged Bonds shall be immediately applied to the repayment of any amounts outstanding hereunder first to the payment of fees, then to the payment of interest and then to the payment of principal. Section II.7. Substitute Letter of Credit. Notwithstanding any provisions of the Indenture to the contrary, the Borrower agrees not to replace the Letter of Credit prior to the earlier of (i) if the Bonds are then rated by Moody's Investors Service, the date on which Moody's Investors Service shall have lowered either the long-term rating on the Bonds backed by the Bank's Letter of Credit below "A" or the short-term rating on the Bonds backed by the Bank's Letter of Credit below "P-1" or (ii) if the Bonds are then rated by Standard & Poor's Corporation, the date on which Standard & Poor's Corporation shall have lowered either the long-term rating on the Bonds backed by the Bank's Letter of Credit below "A" or the short-term rating on the Bonds backed by the Bank's Letter of Credit below "A-1." As a condition to any such replacement of the Letter of Credit, the Borrower shall (A) provide the Bank with ninety (90) days' prior written notice of the same and (B) pay in full all outstanding obligations hereunder. Section II.8. Optional Redemption. The Borrower agrees in the case of any redemption of Bonds under Section 302 of the Indenture, to deposit an amount equal to the amount to be drawn by the Trustee under the resulting Redemption Drawing (as defined in the Letter of Credit) with the Bank, which amount shall be deposited not later than thirty-one (31) days prior to the redemption date. The Borrower hereby grants to the Bank a security interest in and pledges, assigns, transfers and sets over to Bank all of its right, title and interest in and to such deposit. Such Deposit shall be held as collateral security for any and all indebtedness, obligations and liabilities of the Borrower to the Bank hereunder, whether now existing or hereafter arising and whether due or contingent, and shall at the written direction of the Borrower, to the extent permitted by law, be invested in Governmental Obligations or such other investments acceptable to the Bank, provided such Governmental Obligations or other investments mature at such time as is necessary to provide sufficient funds to satisfy such indebtedness, obligations and liabilities of the Borrower to the Bank hereunder. Upon the payment by the Bank of the amount demanded in said Redemption Drawing, the Bank shall immediately reimburse itself from said collateral and remit any excess to the Borrower. Section 2.9. Required Deposits for Mandatory Redemption Under Section 302(g). On or before each November 1, continuing through November 1, 2003, the Borrower will direct the Trustee to make an optional redemption of the Bonds pursuant to Section 301(g) of the Indenture. The amount of the Bonds to be redeemed upon each such mandatory optional redemption shall be in accordance with the following schedule: November 1 Principal Amount - ---------- ---------------- 1997 $325,000 1998 $325,000 1999 $325,000 2000 $325,000 2001 $325,000 2002 $325,000 2003 $325,000* * The remaining $205,000 principal amount shall be due on November 1, 2004. ARTICLE III ISSUANCE OF LETTER OF CREDIT; CONDITIONS TO ISSUANCE Section III.1. Issuance of Letter of Credit. Upon satisfaction of the conditions set forth in Section 3.2, the Bank agrees to issue the Letter of Credit to the Trustee on the Date of Issuance in an amount not to exceed the Stated Amount expiring on November 5, 1998, unless terminated prior thereto in accordance with its terms or unless extended by the Bank pursuant to Section 6.2 hereof. Section III.2. Conditions Precedent to Issuance of Letter of Credit. (i) The Bank shall have received on or before the Date of Issuance, in form and substance satisfactory to the Bank and its legal counsel, the following: (a) copies of the Certificate or Articles of Incorporation certified by the State of incorporation and copies of the By-laws of the Borrower certified by the Secretary of State of the applicable jurisdiction and the secretary or assistant secretary of the Borrower; (b) certified copies of the resolutions of the Board of Directors of the Borrower evidencing corporate authorization for the execution and delivery of this Agreement and the other Documents to which the Borrower is a party; (c) incumbency certificates as to the authority and signature of the person(s) signing this Agreement and the other Documents to which the Borrower is a party on behalf of the Borrower; (d) true and correct copies of all governmental approvals, if any, necessary for the Borrower to enter into this Agreement and the transactions contemplated hereby, together with certified copies of all approvals, authorizations, or consents of or notices or registrations with, any governmental body or agency required for the Borrower to enter into this Agreement and the transactions and consequences contemplated hereby and thereby, as the case may be; (e) the legal opinion of counsel to the Borrower, which shall be substantially in the form of Exhibit B to this Agreement; (f) accurate and complete executed copies of the Indenture, the Loan Agreement, the Remarketing Agreement, a specimen Bond and all other documents and agreements furnished in connection with the closing of the sale of the Bonds; (g) accurate and complete executed copies of this Agreement, the Mortgage, the Environmental Agreement, the Assignment of Rents and Form UCC-1 Financing Statements; (h) an ALTA Loan Policy-1992 title policy issued by Chicago Title Insurance Company naming the Borrower as the fee owner of the property subject to the Mortgage and insuring the Bank in the amount of Two Million Six Hundred Thousand and 00/100 Dollars ($2,600,000.00) as the holder of a valid and existing first and prior mortgage lien as to the Mortgage, with extended coverage, and subject only to those exceptions and exclusions as are acceptable to the Bank and with the following title endorsements: (i) Zoning 3.1; (ii) Comprehensive l; (iii) letter of credit; (iv) location no. 1; (v) survey; (vi) access; (vii) contiguity, if applicable; (viii) usury, if available; (ix) creditor's rights, if available; and (iv) such other special endorsements as the Bank may require; (i) an environmental assessment report in form and substance satisfactory to the Bank from an experienced environmental consulting firm satisfactory to the Bank. The report shall be certified by a supervising professional registered engineer or certified professional geologist. The report shall, among other things, (i) contain a detailed history of the prior ownership and uses of the Project site and surrounding properties within a one-half mile radius of the Project site, including copies or summaries of hazardous and solid waste reporting documents on file at the applicable regulatory agencies for present and past storage and disposal at each site investigated, (ii) contain reports of investigations of federal, state and local environmental agencies, CERCLIS lists, National Priorities' Lists, the registrations of underground storage tanks, landfills and wetlands designations, all with respect to the Project site and surrounding properties within a one-half mile radius of the Project site, and (iii) indicate in the professional judgment of such consultant, that the Project site and surrounding properties are free of Environmental Claims and are in compliance with all applicable Environmental Laws. The report shall contain recommendations of what further study, if any, may be necessary to define the extent of any contamination or noncompliance found or suspected to exist at the Project site, the Project, or surrounding properties; (j) a complete and current spotted plat of survey of the Project site certified to the Bank and Chicago Title Insurance Company and prepared in accordance with the Minimum Standard Detail Requirements of the American Land Title Association by an independent surveyor satisfactory to the Bank, showing thereon: (i) the location of the perimeter of the Project site by courses and distances; (ii) the location of all improvements, rights of way, encroachments, and visible or recorded utilities and sewers (delineating, if possible, their course to the point of connection with the public system); and (iii) the location of the lines of the streets abutting the Project site and the width thereof; and whether the Project site is located in a designated flood hazard area; (k) a certificate of an executive officer of the Borrower certifying on behalf of the Borrower that (i) no Event of Default shall have occurred and be continuing under this Agreement or would result from the issuance of the Letter of Credit, and no event has occurred and is continuing which would constitute any such Event of Default but for the requirement that notice be given or time elapse or both, (ii) the representations and warranties of the Borrower contained in this Agreement shall be true and correct as of the Date of Issuance, and (iii) all conditions precedent to the issuance, sale and delivery of the Bonds and the effectiveness of this Agreement shall have occurred; (l) a Good Standing Certificate for the Borrower issued by the Secretaries of State of both Delaware and Missouri as of a date not more than three days prior to the Date of Issuance; (m) a legal opinion of Bryan, Cave, McPheeters & McRoberts, as Bond counsel, relating to the validity and tax exempt status of the Bonds dated as of the Date of Issuance; (n) such other approvals, opinions or documents as the Bank may reasonably request; (o) UCC, Tax Lien, Bankruptcy and Judgment searches of the Borrower, which shall be satisfactory to the Bank; (p) payment in to the Bank in respect of the letter of credit fee required pursuant to Section 2.2(a)(i); and (q) Lender's Loss Payable Endorsement in favor of Bank for each insurance policy of Borrower naming Bank as loss payee and additional insured. (ii) The statements set forth in Section 3.2(k) above shall be true and correct on the Date of Issuance and upon the date of each draw under the Letter of Credit. (iii) On and before the Date of Issuance, the Indenture shall continue to be in full force and effect and no default or event of default thereunder shall have occurred thereunder. ARTICLE IV REPRESENTATIONS AND WARRANTIES; COVENANTS; INDEMNIFICATION; CONTINUING OBLIGATION Section IV.1. Representations and Warranties of the Borrower. The Borrower hereby represents and warrants as of (i) the date hereof, (ii) the Date of the Issuance, and (iii) with respect to subsections (a) through (e) and subsections (h) through (w) below, the date of each drawing under the Letter of Credit, as follows: (a) The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and 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. The Borrower has all 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) The execution, delivery and performance by the Borrower of this Agreement and the other Documents to which it is a party are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action and do not contravene (i) the Borrower's Certificate of Incorporation or By-laws or (ii) in any material respect any law or any contractual restriction binding on or affecting the Borrower or its properties, and do not result in or require the creation of any Lien (except as may be created under the Documents) upon or with respect to any of its properties. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Borrower of this Agreement or any other Document to which the Borrower is a party. (d) This Agreement is, and the Documents to which the Borrower is a party when delivered hereunder will be, legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms. (e) The Bonds have been duly authorized, authenticated and issued and delivered, and are the legal, valid and binding obligations of the Issuer, and are not in default. Interest on the Bonds is exempt from federal income taxation, and the Borrower has taken no action which would adversely affect the exemption for such interest from such taxation. The issuance and sale of the Bonds was and any remarketing of the Bonds after their issuance was or will be in full compliance with all applicable securities laws. (f) The balance sheet (including the notes thereto) of the Borrower and its Affiliates on a consolidated basis as at March 31, 1997, and the related statements of revenues and expenses and changes in net assets employed for the benefit of members for the fiscal year then ended, audited by BDO Seidman, LLP, are complete and correct and fairly present the combined financial condition of the Borrower and its Affiliates as at such date and the results of the operations of the Borrower and its Affiliates for the fiscal year ended on such date, in accordance with GAAP, and the balance sheet of the Borrower as at June 30, 1997 and the related statements of revenues and expenses and changes in net assets employed for the benefit of members for the period ended June 30, 1997, internally prepared, are complete and correct and fairly present the financial condition of the Borrower as at such date and the results of the operations of the Borrower for the period ended on such date, and since March 31, 1997, there has been no material adverse change in the Borrower's financial condition, business, properties or operations. Neither the Borrower nor any Affiliate has on the date hereof, nor will have on the Date of Issuance, any material contingent obligations, long-term leases or unusual forward or long-term commitments, which are not reflected in the foregoing statements (and the related notes thereto) except the obligations entered into in connection with the issuance of the Bonds. (g) There is no pending or, to the best knowledge of the Borrower, threatened action, suit, inquiry, investigation, or proceeding affecting, directly or indirectly, the Borrower or any Affiliate before any court, governmental agency or arbitrator, which, in any case, may (i) materially and adversely affect the financial condition or operation of the Borrower or any Affiliate, (ii) which seeks to restrain or would otherwise have a material adverse effect on the transactions contemplated herein, or (iii) which would affect the validity or enforceability of the Agreement or any Documents. (h) No proceeds of any drawing under the Letter of Credit 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. (i) The Borrower is not 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 drawing under the Letter of Credit 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. (j) No ERISA Termination Event has occurred nor is expected to occur with respect to any Plan. (k) Schedule B (Actuarial Information) to the 1996 annual report (Form 5500 Series) with respect to each Plan, copies of which have been filed with the Internal Revenue Service and furnished to the Bank, has been signed by the enrolled actuary for such Plan as complete and accurate and as fairly presenting the funding status of such Plan, and since the date of such Schedule B there has been no material adverse change in such funding status. (l) Neither the Borrower nor any ERISA Affiliate has incurred, or expects to incur, any material withdrawal liability under Section 4201 of ERISA to any Multiemployer Plan. (m) The Borrower and each Affiliate have 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 the Borrower or an Affiliate is contesting in good faith by appropriate legal proceedings. (n) There are no Liens upon or with respect to any of the properties of the Borrower or any right to receive revenues of the Borrower, other than (i) Liens arising under this Agreement, the Letter of Credit, the Pledge Agreement, the Indenture or the Loan Agreement and (ii) other Liens permitted pursuant to Section 4.3(a) hereof. (o) Neither the Borrower nor any Affiliate 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 the Borrower to perform its respective obligations under any of the Documents to which it is party or is to be a party or which would restrict or otherwise limit the incurring of the indebtedness represented by this Agreement and the other Documents. (p) (i) The operations of the Borrower and each Affiliate (including, without limitation, all operations and conditions at or in the Project) comply with all Environmental Laws; (ii) the Borrower and each Affiliate has obtained or has timely applied for all Governmental Authorizations under Environmental Laws necessary to its operations, if any, and all such permits as have been obtained are in good standing, and the Borrower and each Affiliate is in compliance with all terms and conditions of such Governmental Authorizations; (iii) the Borrower and each Affiliate has not received (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 to the Borrower's and each Affiliate's knowledge, none of the operations of the Borrower and each Affiliate 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 or at any other location; (iv) to the best knowledge of the Borrower and each Affiliate after diligent investigation, the operations of the Borrower and each Affiliate are not subject to any judicial or administrative proceeding alleging the violation of or liability under any Environmental Laws; (v) to the best knowledge of the Borrower and each Affiliate after diligent investigation, the Borrower and each Affiliate is not and the Project is not, 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) to the best knowledge of the Borrower and each Affiliate after diligent investigation, the Borrower and each Affiliate does not have any contingent liability in connection with any Release of any Hazardous Materials; (vii) neither the Borrower and each Affiliate nor any of its predecessors has filed any notice under any Environmental Law indicating past or present treatment or Release of Hazardous Materials at any Facility, and the Borrower's and each Affiliate's operations do not 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 the Project in a manner that is known to give rise to an Environmental Claim and the Borrower and each Affiliate has not filed any notice or report of a Release of any Hazardous Materials that could give rise to an Environmental Claim; (ix) neither the Borrower and each Affiliate nor any of its predecessors has disposed of any Hazardous Materials in a manner that is known to give rise to an Environmental Claim; (x) no underground storage tanks or surface impoundments are on or at the Project; 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 has been filed or has been attached to the Project. (q) (i) the Borrower and each Affiliate has not received any notice from any insurance company of any defects or inadequacies in the Project which would adversely affect the insurability of the Project or which would materially increase the cost of insuring the Project beyond that which is customarily charged for similar property in the vicinity of the Project and for a similar purpose; and (ii) (a) no condemnation of any portion of the Project, (b) no condemnation or relocation of any roadways abutting the Project, and (c) no denial of access to the Project from any point of access to the Project, has commenced of which the Borrower and each Affiliate has knowledge after diligent investigation or to which the Borrower and each Affiliate is a party; and that to the best of the Borrower's and each Affiliate's knowledge, none of the foregoing is contemplated by any governmental authority which could have an adverse effect on the use, occupancy or enjoyment of the Project. (r) Neither the Borrower nor any Affiliate is an "investment company" or a company "controlled by an investment company," within the meaning of the Investment Company Act of 1940, as amended. (s) The Borrower and each Affiliate is in compliance in all material respects 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 the Borrower and each Affiliate. (t) The Borrower makes each of the representations and warranties contained in the other Documents to which the Borrower is a party operative and applicable for the benefit of the Bank as if the same were set forth at length herein. (u) The representations and warranties of the Borrower in the other Documents to which it is a party are true and correct. (v) The Borrower and each Affiliate possess adequate licenses, patents, patent applications, copyrights, service marks, trademarks and trade names to conduct their operations and business in all material respects as heretofore conducted and as intended to be hereafter conducted and all such items are, and will continue to be, owned by the Borrower and/or an Affiliate free and clear of conflicting claims or uses of any other Person. (w) The Affiliates of the Borrower are PDI and ETHEX. Section IV.2. Affirmative Covenants. So long as the Termination Date has not yet occurred or any amounts are due or owing to the Bank hereunder or under the Documents, the Borrower hereby covenants that it will, unless the Bank shall otherwise consent in writing: (a) Existence, Etc. Subject to Section 4.3(b), do or cause to be done all things necessary to preserve and keep in full force and effect the Borrower's and each Affiliate's corporate existence in good standing. (b) Compliance with Laws. Etc. Comply, and cause each Affiliate to comply, in all material respects with all applicable laws, rules, regulations and orders, noncompliance with which may materially adversely affect (i) the financial condition or operations of the Borrower or any Affiliate or (ii) the ability of the Borrower to perform its obligations under this Agreement or any of the Documents. (c) Payment of Taxes and Other Claims. Subject to the terms of the Mortgage when delivered to the Bank, pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (i) all material taxes, assessments and governmental charges levied or imposed upon the Borrower and each Affiliate or upon the income, surplus or property of the Borrower and each Affiliate, and (ii) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of the Borrower and each Affiliate; provided, however, that the Borrower shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and in accordance with the terms of the Mortgage. (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 Borrower 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 Borrower beginning with the quarter ending June 30, 1997, Borrower shall immediately deliver to Bank an internally-prepared balance sheet of Borrower and its Affiliates on a consolidated basis as at the end of such quarter and the related statements of operations and statements of cash flows of Borrower and its Affiliates 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 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 Borrower; (iii) as soon as available, copies of the Form 10-K Annual Report or comparable successor report filed by Borrower 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 Borrower, Borrower 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 Affiliates on a consolidated basis as of the end of such fiscal year, fairly and accurately presenting the financial condition of Borrower and its Affiliates on a consolidated basis as at such date and the results of operations of Borrower and its Affiliates 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, Borrower shall deliver to Bank a certificate executed by the President or Chief Financial Officer of 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 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 K-V Agreement and the Documents 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 4.2(i) below; (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 Borrower and its Affiliates; (vii) (A) as soon as possible and in any event (i) within thirty (30) days after 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 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 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 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 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 Seven Hundred Fifty Thousand and 00/100 Dollars ($750,000.00); (ix) at Bank's request, 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 Borrower 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 (xi) such other information respecting the condition or operations, financial or otherwise, of Borrower or any Affiliate as Bank may from time to time reasonably request. (e) Maintenance of Insurance. Subject to the terms of the Mortgage when delivered to the Bank, insure and keep insured, with insurance companies meeting the standards set forth in the Mortgage, all of its property of an insurable nature against liability, fire and other casualties in such manner and to the extent required pursuant to the Mortgage. If the Borrower, at any time or times hereafter, shall fail to obtain or maintain, or cause to be obtained or maintained, any of the policies of insurance required to be maintained pursuant to the Mortgage or to pay or cause to be paid any premium in whole or in part relating thereto, then the Bank, without waiving or releasing any obligation or Event of Default by the Borrower hereunder, may at any time or times thereafter (but shall be under no obligation to do so) obtain and maintain such policies of insurance and pay such premiums and take any other action with respect thereto which the Bank deems advisable. (f) Compliance With Securities Laws. Cause any remarketing of the Bonds after the Date of Issuance to be in full compliance with all applicable securities laws. (g) Visitation Rights. At any time or times during the Borrower's usual business hours and, prior to an Event of Default, with at least one (1) Business Day's prior notice, permit the Bank or any agents or representatives thereof, to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, the Borrower and any Affiliate, all as the Bank shall reasonably request, and to discuss the affairs, finances and accounts of the Borrower, and any Affiliate with the Borrower's or officers or directors. (h) Environmental Disclosure and Inspection. (i) Exercise due diligence in order to comply with all Environmental Laws. (ii) Permit the Bank, from time to time and in its sole and absolute discretion, to retain, at the Borrower's expense, an independent professional consultant to review any report relating to Hazardous Materials prepared by or for the Borrower and at reasonable times and subject to reasonable conditions to conduct its own investigation of the Project. The Borrower hereby grants to the Bank, its agents, employees, consultants, and contractors the right to enter into or onto, with one (1) Business Day's prior notice prior to an Event of Default or at any time without notice on or after an Event of Default, the Project to perform such tests on such property as are reasonably necessary to conduct such a review and/or investigation. (iii) Promptly advise the Bank in writing and in reasonable detail 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 the Borrower or any other person in response to (1) any Hazardous Material on, under or about any Facility, the existence of which could result in an Environmental Claim, or (2) any Environmental Claim that could have a material adverse effect on the Borrower, (iv) the Borrower's discovery of any occurrence or condition on any real property adjoining or in the vicinity of any Facility that could 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 the Borrower may be potentially responsible for a Release of Hazardous Materials. (iv) Promptly notify the Bank of (i) any acquisition of stock, assets, or property by the Borrower that reasonably could be expected to expose the 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 the Borrower, and (ii) any proposed action outside of the normal course of business to be taken by the Borrower to commence industrial or other operations that could subject the Borrower 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 the Bank may reasonably request in relation to any matters disclosed pursuant to this Section 4.2(h). (vi) Promptly take any and all necessary remedial action in connection with the presence, storage, use, disposal, transportation or Release of any Hazardous Materials on, under or about the Project in order to comply with all applicable Environmental Laws and Governmental Authorizations. In the event the Borrower undertakes any remedial action with respect to any Hazardous Material on, under or about the Project, the Borrower 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. (i) Financial Covenants. Borrower warrants and represents to and covenants with Bank that it shall maintain the following financial covenants on a consolidated basis: (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 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 (as that term is defined in the K-V Loan Agreement) proceeds or other Funded Debt (as that term is defined in the K-V Loan Agreement) 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 (as that term is defined in the K-V Loan Agreement) and thereafter. (j) Recording of Mortgage. The Borrower will, at its expense, cause the Mortgage and Assignment of Rents to be properly recorded as a mortgage upon its interest in the Project and certain related real property and will, at its expense, do all things necessary by way of any additional filings to continue and maintain the first lien and priority of the Mortgage. (k) Creation of New Affiliate. Prior to the formation of any Affiliate other than those disclosed in Section 4.1(w), the Borrower shall provide notice to the Bank thereof, which notice shall specify (i) the name, state or jurisdiction of incorporation and address of such Affiliate, (ii) the operating purpose of such Affiliate and (iii) the assets to be owned by such Affiliate. Section IV.3. Negative Covenants. So long as the Termination Date has not occurred or any amount is due or owing to the Bank hereunder, unless the Bank shall otherwise consent in writing, the Borrower shall not: (a) Liens, Etc. Create or suffer to exist any Lien, other charge or encumbrance, or any other type of preferential arrangement upon or with respect to any of its properties, whether now owned or hereafter acquired, or assign any right to receive income, in each case to secure or provide for the payment of any Debt of any Person, except: (i) Liens existing prior to the date of this Agreement, provided such Liens have been disclosed to the Bank prior to the date hereof and are not being paid or satisfied by any loans to Borrower or its Affiliates from the Bank, and Liens arising under this Agreement, the Letter of Credit, the Pledge Agreement, the Mortgage, the Assignment of Rents, the Indenture or the Loan Agreement; (ii) Liens for current taxes, assessments or other governmental charges which are not delinquent or remain payable without any penalty, or the validity of which are contested in good faith by appropriate proceedings upon stay of execution of the enforcement thereof and appropriate reserves are set aside therefor and pursuant to and in compliance with the provisions of the Mortgage; (iii) deposits or pledges to secure: (A) statutory obligations; (B) surety or appeal bonds; (C) bonds for release of attachment, stay of execution or injunction; or (D) performance of bids, tenders, contracts (other than for the repayment of Debt) or leases, or for purposes of like general nature in the ordinary course of its business; (iv) other Liens incidental to the conduct of its operations or the ownership or use of its property (including, without limitation, carriers', warehousemen's, vendors' liens, and other similar liens) which do not in the aggregate materially detract from the value of the property or assets of the Borrower or materially impair its use in the operation of the business of the Borrower, and which encumber only the personal property of the Borrower; (v) any Lien placed upon any personal property of the Borrower to secure or provide the payment of all or part of the purchase price of such property; provided that any such Lien shall not encumber any other property of the Borrower other than the property so acquired and further provided that the Debt incurred after the date hereof and secured thereby shall not exceed $750,000.00 in the aggregate; (vi) Liens permitted under Section 2.5(c) above; and (vii) any Lien renewing, extending or refunding any Lien existing on the date hereof or permitted by clauses (i) through (vi) above, provided that the principal amount secured is not increased, and the Lien is not extended to other property. (b) Maintain Existence, Etc. (i) dissolve or liquidate the Borrower or any Affiliate or amend or modify the Borrower's Certificate of Incorporation in any manner inconsistent with the performance of the Borrower's obligations hereunder; or (ii) convey, transfer, lease or otherwise dispose of the Project or any Collateral (except for Collateral transferred or disposed of in the usual and ordinary course of business to any person); or (iii) engage in any transaction out of the ordinary course of business. (c) Amendments to Documents. Enter into or consent to any amendments or modifications of, or grant or accept the benefit of any waivers of any provisions of, any Document. (d) Merger, Etc. (i) merge or consolidate with any Person or permit the merger or consolidation of any Affiliate with any Person; or (ii) 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. Notwithstanding anything to the contrary in this Section 4.3, Borrower may enter into and complete any acquisition so long as the consideration to be paid in the acquisition is solely stock of Borrower or consists of a combination of stock of Borrower plus net cash of not greater than Five Million and 00/100 Dollars ($5,000,000.00). (e) Indebtedness. Incur, create, assume, become or be liable in any manner with respect to or permit to exist, any Debt, obligations or other indebtedness, except (i) the obligations under the Documents; and (ii) trade obligations and normal accruals in the ordinary course of business not yet due and payable, including indebtedness incurred to purchase machinery and equipment not exceeding at any time $750,000.00 in the aggregate, or with respect to which the Borrower is contesting in good faith the amount or validity thereof by appropriate proceedings, and then only to the extent that the Borrower has set aside on its books adequate reserves therefor, if appropriate under GAAP. (f) Investments or Loans. Make or permit to exist investments or loans in or to any other Person, except for Permitted Investments (as defined in the Indenture). Notwithstanding the foregoing, the restrictions set forth in Section 4.3(b) and this Section 4.3(f) shall not be deemed to limit the ability of the Borrower to make grants, loans or investments in accordance with law and the Certificate of Incorporation and By-laws of the Borrower as currently in existence. (g) Guaranties. Enter into any guaranty agreement, endorsement or any other agreement which in any way directly, indirectly or contingently causes the Borrower to become liable for the obligations or liabilities of any other Person, except endorsements of negotiable instruments for collection in the ordinary course of business. (h) Arbitrage. The Borrower shall not make any use nor permit any use to be made of the proceeds of any of the Bonds or any other funds which will cause any of the Bonds to be "arbitrage bonds" subject to federal income taxation by reason of Section 148(a) of the Code and any applicable regulations promulgated thereunder. Section IV.4. Indemnification. The Borrower hereby indemnifies, defends and holds harmless the Bank from and against any and all claims, damages, losses, liabilities reasonable costs and expenses whatsoever (including attorneys' fees) which the Bank may incur (or which may be claimed against the Bank by any person or entity whatsoever) by reason of or in connection with (a) the execution and delivery or transfer of, or payment or failure to pay under, the Letter of Credit, (b) the issuance, sale and remarketing of the Bonds, including, without limitation, any of the foregoing resulting from any actual or alleged misstatement or omission in any offering document with respect to the Bonds, (c) the purchase of any of the Bonds pursuant to the Remarketing Agreement, (d) any action, suit, proceeding, claim or loss suffered or incurred by the Bank, or resulting in any Lien against the property of the Borrower, under or on account of any Environmental Claims, Environmental Laws or Release of any Hazardous Materials relating to any Facility or any action or failure to act with respect thereto by the Borrower or any Affiliate, or (e) the operation or maintenance of the Project; provided, that the Borrower shall not be required to indemnify the Bank for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by (i) the willful misconduct or gross negligence of the Bank in determining whether a document presented under the Letter of Credit complied with the terms of the Letter of Credit or (ii) the Bank's wrongful failure to pay under the Letter of Credit after the presentation to it by the Trustee (or a successor Trustee under the Indenture to whom the Letter of Credit has been transferred in accordance with its terms) of a document strictly complying with the terms and conditions of the Letter of Credit (it being understood that in making any payment under the Letter of Credit, the Bank's exclusive reliance on the documents presented to the Bank in accordance with the terms of the Letter of Credit as to any and all matters set forth therein, whether or not any statement or any document presented pursuant to the Letter of Credit shall prove to be forged, fraudulent, invalid or insufficient in any respect or any statement therein proves to be untrue or inaccurate in any respect whatsoever, shall not be deemed to be willful misconduct or gross negligence of the Bank). If any proceeding shall be brought or threatened against the Bank by reason of or in connection with the events described in clause (a), (b), (c), (d) or (e) above (and except as otherwise provided in clause (i) or (ii) above), the Bank shall notify the Borrower in writing, and the Borrower shall assume the defense thereof, including the employment of counsel reasonably acceptable to the Bank and the payment of all costs of litigation. Notwithstanding the preceding sentences, the Bank shall have the right to employ its own counsel and to determine its own defense of such action in any such case, but the fees and expenses of such counsel shall be at the expense of the Bank unless (i) the employment of such counsel shall have been authorized in writing by the Borrower or (ii) the Borrower, after the aforementioned notice of the action, shall not have employed counsel reasonably acceptable to the Bank to have charge of such defense, in either of which events the reasonable fees and expenses of such counsel shall be borne by the Borrower. The Borrower shall not be liable for any settlement of any such action effected without its consent. If the Borrower elects to settle such claim at the sole cost and expense of the Borrower and the Bank refuses to permit such settlement, the obligation of the Borrower to pay fees and expenses relating to such claim pursuant to this Section 4.4 shall become null and void. Nothing in this Section 4.4 is intended to limit the obligations of the Borrower contained in Article II and Article VI hereof. Section IV.5. Continuing Obligation; Obligation Absolute. This Agreement is a continuing obligation and shall (a) be binding upon the Borrower and its successors and permitted assigns, and (b) inure to the benefit of and be enforceable by the Bank and its successors, transferees and assigns; provided, that the Borrower may not assign all or any part of this Agreement without the prior written consent of the Bank. The obligations of the Borrower under this Agreement shall be absolute, unconditional and irrevocable and shall be satisfied strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including, without limitation, the following circumstances: (i) any lack of validity or enforceability of the Letter of Credit, the Bonds, the Indenture, the Loan Agreement or any other Document; (ii) any amendment or waiver of or any consent to departure from all or any of the Documents (except an amendment to this Agreement in accordance with Section 6.11); (iii) the existence of any claim, setoff, defense or other rights which the Borrower or any other Person may have at any time against the Trustee or any successor trustee, any beneficiary or any transferee of the Letter of Credit (or any persons or entities for whom the Trustee, any such beneficiary or any such transferee may be acting), the Bank (other than the defense of payment to the Bank in accordance with the terms of this Agreement) or any other Person or entity whether in connection with this Agreement, the other Documents or any unrelated transaction; (iv) any demand, statement or any other document presented under the Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (v) payment by the Bank, under the Letter of Credit against presentation of a demand, draft or certificate which does not comply with the terms of the Letter of Credit; and (vi) any other circumstance or happening or omission whatsoever, whether or not similar to any of the foregoing. Section IV.6. Liability of the Bank (a) Without waiving, for purposes of this Section, any legal right against parties other than the Bank, the Borrower assumes all risks of the acts or omissions of the Trustee and any transferee of the Letter of Credit with respect to its use of the Letter of Credit. Neither the Bank nor any of its officers, directors, employees or agents shall be liable or responsible for: (i) the use which may be made of the Letter of Credit or by or for any acts or omissions of the Trustee or any transferee in connection therewith; (ii) the validity, sufficiency or genuineness of drafts, certificates or documents, or of any endorsement(s) thereon, even if such drafts, certificates or documents should in fact prove to be in any or all respects invalid, insufficient, fraudulent or forged; (iii) payment by the Bank against presentation of drafts or certificates which do not comply with the terms of the Letter of Credit; or (iv) any other circumstances whatsoever in making or failing to make payment under the Letter of Credit, except only that the Borrower shall have a claim against the Bank, and the Bank shall be liable to the Borrower to the extent, but only to the extent, of any direct, as opposed to consequential, damages suffered by the Borrower which the Borrower proves were caused by (i) the Bank's willful misconduct or gross negligence in determining whether drafts, certificates or documents presented under the Letter of Credit complied with the terms of the Letter of Credit or (ii) the Bank's wrongful and willful failure to pay under the Letter of Credit after the presentation to it by the Trustee (or a successor Trustee under the Indenture to whom the Letter of Credit has been transferred in accordance with its terms) of drafts, certificates or documents strictly complying with the terms and conditions of the Letter of Credit (it being understood that in making such payment the Bank's exclusive reliance on the documents presented to the Bank in accordance with the terms of the Letter of Credit as to any and all matters set forth therein, whether or not any statement or any document presented pursuant to the Letter of Credit proves to be forged, fraudulent, invalid or insufficient in any respect or any statement therein proves to be untrue or inaccurate in any respect whatsoever, shall not be deemed willful misconduct or gross negligence of the Bank). The Bank is hereby expressly authorized and directed to honor any demand for payment which is made under the Letter of Credit without regard to, and without any duty on its part to inquire into the existence of, any disputes or controversies between the Issuer, the Borrower, the Trustee or any other person or the respective rights, duties or liabilities of any of them, or whether any facts or occurrences represented in any of the documents presented under the Letter of Credit are true and correct. (b The Bank may, under the Letter of Credit, receive, accept and pay any drafts or certificates or other documents and instruments (otherwise in order) signed by or issued to the receiver, trustee in bankruptcy or custodian of anyone named in the Letter of Credit as the person by whom drafts, certificates and other documents and instruments are to be made or issued. The Bank may accept drafts or certificates or documents that appear on their face to be in order, without responsibility for further investigation. (c The Bank shall not have any liability to the Borrower for the solvency, standing and responsibility of any Person whomsoever and the Bank shall not have any liability to the Borrower, and the Borrower assumes all responsibility, for (i) the form, sufficiency, correctness, validity, genuineness, falsification and legal effect of any drafts, certificates and other documents, instruments and other papers relating thereto, (ii) the general and particular conditions stipulated therein, (iii) the good faith and acts of any Person (other than the Bank), (iv) the existence, form, sufficiency and breach of contracts of any nature whatsoever, including the Documents, (v) any delay in giving or failure to give any notice, demand or protest, (vi) the failure of any Person (other than the Bank) to comply with the terms of the Letter of Credit, (vii) errors, omissions, delays in or non-delivery of any message, however sent, and (viii) any other error, neglect or omission, except only that the Borrower shall have a claim against the Bank, and the Bank shall be liable to the Borrower to the extent, but only to the extent, of any direct, as opposed to consequential, damages suffered by the Borrower which the Borrower proves were caused by (i) the Bank's willful misconduct or gross negligence in determining whether drafts, certificates or documents presented under the Letter of Credit complied with the terms of the Letter of Credit or (ii) the Bank's wrongful failure to pay under the Letter of Credit after the presentation to it by the Trustee (or a successor Trustee under the Indenture to whom the Letter of Credit has been transferred in accordance with its terms) of drafts, certificates or documents strictly complying with the terms and conditions of the Letter of Credit (it being understood that in making such payment the Bank's exclusive reliance on the documents presented to the Bank in accordance with the terms of the Letter of Credit as to any and all matters set forth therein, whether or not any statement or any document presented pursuant to the Letter of Credit proves to be forged, fraudulent, invalid or insufficient in any respect or any statement therein proves to be untrue or inaccurate in any respect whatsoever, shall not be deemed wilful misconduct or gross negligence of the Bank). (d The Bank shall not have any liability to the Borrower for, and the Borrower hereby waives any right to object to payment made under the Letter of Credit against, a draft, certificate or document under the Letter of Credit varying in punctuation, capitalization, spelling or similar matters of form. The determination whether a draft, certificate or document has been made prior to the expiration of the Letter of Credit and whether a draft, certificate or document is in proper and sufficient form for compliance with the Letter of Credit shall be made by the Bank in its sole discretion, which determination, absent manifest error, shall be conclusive and binding upon the Borrower except as otherwise provided in this Agreement. ARTICLE V DEFAULTS AND REMEDIES Section V.1. Events of Default; Remedies. Unless waived by the Bank in the manner provided in Section 5.2 hereof, each of the following shall constitute an "Event of Default" hereunder: (a the Borrower shall fail to pay on the date due any fee or other amount required to be paid or reimbursed under this Agreement; or (b any representation or warranty made or deemed made by the Borrower herein or in any certificate, financial or other statement furnished by the Borrower pursuant to this Agreement shall prove to have been untrue, incorrect or incomplete in any material respect when made or deemed made; or (c the breach by the Borrower of any term or provision of Section 4.2 or Section 4.3 or any other term or provision of this Agreement which is not remedied within 30 days thereafter; or (d any default or Event of Default shall occur and be continuing (after the expiration of all applicable grace periods) under the other Documents or any other agreement now or hereafter entered into evidencing any obligation owed to the Bank by the Borrower or any Affiliate; or (e the Borrower or any Affiliate shall fail to pay any principal of, premium or interest on, or other amount owing in respect of any of its Debt in excess of Seven Hundred Fifty Thousand and 00/100 Dollars ($750,000.00) when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; or (f (i) the Borrower or any Affiliate shall (A) apply for or consent to the appointment of a receiver, trustee or liquidator, (B) admit in writing its inability to pay its debts generally as they become due, (C) make a general assignment for the benefit of creditors, (D) be adjudicated bankrupt or insolvent, or (E) commence a voluntary case under applicable bankruptcy laws or file a voluntary petition or answer seeking reorganization, an arrangement with creditors or an order for relief or seeking to take advantage of an insolvency law or file an answer admitting the material allegations of a petition filed against it in any bankruptcy, reorganization or insolvency proceeding; or corporate action shall be taken by it for the purpose of effecting any of the foregoing; or (ii) if, without the application, approval or consent of the Borrower or any Affiliate, a proceeding shall be instituted in any court of competent jurisdiction, under any law relating to bankruptcy, insolvency, reorganization, dissolution, winding up, liquidation, a composition or arrangement with creditors, a readjustment of debts, the appointment of a trustee, receiver, liquidator or custodian or the like of the Borrower or any Affiliate, as the case may be, or of all or any substantial part of any of the Borrower's or such Affiliate's assets, or other like relief in respect thereof under any bankruptcy or insolvency law, and, if such proceeding is being contested in good faith, the same shall (i) result in the entry of an order for relief or any such adjudication or appointment or (ii) continue undismissed, pending and unstayed, for any period of forty-five (45) consecutive days; or (g) a material portion of Borrower's or any Affiliate's assets is attached, seized, subjected to a writ or distress warrant or is levied upon; or (h) any approval of any governmental body, public board or public body related to this Agreement or the other Documents shall be modified, rescinded, revoked or set aside or otherwise cease to remain in full force and effect or shall otherwise not authorize the entirety of the drawings and other amounts outstanding hereunder; or (i) any provision of this Agreement or the other Documents, shall at any time for any reason cease to be valid and binding on the Borrower or any other Affiliate, as the case may be, or shall be declared to be null and void, or the validity or enforceability thereof shall be denied or contested by the Borrower or any other Affiliate, as the case may be, or a proceeding shall be commenced by any governmental agency or authority having jurisdiction over the Borrower or any Affiliate seeking to establish the invalidity or unenforceability thereof and the Borrower or any Affiliate, as the case may be, shall fail diligently or successfully to defend such proceeding; or (j) any default or Event of Default shall occur and be continuing (after the expiration of all applicable grace periods) under the K-V Loan Agreement. Upon the occurrence of an Event of Default hereunder, by notice to the Borrower (except in the case of an Event of Default described in clause (f) above, notice of which shall not be required) the Bank may, in its sole discretion, but shall not be obligated to take one or more of the following actions: (i) declare all amounts due and payable hereunder by the Borrower to be forthwith due and payable, and the same shall thereupon become immediately due and payable without demand, presentment, protest or further notice of any kind all of which are hereby expressly waived, (ii) require the Borrower to provide cash collateral in an amount equal to the amount of the Letter of Credit, in which case the Borrower shall immediately provide such cash collateral, (iii) exercise its rights and remedies hereunder and under the Pledge Agreement and/or the Mortgage and/or the Assignment of Rents and all rights and remedies of a secured party on default under the Uniform Commercial Code in effect in the State of Missouri at that time or (iv) notify the Trustee of the occurrence and continuance of an Event of Default hereunder by sending to the Trustee (to the address specified in or pursuant to the Indenture) a notice to redeem the Bonds as referenced in Section 302(d) of the Indenture. Section V.2. No Waiver; Remedies Cumulative. No failure by the Bank to exercise, and no delay in exercising, any right against any party hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other further exercise thereof or the exercise of any other right. No waiver hereunder shall be valid unless in writing signed by the parties hereto. The remedies herein provided are cumulative and not exclusive of any remedies provided by law or equity. Section V.3. Right of Set-Off. Upon the occurrence and during the continuance of any Event of Default, the Bank is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final), at any time held and other indebtedness at any time owing by the Bank to or for the credit or the account of the Borrower or any other Affiliate against any and all of the obligations of the Borrower now or hereafter existing under this Agreement, irrespective of whether or not the Bank shall have made any demand hereunder and although such obligations may be contingent or unmatured. ARTICLE VI MISCELLANEOUS Section VI.1. Costs, Expenses and Taxes. The Borrower hereby agrees to pay on demand all reasonable costs and expenses incurred by the Bank in connection with the preparation, execution and delivery of this Agreement and any other documents which may be delivered in connection with this Agreement and all reasonable costs and expenses, if any, in connection with the enforcement of this Agreement and such other documents which may be delivered in connection with this Agreement, including, without limitation, the reasonable fees and expenses of counsel for the Bank with respect thereto and with respect to advising the Bank as to its rights and responsibilities under this Agreement. In addition, the Borrower hereby agrees to pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of this Agreement, the Documents and such other documents and agrees to save the Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees, provided that the conduct of the Bank in so delaying or omitting to pay does not constitutes willful misconduct or gross negligence. Section VI.2. Term of Letter of Credit and Agreement; Termination by Borrower (a The Stated Termination Date shall be November 5, 1998 unless the Borrower and the Bank shall mutually agree to extend the Stated Termination Date as provided in paragraph (b) of this Section 6.2. This Agreement shall remain in full force and effect so long as the Letter of Credit is in effect and until all amounts owed by the Borrower to the Bank hereunder are paid in full. Notwithstanding the foregoing, the provisions of Sections 4.4 and 6.1 shall survive the termination of this Agreement. (b This Letter of Credit shall be automatically renewed for additional terms of one year beginning November 6, 1998 and terminating on the following November 5, unless the Bank, in its sole discretion, elects not to renew this Letter of Credit following expiration of the then existing term. In such event, Bank shall provide the Borrower and the Trustee with written notice of its election not to renew the Letter of Credit at least sixty (60) days prior to the then Stated Termination Date. (c In evaluating whether or not to extend the Stated Termination Date of the Letter of Credit in accordance with the foregoing provisions of this Section 6.2, the Bank agrees to evaluate the possibility of such extension pursuant to the then current underwriting standards in effect at the Bank at such time. Notwithstanding the foregoing, the Bank shall have no obligation to extend the Stated Termination Date of the Letter of Credit beyond one year. Section VI.3. Transfer of Letter of Credit. The Letter of Credit may be transferred to a successor trustee acceptable to the Bank in accordance with the terms of the Indenture. Section VI.4. Severability. Any provision of this Agreement which is prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or nonauthorization without invalidating the remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. Section VI.5. Governing Law. This Agreement shall be governed by, and construed in accordance with, the internal law and not the choice of law rules of the State of Illinois. BORROWER HEREBY AGREES THAT ALL ACTIONS OR PROCEEDINGS INITIATED BY BORROWER AND ARISING DIRECTLY OR INDIRECTLY OUT OF THIS AGREEMENT OR THE OTHER DOCUMENTS SHALL BE LITIGATED IN THE CIRCUIT COURT OF COOK COUNTY, ILLINOIS OR THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS OR, IF BANK INITIATES SUCH ACTION, IN ADDITION TO THE FOREGOING COURTS ANY COURT IN WHICH BANK SHALL INITIATE SUCH ACTION, TO THE EXTENT SUCH COURT HAS JURISDICTION. BORROWER HEREBY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED BY BANK IN ANY OF SUCH COURTS AND HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS AND COMPLAINT, OR OTHER PROCESS OR PAPERS ISSUED THEREIN, AND AGREES THAT SERVICE OF SUCH SUMMONS AND COMPLAINT OR OTHER PROCESS OR PAPERS MAY BE MADE BY ACTUAL DELIVERY OR REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO BORROWER AT THE ADDRESS TO WHICH NOTICES ARE TO BE SENT HEREIN. BORROWER HEREBY IRREVOCABLY APPOINTS AND DESIGNATES KURTIS B. REEG OF GALLOP, JOHNSON AND 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 ILLINOIS, WHOM BORROWER MAY HEREAFTER FROM TIME TO TIME DESIGNATE (HAVING GIVEN FIVE (5) DAYS WRITTEN NOTICE THEREOF TO BANK) AS BORROWER'S TRUE AND LAWFUL ATTORNEY AND DULY AUTHORIZED AGENT FOR ACCEPTANCE OF SERVICE OF PROCESS. BORROWER AGREES THAT NOTWITHSTANDING ANYTHING CONTAINED HEREIN TO THE CONTRARY, SUCH SERVICE OF PROCESS UPON SUCH PERSON SHALL CONSTITUTE PERSONAL SERVICE OF PROCESS UPON BORROWER. BORROWER WAIVES ANY CLAIM THAT COOK COUNTY, ILLINOIS OR THE NORTHERN DISTRICT OF ILLINOIS IS AN INCONVENIENT FORUM OR AN IMPROPER FORUM BASED ON LACK OF VENUE. SHOULD BORROWER, AFTER BEING SO SERVED, FAIL TO APPEAR OR ANSWER TO ANY SUMMONS, COMPLAINT, PROCESS OR PAPERS SO SERVED WITHIN THE NUMBER OF DAYS PRESCRIBED BY LAW AFTER THE MAILING THEREOF, BORROWER SHALL BE DEEMED IN DEFAULT AND AN ORDER AND/OR JUDGMENT MAY BE ENTERED BY BANK AGAINST BORROWER AS DEMANDED OR PRAYED FOR IN SUCH SUMMONS, COMPLAINT, PROCESS OR PAPERS, PROVIDED, HOWEVER, BANK MAY NOT SEEK A DEFAULT JUDGMENT FOR AT LEAST THIRTY (30) DAYS AFTER THE DATE OF PROOF OF SERVICE. THE EXCLUSIVE CHOICE OF FORUM FOR BORROWER SET FORTH HEREIN SHALL NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT, BY BANK, OF ANY JUDGMENT OBTAINED IN ANY OTHER FORUM OR THE TAKING, BY BANK, OF ANY ACTION TO ENFORCE THE SAME IN ANY OTHER APPROPRIATE JURISDICTION, AND BORROWER HEREBY WAIVES THE RIGHT TO COLLATERALLY ATTACK ANY SUCH JUDGMENT OR ACTION. BANK AND BORROWER ACKNOWLEDGE AND AGREE THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT OR ANY OF THE OTHER DOCUMENTS OR WITH RESPECT TO THE TRANSACTION CONTEMPLATED THEREBY WOULD BE BASED UPON DIFFICULT AND COMPLEX ISSUES AND, THEREFORE, THE PARTIES AGREE THAT ANY LAWSUIT ARISING OUT OF ANY SUCH CONTROVERSY SHALL BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. Section VI.6. Headings. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. Section VI.7. Notices. All notices and other communications provided for hereunder shall be in writing, shall be personally delivered or sent by United States registered or certified mail, return receipt requested, postage prepaid, and shall be addressed to the appropriate party as set forth below or to such other address as shall be designated by a party in a written notice to the other party pursuant hereto. All such notices and other communications shall be effective upon their delivery to the applicable address. (a If to the Bank: LaSalle National Bank 135 South LaSalle Street Chicago, Illinois 60603 Attention: Commercial Loans Telephone: (312) 904-5415 Telecopy: (312) 750-6353 with a copy to: Vedder, Price, Kaufman & Kammholz 222 North LaSalle Street Suite 2600 Chicago, Illinois 60601 Attention: Michael A. Nemeroff, Esq. Telephone: (312) 609-7858 Telecopy: (312) 609-5005 (b If to the Borrower: K-V Pharmaceutical Company 2503 South Hanley Road St. Louis, Missouri Attention: Gerald R. Mitchell Telephone: (314) 645-6600 Telecopy: (314) 645-6732 with a copy to: Gallop, Johnson & Neuman, L.C. 101 South Hanley St. Louis, Missouri Attention: John P. Walsh Telephone: (214) 862-1200 Telecopy: (214) 862-1219 Except as otherwise specifically required herein, notice of the exercise of any right, power or option granted to the Bank by this Agreement is not required to be given. Rejection or refusal to accept or inability to deliver because of changed address when no notice of changed address was given, shall be deemed to be receipt. Section VI.8. Participation. The Borrower understands that the Bank may enter into a participation agreement with certain other banks providing for participation in the payments made by the Bank under the Letter of Credit; provided, however, the Bank shall retain such portion of the Stated Amount of the Letter of Credit which is larger than such portion of any such participating bank, and provided further, that any such participation shall not affect the Bank's obligations under the Letter of Credit. The Borrower hereby consents to such participation. The Borrower further agrees that to the extent that any such other bank so participates, the Borrower shall have in respect of such other participating bank all the concomitant duties and obligations set forth in this Agreement as if such duties and obligations ran directly to such other participating bank had signed this Agreement, save that all payments by the Borrower in respect of such duties and obligations shall be made to the Bank. Such participation shall not expand the obligations of the Borrower beyond those which the Borrower expressly assumes in the Loan Agreement and this Agreement. Section VI.9. Counterparts. This Agreement may be executed in several counterparts, each of which shall be regarded as the original and all of which shall constitute one and the same Agreement. Section VI.10. Notices and Payments. The Bank will give prompt written notice to the Trustee of its receipt of reimbursement for Tender Drawings (as defined in the Letter of Credit). Section VI.11. Modification. This Agreement may not be modified, altered or amended except by an agreement in writing signed by the Bank and the Borrower. IN WITNESS WHEREOF, the Borrower and the Bank have executed this Agreement as of the date first above written. K-V PHARMACEUTICAL COMPANY By: Its: ATTEST: By: Its: LASALLE NATIONAL BANK By: Its: SCHEDULE 1.0 Collateral All right, title and interest of the Borrower, in and to all of the following purchased with the proceeds from the sale of the Bonds and located at 2303 Schuetz Road, St. Louis, Missouri 63043. (i Improvements and Fixtures. All buildings, structures, replacements, furnishings, fixtures, fittings and other improvements and property of every kind and character now or hereafter located or erected on the Real Estate (hereinafter defined) and owned or purported to be owned by the Borrower, together with all building or construction materials, equipment, appliances, machinery, plant equipment, fittings, apparati, fixtures and other articles of any kind or nature whatsoever now or hereafter found on, affixed to or attached to the Real Estate and owned or purported to be owned by the Borrower, including (without limitation) all motors, boilers, engines and devices for the operation of pumps, and all heating, electrical, lighting, power, plumbing, air conditioning, refrigeration and ventilation equipment (all of the foregoing is herein referred to collectively as the "Improvements"); (ii Personal Property. All furniture, furnishings, equipment (including, without limitation, telephone and other communications equipment, window cleaning, building cleaning, monitoring, garbage, air conditioning, pest control and other equipment) and all other tangible property of any kind or character located on the Real Estate including, without limitation, all rights of the Borrower as lessee under any lease for furniture, furnishings, fixtures and other items of personal property at any time during the term of such lease (all of the foregoing is herein referred to collectively as the "Goods"); (iii Intangibles. All option rights, purchase contracts, books and records and general intangibles of the Borrower relating to the Real Estate or the Improvements and all accounts, contract rights, instruments, chattel paper and other rights of the Borrower for payment of money to it for property sold or lent by it, for services rendered by it, for money lent by it, or for advances or deposits made by it, and any other intangible property of the Borrower to the extent that any of the foregoing is related to the Real Estate or the Improvements (all of the foregoing is herein referred to collectively as the "Intangibles"); (iv Rents. All rents, issues, profits, royalties, avails, income and other benefits derived or owned by the Borrower directly or indirectly from the Real Estate or the Improvements (all of the foregoing is herein collectively called the "Rents"); (v Leases. All rights of the Borrower under all leases, licenses, occupancy agreements, concessions or other arrangements, whether written or oral, whether now existing or entered into at any time hereafter, whereby any person agrees to pay money to the Borrower or any consideration for the use, possession or occupancy of, or any estate in, the Real Estate or the Improvements or any part thereof, and all rents, income, profits, benefits, avails, advantages and claims against guarantors under any thereof (all of the foregoing is herein referred to collectively as the "Leases"), which Leases shall be deemed to include, without limitation, any lease entered into between the Borrower and the Guarantor in respect of the Real Estate and Improvements; (vi Contracts for Services. All rights of the Borrower, if any, under any contracts executed by the Borrower with any provider of goods or services for or in connection with services performed or to be performed in connection with the Real Estate or the Improvements (all of the foregoing being herein referred to collectively as the "Contracts"); (vii Other Property. All other property or rights of the Borrower of any kind or character related to the Real Estate or the Improvements, and all proceeds (including insurance and condemnation proceeds) and products of any of the foregoing. (All of the Real Estate and the Improvements, and any other property which is real estate under applicable law, is sometimes referred to collectively herein as the "Premises"); (viii Secured Assignment of Deposit Accounts. All accounts established with the Bank and identified on the books of the Bank as an account of the Borrower (the "Account"), any and all deposits at any time or from time to time credited to or deposited in the Account, and all property which may, prior to a permitted withdrawal, be acquired directly or indirectly using the proceeds (or any part thereof) of any of the foregoing, any and all interest and other income distributions on or with respect to any of the foregoing and any and all substitutions for and proceeds of any of the foregoing; provided, however, that Collateral shall not include any funds or proceeds thereof donated to the Borrower, the use of which is restricted to a specific purpose by the donor thereof. The term "Real Estate" shall mean and include the following: All of the land described on Exhibit A to Schedule 1.0 attached hereto (the "Land"), together with all and singular the tenements, rights, easements, hereditaments, rights of way, privileges, liberties, appendages and appurtenances to the Land (including, without limitation, all rights relating to storm and sanitary sewer, water, gas, electric, railway and telephone services); all development rights, air rights, water, water rights, water stock, gas, oil, minerals, coal and other substances of any kind or character underlying or relating to the Land; all estate, claim, demand, right, title or interest of the Borrower in and to any street, road, highway, or alley (vacated or otherwise) adjoining the Land or any part thereof; all strips and gores belonging, adjacent or pertaining to the Land; and any after-acquired title to any of the foregoing. Exhibit A to Schedule 1.0 Legal Description of Real Estate Lot 2 of WESTPORT INDUSTRIAL SUBDIVISION FIRST ADDITION, according to the plat thereof recorded in Book 106, page 12 in the St. Louis County Recorder's Office. Exhibit A Letter of Credit SEE ATTACHED Exhibit B Form of Legal Opinion of Counsel to Borrower SEE ATTACHED EX-4 3 EXHIBIT 4(G)-DEED OF TRUST & SECURITY AGREEMENT MISSOURI FUTURE ADVANCE DEED OF TRUST AND SECURITY AGREEMENT SECURING FUTURE ADVANCES AND FUTURE OBLIGATIONS NOT TO EXCEED $5,000,000.00 PURSUANT TO SECTION 443.055 RSMo. This Missouri Future Advance Deed of Trust and Security Agreement (hereinafter referred to as "Deed of Trust") entered into this 16th day of October, 1997, by K-V Pharmaceutical Company, a Delaware corporation (hereinafter referred to as "Grantor," whether one or more), whose address for notice hereunder is 2503 South Hanley Road, St. Louis, Missouri 63144 to Franklin D. Weihe, Hillsboro Title Company, Highway 21 and 3rd Street, Hillsboro, MO 63050 ("Trustee"), as trustee for the benefit of LaSalle National Bank, a national banking association, having a principal office at 135 South LaSalle Street, Chicago, Illinois 60603 ("Beneficiary"). W I T N E S S E T H: THIS DEED OF TRUST SECURES FUTURE ADVANCES OR OBLIGATIONS PURSUANT TO R.S. MO. SECTION 443.055 WHEREAS, Grantor has executed and delivered to Beneficiary a Reimbursement Agreement effective as of even date herewith (hereinafter as originally executed and as amended, modified or supplemented from time to time, the "Reimbursement Agreement"). Capitalized terms used herein and not otherwise defined shall have the meaning given thereto in the Reimbursement Agreement. ARTICLE I DEFINITIONS I.1 As used herein, the following terms shall have the following meanings: (a) Affiliate: As to any Person, any other Person which directly or indirectly controls, or is under common control with, or is controlled by, such Person and, if such Person is an individual, any member of the immediate family (including parents, spouse and children) of such individual and any trust whose principal beneficiary is such individual or one or more members of such immediate family and any Person who is controlled by any such member of trust. As used in this definition, "control" (including, with correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interest, by contract or otherwise). (b) Beneficiary: LaSalle National Bank, and the subsequent party or parties, from time to time, to the Reimbursement Agreement. (c) Debtor Relief Laws: The term Debtor Relief Laws shall mean any applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, insolvency, reorganization, or similar laws affecting the rights or remedies of creditors generally, as in effect from time to time. (d) Event of Default: Any happening or occurrence described in Article VI herein. (e) Escrowed Sums: The amounts paid by Grantor to Beneficiary pursuant to paragraph 11.14 hereof to be held by Beneficiary in a fund for the payment of Impositions and insurance premiums. (f) Financial Statements: The balance sheets, profit and loss statements, reconciliations of capital and surplus, changes in cash flow, schedules of sources and applications of funds, and other financial information of Grantor or the Guarantors heretofore furnished to Beneficiary or required to be furnished to Beneficiary under the terms of this Deed of Trust or any other of the Security Documents from time to time, which statements shall be prepared in accordance with generally accepted accounting principles consistently applied or such other form as shall be reasonably acceptable to Beneficiary and shall be certified by Grantor or the Guarantors, as appropriate. (g) Fixtures: All materials, supplies, equipment, apparatus and other items now or hereafter attached to, installed on or in the Land or the Improvements, or which in some fashion are deemed to be fixtures to the Land or Improvements under the laws of the State of Missouri, other than those owned by tenants under any lease. The term "Fixture" shall include, without limitation, all items of Personalty to the extent that the same may be deemed fixtures under applicable law. (h) Governmental Authority: Any and all courts, boards, agencies, commissions, offices or authorities of any nature whatsoever for any governmental unit (federal, state, county, district, municipal, city or otherwise) whether now or hereafter in existence. (i) Governmental Requirements: The term Governmental Requirements shall mean all statutes, laws, ordinances, orders, writs, injunctions, decrees, rules and regulations of any Governmental Authority applicable to Grantor, the Mortgaged Property or the Improvements. (j) Grantor: The above defined Grantor and any and all subsequent record or equitable owners of the Mortgaged Property. (k) Impositions: All real estate and personal property taxes; water, gas, sewer, electricity and other utility rates and charges; charges imposed pursuant to any subdivision, planned unit development or condominium declaration or restrictions; charges for any easement, license or agreement maintained for the benefit of the Mortgaged Property, and all other taxes, charges and assessments and any interest, costs or penalties with respect thereto of any kind and nature whatsoever which at any time prior to or after the execution hereof may be assessed, levied or imposed upon the Mortgaged Property or the ownership, use, occupancy or enjoyment thereof by entities with the legal right or authority to so assess, levy or impose. (l) Improvements: Any and all buildings, structures, open parking areas and other improvements, and any and all accessions, additions, replacements, substitutions or alterations thereof or appurtenances thereto, now or at any time hereafter situated, placed or constructed upon the Land or any part thereof. (m) Indebtedness: The principal of, including future advances of said principal amount, interest on and all other amounts and payments due under or secured by the Reimbursement Agreement and the other Security Documents, together with all funds hereafter advanced by Beneficiary to or for the benefit of Grantor (including, without limiting the generality of the foregoing, advances to protect the security of and costs of enforcement under the Reimbursement Agreement, this Deed of Trust or the other Security Documents), and all other indebtedness of whatever kind or character, direct or indirect, absolute or contingent, owing or which may hereafter become owing by Grantor to Beneficiary, whether such indebtedness is evidenced by note, open account, overdraft, endorsement, surety agreement, guaranty or otherwise, it being contemplated that Grantor may hereafter become indebted to Beneficiary in further sum or sums including, without limitation, the obligation of the Grantor to reimburse the Beneficiary with interest for all amounts paid by the Beneficiary on account of the Beneficiary's letter of credit (the "Letter of Credit") in the original principal amount of Two Million Six Hundred Thousand and 00/100 ($2,600,000.00) for the account of Grantor and for the benefit of Mark Twain Bank, a bank with its principal office in St. Louis Missouri, as trustee under an Indenture of Trust (the "Trust Indenture") between such trustee and the Industrial Development Authority of the County of St. Louis, Missouri (the "Issuer") dated as of November 1, 1989, pursuant to which were issued the Issuer's Private Activity Refunding and Revenue Bonds Series 1989(F) (K-V Pharmaceutical Company Project). The total principal amount of Indebtedness secured by this Deed of Trust, excluding accrued interest (whether or not added to principal) and costs, fees and charges and further excluding advances described in subsection 3 of Section 443.055 R.S.Mo. (as the same may be amended from time to time) and advances by Beneficiary for other purposes authorized by this Deed of Trust shall not exceed Five Million and 00/100 Dollars ($5,000,000.00). (n) Land: The real estate or any interest therein described on Exhibit "A" attached hereto and made a part hereof, together with all Improvements and fixtures and all rights, titles and interests appurtenant thereto. (o) Leases: All of the right, title and interest of Grantor in and to any and all Real Estate Leases and all leases, subleases, licenses, concessions or other agreements (written or verbal, now or hereafter in effect) which grant Grantor an interest in the Personalty. (p) Legal Requirements: (i) Any and all present and future judicial decisions, statutes, rulings, rules, regulations, permits, certificates or ordinances of any Governmental Authority in any way applicable to Grantor or the Mortgaged Property, including but not limited to those respecting the ownership, use, occupancy, possession, operation, maintenance, alteration, repair or reconstruction thereof, (ii) Grantor's presently or subsequently effective by-laws and articles of incorporation, or any instruments establishing any partnership, limited partnership, joint venture, trust or other form of business association (if either, both or all by any of same), (iii) any and all Leases and other contracts (written or oral) of any nature to which Grantor may be bound and (iv) any and all restrictions, reservations, conditions, easements or other covenants or agreements of record affecting the Mortgaged Property. (q) Mortgaged Property: The Land, Improvements, Fixtures, Personalty, Leases and Rents, together with: (i) all rights, privileges, tenements, hereditaments, rights-of-way, easements, appendages and appurtenances in anywise appertaining thereto, and all right, title and interest of Grantor in and to any streets, ways, alleys, strips or gores of land adjoining the Land or any part therein or thereof; (ii) all betterments, accessions, additions, appurtenances, substitutions, replacements and revisions thereof and thereto and all reversions and remainders therein; (iii) all other interest of every kind and character which Grantor now has or at anytime hereafter acquires in and to the above-described real and personal property and all property which is used in connection therewith, including rights of ingress and egress, easements, licenses, and all reversionary rights or interests of Grantor with respect to such property. In the event the estate of Grantor in and to any of the Land and Improvements is a leasehold estate, this conveyance shall include and the lien, security interest and assignment created hereby shall encumber and extend to all other, further or additional title, estates, interest or rights which may exist now or at any time be acquired by Grantor in or to the property demised under the lease creating such leasehold estate and including Grantor's rights, if any, to purchase the property demised under such lease and, if fee simple title to any of such property shall ever become vested in Grantor, such fee simple interest shall be encumbered by this Mortgage in the same manner as if Grantor had fee simple title to such property as of the date of execution hereof; and (iv) any and all other security and collateral of any nature whatsoever, now or hereafter given for the repayment of the Indebtedness or the performance and discharge of the Obligations. As used in this Deed of Trust, the term "Mortgaged Property" is expressly defined as meaning all or, where the context permits or requires, any portion of the above and all or, where the context permits or requires, any interest therein. (r) Obligations: Any and all of the covenants, warranties, representations and other obligations (other than to repay the Indebtedness) made or undertaken by Grantor to Beneficiary, Trustee or others as set forth in the Security Documents, and/or any other documents or instruments executed in connection with the Indebtedness. (s) Permitted Encumbrances: The outstanding liens, easements, building lines, restrictions, security interests and other matters (if any) as set forth on Exhibit "B" attached hereto and made a part hereof, if any, existing financing statements, if any, not required to be released by Beneficiary of even date herewith and to the extent permitted pursuant to Section 5.4 of this Deed of Trust, (i) the rights of the lessors under any Leases other than Real Estate Leases wherein Grantor is the lessee, (ii) purchase money security interests in Personalty, and (iii) any financing statements evidencing the foregoing. (t) Person: An individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization, government or any agency or political subdivision thereof, or any other form of entity. (u) Personalty: All of the right, title and interest of Grantor in and to all tangible and intangible personal property which is now or becomes attached to, installed on or placed on or used on or in connection with or which is acquired for such attachment, installation, placement or use, or which arises out of the development, improvement, financing, leasing, sale, operation or use of the Land, Improvements, Fixtures or other goods located on the Land or Improvements, and with respect to all of the foregoing, whether now owned or at any time hereafter acquired, including, but not limited to: (i) all furnishings, building materials, supplies, machines, engines, boilers, stokers, pumps, fans, vents, blowers, dynamos, furnaces, elevators, ducts, shafts, pipes, furniture, cabinets, shades, blinds, screens; plumbing, heating, air conditioning, lighting, lifting, ventilating, refrigerating, cooking, medical, laundry and incinerating equipment; partitions, drapes, carpets, rugs and other floor coverings, awnings; call and sprinkler systems, fire prevention and extinguishing apparatus and equipment, water tanks, swimming pools, compressors, vacuum cleaning systems; disposals, dishwashers, ranges, ovens, kitchen equipment, cafeteria equipment and recreational equipment, to the extent the same constitutes real property in the state in which the Mortgaged Property is located; (ii) all items relating to the design, development, operation, management and use of the Land, the Improvements and the Fixtures, including, but not limited to: (w) all names under which or by which the Land, the Improvements and the Fixtures, may at any time be owned and operated under, any such names or any variant thereof, and all goodwill in any way relating to the Land, the Improvements and the Fixtures; (x) all permits, licenses, authorizations, variances, trademarks, service marks, trade names, symbols, land use entitlements, approvals, consents, clearances, and rights obtained from governmental agencies issued or obtained in connection with the Land, the Improvements and the Fixtures; and (y) to the extent allowed or permitted, all permits, licenses, approvals, consents, authorizations, franchises and agreements issued or obtained in connection with the use, occupation or operation of the Land, the Improvements and the Fixtures; and (iii) all evidence of ownership of any part of the Land, the Improvements, and the Fixtures that is owned by Grantor in common with others, including all water stock relating to the Land, if any, and all documents or rights of membership in any owners' or members' association or similar group having responsibility for managing or operating any part of the Land; (iv) any and all construction, development, financing, guaranty, indemnity, maintenance, management, service, supply and warranty agreements, commitments, contracts, subcontracts, insurance policies and the proceeds therefrom, licenses and bonds now or anytime hereafter arising from construction on the Land or the use or enjoyment of the Land and the Improvements including, without limitation, maintenance agreements, service contracts and all contracts and agreements for the operation, management and leasing of the Land and/or the Improvements; (v) all water, water stock, water capacity or other water rights, licenses, permits, warranties, irrigation rights, oil and gas rights, minerals, crops and timber, and wastewater and storm drainage discharge capacity attributable or allowable to all or any portion of the Land, the Improvements; (vi) all rights, titles and interests in and to all of the plans, specifications, drawings, surveys, maps and plats, including, but not limited to, plot plans, foundation plans, floor plans, elevations, framing plans, cross-sections of walls, mechanical plans, electrical plans and architectural and engineering studies and analyses heretofore or hereafter prepared by any architect or engineer in respect to the Land, Improvements or Fixtures; (vii) all of Grantor's right, title and interest in and to any award, remuneration, settlement of compensation heretofore made or hereafter to be made by any Governmental Authority to Grantor, including those for any vacation of, change of grade in, any streets affecting the Land or the Improvements; (viii) all of Grantor's right, title and interest in and to all proceeds arising from or by virtue of the sale, lease or other disposal of all or any part of the Mortgaged Property (consent to same not granted or to be implied hereby); and, all proceeds (including premium refunds) payable or to be payable under each policy of insurance relating to the Mortgaged Property; and (ix) all additions, accessions, accessories, amendments, modifications, extensions, renewals and enlargements, and additions to, substitutions for the products thereof, and all proceeds, whether cash proceeds or noncash proceeds, and including insurance and condemnation proceeds, received when any of the foregoing property described in (i) through (ix) above (or the proceeds thereof) is sold, exchanged, leased, licensed, or otherwise disposed of, whether voluntarily or involuntarily or when earlier received. Notwithstanding any of the foregoing to the contrary, accounts receivables for medical services rendered in connection with the operation of a hospital on the Land are specifically excluded from, and not covered by the term "Personalty." (v) Real Estate Leases: All of the lessor's right, title and interest in and to any and all leases, subleases, licenses, concessions or other agreements (written or verbal, now or hereafter in effect) which grant a possessory interest in and to, or the right to extract, mine, reside in, sell or use the Land, Improvements or Fixtures. (w) Rents: All of the rents, revenues, income, proceeds, royalties, profits and other benefits paid or payable for using, leasing, licensing, possessing, operating from or in, residing in, selling, mining, extracting or otherwise enjoying or using the Mortgaged Property. (x) Security Documents: The Reimbursement Agreement, the Security Agreement, this Deed of Trust, the Letter of Credit, the Assignment of Rents and Leases and any and all other documents now or hereafter executed by Grantor or any other person or party to evidence or secure the payment of the Indebtedness or the performance and discharge of the Obligations, as same may be amended. (y) Trustee: Franklin D. Weihe, Hillsboro Title Company, Highway 21 and 3rd Street, Hillsboro, MO 63050 and any other successor trustee hereunder. ARTICLE II GRANT II.1 For and in consideration of ten dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and for the further consideration of the uses, purposes and trusts hereinafter set forth, and to secure the punctual payment by Grantor when due, whether at stated maturity, by acceleration or otherwise of the Indebtedness and the performance and observance of the Obligations, Grantor has and does hereby grant, bargain, sell, mortgage, warrant, convey, remise, release, assign, transfer, grant a security interest in, set over, deliver and confirm unto Trustee (and, where the nature of any of the following property requires a grant directly to Beneficiary to create a valid and enforceable security interest, unto Beneficiary) and his (or its) substitutes, successors and assigns upon the terms and conditions of this Deed of Trust, with power of sale as provided herein, all of the estate, right, title and interest of Grantor in, to and under or derived from the Mortgaged Property whether now owned or hereafter acquired, including the products and proceeds thereof and additions and accessions thereto. ARTICLE III WARRANTIES AND REPRESENTATIONS Grantor hereby unconditionally warrants and represents to Beneficiary as of the date hereof as follows: III.1 Organization and Power: (a) That Grantor is duly organized, and validly existing under the laws of the State of Delaware, all in accordance with applicable Legal Requirements, and the articles of incorporation and by-laws of Grantor are in full force and effect and have not been amended or changed except as previously disclosed to Beneficiary in writing; (b) no proceeding is pending, planned or threatened for the dissolution or annulment of Grantor; (c) all licenses, filing fees, income and other taxes due and payable by Grantor have been paid in full; (d) all conditions prerequisite to Grantor doing business in Missouri have been done; (e) Grantor is in good standing in Delaware and Missouri; and (f) Grantor has all requisite power and authority to own, lease, operate and encumber the Mortgaged Property. III.2 Validity of Documents: The execution, delivery and performance by Grantor of the Security Documents and the borrowing evidenced by the Reimbursement Agreement are within Grantor's powers and have been duly authorized by Grantors and all other requisite corporate action; (b) have received all (if any) requisite prior governmental approval in order to be legally binding and enforceable in accordance with the terms thereof; and (c) will not violate, be in conflict with, result in a breach of or constitute (with due notice or lapse of time, or both) a default under, any Legal Requirement or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon Grantor's property or assets, except as contemplated by the provisions of the Security Documents. The Security Documents constitute legal, valid and binding obligations of Grantor obligated under the terms of the Security Documents in accordance with their respective terms, and Grantor has full and lawful authority to bargain, grant, sell, mortgage, assign, transfer and convey all of the Mortgaged Property as set forth herein. III.3 Information: All information, reports, papers and data given to Beneficiary with respect to Grantor or the Mortgaged Property (excluding any projections or forecasts) are accurate, complete and correct in all material respects as of the date hereof and to the best knowledge of Grantor, do not omit any fact the inclusion of which is necessary to prevent the facts contained therein from being materially misleading. III.4 Title to Mortgaged Property and Lien of this Instrument: Grantor has good and indefeasible title in fee simple to the Land described on Exhibit "A" attached hereto, and good and indefeasible title to the Improvements, the Fixtures and Personalty, Leases and Rents, free and clear of any liens, charges, encumbrances, security interests and adverse claims whatsoever except the Permitted Encumbrances. This Deed of Trust constitutes a valid, subsisting, first lien deed of trust on the Land, the Improvements, the Fixtures and a valid, subsisting first security interest in and to the Personalty, all in accordance with the terms hereof. III.5 Taxes and Other Payments: Grantor has filed all federal, state, county, municipal and city income and other tax returns required to have been filed by it and has paid all taxes which have become due pursuant to such returns or pursuant to any assessments received by Grantor, and Grantor does not know of any basis for any additional assessment in respect of any such taxes. Grantor has paid or will pay in full in a commercially reasonable time and manner all sums owing or claimed for labor, material, supplies, personal property (whether or not constituting a Fixture hereunder) and services of every kind and character used, furnished or installed in the Mortgaged Property which Grantor is obligated to pay. III.6 Litigation: There are no actions, suits or proceedings pending or, to the knowledge of Grantor, threatened against or affecting the Mortgaged Property or involving the validity or enforceability of this Deed of Trust or the priority of the lien and security interest hereof, and no event has occurred (including specifically Grantor's execution of the Security Documents and its consummation of the loan represented thereby) which will violate, be in conflict with, result in the breach of or constitute (with due notice or lapse of time, or both) a default under, any Legal Requirement or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of Grantor's property other than the lien and security interest created by the Security Documents. III.7 The Financial Statements: To the best of Grantor's knowledge the Financial Statements are true, correct, and complete as of the dates specified therein and fully and accurately present in all material respects the financial condition of Grantor as of the date thereof. No material adverse change has occurred in the financial condition of Grantor since the date of the most recent Financial Statements delivered to Beneficiary. III.8 Utilities: All utility services in such capacities as are necessary for the Mortgaged Property and the operation thereof for their intended purpose are available to the Mortgaged Property and the operation thereof for their intended purpose, including water supply, storm and sanitary sewer facilities, gas, electric and telephone facilities. III.9 Streets and Parking: All parking areas, streets, roads, and/or highways necessary for the full utilization of the Improvements for their intended purposes have been completed or the necessary rights-of-way therefor have either been acquired by the appropriate Governmental Authority or have been dedicated to the public use and accepted by such Governmental Authority. III.10 Permits: All zoning, utility, building, health and operating permits (if any) required for the operation of the Improvements have been obtained and copies of same shall be delivered to Beneficiary. ARTICLE IV AFFIRMATIVE COVENANTS Grantor hereby unconditionally covenants and agrees with Beneficiary as follows: IV.1 Payment and Performance: Grantor will pay the Indebtedness as and when called for in the Security Documents and will perform all of the Obligations in full and on or before the dates they are to be performed. IV.2 Existence: Grantor will preserve and keep in full force and effect its existence, rights, franchises and trade names. IV.3 Compliance with Legal Requirements: Grantor will promptly and faithfully comply with, conform to and obey all present and future Legal Requirements whether or not same shall necessitate structural changes in, improvements to, or interfere with the use or enjoyment of, the Mortgaged Property. IV.4 Payment of Impositions: Subject to the provisions of paragraph 11.14 herein, Grantor will pay and discharge, or cause to be paid and discharged, the Impositions not later than the earlier of the date same becomes delinquent, or the day any fine, penalty, interest or cost may be added thereto or imposed or the day any lien may be filed for the nonpayment thereof (if such day is used to determine the due date of the respective item); provided, however, that Grantor may, if permitted by law and pursuant to an agreement with the taxing entity, pay the Impositions in installments whether or not interest shall accrue on the unpaid balance of such Impositions. Grantor may in good faith, in lieu of paying such Impositions as they become due and payable, by appropriate proceedings, contest the validity thereof. During such contest Grantor shall not be deemed in default hereunder because of such nonpayment if, in the case of a contest involving an amount in excess of $100,000, prior to delinquency of the asserted tax or assessment, Grantor furnishes Beneficiary an indemnity bond, conditioned that such tax or assessment with interest, cost and penalties be paid as herein stipulated, secured by a deposit in cash or security acceptable to Beneficiary or with surety acceptable to Beneficiary, in the amount of the tax or assessment being contested by Grantor and a reasonable additional sum to pay all possible costs, interest and penalties imposed or incurred in connection therewith. Upon conclusion of such contest Grantor shall promptly pay any amount adjudged by a court of competent jurisdiction to be due, with all costs, penalties and interest thereon prior to the date such judgment becomes final or any writ or order is issued under which the Mortgaged Property may be sold pursuant to such judgment. IV.5 Repair: Grantor will keep or cause the Mortgaged Property to be kept in good order and condition consistent with its existing condition, reasonable wear and tear excepted, and presenting a good appearance and will make or cause tenants of the Mortgaged Property to make all repairs, replacements, renewals, additions, betterments, improvements and alterations thereof and thereto, interior and exterior, structural and nonstructural, ordinary and extraordinary, foreseen and unforeseen, which are necessary or reasonably appropriate to keep same in such order and condition, reasonable wear and tear excepted. Grantor will also use its reasonable efforts to prevent any act or occurrence which might impair the value or usefulness of the Mortgaged Property for its intended usages as set forth in any plans and specifications for the Improvements submitted to Beneficiary or in the Security Documents. In instances where repairs, replacements, renewals, additions, betterments, improvements or alterations are required in and to the Mortgaged Property on an emergency basis to prevent loss, damage, waste or destruction thereof, Grantor shall proceed to construct same, or cause same to be constructed, notwithstanding anything to the contrary contained in paragraph 5.2 hereinbelow; provided, however, that in instances where such emergency measures are to be taken, Grantor will promptly notify Beneficiary in writing of the commencement of such emergency measures and, when same are completed, the completion date and the measures actually taken. IV.6 Insurance: Grantor shall obtain and maintain insurance upon and relating to the Mortgaged Property providing the following described insurance coverage: (a) Casualty. Fire and casualty insurance insuring against personal injury and death, loss by fire and such other hazards, casualties and contingencies (including but not limited to fire, lightning, hail, windstorm, explosion, malicious mischief, vandalism and rent loss or business interruption insurance covering loss of Rents) as are covered by extended coverage policies in effect where the Land is located and such other risks as may be specified by Beneficiary from time to time, all in such amounts and with such insurers of recognized responsibility as are acceptable to Beneficiary; provided, however, that absent written direction from Beneficiary, such insurance shall be in an amount not less than the full insurable replacement value of the Mortgaged Property with no co-insurance liability. (b) Flood. If, and to the extent that the Mortgaged Property is located within an area that has been or is hereafter designated or identified as an area having special flood hazards by the Secretary of Housing and Urban Development or by such other official as shall from time to time be authorized by federal or state law to make such designation pursuant to the National Flood Insurance Act of 1968, as such act may from time to time be amended and in effect, or pursuant to any other national or state program of flood insurance, Grantor shall carry flood insurance with respect to the Mortgaged Property in amounts not less than the maximum limit of coverage then available with respect to the Mortgaged Property pursuant to any and all national and state flood insurance programs with respect to the Mortgaged Property or the amount of the Indebtedness, whichever is less. (c) Boiler and Machinery. Boiler and machinery insurance covering loss or damage to all portions of the Mortgaged Property comprised of air conditioning and heating systems, other pressure vessels, machinery, boilers or high pressure piping in an amount and containing terms acceptable to Beneficiary. (d) Liability Insurance. Commercial general liability, automobile liability, worker's compensation, employer liability and broad form umbrella or excess liability insurance policies against claims for bodily injury, death or property damage in an amount and containing terms acceptable to Beneficiary. Each insurance policy issued in connection with the Mortgaged Property shall provide, by way of endorsements, riders or otherwise, that proceeds will be payable to Beneficiary as its interest may appear. All renewal and substitute policies of insurance or certified copies thereof shall be delivered at the office of Beneficiary, premiums paid, at least thirty (30) days before termination of policies theretofore delivered to Beneficiary. If proof of renewal or re-issuance of any insurance policy required hereunder has not been received by Beneficiary at least thirty (30) days prior to the expiration of an existing policy, and Beneficiary gives at least ten (10) days written notice to Grantor or, if such policy will expire within said ten (10) day period, then such lesser notice prior to the expiration of the policy as Beneficiary may reasonably give, Beneficiary shall have the right, but not the obligation, to make premium payments, at Grantor's expense, to prevent any cancellation, endorsement, alteration or reissuance, and such payments shall be accepted by the insurer to prevent same. All such payments by Beneficiary shall be part of the Indebtedness secured hereby and payable on demand. IV.7 Restoration Following Casualty: If any act or occurrence of any kind or nature (including any casualty for which insurance was not obtained or obtainable) shall result in damage to or loss or destruction of the Mortgaged Property, Grantor will give notice thereof to Beneficiary. In case of loss in which the cost of the restoration, repair or replacement (hereinafter referred to as the "Work") of the Mortgaged Property estimated by Beneficiary shall not exceed $1,000,000.00 then such proceeds may be used for the prosecution of the Work in the manner hereinafter provided. If the cost of the Work estimated by Beneficiary shall exceed $1,000,000.00, Beneficiary, at its option, shall be entitled to receive and retain the proceeds of the insurance policies, applying the same upon the Indebtedness; however, if such repairs are essential to Grantor's ongoing business and the repayment of the Indebtedness, Beneficiary shall be reasonable in determining whether or not to make such funds available to pay the cost of the Work. Notwithstanding anything herein to the contrary if any loss shall occur at anytime when Grantor shall be in default in the performance of this covenant, Beneficiary shall be entitled to the benefit of all insurance policies held by or for any Grantor, to the extent as if same had been made payable to Beneficiary; and upon foreclosure hereunder, Beneficiary shall become the owner of any insurance proceeds paid or to be paid under said policies and shall promptly apply such proceeds to reduce the Indebtedness. In the event Beneficiary elects to make such insurance proceeds available to Grantor for such purpose, Grantor will promptly and at Grantor's sole cost and expense and regardless of whether the insurance proceeds (if any) shall be sufficient for the purpose, commence and continue diligently to completion to restore, repair, replace and rebuild the Mortgaged Property as nearly as possible to its value, condition and character immediately prior to such damage, loss or destruction. In the event insurance proceeds are not made available to Grantor to restore, repair, replace or rebuild the Mortgaged Property as aforesaid, Grantor shall not be obligated to perform such work but shall clean up any damaged areas in a commercially reasonable manner at Grantor's sole cost and expense. If the proceeds of the insurance described in Paragraph 4.6 hereinabove are to be used for the prosecution of the Work, such proceeds shall be paid out by Beneficiary from time to time to Grantor (or, at the option of Beneficiary, jointly to Grantor and the persons furnishing labor and/or material incident to such restoration, repair or replacement or directly to such persons) as the Work progresses, subject to the following conditions if the cost of the Work exceeds $100,000.00: (a) an architect or engineer, approved by Beneficiary, shall be retained by Grantor (at Grantor's expense) and charged with the supervision of the Work and Grantor shall have prepared, submitted to Beneficiary and secured Beneficiary's written approval of the plans and specifications for such Work which shall not be unreasonably withheld or delayed; (b) each request for payment by Grantor shall be made on ten (10) days prior written notice to Beneficiary and shall be accompanied by a certificate executed by the architect or engineer supervising the Work stating, among such other matters as may be reasonably required by Beneficiary that: (i) all of the Work completed has been done in compliance with the approved plans and specifications; (ii) the sum requested is justly required to reimburse Grantor for payments by Grantor to, or is justly due to, the contractor, subcontractors, materialmen, laborers, engineers, architects or other persons rendering services or materials for the Work (giving a brief description of such services and materials); (iii) when added to all sums previously paid out by Grantor, the sum requested does not exceed the value of the Work done to the date of such certificate: and (iv) the amount of insurance proceeds remaining in the hands of Beneficiary plus any funds deposited with Beneficiary or demonstrated to be available for such purpose in accordance with subparagraph (f) below, will be sufficient on completion of the Work to pay for the same in full (giving in such reasonable detail as the Beneficiary may require an estimate of the cost of such completion); (c) each request shall be accompanied by waivers of lien satisfactory in form and substance to Beneficiary covering that part of the Work completed prior to that part of the Work for which payment or reimbursement is being requested and by a search prepared by a title company or licensed abstracter or by other evidence satisfactory to Beneficiary that there has not been filed with respect to the Mortgaged Property any mechanic's lien or other lien, affidavit or instrument asserting any lien or any lien rights with respect to the Mortgaged Property; (d) there has not occurred any Event of Default (as herein defined) since the hazard, casualty or contingency giving rise to payment of the insurance proceeds occurred; (e) in the case of the request for the final disbursement, such request is accompanied by a copy of any Certificate of Occupancy or other certificate required by any Legal Requirement to render occupancy of the damaged portion of the Mortgaged Property lawful; and (f) if, in Beneficiary's reasonable judgment, the amount of such insurance proceeds will not be sufficient to complete the Work (which determination may be made prior to or during the performance of the Work), Grantor shall deposit with Beneficiary, immediately upon a request therefor, or, demonstrate to Beneficiary's reasonable satisfaction that Grantor has funds available for such purpose in Grantor's possession (in which event such funds will be the first funds expended to pay for the Work) an amount of money which when added to such insurance proceeds will be sufficient, in Beneficiary's reasonable judgment, to complete the Work. If, upon completion of the Work, any portion of the insurance proceeds has not been disbursed to Grantor (or one or more of the other aforesaid persons) incident thereto, Beneficiary shall disburse such balance to Grantor. Nothing herein shall be interpreted to prohibit Beneficiary from (y) withholding from each such disbursement ten percent (10%) (or such greater amount, if permitted or required by any Legal Requirement) of the amount otherwise herein provided to be disbursed, and then continuing to withhold such sum until the time permitted for perfecting liens against the Mortgaged Property has expired, at which time the amount withheld shall be disbursed to Grantor (or to Grantor and/or any person or persons furnishing labor and/or material for the Work or directly to such persons), or (z) applying at any time the whole or any part of such insurance proceeds to the curing of any Event of Default. IV.8 Leases and Rents: Except in the ordinary course of Grantor's business (which shall generally include current market conditions at such location when such events occur), Grantor shall (a) with respect to any proposed Real Estate Lease, not execute any Real Estate Lease without the prior written consent of Beneficiary (and which Real Estate Lease shall be only for the occupancy by the tenant thereunder); (b) not discount any rent payable under any Real Estate Lease or modify or vary, surrender or terminate, either orally or in writing, any Real Estate Lease resulting in terms less favorable to Grantor than those existing as of the date hereof; (c) not cancel any Real Estate Lease affecting the Mortgaged Property or any part thereof; (d) not voluntarily terminate, cancel, waive, modify or amend its rights or the obligations of any party under any of the Real Estate Leases or (e) use all reasonable efforts to maintain each of the Real Estate Leases in full force and effect during the full term hereof. With respect to the Real Estate Leases, Grantor shall (i) not collect any rent payable for a period of more than one (1) month in advance (except that Grantor may collect the first month's rent at one time prior to the lease commencement date); (ii) not further assign its interest in, to or under any Real Estate Lease or the rents payable under any Real Estate Lease and from the Mortgaged Property to any person or entity; (iii) duly and punctually perform and comply with any and all representations, warranties, covenants and agreements expressed as binding upon it under each of the Real Estate Leases; and (iv) appear and/or defend any action or proceeding involving Grantor arising under or in any manner connected with any of the Real Estate Leases. Grantor has executed and delivered to Beneficiary an Assignment of Leases and Rents of even date herewith granting Beneficiary certain rights with respect to the Mortgaged Property including, without limiting the generality of the foregoing, the right to collect Rents directly from the tenants under the Real Estate Leases. IV.9 Inspection: Grantor will permit Trustee and Beneficiary and their agents, representatives and employees to inspect the Mortgaged Property during reasonable business hours, provided such inspection does not unreasonably interfere with the conduct of business by tenants occupying the Mortgaged Property. Trustee and Beneficiary will notify Grantor prior to any inspection. IV.10 Defense of Title: If the title of Trustee to, or the interest of Beneficiary in, the Mortgaged Property hereby conveyed, or any part thereof, shall be endangered or shall be attached, directly or indirectly, and in the event the title insurance company issuing Beneficiary a title insurance policy is either not defending against such claim or, in Beneficiary's reasonable opinion, not adequately defending against such claim, Grantor shall, at Grantor's expense, take all necessary and proper steps for the defense of such title or interest, including the employment of counsel, the prosecution or defense of litigation and the compromise or discharge of claims made against such title or interest in the Mortgaged Property. Grantor will indemnify and hold Beneficiary harmless from and against any and all loss, cost, damage, liability or expense (including all court costs and attorneys' fees) incurred by Beneficiary in protecting its interests hereunder in such an event. In the event Beneficiary, in Beneficiary's sole discretion, is not satisfied with Grantor's actions in such regard, Grantor hereby authorizes Beneficiary, at Grantor's expense, to take all necessary and proper steps for the defense of such title or interest, including the employment of counsel, the prosecution or defense of litigation and the compromise or discharge of claims made against such title or interest in the Mortgaged Property. All such payments by Beneficiary shall be part of the Indebtedness secured hereby and be payable on demand. IV.11 Future Impositions: At any time any law shall be enacted imposing or authorizing the imposition of any tax upon this Deed of Trust or upon any rights, titles, liens or security interests created hereby or upon the Letter of Credit, or any part thereof, upon Beneficiary's written request, Grantor shall immediately pay all such taxes; provided that, in the alternative, upon Beneficiary's written request, Grantor may, in the event of the enactment of such a law, and must if it is unlawful for Grantor to pay such taxes, prepay the amounts due under the Reimbursement Agreement in full within sixty (60) days after demand therefor by Beneficiary. IV.12 Estoppel Certificates. Grantor shall, upon request, promptly furnish, at any time and from time to time a written statement or affidavit, in such form as may be reasonably required by Beneficiary, stating the amount of the unpaid balance of funds advanced pursuant to the Letter of Credit. IV.13 Financial Statements and Reports: Grantor will maintain full and accurate books of account and other records reflecting the results of its operations and will furnish or cause to be furnished to Beneficiary those Financial Statements required pursuant to the Reimbursement Agreement. ARTICLE V NEGATIVE COVENANTS Grantor hereby covenants and agrees with Beneficiary that, until the entire Indebtedness shall have been paid in full and all of the Obligations which are then subject to performance and discharge shall have been fully performed and discharged: V.1 Use Violations: Grantor will not use, maintain, operate or occupy, or allow the use, maintenance, operation or occupancy of the Mortgaged Property in any manner which (a) violates any Legal Requirement, including, without limitation, Legal Requirements with respect to the disposal of medical waste products, (b) may be dangerous unless safeguarded as required by law, or (c) constitutes a public or private nuisance. V.2 Alterations: Grantor (i) will not commit or permit any waste (as such term is defined at common law) of the Mortgaged Property and (ii) will not (subject to the provisions of paragraph 4.5 and 4.7 herein), without the prior written consent of Beneficiary, make or permit to be made any alterations or additions to the Mortgaged Property which materially and adversely affect the structural portions of any Improvements, the exterior side or common areas of any Improvements, or any areas visible from the exterior or common areas of the Improvements. V.3 Replacement of Fixtures and Personalty: Grantor will not, without the prior written consent of Beneficiary, permit any of the Fixtures or Personalty to be removed at any time from the Land or Improvements (i) except in the ordinary course of Grantor's business in a manner that does not materially adversely affect Grantor's business operations or (ii) unless the removed item is obsolete, removed temporarily for maintenance and repair or, if removed permanently, is replaced by an article of equal suitability and value, owned by Grantor, free and clear of any lien or security interest except such as may be first approved in writing by Beneficiary. V.4 No Further Encumbrances: Grantor will not, without the prior written consent of Beneficiary, create, place, suffer or permit to be created or placed or, through any act or failure to act, acquiesce in the placing of or allow to remain, any mortgage, pledge, lien (statutory, constitutional or contractual), security interest, encumbrance or charge on, or conditional sale or other title retention agreement, regardless of whether same are expressly subordinate to the liens of the Security Documents, with respect to the Mortgaged Property, other than (i) the Permitted Encumbrances, and (ii) leases of Personalty or Fixtures used on the Mortgaged Property which according to generally accepted accounting principles consistently applied are capital leases ("Capital Leases"), purchase money security interests in Personalty and Fixtures used on the Mortgaged Property and leases, which are not Capital Leases, of Personalty and Fixtures used on the Mortgaged Property, provided that the liability for the Personalty and Fixtures so leased and so subject to security interests does not exceed $1,500,000.00, or such greater amount as Beneficiary may agree to in writing. The foregoing shall not limit the right of tenants under Real Estate Leases to install removable fixtures subject to security interests on the Mortgaged Property which can be removed without damage to the Mortgaged Property and which pursuant to the Real Estate Leases and the written consent of Grantor obtained prior to installation shall remain the property of such tenants and shall not be considered part of the Mortgaged Property. V.5 Zoning; Title Matters: Grantor will not, without Beneficiary's express prior written consent, (A) initiate or support any zoning reclassification of the Mortgaged Property or seek any variance under existing zoning ordinances applicable thereto; (B) modify, amend or supplement any Permitted Encumbrances; (C) impose any restrictive covenants or any other encumbrance upon the Mortgaged Property, execute or file any subdivision plat affecting the Mortgaged Property or consent to the annexation of the Mortgaged Property to any municipality; or (D) permit or offer the Mortgaged Property to be used by the public or any person in such manner as might make possible a claim of adverse usage or possession or of any implied dedication or easement by prescription. ARTICLE VI EVENTS OF DEFAULT VI.1 Default: Any one or more of the following events shall constitute an "Event of Default" hereunder and under the Security Documents: (a) A failure to pay when and as the same shall become due and payable, whether by maturity or otherwise, any interest, principal or other amounts required to be paid hereunder or under any of the Security Documents; which default continues for a period of ten (10) days after Beneficiary delivers written notice of such failure to Grantor; provided, however, Beneficiary shall only be obligated to deliver two such notices within any calendar year and if Beneficiary has delivered two written notices of prior failures to Grantor within a calendar year, Beneficiary shall not be obligated to deliver any additional written notices of subsequent failures within the calendar year after the two written notices of the prior failures and an Event of Default shall be deemed to occur automatically upon the subsequent failure within the calendar year to pay any such sum within ten (10) days of the date same is due and payable without any notice to Grantor; (b) Default in the due observance or performance of any of the terms, covenants or conditions contained in this Deed of Trust or the Reimbursement Agreement or any of the Security Documents (except for a default described in subparagraph (a) above) which default continues for a period of thirty (30) days after Beneficiary delivers written notice of such default to Grantor; (c) Any representation or warranty made by Grantor or a Guarantor to Beneficiary in any of the Security Documents or any certificate or document furnished to Beneficiary in connection with the funds advanced pursuant to the Letter of Credit or in furtherance of the requirements of this Deed of Trust or of any other Security Document shall be incorrect in any material respect at the time when made or at the time when reaffirmed or deemed reaffirmed by the terms of any Security Document; (d) Subject to Grantor's rights to contest, as set forth in Section 4.4 hereof, a failure by Grantor to pay or cause to be paid, before any fine, penalty, interest or cost may be added thereto, all franchise taxes and charges, and other governmental charges, general and special, ordinary and extraordinary, unforeseen as well as foreseen, of any kind and nature whatsoever, in an amount in excess of $100,000, including but not limited to, assessments for public improvements or benefits which are assessed, levied, confirmed, imposed or become a lien upon the Mortgaged Property or any part thereof or become payable during the term of the Reimbursement Agreement, which default continues for a period of thirty (30) days after Beneficiary delivers written notice thereof to Grantor; (e) Grantor sells, leases (other than leases approved in writing by Beneficiary), exchanges, assigns, conveys or otherwise disposes of the Land, Improvements, or Real Estate Leases or any interest therein, or enters into a written agreement to do so, or grants or permits to exist any other mortgage, deed of trust or other lien, charge or encumbrance against the Land, Improvements, or Real Estate Leases, whether superior or inferior to this Deed of Trust; (f) Except as permitted in accordance with Section 5.3 or Section 5.4 above, Grantor sells, leases, exchanges, assigns, conveys or otherwise disposes of any portion of the Mortgaged Property, other than the Land, Improvements or Real Estate Leases or any interest thereon covered by Section 6.1(e) hereof, or enters into a written agreement to do so, or grants or permits to exist any other lien, charge or encumbrance against such property, whether superior or inferior to the liens and security interests in this Deed of Trust, and such default continues for a period of thirty (30) days after written notice thereof to Grantor; (h) Grantor shall be in Default (as that term is defined in the Reimbursement Agreement); (i) A receiver, liquidator or trustee of Grantor, a Guarantor or of the Mortgaged Property or of any substantial portion of the properties of any of them, shall be appointed and shall not be removed within thirty (30) days; (j) A petition in bankruptcy or for reorganization or for protection under any Debtor Relief Laws shall have been filed against Grantor, or a Guarantor and the same is not withdrawn, dismissed, canceled or terminated within sixty (60) days; (k) Grantor or a Guarantor makes an assignment for the benefit of creditors or files or consents to the filing of a petition in bankruptcy or for protection under any Debtor Relief Laws or commences or consents to the commencement of any proceeding under the Federal Bankruptcy Code or any other federal or state law, now or hereafter in effect, relating to the reorganization of Grantor, or a Guarantor or the arrangement or rearrangement or readjustment of the debts of Grantor or a Guarantor or having the effect of enjoining or staying the exercise of rights or remedies by creditors, it being understood that the filing against any such entity of such a petition by a partner of such entity, shall be deemed to be a filing with the consent of such entity; (l) There is an attachment or sequestration of or relating to a portion of the Mortgaged Property with a value of more than $500,000 and the same is not promptly discharged within thirty (30) days; (m) Grantor ceases to do business or terminates its business of owning and operating a warehouse and general offices on the Land for any reason whatsoever; (n) A material default occurs under any other agreement that Grantor or any Guarantor has with Beneficiary, and such default continues beyond any applicable grace period and for a period of thirty (30) days after Beneficiary delivers written notice of such default to Grantor; (o) Any suit is filed against Grantor which, if adversely determined, could substantially impair the ability of Grantor to perform each and every one of its obligations under and by virtue of the Security Documents, and Grantor fails to answer such suit and diligently prosecute the defense of such suit; (p) Grantor shall default or breach any material Governmental Requirements pertaining to the Mortgaged Property, and such default continues for a period of thirty (30) days after Beneficiary delivers written notice of such default to Grantor; (q) Grantor shall be in default under the terms of any document evidencing or securing payment of a debt in excess of $100,000 secured by any lien or security interest on the Mortgaged Property or Improvements (without implying Beneficiary's consent to the existence, placing, creating or permitting of any lien or security interest) and such default continues for a period of thirty (30) days after delivery of written notice thereof from Beneficiary to Grantor; (r) The dissolution of Grantor without the immediate reconstitution of Grantor in a manner so that Beneficiary's rights hereunder, and Grantor's operations are not materially adversely affected; and (s) Any substantial damage to or destruction of the Improvements shall occur and insurance proceeds (together with other funds available for such purpose, including funds of Grantor) shall not, in the reasonable opinion of Beneficiary, be sufficient to restore or repair the Improvements and pay all extra cost to be incurred such as additional interest, or if insurance proceeds shall not be paid within one hundred twenty (120) days after the date of such casualty, or if Grantor shall fail to promptly commence repair or restoration of the Improvements and/or thereafter not diligently complete such repair and restoration within a reasonable time any of which continue for a period of thirty (30) days after written notice of such default from Beneficiary to Grantor. As used in this Section 6.1, the term control as used with respect to any person or entity shall mean the possession of the power to direct the management and policies of such entity. ARTICLE VII DEFAULT AND FORECLOSURE VII.1 Remedies: If an Event of Default shall occur and shall continue, Beneficiary may, at Beneficiary's election and by and through Trustee or otherwise, exercise any or all of the following rights, remedies and recourses: (a) Acceleration and Future Advances: Declare the entire Indebtedness, Principal Balance (defined hereby as meaning the then unpaid principal balance on the funds advanced under the Letter of Credit), the accrued interest and any other accrued but unpaid interest thereon, court costs, and attorney's fees hereunder immediately due and payable, without (except as specifically set forth herein) notice, presentment, protest, notice of intent to accelerate, notice of acceleration, demand or action of any nature whatsoever (each of which hereby is expressly waived by Grantor), whereupon the same shall become immediately due and payable. Additionally, Beneficiary shall not be required to make any further advances under the Letter of Credit or other Security Documents upon the occurrence of an Event of Default or an event which, with the giving of notice or passing of time, would constitute an Event of Default. (b) Entry on Mortgaged Property: To the extent permitted by law, with prior notice to Grantor, enter upon the Mortgaged Property and take exclusive possession thereof and of all books, records and accounts relating thereto without being guilty of trespass. If Grantor remains in possession of all or any part of the Mortgaged Property after an Event of Default and without Beneficiary's prior written consent thereto, Beneficiary may, without notice to Grantor, invoke any and all legal remedies to dispossess Grantor, including specifically one or more actions for forcible entry and detainer, trespass to try title and writ of restitution. Nothing contained in the foregoing sentence shall, however, be construed to impose any greater obligation or any prerequisites to acquiring possession of the Mortgaged Property after an Event of Default than would have existed in the absence of such sentence. (c) Operation of Mortgaged Property: Hold, lease, manage, operate or otherwise use or permit the use of the Mortgaged Property, either itself or by other persons, firms or entities, in such manner, for such time and upon such other terms as Beneficiary may deem to be prudent and reasonable under the circumstances (making such repairs, alterations, additions and improvements thereto and taking any and all other action with reference thereto, from time to time, as Beneficiary shall deem necessary or desirable) and apply all Rents and other amounts collected by Trustee in connection therewith in accordance with the provisions of paragraph 7.4 herein. (d) Foreclosure and Sale: Upon the acceleration of the Indebtedness, or at any time thereafter, the Trustee, or his successor or substitute as hereinafter provided, at the request of Beneficiary, may enforce this trust and execute the power of sale herein granted in accordance with applicable law. After advertising the time, place and terms of the sale of the Mortgaged Property and mailing notices to such parties and in such form as may then be required by law, and otherwise complying with applicable laws affecting foreclosure by exercise of the power of sale granted herein, the Trustee shall sell the Mortgaged Property at public auction in accordance with such advertisement and notices at the time and place specified therein, to the highest bidder for cash, selling all of the Mortgaged Property as an entirety or in such parcels as the Trustee may elect, and make due conveyance to the purchaser or purchasers. The recitals in the conveyance to the purchaser or purchasers shall be full and conclusive evidence of the truth of the matters therein stated, all prerequisites to said sale shall be presumed to have been performed in accordance with law, and such sale and conveyance shall be conclusive against Grantor, its heirs, successors and assigns. (e) Trustee or Receiver: Upon, or at any time after, commencement of foreclosure of the lien and security interest provided for herein or any legal proceedings hereunder, make application to a court of competent jurisdiction, as a matter of strict right and without notice to Grantor or regard to the adequacy of the Mortgaged Property for the repayment of the Indebtedness, for appointment of a receiver of the Mortgaged Property, and Grantor does hereby irrevocably consent to such appointment. Any such receiver shall have all the usual powers and duties of receivers in similar cases, including the full power to rent, maintain and otherwise operate the Mortgaged Property upon such terms as may be approved by the court, and shall apply such Rents in accordance with the provisions of paragraph 7.4 herein. (f) Other: Exercise any and all other rights, remedies and recourses granted under the Security Documents or now or hereafter existing in equity, at law, by virtue of statute or otherwise, including, without limiting the generality of the foregoing: (i) to the extent permitted by law, institute a proceeding or proceedings, judicial or otherwise, for the complete foreclosure of this Deed of Trust as a mortgage or otherwise under any applicable provision of law, in addition to the statutory power of sale and all other rights and remedies hereunder; (ii) institute a proceeding or proceedings for the partial foreclosure of this Deed of Trust under any applicable provision of law for the portion of the Indebtedness then due and payable, subject to the lien of this Deed of Trust continuing unimpaired and without loss of priority to secure the balance of the Indebtedness not then due and payable; (iii) to the extent permitted by applicable law, sell the Mortgaged Property, and all estate, right, title interest, claim and demand of Grantor therein, and all right of redemption thereof, at one or more sales, as an entirety or in parcels, with such elements of real and/or personal property (and, to the extent permitted by applicable law, Beneficiary may elect to deem all of the Mortgaged Property to be real property for the purposes thereof), and at such time and place and upon such terms as it may deem expedient, or as may be required by applicable law, and in the event of a sale, by foreclosure or otherwise, of less than all of the Mortgaged Property, this Deed of Trust shall continue as a lien and security interest on the remaining portion of the Mortgaged Property; (iv) institute an action, suit or proceeding in equity for the specific performance of any of the provisions contained in the Reimbursement Agreement, this Deed of Trust or any other of the Security Documents; (v) sue and recover a judgment on the Indebtedness as the same become due and payable, or on account of any default or defaults by Grantor under the Reimbursement Agreement, this Deed of Trust or any other of the Security Documents; (vi) release any portion of the Mortgaged Property for such consideration as Beneficiary may reasonably require, without, as to the remainder of the Mortgaged Property, in any way impairing or affecting the lien or priority of this Deed of Trust, or improving the position of any subordinate lienholder with respect thereto, except to the extent that the Indebtedness shall have been reduced by the actual monetary consideration, if any, received by Beneficiary for such release, and may accept by assignment, pledge or otherwise any other property in place thereof as Beneficiary may require without being accountable for so doing to any other lienor; and/or (vii) take all actions permitted under the Uniform Commercial Code of the state in which the Mortgaged Property is located. If Beneficiary exercises any of the rights or remedies set forth herein, Beneficiary shall not be deemed to have entered upon or taken possession of the Mortgaged Property except upon the exercise of its option to do so, evidenced by its demand and overt act for such purposes, nor shall Beneficiary be deemed a mortgagee in possession by reason of such entry or taking possession. Beneficiary will not be liable to account for any action taken pursuant to any such exercise other than for rents actually received, nor be liable for any loss sustained by Grantor resulting from any failure to let the Mortgaged Property, nor from any other act or omission of Beneficiary, except to the extent such loss is caused by the willful misconduct or gross negligence of Beneficiary. Grantor hereby consents to, ratifies and confirms the exercise by Beneficiary of said rights and remedies and appoints Beneficiary as Grantor's attorney-in-fact, which appointment shall be deemed to be coupled with an interest and is irrevocable for such purposes. VII.2 Expenses: In any proceeding, judicial or otherwise, to foreclose this Deed of Trust or enforce any other remedy of Beneficiary under the Reimbursement Agreement, this Deed of Trust or any other Security Documents, there shall be allowed and included as an addition to and a part of the Indebtedness in the decree for sale or other judgment or decree all reasonable expenditures and expenses, including attorneys' fees and court costs, which may be paid or incurred in connection with the exercise by Beneficiary of any of its rights and remedies and the same shall be secured by this Deed of Trust. VII.3 Rights Pertaining to Sales: The following provisions shall, to the extent permitted by law, apply to any sale or sales of all or any portion of the Mortgaged Property under or by virtue of this Deed of Trust, whether under the power of sale herein granted or by virtue of judicial proceedings or of a judgment or decree of foreclosure and sale: (A) Trustee may conduct any number of sales from time to time. The power of sale shall not be exhausted by any one or more of such sales as to any part of the Mortgaged Property that have not been sold, or by any sale that is not completed or is defective until the Indebtedness shall have been paid in full. (B) Any sale may be postponed or adjourned by public announcement at the time and place appointed for such sale or for such postponed or adjourned sale, and sale may be completed at the time and place so announced without further notice. (C) After each sale, Trustee, his successors and assigns or an officer of any court empowered to do so, shall, as required by law, execute and deliver to the purchaser or purchasers at such sale a good and sufficient instrument or instruments granting, conveying, and assigning the property and rights sold and shall receive the proceeds of such sale or sales and apply the same as herein provided. Beneficiary is hereby appointed the true and lawful attorney-in-fact of Grantor, which appointment is irrevocable and shall be deemed to be coupled with an interest, in Grantor's name and stead, to make all necessary conveyances, assignments, transfers and deliveries of the property and rights so sold, and for that purpose Beneficiary may execute all necessary instruments to accomplish the same, and may substitute one or more persons with like power, and Grantor hereby ratifies and confirms all that said attorney or such substitute or substitutes shall lawfully do by virtue thereof. Nevertheless, Grantor, if requested by Beneficiary, shall ratify and confirm any such sale or sales by executing and delivering to Beneficiary or such purchaser or purchasers, as applicable, all such instruments as may be advisable, in Beneficiary's judgment, for the purposes designated in such request. (D) Any and all statements of fact or other recitals made in any of the instruments referred to in Subsection (C) of this Section given by Beneficiary concerning nonpayment of the Indebtedness, occurrence of any Event of Default, any declaration by Beneficiary that all or any of the Indebtedness is due and payable, any request to sell, any representation that notice of time, place and terms of sale and property or rights to be sold was duly given, or that any other act or thing was duly done by Beneficiary, shall be taken as prima facie evidence of the truth of the facts so stated and recited. (E) The receipt of Trustee for the purchase money paid at any such sale, or the receipt of any other person authorized to give the same, shall be sufficient discharge therefor to any purchaser of any property or rights sold as aforesaid, and no purchaser, or its representatives, grantees or assigns, after paying such purchase price and receiving such receipt, shall be bound to see to the application of such purchase price or any part thereof upon or for any trust or purchase of this Deed of Trust or, in any manner whatsoever, be answerable for any loss, misapplication or nonapplication of any such purchase money, or part thereof, or be bound to inquire as to the authorization, necessity, expediency or regularity of any such sale. (F) Any such sale or sales shall operate to divest all of the estate, right, title, interest, claim and demand whatsoever, whether at law or in equity, of Grantor in and to the properties and rights so sold, and shall be a perpetual bar both at law and in equity against Grantor and any and all persons claiming or who may claim the same, or any part thereof, by, through or under Grantor to the fullest extent permitted by applicable law. (G) Upon any such sale or sales, Beneficiary may bid for and acquire the Mortgaged Property and, in lieu of paying cash therefor, may make settlement for the purchase price by crediting against the Indebtedness the amount of the bid made therefor, after deducting therefrom the expenses of the sale, the cost of any enforcement proceeding hereunder and any other sum which Beneficiary is authorized to charge to Grantor under the terms of this Deed of Trust, to the extent necessary to satisfy such bid. (H) In the event that Grantor, or any person claiming by, through or under Grantor, shall transfer or refuse or fail to surrender possession of the Mortgaged Property after any sale thereof, then Grantor or such person shall be deemed a tenant at sufferance of the purchaser at such sale, subject to eviction by means of unlawful detainer proceedings or other appropriate proceedings, and to any other right or remedy available hereunder or under applicable law. (I) Upon any such sale, it shall not be necessary for Trustee, Beneficiary or any public officer acting under execution or order of court to have present or constructively in its possession any or all of the Mortgaged Property. (J) In the event of any sale referred to in this Section, all of the Indebtedness, if not previously due and payable, immediately thereupon shall, notwithstanding anything to the contrary in the Reimbursement Agreement, this Deed of Trust or any other Security Documents, become due and payable. (K) This instrument shall be effective as a mortgage. If a foreclosure hereunder shall be commenced by Trustee, Beneficiary may, at any time before the sale of the Mortgaged Property, direct the Trustee to abandon the sale, and may institute suit for the collection of the Indebtedness and for the foreclosure of this Deed of Trust. If Beneficiary shall institute suit for the collection of the Indebtedness, and for the foreclosure of this Deed of Trust, Beneficiary may at any time before the entry of final judgment in said suit dismiss the same and direct the Trustee to sell the Mortgaged Property in accordance with the provisions of this Deed of Trust. Beneficiary may pursue its rights and remedies against any guarantor or other party liable for any of the Indebtedness in such a suit for foreclosure or by separate suit, whether or not the Trustee is also pursuing a sale under the terms hereof. VII.4 Application of Proceeds: The purchase money, proceeds or avails of any sale, together with any other sums which may be held by Beneficiary hereunder, whether under the provisions of this Article or otherwise, shall, except as herein expressly provided to the contrary, be applied as follows: FIRST: To the payment of the costs and expenses of any such sale, including the commission or statutory fee payable to Trustee, compensation to Beneficiary, its agents and counsel, and all other liabilities and advances made or incurred by Beneficiary or Trustee hereunder, together with interest thereon as provided herein, and all taxes, assessments and other charges, except any taxes, assessments or other charges subject to which the Mortgaged Property shall have been sold. SECOND: Ratably, to the payment in full of the Indebtedness (including principal, interest, and other sums owed in such order as Beneficiary may elect). THIRD: To the extent permitted by applicable law, to be set aside by Beneficiary as adequate security in its judgment for the payment of sums which would have been paid by application under clauses First and Second above to Beneficiary, arising out of an obligation or liability with respect to which Grantor has agreed to indemnify it, but which sums are not yet due and payable or liquidated; FOURTH: The surplus, if any, to whomsoever may be lawfully entitled thereto. VII.5 Additional Remedial Provisions: (A) No right or remedy herein conferred upon or reserved to Beneficiary is intended to be exclusive of any other right or remedy, and each and every such right or remedy shall be cumulative and continuing, shall be in addition to every other right or remedy given under the Reimbursement Agreement, this Deed of Trust or any other of the Security Documents or now or hereafter existing at law or in equity, and may be exercised from time to time and as often as may be deemed expedient by Beneficiary. (B) No delay or omission by Beneficiary to exercise any right or remedy hereunder upon an Event of Default shall impair such exercise, or be construed to be a waiver of any such Event of Default or an acquiescence therein. (C) The failure, refusal or waiver by Beneficiary of its right to assert any right or remedy hereunder upon any Event of Default or other occurrence shall not be construed as waiving such right or remedy upon any other or subsequent Event of Default or other occurrence. (D) Beneficiary shall not have any obligation to pursue any rights or remedies it may have under any other agreement, the Reimbursement Agreement or any other of the Security Documents prior to pursuing its rights or remedies under the Reimbursement Agreement, this Deed of Trust or any other of the Security Documents. (E) No recovery of any judgment by Beneficiary and no levy of an execution upon the Mortgaged Property or any other property of Grantor shall affect, in any manner or to any extent, the lien and security interest of this Deed of Trust upon the Mortgaged Property, and any liens, rights, powers and remedies shall continue unimpaired as before. (F) Beneficiary may resort to any security given by this Deed of Trust or any other security now given or hereafter existing to secure the Indebtedness, in whole or in part, in such portions and in such order as it may, in its discretion, elect, and no such election shall be construed as a waiver of any of the liens, rights or benefits granted hereunder. (G) Nothing in the Reimbursement Agreement, this Deed of Trust or any other of the Security Documents shall be deemed a waiver or a cure of such Event of Default, and acceptance of any payment less than any amount then due shall be deemed an acceptance on account only. (H) In the event that Beneficiary shall have proceeded to enforce any right or remedy hereunder by foreclosure, sale, entry or otherwise, and such proceeding shall be discontinued, abandoned, defectively performed or completed or determined adversely to Beneficiary for any reason, then Grantor and Beneficiary shall be restored to their former positions and rights hereunder with respect to the Mortgaged Property, subject to the lien hereof. VII.6 Waiver of Rights and Defenses: To the full extent Grantor may do so, Grantor agrees with Beneficiary as follows: (A) Grantor hereby waives and will not at any time insist on, plead, claim or take the benefit or advantage of any statute or rule of law now or hereafter in force providing for any appraisement, valuation, stay, extension, moratorium or redemption, or of any statute of limitations, and Grantor, for itself and its successors and assigns, and for any and all persons ever claiming an interest in the Mortgaged Property, hereby waives and releases all rights of redemption, valuation, appraisement, notice of intention to mature or declare due the whole of the Indebtedness, and all rights to a marshaling of the assets of Grantor, including the Mortgaged Property, or to a sale in inverse order of alienation, in the event of foreclosure of the liens and security interests created hereunder. (B) Grantor hereby waives and shall not have or assert the matters set forth in subsection (A) of this Section, or to any other matters whatsoever to defeat, reduce or affect any of the rights or remedies of Beneficiary hereunder, including sale of the Mortgaged Property for the collection of the Indebtedness and the payment of the Indebtedness out of the proceeds of sale of the Mortgaged Property in preference to any other person. (C) If any statute or rule of law referred to in this Section and now in force, of which Grantor or any of its successors of assigns and such other persons claiming any interest in the Mortgaged Property might take advantage despite this Section, shall hereafter be repealed or cease to be in force, such statute or rule of law shall not thereafter be deemed to preclude the application of this Section. (D) Grantor shall not be relieved of its obligation to pay the Indebtedness or perform the Obligations at the time and in the manner provided in the Reimbursement Agreement, this Deed of Trust or any other of the Security Documents, nor shall the lien, security interest or priority of this Deed of Trust or any other of the Security Documents be impaired by any of the following actions, nonactions or indulgences by Beneficiary: (i) any failure or refusal by Beneficiary to comply with any request by Grantor, or to consent to any action by Grantor, or to take any action to foreclose this Deed of Trust or otherwise enforce any of the provisions of this Deed of Trust or any other of the Security Documents; (ii) any release, regardless of consideration, of the whole or any part of the Mortgaged Property or any other security for the Indebtedness, or any person liable for payment of the Indebtedness; (iii) any waiver by Beneficiary of compliance by Grantor with any provision of the Reimbursement Agreement, this Deed of Trust or any other of the Security Documents, or consent by Beneficiary to the performance by Grantor of any action which would otherwise be prohibited hereunder or thereunder, or to the failure by Grantor to take any action which would otherwise be required hereunder or thereunder; and (iv) any agreement or stipulation, with or without Grantor's consent, between Beneficiary and any subsequent owner or owners of the Mortgaged Property or any other security for the Indebtedness, renewing, extending or modifying the time of payment or the terms of the Reimbursement Agreement, this Deed of Trust or any other of the Security Documents (including a modification of any interest rate), and in any such event Grantor shall continue to be obligated to pay the Indebtedness at the time and in the manner provided in the Reimbursement Agreement, this Deed of Trust and the other of the Security Documents as so renewed, extended or modified, unless expressly released and discharged by Beneficiary. ARTICLE VIII CONDEMNATION VIII.1 Application of Proceeds: If the Mortgaged Property or any part thereof, shall be condemned or otherwise taken for public or quasi-public use under the power of eminent domain, or be transferred in lieu thereof, all damages or other amounts awarded for the taking, or injury to, the Mortgaged Property (the "Award") shall be paid to Beneficiary. To enforce its rights hereunder, Beneficiary shall be entitled to participate in any condemnation proceedings and to be represented therein by counsel of its own choice, and Grantor will deliver, or cause to be delivered, to Beneficiary such instruments as may be requested by it from time to time to permit such participation. In case of a taking in which the cost of the restoration, repair or replacement (hereinafter referred to as the "Restoration") of the Mortgaged Property estimated by Beneficiary shall not exceed $1,000,000 then such Award may be used for the prosecution of the Restoration in the manner hereinafter provided. If the cost of the Restoration estimated by Beneficiary shall exceed $1,000,000, Beneficiary, at its option, shall be entitled to receive and retain the Award, applying the same upon the Indebtedness. In the event Beneficiary elects to make such Award available to Grantor for such purpose, Grantor will (if such work is necessary to the continued operation of the Mortgaged Property as determined by Beneficiary in its reasonable discretion) promptly and at Grantor's sole cost and expense and regardless of whether the Award (if any) shall be sufficient for the purpose, commence and continue diligently to completion to restore, repair, replace and rebuild the Mortgaged Property as nearly as possible to its value, condition and character immediately prior to such taking subject to the conditions and restrictions applicable to Grantor's use of insurance proceeds contained in the second paragraph of Section 4.7 above. In the event the Award exceeds the cost of any work to restore, repair, replace and rebuild the Mortgaged Property, following completion of such work Beneficiary shall apply such excess to the Indebtedness or, pay such excess to Grantor if Grantor furnishes Beneficiary with an appraisal acceptable to Beneficiary concluding that the appraised value of the Mortgaged Property following such taking and work is at least two times the sum of (i) the outstanding balance of the funds advanced pursuant to the Letter of Credit and (ii) the remaining amount which Beneficiary may be obligated to advance under the Letter of Credit pursuant to the Reimbursement Agreement. ARTICLE IX SECURITY AGREEMENT IX.1 Security Interest: This Deed of Trust shall be construed as a Deed of Trust on real property, and it shall also constitute and serve as a security agreement on personal property within the meaning of, and shall constitute until the grant of this Deed of Trust shall terminate as provided in Article II hereof, a first and prior pledge and assignment and a first and prior security interest under the Missouri Uniform Commercial Code as to the property within the scope thereof and situated in the State of Missouri with respect to the Personalty, Fixtures, Leases and Rents subject to the Permitted Encumbrances. Grantor has granted, bargained, conveyed, assigned, transferred and set over, and by these presents does grant, bargain, convey, assign, transfer and set over unto Beneficiary a first and prior security interest in and to all of Grantor's right, title and interest in, to and under the Personalty, Leases and Rents, to secure the full and timely payment of the Indebtedness and the full and timely performance and discharge of the Obligations. Upon an Event of Default, Grantor shall gather all of the Mortgaged Property which is Personalty at a location designated by Beneficiary for sale pursuant to the terms hereof. IX.2 Financing Statements: Grantor shall execute and deliver to Beneficiary, in form and substance satisfactory to Beneficiary, such financing statements and such further assurances as Beneficiary may, from time to time, consider reasonably necessary to create, perfect and preserve Beneficiary's security interest herein granted, and Beneficiary may cause such statements and assurances to be recorded and filed at such times and places as may be required or permitted by law to so create, perfect and preserve such security interest. Pursuant to the Missouri Uniform Commercial Code this Deed of Trust shall be effective as a Financing Statement filed as a fixture filing from the date of its filing for record covering the Fixtures and Personalty. The addresses of Grantor, as Debtor, and Beneficiary, as Secured Party, are as set forth herein. The above described goods are or are to become fixtures related to the Land and Improvements of which Grantor is record title owner. IX.3 Uniform Commercial Code Remedies: Trustee and Beneficiary shall have all the rights, remedies and recourses with respect to the Personalty, Fixtures, Leases and Rents afforded a secured party by the aforesaid Missouri Uniform Commercial Code in addition to, and not in limitation of, the other rights, remedies and recourses afforded by the Security Documents and at law. IX.4 No Obligation of Trustee or Beneficiary: The assignment and security interest herein granted shall not be deemed or construed to constitute Trustee or Beneficiary as a trustee in possession of the Mortgaged Property, to obligate Trustee or Beneficiary to operate the Mortgaged Property or attempt to do the same, or take any action, incur expenses or perform or discharge any obligation, duty or liability whatsoever under any of the Leases or otherwise. ARTICLE X CONCERNING THE TRUSTEE X.1 No Liability: Trustee shall not be liable for any error or judgment or act done by Trustee or be otherwise responsible or accountable except for Trustee's gross negligence or willful misconduct. Trustee shall not be personally liable in case of entry by him or anyone acting by virtue of the powers herein granted him upon the Mortgaged Property for debts contracted or liability or damages incurred in the management or operation of the Mortgaged Property. Trustee shall have the right to rely on any instrument, document or signature authorizing or supporting any action taken or proposed to be taken by him hereunder or believed by him in good faith to be genuine. Trustee shall be entitled to reimbursement for expenses incurred by him in the performance of his duties hereunder. X.2 Retention of Monies: All monies received by Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated in any manner from any other monies (except to the extent required by law), and Trustee shall be under no liability for interest on any monies received by him hereunder. X.3 Successor Trustee: Trustee may resign by the giving of notice of such resignation in writing to Beneficiary. If trustee shall die, resign or become disqualified from acting in the execution of this Trust or shall fail or refuse to exercise the same when requested by Beneficiary so to do or if for any reason and without cause Beneficiary shall prefer to appoint a substitute trustee to act instead of the original Trustee named herein, or any prior successor or substitute trustee, Beneficiary shall have full power to appoint a substitute trustee and, if preferred, several substitute trustees in succession who shall succeed to all the estate, rights, powers and duties of the aforenamed Trustee. If any notice of a foreclosure sale hereunder has been sent or published, or is being published, when such appointment of a successor or substitute Trustee is made, the successor or substitute Trustee may complete said sale at the time and place designated in such notice without the necessity of sending or publishing further notice. X.4 Succession Instruments: Any new Trustee appointed pursuant to any of the provisions hereof shall, without any further act, deed or conveyance, become vested with all the estates, properties, rights, powers and trusts of its or his predecessor in the rights hereunder with like effect as if originally named as Trustee herein; but, nevertheless, upon the written request of Beneficiary or his successor trustee, Trustee ceasing to act shall execute and deliver an instrument transferring to such successor trustee, upon the trust herein expressed, all the estates, properties, rights, powers and trusts of Trustee so ceasing to act, and shall duly assign, transfer and deliver any of the property and monies held by Trustee to the successor trustee so appointed in its or his place. X.5 Performance of Duties by Agents: Trustee may authorize one or more parties to act on his behalf to perform the ministerial functions required of him hereunder, including, without limitation, the transmittal and posting of any notices. ARTICLE XI MISCELLANEOUS XI.1 Survival of Obligations: Each and all of the Obligations shall survive the execution and delivery of the Security Documents and the consummation of the loan called for therein and shall continue in full force and effect until the Indebtedness shall have been paid in full. XI.2 Further Assurances: Grantor, upon the request of Trustee or Beneficiary, will execute, acknowledge, deliver and record and/or file such further instruments and do such further acts as may reasonably be necessary, desirable or proper to carry out more effectively the purposes of the Security Documents, to subject to the liens and security interests thereof any property intended by the terms thereof to be covered thereby, including, specifically, without limitation, any renewals, additions, substitutions, replacements or appurtenances to the Mortgaged Property, and to complete, execute, record and file any document or instrument necessary to place third parties on notice of the liens and security interests granted under the Security Documents. Grantor hereby irrevocably appoints Trustee and Beneficiary as its agents to execute and deliver all such instruments and additionally to record and file any of the same as may be necessary. XI.3 Recording and Filing: Grantor will cause the Security Documents and all amendments and supplements thereto and substitutions therefor to be recorded, filed, re-recorded and refiled in such manner and in such places as Trustee or Beneficiary shall reasonably request and will pay all such recording, filing, re-recording and refiling taxes, fees and other charges. XI.4 Notices: Any notice, request or other communication required or permitted to be given hereunder may be given and shall conclusively be deemed and considered to have been given and received upon the deposit thereof, in writing, in the U.S. Mails, certified mail, return receipt requested, postage prepaid, and addressed to the party to receive such notice at the address set forth below or such address elected in writing by the party to receive such notice; but actual notice however given or received, shall always be effective. The last preceding sentence shall not be construed in anywise to effect or impair the waiver of notice or demand to or upon Grantor in any situation or for any reason (except as otherwise specifically provided). If to Grantor: K-V Pharmaceutical Company 2503 South Hanley Road St. Louis, Missouri 63144 Attn: Gerald R. Mitchell with copy to: Gallop, Johnson & Neuman, L.C. Interco Corporate Tower 101 South Hanley St. Louis, Missouri 63105 Attn: John P. Walsh, Esq. If to Beneficiary: LaSalle National Bank 135 South LaSalle Street Chicago, Illinois 60603 Attn: Chip Schroederwith Vedder, Price, Kaufman & Kammholz copy to: 222 North LaSalle Street Suite 2300 Chicago, Illinois 60601 Attn: Michael A. Nemeroff, Esq. XI.5 No Waiver: Any failure by Trustee or Beneficiary to insist, or any election by Trustee or Beneficiary not to insist, upon strict performance by Grantor of any of the terms, provisions or conditions of the Security Documents shall not be deemed to be a waiver of the same or of any other term, provision or condition thereof, and Trustee or Beneficiary shall have the right at any time or times thereafter to insist upon strict performance by Grantor of any and all of such terms, provisions and conditions. XI.6 Beneficiary's Right to Pay Indebtedness and Pay Obligations: If an Event of Default shall occur and be continuing under any of the Security Documents, then at any time thereafter and without further notice to or demand upon Grantor or any other party, without waiving or releasing any other right, remedy or recourse Beneficiary may have because of the same, Beneficiary may (but shall not be obligated to) make such payment or perform such act for the account of and at the expense of Grantor and shall have the right to enter upon the Mortgaged Property for such purpose and to take all such action thereon with respect to the Mortgaged Property as it may deem necessary or appropriate. Grantor shall be obligated to repay Beneficiary for all sums advanced by it pursuant to this Paragraph 11.6 and shall indemnify and hold Beneficiary harmless from and against any and all loss, cost, expense, liability, damage and claims and causes of action, including reasonable attorney's fees, incurred or accruing by any acts performed by Beneficiary pursuant to the provisions of this Paragraph 11.6 or by reason of any other provision of the Security Documents. All sums paid by Beneficiary pursuant to this Paragraph 11.6 and all other sums expended by Beneficiary to which it shall be entitled to be indemnified, together with interest thereon at the "Default Rate" as defined in the Reimbursement Agreement from the date of such payment or expenditure, shall constitute additions to the Indebtedness and Obligations, shall be secured by the Security Documents and shall be paid by Grantor to Beneficiary upon demand. XI.7 Covenants Running with the Land: All obligations contained in the Security Documents are intended by the parties to be and shall be construed as covenants running with the Mortgaged Property. XI.8 Successors and Assigns: All of the terms of the Security Documents shall apply to, be binding upon and inure to the benefit of the parties thereto, their respective successors, assigns, heirs and legal representatives and all other persons claiming by, through or under them. XI.9 Severability: The Security Documents are intended to be performed in accordance with, and only to the extent permitted by, all applicable Legal Requirements. If any provision of any of the Security Documents or the application thereof to any person or circumstance shall, for any reason and to any extent, be invalid or unenforceable, neither the remainder of the instrument in which such provision is contained nor the application of such provision to other persons or circumstances or other instruments referred to hereinabove shall be affected thereby, but rather the same shall be enforced to the greatest extent permitted by law. XI.10 Usury: All agreements in the Reimbursement Agreement and all other Security Documents are expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of maturity of the Indebtedness or otherwise, shall the amount agreed to be paid hereunder for the use, forbearance or detention of money exceed the highest lawful rate permitted under applicable usury laws. If, from any circumstances whatsoever, fulfillment of any provision of the Reimbursement Agreement, this Deed of Trust or any other of the Security Documents at the time performance of such provision shall be due, shall involve exceeding any usury limit prescribed by law which a court of competent jurisdiction may deem applicable hereto, then, ipso facto, the obligations to be fulfilled shall be reduced to allow compliance with such limit, and if, from any circumstance whatsoever, Beneficiary shall ever receive as interest an amount which would exceed the highest lawful rate, the receipt of such excess shall be deemed a mistake and shall be canceled automatically or, if theretofore paid, such excess shall be credited against the principal amount of the Indebtedness to which the same may lawfully be credited, and any portion of such excess not capable of being so credited shall be refunded immediately to Grantor. Grantor hereby affirms that the Indebtedness was obtained, and the proceeds thereof have been and shall be used, solely for business purposes. XI.11 Entire Agreement and Modification: The Security Documents contain the entire agreements between the parties relating to the subject matter hereof and thereof, and all prior agreements relative thereto which are not contained herein or therein are terminated. The Security Documents may be amended, revised, waived, discharged, released or terminated only by a written instrument or instruments executed by the party against which enforcement of the amendment, revision, waiver, discharge, release or termination is asserted. Any alleged amendment, revision, waiver, discharge, release or termination which is not so documented shall not be effective as to any party. XI.12 Counterparts: This Deed of Trust may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute but one instrument. XI.13 Headings and General Application: The article, paragraph and subparagraph entitlements hereof are inserted for convenience or reference only and shall in no way affect, modify or define, or be used in construing, the text of such article, paragraph or subparagraph. If the context requires, words used in the singular shall be read as including the plural, and pronouns of any gender shall include all genders. XI.14 Impositions and Insurance Escrow: To implement the provisions of Paragraphs 4.4 and 4.6 hereof, upon the occurrence of an Event of Default, Grantor, at Beneficiary's request, shall pay to Beneficiary in advance, as and when directed by Beneficiary and as escrowed sums, an amount equal to the sums of: (a) monthly, an amount reasonably determined by Beneficiary to be equal to the amount which, when added to the other monthly payments to be made prior to the due date of the annual Impositions, shall be sufficient to pay the annual Impositions (estimated wherever necessary) to become due for the tax year during which such payment is so directed; and (b) monthly, an amount reasonably determined by Beneficiary to be equal to the amount which, when added to the other monthly payments to be made prior to the due date of the insurance premiums, shall be sufficient to pay the insurance premiums for the same year for those insurance policies as are required hereunder. If Beneficiary determines that any amounts theretofore paid by Grantor are insufficient for the payment in full of such Impositions and insurance premiums, Beneficiary shall notify Grantor of the increased amounts required to provide a sufficient fund, whereupon Grantor shall pay to Beneficiary within thirty (30) days thereafter the additional amount so stated in Beneficiary's notice. The escrowed sums may be held by Beneficiary in non-interest bearing accounts and may be commingled with Beneficiary's other funds. Upon assignment of this Deed of Trust, Beneficiary shall have the right to pay over the balance of the escrowed sums then in its possession to its assignee, whereupon Beneficiary and its Trustee shall then become completely released from all liability with respect thereto. Upon payment of the Indebtedness and Obligations, or at such earlier time that Beneficiary may elect, the balance of the escrowed sums in its possession may be paid over to Grantor, and no other party shall have any right or claim thereto. If the Event of Default shall be cured by Grantor, the escrowed sums must be repaid to Grantor in sufficient time to allow Grantor to satisfy Grantor's obligations under the Security Documents to pay the Impositions and the required insurance premiums or may be paid by Beneficiary directly to the Governmental Authority and the insurance company entitled thereto. If an Event of Default shall have occurred or be continuing hereunder, and Beneficiary has accelerated the termination date of the Reimbursement Agreement as provided for herein, Beneficiary shall have the additional option of crediting the full amount of the escrowed sums against the Indebtedness. Notwithstanding anything to the contrary contained in this Paragraph 11.14 or elsewhere in this Deed of Trust, Beneficiary hereby reserves the right to waive the payment by Grantor to Beneficiary of the escrowed sums and, in the event Beneficiary does so waive such payment, it shall be without prejudice to Beneficiary's right to insist, at any subsequent time or times, that such payments be made in accordance herewith. XI.15 Sole Benefit: This instrument and the other Security Documents have been executed for the sole benefit of Grantor and Beneficiary and the heirs, successors, assigns and legal representatives of Beneficiary. No other party shall have rights thereunder nor be entitled to assume that the parties thereto will insist upon strict performance of their mutual obligations hereunder, any of which may be waived from time to time. Grantor shall have no right to assign any of their rights under the Security Documents to any party whatsoever, including the right to receive advances under the Letter of Credit or otherwise. XI.16 Subrogation: If any or all of the proceeds of the Indebtedness or the Obligations have been used to extinguish, extend or renew any indebtedness heretofore existing against the Mortgaged Property or to satisfy any indebtedness or obligation secured by a lien or encumbrance of any kind (including liens securing the payment of any Impositions), such proceeds have been advanced by Beneficiary at Grantor's request, and, to the extent of such funds so used, the Indebtedness and Obligations in this Deed of Trust shall be subrogated to and extend to all of the liens and titles heretofore existing against the Mortgaged Property to secure the indebtedness or obligation so extinguished, paid, extended or renewed, and the former liens and titles, if any, shall not be waived, but rather shall be continued in full force and effect and in favor of Beneficiary and shall be merged with the lien and security for the repayment of the Indebtedness and satisfaction of the Obligations. XI.17 Business or Commercial Purpose: Grantor warrants that the extension of credit evidenced by the Letter of Credit secured hereby is solely for business or commercial purposes, other than agricultural purposes. Grantor further warrants that the credit transaction evidenced by the Reimbursement Agreement is specifically exempted under Regulation Z issued by the Board of Governors of the Federal Reserve System and Title I (Consumer Credit Cost Disclosure) of the Consumer Credit Protection Act and that no disclosures are required to be given under such regulations and federal laws in connection with the above transaction. XI.18 JURISDICTION AND VENUE: GRANTOR HEREBY AGREES THAT ALL ACTIONS OR PROCEEDINGS INITIATED BY GRANTOR AND ARISING DIRECTLY OR INDIRECTLY OUT OF THIS DEED OF TRUST OR THE OTHER SECURITY DOCUMENTS SHALL BE LITIGATED IN THE SUPERIOR COURT OF MISSOURI, ST. LOUIS COUNTY DIVISION, OR THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MISSOURI OR, IF BENEFICIARY INITIATES SUCH ACTION, IN ADDITION TO THE FOREGOING COURTS ANY COURT IN WHICH BENEFICIARY SHALL INITIATE SUCH ACTION, TO THE EXTENT SUCH COURT HAS JURISDICTION. GRANTOR HEREBY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED BY BENEFICIARY IN ANY OF SUCH COURTS AND HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS AND COMPLAINT, OR OTHER PROCESS OR PAPERS ISSUED THEREIN, AND AGREES THAT SERVICE OF SUCH SUMMONS AND COMPLAINT OR OTHER PROCESS OR PAPERS MAY BE MADE BY ACTUAL DELIVERY OR REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO GRANTOR AT THE ADDRESS TO WHICH NOTICES ARE TO BE SENT HEREIN. GRANTOR WAIVES ANY CLAIM THAT ST. LOUIS, MISSOURI OR THE DISTRICT OF MISSOURI IS AN INCONVENIENT FORUM OR AN IMPROPER FORUM BASED ON LACK OF VENUE. SHOULD GRANTOR, AFTER BEING SO SERVED, FAIL TO APPEAR OR ANSWER TO ANY SUMMONS, COMPLAINT, PROCESS OR PAPERS SO SERVED WITHIN THE NUMBER OF DAYS PRESCRIBED BY LAW AFTER THE MAILING THEREOF, GRANTOR SHALL BE DEEMED IN DEFAULT AND AN ORDER AND/OR JUDGMENT MAY BE ENTERED BY BENEFICIARY AGAINST GRANTOR AS DEMANDED OR PRAYED FOR IN SUCH SUMMONS, COMPLAINT, PROCESS OR PAPERS, PROVIDED, HOWEVER, BENEFICIARY MAY NOT SEEK A DEFAULT JUDGMENT FOR AT LEAST THIRTY (30) DAYS AFTER THE DATE OF PROOF OF SERVICE. THE EXCLUSIVE CHOICE OF FORUM FOR GRANTOR SET FORTH HEREIN SHALL NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT, BY BENEFICIARY, OF ANY JUDGMENT OBTAINED IN ANY OTHER FORUM OR THE TAKING, BY BENEFICIARY, OF ANY ACTION TO ENFORCE THE SAME IN ANY OTHER APPROPRIATE JURISDICTION, AND GRANTOR HEREBY WAIVES THE RIGHT TO COLLATERALLY ATTACK ANY SUCH JUDGMENT OR ACTION. XI.19 WAIVER OF RIGHT TO JURY TRIAL: BENEFICIARY AND GRANTOR ACKNOWLEDGE AND AGREE THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS DEED OF TRUST OR ANY OF THE OTHER SECURITY DOCUMENTS OR WITH RESPECT TO THE TRANSACTION CONTEMPLATED THEREBY WOULD BE BASED UPON DIFFICULT AND COMPLEX ISSUES AND, THEREFORE, THE PARTIES AGREE THAT ANY LAWSUIT ARISING OUT OF ANY SUCH CONTROVERSY SHALL BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. XI.20 APPLICABLE LAW: THIS DEED OF TRUST AND THE OTHER SECURITY DOCUMENTS SHALL BE DEEMED TO HAVE BEEN, DELIVERED AND ACCEPTED IN, AND THIS DEED OF TRUST, AND THE OTHER SECURITY DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE INTERNAL LAWS AND DECISIONS OF, THE STATE OF MISSOURI (WITHOUT REGARD FOR ITS CONFLICTS OF LAW PRINCIPLES), THE STATE IN WHICH BENEFICIARY'S PRINCIPAL PLACE OF BUSINESS IS LOCATED, AND BY EXECUTION HEREOF GRANTOR AND BY ACCEPTANCE HEREOF, BENEFICIARY, EACH AGREE THAT SUCH LAWS AND DECISIONS OF THE STATE OF MISSOURI SHALL GOVERN THIS DEED OF TRUST AND THE OTHER SECURITY DOCUMENTS, NOTWITHSTANDING THE FACT THAT THERE MAY BE OTHER JURISDICTIONS WHICH MAY BEAR A REASONABLE RELATIONSHIP TO THE TRANSACTIONS CONTEMPLATED HEREBY; PROVIDED, HOWEVER, THAT WITH RESPECT TO THE PROCEDURAL AND SUBSTANTIVE MATTERS RELATING ONLY TO THE CREATION, VALIDITY, PERFECTION AND ENFORCEMENT BY BENEFICIARY OF ITS RIGHTS AND REMEDIES AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL LOCATED IN ANY STATE OTHER THAN MISSOURI, SUCH MATTERS SHALL BE GOVERNED BY THE LAWS OF THE STATE IN WHICH SUCH PROPERTY IS LOCATED. XI.21 TENANCY OF GRANTOR: GRANTOR HEREBY RESERVES POSSESSION OF THE LAND, IMPROVEMENTS AND FIXTURES AND AGREES TO LEASE THE SAME AS TENANT OF THE TRUSTEE AT A RENTAL OF ONE CENT PER MONTH, PAYABLE ON DEMAND, UNTIL AN EVENT OF DEFAULT SHALL OCCUR HEREUNDER, WHEREUPON GRANTOR SHALL DELIVER POSSESSION OF THE LAND, IMPROVEMENTS AND FIXTURES TO THE TRUSTEE OR THE PURCHASER AT ANY FORECLOSURE OR TRUSTEE'S SALE HEREUNDER. Executed as of the date first above written. K-V Pharmaceutical Company, a Delaware corporation By: Name: Title: THE STATE OF ) ) COUNTY OF ) On this ______ day of October, 1997, before me appeared _________________________, to me personally known, who being by me duly sworn, did say that he is the _______________ of K-V Pharmaceutical Company, a Delaware corporation and that said instrument was signed in behalf of said company by authority of its Board of Directors and said _______________ acknowledged said instrument to be the free act and deed of said company. IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed my official seal the day and year last above written. ---------------------------------------- Notary Public My Commission Expires: - ------------------------ Exhibit "A" PROPERTY DESCRIPTION Lot 2 of WESTPORT INDUSTRIAL SUBDIVISION FIRST ADDITION, according to the plat thereof, recorded in Book 106, page 12 in the St. Louis County Recorder's Office. Exhibit "B" PERMITTED ENCUMBRANCES 1. All assessments and taxes for the year 1997 and all subsequent years for the County of St. Louis and City of Maryland Heights. 2. Building lines and easements established by the plat recorded in Plat Book 106 page 12, and covenants and restrictions, including a provision for Subdivision Assessments, contained in the instrument recorded in Book 4997 page 13. 3. Terms, conditions, covenants and provisions contained in Declaration creating West Port Industrial Community Association recorded in Book 4997 page 13. 4. Terms, conditions, restrictions and assessments contained in sewer contract recorded in Book 4885 page 463. 5. Easement granted to Fee Fee Trunk Sewer, Inc., by instrument recorded in Book 4981 page 379. 6. Easement granted to The St. Louis County Water Company by instrument recorded in Book 5955 page 271. 7. Easement granted to Southwestern Bell Telephone Company by instrument recorded in Book 6011 page 252. 8. Easement granted to Union Electric Company according to instrument recorded in Book 6091 page 240, as partially released according to instrument recorded in Book 7299 page 2494 of the St. Louis County Records. 9. Easement granted to Union Electric Company by instrument recorded in Book 8881 page 1786. EX-10 4 EXHIBIT 10(BB) - STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT Date: Option Number: SP-10 January 3, 1997 Number of Shares Purchasable 100,000 To Purchase Shares of Class B Common Stock Of K-V PHARMACEUTICAL COMPANY THIS CERTIFIES THAT Marc S. Hermelin is hereby granted the option to purchase, at the option price of $12.788 per share, all or any part of that number of fully paid and non-assessable shares of the Class B Common Stock, par value $0.01 per share ("Class B Common Stock"), of K-V Pharmaceutical Company, a Delaware corporation (hereinafter called the "Company") above set forth, upon and subject to the following terms and conditions: This Option and all rights to purchase shares hereunder shall expire five (5) years from the date hereof (hereinafter called the "expiration date"). This Option and all rights hereunder shall be assignable and transferable. As of January 3, 1997, and prior to its expiration or earlier termination, this Option shall be exercisable from time to time as to all or any of the shares then purchasable hereunder as follows: During the five-year period commencing January 3, 1997 and ending January 2, 2002, it may be exercised as to all or any shares at any time during which this Option shall be exercisable as to the shares subject hereto. This Option may be exercised from time to time only by delivery to the Company at its main office (attention of the Secretary) of a duly signed notice in writing stating the number of shares with respect to which this Option is being exercised and the time and date of delivery thereof, which time and date of delivery shall be during the normal business hours of the Company on a regular business day not less than fifteen (15) days after the giving of such notice unless an earlier date has been mutually agreed upon; provided, however, that not less than ten (10) shares may be purchased at any one time unless the number purchased is the total number then purchasable hereunder; and provided further that this Option may not be exercised at any time when this Option or the granting or exercise hereof violates any law or governmental order or regulation. At the time of delivery specified in such notice, the company shall, without transfer or issue tax to the holder (or other person entitled to exercise this Option) transfer and set aside for the benefit of the holder (or other person entitled to exercise this Option) a certificate or certificates out of the Company's theretofore authorized but unissued or reacquired shares of Class B Common Stock as the Company may elect (with appropriate legend thereon, if deemed necessary by the Company, containing the representation by the person exercising the Option that the shares purchased shall be for investment purposes and not with a view to resale or distribution) against payment of the option price in full for the number of shares purchased by either (i) cash (including a certified or bank cashier's check or the equivalent thereof), or (ii) at the discretion of the Board by delivering at fair market value, as determined by the Board, Company Common Stock already owned by the Participant, or (iii) any combination of cash and Company Common Stock, to be held by the Company and subsequently delivered to the holder (or such other person) as hereinafter provided. If the holder fails to pay for any part of the number of shares specified in such notice as required, the right to purchase such shares may be terminated by the Board. To the extent that this Option has not been exercised in full prior to its termination or expiration date, whichever occurs sooner, it shall terminate and become void and of no effect. All Class B Common Stock purchased pursuant to the exercise of an Option shall be held by the Company for a period of two years from the date of exercise (the "Holding Period"). Upon completion of the Holding Period (under normal Company policies), the Company shall deliver to the holder of the holder's personal representative, as soon as practicable thereafter, certificates representing the Class B Common Stock purchased hereunder (the "Certificates"), free and clear of restrictions except for the restrictions which are necessary to assure compliance by the Company and the holder with applicable federal and state securities laws and/or the listing requirements of any national securities exchange. This Option shall not confer upon the holder any right to remain in the employ of the Company or any subsidiary thereof and shall not confer upon the holder any rights in the stock of the Company prior to the issuance of a stock certificate pursuant to the exercise of this Option. No adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. In the event that the outstanding shares of Class B Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation, or in the event that there is a "corporate transaction" as that term is defined in the Regulations under Section 425 of the Internal Revenue Code of 1986, by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, spin-off, combination of shares or dividend payable in capital stock, this Option shall, to the extent that it has not been exercised, entitle the holder upon the subsequent exercise of this Option to such number and kind of securities or other property, subject to the terms of the Option, to which the holder would be entitled had the holder actually owned the shares subject to the unexercised portion of this Option at the time of the occurrence of such event, and the aggregate purchase price upon the subsequent exercise of this Option shall be the same as if the Class B Common Stock of the Company originally optioned were being purchased as provided herein; provided, however, that each such adjustment in the number and kind of shares subject to this Option, including any adjustment in the Option price, shall be made in such manner as not to constitute a "modification" as defined in Section 425 of the Internal Revenue Code of 1986. Any such adjustment made by the Board of Directors shall be conclusive. The Company may postpone the issuance and delivery of shares upon any exercise of this Option, if necessary, until admission of such shares to listing on any stock exchange and completion of registration and qualification of such shares under any applicable state or federal law, rule or regulation. The holder hereof shall make such representations and furnish such information to the Company as may be appropriate to permit the Company to issue such shares in compliance with the provisions of the Security Act of 1933, as amended (the "Securities Act"), or any other applicable law, including state securities laws. Without limiting the generality of the foregoing, if requested by the Company, the holder will represent, in form acceptable to the Company, that the holder is purchasing any shares issued pursuant hereto for investment purposes and not with a view to resale or distribution. This Option is issued pursuant to resolutions duly adopted by the Board of Directors, the receipt of a copy of which the holder acknowledges by virtue of the acceptance hereof, and is subject to all the terms and conditions of said resolutions. A determination by the Board of Directors of any question which may arise with respect to the interpretation and construction of the provisions of this Option shall be final. WITNESS the seal of the Company and the signatures of its duly authorized officers or agents. Dated: January 3, 1997 K-V PHARMACEUTICAL COMPANY /s/ Gerald R. Mitchell By Vice President, Finance ACCEPTED: /s/ Marc S. Hermelin Marc S. Hermelin EX-10 5 EXHIBIT 10(CC) - STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT Date: Option Number: SP-11 May 15, 1997 Number of Shares Purchasable 200,000 To Purchase Shares of Class B Common Stock Of K-V PHARMACEUTICAL COMPANY THIS CERTIFIES THAT Marc S. Hermelin is hereby granted the option to purchase, at the option price of $17.8125 per share, all or any part of that number of fully paid and non-assessable shares of the Class B Common Stock, par value $0.01 per share ("Class B Common Stock"), of K-V Pharmaceutical Company, a Delaware corporation (hereinafter called the "Company") above set forth, upon and subject to the following terms and conditions: This Option and all rights to purchase shares hereunder shall expire three (3) years from the date hereof (hereinafter called the "expiration date"). This Option and all rights hereunder shall be assignable and transferable. As of May 15, 1997, and prior to its expiration or earlier termination, this Option shall be exercisable from time to time as to all or any of the shares then purchasable hereunder as follows: During the three-year period commencing May 15, 1997 and ending May 14, 2000, it may be exercised as to all or any shares at any time during which this Option shall be exercisable as to the shares subject hereto. This Option may be exercised from time to time only by delivery to the Company at its main office (attention of the Secretary) of a duly signed notice in writing stating the number of shares with respect to which this Option is being exercised and the time and date of delivery thereof, which time and date of delivery shall be during the normal business hours of the Company on a regular business day not less than fifteen (15) days after the giving of such notice unless an earlier date has been mutually agreed upon; provided, however, that not less than ten (10) shares may be purchased at any one time unless the number purchased is the total number then purchasable hereunder; and provided further that this Option may not be exercised at any time when this Option or the granting or exercise hereof violates any law or governmental order or regulation. At the time of delivery specified in such notice, the company shall, without transfer or issue tax to the holder (or other person entitled to exercise this Option) transfer and set aside for the benefit of the holder (or other person entitled to exercise this Option) a certificate or certificates out of the Company's theretofore authorized but unissued or reacquired shares of Class B Common Stock as the Company may elect (with appropriate legend thereon, if deemed necessary by the Company, containing the representation by the person exercising the Option that the shares purchased shall be for investment purposes and not with a view to resale or distribution) against payment of the option price in full for the number of shares purchased by either (i) cash (including a certified or bank cashier's check or the equivalent thereof), or (ii) at the discretion of the Board by delivering at fair market value, as determined by the Board, Company Common Stock already owned by the Participant, or (iii) any combination of cash and Company Common Stock, to be held by the Company and subsequently delivered to the holder (or such other person) as hereinafter provided. If the holder fails to pay for any part of the number of shares specified in such notice as required, the right to purchase such shares may be terminated by the Board. To the extent that this Option has not been exercised in full prior to its termination or expiration date, whichever occurs sooner, it shall terminate and become void and of no effect. All Class B Common Stock purchased pursuant to the exercise of an Option shall be held by the Company for a period of two years from the date of exercise (the "Holding Period"). Upon completion of the Holding Period (under normal Company policies), the Company shall deliver to the holder of the holder's personal representative, as soon as practicable thereafter, certificates representing the Class B Common Stock purchased hereunder (the "Certificates"), free and clear of restrictions except for the restrictions which are necessary to assure compliance by the Company and the holder with applicable federal and state securities laws and/or the listing requirements of any national securities exchange. This Option shall not confer upon the holder any right to remain in the employ of the Company or any subsidiary thereof and shall not confer upon the holder any rights in the stock of the Company prior to the issuance of a stock certificate pursuant to the exercise of this Option. No adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. In the event that the outstanding shares of Class B Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation, or in the event that there is a "corporate transaction" as that term is defined in the Regulations under Section 425 of the Internal Revenue Code of 1986, by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, spin-off, combination of shares or dividend payable in capital stock, this Option shall, to the extent that it has not been exercised, entitle the holder upon the subsequent exercise of this Option to such number and kind of securities or other property, subject to the terms of the Option, to which the holder would be entitled had the holder actually owned the shares subject to the unexercised portion of this Option at the time of the occurrence of such event, and the aggregate purchase price upon the subsequent exercise of this Option shall be the same as if the Class B Common Stock of the Company originally optioned were being purchased as provided herein; provided, however, that each such adjustment in the number and kind of shares subject to this Option, including any adjustment in the Option price, shall be made in such manner as not to constitute a "modification" as defined in Section 425 of the Internal Revenue Code of 1986. Any such adjustment made by the Board of Directors shall be conclusive. The Company may postpone the issuance and delivery of shares upon any exercise of this Option, if necessary, until admission of such shares to listing on any stock exchange and completion of registration and qualification of such shares under any applicable state or federal law, rule or regulation. The holder hereof shall make such representations and furnish such information to the Company as may be appropriate to permit the Company to issue such shares in compliance with the provisions of the Security Act of 1933, as amended (the "Securities Act"), or any other applicable law, including state securities laws. Without limiting the generality of the foregoing, if requested by the Company, the holder will represent, in form acceptable to the Company, that the holder is purchasing any shares issued pursuant hereto for investment purposes and not with a view to resale or distribution. This Option is issued pursuant to resolutions duly adopted by the Board of Directors, the receipt of a copy of which the holder acknowledges by virtue of the acceptance hereof, and is subject to all the terms and conditions of said resolutions. A determination by the Board of Directors of any question which may arise with respect to the interpretation and construction of the provisions of this Option shall be final. WITNESS the seal of the Company and the signatures of its duly authorized officers or agents. Dated: May 15, 1997 K-V PHARMACEUTICAL COMPANY /s/ Gerald R. Mitchell By Vice President, Finance ACCEPTED: /s/ Marc S. Hermelin Marc S. Hermelin EX-21 6 EXHIBIT 21 - LIST OF SUBSIDIARIES ETHEX Corporation, a Missouri corporation Particle Dynamics, Inc., a New York corporation DrugTech Corporation, a Delaware corporation SPI - Sub, Inc., a Delaware corporation EX-23 7 EXHIBIT 23 - CONSENT OF INDEPENDENT ACCOUNTANTS Consent of Independent Certified Public Accountants KV Pharmaceutical Company St. Louis, Missouri We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Numbers 2-56793, 2-76173, 33-46400, 33-44927 and 333-199) of our report dated May 21, 1998 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, 1998. /s/ BDO SEIDMAN, LLP St. Louis, Missouri May 21, 1998 EX-27 8 FDS --
5 12-MOS MAR-31-1998 APR-01-1997 MAR-31-1998 18,157,595 0 15,304,340 0 15,606,037 52,559,395 12,436,533 0 68,360,827 17,156,257 0 0 2,410 182,030 0 68,360,827 98,486,060 0 0 56,482,539 25,110,307 0 452,262 16,991,138 5,687,382 11,303,756 0 0 0 11,303,756 .60 .58
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