-----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, M5nYZ7v8fAH4Ii3UZzDCD23Z6GNP+P6SSb09Mq/lAdbxGLdeha8hxrC4qN5ZTPdP 1YYwrgF/EEVoORdSd3ONzA== 0001068800-03-000434.txt : 20030627 0001068800-03-000434.hdr.sgml : 20030627 20030627163830 ACCESSION NUMBER: 0001068800-03-000434 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 21 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030627 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KV PHARMACEUTICAL CO /DE/ CENTRAL INDEX KEY: 0000057055 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 430618919 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09601 FILM NUMBER: 03761708 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 form10k.txt - ------------------------------------------------------------------------------ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2003 Commission file number 1-9601 K-V PHARMACEUTICAL COMPANY 2503 South Hanley Road St. Louis, MO 63144 (314) 645-6600 Incorporated in Delaware IRS Employer identification No. 43-0618919 Securities Registered Pursuant to Section 12(b) of the Act: Class A Common Stock, par value $.01 per share New York Stock Exchange Class B Common Stock, par value $.01 per share New York Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: 7% Cumulative Convertible Preferred, par value $.01 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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. [X] 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. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes X No --- --- The aggregate market value of the 19,993,164 shares of Class A and 4,900,849 shares of Class B Common Stock held by nonaffiliates of the registrant as of September 30, 2002, the last business day of the registrant's most recently completed second fiscal quarter, was $377,870,800 and $92,626,046, respectively. As of June 4, 2003, the registrant had outstanding 21,750,660 and 10,604,679 shares of Class A and Class B Common Stock, respectively, exclusive of treasury shares. DOCUMENTS INCORPORATED BY REFERENCE Part III: Portions of the definitive proxy statement of the Registrant (to be filed pursuant to Regulation 14A for Registrant's 2003 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. - ------------------------------------------------------------------------------ CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This Form 10-K, including the documents that we incorporate herein by reference, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as "anticipate," "estimate," "plans," "projects," "continuing," "ongoing," "expects," "management believes," "we believe," "we intend" and similar words or phrases. Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Form 10-K. Factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to, the following: (1) the degree to which we are successful in developing new products and commercializing products under development; (2) the degree to which we are successful in acquiring new pharmaceutical products, drug delivery technologies and/or companies that offer these properties; (3) the difficulty of predicting FDA approvals; (4) acceptance and demand for new pharmaceutical products; (5) the impact of competitive products and pricing; (6) the availability of raw materials; (7) the regulatory environment; (8) fluctuations in operating results; (9) the difficulty of predicting the pattern of inventory movements by our customers; (10) the impact of competitive response to our efforts to leverage our brand power with product innovation, promotional programs, and new advertising; (11) the risks detailed from time to time in our filings with the Securities and Exchange Commission and detailed in this Form 10-K; (12) the availability of third-party reimbursement for our products; and (13) our dependence on sales to a limited number of large pharmacy chains and wholesale drug distributors for a large portion of our total net sales. Because the factors referred to above, as well as the statements included under the captions "Narrative Description of Business," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Form 10-K, could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made and, unless applicable law requires to the contrary, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise, when they will arise and/or their effects. In addition, we cannot assess the impact of each factor on our business or financial condition or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. 2 ITEM 1. DESCRIPTION OF BUSINESS ----------------------- (a) GENERAL DEVELOPMENT OF BUSINESS ------------------------------- Generally, when we use the words "we," "our," "us" or "our company" we are referring to K-V Pharmaceutical Company and its wholly-owned subsidiaries, including Ther-Rx Corporation, ETHEX Corporation and Particle Dynamics, Inc. We were incorporated under the laws of Delaware in 1971 as a successor to a business originally founded in 1942. Victor M. Hermelin, our Chairman and founder, invented and obtained initial patents for early controlled release and enteric coating which became part of our core business and a platform for future drug delivery emphasis. We develop advanced drug delivery technologies which enhance the effectiveness of new therapeutic agents, existing pharmaceutical products and nutritional supplements. We have developed and patented a wide variety of drug delivery and formulation technologies which are primarily focused in four principal areas: SITE RELEASE(R) bioadhesives; tastemasking; oral controlled release; and quick dissolving tablets. We incorporate these technologies in the products we market to control and improve the absorption and utilization of active pharmaceutical compounds. In 1990, we established a generic/non-branded marketing capability through a wholly-owned subsidiary, ETHEX Corporation ("ETHEX"), which makes us one of the only drug delivery research and development companies that also markets "technologically distinguished" generic/non-branded products. In 1999, we established a wholly-owned subsidiary, Ther-Rx Corporation ("Ther-Rx"), to market branded pharmaceuticals directly to physician specialists. Our wholly-owned subsidiary, Particle Dynamics, Inc. ("PDI"), was acquired in 1972. Through PDI, we develop and market specialty value-added raw materials, including drugs, directly compressible and microencapsulated products, and other products used in the pharmaceutical, nutritional, food, personal care and other markets. (b) SIGNIFICANT BUSINESS DEVELOPMENTS --------------------------------- During July 2002, we completed a public offering of approximately 3.3 million shares of Class A common stock. Net proceeds to us were $72.4 million, after deducting underwriting discounts, commissions and offering expenses. The proceeds from the offering are being used for general corporate purposes, including product acquisitions, research and development activities and working capital. On March 31, 2003, we completed two acquisitions of an aggregate of nine pharmaceutical products for a total cost of approximately $41.3 million. The acquisitions include two leading lines of hematinic products, Chromagen(R) and Niferex(R), and the related line of StrongStart(R) branded prenatal vitamins, a category in which we are a market leader under the PreCare(R) brand. Current annual revenues of the acquired products are approximately $16.0 million. Similar to our strategy with other acquired products, we plan to make formulation enhancements to the acquired product lines. In April 2003, we purchased a building for $8.8 million. The facility consists of approximately 275,000 square feet of office, production, distribution and warehouse space. The purchase of the building was financed by a term loan secured by the property. The building mortgage bears interest at 5.30% and is due in April 2008. During May 2003, we completed the issuance of $200.0 million of Contingent Convertible Subordinated Notes (the "Notes") that are convertible, under certain circumstances, into shares of our Class A common stock at an initial conversion price of $34.51 per share. The Notes bear interest at a rate of 2.50% and mature on May 16, 2033. The net proceeds to us were approximately $194.0 million, after deducting underwriting discounts, commissions and offering expenses. The proceeds from the offering were used to purchase $50.0 million of our 3 Class A common stock, with the remaining proceeds to be used to fund future acquisitions of products, technologies and businesses, and for general corporate purposes. (c) INDUSTRY SEGMENTS ----------------- We operate principally in three industry segments, consisting of branded products marketing, specialty generics marketing and specialty raw materials marketing. Revenues are derived primarily from directly marketing our own technologically distinguished generic/non-branded and brand-name products. Revenues may also be received in the form of licensing revenues and/or royalty payments based upon a percentage of the licensee's sales of the product, in addition to manufacturing revenues, when marketing rights to products using our advanced drug delivery technologies are licensed (see Note 17 to our consolidated financial statements). (d) NARRATIVE DESCRIPTION OF BUSINESS --------------------------------- OVERVIEW We are a fully integrated specialty pharmaceutical company that develops, acquires, manufactures and markets technologically distinguished branded and generic/non-branded prescription pharmaceutical products. We have a broad range of dosage form capabilities including tablets, capsules, creams, liquids and ointments. We conduct our branded pharmaceutical operations through Ther-Rx Corporation and our generic/non-branded pharmaceutical operations through ETHEX Corporation, which focuses principally on technologically distinguished generic/non-branded products in multiple therapeutic categories, with a particular emphasis on the cardiovascular, women's health, pain management and respiratory areas. Through Particle Dynamics, Inc., we also develop, manufacture and market technologically advanced, value-added raw material products for the pharmaceutical, nutritional, personal care, food and other markets. We have a broad portfolio of drug delivery technologies which we leverage to create technologically distinguished brand name and specialty generic/non-branded products. We have developed and patented 15 drug delivery and formulation technologies primarily in four principal areas: SITE RELEASE(R) bioadhesives, oral controlled release, tastemasking, and quick dissolving tablets. We incorporate these technologies in the products we market to control and improve the absorption and utilization of active pharmaceutical compounds. These technologies provide a number of benefits, including reduced frequency of administration, reduced side effects, improved drug efficacy, enhanced patient compliance and improved taste. We have a long history of developing drug delivery technologies. In the 1950's, we received what we believe to be the first patents for sustained release delivery systems which enhance the convenience and effectiveness of pharmaceutical products. In our early years, we used our technologies to develop products for other drug marketers. Our technologies have been used in several well known products including Actifed(R) 12-hour, Sudafed(R) SA, Centrum Jr.(R) and Kaopectate(R) Chewable. Since the 1990's, we have chosen to focus our drug development expertise on internally developed products for our branded and generic/non-branded pharmaceutical businesses. For example, since its inception in March 1999, our Ther-Rx business has launched five internally developed branded pharmaceutical products, all of which incorporate our drug delivery technologies. In addition, most of the internally developed generic/non-branded products marketed by our ETHEX business incorporate one or more of our drug delivery technologies. Our drug delivery technology allows us to differentiate our products in the marketplace, both in the branded and generic/non-branded pharmaceutical areas. We believe that this differentiation provides substantial competitive advantages for our products, allowing us to establish a strong record of growth and profitability and a leadership position in certain segments of our industry. From 1998 to March 31, 2003, we have grown net revenues and net income at compounded annual growth rates of 20.2% and 20.0%, respectively. Ther-Rx, which was established in 1999, has grown substantially since its inception and continues to gain market share in its women's healthcare family of products. Of more than 100 products sold by our ETHEX subsidiary, approximately 58% were 4 identified as the leading product and approximately 90% were identified as the first or second leading products in their respective generic categories by IMS America, an independent healthcare market research firm. THER-RX -- OUR BRAND NAME PHARMACEUTICAL BUSINESS We established our Ther-Rx business in 1999 to market brand name pharmaceutical products which incorporate our proprietary technologies. Since its inception, Ther-Rx has introduced 16 products, of which 11 were acquired and five were developed internally using our proprietary technologies. Ther-Rx generated $43.7 million of net revenues during fiscal 2003, which represented 17.8% of our total net revenues. We established our women's healthcare franchise through the August 1999 acquisition of PreCare(R), a prescription prenatal vitamin, from UCB Pharma, Inc. Since the acquisition, Ther-Rx has reformulated the original product using proprietary technologies, and subsequently has launched four internally developed products as extensions to the PreCare(R) product line. Building upon the PreCare(R) acquisition, we have developed a line of proprietary products which makes Ther-Rx the leading provider of branded prescription prenatal vitamins in the United States. The first of our internally developed, patented line extensions to PreCare(R) was PreCare(R) Chewables, the world's first prescription chewable prenatal vitamin. PreCare(R) Chewables addressed a longstanding challenge to improve pregnant women's compliance with prenatal vitamin regimens by alleviating the difficulty that patients experience in swallowing large prenatal pills. Ther-Rx's second internally developed product, PremesisRx(TM), is an innovative prenatal prescription product that incorporates our controlled release Vitamin B6. This product is designed for use in conjunction with a physician-supervised program to reduce pregnancy-related nausea and vomiting, which is experienced by 50% to 90% of women. The third product, PreCare(R) Conceive(TM), is the first single nutritional pre-conception supplement designed for use by both men and women. The fourth product, PrimaCare(TM), is the first prescription prenatal/postnatal nutritional supplement with essential fatty acids specially designed to help provide nutritional support for women during pregnancy, postpartum recovery and throughout the childbearing years. All of the products in the PreCare(R) product line have been formulated to contain 1 mg. of folic acid, which has been shown to reduce the incidence of fetal neural tube defects by at least 50%. In June 2000, Ther-Rx launched its first New Drug Application, or NDA, approved product, Gynazole-1(R), the only one-dose prescription cream treatment for vaginal yeast infections. Gynazole-1(R) incorporates our patented drug delivery technology, VagiSite(R), the only clinically proven and Federal Food and Drug Administration, or FDA, approved controlled release bioadhesive system. Since its launch, the product has gained an 18% market share in the U.S. prescription vaginal antifungal cream market. In addition, we have entered into four licensing agreements for the right to market Gynazole-1(R) in 49 countries outside of the United States. We expect to continue to license marketing rights for Gynazole-1(R) in additional international markets. Ther-Rx's cardiovascular product line consists of Micro-K(R), an extended-release potassium supplement used to replenish electrolytes, primarily in patients who are on medication which depletes the levels of potassium in the body. We acquired Micro-K(R) in March 1999 from the pharmaceutical division of Wyeth. On March 31, 2003, we completed two acquisitions of an aggregate of nine pharmaceutical products for a total cost of approximately $41.3 million. The acquisitions include two leading lines of hematinic products, Chromagen(R) and Niferex(R), and the related line of StrongStart(R) branded prenatal vitamins, a category in which Ther-Rx is already a market leader under the PreCare(R) banner. Current annual revenues of the acquired products are approximately $16.0 million. Similar to our strategy with other acquired products, we plan to make formulation enhancements to the acquired product lines. Ther-Rx has approximately 160 specialty sales representatives. Ther-Rx's sales force focuses on physician specialists who are identified through available market research as frequent prescribers of our prescription 5 products. Ther-Rx also has a corporate sales and marketing management team dedicated to planning and managing Ther-Rx's sales and marketing efforts. ETHEX -- OUR TECHNOLOGICALLY DISTINGUISHED GENERIC/NON-BRANDED DRUG BUSINESS We established ETHEX, currently our largest business segment, in 1990 to utilize our portfolio of drug delivery systems to develop and market hard-to-copy generic/non-branded pharmaceuticals. We believe many of our ETHEX products enjoy higher gross margins due to our approach of selecting products that can take advantage of our proprietary drug delivery systems and our specialty manufacturing capabilities. These advantages act as barriers to entry which limit competition and reduce the rate of price erosion typically experienced in the generic market. ETHEX's net revenues were $179.7 million for fiscal 2003, which represented 73.4% of our total net revenues. We have incorporated our proprietary drug delivery technology in many of our generic/non branded pharmaceutical products. For example, we have included METER RELEASE(R), one of our proprietary controlled release technologies, into the only generic equivalent to Norpace(R) CR, an antiarrhythmic that is taken twice daily. Further, we have used our KV/24(R) once daily technology in the generic equivalent to IMDUR(R), a cardiovascular drug that is taken once per day. In addition, utilizing our specialty manufacturing expertise and a sublingual delivery system, we produced and marketed the first non-branded alternative to Nitrostat(R) sublingual, an anti-angina product which historically has been difficult to manufacture. To capitalize on ETHEX's unique product capabilities, we continue to expand our ETHEX product portfolio. Over the past two years, we have introduced more than 25 new generic/non-branded products and have a number of products currently in development to be marketed by ETHEX. Since January 1, 2002, we have received seven new Abbreviated New Drug Application, or ANDA, approvals and have several currently pending. In addition to our internal marketing efforts, we have licensed the exclusive rights to co-develop and market nine products with other drug delivery companies. These products will be generic equivalents to brand name products with aggregate annual sales totaling approximately $2.5 billion and are expected to be launched at various times beginning in fiscal 2005 and continuing through fiscal 2007. ETHEX's current product line consists of more than 100 products, of which approximately 58% were identified as the leading product and approximately 90% were identified as the first or second leading products in their respective generic categories by IMS America, an independent healthcare market research firm. ETHEX primarily focuses on the therapeutic categories of cardiovascular, women's health, pain management and respiratory, leveraging our expertise in developing and manufacturing products in these areas. In addition, we pursue opportunities outside of these categories where we also may differentiate our products based upon our proprietary drug delivery systems and our specialty manufacturing expertise. CARDIOVASCULAR. ETHEX currently markets over 30 products in its cardiovascular line, including products to treat angina, arrhythmia and hypertension, as well as for potassium supplementation. In addition to marketing the generic versions of IMDUR(R), Norpace CR(R), Cardura(R) and Rythmol(R), we received an April 2002 ANDA approval for the generic equivalent to K-Dur(R) which was launched in fiscal 2003. The cardiovascular line accounted for 45.9% of ETHEX's net revenues in fiscal 2003. WOMEN'S HEALTH CARE. ETHEX currently markets 20 products in its women's healthcare line, all of which are prescription prenatal vitamins. Based on the number of units sold, ETHEX is the leading provider of prescription prenatal vitamins in the United States. The women's healthcare line accounted for 12.1% of ETHEX's net revenues in fiscal 2003. 6 PAIN MANAGEMENT. ETHEX currently markets 19 products in its pain management line. Included in this line are several controlled substance drugs, such as morphine and hydromorphone, as well as oxycodone capsules, which are currently the only alternative to OxyIR(R) capsules. The pain management line accounted for 14.2% of ETHEX's net revenues in fiscal 2003. RESPIRATORY. ETHEX currently markets over 30 products in its respiratory line, which consists primarily of cough/cold products. ETHEX is the leading provider on a unit basis of prescription cough/cold products in the United States today. The cough/cold line accounted for 14.4% of ETHEX's net revenues in fiscal 2003. OTHER THERAPEUTICS. In addition to our core therapeutic lines, ETHEX markets over 30 products in the gastrointestinal, dermatological, anti-inflammatory, digestive enzyme and general nutritional categories. These categories accounted for 13.4% of ETHEX's net revenues in fiscal 2003. ETHEX has a dedicated sales and marketing team, which includes an outside sales team of regional managers and national account managers and an inside sales team. The outside sales force calls on wholesalers and distributors and national drugstore chains, as well as hospitals, nursing homes, independent pharmacies and mail order firms. The inside sales force calls on independent pharmacies to create pull-through at the wholesale level. PARTICLE DYNAMICS, INC. - OUR VALUE-ADDED RAW MATERIAL BUSINESS Particle Dynamics develops and markets specialty raw material products for the pharmaceutical, nutritional, food and personal care industries. Its products include value-added active drug molecules, vitamins, minerals and other raw material ingredients that provide benefits such as improved taste, altered or controlled release profiles, enhanced product stability or more efficient and other manufacturing process advantages. Particle Dynamics is also a significant supplier of value-added raw material for our Ther-Rx and ETHEX businesses. Net revenues for Particle Dynamics were $17.4 million in fiscal 2003, which represented 7.1% of our total net revenues. Particle Dynamics currently offers three distinct lines of specialty raw material products: o DESCOTE(R) is a family of microencapsulated tastemasked vitamins and minerals for use in chewable nutritional products, quick dissolve dosage forms, foods, children's vitamins and other products. This technology is incorporated in Centrum(R) and Centrum Jr.(R) vitamins and Flintstones(R), Bugs Bunny(R) and One a Day(R) vitamins. DESCOTE(R) products accounted for 36.5% of Particle Dynamics' sales in fiscal 2003. o DESTAB(TM) is a family of direct compression products that enables pharmaceutical manufacturers to produce tablets and caplets more efficiently and economically. This technology is incorporated in Di-gel(R), Maalox(R) Quick Dissolve, Tylenol PM(R) and Mylanta(R) gelcaps, Centrum(R) and Centrum Jr.(R) vitamins and Flintstones(R), Bugs Bunny(R) and One a Day(R) vitamins. DESTAB(TM) products accounted for 61.9% of Particle Dynamics' sales in fiscal 2003. o MicroMask(TM) is a family of products designed to alleviate problems associated with swallowing tablets. This is accomplished by offering superior tasting, chewable or quick dissolving dosage forms of medication. This technology is incorporated in Triaminic(R) Soft Chew and Children's Sudafed(R). In addition, we use MicroMask(TM) technology in PreCare(R) Prenatal caplet, PreCare(R) Chewables and PreCare(R) Conceive(TM), all of which are marketed by Ther-Rx. STRATEGIES Our goal is to enhance our position as a leading specialty pharmaceutical company that utilizes its expanding drug delivery expertise to bring technologically distinguished brand name and generic/non-branded products to market. Our strategies incorporate the following key elements: 7 INTERNALLY DEVELOP BRAND NAME PRODUCTS. We apply our existing drug delivery technologies, research and development and manufacturing expertise to introduce new products which can expand our existing franchises. Since the acquisition and reformulation of PreCare(R), we have successfully introduced four internally developed brand name products: PreCare(R) Chewables, PremesisRx(TM), PreCare(R) Conceive(TM) and PrimaCare(TM). These products incorporate our proprietary oral extended release and tastemasking technologies. In June 2000, Ther-Rx launched its first NDA approved product, Gynazole-1(R), the only one-dose prescription cream treatment for vaginal yeast infections. We plan to continue to use our research and development, manufacturing and marketing expertise to create unique brand name products within our core therapeutic areas. We currently have a number of products in clinical development. We also plan to incorporate technology enhancements into the Chromagen(R), Niferex(R) and StrongStart(R) product lines acquired on March 31, 2003. CAPITALIZE ON ACQUISITION OPPORTUNITIES. We actively seek acquisition opportunities for both Ther-Rx and ETHEX. Ther-Rx continually looks for platform acquisition opportunities similar to PreCare(R) around which we can build franchises. We believe that consolidation among large pharmaceutical companies, coupled with cost-containment pressures, has increased the level of sales necessary for an individual product to justify active marketing and promotion. This has led large pharmaceutical companies to focus their marketing efforts on drugs with higher volume sales, newer or novel drugs which have the potential for high volume sales and products which fit within core therapeutic or marketing priorities. As a result, major pharmaceutical companies increasingly have sought to divest small or non-strategic product lines, which can be profitable for specialty pharmaceutical companies like us. In making acquisitions, we apply several important criteria in our decision making process. We pursue products with the following attributes: o products which we believe have relevance for treatment of significant clinical needs; o promotionally sensitive maintenance drugs which require continual use over a long period of time, as opposed to more limited use products for acute indications; o products which are predominantly prescribed by physician specialists, which can be cost effectively marketed by our focused sales force; and o products which we believe have potential for technological enhancements and line extensions based upon our drug delivery technologies. FOCUS SALES EFFORTS ON HIGH VALUE NICHE MARKETS. We focus our Ther-Rx sales efforts on niche markets where we believe we can target a relatively narrow physician audience. Because our products are sold to specialty physician groups that tend to be relatively concentrated, we believe that we can address these markets cost effectively with a focused sales force. Currently, we have approximately 160 sales representatives who principally call on gynecologists and obstetricians. We plan to continue to build our sales force as necessary to accommodate current and future expansions of our product lines. PURSUE ATTRACTIVE GROWTH OPPORTUNITIES WITHIN THE GENERIC INDUSTRY. We intend to continue to introduce generic counterparts to drugs whose patents have expired. When patents no longer protect a branded product, opportunities exist for ETHEX to introduce generic counterparts to branded products. Such generic or off-patent pharmaceutical products are generally sold at significantly lower prices than the branded product. Accordingly, generic pharmaceuticals provide a cost-efficient alternative to users of branded products. We believe the health care industry will continue to support growth in the generic pharmaceutical market and that industry trends favor generic product expansion into the managed care, long-term care and government contract markets. We further believe that our competitively priced, technologically distinguished generic/non-branded products can help contain costs and improve patient compliance. 8 ADVANCE EXISTING AND DEVELOP NEW DRUG DELIVERY TECHNOLOGIES. We believe our drug delivery platform of 15 distinguished technologies has unique breadth and depth. These technologies have enabled us to create innovative products, including Gynazole-1(R), the only one-dose vaginal antifungal prescription cream treatment for yeast infections, incorporating VagiSite(TM), our proprietary bioadhesive controlled release system. In addition, our tastemasking and controlled release systems are incorporated into our prenatal vitamins, providing them with differentiated benefits over other products on the market. We plan to continue to develop our drug delivery technologies and have identified various technologies with substantial growth potential, such as TransCell(TM), a novel bioadhesive, controlled release delivery system that may permit oral delivery of bioactive peptides and proteins that are normally degraded by stomach enzymes or first-pass liver effects. OUR PROPRIETARY DRUG DELIVERY TECHNOLOGIES We are a leader in the development of proprietary drug delivery systems and formulation technologies which enhance the effectiveness of new therapeutic agents, existing pharmaceutical products and nutritional supplements. We have used many of these technologies to successfully commercialize technologically distinguished branded and generic/non branded products. Additionally, we continue to invest our resources in the development of new technologies. The following describes our principal drug delivery technologies. SITE RELEASE(R) TECHNOLOGIES. SITE RELEASE(R) is our largest family of technologies and includes eight systems designed specifically for oral, topical or interorificial use. These systems rely on controlled bioadhesive properties to optimize the delivery of drugs to either wet mucosal tissue or the skin and are the subject of issued patents and pending patent applications. Of the technologies developed, products using the VagiSite(TM) and DermaSite(TM) technologies have been successfully commercialized. Our fully developed technologies include the following: o VagiSite(TM) is a controlled release bioadhesive delivery system that incorporates advanced polyphasic principles to create a bioemulsion system delivering therapeutic agents to the vagina. We have outlicensed VagiSite(TM) for sale in international markets for the treatment of vaginal infections. VagiSite(TM) technology is used in Gynazole-1(R), a one-dose prescription cream treatment for vaginal yeast infections. o 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. DermaSite(TM) technology is used in Dermarin-L(TM), a topical antifungal product being marketed by the leading over-the-counter company in Japan, Taisho Pharmaceutical, Ltd. o OraSite(R) is a controlled release 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 categories such as oral hygiene, sore throat and periodontal and upper gastrointestinal tract disorders. o OraSert(TM) is a solid dosage-form application system specifically designed for localized delivery of active agents to the oral tissues. The product is formulated as a "cough drop" type tablet, which immediately liquefies upon placement in the mouth and bioadheres to mucosal tissue in the mouth, throat and esophagus. OraSert(TM) possesses characteristics particularly advantageous to therapeutic applications such as periodontal disease, respiratory conditions, pharyngeal conditions and upper gastrointestinal tract disorders. o BioSert(TM) is a bioadhesive delivery system in a solid insert formulation for vaginal or rectal administration, similar in appearance to a vaginal or rectal suppository, which can be used for both local and systemic delivery of drugs. The BioSert(TM) dosage form liquefies and bioadheres to vaginal or rectal tissues, which is of 9 particular benefit when a patient can no longer tolerate orally administered medications. We are currently developing several drug products that utilize the BioSert(TM) technology, including non-steroidal anti-inflammatory drugs, or NSAIDs, and antifungals for a local effect and opioids for a systemic effect. In addition, the following SITE RELEASE(R) technologies are currently under development: o TransCell(TM) is a novel bioadhesive, controlled release delivery system that may permit oral delivery of bioactive peptides and proteins that are normally degraded by stomach enzymes or first- pass liver effects. The TransCell(TM) technology was specifically designed to provide an oral delivery alternative to biotechnology and other compounds that currently are delivered as injections or infused. In "proof of principle" and "proof of concept" studies conducted during fiscal 2002, the TransCell(TM) delivery system demonstrated the successful oral delivery of the hormone calcitonin, a drug used in the treatment and prevention of osteoporosis and to normalize calcium levels in renal dialysis patients. o OcuSite(TM) is a liquid, microemulsion delivery system intended for topical applications in the eye. The microemulsion formulation lends optical clarity to the application and is ideal for ophthalmic use. The bioadhesive and controlled release properties of this delivery system allow for reduced dosing regimentation. o PulmoSite(TM) applies bioadhesive and controlled release characteristics to drug agents that are to be inhaled for either local action to the lung or for systemic absorption. ORAL CONTROLLED RELEASE TECHNOLOGIES. The technological preeminence of our advanced drug delivery systems was established in the development of our three oral controlled release technologies, all of which have been commercialized. Our systems can be individually designed to achieve the desired release profile for a given drug. The release profile is dependent on many parameters, such as drug solubility, protein binding and site of absorption. Some of the products utilizing our oral controlled release systems in the market include Isosorbide-5-Mononitrate (an AB rated generic equivalent to IMDUR(R)) and Disopyramide Phosphate (an AB rated generic equivalent of Norpace(R) CR). Our patented technologies include the following: o KV/24(R) is a multi-particulate drug delivery system that encapsulates one or more drug compounds into spherical particles which release the active drug or drugs systemically over an 18- to 24-hour period, permitting the development of once-a-day drug formulations. We believe that our KV/24(R) oral dosing system is the only commercialized 24-hour oral controlled release system that is successfully able to incorporate more than one active compound. o METER RELEASE(R) is a polymer-based drug delivery system that offers different release characteristics than KV/24(R) and is used for products that require drug release rates of between eight and 12 hours. We have developed METER RELEASE(R) systems in tablet, capsule and caplet form that have been commercialized in ETHEX products in the cardiovascular, gastrointestinal and upper respiratory product categories. o MICRO RELEASE(R) is a microparticulate formulation that encapsulates therapeutic agents, employing smaller particles than KV/24(R) and METER RELEASE(R). This system is used to extend the release of drugs in the body where precise release profiles are less important. MICRO RELEASE(R) has been commercialized in prescription products marketed by ETHEX and Ther-Rx as well as over-the-counter nutritional products. TASTEMASKING TECHNOLOGIES. Our tastemasking technologies improve the taste of unpleasant drugs. Our three patented tastemasking systems can be applied to liquids, chewables or dry powders. We first introduced tastemasking technologies in 1991 and have utilized them in a number of Ther-Rx and ETHEX products, including PreCare(R) Chewables and most of the liquid products that are sold in ETHEX's cough/cold line. Our patented technologies include the following: 10 o LIQUETTE(R) is a tastemasking system that 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 where low manufacturing costs are particularly important. o FlavorTech(R) is a liquid formulation technology designed to reduce the objectionable taste of a wide variety of therapeutic products. FlavorTech(R) technology has been used in cough/cold syrup products sold by ETHEX and has special application to other products, such as antibiotic, geriatric and pediatric pharmaceuticals. o MicroMask(TM) is a tastemasking technology that incorporates a dry powder, microparticulate approach to reducing objectionable tastes by sequestering the unpleasant drug agent in a specialized matrix. This formulation technique has the effect of "shielding" the drug from the taste receptors without interfering with the dissolution and ultimate absorption of the agent within the gastrointestinal tract. MicroMask(TM) is a more potent tastemasking technology than LIQUETTE(R) and has been used in connection with two Ther-Rx products. QUICK DISSOLVING TECHNOLOGY. Our OraQuick(TM) system is a quick-dissolving tablet technology that provides the ability to tastemask, yet dissolves in the mouth in a matter of seconds. Most other quick-dissolving technologies offer either quickness at the expense of poor tastemasking or excellent tastemasking at the expense of quickness. While still under development, this system allows for a drug to be quickly dissolved in the mouth, and can be combined with tastemasking capabilities that offer a unique dosage form for the most bitter tasting drug compounds. We have been issued patents and have patents pending for this system with the U.S. Patent and Trademark Office, or PTO. SALES AND MARKETING Ther-Rx has a national sales and marketing infrastructure which includes approximately 160 sales representatives dedicated to promoting and marketing our branded pharmaceutical products to targeted physician specialists. By targeting physician specialists, we believe we can compete successfully without the need to build a large sales force. We also have a national sales management team, as well as a sales team dedicated to managed care and trade accounts. We attempt to increase sales of our branded pharmaceutical products through physician sales calls and promotional efforts, including sampling, advertising and direct mail. For acquired branded products, we generally increase the level of physician sales calls and promotion relative to the previous owner. For example, with the PreCare(R) prenatal sales efforts, we increased the level of physician sales calls and sampling to the highest prescribers of prenatal vitamins. We also have enhanced our PreCare(R) brand franchise by launching four more line extensions to address unmet needs, including the launch of PreCare(R) Chewables, Premesis Rx(TM), PreCare(R) Conceive(TM) and PrimaCare(TM). The PreCare(R) product line enables us to deliver a full range of nutritional products for physicians to prescribe to women in their childbearing years. In addition, we added to our women's health care family of products in June 2000 with the introduction of our first NDA approved product, Gynazole-1(R), the only one-dose prescription cream treatment for yeast infections. By offering multiple products to the same group of physician specialists, we are able to maximize the effectiveness of our experienced sales force. ETHEX has an experienced sales and marketing team, which includes an outside sales team, regional account managers, national account managers and an inside sales team. The outside sales force calls on wholesalers, distributors and national drugstore chains, as well as hospitals, nursing homes, mail order firms and independent pharmacies. The inside sales team calls on independent pharmacies to create pull-through at the wholesale level. We believe that industry trends favor generic product expansion into the managed care, long-term care and government contract markets. Further, we believe that our competitively priced, technologically distinguished 11 generic/non-branded products can fulfill the increasing need of these markets to contain costs and improve patient compliance. Accordingly, we intend to continue to devote significant marketing resources to the penetration of such markets. Particle Dynamics has a specialized technical sales group that calls on the leading companies in the pharmaceutical, nutritional, personal care, food and other markets in the United States. During fiscal 2003, our three largest customers accounted for 23%, 18% and 14% of gross revenues. These customers were McKesson Drug Company, Amerisource Corporation and Cardinal Health, respectively. In fiscal 2002 and 2001, these customers accounted for gross revenues of 20%, 13% and 19% and 23%, 14% and 20%, respectively. Although we sell internationally, we do not have material operations or sales in foreign countries and our sales are not subject to unusual geographic concentration. RESEARCH AND DEVELOPMENT Our research and development activities include the development of new and next generation drug delivery technologies, the formulation of brand name proprietary products and the development of technologically distinguished generic/non-branded versions of previously approved brand name pharmaceutical products. In fiscal 2003, 2002 and 2001, total research and development expenses were $19.1 million, $10.7 million, and $9.3 million, respectively. Ther-Rx currently has a number of products in its research and development pipeline at various stages of development. We believe we have the technological expertise required to develop unique products to meet currently unmet needs in the area of women's health, as well as other therapeutic areas. ETHEX currently has more than 30 products in its research and development pipeline at various stages of development and exploration. Our development process typically consists of formulation, development and laboratory testing, and where required (1) preliminary bioequivalency studies of pilot batches of the manufactured product, (2) full scale bioequivalency studies using commercial quantities of the manufactured product and (3) submission of an ANDA, to the FDA. We believe that, unlike many generic drug companies, we have the technical expertise required to develop generic substitutes to the hard-to-copy branded pharmaceutical products. Since January 1, 2002, ETHEX has received the following seven ANDA approvals from the FDA:
ETHEX PRODUCT BRAND EQUIVALENT -------------------------------------------------- ------------------------------- Propafenone HCI Tablets Rythmol(R) Buspirone HCI Tablets BuSpar(R) Hydrocodone Bitartrate & Acetaminophen Elixir CIII Lortab(R) Elixir Potassium Chloride 20mEq Extended Release Tablets K-Dur 20(R) Prednisolone Syrup USP Prelone(R) Dextroamphetamine Sulfate Tablets, 5mg Dexedrine(R), Dextrostat(R) Dextroamphetamine Sulfate Tablets, 10mg Dextrostat(R)
In addition to our internal product development and marketing efforts, we have licensed the exclusive rights to co-develop and market nine products with other drug delivery companies. These products will be generic/non-branded equivalents to brand name products with aggregate annual sales totaling approximately $2.5 billion and are expected to be launched at various times beginning in fiscal 2005. 12 Particle Dynamics currently has a number of products in its research and development pipeline at various stages of development. Particle Dynamics applies its technologies to a diverse number of active and inactive chemicals for more efficient processing of materials to achieve benefits such as prolonged action of release, tastemasking, making materials more site specific and other benefits. Typically, the finished products into which the specialty raw materials are incorporated do not require FDA approval. We continually apply our scientific and development expertise to refine and enhance our existing drug delivery systems and formulation technologies and to create new technologies that may be used in our drug development programs. Certain of these technologies currently under development include advanced oral controlled release systems, quick dissolving oral delivery systems (with and without tastemasking characteristics) and transesophageal and intrapulmonary delivery technologies. PATENTS AND OTHER PROPRIETARY RIGHTS Our policy is to file patent applications in appropriate situations to protect and preserve, for our own use, technology, inventions and improvements that we consider important to the development of our business. We currently hold domestic and foreign issued patents the last of which expires in 2018 relating to our controlled release, site-specific, quick dissolve and tastemasking technologies. We have been granted 28 U.S. patents and have 16 U.S. patent applications pending. In addition, we have 36 foreign issued patents and a total of 84 patent applications pending primarily in Canada, Europe, Australia, Japan and South Korea (see "We depend on our patents and other proprietary rights" under RISK FACTORS for additional information). We currently own more than 50 U.S. and foreign trademark registrations and have also applied for trademark protection for the names of our proprietary controlled-release, tastemasking, site-specific and quick dissolve technologies. We intend to continue to trademark new technology and product names as they are developed. To protect our trademark, domain name, and related rights, we generally rely on trademark and unfair competition laws, which are subject to change. Some, but not all, of our trademarks are registered in the jurisdictions where they are used. Some of our other trademarks are the subject of pending applications in the jurisdictions where they are used or intended to be used and others are not. MANUFACTURING AND FACILITIES We believe that our administrative, research, manufacturing and distribution facilities are an important factor in achieving our long-term growth objectives. All facilities at March 31, 2003, aggregating approximately 833,000 square feet, are located in the St. Louis, Missouri area. We own approximately 299,000 square feet, with the balance under various leases at pre-determined annual rates under agreements expiring from 2003 through 2012, subject in most cases to renewal at our option. On April 28, 2003, we purchased a building consisting of approximately 275,000 square feet of office, production, distribution and warehouse space. We believe our facilities are suitable for the purposes for which they are used and adequate to meet our needs for at least the next three years. We manufacture drug products in liquid, semi-solid, tablet, capsule and caplet forms for distribution by Ther-Rx, ETHEX and our corporate licensees and value-added specialty raw materials for distribution by Particle Dynamics. We believe that all of our facilities comply with applicable regulatory requirements. We seek to maintain inventories at sufficient levels to support current production and sales levels. During fiscal 2003, we encountered no serious shortage of any particular raw materials and have no indication that significant shortages will occur in the foreseeable future. 13 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 our own, are engaged in developing, marketing and selling products that compete with those that we offer. Our branded pharmaceutical products may also be subject to competition from alternate therapies during the period of patent protection and thereafter from generic equivalents. In addition, our generic/non-branded pharmaceutical products may be subject to competition from pharmaceutical companies engaged in the development of alternatives to the generic/non-branded products we offer or of which we undertake development. Our competitors may develop generic products before we do or may have pricing advantages over our products. In our specialty pharmaceutical businesses, we compete primarily on the basis of product efficacy, breadth of product line and price. We believe that our patents, proprietary trade secrets, technological expertise, product development and manufacturing capabilities position us to maintain a leadership position in the field of advanced drug delivery technologies and to continue to develop products to compete effectively in the marketplace. In addition, we compete with other pharmaceutical companies that acquire branded product lines from other pharmaceutical companies. These competitors may have substantially greater financial and managerial resources than we do. Accordingly, our competitors may succeed in product line acquisitions that we seek to acquire. We also compete with drug delivery companies engaged in the development of alternative drug delivery systems. We are aware of a number of companies currently seeking to develop new non-invasive drug delivery systems, including oral delivery and transmucosal systems. Many of these companies may have greater research and development capabilities, experience, manufacturing, marketing, financial and managerial resources than we do. Accordingly, our competitors may succeed in developing competing technologies, obtaining FDA approval for products or gaining market acceptance more rapidly than we do. GOVERNMENT REGULATION All pharmaceutical manufacturers are subject to extensive regulation by the federal government, principally the FDA, and, to a lesser extent, by state, local and foreign governments. The Federal Food, Drug and Cosmetic Act, or FDCA, and other federal statutes and regulations govern or influence, among other things, the development, testing, manufacture, safety, labeling, storage, recordkeeping, approval, advertising, promotion, sale and distribution of pharmaceutical products. Pharmaceutical manufacturers are also subject to certain record keeping and reporting requirements, establishment registration and product listing, and FDA inspections. With respect to any non-biological "new drug" product with active ingredients not previously approved by the FDA, a prospective manufacturer must submit a full NDA, including complete reports of preclinical, clinical and other studies to prove the product's safety and efficacy. A full NDA may also need to be submitted for a drug product with a previously approved active ingredient if, among other things, the drug will be used to treat an indication for which the drug was not previously approved, or if the abbreviated procedure discussed below is otherwise not available. A manufacturer intending to conduct clinical trials in humans for a new drug may be required first to submit a Notice of Claimed Investigational Exception for a New Drug, or IND, to the FDA containing information relating to preclinical and clinical studies. INDs and full NDAs may be required to be filed to obtain approval of certain of our products, including those that do not qualify for abbreviated application procedures. The full NDA process, including clinical development and testing, is expensive and time consuming. The Drug Price Competition and Patent Restoration Act of 1984, known as the Waxman-Hatch Act, established ANDA procedures for obtaining FDA approval for generic versions of many non-biological drugs for which patent or marketing exclusivity rights have expired and which are bioequivalent to previously approved drugs. 14 "Bioequivalence" for this purpose, with certain exceptions, generally means that the proposed generic formulation is absorbed by the body at the same rate and extent as a previously approved "reference drug." Approval to manufacture these drugs is obtained by filing abbreviated applications, such as ANDAs. As a substitute for clinical studies, the FDA requires data indicating the ANDA drug formulation is bio-equivalent to a previously approved reference drug among other requirements. Analogous abbreviated application procedures apply to antibiotic drug products that are bio-equivalent to previously approved antibiotics. The advantage of the ANDA approval mechanism, compared to an NDA, is that an ANDA applicant is not required to conduct preclinical and clinical studies to demonstrate that the product is safe and effective for its intended use and may rely, instead, on studies demonstrating bio-equivalence to a previously approved reference drug. In addition to establishing ANDA approval mechanisms, the Waxman-Hatch Act fosters pharmaceutical innovation through such incentives as non-patent exclusivity and patent restoration. The Act provides two distinct exclusivity provisions that either preclude the submission or delay the approval of an ANDA. A five-year exclusivity period is provided for new chemical compounds, and a three-year marketing exclusivity period is provided for changes to previously approved drugs which are based on new clinical investigations essential to the approval. The three-year marketing exclusivity period may be applicable to the approval of a novel drug delivery system. The marketing exclusivity provisions apply equally to patented and non-patented drug products. These provisions do not delay or otherwise affect the approvability of full NDAs even when effective ANDA approvals are not available. For drugs covered by patents, patent extension may be provided for up to five years as compensation for reduction of the effective life of the patent resulting from time spent in conducting clinical trials and in FDA review of a drug application. There has been substantial litigation in the biomedical, biotechnology and pharmaceutical industries with respect to the manufacture, use and sale of new products that are the subject of conflicting patent rights. One or more patents cover most of the proprietary products for which we are developing generic versions. When we file an ANDA for such drug products, we will, in most cases, be required to certify to the FDA that any patent which has been listed with the FDA as covering the product is invalid or will not be infringed by our sale of our product. Alternatively, we could certify that we would not market our proposed product until the applicable patent expires. A patent holder may challenge a notice of noninfringement or invalidity by filing suit for patent infringement, which would prevent FDA approval until the suit is resolved or until at least 30 months has elapsed (or until the patent expires, whichever is earlier). Should any entity commence a lawsuit with respect to any alleged patent infringement by us, the uncertainties inherent in patent litigation would make the outcome of such litigation difficult to predict. In addition to marketing drugs which are subject to FDA review and approval, we market products under (a) certain "grandfather" clauses of the FDCA that exempt certain categories of drugs from some or all pre-market approval requirements, and (b) additional statutory and regulatory exceptions from pre-market approval requirements that apply to certain drug products that fall outside of the legal definition of a "new drug." A determination as to whether a particular product does or does not require pre-market NDA or ANDA approval can involve numerous complex considerations. The FDA has published a Compliance Policy Guide that recognizes the marketing of certain categories of drug products without an approved NDA or ANDA as long as those products are not significantly different in formulation than products marketed before November 13, 1984. With respect to these products, any enforcement action initiated by the FDA would typically affect all similarly situated products at the same time and in a similar manner. If a product is significantly different from all products marketed before November 13, 1984 or falls outside of the scope of the Compliance Guide or raises significant new questions of safety or effectiveness, however, the FDA could make a determination whether or not the new drug provisions are applicable to it without first implementing the procedures called for by the policy guide and could single out the product for immediate regulatory action, including seizure or injunction against further marketing. We list all of our marketed drug products, as required, with the FDA. We believe that each of our products which has been marketed without FDA approval qualifies for deferral of regulatory action under the Compliance Policy Guide or under other agency policies. The FDA has initiated no regulatory or judicial proceeding to prevent the marketing of these products. However, if a determination is made by the FDA that a 15 particular drug requires an approved NDA or ANDA, we may be required to cease distribution of the product until such approval is obtained. In addition to obtaining pre-market approval for certain of our products, we are required to maintain all facilities in compliance with the FDA's current Good Manufacturing Practice, or cGMP, requirements. In addition to compliance with cGMP each pharmaceutical manufacturer's facilities must be registered with the FDA. Manufacturers must also be registered with the Drug Enforcement Agency, or DEA, and similar state and local regulatory authorities if they handle controlled substances, and with the EPA and similar state and local regulatory authorities if they generate toxic or dangerous wastes. Noncompliance with applicable requirements can result in fines, recall or seizure of products, total or partial suspension of production and distribution, refusal of the government to enter into supply contracts or to approve NDA's, ANDA's or other applications and criminal prosecution. The FDA also has the authority to revoke for cause drug approvals previously granted. The Prescription Drug Marketing Act, or PDMA, which amended various sections of the FDCA, requires, among other things, state licensing of wholesale distributors of prescription drugs under federal guidelines that include minimum standards for storage, handling and record keeping. It also imposes detailed requirements on the distribution of prescription drug samples such as those distributed by the Ther-Rx sales force. The PDMA sets forth substantial civil and criminal penalties for violations of these and other provisions. For international markets, a pharmaceutical company is subject to regulatory requirements, inspections and product approvals substantially the same as those in the United States. In connection with any future marketing, distribution and license agreements that we may enter into, our licensees may accept or assume responsibility for such foreign regulatory approvals. The time and cost required to obtain these international market approvals may be greater or lesser than those required for FDA approval. Product development and approval within this regulatory framework take a number of years, involve the expenditure of substantial resources and is uncertain. Many drug products ultimately do not reach the market because they are not found to be safe or effective or cannot meet the FDA's other regulatory requirements. In addition, the current regulatory framework may change and additional regulation may arise at any stage of our product development that may affect approval, delay the submission or review of an application or require additional expenditures by us. We may not be able to obtain necessary regulatory clearances or approvals on a timely basis, if at all, for any of our products under development, and delays in receipt or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or failure to comply with existing or future regulatory requirements could have a material adverse effect on our business. EMPLOYEES As of March 31, 2003, we employed a total of 916 employees. We are party to a collective bargaining agreement covering 155 employees that will expire December 31, 2004. We believe that our relations with our employees are good. ENVIRONMENT We do 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 our capital expenditures, earnings or competitive position. AVAILABLE INFORMATION We make available, free of charge through our Internet website (http://www.kvpharmaceutical.com), our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon 16 as reasonably practicable after we electronically file these reports with, or furnish them to, the Securities and Exchange Commission, or SEC. In addition, the SEC maintains an Internet website (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. RISK FACTORS We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. The following discussion highlights some of these risks and others are discussed elsewhere in this report. Additional risks presently unknown to us or that we currently consider immaterial or unlikely to occur could also impair our operations. These and other risks could materially and adversely affect our business, financial condition, operating results or cash flows. RISKS RELATED TO OUR BUSINESS WE NEED TO INTERNALLY DEVELOP NEW PRODUCTS TO ACHIEVE OUR STRATEGIC OBJECTIVES. We need to continue to develop and commercialize new brand name products and generic products utilizing our proprietary drug delivery systems to maintain the growth of Ther-Rx, ETHEX and Particle Dynamics. To do this we will need to identify, develop and commercialize technologically enhanced branded products and identify, develop and commercialize drugs that are off-patent and that can be produced and sold by us as generic/non-branded products using our drug delivery technologies. If we are unable to identify, develop and commercialize new products, we may need to obtain licenses to additional rights to branded or generic products, assuming they would be available for licensing, which could decrease our profitability. We cannot assure you that we will be successful in pursuing this strategy. WE MAY NOT BE ABLE TO COMMERCIALIZE PRODUCTS UNDER DEVELOPMENT. Certain products we are developing will require significant additional development and investment, including preclinical and clinical testing, where required, prior to their commercialization. We expect that many of these products will not be commercially available for several years, if at all. We cannot assure you that such products or future products will be successfully developed, prove to be safe and effective in clinical trials (if required), meet applicable regulatory standards, or be capable of being manufactured in commercial quantities at reasonable cost. OUR ACQUISITION STRATEGY MAY NOT BE SUCCESSFUL. We intend to continue to acquire pharmaceutical products, novel drug delivery technologies and/or companies that fit into our research, manufacturing, distribution or sales and marketing operations or that could provide us with additional products, technologies or sales and marketing capabilities. We may not be able to successfully identify, evaluate and acquire any such products, technologies or companies or, if acquired, we may not be able to successfully integrate such acquisitions into our business. We compete with many specialty pharmaceutical companies for products and product line acquisitions. These competitors may have substantially greater financial and managerial resources than we have. WE DEPEND ON OUR PATENTS AND OTHER PROPRIETARY RIGHTS. Our success depends, in large part, on our ability to protect our current and future technologies and products, to defend our intellectual property rights and to avoid infringing on the proprietary rights of others. We have been issued numerous patents in the United States and in certain foreign countries which cover certain of our 17 technologies, and have filed, and expect to continue to file, patent applications seeking to protect newly developed technologies and products. The pharmaceutical field is crowded and a substantial number of patents have been issued. In addition, the patent position of pharmaceutical companies can be highly uncertain and frequently involves complex legal and factual questions. As a result, the breadth of claims allowed in patents relating to pharmaceutical applications or their validity and enforceability cannot be predicted. Patents are examined for patentability at patent offices against bodies of prior art which by their nature may be incomplete and imperfectly categorized. Therefore, even presuming that the examiner has been able to identify and cite the best prior art available to him during the examination process, any patent issued to us could later be found by a court or a patent office during post issuance proceedings to be invalid in view of newly-discovered prior art or already considered prior art or other legal reasons. Furthermore, there are categories of "secret" prior art unavailable to any examiner, such as the prior inventive activities of others, which could form the basis for invalidating any patent. In addition, there are other reasons why a patent may be found to be invalid, such as an offer for sale or public use of the patented invention in the United States more than one year before the filing date of the patent application. Moreover, a patent may be deemed unenforceable if, for example, the inventor or the inventor's agents failed to disclose prior art to the PTO that they knew was material to patentability. The coverage claimed in a patent application can be significantly reduced before a patent is issued, either in the United States or abroad. Consequently, there can be no assurances that any of our pending or future patent applications will result in the issuance of patents. Patents issued to us may be subjected to further proceedings limiting their scope and may not provide significant proprietary protection or competitive advantage. Our patents also may be challenged, circumvented, invalidated or deemed unenforceable. Patent applications in the United States filed prior to November 29, 2000 are currently maintained in secrecy until and unless patents issue, and patent applications in certain other countries generally are not published until more than 18 months after they are first filed (which generally is the case in the United States for applications filed on or after November 29, 2000). In addition, publication of discoveries in scientific or patent literature often lags behind actual discoveries. As a result, we cannot be certain that we or our licensors will be entitled to any rights in purported inventions claimed in pending or future patent applications or that we or our licensors were the first to file patent applications on such inventions. Furthermore, patents already issued to us or our pending applications may become subject to dispute, and any dispute could be resolved against us. For example, we may become involved in re-examination, reissue or interference proceedings in the PTO, or opposition proceedings in a foreign country. The result of these proceedings can be the invalidation or substantial narrowing of our patent claims. We also could be subject to court proceedings that could find our patents invalid or unenforceable or could substantially narrow the scope of our patent claims. In addition, statutory differences in patentable subject matter may limit the protection we can obtain on some of our inventions outside of the United States. For example, methods of treating humans are not patentable in many countries outside of the United States. These and other issues may prevent us from obtaining patent protection outside of the United States. Furthermore, once patented in foreign countries, the inventions may be subjected to mandatory working requirements and/or subject to compulsory licensing regulations. We also rely on trade secrets, unpatented proprietary know-how and continuing technological innovation that we seek to protect, in part by confidentiality agreements with licensees, suppliers, employees and consultants. These agreements may be breached by the other parties to these agreements. We may not have adequate remedies for any breach. Disputes may arise concerning the ownership of intellectual property or the applicability or enforceability of our confidentiality agreements and there can be no assurance that any such disputes would be resolved in our favor. Furthermore, our trade secrets and proprietary technology may become known or be independently developed by our competitors, or patents may not be issued with respect to products or methods arising from our research, and we may not be able to maintain the confidentiality of information relating to those products or methods. Furthermore, certain unpatented technology may be subject to intervening rights. WE DEPEND ON OUR TRADEMARKS AND RELATED RIGHTS. We also rely on our brand names. To protect our trademarks and goodwill associated therewith, domain name, and related rights, we generally rely on federal and state trademark and unfair competition laws, which are subject 18 to change. Some, but not all, of our trademarks are registered in the jurisdictions where they are used. Some of our other trademarks are the subject of pending applications in the jurisdictions where they are used or intended to be used, and others are not. It is possible that third parties may own or could acquire rights in trademarks or domain names in the United States or abroad that are confusingly similar to or otherwise compete unfairly with our marks and domain names, or that our use of trademarks or domain names may infringe or otherwise violate the intellectual property rights of third parties. The use of similar marks or domain names by third parties could decrease the value of our trademarks or domain names and hurt our business, for which there may be no adequate remedy. THIRD PARTIES MAY CLAIM THAT WE INFRINGE ON THEIR PROPRIETARY RIGHTS, OR SEEK TO CIRCUMVENT OURS. We may be required to defend against charges of infringement of patents, trademarks or other proprietary rights of third parties. This defense could require us to incur substantial expense and to divert significant effort of our technical and management personnel, and could result in our loss of rights to develop or make certain products or require us to pay monetary damages or royalties to license proprietary rights from third parties. If a dispute is settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties. Furthermore, we cannot be certain that the necessary licenses would be available to us on acceptable terms, if at all. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing, using, selling and/or importing in to the United States certain of our products. Litigation also may be necessary to enforce our patents against others or to protect our know-how or trade secrets. That litigation could result in substantial expense or put our proprietary rights at risk of loss, and we cannot assure you that any litigation will be resolved in our favor. There currently are two patent infringement law suits pending against us. Although we do not believe they will have a material adverse effect on our future financial condition or results of operations, we cannot assure you of that. WE MAY BE UNABLE TO MANAGE OUR GROWTH. Over the past eight years, our businesses and product offerings have grown substantially. This growth and expansion has placed, and is expected to continue to place, a significant strain on our management, operational and financial resources. To manage our growth, we must continue to (1) expand our operational, customer support and financial control systems and (2) hire, train and retain qualified personnel. We cannot assure you that we will be able to adequately manage our growth. If we are unable to manage our growth effectively, our business, results of operations and financial condition could be materially adversely affected. WE MAY NOT OBTAIN REGULATORY APPROVAL FOR OUR NEW PRODUCTS ON A TIMELY BASIS, OR AT ALL. Many of our new products will require FDA approval. FDA approval typically involves lengthy, detailed and costly laboratory and clinical testing procedures, as well as the FDA's review and approval of the information submitted. We cannot assure you that the products we develop will be determined to be safe and effective in these testing procedures, or that they will be approved by the FDA. The FDA also has the authority to revoke for cause drug approvals previously granted. WE MAY BE ADVERSELY AFFECTED BY THE CONTINUING CONSOLIDATION OF OUR DISTRIBUTION NETWORK AND THE CONCENTRATION OF OUR CUSTOMER BASE. Our principal customers are wholesale drug distributors, major retail drug store chains, independent pharmacies and mail order firms. These customers comprise a significant part of the distribution network for pharmaceutical products in the United States. This distribution network is continuing to undergo significant consolidation marked by mergers and acquisitions among wholesale distributors and the growth of large retail drug store chains. As a result, a small number of large wholesale distributors control a significant share of the market, and the 19 number of independent drug stores and small drug store chains has decreased. We expect that consolidation of drug wholesalers and retailers will increase pricing and other competitive pressures on drug manufacturers. For the fiscal year ended March 31, 2003, our three largest customers accounted for 23%, 18% and 14% of our gross sales. The loss of any of these customers could materially and adversely affect our results of operations or financial condition. THE REGULATORY STATUS OF CERTAIN OF OUR NON-BRANDED PRODUCTS MAY MAKE THEM SUBJECT TO INCREASED COMPETITION. Many of our products are manufactured and marketed without FDA approval. For example, our prenatal products, which contain folic acid, are sold as prescription multiple vitamin supplements. These types of prenatal vitamins are typically regulated by the FDA as prescription drugs, but are not covered by an NDA or ANDA. As a result, competitors may more easily and rapidly introduce products competitive with our prenatal and other products that have a similar regulatory status. CHANGES TO FDA REGULATIONS AND GUIDELINES, AS WELL AS COURT DECISIONS AND POSSIBLE ENACTMENT OF FURTHER CHANGES IN THE UNDERLYING STATUTORY PROVISIONS MAY IMPAIR OUR ABILITY TO QUALIFY FOR OR UTILIZE FULLY THE 180-DAY GENERIC MARKETING EXCLUSIVITY PERIOD FOR PATENT CHALLENGES, SUBSTANTIALLY DIMINISHING THE VALUE OF A FAVORABLE RULING AND THE INCENTIVES FOR CHALLENGING LISTED PATENTS. One of the key motivations for challenging patents is the reward of a 180-day period of market exclusivity. Under the Waxman-Hatch Act, the developer of a generic version of a product which is the first to have its ANDA accepted for filing by the FDA, and whose filing includes a certification that the patent is invalid, unenforceable and/or not infringed (a so-called "Paragraph IV certification"), may be eligible to receive a 180-day period of generic market exclusivity. This period of market exclusivity provides the patent challenger with the opportunity to earn a risk-adjusted return on legal and development costs associated with bringing a product to market. In August 1999, the FDA issued a notice of proposed rulemaking in which it proposed new regulations for implementing the 180-day generic market exclusivity provisions. Additionally, the FDA announced an interim modification to its generic drug exclusivity policies in a March 2000 Industry Guidance and in a July 13, 2000 interim rule. On October 24, 2002, the FDA published an additional proposal to adopt regulations that would further alter the patent listing and certification procedures on which the opportunities for 180-day generic exclusivity are based. On November 1, 2002, the FDA withdrew the August 1999 proposed rule, announcing that it would, instead, apply the 180-day exclusivity provisions based on the applicable statutory language as interpreted from time-to-time by the Courts in private litigation involving patent infringement claims or in litigation involving direct challenges to FDA's policies and interpretations of the law. On June 18, 2003, the FDA issued final regulations based on the October 24, 2002 proposal. We believe that these new regulations are likely to be challenged in Court, and cannot predict whether they will be upheld after such a challenge. Additionally, legislation has been introduced in Congress that would make similar and/or additional changes in the provisions of the Waxman-Hatch Amendments governing the listing of patents, the requirements for making certifications to patents and the circumstances in which a company may be awarded a 180-day marketing exclusivity period following a successful challenge to a listed patent. The language and scope of possible legislation on these issues is still being hotly debated and it is impossible to predict whether, when or in what form any statutory changes may be enacted as a result. The range of proposals being debated include proposals that would severely limit or completely eliminate 180-day generic exclusivity. Some of these proposals, if enacted, could substantially change the incentives and the manner in which patents on drug products are enforced and challenged. Because our business involves both enforcement of our own patents and challenges to the patents of others, we are not in a position to predict whether any such proposals, if enacted, would ultimately have a positive or negative impact on our business. One or more of our product development or marketing plans could be adversely affected either by additional changes in the language or 20 interpretation of the Waxman-Hatch provisions or by an extended period of uncertainty over whether and in what form such changes may be made. WE FACE THE RISK OF PRODUCT LIABILITY CLAIMS, FOR WHICH WE MAY BE INADEQUATELY INSURED. Manufacturing, selling and testing pharmaceutical products involve a risk of product liability. Even unsuccessful product liability claims could require us to spend money on litigation, divert management's time, damage our reputation and impair the marketability of our products. A successful product liability claim outside of or in excess of our insurance coverage could require us to pay substantial sums and adversely affect our results of operations and financial condition. We previously distributed several low volume pharmaceutical products that contained phenylpropanolamine, or PPA, and that were discontinued in 2000 and 2001. We are presently named as one of several defendants in two product liability lawsuits in federal court in Nevada and Mississippi involving PPA. Both cases have been transferred to the nationwide, multi-district litigation for PPA claims now pending in the U.S. District Court for the Western District of Washington. Each lawsuit alleges bodily injury, wrongful death, economic injury, punitive damages, loss of consortium and/or loss of services from the use of our distributed pharmaceuticals containing PPA that have since been discontinued and/or reformulated to exclude PPA. Discovery in these cases is ongoing. We believe that we have substantial defenses to these claims, though the ultimate outcome of these cases and the potential effect on us cannot be determined. We are being defended and indemnified in the Nevada PPA lawsuits by our liability insurer subject to aggregate products-completed operations policy limits in the amount of $10 million and subject to a reservation of rights. Our product liability coverage was obtained on a claims made basis and provides coverage for judgments, settlements and defense costs arising from product liability claims. However, such insurance may not be adequate to remove the risk from some or all product liability claims, including PPA claims, and is subject to the limitations described in the terms of the policies. Furthermore, our product liability coverage for PPA claims expired for claims made after June 15, 2002. Although we renewed our product liability coverage for a policy term of June 15, 2002 through June 15, 2003, that policy excludes future PPA claims in accordance with the standard industry exclusion. Consequently, as of June 15, 2002, we have provided for legal defense costs and indemnity payments involving PPA claims on a going forward basis, including the Mississippi lawsuit that was filed during the June 15, 2002 through June 15, 2003 policy period. From time to time in the future, we may be subject to further litigation resulting from products containing PPA that we formerly distributed. We intend to vigorously defend against any claims that may be raised in the current and future litigations. BECAUSE WE ARE INVOLVED IN CERTAIN LEGAL PROCEEDINGS WE MAY BE REQUIRED TO PAY DAMAGES THAT MAY IMPAIR OUR PROFITABILITY AND REDUCE OUR LIQUIDITY. ETHEX is a defendant in a lawsuit styled Healthpoint, Ltd. v. ETHEX Corporation, pending in federal court in San Antonio, Texas. In general, the plaintiffs allege that ETHEX's comparative promotion of its Ethezyme(TM) to Healthpoint's Accuzyme(R) product resulted in false advertising and misleading statements under various federal and state laws, and constituted unfair competition and misappropriation of trade secrets. In September 2001, the jury returned verdicts against ETHEX on certain false advertising, unfair competition, and misappropriation claims. The jury awarded compensatory and punitive damages totaling $16.5 million. On October 1, 2002, the U.S. District Court for the Western District of Texas denied ETHEX's motion to set aside the jury's verdict. On December 17, 2002, the court entered a judgment awarding attorneys' fees to Healthpoint in an amount to be subsequently determined. We believe that the jury award is excessive and is not sufficiently supported by the facts or the law. We intend to vigorously appeal once a final judgment has been entered by the court. We and our counsel believe that there are meritorious arguments to be raised during the appeal process, however, we are not presently able to predict the 21 outcome of the pending District Court's motions or an appeal. As a result of the court's earlier decisions, our results of operations for fiscal 2003 included a reserve for potential damages of $16.5 million, which is reflected in accrued liabilities on our consolidated balance sheet as of March 31, 2003. To date Healthpoint has requested reimbursement for approximately $1.8 million in attorneys' fees in addition to the judgment discussed above. We are contesting Healthpoint's entitlement to and their requested amount of attorneys' fees. As of this date, the court had not entered any order with respect to the amount of attorneys' fees to be awarded. Our counsel has advised us that the amount could range from zero to $1.8 million, the amount requested by Healthpoint. Based on our current analysis we believe that the reserve as recorded will be adequate to cover any judgment, including attorneys' fees, which may result at the end of the appeal process. We are continually evaluating the need for additional reserves as the case progresses through the appeal process. WE DEPEND ON LICENSES FROM OTHERS, AND ANY LOSS OF THESE LICENSES COULD HARM OUR BUSINESS, MARKET SHARE AND PROFITABILITY. We have acquired the rights to manufacture, use and/or market certain products. We also expect to continue to obtain licenses for other products and technologies in the future. Our license agreements generally require us to develop the markets for the licensed products. If we do not develop these markets, the licensors may be entitled to terminate these license agreements. We cannot be certain that we will fulfill all of our obligations under any particular license agreement for any variety of reasons, including insufficient resources to adequately develop and market a product, lack of market development despite our efforts and lack of product acceptance. Our failure to fulfill our obligations could result in the loss of our rights under a license agreement. Certain products we have the right to license are at certain stages of clinical tests and FDA approval. Failure of any licensed product to receive regulatory approval could result in the loss of our rights under its license agreement. WE MAY HAVE FUTURE CAPITAL NEEDS AND FUTURE ISSUANCES OF EQUITY SECURITIES WILL RESULT IN DILUTION. We anticipate that funds generated internally, together with funds available under our credit facility, and the proceeds received from our Notes offering completed in May 2003, will be sufficient to implement our business plan for the foreseeable future, subject to additional needs as may arise if acquisition opportunities become available. We also may need additional capital if unexpected events occur or opportunities arise. Additional capital might be raised through the public or private sale of debt or equity securities. If we sell equity securities, holders of our common stock could experience dilution. Furthermore, those securities could have rights, preferences and privileges more favorable than those of the Class A common stock. We cannot assure you that additional funding will be available, or available on terms favorable to us. If the funding is not available, we may not be able to fund our expansion, take advantage of acquisition opportunities or respond to competitive pressures. RISKS RELATED TO OUR INDUSTRY OUR BUSINESS MAY BE ADVERSELY AFFECTED BY CHANGES IN THIRD PARTY REIMBURSEMENT PRACTICES, THIRD PARTY REJECTION OF OUR PRODUCTS AND RELATED PRICING PRESSURES. The market for our products may be limited by actions of third party payers, such as government and private health insurers and managed care organizations. For example, many managed health care organizations are now controlling the pharmaceuticals that appear on their lists of reimbursable medications. The resulting competition among pharmaceutical companies to place their products on these formulary lists has created a trend of downward pricing pressure in the industry. In addition, many managed care organizations are pursuing various ways to reduce pharmaceutical costs and are considering formulary contracts primarily with those pharmaceutical 22 companies that can offer a full line of products for a given therapeutic category or disease state. Our products might not be included in the formulary lists of managed care organizations. Also, downward pricing pressure in the industry generally may negatively impact our results of operations. Our ability to market generic/non-branded pharmaceutical products successfully depends, in part, on the acceptance of the products by independent third parties, including pharmacies, government formularies and other retailers, as well as patients. We manufacture a number of prescription drugs which are used by patients who have severe health conditions. Although the brand-name products generally have been marketed safely for many years prior to our introduction of a generic/non-branded alternative, there is a possibility that one of these products could produce a side effect which could result in an adverse effect on our ability to achieve acceptance by managed care providers, pharmacies and other retailers, customers and patients. If these independent third parties do not accept our products, it could have a material adverse effect on our revenues and profitability. Furthermore, a number of legislative and regulatory proposals aimed at changing the health care system have been proposed. We cannot predict whether any of these proposals will be adopted or the effect they may have on our business. The fact that these proposals are pending, the nature of these proposals, and the adoption of any of these proposals are likely to increase industry-wide pricing pressures. OUR BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION. Our business is subject to extensive regulation by numerous governmental authorities in the United States and other countries, particularly the FDA. Failure to comply with applicable FDA or other regulatory requirements may result in criminal prosecution, civil penalties, injunctions, recall or seizure of products and total or partial suspension of production, as well as other regulatory actions against our products and us. We market certain drug products in the United States without FDA approval under certain "grandfather" clauses and statutory and regulatory exceptions to the pre-market approval requirement for "new drugs" under the Federal Food, Drug and Cosmetic Act, or the FDCA. A determination as to whether a particular product does or does not require FDA pre-market review and approval can involve consideration of numerous complex and imprecise factors. If a determination is made by the FDA that any product marketed without approval requires such approval, the FDA may institute enforcement actions, including product seizure, or an action seeking an injunction against further marketing and may or may not allow sufficient time to obtain the necessary approvals before it seeks to curtail further marketing. For example, in October 2002, FDA sent warning letters to manufacturers and distributors of unapproved prescription drug products containing the expectorant guaifenesin as a single entity in a solid oral dosage form. Citing the recent approval of one such product, the FDA warning letters asserted that the marketing of all such products without NDA or ANDA approval should stop. The FDA subsequently agreed to allow continued manufacture through May 2003 and sale through October 2003 of the products, and we are complying with those deadlines unless and until we obtain NDA or ANDA approval for our versions of the affected guaifenesin products. We are not in a position to predict whether or when the FDA might choose to raise similar objections to the marketing without NDA or ANDA approval of another category or categories of drug products represented in our product lines. In the event such objections are raised, we could be required or could decide to cease distribution of additional products until pre-market approval is obtained. In addition, we may not be able to obtain any particular approval that may be required or such approvals may not be obtained on a timely basis. In addition to compliance with current Good Manufacturing Practice, or cGMP, requirements, drug manufacturers must register each manufacturing facility with the FDA. Manufacturers also must be registered with the Drug Enforcement Administration, or DEA, and similar state and local regulatory authorities if they handle controlled substances, and with the Environmental Protection Agency, or EPA, and similar state and local regulatory authorities if they generate toxic or dangerous wastes. We are currently in material compliance with cGMP and are registered with the appropriate agencies. Non-compliance with applicable cGMP requirements or the rules and regulations of these agencies can result in fines, recall or seizure of products, total or partial suspension of 23 production and/or distribution, refusal of government agencies to grant pre-market approval or other product applications and criminal prosecution. Despite our ongoing efforts, cGMP requirements and other regulatory requirements, and related enforcement priorities and policies may evolve over time and we may not be able to remain continuously in material compliance with all of these requirements. From time to time, governmental agencies have conducted investigations of other pharmaceutical companies relating to the distribution and sale of drug products to government purchasers or subject to government or third party reimbursement. We believe that we have marketed our products in compliance with applicable laws and regulations. However, standards sought to be applied in the course of governmental investigations may not be consistent with standards previously applied to our industry generally or previously understood by us to be applicable to our activities. OUR INDUSTRY IS HIGHLY COMPETITIVE. Numerous pharmaceutical companies are involved or are becoming involved in the development and commercialization of products incorporating advanced drug delivery systems. Our business is highly competitive, and we believe that competition will continue to increase in the future. Many pharmaceutical companies have invested, and are continuing to invest, significant resources in the development of proprietary drug delivery systems. In addition, several companies have been formed to develop specific advanced drug delivery systems. Many of these pharmaceutical and other companies who may develop drug delivery systems have greater financial, research and development and other resources than we do, as well as more experience in commercializing pharmaceutical and drug delivery products. Those companies may develop products using their drug delivery systems more rapidly than we do or develop drug delivery systems that are more effective than ours and thus may represent significant potential competitors. Our branded pharmaceutical business is subject to competition from larger companies with greater financial resources that can support larger sales forces. The ability of a sales force to compete is affected by the number of physician calls it can make, which is directly related to its size, the brand name recognition it has in the marketplace and its advertising and promotional efforts. We are not as well established in our branded product sales initiative as larger pharmaceutical producers and could be adversely affected by competition from companies with a larger, more established sales force and higher advertising and promotional expenditures. Our generic/non-branded pharmaceutical business is also subject to competitive pressures from a number of companies, some of which have greater financial resources and broader product lines. To the extent that we succeed in being first to market with a generic/non-branded version of a significant product, our sales and profitability can be substantially increased in the period following the introduction of such product and prior to additional competitors' introduction of an equivalent product. Competition is generally on price, which can have an adverse effect on profitability as falling prices erode margins. In addition, the continuing consolidation of the customer base (wholesale distributors and retail drug chains) and the impact of managed care organizations will increase competition as suppliers compete for fewer customers. Consolidation of competitors will increase competitive pressures as larger suppliers are able to offer a broader product line. Further, companies continually seek new ways to defeat generic competition, such as filing applications for new patents to cover drugs whose original patent protection is about to expire, developing and marketing other dosage forms including patented controlled-release products or developing and marketing as over-the-counter products those branded products which are about to lose exclusivity and face generic competition. In addition to litigation over patent rights, pharmaceutical companies are often the subject of objections by competing manufacturers over the qualities of their branded or generic products and/or their promotional activities. For example, marketers of branded products have challenged the marketing of certain of our non-branded products that do not require FDA approval and are not rated for therapeutic equivalence. Currently, ETHEX is a defendant in ongoing litigation with Healthpoint, regarding allegations of unfair competition and misleading marketing. A jury verdict against us is currently pending, which the court refused to set aside. As a 24 result, we made an appropriate provision for liability in our financial statements. We intend to vigorously appeal the judgment entered by the court. Competitors' objections may be pursued in complaints before governmental agencies or courts. These objections can be very expensive to pursue or to defend, and the outcome of agency or court review of the issues raised is impossible to predict. In these proceedings, companies can be subjected to restrictions on their activities or to liability for alleged damages despite their belief that their products and procedures are in full compliance with appropriate standards. In addition, companies that pursue what they believe are legitimate complaints about competing manufacturers and/or their products may nevertheless be unable to obtain any relief. OUR INDUSTRY EXPERIENCES RAPID TECHNOLOGICAL CHANGE. The drug delivery industry is a rapidly evolving field. A number of companies, including major pharmaceutical companies, are developing and marketing advanced delivery systems for the controlled delivery of drugs. Products currently on the market or under development by competitors may deliver the same drugs, or other drugs to treat the same indications, as many of the products we market or are developing. The first pharmaceutical branded or generic/non-branded product to reach the market in a therapeutic area often obtains and maintains significant market share relative to later entrants to the market. Our products also compete with drugs marketed not only in similar delivery systems but also in traditional dosage forms. New drugs, new therapeutic approaches or future developments in alternative drug delivery technologies may provide advantages over the drug delivery systems and products that we are marketing, have developed or are developing. Changes in drug delivery technology may require substantial investments by companies to maintain their competitive position and may provide opportunities for new competitors to enter the industry. Developments by others could render our drug delivery products or other technologies uncompetitive or obsolete. If others develop drugs which are cheaper or more effective or which are first to market, sales or prices of our products could decline. THE HOLDERS OF THE NOTES MAY REQUIRE US TO REPURCHASE THE NOTES UPON THE OCCURRENCE OF A CHANGE IN CONTROL. On May 16, 2008, 2013, 2018, 2023 and 2028 and upon the occurrence of a change in control, holders of the Notes may require us to offer to repurchase their Notes for cash. The source of funds for any repurchase required as a result of any such events will be our available cash or cash generated from operating activities or other sources, including borrowings, sales of assets, sales of equity or funds provided by a new controlling entity. The use of available cash to fund the repurchase of the Notes may impair our ability to obtain additional financing in the future. OUR REPORTED EARNINGS PER SHARE MAY BE MORE VOLATILE BECAUSE OF THE CONVERSION CONTINGENCY PROVISION OF THE NOTES ISSUED IN MAY 2003. Holders of the Notes issued in May 2003 may convert the Notes into our Class A common stock during any quarter commencing after June 30, 2003, if the closing sale price of our Class A common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the quarter preceding the quarter in which the conversion occurs is more than 120% of the conversion price per share of our Class A common stock on that 30th trading day. Until this contingency is met, the shares underlying the Notes are not included in the calculation of basic or fully diluted earnings per share. Should this contingency be met, reported earnings per share would be expected to decrease as a result of the inclusion of the underlying shares in the earnings per share calculation. An increase in volatility in our stock price could cause this condition to be met in one quarter and not in a subsequent quarter, increasing the volatility of reported fully diluted earnings per share. 25 RISKS RELATED TO OUR CLASS A COMMON STOCK MANAGEMENT STOCKHOLDERS CONTROL OUR COMPANY. At March 31, 2003, our directors and executive officers beneficially own approximately 15% of our Class A common stock and approximately 51% of our Class B common stock. As a result, these persons control approximately 47% of the combined voting power represented by our outstanding securities. These persons will retain effective voting control of our company and are expected to continue to have the ability to effectively determine the outcome of any matter being voted on by our stockholders, including the election of directors and any merger, sale of assets or other change in control of our company. THE MARKET PRICE OF OUR STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE. The market prices of securities of companies engaged in pharmaceutical development and marketing activities historically have been highly volatile. In addition, any or all of the following may have a significant impact on the market price of our Class A common stock: announcements by us or our competitors of technological innovations or new commercial products; delays in the development or approval of products; developments or disputes concerning patent or other proprietary rights; publicity regarding actual or potential medical results relating to products marketed by us or products under development; regulatory developments in both the United States and foreign countries; publicity regarding actual or potential acquisitions; public concern as to the safety of drug technologies or products; financial results which are different from securities analysts' forecasts; and economic and other external factors, as well as period-to-period fluctuations in our financial results. FUTURE SALES OF COMMON STOCK COULD ADVERSELY AFFECT OUR CLASS A COMMON STOCK. As of March 31, 2003, an aggregate of 1,827,082 shares of our Class A common stock and 508,273 shares of our Class B common stock were issuable upon exercise of outstanding stock options under our stock option plans, and an additional 1,945,175 shares of our Class A common stock and 1,261,000 shares of Class B common stock were reserved for the issuance of additional options and shares under these plans. In addition, as of March 31, 2003, 225,000 shares of our Class A common stock were reserved for issuance upon conversion of our outstanding 7% cumulative convertible preferred stock. Future sales of our common stock and instruments convertible or exchangeable into our common stock and transactions involving equity derivatives relating to our common stock, or the perception that such sales or transactions could occur, could adversely affect the market price of our common stock. This could, in turn, have an adverse effect on the trading price of the Notes resulting from, among other things, a delay in the ability of holders to convert their Notes into our Class A common stock. OUR CHARTER PROVISIONS AND DELAWARE LAW MAY HAVE ANTI-TAKEOVER EFFECTS. Our Amended Certificate of Incorporation authorizes the issuance of common stock in two classes, Class A common stock and Class B common stock. Each share of Class A common stock entitles the holder to one-twentieth of one vote on all matters to be voted upon by stockholders, while each share of Class B common stock entitles the holder to one full vote on each matter considered by the stockholders. In addition, our directors have the authority to issue additional shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions of those shares without any further vote or action by the stockholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The existence of two classes of common stock with different voting rights and the ability of our directors to issue additional shares of preferred stock could make it more difficult for a third party to acquire a majority of our voting stock. Other provisions of our Certificate of Incorporation and Bylaws, such as a classified board of directors, also may have the effect of discouraging, delaying or preventing a merger, 26 tender offer or proxy contest, which could have an adverse effect on the market price of our Class A common stock. In addition, certain provisions of Delaware law applicable to our company could also delay or make more difficult a merger, tender offer or proxy contest involving our company, including Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years unless certain conditions are met. Our senior management is entitled to certain payments upon a change in control. All of our stock option plans provide for the acceleration of vesting in the event of a change in control in our company. ITEM 2. PROPERTIES ---------- Our corporate headquarters is located at 2503 South Hanley Road in St. Louis County, Missouri, and contains approximately 40,000 square feet of floor space. We have a lease on the building for a period of ten years expiring December 31, 2006, with one five-year option to renew. The building is leased from an affiliated partnership of an officer and director of the Company. In addition, we lease or own the facilities shown in the following table:
SQUARE LEASE RENEWAL FOOTAGE USAGE EXPIRES OPTIONS -------------------------------------------------------------------------------- 31,630 PDI Office/Mfg./Whse. 11/30/07 5 Years(1) 10,000 PDI/KV Lab/Whse. 11/30/03 None 23,000 KV Office/R&D/Mfg. 12/31/06 5 Years(1) 122,350 KV Office/Whse./Lab Owned N/A 90,000 KV Mfg. Oper. Owned N/A 87,020 ETHEX/Ther-Rx/Whse. Owned N/A 260,160 ETHEX/Ther-Rx/PDI Distribution 04/30/12 5 Years(1) 40,000 KV Warehouse 11/30/03 None 128,960 ETHEX/Ther-Rx/PDI Office/Whse. 05/31/11 5 Years(1) ---------------------------------------- (1) Two five-year options.
In April 2003, we purchased a building that consists of approximately 275,000 square feet of additional office, production, distribution and warehouse space. Properties used in our operations are considered suitable for the purposes for which they are used and are believed to be adequate to meet our Company's needs for the reasonably foreseeable future. However, we will consider leasing or purchasing additional facilities from time to time, when attractive facilities become available, to accommodate the consolidation of certain operations and to meet future expansion plans. ITEM 3. LEGAL PROCEEDINGS ----------------- ETHEX is a defendant in a lawsuit styled Healthpoint, Ltd. v. ETHEX Corporation, pending in federal court in San Antonio, Texas. The suit was filed by Healthpoint, Ltd., or Healthpoint, on August 3, 2000 and later was joined by companies affiliated with Healthpoint. In general, the plaintiffs allege that ETHEX's comparative promotion of its Ethezyme(TM) to Healthpoint's Accuzyme(R) product resulted in false advertising and misleading statements under various federal and state laws, and constituted unfair competition and misappropriation of trade secrets. In September 2001, the jury returned verdicts against ETHEX on certain false advertising, unfair 27 competition, and misappropriation claims. The jury awarded compensatory and punitive damages totaling $16.5 million. On October 1, 2002, the U.S. District Court for the Western District of Texas denied ETHEX's motion to set aside the jury's verdict. On December 17, 2002, the court entered a judgment awarding attorneys' fees to Healthpoint in an amount to be subsequently determined. We believe that the jury award is excessive and is not sufficiently supported by the facts or the law. We intend to vigorously appeal once the court has entered a final judgment. We and our counsel believe that there are meritorious arguments to be raised during the appeal process; however, we are not presently able to predict the outcome of the pending District Court's motions or an appeal. As a result of the court's earlier decisions, our results of operations for fiscal 2003 included a reserve for potential damages of $16.5 million, which is reflected in accrued liabilities on our consolidated balance sheet as of March 31, 2003. To date Healthpoint has requested reimbursement for approximately $1.8 million in attorneys' fees in addition to the judgment discussed above. We are contesting Healthpoint's entitlement to and their requested amount of attorneys' fees. As of this date, the court had not entered any order with respect to the amount of attorneys' fees to be awarded. Our counsel has advised us that the amount could range from zero to $1.8 million, the amount requested by Healthpoint. Based on our current analysis we believe that the reserve as recorded will be adequate to cover any judgment, including attorneys' fees, which may result at the end of the appeal process. We are continually evaluating the need for additional reserves as the case progresses through the appeal process. We previously distributed several low volume pharmaceutical products that contained phenylpropanolamine, or PPA, and that were discontinued in 2000 and 2001. We are presently named as one of several defendants in two product liability lawsuits in federal court in Nevada and Mississippi involving PPA. The Nevada case is Deuel, David, et al. v. KV Pharmaceutical Company, Inc. The suit was filed on June 11, 2001. Discovery has been initiated in this case, and we currently have completed the basic fact discovery and depositions, however no discovery cut-off date has been assigned and there is presently no trial date. The Mississippi case is Virginia Madison, et al. v. Bayer Corporation, et al. We are one of several defendants named in the lawsuit. The suit was filed on December 23, 2002, but was not served on us until February 2003. The case was originally filed in the Circuit Court of Hinds County, Mississippi, and was removed to the United States District Court for the Southern District of Mississippi by co-defendant Bayer Corporation. The Plaintiffs have filed a motion to remand the case to the Circuit Court of Hinds County, Mississippi, which has caused the Court to enter a stay of all proceedings pending a resolution of the motion. So far, the Court has not ruled on the motion. Both the Nevada and Mississippi cases have been transferred to a Judicial Panel on Multi District Litigation for PPA claims sitting in the Western District of Washington. Each lawsuit alleges bodily injury, wrongful death, economic injury, punitive damages, loss of consortium and/or loss of services from the use of our distributed pharmaceuticals containing PPA that have since been discontinued and/or reformulated to exclude PPA. We believe that we have substantial defenses to these claims, though the ultimate outcome of these cases and the potential effect on us cannot be determined. We are being defended and indemnified in the Nevada PPA lawsuits by our liability insurer subject to aggregate products-completed operations policy limits in the amount of $10 million and subject to a reservation of rights. Our product liability coverage was obtained on a claims made basis and provides coverage for judgments, settlements and defense costs arising from product liability claims. However, such insurance may not be adequate to remove the risk from some or all product liability claims, including PPA claims, and is subject to the limitations described in the terms of the policies. Furthermore, our product liability coverage for PPA claims expired for claims made after June 15, 2002. Although we renewed our product liability coverage for a policy term of June 15, 2002 through June 15, 2003, that policy excludes future PPA claims in accordance with the standard industry exclusion. Consequently, as of June 15, 2002, we have provided for legal defense costs and indemnity payments involving PPA claims on a going forward basis, including the Mississippi lawsuit that was filed during the June 15, 2002 through June 15, 2003 policy period. Moreover, we may not be able to obtain product liability insurance in the future for PPA claims with adequate coverage limits at commercially reasonable prices for subsequent periods. From time to time in the future, we may be subject to further litigation resulting from products containing PPA that we formerly distributed. We intend to vigorously defend any claims that may be raised in the current and future litigations. 28 From time to time, we become involved in various legal matters in addition to the above described matters, that we consider to be in the ordinary course of business. While we are not presently able to determine the potential liability, if any, related to such matters, we believe none of such matters, individually or in the aggregate, will have a material adverse effect on our financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of the Company's fiscal year ended March 31, 2003. ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT ------------------------------------ The following is a list of current executive officers of our Company, their ages, their positions with our Company and their principal occupations for at least the past five years.
NAME AGE POSITION HELD AND PAST EXPERIENCE - -------------------------------------------------------------------------------------------------------------------- Victor M. Hermelin 89 Director, Chairman of the Board.(1) Marc S. Hermelin 61 Director, Vice-Chairman of the Board and Chief Executive Officer. Alan G. Johnson 68 Director, Senior Vice President-Strategic Planning and Corporate Growth since September 27, 1999 and Secretary of the Company; Chairman of Johnson Research & Capital, Inc., an investment banking and institutional research firm from January to September 1999; Member of the law firm Gallop, Johnson & Neuman, L.C. 1976 to 1998; Director of Siboney Corporation. Gerald R. Mitchell 64 Vice President, Treasurer and Chief Financial Officer since 1981.
The term of office for each executive officer of the Company expires at the next annual meeting of the Board of Directors or at such time as his successor has been elected and qualified. - ------------------------------- (1) Victor M. Hermelin is the father of Marc S. Hermelin. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER -------------------------------------------------------------------- MATTERS ------- a) PRINCIPAL MARKET ---------------- Our Class A Common Stock and Class B Common Stock are traded on the New York Stock Exchange under the symbols KV.a and KV.b, respectively. b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK --------------------------------------------- The number of holders of record of Class A and Class B Common Stock as of June 4, 2003 was 655 and 444, respectively (not separately counting shareholders whose shares are held in "nominee" or "street" names, which are estimated to represent approximately 6,000 of Class A and of Class B additional shareholders combined). 29 c) STOCK PRICE AND DIVIDEND INFORMATION ------------------------------------ The high and low closing sales prices of our Class A and Class B Common Stock, as reported on the New York Stock Exchange, during each quarter of fiscal 2003 and 2002 were as follows:
CLASS A COMMON STOCK -------------------- FISCAL 2003 FISCAL 2002 ----------- ----------- QUARTER HIGH LOW HIGH LOW ------- ---- --- ---- --- First...................... $31.95 $25.12 $27.75 $16.50 Second..................... 24.00 16.78 30.95 24.00 Third...................... 23.66 15.00 29.50 23.79 Fourth..................... 24.00 16.42 29.43 23.90 CLASS B COMMON STOCK -------------------- FISCAL 2003 FISCAL 2002 ----------- ----------- QUARTER HIGH LOW HIGH LOW ------- ---- --- ---- --- First...................... $33.00 $26.25 $33.50 $16.25 Second..................... 24.25 16.80 33.00 26.30 Third...................... 23.90 15.31 32.46 26.80 Fourth..................... 24.39 16.78 33.03 27.00
Since 1980, we have not declared or paid any cash dividends on our common stock and we do not plan to do so in the foreseeable future. No dividends may be paid on Class A common stock or Class B common stock unless all dividends on the Cumulative Convertible Preferred Stock have been declared and paid. Dividends must be paid on Class A common stock when, and if, we declare and distribute dividends on the Class B common stock. Undeclared and unaccrued cumulative preferred dividends were approximately $366,000, or $9.14 per share, at March 31, 2003 and 2002. Also, under the terms of our credit agreement, we may not pay cash dividends in excess of 25% of the prior year's consolidated net income. Dividends of $70,000 were paid in fiscal 2003 and 2002 on 40,000 shares of Cumulative Convertible Preferred Stock. On May 12, 2003, we also paid a dividend of approximately $366,000, or $9.14 per share, to Cumulative Convertible Preferred Stock holders of record on March 31, 2003 for the previously undeclared and unaccrued cumulative preferred dividends. For the foreseeable future, we plan to use cash generated from operations for general corporate purposes, including funding potential acquisitions, research and development and working capital. Our board of directors reviews our dividend policy periodically. Any payment of dividends in the future will depend upon our earnings, capital requirements, financial condition and other factors considered relevant by our board of directors. 30 ITEM 6. SELECTED FINANCIAL DATA -----------------------
YEARS ENDED MARCH 31, 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- BALANCE SHEET DATA: ($ in thousands, except per share data) Total assets $352,668 $195,192 $151,417 $140,385 $127,990 Long-term debt 10,106 4,387 5,080 16,779 31,491 Shareholders' equity 260,616 158,792 125,942 97,799 67,548 INCOME STATEMENT DATA: Revenues $244,996 $204,105 $177,767 $142,734 $112,853 % Increase 20.0% 14.8% 24.5% 26.5% 15.5% Operating income(b) $ 42,929(b) $ 49,294 $ 37,972 $ 34,192 $ 24,116 Net income(a)(b) 28,110(b) 31,464 23,625 24,308(a) 23,340(a) Net income per common share-diluted(c) $ 0.82 $ 0.98 $ 0.74 $ 0.80(a) $ 0.78(a) Preferred Stock Dividends $ 70 $ 70 $ 420 $ 420 $ 422 - ---------------- (a) Net income in fiscal 2000 and 1999 includes gains associated with $7.0 million and $13.3 million in arbitration awards, respectively. The awards net of applicable income taxes and expenses were $3.9 million and $8.0 million in fiscal 2000 and 1999, respectively. (b) Operating income in fiscal 2003 includes a reserve of $16.5 million for potential damages associated with a lawsuit (see Note 10). The impact of the litigation reserve, net of applicable income taxes, was to reduce net income by $10.4 million and diluted earnings per share by $.30 in fiscal 2003. (c) Previously reported amounts give effect to the three-for-two stock splits effected in the form of a 50% stock dividend that occurred on September 7, 2000 and April 17, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, AND ------------------------------------------------------------------ LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Except for the historical information contained herein, the following discussion contains forward-looking statements that are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. These risks, uncertainties and other factors are discussed throughout this report and specifically under the caption "Cautionary Statement Regarding Forward-Looking Information" and "Risk Factors." In addition, the following discussion and analysis of the financial condition and results of operations should be read in conjunction with "Selected Financial Data" and our consolidated financial statements and notes thereto appearing elsewhere in this Form 10-K. BACKGROUND We develop, acquire, manufacture and market technologically distinguished branded and generic prescription pharmaceutical products. We also enter into licensing agreements with pharmaceutical marketing companies to develop and commercialize additional brand name products. Until the mid-1990's, we derived most of our revenues from our manufacturing and licensing activities. Today, we derive most of our revenues from our product sales. While we expect to continue to enter into new licensing agreements, we emphasize the 31 development or acquisition and marketing of technologically distinguished prescription products, whether branded or generic/non-branded through our Ther-Rx and ETHEX business lines, as well as specialty raw materials through Particle Dynamics. In 1990, we established our ETHEX business to market and distribute technologically distinguished generic/non-branded drugs that use our proprietary technologies. Net revenues from ETHEX have increased from $13.5 million in fiscal 1994 to $179.7 million in fiscal 2003. We launched our Ther-Rx business in 1999 to market branded pharmaceutical products. We acquired and introduced our first two of 16 Ther-Rx branded products, Micro-K(R) and PreCare(R), in March and August 1999, respectively. Ther-Rx has also introduced four internally developed product line extensions to PreCare(R) since October 1999, including PrimaCare(TM) in the fourth quarter of fiscal 2002, the first prescription prenatal/postnatal nutritional supplement with essential fatty acids specially designed to help provide nutritional support for women during pregnancy, postpartum recovery and throughout the childbearing years. In June 2000, we launched our first NDA approved product, Gynazole-1(R), a one-dose prescription cream treatment for vaginal yeast infections. Net revenues from Ther-Rx have increased from $1.8 million in fiscal 1999 to $43.7 million in fiscal 2003. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our consolidated financial statements are presented on the basis of accounting principles that are generally accepted in the United States. Our significant accounting policies are described in Note 2 to our consolidated financial statements. Certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management. As a result, these policies are subject to an inherent degree of uncertainty. In applying these policies, our management makes estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. We base our estimates and judgments on our historical experience, the terms of existing contracts, our observance of trends in the industry, information that we obtain from our customers and outside sources, and on various other assumptions that we believe to be reasonable and appropriate under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Although we believe that our estimates and assumptions are reasonable, actual results may differ significantly from these estimates. Changes in estimates and assumptions based upon actual results may have a material impact on our results of operations and/or financial condition. Our critical accounting policies are described below. REVENUE RECOGNITION AND SALES ALLOWANCES. We recognize revenue on product sales upon shipment when title and risk of loss have transferred to the customer and when estimated sales provisions for product returns, sales rebates, payment discounts, chargebacks, and other promotional programs are reasonably determinable. Accruals for these provisions are presented in the consolidated financial statements as reductions to revenues and accounts receivable. Provisions for estimated product returns, sales rebates, payment discounts, and other promotional programs require a limited degree of subjectivity, yet combined represent a significant portion of the provisions. These provisions are estimated based on historical payment experience, historical relationship to revenues, estimated customer inventory levels and contract terms. Such provisions are reasonably determinable due to the limited number of assumptions and consistency of historical experience. The provision for chargebacks is the most significant and complex estimate used in the recognition of revenue. We establish contract prices for indirect customers who are supplied by our wholesale customers. A chargeback represents the difference between our invoice price to the wholesaler and the indirect customer's contract price, which is lower. We credit the wholesaler for purchases by indirect customers at the lower price. Accordingly, we record these chargebacks at the time we recognize revenue in connection with our sales to wholesalers. Provisions for estimating chargebacks are calculated primarily using historical chargeback experience, actual contract pricing 32 and estimated wholesaler inventory levels. We continually monitor our assumptions giving consideration to estimated wholesaler inventory levels and current pricing trends and make adjustments to these provisions when we believe that the actual chargeback credits will differ from the estimated provisions. ALLOWANCE FOR INVENTORIES. Inventories consist of finished goods held for distribution, raw materials and work in process. Our inventories are stated at the lower of cost or market, with cost determined on the first-in, first-out basis. In evaluating whether inventory is to be stated at the lower of cost or market, we consider such factors as the amount of inventory on hand and in the distribution channel, estimated time required to sell existing inventory, remaining shelf life and current and expected market conditions, including levels of competition. We establish reserves, when necessary, for slow-moving and obsolete inventories based upon our historical experience and management's assessment of current product demand. If we determine that inventory is overvalued based upon the above factors, then the necessary provisions to reduce inventories to their net realizable value are made. INTANGIBLE ASSETS AND GOODWILL. Our intangible assets consist of product rights, license agreements and trademarks resulting from product acquisitions and legal fees and similar costs relating to the development of patents and trademarks. Intangible assets that are acquired are stated at cost, less accumulated amortization, and are amortized on a straight-line basis over estimated useful lives of 20 years. Upon approval, costs associated with the development of patents and trademarks are amortized on a straight-line basis over estimated useful lives ranging from five to 17 years. We determine amortization periods for intangible assets that are acquired based on our assessment of various factors impacting estimated useful lives and cash flows of the acquired products. Such factors include the product's position in its life cycle, the existence or absence of like products in the market, various other competitive and regulatory issues, and contractual terms. Significant changes to any of these factors may result in a reduction in the intangible asset's useful life and an acceleration of related amortization expense. We assess the impairment of intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Some factors we consider important which could trigger an impairment review include the following, (1) significant underperformance relative to expected historical or projected future operating results; (2) significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and (3) significant negative industry or economic trends. When we determine that the carrying value of intangible assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we first perform an assessment of the asset's recoverability. Recoverability is determined by comparing the carrying amount of an intangible asset against an estimate of the undiscounted future cash flows expected to result from its use and eventual disposition. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the intangible asset, an impairment loss is recognized based on the excess of the carrying amount over the estimated fair value of the intangible asset. Goodwill relates to the 1972 acquisition of our specialty materials segment and is recorded net of accumulated amortization through March 31, 2002. As of April 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, which eliminated the amortization of goodwill, resulting in an increase in pretax income of approximately $55,000 for the fiscal year ended March 31, 2003. Adoption of this standard did not have a material effect on the Company's consolidated financial statements. Upon adoption of SFAS No. 142, we performed the initial impairment test of our goodwill and determined that no impairment of the recorded goodwill existed. In accordance with SFAS No. 142, we will test goodwill for impairment at least annually and more frequently if an event occurs which indicates the goodwill may be impaired. 33 RESULTS OF OPERATIONS FISCAL 2003 COMPARED TO FISCAL 2002 NET REVENUES BY SEGMENT
YEARS ENDED MARCH 31, ------------------------------------------------ CHANGE ------------------ ($ IN THOUSANDS): 2003 2002 $ % -------- -------- -------- ------- Branded products $ 43,677 $ 40,424 $ 3,253 8.0% as % of net revenues 17.8% 19.8% Specialty generics 179,724 141,007 38,717 27.5% as % of net revenues 73.4% 69.1% Specialty materials 17,395 19,557 (2,162) (11.1)% as % of net revenues 7.1% 9.6% Other 4,200 3,117 1,083 34.7% -------- -------- -------- Total net revenues $244,996 $204,105 $ 40,891 20.0%
The increase in branded product sales was due to continued growth of our women's healthcare family of products. Sales from this product group increased $5.6 million, or 20.1%, in fiscal 2003. Gynazole-1(R), our vaginal antifungal product, continued its market penetration as its market share increased to 18% at the end of fiscal 2003, compared to 13% at the end of the prior fiscal year. Due to its continued growth in market share, sales of Gynazole-1(R) increased $4.4 million, or 53.4% during the year. Also included in the women's healthcare family of products is the PreCare(R) product line which contributed $1.2 million of incremental sales in fiscal 2003. This increase was primarily attributable to increased sales volume associated with PrimaCare(R), a prescription prenatal/postnatal multivitamin and mineral supplement with essential fatty acids, which has continued to show growth in market share since its introduction in the fourth quarter of fiscal 2002. Further, the PreCare(R) family of products is currently the leading branded line of prescription prenatal nutritional supplements in the United States. Increased sales from the women's healthcare family of products was partially offset by a $2.3 million, or 18.4%, decline in sales from the branded products cardiovascular product line. The decrease in cardiovascular sales was due to the impact of customer buying during the fourth quarter of the prior fiscal year in anticipation of a year-end price increase coupled with increased substitution of our generic equivalent products. The increase in sales for specialty generics resulted primarily from higher sales volume in the cardiovascular, pain management and cough/cold product lines, coupled with continued expansion of our other product lines, including gastrointestinal and anti-anxiety. Increased sales from these product lines was partially offset by a reduction in sales in our prenatal vitamin product line. The cardiovascular product line, which comprised 45.9% of specialty generic sales in fiscal 2003, contributed $11.2 million of increased sales from existing products and $5.3 million of incremental sales volume from the April 2002 ANDA approval and subsequent launch of Potassium Chloride 20 mg. tablets (generic equivalent to K-Dur(R)). Sales volume for the pain management product line increased $11.6 million due to market share gains coupled with the impact of a full year of sales of two products introduced in the prior year. The remaining $12.9 million of increased sales volume resulted primarily from new product introductions in the cough/cold, gastrointestinal and anti-anxiety product lines coupled with a full year of sales on products introduced in the prior year. We introduced 16 and 14 new specialty generic/non-branded products in fiscal 2003 and 2002, respectively. The $0.9 million decline in sales volume for the prenatal product line was primarily attributable to a reduction in the corresponding brand equivalent market. This market decline was due, in part, to the introduction of Primacare(R) by our branded products segment in the fourth quarter of fiscal 2002. The increased sales volume experienced by specialty generics during fiscal 2003 34 was partially offset by $1.4 million of product price erosion that resulted primarily from normal and expected pricing pressures in the pain management and cough/cold product lines. The decrease in specialty material product sales was primarily due to an unexpected softness in the nutritional supplement market for which the specialty materials segment is a supplier. GROSS PROFIT BY SEGMENT
YEARS ENDED MARCH 31, ------------------------------------------------ CHANGE ------------------ ($ IN THOUSANDS): 2003 2002 $ % -------- -------- -------- ------- Branded products $ 38,460 $ 34,643 $ 3,817 11.0% as % of net revenues 88.1% 85.7% Specialty generics 106,854 80,733 26,121 32.4% as % of net revenues 59.5% 57.3% Specialty materials 5,720 6,931 (1,211) (17.5)% as % of net revenues 32.9% 35.4% Other (565) 1,395 (1,960) (140.5)% -------- -------- -------- Total gross profit $150,469 $123,702 $ 26,767 21.6% as % of total net revenues 61.4% 60.6%
The increase in gross profit was attributable to the sales growth experienced by the branded products and specialty generics segments, offset partially by a sales decline in the specialty materials segment. The higher gross profit percentage was favorably impacted by price increases of branded products that took effect at the beginning of fiscal 2003 and higher margins realized on new specialty generic products introduced during the current and prior fiscal years. The gross profit percentage increases experienced by the branded products and specialty generics segments were partially offset by a decline in the gross profit percentage at the specialty raw materials segment. This decline resulted from unfavorable cost variances associated with lower production. RESEARCH AND DEVELOPMENT
YEARS ENDED MARCH 31, ------------------------------------------------ CHANGE ------------------ ($ IN THOUSANDS): 2003 2002 $ % -------- -------- -------- ------- Research and development $19,135 $ 10,712 $ 8,423 78.6% as % of net revenues 7.8% 5.2%
The increase in research and development expense was primarily due to higher costs associated with the expansion of clinical testing connected to our internal product development efforts and higher personnel expenses related to the growth of our research and development staff. In fiscal 2004, we expect research and development costs to increase by approximately 30% over fiscal 2003 levels. 35 SELLING AND ADMINISTRATIVE
YEARS ENDED MARCH 31, ------------------------------------------------ CHANGE ------------------ ($ IN THOUSANDS): 2003 2002 $ % -------- -------- -------- ------- Selling and administrative $ 69,584 $ 61,343 $ 8,241 13.4% as % of net revenues 28.4% 30.1%
The increase in selling and administrative expense resulted primarily from an increase in specialty generic/non-branded marketing and promotional expenses, an increase in personnel costs associated with corporate administration and branded products marketing and higher insurance costs. These increases were partially offset by a reduction in legal expenses which resulted from insurance reimbursements of defense costs in the Healthpoint litigation. AMORTIZATION OF INTANGIBLE ASSETS
YEARS ENDED MARCH 31, ------------------------------------------------ CHANGE ------------------ ($ IN THOUSANDS): 2003 2002 $ % -------- -------- -------- ------- Amortization of intangible assets $ 2,321 $ 2,353 $ (32) (1.4)%
The decrease in amortization of intangible assets was due primarily to the implementation of SFAS No. 142, Goodwill and Other Intangible Assets, which discontinued the amortization of goodwill effective April 1, 2002 (see Notes 2 and 6 in the accompanying Notes to Consolidated Financial Statements). LITIGATION
YEARS ENDED MARCH 31, ------------------------------------------------ CHANGE ------------------ ($ IN THOUSANDS): 2003 2002 $ % -------- -------- -------- ------- Litigation $16,500 $ - $ 16,500 n/a %
In September 2002, the Company recorded a litigation reserve of $16.5 million for potential damages associated with the adverse decision made by a federal court in Texas to uphold a previously rendered jury verdict in a lawsuit against ETHEX Corporation, a wholly-owned subsidiary of the Company (see Note 10 in the accompanying Notes to Consolidated Financial Statements). 36 OPERATING INCOME
YEARS ENDED MARCH 31, ------------------------------------------------ CHANGE ------------------ ($ IN THOUSANDS): 2003 2002 $ % -------- -------- -------- ------- Operating income $ 42,929 $ 49,294 $(6,365) (12.9)%
The decrease in operating income resulted from the $16.5 million litigation reserve established by us for potential damages associated with a lawsuit. Excluding the effect of the litigation reserve, operating income for fiscal 2003 increased $10.1 million, or 20.6%, to $59.4 million. INTEREST AND OTHER INCOME
YEARS ENDED MARCH 31, ------------------------------------------------ CHANGE ------------------ ($ IN THOUSANDS): 2003 2002 $ % -------- -------- -------- ------- Interest and other income $ 977 $ 411 $ 566 137.7%
The increase in interest and other income was primarily due to the investment of $72.4 million of proceeds from the July 2002 secondary public offering in short-term, highly liquid investments. PROVISION FOR INCOME TAXES
YEARS ENDED MARCH 31, ------------------------------------------------ CHANGE ------------------ ($ IN THOUSANDS): 2003 2002 $ % -------- -------- -------- ------- Provision for income taxes $ 15,471 $ 17,891 $(2,420) (13.5)% effective tax rate 35.5% 36.2%
The decline in the effective tax rate was primarily due to an increase in research and development tax credits. 37 NET INCOME
YEARS ENDED MARCH 31, ------------------------------------------------ CHANGE ------------------ ($ IN THOUSANDS): 2003 2002 $ % -------- -------- -------- ------- Net income $ 28,110 $ 31,464 $(3,354) (10.7)% Diluted earnings per share 0.82 0.98 (0.16) (16.3)%
The decrease in net income resulted from the $16.5 million litigation reserve established by us for potential damages associated with a lawsuit. The impact of the litigation reserve, net of applicable taxes, reduced net income by $10.4 million. The more significant percentage decline in earnings per diluted share for fiscal 2003 resulted from an increase in weighted average shares outstanding due to the issuance of approximately 3.3 million shares of Class A common stock in the secondary public offering that was completed in July 2002. Excluding the effect of the litigation reserve, net income for fiscal 2003 would have increased $7.1 million, or 22.5%, to $38.6 million, or $1.12 per diluted share. FISCAL 2002 COMPARED TO FISCAL 2001 NET REVENUES BY SEGMENT
YEARS ENDED MARCH 31, ------------------------------------------------ CHANGE ------------------ ($ IN THOUSANDS): 2002 2001 $ % -------- -------- -------- ------- Branded products $ 40,424 $ 25,206 $ 15,218 60.4% as % of net revenues 19.8% 14.2% Specialty generics 141,007 132,154 8,853 6.7% as % of net revenues 69.1% 74.3% Specialty materials 19,557 17,088 2,469 14.4% as % of net revenues 9.6% 9.6% Other 3,117 3,319 (202) (6.1)% -------- -------- -------- Total net revenues $204,105 $177,767 $ 26,338 14.8%
The increase in branded product sales was due to increased sales volume among all product categories. Sales from the women's health care family of products increased $11.3 million, or 69.2%, in fiscal 2002. Included in women's health care is the PreCare(R) family of prenatal products, which contributed $9.1 million of incremental sales in fiscal 2002 due to volume-related increases in market share. During the fourth quarter of fiscal 2002, Ther-Rx introduced PrimaCare(TM), a prescription prenatal/postnatal multivitamin and mineral supplement with essential fatty acids. We also market Gynazole-1(R), a vaginal antifungal product introduced in the first quarter of fiscal 2001. Due to its continued growth in market share, Gynazole-1(R) sales increased $2.2 million, or 38.1%, in fiscal 2002. Sales from the cardiovascular disease product line increased $4.0 million, or 47.8%, in fiscal 2002 as customer inventories returned to normal levels. The increase in specialty generic sales was primarily due to a $17.8 million increase in the sales volume of existing products coupled with $10.8 million of incremental sales from new products. The cardiovascular product 38 line, which comprised 45.4% of specialty generic sales, accounted for $7.2 million of the total sales growth. We introduced 14 new products in fiscal 2002. The volume growth experienced by specialty generics was partially offset by $19.7 million of product price erosion that resulted from normal and expected competitive pricing pressures on certain products. The increase in specialty raw material product sales was primarily due to sales of new products and increased sales of existing products. GROSS PROFIT
YEARS ENDED MARCH 31, ------------------------------------------------ CHANGE ------------------ ($ IN THOUSANDS): 2002 2001 $ % -------- -------- -------- ------- Gross profit $123,702 $107,104 $ 16,598 15.5% as % of net revenues 60.6% 60.3%
The increase in gross profit was primarily attributable to the increased level of product sales. The higher gross profit percentage in fiscal 2002 resulted primarily from a shift in the mix of product sales toward higher margin branded products comprising a larger percentage of net revenues and favorable cost variances associated with increased production. The positive impact of these two factors was partially offset by the price erosion in certain specialty generic products discussed above. RESEARCH AND DEVELOPMENT
YEARS ENDED MARCH 31, ------------------------------------------------ CHANGE ------------------ ($ IN THOUSANDS): 2002 2001 $ % -------- -------- -------- ------- Research and development $ 10,712 $ 9,282 $ 1,430 15.4% as % of net revenues 5.2% 5.2%
The increase in research and development expense was primarily due to higher costs associated with clinical testing connected to our internal product development efforts and higher personnel expenses related to expansion of our research and development staff. 39 SELLING AND ADMINISTRATIVE
YEARS ENDED MARCH 31, ------------------------------------------------ CHANGE ------------------ ($ IN THOUSANDS): 2002 2001 $ % -------- -------- -------- ------- Selling and administrative $ 61,343 $ 57,509 $ 3,834 6.7% as % of net revenues 30.1% 32.4%
The increase in selling and administrative expense was due primarily to an increase in personnel costs associated with corporate administration and branded marketing. INTEREST EXPENSE
YEARS ENDED MARCH 31, ------------------------------------------------ CHANGE ------------------ ($ IN THOUSANDS): 2002 2001 $ % -------- -------- -------- ------- Interest expense $ 350 $ 1,072 $ (722) (67.4)%
The decrease in interest expense was due to a corresponding reduction in debt. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Cash and cash equivalents and working capital were $96.3 million and $137.9 million, respectively, at March 31, 2003, compared to $12.1 million and $81.4 million, respectively, at March 31, 2002. Internally generated funds from product sales growth continued to be the primary source of operating capital used to fund our businesses. The net cash flow from operating activities was $43.3 million in fiscal 2003 compared to $15.9 million in fiscal 2002. The 172.5% increase in net cash flow from operating activities resulted primarily from an increase in cash earnings coupled with the receipt of certain delayed customer payments which were due at the end of fiscal 2002 and collected during the first quarter of fiscal 2003. These increases were offset in part by an increase in inventories due to increased production of specialty generic products in fiscal 2003, in anticipation of continued sales growth and an increase in current liabilities due to an increase in accounts payable related to purchases to support our production increases and the timing of income tax payments. Net cash flow used in investing activities was $32.1 million for fiscal 2003 compared to $8.5 million for the prior year. Capital expenditures of $16.1 million were funded by net cash flows from operating activities. Our investment in capital assets was primarily for purchasing machinery and equipment to upgrade and expand our pharmaceutical manufacturing and distribution capabilities, and for other building renovations. Other investing activities for the year included a $3.0 million payment related to the purchase of certain licensing rights combined with an equity investment in a women's healthcare company. Also, on March 31, 2003, we completed the purchase of product rights and trademarks to the Chromagen(R) and StrongStart(R) product lines from a subsidiary of Altana Pharma AG (Altana) and the Niferex(R) product line from Schwarz Pharma. The acquisition of the Chromagen(R) and StrongStart(R) product lines was financed with a $13.0 million cash payment made on March 31, 2003 and two non-interest bearing $7.0 million promissory notes issued to Altana, which are due on the first and second anniversaries of the agreement. A cash payment of $14.3 million was made in April 2003 for the Niferex(R) product line. 40 Total debt increased to $17.6 million at March 31, 2003 compared to $5.1 million at March 31, 2002. The increase resulted from the issuance of two non-interest bearing $7.0 million promissory notes to Altana as partial funding for the Chromagen(R) and StrongStart(R) product line acquisitions on March 31, 2003. The two notes are due on the first and second anniversaries of the agreement. The promissory notes, which are non-interest bearing, were discounted using imputed interest rates of 3.36% and 4.08%, respectively, both of which approximate the Company's borrowing rate for similar debt instruments at the time of the borrowing. The present value of the notes was determined to be $13.2 million, resulting in a discount of $0.8 million. In December 2002, the Company refinanced a $1.7 million building mortgage that was due in March 2004. The refinanced building mortgage bears interest at 6.27% and is due in December 2007. As of March 31, 2003, we have a credit agreement with a bank that provides for a revolving line of credit for borrowing up to $60 million. The credit agreement provides for a $40 million unsecured revolving line of credit along with an unsecured supplemental credit line of $20 million for financing acquisitions. The $40 million unsecured revolving line of credit expires in October 2004. The unsecured supplemental credit line of $20 million, which was renewed in December 2002, expires in December 2003. At March 31, 2003, we had no borrowings outstanding under either credit facility and $11.9 million in open letters of credit issued under the revolving credit line. During July 2002, we completed a public offering of approximately 3.3 million shares of Class A common stock. Net proceeds to us were $72.4 million, after deducting underwriting discounts, commissions and offering expenses. The proceeds from the offering are being used for general corporate purposes, including product acquisitions, research and development activities and working capital. At March 31, 2003, the net proceeds were temporarily invested in short-term, highly liquid instruments. On April 28, 2003, we purchased a building for $8.8 million. The facility consists of approximately 275,000 square feet of office, production, distribution and warehouse space. The purchase of the building was financed by a term loan secured by the property. The building mortgage bears interest at 5.30% and requires monthly principal payments of $49,000 plus interest through March 2008. The remaining principal balance plus any unpaid interest is due in April 2008. During May 2003, we completed the issuance of $200.0 million of Contingent Convertible Subordinated Notes (the Notes) that are convertible, under certain circumstances, into shares of our Class A common stock at an initial conversion price of $34.51 per share. The Notes bear interest at a rate of 2.50% and mature on May 16, 2033. We may redeem some or all of the Notes at any time on or after May 21, 2006, at a redemption price, payable in cash, of 100% of the principal amount of the Notes, plus accrued and unpaid interest (including contingent interest, if any) to the date of redemption. Holders may require us to repurchase all or a portion of their Notes on May 16, 2008, 2013, 2018, 2023 and 2028, and upon a change in control, as defined in the indenture governing the Notes, at 100% of the principal amount of the Notes, plus accrued and unpaid interest (including contingent interest, if any) to the date of repurchase, payable in cash. The Notes are subordinate to all of our existing and future senior obligations. The net proceeds to us were approximately $194.0 million, after deducting underwriting discounts, commissions and offering expenses. The proceeds from the offering were used to purchase $50.0 million of our Class A common stock, with the remaining proceeds to be used to fund future acquisitions of products, technologies or businesses, and for general corporate purposes. As a result of the significant increase in debt related to the $200.0 million Notes issuance, the $60 million revolving line of credit we have with a bank was changed. The credit agreement, which previously included covenants that impose minimum levels of earnings before interest, taxes, depreciation and amortization, a maximum funded debt ratio, and a limit on capital expenditures and dividend payments, was expanded to include a minimum fixed charge ratio and a maximum senior leverage ratio. 41 The following table summarizes our contractual obligations (in thousands):
2008 AND TOTAL 2004 2005 2006 2007 THEREAFTER ----- ---- ---- ---- ---- ---------- OBLIGATIONS AT MARCH 31, 2003 ----------------------------- Long-term debt $ 17,590 $ 7,484 $ 7,052 $ 386 $ 1,593 $ 1,075 Operating leases 20,115 3,072 2,761 2,390 2,308 9,584 Other long-term liabilities 2,913 - - - - 2,913 ------------------------------------------------------------------------------ Total obligations at March 31, 2003 40,618 10,556 9,813 2,776 3,901 13,572 EVENTS SUBSEQUENT TO MARCH 31, 2003 ----------------------------------- Building mortgage 8,800 539 588 588 588 6,497 Convertible notes 200,000 - - - - 200,000 ------------------------------------------------------------------------------ Total contractual cash obligations $249,418 $ 11,095 $ 10,401 $ 3,364 $ 4,489 $220,069 ------------------------------------------------------------------------------
We believe our cash and cash equivalents balance, cash flows from operations, funds available under our credit facilities, proceeds received from our secondary public offering of Class A common stock completed during July 2002 and proceeds received from our Notes offering completed in May 2003 will be adequate to fund operating activities for the presently foreseeable future, including the payment of short-term and long-term debt obligations, capital improvements, research and development expenditures, product development activities and expansion of marketing capabilities for the branded pharmaceutical business. In addition, we continue to examine opportunities to expand our business through the acquisition of or investment in companies, technologies, product rights, research and development and other investments that are compatible with our existing businesses. We intend to use our available cash to help in funding any acquisitions or investments. As such, cash has been invested in short-term, highly liquid instruments. We also may use funds available under our credit facility, or financing sources that subsequently become available, including the future issuances of additional debt or equity securities, to fund these acquisitions or investments. If we were to fund one or more such acquisitions or investments, our capital resources, financial condition and results of operations could be materially impacted in future periods. INFLATION Inflation may apply upward pressure on the cost of goods and services used by us in the future. However, we believe that the net effect of inflation on our operations during the past three years has been minimal. In addition, changes in the mix of products sold and the effect of competition has made a comparison of changes in selling prices less meaningful relative to changes in the overall rate of inflation over the past three years. RECENTLY ISSUED ACCOUNTING STANDARDS In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for fiscal years beginning after June 15, 2002. Management does not believe the adoption of this statement will have a material impact on the results of operations or financial position of the Company. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. It supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and certain provisions of APB No. 30, Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. SFAS 144 establishes a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale and resolves other implementation issues related to SFAS 121. This statement was adopted by the Company effective April 1, 2002. The adoption of SFAS 144 did not have a material impact on the Company's results of operations or financial position. 42 In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 rescinds, amends or makes various technical corrections to certain existing authoritative pronouncements. Management does not believe the adoption of this statement will have a material impact on the results of operations or financial position of the Company. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities, including costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is generally before an actual liability has been incurred. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS 146 did not have a material impact on the Company's results of operations or financial position. In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and the disclosure requirements are effective for all financial statements of periods ending after December 31, 2002. At March 31 2003, the Company was not a guarantor on any debt instruments. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123. SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for the Company's fiscal year ended March 31, 2003. The Company did not adopt the fair value method of valuing stock options, however, the adoption of the disclosure provisions of SFAS 148 did not have a material impact on the Company's financial condition or results of operations. In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. FIN 46 provides guidance on: 1) the identification of entities for which control is achieved through means other than through voting rights and 2) how to determine when and which business enterprise should consolidate such entities. In addition, FIN 46 requires that any enterprises with a significant variable interest in these types of entities make additional disclosures in all financial statements initially issued after January 31, 2003. The Company does not anticipate the adoption of this Interpretation will have any impact on its financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes standards for how entities classify and measure in their statement of financial position certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS 150 are effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first fiscal interim period beginning after June 15, 2003. The Company does not expect adoption of this statement to have a material impact on its results of operations or financial position. 43 ITEM 7a. QUANTITIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK ------------------------------------------------------ Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- 44 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Stockholders and Board of Directors of K-V Pharmaceutical Company We have audited the consolidated balance sheets of K-V Pharmaceutical Company and Subsidiaries as of March 31, 2003 and 2002 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended March 31, 2003. These consolidated 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 auditing standards generally accepted in the United States of America. 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 K-V Pharmaceutical Company and Subsidiaries at March 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/ BDO Seidman, LLP Chicago, Illinois May 23, 2003 45 K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 31, ----------------------- 2003 2002 -------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS ------ Current Assets: Cash and cash equivalents.................................................. $ 96,288 $ 12,109 Receivables less allowance for doubtful accounts of $422 and $403 in 2003 and 2002, respectively.......................................... 57,385 54,218 Inventories, net........................................................... 42,343 35,097 Prepaid and other assets................................................... 2,709 2,102 Deferred tax asset......................................................... 14,791 5,227 -------- -------- Total Current Assets.................................................... 213,516 108,753 Property and equipment, less accumulated depreciation...................... 51,903 41,224 Intangible assets and goodwill, net........................................ 82,577 41,293 Other assets............................................................... 4,672 3,922 -------- -------- Total Assets............................................................ $352,668 $195,192 ======== ======== LIABILITIES ----------- Current Liabilities: Accounts payable........................................................... $ 15,588 $ 10,312 Accrued liabilities........................................................ 52,548 16,332 Current maturities of long-term debt....................................... 7,484 712 -------- -------- Total Current Liabilities............................................... 75,620 27,356 Long-term debt............................................................. 10,106 4,387 Other long-term liabilities................................................ 2,913 2,717 Deferred tax liability..................................................... 3,413 1,940 -------- -------- Total Liabilities....................................................... 92,052 36,400 -------- -------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY -------------------- 7% cumulative convertible Preferred Stock, $.01 par value; $25.00 stated and liquidation value; 840,000 shares authorized; issued and outstanding -- 40,000 shares in both 2003 and 2002 (convertible into Class A shares at a ratio of 5.625 to one)........................ -- -- Class A and Class B Common Stock, $.01 par value;150,000,000 and 75,000,000 shares authorized, respectively; Class A -- issued 23,651,290 and 20,158,334 at March 31, 2003 and 2002, respectively...... 236 201 Class B -- issued 10,577,119 and 10,711,514 at March 31, 2003 and 2002, respectively (convertible into Class A shares on a one-for-one basis)... 106 108 Additional paid-in capital................................................. 120,961 47,231 Retained earnings.......................................................... 139,341 111,301 Less: Treasury Stock, 32 shares of Class A and 53,428 shares of Class B Common Stock in 2003 and 40,493 shares of Class A and 53,428 shares of Class B Common Stock, in 2002, at cost................. (28) (49) -------- -------- Total Shareholders' Equity................................................. 260,616 158,792 -------- -------- Total Liabilities and Shareholders' Equity................................. $352,668 $195,192 ======== ======== SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
46 K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED MARCH 31, -------------------------------------------------- 2003 2002 2001 -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues................................ $244,996 $204,105 $177,767 Cost of sales............................... 94,527 80,403 70,663 -------- -------- -------- Gross profit................................ 150,469 123,702 107,104 -------- -------- -------- Operating expenses: Research and development................ 19,135 10,712 9,282 Selling and administrative.............. 69,584 61,343 57,509 Amortization of intangible assets....... 2,321 2,353 2,341 Litigation.............................. 16,500 -- -- -------- -------- -------- Total operating expenses.................... 107,540 74,408 69,132 -------- -------- -------- Operating income............................ 42,929 49,294 37,972 -------- -------- -------- Other income (expense): Interest and other income............... 977 411 164 Interest expense........................ (325) (350) (1,072) -------- -------- -------- Total other income (expense), net........... 652 61 (908) -------- -------- -------- Income before income taxes.................. 43,581 49,355 37,064 Provision for income taxes.................. 15,471 17,891 13,439 -------- -------- -------- Net income.................................. $ 28,110 $ 31,464 $ 23,625 ======== ======== ======== Net income per common share-basic........... $0.84 $1.03 $0.80 ===== ===== ===== Net income per common share-diluted......... $0.82 $0.98 $0.74 ===== ===== ===== SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
47 K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2003, 2002 AND 2001 --------------------------------------------------------------------------------- CLASS A CLASS B ADDITIONAL TOTAL PREFERRED COMMON COMMON PAID IN TREASURY RETAINED SHAREHOLDERS' STOCK STOCK STOCK CAPITAL STOCK EARNINGS EQUITY ----- ----- ----- ------- ----- -------- ------ (IN THOUSANDS, EXCEPT SHARE DATA) BALANCE AT MARCH 31, 2000..................... $ 2 $123 $ 66 $ 40,864 $(55) $ 56,799 $ 97,799 Net income.................................... -- -- -- -- -- 23,625 23,625 Dividends paid on preferred stock............. -- -- -- -- -- (420) (420) Product development........................... -- -- -- 200 -- -- 200 Conversion of 422,088 Class B shares to Class A shares -- 4 (4) -- -- -- -- Stock Options exercised: 46,004 shares of Class A................... -- -- -- 366 -- -- 366 994,081 shares of Class B.................. -- -- 10 4,362 -- -- 4,372 Three-for-two stock split..................... -- 62 35 -- -- (97) -- --------------------------------------------------------------------------- BALANCE AT MARCH 31, 2001..................... 2 189 107 45,792 (55) 79,907 125,942 Net income.................................... -- -- -- -- -- 31,464 31,464 Dividends paid on preferred stock............. -- -- -- -- (70) (70) Conversion of 200,000 shares of preferred stock to 1,125,000 Class A Shares........... (2) 11 -- (9) -- -- -- Sale of 12,825 Class A shares to employee profit sharing plan......................... -- -- -- 332 6 -- 338 Issuance of 5,061 Class A shares under product development agreement......... -- -- -- 125 -- -- 125 Conversion of 32,575 Class B shares to Class A shares.............................. -- -- -- -- -- -- -- Stock Options exercised: 108,018 shares of Class A less 8,847 shares repurchased............................... -- 1 -- 530 -- -- 531 80,685 shares of Class B less 170 shares repurchased............................... -- -- 1 461 -- -- 462 --------------------------------------------------------------------------- BALANCE AT MARCH 31, 2002..................... -- 201 108 47,231 (49) 111,301 158,792 Net income.................................... -- -- -- -- -- 28,110 28,110 Dividends paid on preferred stock............. -- -- -- -- (70) (70) Conversion of 175,000 Class B shares to Class A shares.............................. -- 2 (2) -- -- -- -- Issuance of 3,285,000 Class A shares.......... -- 33 -- 72,347 -- -- 72,380 Sale of 40,461 Class A shares to employee profit sharing plan......................... -- -- -- 884 21 -- 905 Stock Options exercised: 42,478 shares of Class A less 9,502 shares repurchased............................... -- -- -- 105 -- -- 105 40,717 shares of Class B less 112 shares repurchased............................... -- -- -- 394 -- -- 394 --------------------------------------------------------------------------- BALANCE AT MARCH 31, 2003..................... $-- $236 $106 $120,961 $(28) $139,341 $260,616 =========================================================================== SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
48 K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31, --------------------------------------------- 2003 2002 2001 -------- -------- -------- (IN THOUSANDS) Operating Activities: Net income............................................................. $ 28,110 $ 31,464 $ 23,625 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization....................................... 7,755 6,460 5,724 Deferred income tax (benefit) provision............................. (8,091) (2,376) 2,294 Deferred compensation............................................... 196 183 174 Litigation.......................................................... 16,500 - - Changes in operating assets and liabilities: Increase in receivables, net........................................ (3,167) (27,959) (2,578) Increase in inventories............................................. (5,623) (2,886) (2,097) Decrease (increase) in prepaid and other assets..................... 514 783 (4,700) Increase (decrease) in accounts payable and accrued................. liabilities...................................................... 7,127 10,228 (5,372) -------- -------- -------- Net cash provided by operating activities.............................. 43,321 15,897 17,070 -------- -------- -------- Investing Activities: Purchase of property and equipment, net............................. (16,113) (8,484) (8,057) Purchase of stock and intangible assets............................. (3,000) - - Product acquisition................................................. (13,000) - - -------- -------- -------- Net cash used in investing activities.................................. (32,113) (8,484) (8,057) -------- -------- -------- Financing Activities: Principal payments on long-term debt................................ (743) (693) (17,646) Proceeds from credit facility....................................... - - 5,000 Dividends paid on preferred stock................................... (70) (70) (420) Proceeds from issuance of common stock.............................. 72,380 - - Sale of common stock to employee profit sharing plan................ 905 338 - Exercise of common stock options.................................... 499 993 4,738 -------- -------- -------- Net cash provided by (used in) financing activities.................... 72,971 568 (8,328) -------- -------- -------- Increase in cash and cash equivalents.................................. 84,179 7,981 685 Cash and cash equivalents: Beginning of year................................................... 12,109 4,128 3,443 -------- -------- -------- End of year......................................................... $ 96,288 $ 12,109 $ 4,128 ======== ======== ======== Non-cash investing and financing activities: Term loans refinanced.................................................. $ 1,738 $ 2,450 $ - Issuance of common stock under product development agreement........................................................... - 125 - Payments due on product acquisitions................................... 15,983 - - Portion of product acquisition financed by promissory notes............ 13,234 - - SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. DESCRIPTION OF BUSINESS ----------------------- K-V Pharmaceutical Company and its subsidiaries ("KV" or the "Company") are primarily engaged in the development, acquisition, manufacture, marketing and sale of technologically distinguished branded and generic/non-branded prescription pharmaceutical products. The Company was incorporated in 1971 and has become a leader in the development of advanced drug delivery and formulation technologies that are designed to enhance therapeutic benefits of existing drug forms. Through internal product development and synergistic acquisitions of products, KV has grown into a fully integrated specialty pharmaceutical company. The Company also develops, manufactures and markets technologically advanced, value-added raw material products for the pharmaceutical, nutritional, food and personal care industries. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ PRINCIPLES OF CONSOLIDATION --------------------------- The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of KV and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES ---------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results in subsequent periods may differ from the estimates and assumptions used in the preparation of the accompanying consolidated financial statements. The most significant estimates made by management include the determination of sales allowances, valuation of inventory balances, the determination of useful lives for intangible assets, and the evaluation of intangible assets and goodwill for impairment. Management periodically evaluates estimates used in the preparation of the consolidated financial statements and makes changes on a prospective basis when adjustments are necessary. CASH EQUIVALENTS ---------------- Cash equivalents consist of only those highly liquid investments that are readily convertible to cash and that have original maturities of three months or less. At March 31, 2003 and 2002, cash equivalents totaled $92,635 and $10,350, respectively. INVENTORIES ----------- Inventories consist of finished goods held for distribution, raw materials and work in process. Inventories are stated at the lower of cost or market, with the cost determined on the first-in, first-out (FIFO) basis. Reserves for potentially obsolete or slow moving inventory are established by management based on evaluation of inventory levels, forecasted demand, and market conditions. 50 PROPERTY AND EQUIPMENT ---------------------- Property and equipment are stated at cost, less accumulated depreciation. Depreciation expense is computed over the estimated useful lives of the related assets using the straight-line method. The estimated useful lives are principally 10 years for land improvements, 10 to 40 years for buildings and improvements, 3 to 15 years for machinery and equipment, and 3 to 10 years for office furniture and equipment. Leasehold improvements are amortized on a straight-line basis over the shorter of the respective lease terms or the estimated useful life of the assets. The Company assesses property and equipment for impairment whenever events or changes in circumstances indicate that an asset's carrying amount may not be recoverable. INTANGIBLE ASSETS AND GOODWILL ------------------------------ Intangible assets consist of product rights, license agreements and trademarks resulting from product acquisitions and legal fees and similar costs relating to the development of patents and trademarks. Intangible assets that are acquired are stated at cost, less accumulated amortization, and are amortized on a straight-line basis over estimated useful lives of 20 years. Upon approval, costs associated with the development of patents and trademarks are amortized on a straight-line basis over estimated useful lives ranging from 5 to 17 years. The Company evaluates its intangible assets for impairment whenever events or changes in circumstances indicate that an intangible asset's carrying amount may not be recoverable. Recoverability is determined by comparing the carrying amount of an intangible asset against an estimate of the undiscounted future cash flows expected to result from its use and eventual disposition. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the intangible asset, an impairment loss is recognized based on the excess of the carrying amount over the estimated fair value of the intangible asset. Goodwill relates to the 1972 acquisition of the Company's specialty materials segment and is recorded net of accumulated amortization through March 31, 2002. In accordance with the Company's adoption of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, on April 1, 2002, amortization of goodwill was discontinued. Instead, goodwill is now subject to at least an annual assessment of impairment on a fair value basis. The Company's initial goodwill impairment test as of April 1, 2002 resulted in no impairment of goodwill. Amortization of goodwill for both fiscal 2002 and 2001 was $55. Basic and diluted earnings per share for fiscal 2002 and 2001 would have been unchanged if goodwill amortization was excluded from net income on a pro forma basis. OTHER ASSETS ------------ Non-marketable equity investments for which the Company does not have the ability to exercise significant influence over operating and financial policies (generally less than 20% ownership) are accounted for using the cost method. Such investments are included in "Other assets" in the accompanying consolidated balance sheets. These investments are periodically reviewed for other-than-temporary declines in fair value. Other than temporary declines in fair value are identified by evaluating market conditions, the entity's ability to achieve forecast and regulatory submission guidelines, as well as the entity's overall financial condition. REVENUE RECOGNITION ------------------- Revenue from product sales is recognized when the merchandise is shipped to an unrelated third party pursuant to Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. Accordingly, revenue is recognized when all of the following occur: a purchase order is received from a customer; title and risk of loss pass to the Company's customer upon shipment of the merchandise under the terms of FOB 51 shipping point; prices and estimated sales provisions for product returns, sales rebates, payment discounts, chargebacks, and other promotional allowances are reasonably determinable; and, the customer's payment ability has been reasonably assured. Concurrently with the recognition of revenue, the Company records estimated sales provisions for product returns, sales rebates, payment discounts, chargebacks, and other sales allowances. Sales provisions are established based upon consideration of a variety of factors, including but not limited to, historical relationship to revenues, historical payment and return experience, estimated customer inventory levels, customer rebate arrangements, and current contract sales terms with wholesale and indirect customers. The following briefly describes the nature of each provision and how such provisions are estimated. o Payment discounts are reductions to invoiced amounts offered to customers for payment within a specified period and are estimated upon shipment utilizing historical customer payment experience. o Sales rebates are offered to certain customers to promote customer loyalty and encourage greater product sales. These rebate programs provide that, upon the attainment of pre-established volumes or the attainment of revenue milestones for a specified period, the customer receives credit against purchases. Other promotional programs are incentive programs periodically offered to customers. Due to the nature of these programs, the Company is able to estimate provisions for rebates and other promotional programs based on the specific terms in each agreement at the time of shipment. o Consistent with common industry practices, the Company has agreed to terms with its customers to allow them to return product that is within a certain period of the expiration date. Upon shipment of product to customers, the Company provides for an estimate of product to be returned. This estimate is determined by applying a historical relationship of customer returns to amounts invoiced. o Generally the Company provides credits to customers for decreases that are made to selling prices for the value of inventory that is owned by customers at the date of the price reduction. The Company has not contractually agreed to provide price adjustment credits to its customers; instead, the Company issues price adjustment credits at its discretion. Price adjustment credits are estimated at the time the price reduction occurs. The amount is calculated based on an estimate of customer inventory levels. o KV has arrangements with certain parties establishing prices for the Company's products for which the parties independently select a wholesaler from which to purchase. Such parties are referred to as indirect customers. A chargeback represents the difference between the Company's invoice price to the wholesaler and the indirect customer's contract price, which is lower. Provisions for estimating chargebacks are calculated primarily using historical chargeback experience, actual contract pricing and estimated wholesaler inventory levels. Actual product returns, chargebacks and other sales allowances incurred are, however, dependent upon future events and may be different than the Company's estimates. The Company continually monitors the factors that influence sales allowance estimates and makes adjustments to these provisions when management believes that actual product returns, chargebacks and other sales allowances may differ from established allowances. Accruals for sales provisions are presented in the consolidated financial statements as reductions to net revenues and accounts receivable. Sales provisions totaled $98,929, $98,592 and $85,881 for the years ended March 31, 2003, 2002 and 2001, respectively. The reserve balances related to the sales provisions totaled $29,658 and $18,958 at March 31, 2003 and 2002, respectively, and are included in "Receivables, less allowance for doubtful accounts" in the accompanying consolidated balance sheets. 52 The Company also enters into long-term agreements under which it assigns marketing rights for the products it has developed to pharmaceutical marketers. Royalties are earned based on the sale of products. CONCENTRATION OF CREDIT RISK ---------------------------- The Company extends credit on an uncollateralized basis primarily to wholesale drug distributors and retail pharmacy chains throughout the United States. As a result, the Company is required to estimate the level of receivables which ultimately will not be paid. The Company calculates this estimate based on prior experience supplemented by a customer specific review when it is deemed necessary. On a periodic basis, the Company performs evaluations of the financial condition of all customers to further limit its credit risk exposure. Actual losses from uncollectible accounts have historically been insignificant. The Company's three largest customers accounted for approximately 33%, 20% and 14%, and 29%, 25% and 12% of gross receivables at March 31, 2003 and 2002, respectively. During fiscal 2003, KV's three largest customers accounted for 23%, 18% and 14% of gross revenues. In fiscal 2002 and 2001, the Company's three largest customers accounted for gross revenues of 20%, 19% and 13% and 23%, 20% and 14%, respectively. SHIPPING AND HANDLING COSTS --------------------------- The Company classifies shipping and handling costs in cost of sales. The Company does not derive revenue from shipping. RESEARCH AND DEVELOPMENT ------------------------ Research and development costs, including licensing fees of early-stage development products, are expensed in the period incurred. The Company has licensed the exclusive rights to co-develop and market various products with other drug delivery companies. These collaborative agreements usually require the Company to pay up-front fees and ongoing milestone payments. When the Company makes an up-front or milestone payment, management evaluates the stage of the related product to determine the appropriate accounting treatment. If the product is considered to be beyond the early development stage but has not yet been approved by regulatory authorities, the Company will evaluate the facts and circumstances of each case to determine if a portion or all of the payment has future economic benefit and should be capitalized. Payments made to third parties subsequent to regulatory approval are capitalized with that cost generally amortized over the patented life of the product. The Company accrues estimated costs associated with clinical studies performed by contract research organizations based on the total of costs incurred through the balance sheet date. The Company monitors the progress of the trials and their related activities to the extent possible, and adjusts the accruals accordingly. These accrued costs are recorded as a component of research and development expense. EARNINGS PER SHARE ------------------ Basic earnings per share is calculated by dividing net income available to common shareholders for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is based on the treasury stock method and is computed by dividing net income by the weighted average common shares and common share equivalents outstanding during the periods presented assuming the conversion of preferred shares and the exercise of all in-the-money stock options. Common share equivalents 53 have been excluded from the computation of diluted earnings per share where their inclusion would be anti-dilutive. INCOME TAXES ------------ Income taxes are accounted for under the asset and liability method where deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. 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. As permissible under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, the Company elected to continue to account for stock option grants to employees in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations. APB 25 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, no compensation expense is recognized for stock option awards granted to employees at or above fair value. Had the Company determined compensation expense using the fair value method prescribed by SFAS 123, the Company's net income and earnings per share would have been as follows:
2003 2002 2001 ---- ---- ---- Net income, as reported........................ $ 28,110 $ 31,464 $ 23,625 Stock based employee compensation expense, net of tax................................... (815) (815) (907) -------- -------- -------- Pro forma net income........................... $ 27,295 $ 30,649 $ 22,718 ======== ======== ======== Earnings per share: Basic - as reported......................... $ 0.84 $ 1.03 $ 0.80 Basic - pro forma........................... 0.82 1.00 0.77 Diluted - as reported....................... 0.82 0.98 0.74 Diluted - pro forma......................... 0.79 0.95 0.71
The weighted average fair value of the options has been estimated on the date of grant using the following weighted average assumptions for grants in fiscal 2003, 2002 and 2001, respectively: no dividend yield; expected volatility of 45%, 56% and 56%; risk-free interest rate of 2.40%, 6.00% and 6.50% per annum; and expected option terms ranging from 3 to 10 years for all three years. Weighted averages are used because of varying assumed exercise dates. FAIR VALUE OF FINANCIAL INSTRUMENTS ----------------------------------- The fair values of the Company's cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate their carrying values due to the relatively short maturity of these items. The carrying 54 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 August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for fiscal years beginning after June 15, 2002. Management does not believe the adoption of this statement will have a material impact on the results of operations or financial position of the Company. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. It supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and certain provisions of APB No. 30, Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. SFAS 144 establishes a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale and resolves other implementation issues related to SFAS 121. This statement was adopted by the Company effective April 1, 2002. The adoption of SFAS 144 did not have a material impact on the Company's results of operations or financial position. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 rescinds, amends or makes various technical corrections to certain existing authoritative pronouncements. Management does not believe the adoption of this statement will have a material impact on the results of operations or financial position of the Company. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities, including costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is generally before an actual liability has been incurred. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS 146 did not have a material impact on the Company's results of operations or financial position. In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and the disclosure requirements are effective for all financial statements of periods ending after December 31, 2002. At March 31, 2003, the Company was not a guarantor on any debt instruments. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123. SFAS 148 amends SFAS 123, Accounting for 55 Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for the Company's fiscal year ended March 31, 2003. The Company did not adopt the fair value method of valuing stock options, however, the adoption of the disclosure provisions of SFAS 148 did not have a material impact on the Company's financial condition or results of operations. In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. FIN 46 provides guidance on: 1) the identification of entities for which control is achieved through means other than through voting rights and 2) how to determine when and which business enterprise should consolidate such entities. In addition, FIN 46 requires that any enterprises with a significant variable interest in these types of entities make additional disclosures in all financial statements initially issued after January 31, 2003. The Company does not anticipate the adoption of this Interpretation will have any impact on its financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes standards for how entities classify and measure in their statement of financial position certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS 150 are effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first fiscal interim period beginning after June 15, 2003. The Company does not expect adoption of this statement to have a material impact on its results of operations or financial position. RECLASSIFICATIONS ----------------- Certain reclassifications to prior years' financial information have been made to conform to the fiscal 2003 presentation. 3. ACQUISITIONS AND LICENSE AGREEMENTS ----------------------------------- On March 31, 2003, the Company acquired from Schwarz Pharma (Schwarz) the product rights and trademarks to the Niferex(R) line of hematinic products for $14,300, plus expenses. The acquisition was financed with cash on hand. The purchase price was allocated to the trademark rights acquired and is being amortized over an estimated life of 20 years. On March 31, 2003, the Company acquired from a subsidiary of Altana Pharma AG (Altana) the world-wide product rights and trademarks to the Chromagen(R) and StrongStart(R) product lines for $27,000, plus expenses. The Chromagen(R) product line includes three hematinic products used in the treatment of anemias and one prenatal vitamin, while the StrongStart(R) product line consists of two prenatal vitamin products. In accordance with the acquisition agreement, the Company entered into a transitional supply agreement. The acquisition was financed with a $13,000 cash payment and two non-interest bearing $7,000 promissory notes issued to Altana, which are due on the first and second anniversaries of the agreement. The promissory notes, which are non-interest bearing, were discounted using imputed interest rates of 3.36% and 4.08%, respectively, both of which approximate the Company's borrowing rate for similar debt instruments at the time of the borrowing. Using the imputed interest rates, the present value of the notes was 56 determined to be $13,234, resulting in a discount of $766. The purchase price was allocated to the trademark rights acquired and is being amortized over an estimated life of 20 years. On April 18, 2002, the Company entered into an agreement with FemmePharma, Inc. (FemmePharma) whereby the Company was granted an exclusive license to manufacture and sell in North America and certain foreign markets intravaginal products containing Danazol and certain vaginal anti-infective products under development (the License Agreement). The initial product covered by the License Agreement is intended for use in the treatment of endometriosis under FemmePharma's patented Pardel(TM) technology. In consideration for the rights and licenses received, the Company paid $1,000 for use of the Pardel(TM) trademark and will pay up to an additional $8,500 upon successful achievement of certain regulatory milestones. These milestone payments will commence upon submission of a New Drug Application (NDA) to the Food and Drug Administration for the initial product covered by the License Agreement. The amounts paid and the costs to be incurred under this agreement will be allocated to license agreements and amortized over the estimated lives of the products upon launch. The Company is also obligated to pay royalties on product sales covered by the License Agreement. These disbursements will be recognized as a cost of sales concurrently with the revenue earned on the products to which the royalties relate. Under a separate agreement, the Company invested $2,000 in FemmePharma's convertible preferred stock and agreed to make an additional $3,000 convertible preferred stock investment following commencement of Phase III studies by the FDA on the initial product covered by the License Agreement. The $2,000 investment was accounted for using the cost method since the Company does not have the ability to exercise significant influence over operating and financial policies of FemmePharma. This investment is included in "Other assets" in the accompanying consolidated balance sheets. 4. INVENTORIES ----------- Inventories as of March 31, consist of:
2003 2002 ---- ---- Finished goods..................... $ 26,524 $ 18,600 Work-in-process.................... 4,290 4,702 Raw materials...................... 12,532 12,903 -------- -------- 43,346 36,205 Reserves for obsolescence.......... (1,003) (1,108) -------- -------- $ 42,343 $ 35,097 ======== ========
57 5. PROPERTY AND EQUIPMENT ---------------------- Property and equipment as of March 31, consist of:
2003 2002 ---- ---- Land and improvements................................. $ 2,083 $ 2,083 Building and building improvements.................... 17,246 16,611 Machinery and equipment............................... 35,548 31,497 Office furniture and equipment........................ 12,185 8,766 Leasehold improvements................................ 10,708 3,195 Construction-in-progress (estimated costs to complete at March 31, 2003 was $1,433)............. 5,848 5,353 -------- -------- 83,618 67,505 Less accumulated depreciation and amortization........ (31,715) (26,281) -------- -------- Net property and equipment......................... $ 51,903 $ 41,224 ======== ========
Purchases of property and equipment were $16,113, $8,484 and $8,057 for fiscal 2003, 2002 and 2001, respectively. Depreciation and amortization of property and equipment was $5,434, $4,107 and $3,383 for fiscal 2003, 2002 and 2001, respectively. 6. INTANGIBLE ASSETS AND GOODWILL ------------------------------ Intangible assets and goodwill as of March 31, consist of:
2003 2002 --------------------------------- --------------------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION ------ ------------ ------- ------------ Product rights - Micro-K(R)....... $36,140 $(7,294) $36,140 $(5,490) Product rights - PreCare(R)....... 8,433 (1,546) 8,433 (1,124) Trademarks acquired............. 42,476 - - - License agreements.............. 1,000 - - - Trademarks and patents.......... 3,114 (303) 3,046 (269) ------- ------- ------- ------- Total intangible assets..... 91,163 (9,143) 47,619 (6,883) Goodwill........................ 557 - 557 - ------- ------- ------- ------- $91,720 $(9,143) $48,176 $(6,883) ======= ======= ======= =======
Amortization of intangible assets was $2,321, $2,298 and $2,286 for fiscal 2003, 2002 and 2001, respectively. Amortization of goodwill was $55 for fiscal 2002 and 2001. Estimated annual amortization expense is $4,450 for each of the five succeeding fiscal years. 58 7. OTHER ASSETS ------------ Other assets as of March 31, consist of:
2003 2002 ---- ---- Cash surrender value of life insurance............... $1,634 $1,845 Other investments.................................... 2,000 - Deposits............................................. 994 2,015 Other................................................ 44 62 ------ ------ $4,672 $3,922 ====== ======
8. ACCRUED LIABILITIES ------------------- Accrued liabilities as of March 31, consist of:
2003 2002 ---- ---- Salaries, wages, incentives and benefits....... $ 6,202 $ 5,665 Income taxes................................... 8,402 6,929 Promotion expenses............................. 2,744 2,846 Payments due on product acquisitions........... 15,983 - Assumed liabilities - product acquisitions..... 1,882 - Litigation reserve............................. 16,500 - Other.......................................... 835 892 ------- ------- $52,548 $16,332 ======= =======
9. LONG-TERM DEBT -------------- Long-term debt as of March 31, consists of:
2003 2002 ---- ---- Industrial revenue bonds.................... $ 530 $ 855 Building mortgages.......................... 3,826 4,244 Notes payable............................... 13,234 - ------- ------ 17,590 5,099 Less current portion........................ (7,484) (712) ------- ------ $10,106 $4,387 ======= ======
As of March 31, 2003, the Company has a credit agreement with a bank that provides for a revolving line of credit for borrowing up to $60,000. The credit agreement provides for a $40,000 unsecured revolving line of credit along with an unsecured supplemental credit line of $20,000 for financing acquisitions. The $40,000 unsecured revolving line of credit expires in October 2004. The unsecured supplemental credit line of $20,000, which was renewed in December 2002, expires in December 2003. The revolving credit lines charge interest at the lower of the prime rate or the one-month LIBOR rate plus 150 basis points. At March 31, 2003, the Company had $11,906 in open letters of credit issued under the credit facilities. The credit agreement includes covenants that impose minimum levels of earnings before interest, taxes, depreciation and amortization, a maximum funded debt ratio, and a limit on capital expenditures and dividend payments. As of March 31, 2003, the Company was in compliance with all of its covenants. 59 The industrial revenue bonds, which bear interest at 7.35% per annum, mature serially through 2005 and are collateralized by certain property and equipment, as well as through a letter of credit, which may only be accessed in case of default on the bonds. The bonds do not allow the holder to require the Company to redeem the bonds. In December 2002, the Company refinanced $1,738 of a building mortgage that was due in March 2004. At March 31, 2003, the building mortgages bear interest at 7.57% and 6.27% and require monthly principal payments of $19 and $13 plus interest through November 2006 and November 2007, respectively. The remaining principal balances plus any unpaid interest are due on December 20, 2006 and December 20, 2007, respectively. The notes payable relate to two unsecured promissory notes for $7,000 each that were entered into in conjunction with the Altana acquisition agreement (see Note 3). The two notes are due on March 31, 2004 and March 31, 2005. The promissory notes, which are non-interest bearing, were discounted using imputed interest rates of 3.36% and 4.08%, respectively, both of which approximate the Company's borrowing rate for similar debt instruments at the time of the borrowing. The present value of the notes was determined to be $13,234, resulting in a discount of $766. The aggregate maturities of long-term debt as of March 31, 2003 are as follows: 2004.......................... $ 7,484 2005.......................... 7,052 2006.......................... 386 2007.......................... 1,593 2008.......................... 1,075 ------- $17,590 ======= The Company paid interest of $389, $417 and $1,329 during the years ended March 31, 2003, 2002 and 2001, respectively. 10. COMMITMENTS AND CONTINGENCIES ----------------------------- LEASES The Company leases manufacturing, office and warehouse facilities, equipment and automobiles under operating leases expiring through 2012. Total rent expense for the years ended March 31, 2003, 2002 and 2001 was $4,785, $4,441 and $4,319, respectively. Future minimum lease commitments under non-cancelable leases are as follows: 2004.......................... $ 3,072 2005.......................... 2,761 2006.......................... 2,390 2007.......................... 2,308 2008.......................... 1,962 Later years................... 7,622 60 CONTINGENCIES The Company is currently subject to legal proceedings and claims that have arisen 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 it currently faces, individually or in the aggregate, will have a material adverse effect on its financial position or operations except for the Healthpoint and PPA litigation described in Litigation below. The Company has licensed the exclusive rights to co-develop and market various generic equivalent products with other drug delivery companies. These collaboration agreements require the Company to make up-front and ongoing payments as development milestones are attained. If all milestones remaining under these agreements were reached, payments by the Company could total up to $17,300. 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 $196, $183 and $174, under this agreement in the years ended March 31, 2003, 2002 and 2001, respectively. LITIGATION ETHEX Corporation (ETHEX), a subsidiary of the Company, is a defendant in a lawsuit styled Healthpoint, Ltd. v. ETHEX Corporation, pending in federal court in San Antonio, Texas. In general, the plaintiffs allege that ETHEX's comparative promotion of its Ethezyme(TM) to Healthpoint's Accuzyme(R) product resulted in false advertising and misleading statements under various federal and state laws, and constituted unfair competition and misappropriation of trade secrets. In September 2001, the jury returned verdicts against ETHEX on certain false advertising, unfair competition, and misappropriation claims. The jury awarded compensatory and punitive damages totaling $16,500. On October 1, 2002, the U.S. District Court for the Western District of Texas denied ETHEX's motion to set aside the jury's verdict. On December 17, 2002, the court entered a judgment awarding attorneys' fees to Healthpoint in an amount to be subsequently determined. We believe that the jury award is excessive and is not sufficiently supported by the facts or the law. We intend to vigorously appeal once the court has entered a final judgment. We and our counsel believe that there are meritorious arguments to be raised during the appeal process; however, we are not presently able to predict the outcome of the pending District Court's motions or an appeal. As a result of the court's earlier decisions, our results of operations for fiscal 2003 included a reserve for potential damages of $16,500, which is reflected in accrued liabilities on our consolidated balance sheet as of March 31, 2003. To date Healthpoint has requested reimbursement for approximately $1,800 in attorneys' fees in addition to the judgment discussed above. We are contesting Healthpoint's entitlement to and their requested amount of attorneys' fees. As of this date, the court had not entered any order with respect to the amount of attorneys' fees to be awarded. Our counsel has advised us that the amount could range from zero to $1,800, the amount requested by Healthpoint. Based on our current analysis we believe that the reserve as recorded will be adequate to cover any judgment, including attorneys' fees, which may result at the end of the appeal process. We are continually evaluating the need for additional reserves as the case progresses through the appeal process. 61 We previously distributed several low volume pharmaceutical products that contained phenylpropanolamine, or PPA, and that were discontinued in 2000 and 2001. We are presently named as one of several defendants in two product liability lawsuits in federal court in Nevada and Mississippi involving PPA. The Nevada case is Deuel, David, et al. v. KV Pharmaceutical Company, Inc. The suit was filed on June 11, 2001. Discovery has been initiated in this case, and we currently have completed the basic fact discovery and depositions, however no discovery cut-off date has been assigned and there is presently no trial date. The Mississippi case is Virginia Madison, et al. v. Bayer Corporation, et al. We are one of several defendants named in the lawsuit. The suit was filed on December 23, 2002, but was not served on us until February 2003. The case was originally filed in the Circuit Court of Hinds County, Mississippi, and was removed to the United States District Court for the Southern District of Mississippi by co-defendant Bayer Corporation. The Plaintiffs have filed a motion to remand the case to the Circuit Court of Hinds County, Mississippi, which has caused the Court to enter a stay of all proceedings pending a resolution of the motion. So far, the Court has not ruled on the motion. Both the Nevada and Mississippi cases have been transferred to a Judicial Panel on Multi District Litigation for PPA claims sitting in the Western District of Washington. Each lawsuit alleges bodily injury, wrongful death, economic injury, punitive damages, loss of consortium and/or loss of services from the use of our distributed pharmaceuticals containing PPA that have since been discontinued and/or reformulated to exclude PPA. We believe that we have substantial defenses to these claims, though the ultimate outcome of these cases and the potential effect on us cannot be determined. We are being defended and indemnified in the Nevada PPA lawsuits by our products liability insurer subject to a reservation of rights. Our product liability coverage was obtained on a claims made basis and provides coverage for judgments, settlements and defense costs arising from product liability claims. However, such insurance may not be adequate to remove the risk from some or all product liability claims, including PPA claims, and is subject to the limitations described in the terms of the policies. Furthermore, our product liability coverage for PPA claims expired for claims made after June 15, 2002. Although we renewed our product liability coverage for a policy term of June 15, 2002 through June 15, 2003, that policy excludes future PPA claims in accordance with the standard industry exclusion. Consequently, as of June 15, 2002, we have provided for legal defense costs and indemnity payments involving PPA claims on a going forward basis, including the Mississippi lawsuit that was filed during the June 15, 2002 through June 15, 2003 policy period. Moreover, we may not be able to obtain product liability insurance in the future for PPA claims with adequate coverage limits at commercially reasonable prices for subsequent periods. From time to time in the future, we may be subject to further litigation resulting from products containing PPA that we formerly distributed. We intend to vigorously defend any claims that may be raised in the current and future litigations. From time to time, we become involved in various legal matters in addition to the above described matters, that we consider to be in the ordinary course of business. While we are not presently able to determine the potential liability, if any, related to such matters, we believe none of such matters, individually or in the aggregate, will have a material adverse effect on our financial position. 62 11. INCOME TAXES ------------ The fiscal 2003, 2002, and 2001 provisions were based on estimated Federal and state taxable income using the applicable statutory rates. The current and deferred Federal and state income tax provisions for fiscal years 2003, 2002 and 2001 are as follows:
2003 2002 2001 ---- ---- ---- PROVISION Current Federal............................... $21,524 $18,603 $10,072 State................................. 2,038 1,664 1,073 ------- ------- ------- 23,562 20,267 11,145 ------- ------- ------- Deferred Federal............................... (7,207) (2,199) 2,061 State................................. (884) (177) 233 ------- ------- ------- (8,091) (2,376) 2,294 ------- ------- ------- $15,471 $17,891 $13,439 ======= ======= =======
The reasons for the differences between the provision for income taxes and the expected Federal income taxes at the statutory rate are as follows:
2003 2002 2001 ---- ---- ---- Expected income tax expense................. $15,253 $17,274 $12,972 State income taxes, less Federal income tax benefit............... 750 967 849 Business credits............................ (370) (260) (142) Other ...................................... (162) (90) (240) ------- ------- ------- $15,471 $17,891 $13,439 ======= ======= =======
As of March 31, 2003 and 2002, the tax effect of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts are as follows:
2003 2002 -------------------------------- ------------------------------ CURRENT NON-CURRENT CURRENT NON-CURRENT Fixed asset basis differences........ $ - $(3,397) $ - $(2,126) Reserves for inventory and receivables....................... 7,776 - 4,376 - Vacation pay reserve................. 456 - 464 - Deferred compensation................ - 1,092 - 1,004 Amortization......................... - (1,108) - (818) Litigation reserve................... 6,056 - - - Other................................ 503 - 387 - ------- ------- ------ ------- Net deferred tax asset (liability) $14,791 $(3,413) $5,227 $(1,940) ======= ======= ====== =======
The Company paid income taxes of $22,088, $15,578 and $11,971 during the years ended March 31, 2003, 2002 and 2001, respectively. 63 12. EMPLOYEE BENEFITS ----------------- STOCK OPTION PLAN AND AGREEMENTS During fiscal 2002, the Board of Directors adopted the Company's 2001 Incentive Stock Option Plan (the 2001 Plan), which allows for the issuance of up to 3,750,000 shares of common stock. Prior to the approval of the 2001 Plan, the Company operated under the 1991 Incentive Stock Option Plan, as amended, which allowed for the issuance of up to 4,500,000 shares of common stock. Under the Company's stock option plans, options to acquire shares of common stock have been made available for grant to certain employees. Each option granted has an exercise price of not less than 100% of the market value of the common stock on the date of grant. The contractual life of each option is generally 10 years. The exercisability of the grants varies according to the individual options granted. In addition to the Stock Option Plan, the Company issues stock options periodically related to employment agreements with its executives and to non-employee directors. At March 31, 2003, options to purchase 244,150 shares of stock were outstanding pursuant to employment agreements and grants to non-employee directors. The following summary shows the transactions for the fiscal years 2003, 2002 and 2001 under option arrangements:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------- ------------------- AVERAGE AVERAGE NO. OF PRICE PER NO. OF PRICE PER SHARES SHARE SHARES SHARE ------ ----- ------ ----- Balance, March 31, 2000........... 3,087,645 $ 7.90 1,779,264 $ 7.10 Options granted................... 592,125 15.62 - - Options becoming exercisable...... - - 433,351 11.13 Options exercised................. (1,344,348) 7.15 (1,344,348) 7.15 Options canceled.................. (182,223) 10.47 (54,644) 9.01 ---------- ---------- Balance March 31, 2001............ 2,153,199 10.27 813,623 9.04 Options granted................... 362,000 20.44 - - Options becoming exercisable...... - - 385,356 12.79 Options exercised................. (188,703) 5.73 (188,703) 5.73 Options canceled.................. (194,110) 12.73 (53,105) 10.63 ---------- ---------- Balance March 31, 2002............ 2,132,386 12.18 957,171 11.11 Options granted................... 467,025 18.52 - - Options becoming exercisable...... - - 377,637 13.81 Options exercised................. (90,280) 7.89 (90,280) 7.89 Options canceled.................. (173,776) 17.51 (50,635) 16.45 ---------- ---------- Balance March 31, 2003............ 2,335,355 $13.22 1,193,893 $11.97 ========== ==========
The weighted-average fair value of options granted at market price was $3.27, $5.45 and $4.18 per share in fiscal 2003, 2002 and 2001, respectively. The weighted-average fair value of options granted with an exercise price exceeding market price on the date of grant was $0.21, $0.45 and $1.83 per share in fiscal 2003, 2002 and 2001, respectively. 64 The following table summarizes information about stock options outstanding at March 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------------- ------------------------------- RANGE OF NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED EXERCISE OUTSTANDING LIFE AVERAGE EXERCISABLE AVERAGE PRICES AT 3/31/03 REMAINING EXERCISE PRICE AT 3/31/03 EXERCISE PRICE ------ ---------- --------- -------------- ---------- -------------- $ 1.23 - $ 5.00 167,888 2 Years $ 3.24 110,968 $ 3.08 $ 5.01 - $ 9.00 252,713 4 Years $ 5.62 155,072 $ 5.57 $ 9.01 - $14.00 875,921 6 Years $11.01 513,616 $11.08 $14.01 - $21.00 818,363 7 Years $17.05 377,532 $17.24 $21.01 - $29.01 220,470 9 Years $24.09 36,705 $24.05
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 $445, $350 and $300 for fiscal 2003, 2002 and 2001, respectively. The Plan includes features as described under Section 401(k) of the Internal Revenue Code. The Company's contributions to the 401(k) investment funds are 50% of the first 7% of the salary contributed by each participant. Contributions of $1,185, $1,028 and $907 were made to the 401(k) investment funds in fiscal 2003, 2002 and 2001, 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 $231, $165 and $161 in fiscal 2003, 2002 and 2001, 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 $100,000 of each employee's covered medical claims. Included in accrued liabilities in the consolidated balance sheets as of March 31, 2003 and 2002 were $400 and $400 of accrued health insurance reserves, respectively, for claims incurred but not reported. For union employees, the Company participates in a fully funded insurance plan sponsored by the union. Total health and medical insurance expense for the two plans was $6,636, $5,255, and $4,088 in fiscal 2003, 2002 and 2001, respectively. 13. RELATED PARTY TRANSACTIONS -------------------------- The Company currently leases certain real property from an affiliated partnership of an officer and director of the Company. Lease payments made for this property during the years ended March 31, 2003, 2002 and 2001 totaled $269, $263 and $246, respectively. 14. EQUITY TRANSACTIONS ------------------- During July 2002, the Company completed a public offering of approximately 3.3 million shares of Class A common stock. Net proceeds to the Company were $72,380 after deducting underwriting discounts, commissions and offering expenses. 65 As of March 31, 2003 and 2002, the Company had 40,000 shares of 7% Cumulative Convertible Preferred Stock (par value $.01 per share) outstanding at a stated value of $25 per share. The preferred stock is non-voting with dividends payable quarterly. The preferred stock is redeemable at its stated value. Each share of preferred stock is convertible into Class A Common Stock at a conversion price of $4.45 per share. The preferred stock has a liquidation preference of $25 per share plus all accrued but unpaid dividends prior to any liquidation distributions to holders of Class A or Class B common stock. No dividends may be paid on Class A or Class B common stock unless all dividends on the Cumulative Convertible Preferred Stock have been declared and paid. Undeclared and unaccrued cumulative preferred dividends were $366, or $9.14 per share, at both March 31, 2003 and 2002. Also, under the terms of its credit agreement, the Company may not pay cash dividends in excess of 25% of the prior fiscal year's consolidated net income. Holders of Class A common stock are entitled to receive dividends per share equal to 120% of the dividends per share paid on the Class B Common Stock and have one-twentieth vote per share in the election of directors and on other matters. Under the terms of the Company's current loan agreement (see Note 9), the Company has limitations on paying dividends, except in stock, on its Class A and Class B common stock. Payment of dividends may also be restricted under Delaware Corporation law. On August 18, 2000, the Company's Board of Directors declared a three-for-two stock split in the form of a 50% stock dividend of its common stock to shareholders of record on August 28, 2000, payable on September 7, 2000. 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. 66 15. EARNINGS PER SHARE ------------------ The following table sets forth the computation of basic and diluted earnings per share:
2003 2002 2001 ---- ---- ---- Numerator: Net income(1)..................................... $28,110 $31,464 $23,625 Preferred stock dividends......................... (70) (70) (420) ------- ------- ------- Numerator for basic earnings per share - income available to common shareholders................................... 28,040 31,394 23,205 Effect of dilutive securities: Preferred stock dividends...................... 70 70 420 ------- ------- ------- Numerator for diluted earnings per share - income available to common shareholders after assumed conversions......... $28,110 $31,464 $23,625 ======= ======= ======= Denominator: Denominator for basic earnings per share -- weighted-average shares............... 33,200 30,408 28,981 ------ ------ ------ Effect of dilutive securities: Employee stock options......................... 949 1,258 1,662 Convertible preferred stock.................... 225 499 1,350 ------- ------- ------- Dilutive potential common shares.................. 1,174 1,757 3,012 ------- ------- ------- Denominator for diluted earnings per share -- adjusted weighted-average shares and assumed conversions............................ 34,374 32,165 31,993 ======= ======= ======= Basic earnings per share(2) ...................... $ 0.84 $ 1.03 $ 0.80 ======= ======= ======= Diluted earnings per share(2)(3) ................. $ 0.82 $ 0.98 $ 0.74 ======= ======= ======= - ------------------------- (1) Net income for the year ended March 31, 2003 includes a reserve of $16,500 for potential damages associated with a lawsuit (see Note 10). The impact of the litigation reserve, net of the applicable tax effect, was $10,444. (2) 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. (3) Employee stock options to purchase 170,490, 27,550 and 5,750 shares of Class A common stock at March 31, 2003, 2002 and 2001, respectively, are not presented because these options are anti-dilutive. The exercise prices of these options exceeded the average market prices of the shares under option in each respective period.
67 16. QUARTERLY FINANCIAL RESULTS (UNAUDITED) ---------------------------------------
1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER YEAR ------- ------- ------- ------- ---- FISCAL 2003 - ----------- Net sales.................................. $49,227 $60,482 $61,929 $73,358 $244,996 Gross profit............................... 30,149 37,001 38,201 45,118 150,469 Pretax income (loss)(a).................... 10,621 (2,220) 15,555 19,625 43,581 Net income (loss)(a)....................... 6,723 (1,405) 10,146 12,646 28,110 Earnings (loss) per share - basic.......... 0.22 (0.04) 0.30 0.37 0.84 Earnings (loss) per share - diluted........ 0.21 (0.04) 0.29 0.36 0.82 FISCAL 2002 - ----------- Net sales.................................. $45,220 $50,658 $51,553 $56,674 $204,105 Gross profit............................... 27,645 29,408 32,247 34,402 123,702 Pretax income.............................. 8,883 11,027 12,782 16,663 49,355 Net income................................. 5,663 7,030 8,148 10,623 31,464 Earnings per share - basic................. 0.19 0.23 0.26 0.35 1.03 Earnings per share - diluted............... 0.18 0.22 0.25 0.33 0.98 NOTE: ---- (a) Pretax income (loss), for the three-months ended September 30, 2002 and the year ended March 31, 2003 includes a reserve of $16,500 for potential damages associated with a lawsuit (see Note 10). The impact of the litigation reserve, net of applicable income taxes was to reduce net income for the three months ended September 30, 2002 and the year ended March 31, 2003 by $10,444.
17. SEGMENT REPORTING ----------------- The reportable operating segments of the Company are branded products, specialty generics and specialty materials. The operating segments are distinguished by differences in products, marketing and regulatory approval. Segment profits are measured based on income before taxes and are determined based on each segment's direct revenues and expenses. The majority of research and development expense, corporate general and administrative expenses, amortization and interest expense, as well as interest and other income, are not allocated to segments, but included in the "all other" classification. Identifiable assets for the three reportable operating segments primarily include receivables, inventory, and property and equipment. For the "all other" classification, identifiable assets consist of cash and cash equivalents, corporate property and equipment, intangible and other assets and all income tax related assets. Accounting policies of the segments are the same as the Company's consolidated accounting policies. 68 The following represents information for the Company's reportable operating segments for fiscal 2003, 2002 and 2001.
FISCAL YEAR ENDED BRANDED SPECIALTY SPECIALTY ALL MARCH 31 PRODUCTS GENERICS MATERIALS OTHER ELIMINATIONS CONSOLIDATED --------- -------- -------- --------- ----- ------------ ------------ - --------------------------------------------------------------------------------------------------------------------------------- Net revenues 2003 $43,677 $179,724 $17,395 $ 4,200 $ - $244,996 2002 40,424 141,007 19,557 3,117 - 204,105 2001 25,206 132,154 17,088 3,319 - 177,767 - --------------------------------------------------------------------------------------------------------------------------------- Segment profit (loss) (a) 2003 8,361 97,339 1,692 (63,811) - 43,581 2002 7,222 74,389 3,684 (35,940) - 49,355 2001 (6,490) 71,779 4,333 (32,558) - 37,064 - --------------------------------------------------------------------------------------------------------------------------------- Identifiable assets 2003 7,819 69,303 8,797 267,907 (1,158) 352,668 2002 12,555 58,618 8,774 116,403 (1,158) 195,192 2001 9,497 31,241 8,278 103,559 (1,158) 151,417 - --------------------------------------------------------------------------------------------------------------------------------- Property and 2003 634 116 143 15,220 - 16,113 equipment additions 2002 707 120 391 7,266 - 8,484 2001 226 805 91 6,935 - 8,057 - --------------------------------------------------------------------------------------------------------------------------------- Depreciation and 2003 260 55 164 7,276 - 7,755 Amortization 2002 74 79 156 6,151 - 6,460 2001 82 180 152 5,310 - 5,724 - --------------------------------------------------------------------------------------------------------------------------------- (a) In the "all other" classification, segment profit (loss) for the year ended March 31, 2003 includes a litigation reserve of $16,500 for potential damages associated with a lawsuit (see Note 10).
Consolidated revenues are principally derived from customers in North America and substantially all property and equipment is located in St. Louis, Missouri. 18. SUBSEQUENT EVENTS ----------------- PURCHASE OF BUILDING On April 28, 2003, the Company completed the purchase of an office building for $8,800. The facility consists of approximately 275,000 square feet of office, production, distribution and warehouse space. The purchase of the building was financed by a term loan secured by the property. The building mortgage bears interest at 5.30% and requires monthly principal payments of $49 plus interest through March 2008. The remaining principal balance plus any unpaid interest is due in April 2008. SALE OF $200 MILLION CONTINGENT CONVERTIBLE SUBORDINATED NOTES On May 16, 2003, the Company issued $200,000 of 2.50% Contingent Convertible Notes due May 16, 2033 (the Notes). Approximately $50,000 of the proceeds from the sale of these Notes was used to repurchase shares of Class A common stock, with the remainder to be used for potential acquisitions and general corporate purposes. The Notes bear interest at a rate of 2.50% per annum, which is payable on May 16 and November 16 of each year, beginning November 16, 2003. The Company also will pay contingent interest at a rate equal to 0.5% per annum during any six-month period from May 16 to November 15 and from November 16 to May 15, with the initial six-month period commencing May 16, 2006, if the average trading price of the Notes reaches certain thresholds. 69 The Company may redeem some or all of the Notes at any time on or after May 21, 2006, at a redemption price, payable in cash, of 100% of the principal amount of the Notes, plus accrued and unpaid interest, including contingent interest, if any. Holders of the Notes may require the Company to repurchase all or a portion of their Notes on May 16, 2008, 2013, 2018, 2023 and 2028 and upon a change in control, as defined in the indenture governing the Notes, at a purchase price, payable in cash, of 100% of the principal amount of the Notes, plus accrued and unpaid interest, including contingent interest, if any. The Notes are convertible, at the holders' option, into shares of the Company's Class A common stock prior to the maturity date in the following circumstances: o during any quarter commencing after June 30, 2003, if the closing sale price of the Company's Class A common stock over a specified number of trading days during the previous quarter is more than 120% of the conversion price of the Notes on the last trading day of the previous quarter. The Notes are initially convertible at a conversion price of $34.51 per share, which is equal to a conversion rate of approximately 28.9771 shares per $1,000 principal amount of Notes; o if the Company has called the Notes for redemption; o during the five trading day period immediately following any nine consecutive day trading period in which the trading price of the Notes per $1,000 principal amount for each day of such period was less than 95% of the product of the closing sale price of our Class A common stock on that day multiplied by the number of shares of our Class A common stock issuable upon conversion of $1,000 principal amount of the Notes; or o upon the occurrence of specified corporate transactions. The Notes, which are unsecured, do not contain any restrictions on the payment of dividends, the incurrence of additional indebtedness or the repurchase of the Company's securities, and do not contain any financial covenants. The Company incurred approximately $6,000 of fees and other origination costs related to the issuance of the Notes. These costs will be amortized over a five-year period. As a result of the significant increase in debt related to the $200.0 million Notes issuance, the $60 million revolving line of credit the Company has with a bank was changed (see Note 9). The credit agreement, which previously included covenants that impose minimum levels of earnings before interest, taxes, depreciation and amortization, a maximum funded debt ratio, and a limit on capital expenditures and dividend payments, was expanded to include a minimum fixed charge ratio and a maximum senior leverage ratio. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- The information contained under the caption "INFORMATION CONCERNING NOMINEES AND DIRECTORS CONTINUING IN OFFICE" in the Company's definitive proxy statement to be filed pursuant to Regulation 14(a) for its 2003 Annual Meeting of Shareholders, which involves the election of directors, is incorporated herein by this reference. Also see Item 4(a) of Part I hereof. 70 ITEM 11. EXECUTIVE COMPENSATION ---------------------- The information contained under the captions "EXECUTIVE COMPENSATION" and "INFORMATION AS TO STOCK OPTIONS" in the Company's definitive proxy statement to be filed pursuant to Regulation 14(a) for its 2003 Annual Meeting of Shareholders is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- The information contained under the caption "SECURITY OWNERSHIP OF PRINCIPAL HOLDERS AND MANAGEMENT" in the Company's definitive proxy statement to be filed pursuant to Regulation 14(a) for its 2003 Annual Meeting of Shareholders is incorporated herein by this reference. EQUITY COMPENSATION PLAN INFORMATION The following information regarding compensation plans of the Company is furnished as of March 31, 2003, the end of the Company's most recently completed fiscal year. 71 EQUITY COMPENSATION PLAN INFORMATION REGARDING CLASS A COMMON STOCK - ----------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES REMAINING AVAILABLE FOR NUMBER OF SECURITIES TO BE FUTURE ISSUANCE UNDER ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE EQUITY COMPENSATION PLANS OUTSTANDING OPTIONS, PRICE OF OUTSTANDING (EXCLUDING SECURITIES WARRANTS AND RIGHTS OPTIONS, WARRANTS AND RIGHTS REFLECTED IN COLUMN (A)) ------------------- ---------------------------- ------------------------ PLAN CATEGORY (A) (B) (C) Equity compensation plans approved by security holders(1) 1,737,332 $13.28 1,945,175 Equity compensation plans not approved by security holders(2) 89,750 $15.58 N/A --------- Total 1,827,082 $13.39 1,945,175 ========= ========= EQUITY COMPENSATION PLAN INFORMATION REGARDING CLASS B COMMON STOCK - ---------------------------------------------------------------------------------------------------------------------- NUMBER OF SECURITIES REMAINING AVAILABLE FOR NUMBER OF SECURITIES TO BE FUTURE ISSUANCE UNDER ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE EQUITY COMPENSATION PLANS OUTSTANDING OPTIONS, PRICE OF OUTSTANDING (EXCLUDING SECURITIES WARRANTS AND RIGHTS OPTIONS, WARRANTS AND RIGHTS REFLECTED IN COLUMN (A)) ------------------- ---------------------------- ------------------------ PLAN CATEGORY (A) (B) (C) Equity compensation plans approved by security holders(1) 353,873 $12.51 1,261,000 Equity compensation plans not approved by security holders(2) 154,400 $13.72 N/A ------- Total 508,273 $12.87 1,261,000 ======= ========= (1) Consists of the Company's 2001 Incentive Stock Option Plan. See Note 12 of Notes to Consolidated Financial Statements. (2) Consists of options that the Vice Chairman elected to take in lieu of earned incentive cash compensation and options granted to non-employee members of the Board of Directors.
72 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- The information contained under the caption "TRANSACTIONS WITH ISSUER" in its definitive proxy statement to be filed pursuant to Regulation 14(a) for its 2003 Annual Meeting of Shareholders is incorporated herein by this reference. ITEM 14. CONTROLS AND PROCEDURES ----------------------- The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective. There have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date we completed our evaluation. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (a) 1. Financial Statements: Page The following consolidated financial statements of the Company are included in Part II, Item 8: Report of Independent Certified Public Accountants............. 45 Consolidated Balance Sheets as of March 31, 2003 and 2002...... 46 Consolidated Statements of Income for the Years Ended March 31, 2003, 2002 and 2001................................ 47 Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 2003, 2002 and 2001.......................... 48 Consolidated Statements of Cash Flows for the Years Ended March 31, 2003, 2002 and 2001................................ 49 73 Notes to Financial Statements.................................. 50 2. Financial Statement Schedules: Report of Independent Certified Public Accountants regarding Financial Statement Schedule................................... 75 Schedule II - Valuation and Qualifying Accounts................ 76 3. Exhibits: See Exhibit Index on pages 80 through 86 of this Report. Management contracts and compensatory plans are designated on the Exhibit Index. (b) A report on Form 8-K was filed by the Company on February 4, 2003 for a Regulation FD Disclosure. 74 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Stockholders and Board of Directors of KV Pharmaceutical Company The audits referred to in our report dated May 23, 2003 relating to the consolidated financial statements of K-V Pharmaceutical Company, which are included in Item 8 of this Form 10-K, included the audit of the accompanying financial statement schedule. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based upon our audits. In our opinion such financial statement schedule presents fairly, in all material respects, the information set forth therein. /s/ BDO SEIDMAN, LLP Chicago, Illinois May 23, 2003 75 2. Financial Statement Schedules: SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE AT CHARGED TO AMOUNTS BALANCE BEGINNING COSTS AND CHARGED TO AT END OF YEAR EXPENSES RESERVES OF YEAR ------- -------- -------- ------- (in thousands) Year Ended March 31, 2001: Allowance for doubtful accounts............ $ 438 $ 13 $ 3 $ 448 Inventory obsolescence..................... 1,062 418 893 587 ------------- ------------- ------------- -------------- $ 1,500 $ 431 $ 896 $ 1,035 ============= ============= ============= ============== Year Ended March 31, 2002: Allowance for doubtful accounts............ $ 448 $ 113 $ 158 $ 403 Inventory obsolescence..................... 587 2,215 1,694 1,108 ------------- ------------- ------------- -------------- $ 1,035 $ 2,328 $ 1,852 $ 1,511 ============= ============= ============= ============== Year Ended March 31, 2003: Allowance for doubtful accounts............ $ 403 $ (81) $ (100) $ 422 Inventory obsolescence..................... 1,108 2,053 2,158 1,003 ------------- ------------- ------------- -------------- $ 1,511 $ 1,972 $ 2,058 $ 1,425 ============= ============= ============= ==============
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. 76 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KV PHARMACEUTICAL COMPANY Date: June 27, 2003 By /s/ Marc S. Hermelin ----------------------------------------- Vice Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: June 27, 2003 By /s/ Gerald R. Mitchell ----------------------------------------- Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the dates indicated by the following persons on behalf of the Company and in their capacities as members of the Board of Directors of the Company: Date: June 27, 2003 By /s/ Marc S. Hermelin ----------------------------------------- Marc S. Hermelin Date: June 27, 2003 By /s/ Victor M. Hermelin ----------------------------------------- Victor M. Hermelin Date: June 27, 2003 By /s/ Norman D. Schellenger ----------------------------------------- Norman D. Schellenger Date: June 27, 2003 By /s/ Alan G. Johnson ----------------------------------------- Alan G. Johnson Date: June 27, 2003 By /s/ Kevin S. Carlie ----------------------------------------- Kevin S. Carlie Date: June 27, 2003 By /s/ John P. Isakson ----------------------------------------- John P. Isakson 77 CERTIFICATIONS I, Marc S. Hermelin, Vice Chairman and Chief Executive Officer, certify that: 1. I have reviewed this Annual Report on Form 10-K of KV Pharmaceutical Company; 2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the "Evaluation Date"); and c) presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this Annual Report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 27, 2003 /s/ MARC S. HERMELIN ------------------------ Marc S. Hermelin Vice Chairman and Chief Executive Officer (Principal Executive Officer) 78 I, Gerald R. Mitchell, Vice President, Treasurer and Chief Financial Officer, certify that: 1. I have reviewed this Annual Report on Form 10-K of KV Pharmaceutical Company; 2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the "Evaluation Date"); and c) presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this Annual Report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 27, 2003 /s/ GERALD R. MITCHELL -------------------------- Gerald R. Mitchell Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) 79 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 3(a) The Company's Certificate of Incorporation, which was filed as Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended March 31, 1981, is incorporated herein by this reference. 3(b) Certificate of Amendment to Certificate of Incorporation of the Company, effective March 7, 1983, which was filed as Exhibit 3(c) to the Company's Annual Report on Form 10-K for the year ended March 31, 1983, is incorporated herein by this reference. 3(c) Certificate of Amendment to Certificate of Incorporation of the Company, effective June 9, 1987, which was filed as Exhibit 3(d) to the Company's Annual Report on Form 10-K for the year ended March 31, 1988, 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, effective July 17, 1986, 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, effective December 23, 1991, 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) Certificate of Amendment to Certificate of Incorporation of the Company, effective September 3, 1998, which was filed as Exhibit 4(g) to the Company's Registration Statement on Form S-3 (Registration Statement No. 333-87402), filed May 1, 2002, is incorporated herein by this reference. 3(h) Bylaws of the Company, as amended through November 18, 1982, which was filed as Exhibit 3(e) to the Company's Annual Report on Form 10-K for the year ended March 31, 1993, is incorporated herein by this reference. 3(i) Amendment to Bylaws of the Company, effective July 2, 1984, which was filed as Exhibit 4(i) to the Company's Registration Statement on Form S-3 (Registration Statement No. 333-87402), filed May 1, 2002, is incorporated herein by this reference. 3(j) Amendment to Bylaws of the Company, effective December 4, 1986, which was filed as Exhibit 4(j) to the Company's Registration Statement on Form S-3 (Registration Statement No. 333-87402), filed May 1, 2002, is incorporated herein by this reference. 3(k) Amendment to Bylaws of the Company effective March 17, 1992, which was filed as Exhibit 4(k) to the Company's Registration Statement on Form S-3 (Registration Statement No. 333-87402), filed May 1, 2002, is incorporated herein by this reference. 80 3(l) Amendment to Bylaws of the Company effective November 18, 1992, which was filed as Exhibit 4(l) to the Company's Registration Statement on Form S-3 (Registration Statement No. 333-87402), filed May 1, 2002, is incorporated herein by this reference. 3(m) Amendment to Bylaws of the Company, effective December 30, 1993, 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. 3(n) Amendment to Bylaws of the Company, effective September 24, 2002, which was filed as Exhibit 4(n) to the Company's Registration Statement on Form S-3 (Registration Statement No. 333-106294), filed June 19, 2003, is incorporated herein by this reference. 4(a) Certificate of Designation of Rights and Preferences of 7% Cumulative Convertible preferred stock of the Company, effective June 9, 1987, and related Certificate of Correction, dated June 17, 1987, which was filed as Exhibit 4(f) to the Company's Annual Report on Form 10-K for the year ended March 31, 1987, is incorporated herein by this reference. 4(b) Loan Agreement dated as of November 1, 1989, with the Industrial Development Authority of the County of St. Louis, Missouri, regarding private activity refunding and revenue bonds issued by such Authority, including form of Promissory Note executed in connection therewith, which was filed as Exhibit 4(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1989, is incorporated herein by this reference. 4(c) Loan Agreement dated June 18, 1997 between the Company and its subsidiaries and LaSalle National Bank ("LaSalle"), which was filed as Exhibit 4(i) to the Company's Annual Report on Form 10-K for the year ended March 31, 1997, is incorporated herein by this reference. 4(d) Revolving Note, dated June 18, 1997, by the Company and its subsidiaries in favor of LaSalle, which was filed as Exhibit 4(j) to the Company's Annual Report on Form 10-K for the year ended March 31, 1997, is incorporated herein by this reference. 4(e) Term Note, dated June 24, 1997, by the Company and its subsidiaries in favor of LaSalle, which was filed as Exhibit 4(k) to the Company's Annual Report on Form 10-K for the year ended March 31, 1997, is incorporated herein by this reference. 4(f) Reimbursement Agreement dated as of October 16, 1997, between the Company and LaSalle, which was filed as Exhibit 4(f) to the Company's Annual Report on Form 10-K for the year ended March 31, 1998, is incorporated herein by this reference. 4(g) Deed of Trust and Security Agreement dated as of October 16, 1997, between the Company and LaSalle, which was filed as Exhibit 4(g) to the Company's Annual Report on Form 10-K for the year ended March 31, 1998, is incorporated herein by this reference. 4(h) First Amendment, dated as of October 28, 1998, to Loan Agreement between the Company and its subsidiaries and LaSalle, which was filed as Exhibit 4(h) to the Company's Annual Report on Form 10-K for the year ended March 31, 1999, is incorporated herein by this reference. 4(i) Second Amendment, dated as of March 11, 1999, to Loan Agreement between the Company and its subsidiaries and LaSalle, which was filed as Exhibit 4(i) to the Company's Annual Report on Form 10-K for the year ended March 31, 1999, is incorporated herein by this reference. 81 4(j) Third Amendment, dated June 22, 1999, to Loan Agreement between the Company and its subsidiaries and LaSalle, which was filed as Exhibit 4(j) to the Company's Annual Report on Form 10-K for the year ended March 31, 2000, is incorporated herein by this reference. 4(k) Fourth Amendment, dated December 17, 1999, to Loan Agreement between the Company and its subsidiaries and LaSalle, which was filed as Exhibit 4(k) to the Company's Annual Report on Form 10-K for the year ended March 31, 2000, is incorporated herein by this reference. 4(l) Fifth Amendment, dated December 21, 2001, to Loan Agreement between the Company and its subsidiaries and LaSalle, which was filed as Exhibit 4(l) to the Company's Annual Report on Form 10-K for the year ended March 31, 2002, is incorporated herein by this reference. 4(m) Sixth Amendment, dated December 20, 2002, to Loan Agreement between the Company and its subsidiaries and LaSalle, filed herewith. 4(n) Seventh Amendment, dated April 28, 2003, to Loan Agreement between the Company and its subsidiaries and LaSalle, filed herewith. 4(0) Indenture dated as of May 16, 2003, by and between the Company and Deutsche Bank Trust Company Americas, filed on May 21, 2003, as Exhibit 4.1 to the Company's Current Report on Form 8-K, is incorporated herein by this reference. 4(p) Registration Rights Agreement dated as of May 16, 2003, by and between the Company and Deutsche Bank Securities, Inc., as representative of the several Purchasers, filed on May 21, 2003 as Exhibit 4.2 to the Company's Current Report on Form 8-K, is incorporated herein by this reference. 10(a)* Stock Option Agreement between the Company and Marc S. Hermelin, Vice Chairman and Chief Executive Officer, dated February 18, 1986, is incorporated herein by this reference. 10(b)* First Amendment to and Restatement of the KV Pharmaceutical 1981 Employee Incentive Stock Option Plan, dated March 9, 1987 (the "Restated 1981 Option Plan"), which as filed as Exhibit 10(t) to the Company's Annual Report on Form 10-K for the year ended March 31, 1988, is incorporated herein by this reference. 10(c)* Second Amendment to the Restated 1981 Option Plan, dated June 12, 1987, which was filed as Exhibit 10(u) to the Company's Annual Report on Form 10-K for the year ended March 31, 1988, is incorporated herein by this reference. 10(d)* Revised Form of Stock Option Agreement, effective June 12, 1987, for the Restated 1981 Option Plan, which was filed as Exhibit 10(v) to the Company's Annual Report on Form 10-K for the year ended March 31, 1988, is incorporated herein by this reference. 10(e)* Consulting Agreement between the Company and Victor M. Hermelin, Chairman of the Board, dated October 30, 1978, as amended October 30, 1982, and Employment Agreement dated February 20, 1974, referred to therein (which was filed as Exhibit 10(m) to the Company's Annual Report on Form 10-K for the year ended March 31, 1983) and subsequent Amendments dated as of August 12, 1986, which was filed as Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended March 31, 1987, and dated as of September 15, 1987 (which was filed as Exhibit 10(s) to the Company's Annual Report on Form 10-K for the year ended March 31, 1988), and dated October 25, 1988 (which was filed as Exhibit 10(n) to the Company's Annual Report on Form 10-K for the year ended March 31, 1989), and dated October 30, 1989 (which was filed as Exhibit 10(n) to the Company's Annual Report on Form 10-K for the year ended March 31, 1990), and dated October 30, 1990 (which was filed as Exhibit 10(n) to the Company's Annual Report on Form 10-K for the year ended March 31, 1991), and dated as of 82 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)* 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(n)* 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(o)* 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(p)* 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. 83 10(q)* 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(r)* 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(s)* Stock Option Agreement dated as of November 6, 1996, granting a stock option to Alan G. Johnson, filed herewith. 10(t)* 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(u)* Agreement between the Company and Marc S. Hermelin, Vice Chairman, dated December 16, 1996, with supplemental letter attached, which was filed as Exhibit 10(z) to the Company's Annual Report on Form 10-K for the year ended March 31, 1997, is incorporated herein by this reference. 10(v) 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(w)* Stock Option Agreement dated as of January 3, 1997, granting a stock option to Marc S. Hermelin, which was filed as Exhibit 10(bb) to the Company's Annual Report on Form 10-K for the year ended March 31, 1999, is incorporated herein by this reference. 10(x)* Stock Option Agreement dated as of May 15, 1997, granting a stock option to Marc S. Hermelin, which was filed as Exhibit 10(cc) to the Company's Annual Report on Form 10-K for the year ended March 31, 1999, is incorporated herein by this reference. 10(y) Asset Purchase Agreement by and between K-V Pharmaceutical Company and American Home Products Corporation, acting through its Wyeth-Ayerst Laboratories division, dated as of February 11, 1999, which was filed as Exhibit 2.1 to the Company's Report on Form 8-K filed April 5, 1999, is incorporated herein by this reference. 10(z)* Amendment, dated as of October 30, 1998, to Employment Agreement between the Company and Marc S. Hermelin, which was filed as Exhibit 10(ee) to the Company's Annual Report on Form 10-K for the year ended March 31, 1999, is incorporated herein by this reference. 10(aa) Exclusive License Agreement, dated as of April 1, 1999 between Victor M. Hermelin as licenser and the Company as licensee, which was filed as Exhibit 10(ff) to the Company's Annual Report on Form 10-K for the year ended March 31, 1999 is incorporated herein by this reference. 10(bb)* Stock Option Agreement dated as of March 31, 1999, granting a stock option to Victor M. Hermelin, which was filed as Exhibit 10(aa) to the Company's Annual Report on Form 10-K for the year ended March 31, 2001, is incorporated by this reference. 10(cc)* Stock Option Agreement dated as of March 31, 1999, granting a stock option to Norman D. Schellenger, filed herewith. 10(dd)* Stock Option Agreement dated as of April 1, 1999, granting a stock option to Marc S. Hermelin, which was filed as Exhibit 10(gg) to the Company's Annual Report on Form 10-K for the year ended March 31, 2000, is incorporated by this reference. 84 10(ee)* Stock Option Agreement dated as of August 16, 1999, granting a stock option to Marc S. Hermelin, which was filed as Exhibit 10 (hh) to the Company's Annual Report on Form 10-K for the year ended March 31, 2000, is incorporated by this reference. 10(ff)* Stock Option Agreement dated as of October 13, 1999, granting a stock option to Alan G. Johnson, filed herewith. 10(gg)* Stock Option Agreement dated as of October 13, 1999, granting a stock option to Alan G. Johnson, filed herewith. 10(hh)* Stock Option Agreement dated as of October 13, 1999, granting a stock option to Alan G. Johnson, filed herewith. 10(ii)* Stock Option Agreement dated as of October 13, 1999, granting a stock option to Alan G. Johnson, filed herewith. 10(jj)* Amendment, dated December 2, 1999, to Employment Agreement between the Company and Marc S. Hermelin, Vice-Chairman, which was filed as Exhibit 10(ii) to the Company's Annual Report on Form 10-K for the year ended March 31, 2000, is incorporated by this reference. 10(kk)* Employment Agreement between the Company and Alan G. Johnson, Senior Vice-President, Strategic Planning and Corporate Growth, dated September 27, 1999, which was filed as Exhibit 10(jj) to the Company's Annual Report on Form 10-K for the year ended March 31, 2000, is incorporated by this reference. 10(ll)* Consulting Agreement, dated as of May 1, 1999, between the Company and Victor M. Hermelin, Chairman, which was filed as Exhibit 10(kk) to the Company's Annual Report on Form 10-K for the year ended March 31, 2000, is incorporated by this reference. 10(mm)* Stock Option Agreement dated as of June 1, 2000, granting a stock option to Marc S. Hermelin, which was filed as Exhibit 10(gg) to the Company's Annual Report on Form 10-K for the year ended March 31, 2001, is incorporated by this reference. 10(nn)* Stock Option Agreement dated as of June 1, 2000, granting a stock option to Marc S. Hermelin, which was filed as Exhibit 10(hh) to the Company's Annual Report on Form 10-K for the year ended March 31, 2001, is incorporated by this reference. 10(oo)* Stock Option Agreement dated as of April 9, 2001, granting a stock option to Kevin S. Carlie, which was filed as Exhibit 10(ii) to the Company's Annual Report on Form 10-K for the year ended March 31, 2002, is incorporated herein by this reference. 10(pp)* Stock Option Agreement dated as of April 9, 2001, granting a stock option to Marc S. Hermelin, which was filed as Exhibit 10(jj) to the Company's Annual Report on Form 10-K for the year ended March 31, 2002, is incorporated herein by this reference. 10(qq)* Stock Option Agreement dated as of April 9, 2001, granting a stock option to Marc S. Hermelin, which was filed as Exhibit 10(kk) to the Company's Annual Report on Form 10-K for the year ended March 31, 2002, is incorporated herein by this reference. 10(rr)* Stock Option Agreement dated as of July 26, 2002, granting a stock option to Marc S. Hermelin, filed herewith. 10(ss)* Stock Option Agreement dated as of October 21, 2002, granting a stock option to John P. Isakson, filed herewith. 10(tt) License Agreement by and between the Company and FemmePharma, Inc., dated as of April 18, 2002, filed herewith. 10(uu) Stock Purchase Agreement by and between the Company and FemmePharma, Inc., dated as of April 18, 2002, filed herewith. 10(vv) Product Acquisition Agreement by and between the Company and Schwarz Pharma dated as of March 31, 2003, filed herewith. 10(ww) Product Acquisition Agreement by and between the Company and Altana Inc. dated as of March 31, 2003, filed herewith. 10(xx)* Amendment, dated as of March 31, 2003, to Consulting Agreement between the Company and Victor M. Hermelin, which was filed as Exhibit 10(kk) to the Company's Annual Report on Form 10-K for the year ended March 31, 2000, filed herewith. 10(yy)* Amendment, dated as of April 3, 2003, to Employment Agreement between the Company and Victor M. Hermelin, filed herewith. 85 21 List of Subsidiaries, filed herewith. 23 Consent of BDO Seidman, LLP, filed herewith. 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. *Management contract or compensation plan. 86 EX-4.(M) 3 exh4pm.txt Exhibit 4(m) SIXTH AMENDMENT TO LOAN AGREEMENT --------------------------------- THIS SIXTH AMENDMENT TO LOAN AGREEMENT (this "Amendment") is entered into as of the 20th day of December, 2002 by and among LaSalle Bank National Association, a national banking association ("Bank"), and each of K-V Pharmaceutical Company, a Delaware corporation ("K-V"), Particle Dynamics, Inc., a New York corporation ("PDI"), ETHEX Corporation, a Missouri corporation ("ETHEX"), and THER-RX Corporation, a Missouri corporation ("THER-RX"), jointly and severally (K-V, PDI, ETHEX and THER-RX are collectively referred to as the "Borrowers"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Bank and the Borrowers are party to that certain Loan Agreement dated as of June 18, 1997, as amended by that certain First Amendment to Loan Agreement dated as of October 28, 1998, that certain Second Amendment to Loan Agreement dated as of March 11, 1999, that certain Third Amendment to Loan Agreement dated as of June 22, 1999, that certain Fourth Amendment to Loan Agreement dated as of December 17, 1999 and that certain Fifth Amendment to Loan Agreement dated as of December 21, 2001 (collectively, the "Agreement"); and WHEREAS, Bank and the Borrowers desire to further amend the Agreement in accordance with this Amendment. NOW, THEREFORE, for and in consideration of the premises and mutual agreements herein contained and for the purposes of setting forth the terms and conditions of this Amendment, the parties, intending to be bound, hereby agree as follows: 1. Incorporation of the Agreement. All capitalized terms which are ------------------------------ not defined hereunder shall have the same meanings as set forth in the Agreement, and the Agreement, to the extent not inconsistent with this Amendment, is incorporated herein by this reference as though the same were set forth in its entirety. To the extent any terms and provisions of the Agreement are inconsistent with the amendments set forth in Paragraph 2 ----------- below, such terms and provisions shall be deemed superseded hereby. Except as specifically set forth herein, the Agreement shall remain in full force and effect and its provisions shall be binding on the parties hereto. 2. Amendment of the Agreement. Borrowers and Bank hereby agree to -------------------------- amend the Agreement as follows: (a) The definitions of the terms "Assignment of Rents", "Fixed ------------------- ----- Rate", "Mortgages", "Supplemental Credit Maturity Date", "Supplemental - ---- --------- --------------------------------- ------------ Note", "Term Loan Maturity Date", and "Term Note B" appearing in Paragraph - ---- ----------------------- ----------- --------- 1.1 are hereby amended and restated as follows: - --- "Assignment of Rents" means those certain Assignments of Rents and ------------------- Leases between K-V and Bank (a) in the case of the Metro Court Properties, each dated as of June 24, 1997, as amended by those certain First Amendments to Assignment of Rents and Leases dated as of December 21, 2001 and (b) in the case of the Lakefront Drive Property, dated as of March 11, 1999, as amended by that certain First Amendment to Assignment of Rents and Leases dated as of December 20, 2002, as each of the same may be further amended, modified or restated from time to time. "Fixed Rate" means (a) seven and 57/100 percent (7.57%) with ---------- respect to Term Note A and (b) six and 27/100 percent of (6.27%) with respect to Term Note B. "Mortgages" means (a) for each of the Metro Court Properties, --------- those certain Missouri Future Advance Deeds of Trust and Security Agreements made by K-V in favor of Bank dated as of June 24, 1997, as amended by those certain First Amendments to Missouri Future Advance Deeds of Trust and Security Agreements dated as of December 21, 2001, and (b) for the Lakefront Drive Property, that certain Missouri Future Advance Deed of Trust and Security Agreement dated as of March 11, 1999, as amended by that certain First Amendment to Missouri Future Advance Deed of Trust and Security Agreement dated as of December 20, 2002, as each of the same may be further amended, restated or modified from time to time. "Supplemental Credit Maturity Date" means December 20, 2003. --------------------------------- "Supplemental Note" means that certain Substitute Supplemental ----------------- Note dated as of December 20, 2002 made by Borrower in favor of Bank in the maximum aggregate principal amount of Twenty Million Dollars ($20,000,000), as the same may be amended, modified or supplemented from time to time, and together with any renewals thereof or exchanges or substitutes therefor. "Term Loan Maturity Date" means: (i) with respect to Term Loan A, ----------------------- the earlier to occur of (A) ninety (90) days after Bank has indicated in writing to K-V that it is unwilling to renew the Revolving Credit Commitment at the maturity thereof, (B) ninety (90) days after Borrowers refinance the Revolving Loans with any other Person, and (C) December 20, 2006; and (ii) with respect to Term Loan B, the earlier to occur of (A) ninety (90) days after Bank has indicated in writing to K-V that it is unwilling to renew the Revolving Credit Commitment at the maturity thereof, (B) ninety (90) days after Borrowers refinance the Revolving Loans with any other Person, and (C) December 20, 2007. "Term Note B" means that certain Substitute Term Note B dated as ----------- of December 20, 2002 in the original principal amount of ONE MILLION SEVEN HUNDRED THIRTY-SEVEN THOUSAND SEVEN HUNDRED SIXTY-EIGHT DOLLARS ($1,737,768), payable by K-V to Bank, as the same may be amended, modified or supplemented from time to time, and together with any renewals thereof or exchanges or substitutes therefor. (b) Paragraph 5.11(a)(i) is hereby amended and restated to read -------------------- in its entirety as follows: (i) There shall first be determined, as of the date fixed for prepayment (the "Prepayment Date"), the amount, if any, by which (A) the applicable Fixed Rate of the Term Loan to be prepaid exceeds (B) the yield to maturity percentage for the United States Treasury Note (the "Treasury Note") maturing October, 2006 in the case of Term Note A and December, 2007 in the case of Term Note B, as published in The Wall Street Journal on the ----------------------- 2 fifth business day preceding the Prepayment Date, plus Two Hundred Twenty-Five basis points (2.25%) (the "Current Yield"). If (A) publication of The Wall Street Journal is discontinued, or (B) ----------------------- publication of the Treasury Note in The Wall Street Journal is ----------------------- discontinued, Bank, in its sole discretion, shall designate another daily financial or governmental publication of national circulation to be used to determine the applicable Current Yield; (c) Paragraph 8.2(g)(iv) is hereby amended and restated in its -------------------- entirety to read as follows: (iv) Not permit the Borrowers' Capital Expenditures on a consolidated basis for any fiscal year to exceed $20,000,000. 3. Delivery of Documents. The following documents and other items --------------------- shall be delivered concurrently with this Amendment: a. Substitute Term Note B; b. Substitute Supplemental Note; c. First Amendment to Missouri Future Advance, Deed of Trust and Security Agreement for Lakefront Drive Property; d. First Amendment to Assignment of Rents and Leases for Lakefront Drive Property; e. Secretary's Certificate of each Borrower certifying to (i) board resolutions evidencing each Borrower's authorization of the Amendment, the Notes and the Other Agreements and (ii) incumbency of each Borrower; f. Opinion of Borrowers' counsel; and g. Such other documents, certificates and financing statements as Bank shall request. 4. Representations, Covenants and Warranties; No Default. The ----------------------------------------------------- representations, covenants and warranties set forth in Paragraph 8 of the ----------- Agreement shall be deemed remade as of the date hereof by each Borrower, except that any and all references to the Agreement in such representations and warranties shall be deemed to include this Amendment. No Event of Default has occurred and is continuing and no event has occurred and is continuing which, with the lapse of time, the giving of notice, or both, would constitute such an Event of Default under the Agreement. 5. Fees and Expenses. The Borrowers agree to pay on demand all costs ----------------- and expenses of or incurred by Bank, including, but not limited to, legal fees and expenses, in 3 connection with the evaluation, negotiation, preparation, execution and delivery of this Amendment. 6. Effectuation. The amendments to the Agreement contemplated by this ------------ Amendment shall be deemed effective immediately upon the full execution of this Amendment and without any further action required by the parties hereto. There are no conditions precedent or subsequent to the effectiveness of this Amendment. 7. Counterparts. This Amendment may be executed in two or more ------------ counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. [SIGNATURE PAGE FOLLOWS] 4 (SIGNATURE PAGE TO SIXTH AMENDMENT) IN WITNESS WHEREOF, the parties hereto have duly executed this Sixth Amendment to Loan Agreement as of the date first above written. LASALLE BANK NATIONAL K-V PHARMACEUTICAL COMPANY ASSOCIATION By: /s/ Michael Barnett By: /s/ Gerald R. Mitchell --------------------------- ----------------------------------- Its: Its: Vice President, Treasurer and CFO -------------------------- ---------------------------------- ETHEX CORPORATION By: ----------------------------------- Its: ---------------------------------- PARTICLE DYNAMICS, INC. By: ----------------------------------- Its: ---------------------------------- THER-RX CORPORATION By: ----------------------------------- Its: ---------------------------------- 5 EX-4.(N) 4 exh4pn.txt Exhibit 4(n) SEVENTH AMENDMENT TO LOAN AGREEMENT ----------------------------------- THIS SEVENTH AMENDMENT TO LOAN AGREEMENT (this "Amendment") is entered into as of the 28th day of April, 2003 by and among LaSalle Bank National Association, a national banking association ("Bank"), and each of K-V Pharmaceutical Company, a Delaware corporation ("K-V"), Particle Dynamics, Inc., a New York corporation ("PDI"), ETHEX Corporation, a Missouri corporation ("ETHEX"), and THER-RX Corporation, a Missouri corporation ("THER-RX"), jointly and severally (K-V, PDI, ETHEX and THER-RX are collectively referred to as the "Borrowers"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Bank and the Borrowers are party to that certain Loan Agreement dated as of June 18, 1997, as amended by that certain First Amendment to Loan Agreement dated as of October 28, 1998, that certain Second Amendment to Loan Agreement dated as of March 11, 1999, that certain Third Amendment to Loan Agreement dated as of June 22, 1999, that certain Fourth Amendment to Loan Agreement dated as of December 17, 1999, that certain Fifth Amendment to Loan Agreement dated as of December 21, 2001 and that certain Sixth Amendment to Loan Agreement dated as of December 20, 2002 (collectively, the "Agreement"); and WHEREAS, Bank and the Borrowers desire to further amend the Agreement in accordance with this Amendment to advance a new secured term loan to K-V in the original principal amount of Eight Million Eight Hundred Thousand Dollars ($8,800,000). NOW, THEREFORE, for and in consideration of the premises and mutual agreements herein contained and for the purposes of setting forth the terms and conditions of this Amendment, the parties, intending to be bound, hereby agree as follows: 1. Incorporation of the Agreement. All capitalized terms which are ------------------------------ not defined hereunder shall have the same meanings as set forth in the Agreement, and the Agreement, to the extent not inconsistent with this Amendment, is incorporated herein by this reference as though the same were set forth in its entirety. To the extent any terms and provisions of the Agreement are inconsistent with the amendments set forth in Paragraph 2 ----------- below, such terms and provisions shall be deemed superseded hereby. Except as specifically set forth herein, the Agreement shall remain in full force and effect and its provisions shall be binding on the parties hereto. 2. Amendment of the Agreement. Borrowers and Bank hereby agree to -------------------------- amend the Agreement as follows: (a) The definitions of the terms "Corporate Woods Property", ------------------------ "Hedging Agreement", "Hedging Obligation", "Term Loan C", "Term Loan ----------------- ------------------ ----------- --------- Commitment C" and "Term Note C" are hereby added to the Agreement in - ------------ ----------- Paragraph 1.1 to read in their entirety as follows: - ------------- "Corporate Woods Property" means that certain parcel of ------------------------ real property owned by K-V located at One Corporate Woods Drive, St. Louis, Missouri. "Hedging Agreement" means any interest rate, currency or ----------------- commodity swap agreement, cap agreement or collar agreement, and any other agreement or arrangement designed to protect a Person against fluctuations in interest rates, currency exchange rates or commodity prices. "Hedging Obligation" means, with respect to any Person, ------------------ any liability of such Person under any Hedging Agreement. "Term Loan C" means all Loans made under Term Loan Commitment C. ----------- "Term Loan Commitment C" shall have the meaning assigned to such ---------------------- term in Paragraph 2.2(c) hereof. ---------------- "Term Note C" means that certain Term Note dated as of ----------- April 28, 2003 in the original principal amount of EIGHT MILLION EIGHT HUNDRED THOUSAND DOLLARS ($8,800,000), payable by K-V to Bank, as the same may be amended, modified or supplemented from time to time, and together with any renewals thereof or exchanges or substitutes therefor. (b) The definitions of the terms "Assignment of Rents", ------------------- "Borrowers' Liabilities", "Debt", "Environmental Indemnity Agreement", ---------------------- ---- --------------------------------- "Interest Period", "LIBOR Margin", "Mortgaged Properties", "Mortgages", --------------- ------------ -------------------- --------- "Notes", "Permitted Debt", "Term Loan", "Term Loan Maturity Date" and "Term ----- -------------- --------- ----------------------- ---- Notes" appearing in Paragraph 1.1 are hereby amended and restated to read as - ----- ------------- follows: "Assignment of Rents" means those certain Assignments of ------------------- Rents and Leases between K-V and Bank (a) in the case of the Metro Court Properties, each dated as of June 24, 1997, as amended by those certain First Amendments to Assignment of Rents and Leases dated as of December 21, 2001, (b) in the case of the Lakefront Drive Property, dated as of March 11, 1999, as amended by that certain First Amendment to Assignment of Rents and Leases dated as of December 20, 2002, and (c) in the case of the Corporate Woods Property, dated as of April 28, 2003, as each of the same may be further amended, modified or restated from time to time. "Borrowers' Liabilities" means all obligations and ---------------------- liabilities of each Borrower in the aggregate to Bank (including, without limitation, all debts, claims, indebtedness and Hedging Obligations) whether primary, secondary, direct, contingent, fixed or otherwise, heretofore, now and/or from time to time hereafter owing, due or payable, however evidenced, created, incurred, acquired or owing and however arising, whether under this Agreement or the Other Agreements, or by oral agreement or operation of law or otherwise. "Debt" means all of a Person's liabilities, obligations ---- and indebtedness to any Person of any and every kind and nature, whether primary, secondary, direct, indirect, absolute, contingent, fixed or otherwise, heretofore, now and/or from time to time hereafter owing, due or payable, however evidenced, created, incurred, acquired or owing and however arising, whether under written or oral agreement, by operation of law or otherwise. Without in any way limiting the generality of the foregoing, Debt specifically includes (i) Funded Debt, (ii) liabilities in respect of unfunded vested benefits under Plans and Multiemployer Plans covered by Title IV of ERISA and (iii) Hedging Obligations. 2 "Environmental Indemnity Agreement" means those certain --------------------------------- Environmental Indemnity Agreements between K -V and Bank for each of the Mortgaged Properties, dated as of June 28, 1997 in the case of the Metro Court Properties, March 11, 1999 in the case of the Lakefront Property and April 28, 2003 in the case of the Corporate Woods Property, as the same may be amended, modified or restated from time to time. "Interest Period" means with respect to the LIBOR Loans, --------------- the period used for the computation of interest commencing on the date the relevant LIBOR Loan is effected by conversion or continued and concluding on the date thirty (30), sixty (60) or ninety (90) days thereafter, at Borrowers' option, with any subsequent Interest Period commencing on the last day of the immediately preceding Interest Period and concluding thirty (30), sixty (60) or ninety (90) days thereafter, at Borrowers' option; provided, however, that no Interest Period for any LIBOR Loan made under the Commitment may extend beyond the Revolving Credit Maturity Date or the applicable Term Loan Maturity Date, as the case may be; provided, further, that no Interest Period for any LIBOR Loan made under Term Loan Commitment C may extend beyond thirty (30) days. Each Interest Period for a LIBOR Loan which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day (unless such next succeeding Business Day is the first Business Day of a calendar month, in which case such Interest Period shall end on the next preceding Business Day). "LIBOR Margin" means (a) one and three-quarters percent ------------ (1.75%) with respect to any LIBOR Loan made pursuant to the Revolving Credit Commitment; provided, however, so long as no Event of Default has occurred, such percentage shall be decreased to one and one-half percent (1.50%) as of the first day of each quarterly accounting period if and to the extent that Borrowers' Funded Debt Ratio for the most recently ended quarterly accounting period is less than 1.00:1.0, as reported on Borrowers' compliance certificate for such most recently ended quarterly accounting period delivered in accordance with Paragraph 8.2(d)(v), and (b) two percent (2.00%) with respect to any LT13OR Loan made pursuant to Term Loan Commitment C. "Mortgaged Properties" means the Metro Court Properties, -------------------- the Lakefront Property and the Corporate Woods Property in which K-V has granted a first priority security interest to Bank pursuant to each of the Mortgages. "Mortgages" means (a) for each of the Metro Court Properties, --------- those certain Missouri Future Advance Deeds of Trust and Security Agreements made by K-V in favor of Bank dated as of June 24, 1997, as amended by those certain First Amendments to Missouri Future Advance Deeds of Trust and Security Agreements dated as of December 21, 2001, (b) for the Lakefront Drive Property, that certain Missouri Future Advance Deed of Trust and Security Agreement dated as of March 11, 1999, as amended by that certain First Amendment to Missouri Future Advance Deed of Trust and Security Agreement dated as of December 20, 2002, and (c) for the Corporate Woods Property, that certain Missouri Future Advance Deed of Trust and Security Agreement dated as of April 28, 2003, as each of the same may be further amended, restated or modified from time to time. "Notes" means, collectively, the Revolving Note, Term Note A, ----- Term Note B and Term Note C. 3 "Permitted Debt" means (a) Debt incurred pursuant to this -------------- Agreement or the Other Agreements, (b) Debt incurred pursuant to purchase money mortgages (including, without limitation, capitalized lease obligations) not to exceed $750,000.00 at any time outstanding in the aggregate, (c) trade payables, accrued expenses and obligations not yet due and payable incurred in the ordinary course of business, (d) Subordinated Debt and (e) Hedging Obligations incurred for bona fide hedging purposes and not for speculation. "Term Loan" means, collectively, Term Loan A, Term Loan B --------- and Term Loan C, unless the context in which such term is used shall otherwise require. "Term Loan Maturity Date" means: (i) with respect to Term ----------------------- Loan A, the earlier to occur of (A) ninety (90) days after Bank has indicated in writing to K-V that it is unwilling to renew the Revolving Credit Commitment at the maturity thereof, (B) ninety (90) days after Borrowers refinance the Revolving Loans with any other Person, and (C) December 20, 2006; (ii) with respect to Term Loan B, the earlier to occur of (A) ninety (90) days after Bank has indicated in writing to K-V that it is unwilling to renew the Revolving Credit Commitment at the maturity thereof, (B) ninety (90) days after Borrowers refinance the Revolving Loans with any other Person, and (C) December 20, 2007 and (iii) with respect to Term Loan C, the earlier to occur of (A) ninety (90) days after Bank has indicated in writing to K-V that it is unwilling to renew the Revolving Credit Commitment at the maturity thereof, (B) ninety (90) days after Borrowers refinance the Revolving Loans with any other Person, and (C) April 28, 2008. "Term Note" or "Term Notes" moans collectively, Term Note A, --------- ---------- Term Note B and Term Note C, unless the context shall otherwise require. (c) Paragraph 2.2 is hereby amended by adding a new sub-paragraph ------------- (c) which shall read as follows: (c) Term Loan Commitment C. On the terms and ---------------------- subject to the conditions set forth in this Agreement, Bank has made Term Loan C to K-V in the original principal amount of EIGHT MILLION EIGHT HUNDRED THOUSAND DOLLARS ($8,800,000) (the "Term Loan Commitment C"). Amounts borrowed in respect of Term Loan C and repaid may not be reborrowed. Term Loan C shall be used to purchase the Corporate Woods Property and for no other purpose. (d) The introductory sentence of Paragraph 2.3 is hereby amended and restated to read in its entirety as follows: 2.3 Borrowing Procedures under Revolving Credit Commitment ------------------------------------------------------- and Term Loan Commitment C. -------------------------- (e) Paragraph 3.2 is hereby amended by adding a new subparagraph ------------- (c) which shall read in its entirety as follows: (c) Term Note C. Term Loan C made by Bank under Term Loan ----------- Commitment C is evidenced by Term Note C, payable to the order of Bank in the original principal amount of EIGHT MILLION EIGHT 4 HUNDRED THOUSAND DOLLARS ($8,800,000). The unpaid principal amount of Term Loan C shall bear interest and be due and payable as provided in this Agreement and Term Note C. Payments to be made by K-V under Term Note C shall be made at the time, in the amounts and upon the terms set forth herein and therein. (f) Paragraph 4.1 (a) and (b) are hereby amended and restated to ------------------------- read in their entirety as follows: (a) Borrowers hereby promise to pay interest on the unpaid principal amount of each Revolving Loan and Term Loan C at a rate per annum equal to the Base Rate from time to time in effect (the "Base Rate Loan") for the period commencing on the date of such Loan until such Base Rate Loan is (A) converted to a LIBOR Loan pursuant to Paragraph 4.3 hereof, or (B) paid in full. Accrued interest on the outstanding principal amount of such Loans shall be payable (i) monthly in arrears on the last Business Day of each calendar month in the case of a Base Rate Loan, (ii) on the last day of the applicable Interest Period in the case of a LIBOR Loan, (iii) upon conversion of any such Loan into a LIBOR Loan (such amount of accrued interest then coming due to be calculated based on the principal amount of the Loan so converted) and (iv) upon the Revolving Credit Termination Date (in the case of a Revolving Loan) or the applicable Term Loan Maturity Date (in the case of Term Loan C), which payments shall commence with the last Business Day of April, 2003 in the case of a Base Rate Loan. After the Revolving Credit Termination Date (in the case of a Revolving Loan), the applicable Term Loan Maturity Date (in the case of Term Loan C), or the Conversion Date (with respect to accrued interest coming due as a result of the conversion), as applicable, accrued interest on such Loans shall be payable on demand. (b) K-V hereby promises to pay interest on the unpaid principal amount of Term Loan A and Term Loan B at a rate per annum equal to the applicable Fixed Rate for Term Loan A or Term Loan B, as the case may be, for the period commencing on the date of such Term Loan until such Fixed Rate Loan is paid in full. Accrued interest and principal on the outstanding principal amount of Term Loan A and Term Loan B shall be payable monthly in arrears on the last Business Day of each calendar month with a final payment of accrued and unpaid interest due on the applicable Term Loan Maturity Date. After the applicable Term Loan Maturity Date, accrued interest and principal on Term Loan A and Term Loan B shall be payable on demand. (g) Paragraph 5.11 is hereby amended and restated to read -------------- in its entirety as follows: 5.11 Prepayment. (a) Term Loan Prepayments. K-V ---------- --------------------- may, from time to time, prepay the Loan evidenced by either Term Note A or Term 5 Note B in whole or in part prior to the date of maturity thereof and the same shall pay, subject to Paragraph 5.7 ------------- hereof, the Make-Whole Amount (as defined below). For the purposes hereof; the "Make-Whole Amount" shall be the amount calculated as follows: (i) There shall first be determined, as of the date fixed for prepayment (the "Prepayment Date"), the amount, if any, by which (A) the applicable Fixed Rate of the Term Loan to be prepaid exceeds (B) the yield to maturity percentage for the United States Treasury Note (the "Treasury Note" maturing December, 2006 in the case of Term Note A and December, 2007 in the case of Term Note B, as published in The Wall Street Journal on the fifth ----------------------- business day preceding the Prepayment Date, plus Two Hundred Twenty-Five basis points (2.25%) (referred to as the "Current Yield"). If (A) publication of The Wall -------- Street Journal is discontinued, or (B) publication of the -------------- Treasury Note in The Wall Street Journal is discontinued, ----------------------- Bank, in its sole discretion, shall designate another daily financial or governmental publication of national circulation to be used to determine the applicable Current Yield; (ii) The difference calculated pursuant to clause (i) above shall be multiplied by the outstanding principal balance on such Term Note to be prepaid hereof as of the Prepayment Date; (iii) The product calculated pursuant to clause (ii) above shall be multiplied by the quotient, rounded to the nearest one hundredth of one percent, obtained by dividing (A) the number of days from and including the Prepayment Date to and including the applicable Maturity Date on such Term Note to be prepaid, by (B) 365; and (iv) The sum calculated pursuant to clause (iii) above shall be discounted at the annual rate of the applicable Current Yield on such Term Note to be prepaid to the present value thereof as of the applicable Prepayment Date, on the assumption that said sum would be received in equal monthly installments on each monthly anniversary of the applicable Prepayment Date prior to the Maturity Date on such Term Note to be propaid, with the final such installment to be deemed received on the Maturity Date on such Term Note to be prepaid; provided that Borrowers shall not be entitled in any event to a credit against, or a reduction of, the Debt being prepaid if the applicable Current Yield on such Term Note to be prepaid exceeds the Fixed Rate or for any other reason. (h) The following proviso shall be added at the end of Paragraph 8.2(g)(iv) reading as follows: - -------------------- Notwithstanding the foregoing, the purchase of the Corporate Woods property shall be excluded from the Capital Expenditure calculation. 6 (i) Paragraph 9.1 is hereby amended by deleting the word ------------- "or" occurring at the end of subsection (k), replacing the period occurring at the end of subsection (l) with "; or" and adding the following new subsection (m) thereto: (m) any election by any Borrower pursuant to Section 443.055 of Missouri Revised Statutes to notify Bank that such Borrower is terminating the operation of any applicable Mortgage as security for future advances or future obligations. 3. Consent Regarding Proposed Purchase. Notwithstanding the ----------------------------------- provisions of Paragraph 8.3(b) of the Agreement to the contrary, Bank hereby ---------------- consents to the purchase by K-V of the real property located at One Corporate Woods Drive, St. Louis, Missouri, in accordance with the terms and conditions of that certain Purchase and Sale Agreement dated as of February 6, 2003 (the "Purchase") and waives compliance with the provisions of Paragraphs 8.3(b) and 8.2(g)(iv) for the Purchase only, provided (i) no - ----------------- ---------- Event of Default exists or would exist with the passage of time, the giving of notice or both; and (ii) no more than Eight Million Eight Hundred Thousand Dollars ($8,800,000) of proceeds of the Loans are utilized for the Purchase. 4. Representations, Covenants and Warranties; No Default. The ----------------------------------------------------- representations, covenants and warranties set forth in Paragraph 8 of the ----------- Agreement shall be deemed remade as of the date hereof by each Borrower, except that any and all references to the Agreement in such representations and warranties shall be deemed to include this Amendment. No Event of Default has occurred and is continuing and no event has occurred and is continuing which, with the lapse of time, the giving of notice, or both, would constitute such an Event of Default under the Agreement. 5. Fees and Expenses. The Borrowers agree to pay on demand all ----------------- costs and expenses of or incurred by Bank in connection with the evaluation, negotiation, preparation, execution and delivery of this Amendment and the other instruments and documents executed and delivered in connection with the transactions described herein (including the filing or recording thereof), including, but not limited to, the fees and expenses of counsel for the Bank and any future amendments to the Agreement. Borrowers also agree to pay to Bank, on demand, a closing fee equal to one percent (1.0%) of the original principal amount of Term Loan Commitment C of $8,800,000, amounting to $88,000. 6. Delivery of Documents. Notwithstanding any of the foregoing, --------------------- prior to entering into this Amendment, Bank shall have received from Borrowers the following fully executed documents, in form and substance satisfactory to Bank, and all of the transactions contemplated by each such document shall have been consummated or each condition contemplated by each such document shall have been satisfied: (a) Seventh Amendment to Loan Agreement; (b) Term Note C; (c) Missouri Future Advance Deed of Trust and Security Agreement for the Corporate Woods Property; 7 (d) Assignment of Rents and Leases for the Corporate Woods Property; (e) Environmental Indemnity Agreement for the Corporate Woods Property; (f) Certificate of Secretary of each Borrower certifying to board resolutions evidencing each Borrower's authorization of the Amendment, Term Note C, the real property collateral documents and incumbency of each Borrower; (g) Lender's Title Policy for the Corporate Woods Property; (h) ALTA survey for the Corporate Woods Property; (i) Gap-Personal Undertaking for the Corporate Woods Property; (j) Officer's Certificate of each Borrower; (k) Officer's Certificate with respect to (i) consummation of the purchase of the Corporate Woods Property and (ii) true and correct copies of the contract relating to the Purchase; (l) Legal opinion of Borrowers' counsel; (m) Opinion of local counsel; and (n) Such other documents, opinions or certificates as Bank may reasonably request. 7. Effectuation. The amendments to the Agreement contemplated by ------------ this Amendment shall be deemed effective immediately upon the full execution of this Amendment and without any further action required by the parties hereto. There are no conditions precedent or subsequent to the effectiveness of this Amendment. 8. Counterparts. This Amendment may be executed in two or more ------------ counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. [SIGNATURE PAGE FOLLOWS] 8 (SIGNATURE PAGE TO SEVENTH AMENDMENT) IN WITNESS WHEREOF, the parties hereto have duly executed this Seventh Amendment to Loan Agreement as of the date first above written. LASALLE BANK NATIONAL K-V PHARMACEUTICAL COMPANY ASSOCIATION By: /s/ Michael Barnett By: /s/ Gerald R. Mitchell ---------------------------------- ------------------------------------ Its: Its: Vice President, Treasurer and CFO --------------------------------- ----------------------------------- ETHEX CORPORATION By: ------------------------------------ Its: ----------------------------------- PARTICLE DYNAMICS, INC. By: ------------------------------------ Its: ----------------------------------- THER-RX CORPORATION By: ------------------------------------ Its: ----------------------------------- 9 EX-10.(S) 5 exh10ps.txt Exhibit 10(s) STOCK OPTION AGREEMENT (Non-Assignable) Date: Option Number: SP-9 November 6, 1996 Number of Shares Purchasable 10,000 To Purchase Shares of Class A Common Stock -of- K-V PHARMACEUTICAL COMPANY THIS CERTIFIES THAT Alan G. Johnson is hereby granted the option to purchase, at the option price of $10.875 per share, all or any part of that number of fully paid and non-assessable shares of the Class A Common Stock, par value $0.01 per share ("Class A 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 ten (10) years from the date hereof (hereinafter called the "expiration date.") This Option and all rights hereunder shall be non-assignable and non-transferable, except to the extent that the holder's legatees, personal representatives or distributees in the event of the holder's death may be permitted to exercise this Option as hereinafter set forth. Any attempted transfer, assignment, pledge, hypothecation or other disposition of this Option except as provided herein shall be null and void and without effect. As of November 6, 1996, and prior to its expiration or earlier termination, this Option shall be exercisable from time to time in cumulative installments as to all or any of the shares then purchasable hereunder as follows: During the twelve-month period commencing November 6, 1996 and ending November 5, 1997, it may be exercised as to 10% of the shares originally subject hereto; and during each additional consecutive twelve-month period, it may be exercised as to an additional 10%; until the tenth 1 twelve-month period, during which this Option shall be exercisable as to all 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 A 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 of Directors ("Board"), as defined in the Plan, by delivering at fair market value, as determined by the Board (as provided under the Plan), 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. Except as hereinafter provided, no Option may be exercised at any time unless the holder hereof is an employee of the Company or any of its subsidiaries. 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 A 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"). If the holder leaves the employ of the Company during the Holding Period for any reason, except retirement (under normal Company policies), death or 2 disability, the holder's purchase thereof shall be voidable at the Company's sole option and discretion at any time within the Holding Period. If any purchase of Class A Common Stock is so voided, the least of (i) the funds paid by the holder in connection with the voided transaction; (ii) the value in cash of Common Stock used to purchase such Class A Common Stock, determined as of the date of such purchase, less any amount which would have been forfeited pursuant to the Plan relative to Stock used to purchase the forfeited stock if such Stock has not been so used and the Holding Period relative to such stock had not expired; or (iii) the fair market value per shares, as determined on the date of termination of the holder's employment with the Company in accordance with the provisions of the Plan, shall be returned in full to the holder within thirty (30) days after such purchase is voided provided, however, no payment shall be due prior to the time that the Company is in possession of the Class A Common Stock and an executed stock power with respect to such Stock. In order to facilitate the repurchase of Class A Common Stock by the Company in accordance with the terms of this Paragraph, each holder who exercises any Option or portion thereof shall, at the time of payment for such Class A Common Stock, as provided hereinabove, deliver to the Company a form of stock power and assignment signed by such holder in form and substance satisfactory to the Company, rendering the certificate representing the shares purchased negotiable to the Company. Notwithstanding the foregoing, if any holder who exercises an Option demonstrates to the Board of the Company a need to obtain financing for the purchase of Class A Common Stock and indicates his good faith intention to remain in the employ of the Company during the Holding Period, the Board, in its sole discretion, may permit delivery of any Class A Common Stock purchased hereunder to a financial institution for use as collateral security for the purchase of the Class A Common Stock, subject to any necessary or appropriate restrictions with respect thereto as may be required to comply with applicable federal and state securities laws and/or the listing requirements of any national securities exchange, and the holder may use any Class A Common Stock so held in payment of the Option Price for additional Class A Common Stock as provided for herein. If the holder remains in the employ of the Company throughout the Holding Period, or is terminated by reason of death, disability or retirement (under normal Company policies) the Company shall deliver to the holder or the holder's personal representative, as soon as practicable thereafter, certificates representing the Class A 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. If the Company fails or declines to exercise its right to void any purchase pursuant to the terms of the preceding paragraph hereof, the Company shall deliver the Certificates to the holder as soon as practicable after the expiration of two years from the date of exercise. 3 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. Except as provided in this paragraph, upon termination of the holder's employment with the Company or any of its subsidiaries for any reason, this Option shall terminate. If the employment of the Participant is terminated by reason of retirement (under normal Company policies) any outstanding Option or unexercised portion thereof granted to him may be fully exercised by the Participant, his personal representative, executor, administrator, heirs or devisees, as applicable, at any time, within three months from the date of termination by reason of retirement. If the employment of a Participant is terminated by reason of death or disability, any outstanding Option or unexercised portion thereof which was granted to him may be fully exercised by the Participant, his personal representative, executor, administrator, heirs or devisees, as applicable, at any time within one year from the date of termination by reason of death or disability, provided that the Participant has completed five (5) full years of employment with the Company from the date the Option was granted. If the Participant has not completed five (5) full years of employment with the Company from the date the Option was granted, the Option may be exercised only to the extent exercisable as of the date of termination of employment. Notwithstanding any of the foregoing, no Option shall be exercisable at any time after the expiration of employment from the Company to any Parent or Subsidiary thereof, or vice versa, shall not be deemed a termination of employment. In the event that the outstanding shares of Class A 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 A 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 4 not to constitute a "modification" as defined in Section 425 of the Internal Revenue Code of 1986. Any such adjustment made by the Board 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 any question which may arise with respect to the interpretation and construction of the provisions of this Option or of said Plan shall be final. The Board may authorize and establish such rules, regulations and revisions thereof not inconsistent with the provisions of said Plan as it may deem advisable. WITNESS the seal of the Company and the signatures of its duly authorized officers or agents. Dated: November 6, 1996 K-V PHARMACEUTICAL COMPANY By /s/ Gerald R. Mitchell -------------------------------- Vice President, Finance ACCEPTED: /s/ Alan G. Johnson - --------------------------------- Alan G. Johnson 5 EX-10.(CC) 6 exh10pcc.txt Exhibit 10(cc) STOCK OPTION AGREEMENT (Non-Assignable) Date: Option Number: SP-12 March 31, 1999 Number of Shares Purchasable 7,500 To Purchase Shares of Class B Common Stock -of- K-V PHARMACEUTICAL COMPANY THIS CERTIFIES THAT Norman D. Schellenger (the "Participant") is hereby granted the option to purchase, at the option price of $14.000 per share (the "Option Price"), 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 non-assignable and non-transferable, except to the extent that the holder's legatees, personal representatives or distributees in the event of the holder's death may be permitted to exercise this Option as hereinafter set forth. Any attempted transfer, assignment, pledge, hypothecation or other disposition of this Option except as provided herein shall be null and void and without effect. As of March 31, 1999, and prior to its expiration or earlier termination, this Option shall be exercisable from time to time in cumulative installments as to all or any of the shares then purchasable hereunder as follows: During the twelve-month period commencing March 31, 1999 and ending March 30, 2000, it may be exercised as to 20% of the shares originally subject hereto; and during each additional consecutive twelve-month period, it may be exercised as to an additional 20%; until the fifth twelve-month period, during which this Option shall be exercisable as to all 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 1 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 of Directors of the Company (with the Participant abstaining from voting), by delivering at fair market value, as determined by the Board of Directors of the Company (with the Participant abstaining from voting), Company Common Stock already owned by the holder, 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 of Directors of the Company (with the Participant abstaining from voting). Except as hereinafter provided, no Option may be exercised at any time unless the holder hereof is a director of the Company. 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"). If the holder ceases to be a director of the Company during the Holding Period for any reason, except death or disability, the holder's purchase thereof shall be voidable at the Company's sole option and discretion at any time within the Holding Period. If any purchase of Class B Common Stock is so voided, the least of (i) the funds paid by the holder in connection with the voided transaction; (ii) the value in cash of Common Stock used to purchase such Class B 2 Common Stock, determined as of the date of such purchase, less any amount which would have been forfeited relative to Stock used and the Holding. Upon completion of the Holding Period (under normal Company policies), the Company shall deliver to the holder or 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 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. 3 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 the 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. 4 A determination by the Board of Directors of any questions which may arise with respect to the interpretation and construction of the provisions of this Option shall be final. 5 WITNESS the seal of the Company and the signatures of its duly authorized officers or agents. Dated: March 31, 1999 K-V PHARMACEUTICAL COMPANY By /s/ Richard H. Chibnall ------------------------------ Vice President, Finance ACCEPTED: /s/ Norman D. Schellenger - --------------------------------- Norman D. Schellenger 6 EX-10.(FF) 7 exh10pff.txt Exhibit 10(ff) STOCK OPTION AGREEMENT Date: Option Number: 91-1457 October 13, 1999 Number of Shares Purchasable 33,610 To Purchase Shares of Class A Common Stock -of- K-V PHARMACEUTICAL COMPANY THIS CERTIFIES THAT Alan G. Johnson is hereby granted the option to purchase, at the option price of $15.250 per share, all or any part of that number of fully paid and non-assessable shares of the Class A Common Stock, par value $0.01 per share ("Class A 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, except to the extent that the holder's legatees, personal representatives or distributees in the event of the holder's death may be permitted to exercise this Option as hereinafter set forth. As of October 13, 1999, and prior to its expiration or earlier termination, this Option shall be exercisable from time to time in cumulative installments as to all or any of the shares then purchasable hereunder as follows: During the twelve-month period commencing October 13, 1999 and ending October 12, 2000, it may be exercised as to 20% of the shares originally subject hereto; and during each additional consecutive twelve-month period, it may be exercised as to an additional 20%; until the fifth twelve-month period, during which this Option shall be exercisable as to all 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 1 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 A 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 Committee, as defined in the Plan, by delivering at fair market value, as determined by the Committee (as provided under the Plan), 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 Committee. Except as hereinafter provided, no Option may be exercised at any time unless the holder hereof is an employee of the Company or any of its subsidiaries. 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. Initially, all Class A Common Stock purchased pursuant to the exercise of this Option shall be held by the Company for a period of two years from the date of exercise (the "Holding Period"). If the holder leaves the employ of the Company during the Holding Period for any reason, except retirement (under normal Company policies), death or disability, the holder's purchase thereof shall be voidable at the Company's sole option and discretion at any time within the Holding Period. If any purchase of Class A Common Stock is so voided, the least of (i) the funds paid by the holder in connection with the voided transaction; (ii) the value in cash of Common Stock used to purchase such Class A Common Stock, determined as of the date of such purchase, less any amount which would have been forfeited pursuant to the Plan relative to Stock used to purchase the forfeited stock if such Stock has not been so used and the Holding Period relative to such stock had not expired; or (iii) the fair market value per share, as determined on the date of termination of the holder's employment with the Company in accordance with the provisions of the Plan, shall be returned in full to the holder within thirty (30) days after such purchase is voided; provided, however, no payment shall be due prior to the time that the Company is in possession of the Class A Common Stock and an executed stock power with respect to such Stock. In order to 2 facilitate the repurchase of Class A Common Stock by the Company in accordance with the terms of this Paragraph, each holder who exercises any Option or portion thereof shall, at the time of payment for such Class A Common Stock, as provided hereinabove, deliver to the Company a form of stock power and assignment signed by such holder in form and substance satisfactory to the Company, rendering the certificate representing the shares purchased negotiable to the Company. Notwithstanding the foregoing, if any holder who exercises an Option demonstrates to the Committee of the Company a need to obtain financing for the purchase of Class A Common Stock and indicates his good faith intention to remain in the employ of the Company during the Holding Period, the Committee, in its sole discretion, may permit delivery of any Class A Common Stock purchased hereunder to a financial institution for use as collateral security for the purchase of the Class A Common Stock, subject to any necessary or appropriate restrictions with respect thereto as may be required to comply with applicable federal and state securities laws and/or the listing requirements of any national securities exchange, and the holder may use any Class A Common Stock so held in payment of the Option Price for additional Class A Common Stock, as provided for herein. If the holder remains in the employ of the Company throughout the Holding Period or is terminated by reason of death, disability or retirement (under normal Company policies), the Company shall deliver to the holder or the holder's personal representative, as soon as practicable thereafter, certificates representing the Class A 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. If the Company fails or declines to exercise its right to void any purchase pursuant to the terms of the preceding paragraph hereof, the Company shall deliver the Certificates to the holder as soon as practicable after the expiration of two years from the date of exercise. Notwithstanding the provisions of the two preceding paragraphs, if the holder's employment by the Company is terminated after three (3) years following the holder's date of commencement of employment ("Start Date"), all exercised portions of this Option may be retained by the holder up to sixty percent (60%) of the total number of shares covered by this Option, if the holder's employment by the Company is terminated after four (4) years from Start Date, all exercised portions of this Option may be retained up to eighty percent (80%) of the total number of shares covered by this Option, and if the holder's employment by the Company is terminated after five (5) years from Start Date, all exercised portions of this Option may be retained up to one hundred percent (100%) of the total number of shares covered by this Option. 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. 3 Except as provided in this paragraph, upon termination of the holder's employment with the Company or any of its subsidiaries for any reason, this Option shall terminate. If the employment of the Participant is terminated by reason of retirement (under normal Company policies), any outstanding Option or unexercised portion thereof granted to him may be fully exercised by the Participant, his personal representative, executor, administrator, heirs or devisees, as applicable, at any time, within three months from the date of termination by reason of retirement. If the employment of a Participant is terminated by reason of death or disability, any outstanding Option or unexercised portion thereof which was granted to him may be fully exercised by the Participant, his personal representative, executor, administrator, heirs or devisees, as applicable, at any time within one year from the date of termination by reason of death or disability, provided that the Participant has completed three (3) full years of employment with the Company from the date the Option was granted. If the Participant has not completed three (3) full years of employment with the Company from the date the Option was granted, the Option may be exercised only to the extent exercisable as of the date of termination of employment. Notwithstanding any of the foregoing, the transfer of employment from the Company to any Parent or Subsidiary thereof, or vice versa, shall not be deemed a termination of employment. In the event that the outstanding shares of Class A 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 A 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 Committee shall be conclusive. Upon the occurrence of: (i) the dissolution or liquidation of the Company, (ii) a reorganization, merger or consolidation of the Company with one or more corporations in which the Company is not the surviving corporation, (iii) a sale of substantially all of the assets of the Company or (iv) the transfer of more than 80% of the then outstanding Stock of the Company to another entity or person in a single transaction or series of transactions, the Plan shall terminate, and any outstanding Options granted under the Plan shall terminate on the day before the consummation of the transaction; provided 4 that the Board of Directors shall have the right, but shall not be obligated, to accelerate the time in which any Options may be exercised prior to such a termination. However, the termination of such Options shall not occur if the Board of Directors takes certain actions as provided in the Plan. In addition, the Board of Directors has the authority to amend the Plan to require that a successor corporation assume any outstanding Options. 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. The holder, by acceptance of this Option, hereby consents to the placing of restrictive legend on any stock certificate for shares purchased hereunder, setting forth the restrictions applicable to the further resale, transfer or other conveyance thereof without registration under the Securities Act of other applicable law or the availability of an exemption from registration thereunder and to the placing of transfer restrictions on the records of the transfer agent for such shares. In addition, the holder hereof will not thereafter resell, transfer or otherwise convey any shares purchased hereunder without compliance with one of the following three conditions: (1) an opinion of the holder's counsel is received, in form and substance satisfactory to counsel for the Company, that registration under the Securities Act and applicable state securities laws is not required; or (2) such shares have been registered for sale under the Securities Act and any applicable state securities laws; or (3) a "no-action" letter is received from the staff of the Securities and Exchange Commission and from applicable state securities agencies, based on an opinion of the holder's counsel in form and substance reasonably satisfactory to counsel for the Company, advising that registration under the Securities Act is not required. 5 WITNESS the seal of the Company and the signatures of its duly authorized officers or agents. Dated: October 13, 1999 K-V PHARMACEUTICAL COMPANY By /s/ Richard H. Chibnall ------------------------------ Vice President, Finance ACCEPTED: /s/ Alan G. Johnson - --------------------------------- Alan G. Johnson 6 EX-10.(GG) 8 exh10pgg.txt Exhibit 10(gg) STOCK OPTION AGREEMENT (Non-Assignable) Date: Option Number: 91-1457 October 13, 1999 Number of Shares Purchasable 16,390 To Purchase Shares of Class A Common Stock -of- K-V PHARMACEUTICAL COMPANY Issued Pursuant to the 1991 Incentive Stock Option Plan (the "Plan") --------------------------------------------- THIS CERTIFIES THAT Alan G. Johnson is hereby granted the option to purchase, at the option price of $15.250 per share, all or any part of that number of fully paid and non-assessable shares of the Class A Common Stock, par value $0.01 per share ("Class A 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 non-assignable and non-transferable, except to the extent that the holder's legatees, personal representatives or distributees in the event of the holder's death may be permitted to exercise this Option as hereinafter set forth. Any attempted transfer, assignment, pledge, hypothecation or other disposition of this Option except as provided herein or in accordance with the Company's 1991 Incentive Stock Option Plan (the "Plan") shall be null and void and without effect. As of October 13, 1999, and prior to its expiration or earlier termination, this Option shall be exercisable from time to time in cumulative installments as to all or any of the shares then purchasable hereunder as follows: During the twelve-month period commencing October 13, 1999 and ending October 12, 2000, it may be exercised as to 20% of the shares originally subject hereto; and during each additional consecutive twelve-month period, it may be exercised as to an additional 20%; until the fifth twelve-month period, during which this Option shall be exercisable as to all the shares subject hereto. 1 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 A 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 Committee, as defined in the Plan, by delivering at fair market value, as determined by the Committee (as provided under the Plan), 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 Committee. Except as hereinafter provided, no Option may be exercised at any time unless the holder hereof is an employee of the Company or any of its subsidiaries. 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. Initially, all Class A Common Stock purchased pursuant to the exercise of this Option shall be held by the Company for a period of two years from the date of exercise (the "Holding Period"). If the holder leaves the employ of the Company during the Holding Period for any reason, except retirement (under normal Company policies), death or disability, the holder's purchase thereof shall be voidable at the Company's sole option and discretion at any time within the Holding Period. If any purchase of Class A Common Stock is so voided, the least of (i) the funds paid by the holder in connection with the voided transaction; (ii) the value in cash of Common Stock used to purchase such Class A Common Stock, determined as of the date of such purchase, less any amount which would have been forfeited pursuant to the Plan relative to Stock used to purchase the forfeited stock if such Stock has not been so used and the 2 Holding Period relative to such stock had not expired; or (iii) the fair market value per share, as determined on the date of termination of the holder's employment with the Company in accordance with the provisions of the Plan, shall be returned in full to the holder within thirty (30) days after such purchase is voided; provided, however, no payment shall be due prior to the time that the Company is in possession of the Class A Common Stock and an executed stock power with respect to such Stock. In order to facilitate the repurchase of Class A Common Stock by the Company in accordance with the terms of this Paragraph, each holder who exercises any Option or portion thereof shall, at the time of payment for such Class A Common Stock, as provided hereinabove, deliver to the Company a form of stock power and assignment signed by such holder in form and substance satisfactory to the Company, rendering the certificate representing the shares purchased negotiable to the Company. Notwithstanding the foregoing, if any holder who exercises an Option demonstrates to the Committee of the Company a need to obtain financing for the purchase of Class A Common Stock and indicates his good faith intention to remain in the employ of the Company during the Holding Period, the Committee, in its sole discretion, may permit delivery of any Class A Common Stock purchased hereunder to a financial institution for use as collateral security for the purchase of the Class A Common Stock, subject to any necessary or appropriate restrictions with respect thereto as may be required to comply with applicable federal and state securities laws and/or the listing requirements of any national securities exchange, and the holder may use any Class A Common Stock so held in payment of the Option Price for additional Class A Common Stock, as provided for herein. If the holder remains in the employ of the Company throughout the Holding Period or is terminated by reason of death, disability or retirement (under normal Company policies), the Company shall deliver to the holder or the holder's personal representative, as soon as practicable thereafter, certificates representing the Class A 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. If the Company fails or declines to exercise its right to void any purchase pursuant to the terms of the preceding paragraph hereof, the Company shall deliver the Certificates to the holder as soon as practicable after the expiration of two years from the date of exercise. Notwithstanding the provisions of the two preceding paragraphs, if the holder's employment by the Company is terminated after three (3) years following the holder's date of commencement of employment ("Start Date"), all exercised portions of this Option may be retained by the holder up to sixty percent (60%) of the total number of shares covered by this Option, if the holder's employment by the Company is terminated after four (4) years from Start Date, all exercised portions of this Option may be retained up to eighty percent (80%) of the total number of shares covered by this Option, and if the holder's employment by the Company is terminated after five (5) years from Start Date, all exercised portions of this Option may be retained up to one hundred percent (100%) of the total number of shares covered by this Option. 3 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. Except as provided in this paragraph, upon termination of the holder's employment with the Company or any of its subsidiaries for any reason, this Option shall terminate. If the employment of the Participant is terminated by reason of retirement (under normal Company policies), any outstanding Option or unexercised portion thereof granted to him may be fully exercised by the Participant, his personal representative, executor, administrator, heirs or devisees, as applicable, at any time, within three months from the date of termination by reason of retirement. If the employment of a Participant is terminated by reason of death or disability, any outstanding Option or unexercised portion thereof which was granted to him may be fully exercised by the Participant, his personal representative, executor, administrator, heirs or devisees, as applicable, at any time within one year from the date of termination by reason of death or disability, provided that the Participant has completed three (3) full years of employment with the Company from the date the Option was granted. If the Participant has not completed three (3) full years of employment with the Company from the date the Option was granted, the Option may be exercised only to the extent exercisable as of the date of termination of employment. Notwithstanding any of the foregoing, the transfer of employment from the Company to any Parent or Subsidiary thereof, or vice versa, shall not be deemed a termination of employment. In the event that the outstanding shares of Class A 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 A 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 Committee shall be conclusive. 4 Upon the occurrence of: (i) the dissolution or liquidation of the Company, (ii) a reorganization, merger or consolidation of the Company with one or more corporations in which the Company is not the surviving corporation, (iii) a sale of substantially all of the assets of the Company or (iv) the transfer of more than 80% of the then outstanding Stock of the Company to another entity or person in a single transaction or series of transactions, the Plan shall terminate, and any outstanding Options granted under the Plan shall terminate on the day before the consummation of the transaction; provided that the Board of Directors shall have the right, but shall not be obligated, to accelerate the time in which any Options may be exercised prior to such a termination. However, the termination of such Options shall not occur if the Board of Directors takes certain actions as provided in the Plan. In addition, the Board of Directors has the authority to amend the Plan to require that a successor corporation assume any outstanding Options. 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. The holder, by acceptance of this Option, hereby consents to the placing of restrictive legend on any stock certificate for shares purchased hereunder, setting forth the restrictions applicable to the further resale, transfer or other conveyance thereof without registration under the Securities Act of other applicable law or the availability of an exemption from registration thereunder and to the placing of transfer restrictions on the records of the transfer agent for such shares. In addition, the holder hereof will not thereafter resell, transfer or otherwise convey any shares purchased hereunder without compliance with one of the following three conditions: (1) an opinion of the holder's counsel is received, in form and substance satisfactory to counsel for the Company, that registration under the Securities Act and applicable state securities laws is not required; or (2) such shares have been registered for sale under the Securities Act and any applicable state securities laws; or (3) a "no-action" letter is received from the staff of the Securities and Exchange Commission and from applicable state securities agencies, based on an opinion of the holder's counsel in form and substance reasonably satisfactory to counsel for the Company, advising that registration under the Securities Act is not required. 5 WITNESS the seal of the Company and the signatures of its duly authorized officers or agents. Dated: October 13, 1999 K-V PHARMACEUTICAL COMPANY By /s/ Richard H. Chibnall ------------------------------ Vice President, Finance ACCEPTED: /s/ Alan G. Johnson - --------------------------------- Alan G. Johnson 6 EX-10.(HH) 9 exh10phh.txt Exhibit 10(hh) STOCK OPTION AGREEMENT Date: Option Number: 91B-277 October 13, 1999 Number of Shares Purchasable 34,190 To Purchase Shares of Class B Common Stock -of- K-V PHARMACEUTICAL COMPANY THIS CERTIFIES THAT Alan G. Johnson is hereby granted the option to purchase, at the option price of $15.813 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, except to the extent that the holder's legatees, personal representatives or distributees in the event of the holder's death may be permitted to exercise this Option as hereinafter set forth. As of October 13, 1999, and prior to its expiration or earlier termination, this Option shall be exercisable from time to time in cumulative installments as to all or any of the shares then purchasable hereunder as follows: During the twelve-month period commencing October 13, 1999 and ending October 12, 2000, it may be exercised as to 20% of the shares originally subject hereto; and during each additional consecutive twelve-month period, it may be exercised as to an additional 20%; until the fifth twelve-month period, during which this Option shall be exercisable as to all 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 1 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 Committee, as defined in the Plan, by delivering at fair market value, as determined by the Committee (as provided under the Plan), 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 Committee. Except as hereinafter provided, no Option may be exercised at any time unless the holder hereof is an employee of the Company or any of its subsidiaries. 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. Initially, all Class B Common Stock purchased pursuant to the exercise of this Option shall be held by the Company for a period of two years from the date of exercise (the "Holding Period"). If the holder leaves the employ of the Company during the Holding Period for any reason, except retirement (under normal Company policies), death or disability, the holder's purchase thereof shall be voidable at the Company's sole option and discretion at any time within the Holding Period. If any purchase of Class B Common Stock is so voided, the least of (i) the funds paid by the holder in connection with the voided transaction; (ii) the value in cash of Common Stock used to purchase such Class B Common Stock, determined as of the date of such purchase, less any amount which would have been forfeited pursuant to the Plan relative to Stock used to purchase the forfeited stock if such Stock has not been so used and the Holding Period relative to such stock had not expired; or (iii) the fair market value per share, as determined on the date of termination of the holder's employment with the Company in accordance with the provisions of the Plan, shall be returned in full to the holder within thirty (30) days after such purchase is voided; provided, however, no payment shall be due prior to the time that the Company is in possession of the Class B Common Stock and an executed stock power with respect to such Stock. In order to 2 facilitate the repurchase of Class B Common Stock by the Company in accordance with the terms of this Paragraph, each holder who exercises any Option or portion thereof shall, at the time of payment for such Class B Common Stock, as provided hereinabove, deliver to the Company a form of stock power and assignment signed by such holder in form and substance satisfactory to the Company, rendering the certificate representing the shares purchased negotiable to the Company. Notwithstanding the foregoing, if any holder who exercises an Option demonstrates to the Committee of the Company a need to obtain financing for the purchase of Class B Common Stock and indicates his good faith intention to remain in the employ of the Company during the Holding Period, the Committee, in its sole discretion, may permit delivery of any Class B Common Stock purchased hereunder to a financial institution for use as collateral security for the purchase of the Class B Common Stock, subject to any necessary or appropriate restrictions with respect thereto as may be required to comply with applicable federal and state securities laws and/or the listing requirements of any national securities exchange, and the holder may use any Class B Common Stock so held in payment of the Option Price for additional Class B Common Stock, as provided for herein. If the holder remains in the employ of the Company throughout the Holding Period or is terminated by reason of death, disability or retirement (under normal Company policies), the Company shall deliver to the holder or 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. If the Company fails or declines to exercise its right to void any purchase pursuant to the terms of the preceding paragraph hereof, the Company shall deliver the Certificates to the holder as soon as practicable after the expiration of two years from the date of exercise. Notwithstanding the provisions of the two preceding paragraphs, if the holder's employment by the Company is terminated after three (3) years following the holder's date of commencement of employment ("Start Date"), all exercised portions of this Option may be retained by the holder up to sixty percent (60%) of the total number of shares covered by this Option, if the holder's employment by the Company is terminated after four (4) years from Start Date, all exercised portions of this Option may be retained up to eighty percent (80%) of the total number of shares covered by this Option, and if the holder's employment by the Company is terminated after five (5) years from Start Date, all exercised portions of this Option may be retained up to one hundred percent (100%) of the total number of shares covered by this Option. 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. 3 Except as provided in this paragraph, upon termination of the holder's employment with the Company or any of its subsidiaries for any reason, this Option shall terminate. If the employment of the Participant is terminated by reason of retirement (under normal Company policies), any outstanding Option or unexercised portion thereof granted to him may be fully exercised by the Participant, his personal representative, executor, administrator, heirs or devisees, as applicable, at any time, within three months from the date of termination by reason of retirement. If the employment of a Participant is terminated by reason of death or disability, any outstanding Option or unexercised portion thereof which was granted to him may be fully exercised by the Participant, his personal representative, executor, administrator, heirs or devisees, as applicable, at any time within one year from the date of termination by reason of death or disability, provided that the Participant has completed three (3) full years of employment with the Company from the date the Option was granted. If the Participant has not completed three (3) full years of employment with the Company from the date the Option was granted, the Option may be exercised only to the extent exercisable as of the date of termination of employment. Notwithstanding any of the foregoing, the transfer of employment from the Company to any Parent or Subsidiary thereof, or vice versa, shall not be deemed a termination of employment. 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 Committee shall be conclusive. Upon the occurrence of: (i) the dissolution or liquidation of the Company, (ii) a reorganization, merger or consolidation of the Company with one or more corporations in which the Company is not the surviving corporation, (iii) a sale of substantially all of the assets of the Company or (iv) the transfer of more than 80% of the then outstanding Stock of the Company to another entity or person in a single transaction or series of transactions, the Plan shall terminate, and any outstanding Options granted under the Plan shall terminate on the day before the consummation of the transaction; provided 4 that the Board of Directors shall have the right, but shall not be obligated, to accelerate the time in which any Options may be exercised prior to such a termination. However, the termination of such Options shall not occur if the Board of Directors takes certain actions as provided in the Plan. In addition, the Board of Directors has the authority to amend the Plan to require that a successor corporation assume any outstanding Options. 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. The holder, by acceptance of this Option, hereby consents to the placing of restrictive legend on any stock certificate for shares purchased hereunder, setting forth the restrictions applicable to the further resale, transfer or other conveyance thereof without registration under the Securities Act of other applicable law or the availability of an exemption from registration thereunder and to the placing of transfer restrictions on the records of the transfer agent for such shares. In addition, the holder hereof will not thereafter resell, transfer or otherwise convey any shares purchased hereunder without compliance with one of the following three conditions: (1) an opinion of the holder's counsel is received, in form and substance satisfactory to counsel for the Company, that registration under the Securities Act and applicable state securities laws is not required; or (2) such shares have been registered for sale under the Securities Act and any applicable state securities laws; or (3) a "no-action" letter is received from the staff of the Securities and Exchange Commission and from applicable state securities agencies, based on an opinion of the holder's counsel in form and substance reasonably satisfactory to counsel for the Company, advising that registration under the Securities Act is not required. 5 WITNESS the seal of the Company and the signatures of its duly authorized officers or agents. Dated: October 13, 1999 K-V PHARMACEUTICAL COMPANY By /s/ Richard H. Chibnall ----------------------------- Vice President, Finance ACCEPTED: /s/ Alan G. Johnson - --------------------------------- Alan G. Johnson 6 EX-10.(II) 10 exh10pii.txt Exhibit 10(ii) STOCK OPTION AGREEMENT (Non-Assignable) Date: Option Number: 91B-277 October 13, 1999 Number of Shares Purchasable 15,810 To Purchase Shares of Class B Common Stock -of- K-V PHARMACEUTICAL COMPANY Issued Pursuant to the 1991 Incentive Stock Option Plan (the "Plan") --------------------------------------------- THIS CERTIFIES THAT Alan G. Johnson is hereby granted the option to purchase, at the option price of $15.813 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 non-assignable and non-transferable, except to the extent that the holder's legatees, personal representatives or distributees in the event of the holder's death may be permitted to exercise this Option as hereinafter set forth. Any attempted transfer, assignment, pledge, hypothecation or other disposition of this Option except as provided herein or in accordance with the Company's 1991 Incentive Stock Option Plan (the "Plan") shall be null and void and without effect. As of October 13, 1999, and prior to its expiration or earlier termination, this Option shall be exercisable from time to time in cumulative installments as to all or any of the shares then purchasable hereunder as follows: During the twelve-month period commencing October 13, 1999 and ending October 12, 2000, it may be exercised as to 20% of the shares originally subject hereto; and during each additional consecutive twelve-month period, it may be exercised as to an additional 20%; until the fifth twelve-month period, during which this Option shall be exercisable as to all the shares subject hereto. 1 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 Committee, as defined in the Plan, by delivering at fair market value, as determined by the Committee (as provided under the Plan), 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 Committee. Except as hereinafter provided, no Option may be exercised at any time unless the holder hereof is an employee of the Company or any of its subsidiaries. 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. Initially, all Class B Common Stock purchased pursuant to the exercise of this Option shall be held by the Company for a period of two years from the date of exercise (the "Holding Period"). If the holder leaves the employ of the Company during the Holding Period for any reason, except retirement (under normal Company policies), death or disability, the holder's purchase thereof shall be voidable at the Company's sole option and discretion at any time within the Holding Period. If any purchase of Class B Common Stock is so voided, the least of (i) the funds paid by the holder in connection with the voided transaction; (ii) the value in cash of Common Stock used to purchase such Class B Common Stock, determined as of the date of such purchase, less any amount which would have been forfeited pursuant to the Plan relative to Stock used to purchase the forfeited stock if such Stock has not been so used and the 2 Holding Period relative to such stock had not expired; or (iii) the fair market value per share, as determined on the date of termination of the holder's employment with the Company in accordance with the provisions of the Plan, shall be returned in full to the holder within thirty (30) days after such purchase is voided; provided, however, no payment shall be due prior to the time that the Company is in possession of the Class B Common Stock and an executed stock power with respect to such Stock. In order to facilitate the repurchase of Class B Common Stock by the Company in accordance with the terms of this Paragraph, each holder who exercises any Option or portion thereof shall, at the time of payment for such Class B Common Stock, as provided hereinabove, deliver to the Company a form of stock power and assignment signed by such holder in form and substance satisfactory to the Company, rendering the certificate representing the shares purchased negotiable to the Company. Notwithstanding the foregoing, if any holder who exercises an Option demonstrates to the Committee of the Company a need to obtain financing for the purchase of Class B Common Stock and indicates his good faith intention to remain in the employ of the Company during the Holding Period, the Committee, in its sole discretion, may permit delivery of any Class B Common Stock purchased hereunder to a financial institution for use as collateral security for the purchase of the Class B Common Stock, subject to any necessary or appropriate restrictions with respect thereto as may be required to comply with applicable federal and state securities laws and/or the listing requirements of any national securities exchange, and the holder may use any Class B Common Stock so held in payment of the Option Price for additional Class B Common Stock, as provided for herein. If the holder remains in the employ of the Company throughout the Holding Period or is terminated by reason of death, disability or retirement (under normal Company policies), the Company shall deliver to the holder or 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. If the Company fails or declines to exercise its right to void any purchase pursuant to the terms of the preceding paragraph hereof, the Company shall deliver the Certificates to the holder as soon as practicable after the expiration of two years from the date of exercise. Notwithstanding the provisions of the two preceding paragraphs, if the holder's employment by the Company is terminated after three (3) years following the holder's date of commencement of employment ("Start Date"), all exercised portions of this Option may be retained by the holder up to sixty percent (60%) of the total number of shares covered by this Option, if the holder's employment by the Company is terminated after four (4) years from Start Date, all exercised portions of this Option may be retained up to eighty percent (80%) of the total number of shares covered by this Option, and if the holder's employment by the Company is terminated after five (5) years from Start Date, all exercised portions of this Option may be retained up to one hundred percent (100%) of the total number of shares covered by this Option. 3 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. Except as provided in this paragraph, upon termination of the holder's employment with the Company or any of its subsidiaries for any reason, this Option shall terminate. If the employment of the Participant is terminated by reason of retirement (under normal Company policies), any outstanding Option or unexercised portion thereof granted to him may be fully exercised by the Participant, his personal representative, executor, administrator, heirs or devisees, as applicable, at any time, within three months from the date of termination by reason of retirement. If the employment of a Participant is terminated by reason of death or disability, any outstanding Option or unexercised portion thereof which was granted to him may be fully exercised by the Participant, his personal representative, executor, administrator, heirs or devisees, as applicable, at any time within one year from the date of termination by reason of death or disability, provided that the Participant has completed three (3) full years of employment with the Company from the date the Option was granted. If the Participant has not completed three (3) full years of employment with the Company from the date the Option was granted, the Option may be exercised only to the extent exercisable as of the date of termination of employment. Notwithstanding any of the foregoing, the transfer of employment from the Company to any Parent or Subsidiary thereof, or vice versa, shall not be deemed a termination of employment. 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 Committee shall be conclusive. 4 Upon the occurrence of: (i) the dissolution or liquidation of the Company, (ii) a reorganization, merger or consolidation of the Company with one or more corporations in which the Company is not the surviving corporation, (iii) a sale of substantially all of the assets of the Company or (iv) the transfer of more than 80% of the then outstanding Stock of the Company to another entity or person in a single transaction or series of transactions, the Plan shall terminate, and any outstanding Options granted under the Plan shall terminate on the day before the consummation of the transaction; provided that the Board of Directors shall have the right, but shall not be obligated, to accelerate the time in which any Options may be exercised prior to such a termination. However, the termination of such Options shall not occur if the Board of Directors takes certain actions as provided in the Plan. In addition, the Board of Directors has the authority to amend the Plan to require that a successor corporation assume any outstanding Options. 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. The holder, by acceptance of this Option, hereby consents to the placing of restrictive legend on any stock certificate for shares purchased hereunder, setting forth the restrictions applicable to the further resale, transfer or other conveyance thereof without registration under the Securities Act of other applicable law or the availability of an exemption from registration thereunder and to the placing of transfer restrictions on the records of the transfer agent for such shares. In addition, the holder hereof will not thereafter resell, transfer or otherwise convey any shares purchased hereunder without compliance with one of the following three conditions: (1) an opinion of the holder's counsel is received, in form and substance satisfactory to counsel for the Company, that registration under the Securities Act and applicable state securities laws is not required; or (2) such shares have been registered for sale under the Securities Act and any applicable state securities laws; or (3) a "no-action" letter is received from the staff of the Securities and Exchange Commission and from applicable state securities agencies, based on an opinion of the holder's counsel in form and substance reasonably satisfactory to counsel for the Company, advising that registration under the Securities Act is not required. 5 WITNESS the seal of the Company and the signatures of its duly authorized officers or agents. Dated: October 13, 1999 K-V PHARMACEUTICAL COMPANY By /s/ Richard H. Chibnall ------------------------------ Vice President, Finance ACCEPTED: /s/ Alan G. Johnson - --------------------------------- Alan G. Johnson 6 EX-10.(RR) 11 exh10prr.txt Exhibit 10(rr) STOCK OPTION AGREEMENT Date: Option Number: 01B-278 July 26, 2002 Number of Shares Purchasable 100,000 To Purchase Shares of Class B Common Stock -of- K-V PHARMACEUTICAL COMPANY Issued Pursuant to the 2001 Incentive Stock Option Plan (the "Plan") --------------------------------------------- THIS CERTIFIES THAT Marc S. Hermelin is hereby granted the option to purchase, at the option price of $18.755 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 four (4) years from the date hereof (hereinafter called the "expiration date.") This Option and all rights hereunder shall be assignable and transferable. As of July 26, 2002, 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 four-year period commencing July 26, 2002 and ending July 25, 2006 it may be exercised as to all or any shares at anytime 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 1 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 Committee, as defined in the Plan, by delivering at fair market value, as determined by the Committee (as provided under the Plan), 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 Committee. 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 or 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, 2 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 Committee 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 the resolutions duly adopted by the Committee, 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 Committee of any questions which may arise with respect to the interpretation and construction of the provisions of this Option shall be final. 3 WITNESS the seal of the Company and the signatures of its duly authorized officers. Dated: July 26, 2002 K-V PHARMACEUTICAL COMPANY By /s/ Richard H. Chibnall -------------------------- Vice President, Finance ACCEPTED: /s/ Marc S. Hermelin - --------------------------------- Marc S. Hermelin 4 EX-10.(SS) 12 exh10pss.txt Exhibit 10(ss) STOCK OPTION AGREEMENT (Non-Assignable) Date: Option Number: 01B-279 October 21, 2002 Number of Shares Purchasable 5,000 To Purchase Shares of Class B Common Stock -of- K-V PHARMACEUTICAL COMPANY THIS CERTIFIES THAT John P. Isakson (the "Participant") is hereby granted the option to purchase, at the option price of $15.310 per share (the "Option Price"), 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 non-assignable and non-transferable, except to the extent that the holder's legatees, personal representatives or distributees in the event of the holder's death may be permitted to exercise this Option as hereinafter set forth. Any attempted transfer, assignment, pledge, hypothecation or other disposition of this Option except as provided herein shall be null and void and without effect. As of October 21, 2002, and prior to its expiration or earlier termination, this Option shall be exercisable from time to time in cumulative installments as to all or any of the shares then purchasable hereunder as follows: During the twelve-month period commencing October 21, 2002 and ending October 20, 2003, it may be exercised as to 20% of the shares originally subject hereto; and during each additional consecutive twelve-month period, it may be exercised as to an additional 20%; until the fifth twelve-month period, during which this Option shall be exercisable as to all 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 1 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 of Directors of the Company (with the Participant abstaining from voting), by delivering at fair market value, as determined by the Board of Directors of the Company (with the Participant abstaining from voting), Company Common Stock already owned by the holder, 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 of Directors of the Company (with the Participant abstaining from voting). Except as hereinafter provided, no Option may be exercised at any time unless the holder hereof is a director of the Company. 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"). If the holder ceases to be a director of the Company during the Holding Period for any reason, except death or disability, the holder's purchase thereof shall be voidable at the Company's sole option and discretion at any time within the Holding Period. If any purchase of Class B Common Stock is so voided, the least of (i) the funds paid by the holder in connection with the voided transaction; (ii) the value in cash of Common Stock used to purchase such Class B Common Stock, determined as of the date of such purchase, less any amount which would have been forfeited relative to Stock used to purchase the forfeited stock if 2 such Stock had not been so used and the Holding Period relative to such stock had not expired; or (iii) the fair market value per shares, as determined on the date of termination of the holder as director of the Company shall be returned in full to the holder within thirty (30) days after such purchase is voided provided, however, no payment shall be due prior to the time that the Company is in possession of the Class B Common Stock and an executed stock power with respect to such Stock. In order to facilitate the repurchase of Class B Common Stock by the Company in accordance with the terms of this Paragraph, exercise of any Option or portion thereof, the holder shall, at the time of payment for such Class B Common Stock, as provided hereinabove, deliver to the Company a form of stock power and assignment signed by the holder in form and substance satisfactory to the Company, rendering the certificate representing the shares purchased negotiable to the Company. Notwithstanding the foregoing, if the holder demonstrates to the Company a need to obtain financing for the purchase of Class B Common Stock, and indicates his good faith intention to remain a director of the Company during the Holding Period, the Company, may permit delivery of any Class B Common Stock purchased hereunder to a financial institution for use as collateral security for the purchase of the Class B Common Stock, subject to any necessary or appropriate restrictions with respect thereto as may be required to comply with applicable federal and state securities laws and/or the listing requirements of any national securities exchange, and the holder may use any Class B Common Stock so held in payment of the Option Price for additional Class B Common Stock as provided for herein. If the holder remains a director of the Company throughout the Holding Period, or ceases to be a director by reason of death or disability, the Company shall deliver to the holder or 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. If the Company fails or declines to exercise its right to void any purchase pursuant to the terms of the preceding paragraph hereof, the Company shall deliver the Certificates to the holder as soon as practicable after the expiration of two years from the date of exercise. This Option 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. 3 Except as provided in this paragraph, upon the date the holder ceases to be a director for any reason, this Option shall terminate. If the Participant's directorship is terminated by reason of death or disability, any outstanding Option or unexercised portion thereof which was granted to him may be fully exercised by the Participant, his personal representative, executor, administrator, heirs or devisees, as applicable, at any time within one (1) year from the date of termination be reason of death or disability, provided that the Participant has completed five (5) full years of service with the Company from the date the Option was granted. If the Participant has not completed five (5) full years of service with the Company from the date the Option was granted, the Option may be exercised only to the extent exercisable as of the date of termination of services. 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 Company shall be conclusive. Upon the occurrence of: (i) the dissolution or liquidation of the Company, (ii) a reorganization, merger or consolidation of the Company with one or more corporations in which the Company is not the surviving corporation, (iii) a sale of substantially all of the assets of the Company or (iv) the transfer of more than 80% of the then outstanding Stock of the Company to another entity or person in a single transaction or series of transactions, this Agreement shall terminate, and any outstanding Options shall terminate on the day before the consummation of the transaction; provided that the Board of Directors of the Company (with the Participant abstaining from voting) shall have the right, but shall not be obligated, to accelerate the time in which any Options may be exercised prior to such a termination. However, the Board of Directors of the Company (with the Participant abstaining from voting) has the authority to amend this Agreement to require that a successor corporation assume any outstanding Options. 4 The Board of Directors of the Company (with the Participant abstaining from voting) 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. The holder, by acceptance of this Option, hereby consents to the placing of restrictive legend on any stock certificate for shares purchased hereunder, setting forth the restrictions applicable to the further resale, transfer or other conveyance thereof without registration under the Securities Act of other applicable law or the availability of an exemption from registration thereunder and to the placing of transfer restrictions on the records of the transfer agent for such shares. In addition, the holder hereof will not thereafter resell, transfer or otherwise convey any shares purchased hereunder without compliance with one of the following three conditions: (1) an opinion of the holder's counsel is received, in form and substance satisfactory to counsel for the Company, that registration under the Security Act and applicable state securities laws is not required; or (2) such shares have been registered for sale under the Securities Act and any applicable state securities laws; or (3) a "no-action" letter is received from the staff of the Securities and Exchange Commission and from applicable state securities agencies, based on an opinion of the holder's counsel in form and substance reasonably satisfactory to counsel for the Company, advising that registration under the Securities Act is not required. A determination by the Board of Directors of the Company (with the Participant abstaining from voting) of any question which may arise with respect to the interpretation and construction of the provisions of this Option shall be final. 5 WITNESS the seal of the Company and the signatures of its duly authorized officers or agents. Dated: October 21, 2002 K-V PHARMACEUTICAL COMPANY By /s/ Gerald R. Mitchell --------------------------- VP, Treasurer and CFO ACCEPTED: /s/ John P. Isakson - --------------------------------- John P. Isakson 6 EX-10.(TT) 13 exh10ptt.txt Exhibit 10(tt) AGREEMENT BETWEEN FEMMEPHARMA, INC. AND K-V PHARMACEUTICAL COMPANY -------------------------- This Agreement is entered into as of the 18th day of April 2002 by and between FEMMEPHARMA, INC. ("FemmePharma"), 37 West Avenue, Suite 101, Wayne, Pennsylvania 19087, and K-V PHARMACEUTICAL COMPANY ("KV"), 2503 South Hanley Road, St. Louis, Missouri 63144. A. FemmePharma is the owner of certain technology and patent rights applicable to intravaginal products containing Danazol and vaginal anti-infective products. B. In the course of obtaining the regulatory approvals contemplated in this Agreement, and during the term of this Agreement, FemmePharma may develop certain inventions and other proprietary rights relating to the manufacture, use and sale of intravaginal products containing Danazol and vaginal anti-infective products and FemmePharma is willing to grant KV an exclusive license for the manufacture, use and sale of intravaginal products containing Danazol and vaginal anti-infective products, and KV desires to acquire the same from FemmePharma. Therefore, in consideration of the mutual covenants and agreements contained herein, and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, FemmePharma and KV, intending to be legally bound, agree as follows: 1. DEFINITIONS. ----------- As used herein, capitalized terms shall have the respective meanings set forth below. "Act" means the United States Federal Food, Drug, and Cosmetic Act, --- as amended, and rules and regulations thereunder. "Affiliate" of a Person means a Person that directly, or indirectly --------- through one or more intermediaries, controls, is controlled by or is under common control with such Person. For purposes of this definition, "control" (and, with correlative meanings, the terms "controlled by" and "under common control with") shall mean the possession of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting stock, by contract or otherwise. In the case of a corporation or other entity "control" shall be presumed to exist by, among other things, the direct or indirect ownership of more than fifty percent (50%) in voting power of its outstanding voting stock, or other voting rights. "Anti-infective Product" means any product used for the treatment ---------------------- of candidiasis, bacterial vaginosis or trichomoniasis, whether such conditions are described by such terms or any other terminology. "Claim" means any and all liabilities, damages, losses, ----- settlements, claims, actions, suits, penalties, fines, costs or expenses (including, without limitation, reasonable attorneys' fees and expenses). "Commercially Reasonable" shall mean reasonable efforts and ----------------------- diligence in developing and commercializing a Product in accordance with a party's business, legal, medical and scientific judgment, such reasonable efforts and diligence to be no less than the efforts and resources the party would use for a product owned by it or to which it has rights, which is of similar market potential at a similar stage in its product life, taking into account the competitiveness of the marketplace, the proprietary position of the compound, the regulatory structure involved, the profitability of the applicable products, and other relevant factors including, without limitation, technical, legal, scientific or medical factors. "Confidential Information" is defined in Section 12.1. ------------------------ "Danazol" has the meaning ascribed thereto in The Merck Index, 12th ------- Edition (1996, 1997). "Danazol Product" is defined under the definition of KV Product. --------------- "DMF" means the Drug Master File, as defined at 21 C.F.R. Section --- 314.420, for any Product or any manufacturing facility of KV at which a Product is manufactured. "Existing Patent" means any issued patent which falls within (a) or --------------- (b) of the definition of Patent Rights. "Fair Market Value" means the cash consideration which the selling ----------------- party would realize from an unaffiliated, unrelated buyer in an arm's length sale of an identical item sold in the same quantity and at the same time and place of transaction. "FDA" means the United States Food and Drug Administration. --- "FemmePharma Improvements" means any Technology discovered, ------------------------ developed or otherwise owned, acquired or controlled by FemmePharma or its Affilitates before or during the Term (except as covered by the Existing Patents). "FemmePharma Indemnitee" means FemmePharma and its Affiliates and ---------------------- their directors, officers, employees, agents, professional consultants, successors and assigns. "FemmePharma Product(s)" means all products other than KV Products. ---------------------- "FemmePharma Technology" means all Technology owned or controlled ---------------------- by FemmePharma or its Affiliates before or during the Term. "FemmePharma Territory" is defined in Section 2.1(b)(i). --------------------- 2 "Gross Profit" means Net Sales minus cost of goods sold (calculated ------------ in accordance with generally accepted accounting principles). "IND" means an Investigational New Drug submission under the Act or --- any equivalent submission in other countries within the Territory. "Initial Product" means the first Danazol Product that meets the --------------- Initial Product Criteria and on which an NDA is contemplated to be obtained under this Agreement. "Initial Product Criteria" means the criteria for the Initial ------------------------ Product set forth in Appendix A. ---------- "Initial Sale" and "Initial Sale Date" are defined in Section 4.2(b). ------------ ----------------- "KV Improvement" means any Technology relating to a Danazol Product -------------- discovered, developed, owned, acquired or controlled by KV or its Affiliates during the Term. "KV Improvement Notice" is defined in Section 2.1(b)(i). --------------------- "KV Improvement Product" is defined in Section 2.1(b)(i). ---------------------- "KV Indemnitee" means KV and its Affiliates and their directors, ------------- officers, employees, agents, professional consultants, successors and assigns. "KV Product" means any: (i) intravaginally administered product ---------- containing Danazol or any analogue, salt, ester, prodrug, isomer, derivative or metabolite of Danazol (a "Danazol Product"), and (ii) Anti-infective ----------------- Product. "Marketing Year" means the period from the Initial Sale Date -------------- through the 12 month period commencing on the first day of the calendar month following the Initial Sale Date and each 12 month period thereafter. "NDA" means a New Drug Application filed with the FDA seeking --- permission to market the applicable product in interstate commerce in the United States which meets the requirements of the Act or any equivalent application made in any country in the Territory. "Net Sales" means the gross amount (including the Fair Market Value --------- of any non-cash consideration) invoiced by KV and its Affiliates for sales of KV Products to third parties (excluding sales to Affiliates and sublicensees), less uncollected accounts receivable (charged off in accordance with KV's normal charge-off policies) and qualifying costs directly attributable to such sales and actually identified on the invoice or otherwise contractually borne by KV or its Affiliates. Such qualifying costs shall be limited to the following: (i) Discounts, rebates, chargebacks, reimbursements, allowances, adjustments and third party administrative fees, in amounts customary in the trade, for quantity 3 purchases and prompt payments, for wholesalers, distributors and retailers, and for governmental agencies and managed care providers; (ii) Credits, adjustments, allowances and refunds, not exceeding the original invoice amount, for claims, rejections, recalls and returns; (iii) Prepaid outbound or return transportation, packaging, handling and warehousing expenses and transportation insurance premiums; (iv) Sales, use and excise taxes, tariffs, duties, surcharges and other fees imposed by a government or governmental agency; and (v) Retroactive price reductions and shelf stock adjustments. Components of Net Sales shall be determined using the accrual method of accounting in accordance with generally accepted accounting principles applied in a manner consistent with a party's customary practices. "Non-serious adverse event" has the meaning set forth in Section 10.6. ------------------------- "Patent Assignment" is defined in Section 2.8(a). ----------------- "Patent Rights" means: (a) U.S. Patent No. 5,993,856, issued ------------- November 30, 1999, entitled "PHARMACEUTICAL PREPARATIONS AND METHODS FOR THEIR ADMINISTRATION", (b) U.S. Patent Application No. 09/355,213, filed 7/23/99, entitled "PHARMACEUTICAL PREPARATIONS AND METHODS FOR THEIR REGIONAL ADMINISTRATION," and (c) all patents and patent applications having one or more claims covering any KV Product or the preparation or use of any KV Product owned or controlled by FemmePharma or its Affiliates in the present or in the future and filed or having legal force in any country in the Territory. Each of the foregoing shall include any and all patents and patent applications in the world corresponding to the foregoing patents and patent applications, including but not limited to any and all equivalents, provisional applications (including but not limited to U.S. Provisional Application No. 60/036,727, filed January 24, 1997, and U.S. Provisional Application No. 60/052,578, filed July 15, 1997), non-provisional applications, continuations, continuations-in-part, divisionals, reissues, reexaminations, substitutions, international applications, national phase applications, regional phase applications, registrations, confirmations, renewals, petty patent applications, and utility model applications, that may be filed in the United States and every foreign country, and the patents, extensions (including, without limitation, patent term extensions and supplementary protection certificates), counterparts or derivations thereof, both foreign and domestic, that may issue thereon having one or more claims covering any KV Product or the preparation or use of any KV Product. "Person" means any individual, partnership, corporation, limited ------ liability company, firm, association, unincorporated organization, joint venture, trust or other entity. "Phase II Studies" is defined in Section 2.2. ---------------- 4 "Phase III Studies" is defined in Section 2.2. ----------------- "Serious adverse event" has the meaning set forth in Section 10.6. --------------------- "Specifications" means all manufacturing and quality control and -------------- assurance procedures, processes, practices, standards, instructions and specifications applicable to the manufacture and packaging of any KV Product, including (but not limited to) the Initial Product Criteria, as the same shall be amended to meet applicable regulatory requirements, and as included in an approved NDA for the KV Product, as amended from time to time. "Stock Purchase Agreement" means the Stock Purchase Agreement ------------------------ entered into between FemmePharma and KV contemporaneously with this Agreement. "Technology" means public and nonpublic technical or other ---------- information, trade secrets, know-how, processes, formulations, concepts, ideas, preclinical, clinical, pharmacological or other data and testing results, all experimental or test methods, laboratory notebooks, results, assays, descriptions, all scientific plans, depictions, inventions, processes, manufacturing methods, physical and analytical safety, testing and quality control data and results, customer lists, marketing information, sales information, and any other written, printed or electronically stored information and materials and any and all other intellectual property, including Patent Rights, of any nature whatsoever; in each case as and to the extent, but only as and to the extent, the same relates to a KV Product. "Term" is defined in Section 8.1. ---- "Territory" means the countries and other geographic areas set --------- forth in Appendix B. ---------- "Third Party(ies)" means any Person other than FemmePharma or any ---------------- Affiliate of FemmePharma. "Time and Events Schedule" is defined in Section 2.2. ------------------------ "Trademark" means the trademark PARDEL(TM). --------- 2. LICENSE; CLINICALS; REGULATORY APPROVAL. --------------------------------------- 2.1. Grant of Licenses; Use of Trademarks. ------------------------------------ (a) FemmePharma Grant of License. ---------------------------- (i) Subject to the terms and conditions of this Agreement, FemmePharma hereby grants to KV the exclusive right, license, with a right to sublicense as provided in this Agreement, and privilege to use the Patent Rights and FemmePharma Technology in the Territory to make, have made, import, use, offer for sale, sell, market, 5 distribute, reproduce and otherwise exploit the KV Products, but not the FemmePharma Products. (ii) FemmePharma expressly retains all rights to the Patent Rights and FemmePharma Technology, except to the extent explicitly granted to KV herein. (iii) FemmePharma hereby grants to KV the right to license or sublicense the Patent Rights and FemmePharma Technology relating to the KV Products, but not the FemmePharma Products, to any Affiliates of KV and any third party in connection with the performance of KV's rights, license, privileges and obligations under this Agreement, provided that: (A) No license or sublicense shall in any way diminish, reduce or eliminate any of KV's obligations to FemmePharma under this Agreement and KV shall remain primarily liable for such obligations; (B) KV shall obtain FemmePharma's prior written approval of the license, sublicense or assignment of KV's rights and obligations hereunder to TAP Pharmaceutical Products Inc., AstraZeneca PLC, Pharmacia Corporation or Sanofi-Synthelabo Inc., or any Affiliate of any such entity, which approval shall not be unreasonably withheld; and (C) All obligations of KV to FemmePharma under this Agreement shall be binding upon the licensee or sub-licensee as if the licensee or sub-licensee was a party to this Agreement, and the licensee or sub-licensee shall undertake in writing to perform all obligations to FemmePharma under this Agreement relevant to the rights and obligations assigned to and to be performed by such licensee or sub-licensee. (b) KV Grant of License to KV Improvements. -------------------------------------- (i) KV shall notify FemmePharma promptly in writing (a "KV Improvement Notice") of any KV Improvement which KV plans to commercialize (or which KV plans to incorporate in a Danazol Product to be commercialized) in the Territory (a "KV Improvement Product"). Upon the reasonable request of FemmePharma, KV shall also disclose such additional detailed data and information as may be relevant to the evaluation and understanding by FemmePharma of such KV Improvement Product; provided, however, that KV shall not be obligated to disclose its confidential proprietary technology or information until such time as FemmePharma determines that it wishes to market the KV Improvement Product. Further, any such disclosures by KV shall be subject to Section 12 of this Agreement. Subject to the terms and conditions of this Section 2.1(b), KV hereby grants to FemmePharma an exclusive license (even as to KV) to import, use, offer for sale and sell any KV Improvement Product in each country outside the Territory in which FemmePharma is selling a Danazol Product or has substantive plans to sell a Danazol Product as of the date of the KV Improvement Notice and, in the case of such FemmePharma plans, thereafter commences the sale of a Danazol Product within 12 months of the later of: (A) the Initial Sale Date, or (B) the date of the KV Improvement Notice, or such later date as is not more than six months after the commencement of the sale of the Danazol Product in any country which has required the completion of 6 additional clinical studies to obtain regulatory approval of and sell the Danazol Product therein, provided FemmePharma or its licensee is continuing to use Commercially Reasonable efforts to obtain regulatory approval and commence the sale of the Danazol Product therein (the "FemmePharma Territory"). Notwithstanding the foregoing, any usage by FemmePharma of a KV Improvement Product in the FemmePharma Territory shall be solely at the election of FemmePharma. If FemmePharma proposes to sell any KV Improvement Product in the FemmePharma Territory, directly or through its licensee(s) in any country in the FemmePharma Territory, the parties shall use their mutual reasonable good faith efforts to negotiate and execute a license agreement which contains commercially reasonable terms and conditions for the marketing, sale and distribution of the KV Improvement Product by FemmePharma and/or its licensees in the FemmePharma Territory; provided, however, that it is recognized and agreed that KV cannot represent or warrant that a KV Improvement Product will be approvable by regulatory authorities in any other country or otherwise saleable outside the Territory, notwithstanding that it can be sold by KV in the Territory, and it shall be FemmePharma's responsibility to assure compliance with applicable regulatory and other requirements with respect to any such sales or proposed sales. (ii) It is expressly understood and agreed to by the parties that upon the incorporation of a KV Improvement into a Danazol Product sold in the Territory by KV or any Affiliate, licensee or sublicensee of KV (pursuant to a license or sublicense from KV or its Affiliate), such KV Improvement will be considered part of the Danazol Product for purposes of the calculation of the royalties payable by KV to FemmePharma on Net Sales of the Danazol Product under Section 4.2(d)(i). (iii) KV shall have the right to market and sell any KV Improvement Product in any country outside both the Territory and the FemmePharma Territory. In the event KV markets and sells a KV Improvement Product outside the Territory itself or through its Affiliate, KV will pay FemmePharma a royalty equal to 5% of its Net Sales thereof outside the Territory. If KV or its Affiliate markets and sells a KV Improvement Product outside the Territory through a licensee or sublicensee, then KV shall pay FemmePharma a percentage of amounts received by KV with respect to the KV Improvement Product, calculated in the same manner as provided in the last sentence of Section 4.2(g)(i) with respect to Anti-Infective Products. (c) License of Trademark. -------------------- (i) Subject to the terms and conditions of this Agreement, FemmePharma hereby grants to KV the perpetual fully-paid exclusive right and license to use and sublicense the Trademark and goodwill associated therewith in connection with the manufacture, use or sale of any KV Product in the Territory. Subject to the limited right of use granted in this Section, all title to and ownership of the Trademark shall remain with FemmePharma. (ii) Notwithstanding the provisions of Section (i) above or any other provision of this Agreement, KV shall have no obligation to use or display the Trademark in connection with the manufacture, use, offer for sale, import or sale of any KV Product and 7 FemmePharma shall have no interest or rights in any trademarks or other marks used by KV in connection with the sale of any KV Product. (iii) Any use or display of the Trademark by KV shall be in or consistent with the form, if any, provided by FemmePharma, and KV shall fully comply with all reasonable guidelines, if any, communicated by FemmePharma concerning the use of the Trademark. (iv) KV shall not utilize the Trademark in any manner that could reasonably be expected to have a material adverse effect upon the goodwill of FemmePharma associated with the Trademark. 2.2. Initial Product Completion and Approval. Upon the execution of --------------------------------------- this Agreement FemmePharma agrees, according to the Time and Events Schedule set forth in Appendix C (the "Time and Events Schedule"), but subject to ---------- such delays as are caused by changes in the requirements of the FDA applicable to the clinical studies or other requirements for obtaining FDA approval of the Initial Product, but in any event in each case not later than 90 days following the respective dates for each event set forth in the Time and Events Schedule: (a) Phase II Studies. That FemmePharma has obtained an approved IND and shall promptly commence and obtain completed Phase II Studies of the Initial Product according to the protocol, clinical plan and clinicians set forth in Appendix D, as the same may be amended upon mutual ---------- agreement of the parties as and to the extent necessary to obtain regulatory approval of the Initial Product. During the period during which such studies are being conducted, KV shall have the right to visit, upon one business day's notice to FemmePharma, the clinical study sites which are participating therein and to review and discuss the work records and the progress and results of the studies with the clinicians involved in the studies. FemmePharma also agrees to provide KV with copies of any reports or correspondence with such clinical study sites and clinicians relating to the conduct of the studies or results thereof. FemmePharma shall obtain and provide KV with a full written report of the Phase II Studies, including the results and conclusions thereof, and three original copies of the full and final written clinical report and statistical analysis of the Phase II Studies, addressed to KV. If the results of the Phase II Studies do not meet the parameters set forth in Appendix A and Appendix D, KV shall have the ---------- ---------- right to terminate this Agreement with respect to the Danazol Product and thereupon KV shall have no further rights or obligations under this Agreement with respect to the Danazol Product (which termination shall not affect the remaining rights and obligations of the parties hereunder with respect to the anti-infective products) upon written notice of such termination to FemmePharma at any time within the 30 day period immediately succeeding the delivery to KV of the final Phase II clinical report. For these purposes, "Phase II Studies" shall mean a clinical study comprising patients with endometriosis to whom the Initial Product is administered in order to preliminarily assess the effectiveness of the Initial Product for endometriosis, the optimal dose thereof and regimen therefor, and the side effects associated with the Initial Product, all as further described in the meeting minutes delivered from the FDA to FemmePharma and in related regulatory documents, as the same shall be attached as part of Appendix D to ---------- this Agreement. 8 (b) Phase III Studies. If KV has not given notice of its intention to terminate this Agreement within the 30 day period contemplated in Section 2.2(a), that FemmePharma will commence and obtain Phase III Studies of the Initial Product (subject to the receipt of an adequate supply of Initial Product from KV to conduct the Phase III Studies, in accordance with the second sentence of Section 3.1) according to the protocol, clinical plan and clinicians set forth in Appendix E, as the same may be amended upon ---------- mutual agreement of the parties as and to the extent necessary to obtain regulatory approval of the Initial Product, which Phase III Studies shall be sufficient to obtain FDA approval of an NDA for the Initial Product. During the period during which such studies are being conducted, KV shall have the right to visit, upon one business day's notice to FemmePharma and only to the extent permitted under applicable FDA regulations, the clinical study sites which are participating therein and to review and discuss the work records and the progress and results of the studies with the clinicians involved in the studies. FemmePharma also agrees to provide KV with copies of any reports or correspondence with such clinical study sites and clinicians relating to the conduct of the studies or results thereof. FemmePharma shall obtain and provide KV with a full and final written clinical report and statistical analysis of the Phase III Studies, including the results and conclusions thereof, and three original copies of the final Phase III clinical report, addressed to KV. For these purposes, "Phase III Studies" shall mean a series of expanded controlled and uncontrolled, pivotal, multi-center (generally) clinical studies after adequate completion of Phase II Studies, comprising patients with endometriosis, to whom the Initial Product is administered in order to obtain sufficient efficacy and safety data to support regulatory submissions and labeling of the Initial Product. If the results of the Phase III Studies do not meet the parameters set forth in Appendix A and Appendix E, KV shall have the right ---------- ---------- to terminate this Agreement with respect to the Danazol Product and thereupon KV shall have no further rights or obligations under this Agreement with respect to the Danazol Product (which termination shall not affect the remaining rights and obligations of the parties hereunder with respect to the anti-infective products) upon written notice of such termination to FemmePharma at any time within the 30 day period immediately succeeding the delivery to KV of the final Phase III clinical report. (c) NDA. If KV has not given notice of its intention to terminate this Agreement with respect to the Danazol Product within the 30 day period contemplated in Section 2.2(b), that FemmePharma will use its commercially reasonable efforts to prepare and file an NDA for the Initial Product with the FDA within 150 days following the completion of the Phase III Studies, plus such additional time as is approved by KV as a result of unforeseen delays, which approval shall not be unreasonably withheld, and thereafter will use its reasonable commercial efforts to obtain FDA approval thereof; provided, however, that FemmePharma shall not be in breach of this Section 2.2(c) by reason of, and for the period of, any delay by FemmePharma in filing or obtaining approval of an NDA arising from: (i) a delay by KV in providing information for or otherwise taking any action required to be taken by KV in connection with KV or its Affiliate or their designee being named as the manufacturer and/or distributor of the Initial Product therein, or (ii) the inability of KV or its designee to qualify to be 9 named as the manufacturer of the Initial Product in the NDA or a failure of KV to pay any amounts payable under Sections 2.4 or 2.5 hereof. Upon receipt of FDA approval of an NDA for the Initial Product and payment of the amounts payable by KV to FemmePharma under Sections 4.2(a) and (b), FemmePharma will transfer the ownership of the NDA to KV. Notwithstanding the foregoing, however, from and after the termination of this Agreement by reason of the breach of this Agreement by KV, all right, title and interest in the NDA will be transferred to and vested solely in FemmePharma, and KV hereby assigns to FemmePharma all right, title and interest in the NDA effective as of such termination. (d) Costs. That, except as set forth in Sections 2.4 and 2.5 or otherwise expressly agreed to by KV, FemmePharma will pay the cost of obtaining the Phase II Studies and the Phase III Studies for the Initial Product and filing and obtaining approval of an NDA for the Initial Product, including (but not limited to) the cost of any required clinical batches of the Initial Product required for the conduct of the Phase II Studies. (e) KV Completion, Termination. If FemmePharma does not proceed according to the "Time and Events Schedule" set forth in Appendix C, ---------- other than by reason of: (i) such delays as are caused by changes in the requirements of the FDA applicable to the clinical studies or other requirements for obtaining FDA approval of the Initial Product, but in any event in each case not later than 90 days following the respective dates for each event set forth in the Time and Events Schedule with respect to the Initial Product; or (ii) any delay or failure by KV to pay any amount payable to FemmePharma under this Agreement or the Stock Purchase Agreement, to provide adequate supplies of the Initial Product for completion of Phase III Studies, to provide such information and otherwise take such steps as are necessary to qualify itself or its Affiliate or designee as the manufacturer of the Initial Product under the NDA therefor, or to otherwise perform in accordance with this Agreement, then, in addition to any other remedies available to KV therefor, KV shall have the right, in its sole discretion upon written notice to FemmePharma, to proceed therewith on behalf of FemmePharma. If KV does so, each of the royalties payable by KV under Section 4.2(d)(i) shall be reduced by 2% (e.g. from 8% to 6%), and any commercially reasonable out-of-pocket funds paid by KV therefor shall be repaid to KV by FemmePharma with interest thereon, calculated monthly at the representative prime rate of interest published from time to time in the Wall Street Journal, plus 3%, from: (A) amounts otherwise payable to FemmePharma by KV under this Agreement (with any deduction being applied first to the payment of accrued interest) and (B) if necessary, under the Stock Purchase Agreement; provided, however, that if any funds otherwise to be invested by KV in FemmePharma under the Stock Purchase Agreement are used for this purpose, the same shall be credited against the payment otherwise due under the Stock Purchase Agreement and shall not reduce the number of shares of FemmePharma Preferred Stock otherwise receivable by KV therefor under the Stock Purchase Agreement. 10 2.3. Reporting. No later than the 15th day after the end of each --------- month (or the next business day if the 15th day is not a business day) prior to the completion of the clinical studies contemplated to be obtained by Section 2.2 and approval of an NDA for the Initial Product, FemmePharma agrees to submit to KV a written progress report detailing the work done by FemmePharma and progress and results of any clinical studies and regulatory applications during the prior month, including a review of compliance with the Time and Events Schedule. In addition, FemmePharma shall be available to consult with KV via telephone at any time during normal business hours during the clinical studies and regulatory approval period regarding the progress thereof. 2.4. Validation. KV shall be responsible, at its expense, for all ---------- process validation and analytical method development and validation necessary for the manufacture and sale of any KV Product by KV and/or its Affiliate(s), licensees, sublicensee(s) or subcontractor(s). 2.5. Other Regulatory Approvals. -------------------------- (a) KV will be responsible for making all applications and obtaining all regulatory approvals necessary to the manufacture, importation, use and sale of any KV Product in any country in the Territory outside the United States in which KV or its Affiliates or their sublicensees expects to manufacture, import, use or sell any KV Product. FemmePharma will assist KV and its Affiliates and their sublicensees to the extent reasonably necessary in making such applications or obtaining such approvals, including the filing (where applicable) of separate applications or other filings, including patent applications, if reasonably necessary to obtain available patent protection and/or approval and to implement the manufacture, importation, use and sale of any KV Product in the Territory. (b) KV shall be responsible for filing and maintaining all documentation and other information required by any state, territory or possession (including Puerto Rico) of the United States for the purpose of listing any KV Product on each such state's or territory's or possession's formulary, and obtaining such other approvals as may be necessary to market any KV Product in each state, territory or possession. 2.6. Commercialization. ----------------- (a) KV agrees to cause the initial commercial introduction and sale of the Initial Product to occur in the United States, directly or through its Affiliate(s), promptly upon FDA approval of an NDA for the Initial Product, and thereafter to use its Commercially Reasonable efforts to market the Initial Product in the Territory and otherwise to continue or cause the continuation of the active marketing, promotion and sale of the Initial Product during the term of this Agreement. KV agrees to position and promote the Initial Product, through a minimum sales force of 150 representatives, with the same or greater level of diligence, marketing, sales effort and promotion as it would apply to other similar new products marketed by KV, both upon initial market introduction and thereafter. In addition, KV agrees to use its Commercially Reasonable efforts, subsequent to the Initial Sale, to market, sell and promote the Initial Product, directly or through sublicensees, in all other countries in the Territory, it being understood that KV's commitment to do so is a material element of this Agreement. 11 (b) (i) KV hereby grants FemmePharma a non-exclusive right to co-promote the Initial Product to reproductive endocrinologists in the United States and its territories and possessions (including Puerto Rico). FemmePharma agrees to position and promote the Initial Product to reproductive endocrinologists through a minimum sales force of 10 representatives. FemmePharma shall have the right to determine whether or not to market and sell the Initial Product to reproductive endocrinologists hereunder; provided, however, that FemmePharma shall give KV notice of its determination to co-promote or not to co-promote the Initial Product to reproductive endocrinologists within 180 days after the filing of an NDA for the Initial Product. If FemmePharma gives KV such notice that it will not co-promote the Initial Product or fails to give KV notice that it will co-promote the Initial Product to reproductive endocrinologists hereunder, FemmePharma's right to co-promote the Initial Product to reproductive endocrinologists under this Agreement shall terminate and be of no further force or effect. If FemmePharma co-promotes the Initial Product to reproductive endocrinologists hereunder, FemmePharma shall use Commercially Reasonable efforts to market, sell and promote the Initial Product to reproductive endocrinologists with not less than the above number of FemmePharma's own representatives, who shall be provided product information and trained on the attributes of and sale of the Initial Product by FemmePharma, as necessary to achieve full coverage of the reproductive endocrinologist specialty in the United States. (ii) If FemmePharma gives KV notice of its election to co-promote the Initial Product to reproductive endocrinologists hereunder, then prior to the Initial Sale Date of the Initial Product, KV and FemmePharma will negotiate and execute a co-promotion agreement, upon commercially reasonable terms, which includes the provisions of this Section 2.6(b) and otherwise sets forth in further detail the parties' respective rights and obligations regarding such co-promotion activities, including, without limitation, the terms upon which prescriptions written by reproductive endocrinologists will be detailed and determined for the purpose of this Section 2.6(b). (iii) All promotional materials and messages utilized by FemmePharma in connection with the marketing, promotion, sale or distribution of the Initial Product shall be consistent with any such materials used by KV and with applicable legal requirements and otherwise shall be subject to the prior written approval of KV. In addition, FemmePharma shall provide reasonable advance notice to KV of all communications provided to FemmePharma's sales representatives for the positioning, promotion or selling messages for the Products for KV's review and approval. FemmePharma shall also distribute, and shall purchase from KV its requirements of, samples of the Initial Product. (iv) If and when FemmePharma co-promotes the Initial Product, KV will pay FemmePharma 50% of KV's Gross Profit on prescriptions written for the Initial Product by reproductive endocrinologists. For such purposes, the amount due and payable to FemmePharma shall be calculated by dividing the number of prescriptions written by reproductive endocrinologists during each calendar quarter by the total number of prescriptions written for the Initial Product during the quarter (as such information is reported by IMS, NDC, Scott Levin or a similar reporting service selected by KV and agreed to by FemmePharma, which agreement shall not be unreasonably withheld) and multiplying the percentage so obtained by 12 KV's total Gross Profit on Net Sales of the Initial Product for the quarter. Payment of the amount so determined shall be made to FemmePharma not later than 30 days after the date that the data becomes available from IMS, NDC, Scott Levin or such other service with respect to each calendar quarter, accompanied by a report showing the calculation thereof. (c) During the Term, except for the sale of any Danazol Product hereunder, neither KV nor any of its Affiliates, licensees or sublicensees shall, without the prior written consent of FemmePharma, make, have made, import, use, offer for sale or sell any product delivered via intravaginal administration for the treatment of endometriosis. Further, during the Term, neither KV nor any of its Affiliates, licensees or sublicensees shall, without the prior written consent of FemmePharma, knowingly participate as a material investor or equity owner in any other entity that makes, has made, imports, uses, offers for sale or sells any product delivered via intravaginal administration for the treatment of endometriosis; provided, however, that the foregoing shall be inapplicable where a product is acquired as a result of a merger or similar reorganization or the purchase of all or substantially all of the assets of a business and the product accounts for less than 10% of the total revenues of the business. It is expressly understood and agreed to by the parties that any Danazol Product into which a KV Improvement is incorporated will continue to constitute a Danazol Product for purposes of Section 4.2(d)(i) and to bear a royalty payable to FemmePharma thereunder, subject to the terms and conditions of this Agreement. 2.7. Anti-infective Products Completion and Approval. KV shall be ----------------------------------------------- responsible, in its sole discretion, for developing, obtaining FDA approval of, and for the marketing and sale of any Anti-infective Product(s) hereunder. Notwithstanding the foregoing, however, if KV fails to either commence, or to file for regulatory approval of, the commercial sale in the United States of an Anti-infective Product covered by the license granted to KV by FemmePharma under Section 2.1(a)(i) within five years from the date of this Agreement, all rights of KV to manufacture, use and sell Anti-infective Products under the Patent Rights and the FemmePharma Technology shall cease and be of no further force or effect under this Agreement and shall thereupon automatically and fully revert to and be owned by FemmePharma. 2.8. Assignment and License of Patent Rights Subsequent to Initial ------------------------------------------------------------- Sale Date. - --------- (a) Within five (5) days of receipt of written notice of the Initial Sale Date, FemmePharma shall assign, transfer and convey to KV joint and undivided right, title and interest in all Patent Rights, as set forth in the Assignment in Exhibit 1 (the "Patent Assignment"). KV shall --------- record the Patent Assignment within thirty (30) days after receipt thereof. However, the Patent Assignment and KV's ownership interest in the Patent Rights shall terminate and KV shall transfer and assign its ownership interest in the Patent Rights back to FemmePharma (the "Reversionary Patent Assignment") in accordance with the Assignment in Exhibit 2 if the Patent --------- Assignment has occurred and this Agreement thereafter terminates with respect to the Danazol Product for reasons other than termination by KV under Section 8.4 or 8.5. For purposes of clarity, this Agreement, to the extent it pertains to Anti-infective Products, shall thereafter continue in effect. 13 (b) Subsequent to the Patent Assignment contemplated by subsection (a), KV agrees not to amend or modify the Patent Rights without the prior written approval of FemmePharma, which approval shall not be unreasonably withheld with respect to any amendment or modification which relates to the KV Products. (c) KV Grant of Patent License. Subject to the terms and -------------------------- conditions of this Agreement, upon execution of the Patent Assignment, KV hereby grants to FemmePharma the exclusive right, license, with the right to sublicense, and privilege under the Patent Rights to make, have made, import, use, offer for sale, sell, market, distribute, reproduce and otherwise exploit any product inside or outside the Territory, except for the KV Products in the Territory; provided that: (i) any rights granted with respect to KV Improvements are subject to Section 2.1(b), and (ii) no license or sublicense by FemmePharma shall in any way diminish, reduce or eliminate any of KV's rights under this Agreement. 3. INITIAL PRODUCT MANUFACTURE; TECHNICAL ASSISTANCE. ------------------------------------------------- 3.1. (a) FemmePharma shall, at its cost and expense except as otherwise provided in this Agreement, manufacture or cause the manufacture of (i) the Initial Product for the Phase II Studies, and (ii) any product containing Danazol for marketing and sale by FemmePharma outside the Territory. (b) KV shall, at its cost and expense except as otherwise provided in this Agreement, manufacture or cause the manufacture of (i) the Initial Product for the Phase III Studies in accordance with the Specifications therefor provided to KV by FemmePharma and (ii) any KV Product for marketing and sale in the Territory under the licenses granted to KV hereunder and the NDA. (c) KV or its designee (for whose performance in accordance with the terms and conditions of this Agreement KV shall be responsible) shall be named as the manufacturer of the Initial Product (or any other Danazol Product) in the NDA filed therefor, and upon approval of the NDA, upon the written request of FemmePharma, the NDA will be amended so as to add FemmePharma or its mutually agreed designee (for whose performance in accordance with the terms and conditions of this Agreement FemmePharma shall be responsible) as an additional manufacturer of the Initial Product (or other Danazol Product) under the NDA. (d) In connection with the manufacture of the Initial Product (or any other KV Product) by KV, as provided hereunder, FemmePharma agrees to provide such technical and other assistance as is required by KV to commence the manufacture and validation and testing thereof and to provide KV with the specifications for and source of the applicator for the Initial Product (or any other KV Product) for use by KV. (e) If the parties agree at any time after the date hereof to have KV manufacture any or all of the requirements of FemmePharma or its licensees or sublicensees of any Danazol Product for marketing and sale outside the Territory (which requirements may be general or on a product-by-product and/or country-by-country basis), then the parties will use their mutual good faith efforts to execute a supply agreement on commercially reasonable terms, 14 which supply agreement will provide for the purchase of such manufactured products by FemmePharma and/or its licensees or sublicensees from KV and shall set forth in detail the parties' respective rights and obligations regarding such product manufacturing. (f) KV agrees to pay FemmePharma 5% of the Gross Profit of KV on such sales of Danazol Product by KV to FemmePharma or its licensees or sublicensees which is resold outside the Territory. (g) Any manufacture of KV Products by KV shall be conducted in accordance with applicable regulatory requirements (cGMP) and the Specifications. (h) In connection with the manufacture of the Initial Product (or any other Danazol Product) by FemmePharma or its other licensees or sublicensees for marketing, use, sale or distribution outside the Territory, KV agrees to provide such technical and other assistance as is reasonably required by FemmePharma or its other licensees or sublicensees to commence the manufacture, validation and testing thereof in connection with the manufacture, use and sale of the Danazol Product by FemmePharma and its other licensees or sublicensees outside the Territory (which shall be subject to the provisions of Section 12 or comparable confidentiality provisions and shall include the right of FemmePharma to have up to two of its employees visit KV's manufacturing facilities used for the manufacture of the Initial Product for up to five working days once a year during the three year period following the approval of an NDA for the Initial Product, without charge), provided FemmePharma otherwise agrees, or such licensees or sublicensees agree, to pay KV's standard hourly charges and related out-of-pocket expenses in connection with its providing such assistance. Such assistance by KV shall include providing such access to data and documents as is provided under Appendix F. ---------- 3.2. (a) FemmePharma agrees to deliver the FemmePharma Technology to KV pursuant to the licenses granted in Section 2.1 above and subject to the terms and conditions of this Agreement. Such information will include, without limitation, any specific information on the machinery and equipment necessary to manufacture any KV Product. (b) FemmePharma also agrees to deliver to KV pursuant to such license, as it is developed or otherwise becomes known, all other FemmePharma Technology relating to the formulation, manufacture, testing, packaging, storage, shipment, use, sale or distribution of any KV Product or other products which use the FemmePharma Technology that becomes known or is developed by FemmePharma during the term of this Agreement that could improve the process of, or reduce the cost of, the formulation, manufacture, testing, packaging, storage, shipment, use, sale or distribution of any KV Product. (c) In addition, FemmePharma will provide KV with complete original copies of any studies performed or obtained by FemmePharma with respect to any KV Product or the FemmePharma Technology for KV's use. (d) FemmePharma also agrees to make its executive, scientific and other appropriate personnel available to KV from time to time during the term of this Agreement to review, explain and discuss any of the foregoing with KV personnel. 15 (e) The parties also agree to make available to each other any medical, toxicological, pharmacological, pre-clinical, clinical, adverse reaction reports and processes for manufacture, that are developed by the respective parties relating to KV Products during the Term. (f) Such information shall be treated as the Confidential Information of the disclosing party for purposes of Article 12 of this Agreement. (g) In addition, each of KV and FemmePharma agree to use reasonable efforts to cause any license or sublicense agreement entered into with a third party regarding the development, manufacture or commercialization of any Danazol Product to contain a provision providing for, upon KV's request in the case of a license or sublicense by FemmePharma and upon FemmePharma's request in the case of a license or sublicense by KV, any medical, toxicological, pharmacological, pre-clinical, clinical, adverse reaction reports and processes for manufacture (which shall not require KV to disclose its proprietary technologies which are applicable to any KV Improvement), that are developed by the licensee or sublicensee relating to Danazol Products during the term of this Agreement. 4. PAYMENTS TO FEMMEPHARMA BY KV. ----------------------------- 4.1. Payment for Trademark License. In consideration for the ----------------------------- exclusive right and license to use and sublicense the Trademark under Section 2.1(c), KV agrees to pay FemmePharma $2,000,000. Payment therefor shall be made and shall be subject to and payable only upon the prior satisfaction of the following conditions: (a) $1,000,000 shall be payable upon the execution of this Agreement; and (b) $1,000,000 shall be payable at and subject to the completion of the Second Closing under the Stock Purchase Agreement and the prior commencement of the Phase III Studies. 4.2. Other Payments. In consideration of all other licenses and -------------- rights granted by FemmePharma to KV and related obligations to be performed by FemmePharma hereunder and transfer of the ownership of the NDA by FemmePharma to KV, as contemplated under Section 2.2(c), KV agrees to pay FemmePharma: (a) $2,000,000 upon submission of an NDA for the Initial Product to the FDA and the acceptance thereof for filing under FDA procedures. (b) $2,000,000 within 90 days after approval of the NDA and initial market introduction and sale of the Initial Product in the U.S. by KV (the "Initial Sale"). KV agrees to give FemmePharma written notice of the date of the Initial Sale (the "Initial Sale Date") promptly after the date thereof. (c) One year following the Initial Sale, $2,000,000 plus $500,000 if Net Sales of the Initial Product in the first Marketing Year exceed $25,000,000, an additional $500,000 if Net Sales of the Initial Product in the first Marketing Year exceed $50,000,000, and an additional 16 $500,000 if Net Sales of the Initial Product in the first Marketing Year exceed $75,000,000, provided KV continues to market the Initial Product in the Territory hereunder. (d) (i) With respect to each Marketing Year during the term of any of the Existing Patents with claims that cover the use, manufacture or sale of a Danazol Product hereunder: 8% on all Net Sales of the Danazol Product up to and including $50,000,000, 9% of Net Sales of the Danazol Product above $50,000,000 to and including $100,000,000, and 10% of Net Sales of the Danazol Product which exceed $100,000,000. Amounts payable by KV under subsections (c) and (d) shall be calculated at the point of last sale by KV or its Affiliate and shall be payable in U.S. dollars, with the rate of exchange to be used in computing the amount due in satisfaction of the royalty payment obligations with respect to sales in countries other than the United States to be calculated by converting such other countries' currencies to U.S. dollars based on the mean exchange rate for the purchase of U.S. dollars with such currency, as published in The Wall Street Journal on the last business day of each ----------------------- calendar quarter for which any royalty payment is to be made by KV under this Agreement. In the event KV or its Affiliate sublicenses to an unaffiliated third party the right to sell any Danazol Product in the U.S. (or its territories or possessions (including Puerto Rico)), then for purposes of determining amounts payable to FemmePharma under this Agreement, sales by such sublicensee shall be treated as if they were sales by KV or an Affiliate of KV. In the event that KV or its Affiliate sublicenses to an unaffiliated third party the right to sell any Danazol Product in any country in the Territory other than the U.S. (or its territories or possessions (including Puerto Rico)), then in lieu of any other payments to FemmePharma hereunder with respect to sales by such sublicensee, KV shall pay FemmePharma: (A) (x) 25% of any milestone and/or other non-royalty payments (excluding Danazol Product sales to such sublicensees) received from any such sublicensee in Canada or Mexico and (y) 40% of any such milestone and/or other non-royalty payments (excluding Danazol Product sales to such sublicensees) received from any such sublicensees in other countries in the Territory outside the United States, and (B) 20% of any royalties received on Danazol Product sales by such sublicensees. (ii) Amounts payable to FemmePharma by KV under subparagraph (i) shall be due and payable to FemmePharma within 30 days with respect to Net Sales of the Products in the U.S. and 45 days with respect to payments relating to portions of the Territory which are outside the U.S. after the end of each calendar quarter in which KV or any Affiliate of 17 KV has any sales of any Danazol Product, based on all sales of any Danazol Product during such quarter, or in which KV receives any such payments from a sublicensee. Each such payment shall be accompanied by an accounting of KV's and its Affiliates' sales and such other payments received for the quarter for which payment is to be made hereunder, and showing: (A) the gross sales of Danazol Product in each country in the Territory; (B) Net Sales of Danazol Product in each country in the Territory, (C) the royalties payable in United States Dollars in respect of such sales and the basis of calculating those royalties, (D) the exchange rates used in converting into United States Dollars from currencies in which sales were made, and payments due which are based on Net Sales, and (E) dispositions of Danazol Product other than pursuant to sale for cash. (e) If development costs reasonably incurred by FemmePharma in completing the Phase II Studies and Phase III Studies exceed $7,000,000 in the aggregate, then KV agrees that, upon the request of FemmePharma, KV will advance FemmePharma up to $500,000 to cover such increased costs, which amount shall be repaid to KV from future amounts thereafter payable by KV to FemmePharma under this Agreement, with each such future payment being reduced by 50% until the entire balance of such advanced amount has been so credited. If any additional development costs are reasonably incurred by FemmePharma, they will be shared equally by FemmePharma and KV, with any amount so contributed by KV being similarly treated as an advance and subject to similar repayment. (f) Upon the initial commercial introduction and sale of each separate Anti-infective Product (not, however, different strengths or put-ups of the same Anti-infective Product) by KV hereunder during the term of any of the Existing Patents with claims that cover the manufacture, use and sale of such Anti-infective Product hereunder, KV will pay FemmePharma the sum of $250,000; provided, however, that if the Danazol Product has previously been terminated from this Agreement, the amount to be paid by KV to FemmePharma shall be $250,000 as of the time of such initial commercial introduction and sale of an Anti-infective Product and $250,000 one year thereafter, provided KV is continuing to market the Anti-infective Product as of the time of such second payment. (g) (i) During the term of any of the Existing Patents with claims that cover the manufacture, use and sale of an Anti-infective Products hereunder, 2% on all Net Sales of the Anti-infective Product, calculated at the point of last sale by KV or its Affiliate and payable in U.S. dollars, with the rate of exchange to be used in computing the amount due in satisfaction of the royalty payment obligations with respect to sales in countries other than the United States to be calculated by converting such other countries' currencies to U.S. dollars based on the mean exchange rate for the purchase of U.S. dollars with such currency, as published in The Wall Street Journal on the last business day of each calendar quarter - ----------------------- for which any royalty payment is to be made by KV under this Agreement. In the event KV or its Affiliate sublicenses to an unaffiliated third party the right to sell any Anti-infective Product in the U.S. (or its territories or possessions (including Puerto Rico)), then for purposes of determining amounts payable to FemmePharma under this Agreement, sales by such sublicensee shall be treated as if they were sales by KV or an Affiliate of KV. In the event that KV or its Affiliate sublicenses to an unaffiliated third party the right to sell any Additional Product in any country other than the U.S. (or its territories or possessions (including Puerto Rico)), then in lieu of any other payments to FemmePharma hereunder with respect to sales of Anti-infective Products by 18 such sublicensee, KV shall pay FemmePharma: 20% of any milestone and/or other non-royalty payments (excluding Anti-infective Product sales to such sublicensees) and such sublicensee of any royalties, received on sales of Anti-infective Products by such sublicensees. (ii) Amounts payable to FemmePharma by KV under subparagraph (g)(i) shall be due and payable to FemmePharma within 30 days with respect to Net Sales of the Products in the U.S. and 45 days with respect to payments relating to portions of the Territory which are outside the U.S. after the end of each calendar quarter in which KV or any Affiliate of KV has any sales of any Anti-infective Product, based on all sales of any Anti-infective Products during such quarter, or in which KV receives any such payments from a licensee or sublicensee. Each such payment shall be accompanied by an accounting of KV's and its Affiliates' sales of Anti-infective Products and such other payments received for the quarter for which payment is to be made hereunder, and showing: (A) the gross sales of each Anti-infective Product in each country in the Territory; (B) Net Sales of each Anti-infective Product in each country in the Territory, (C) the royalties payable in United States Dollars in respect of such sales and the basis of calculating those royalties, (D) the exchange rates used in converting into United States Dollars from currencies in which sales were made, and payments due which are based on Net Sales of Anti-infective Products, and (E) dispositions of Anti-infective Products other than pursuant to sale for cash. 4.3. Books and Records. During the Term and for a period of three ----------------- years thereafter, KV and its Affiliates sublicensees shall keep complete and accurate records pertaining to the sale or other disposition of the KV Products in sufficient detail to permit FemmePharma to confirm the accuracy of all payments due from KV and its Affiliates, licensees and sublicensees hereunder. FemmePharma shall have the right to cause an independent, certified public accountant to audit such records to confirm Net Sales figures (of either Danazol Products and/or Anti-Infective Products) and royalty and milestone payments and other payments payable to FemmePharma; provided, however, that such auditor shall not disclose to FemmePharma any Confidential Information of KV, its Affiliates or sublicensees, except to the extent such disclosure is necessary to verify the amount of royalties and milestone payments and other payments due under this Agreement. Such audit right may be exercised once per year, within three years after the Marketing Year to which such records relate, upon reasonable advance notice to KV and during normal business hours. FemmePharma shall bear the full cost of such audit unless such audit discloses an underpayment of more than 5% in the total amount of royalties or milestones previously paid for such Marketing Year. In such case, KV shall bear the full cost of such audit. KV shall promptly remit to FemmePharma the amount of any underpayment disclosed in such audit. In addition, upon the written request of FemmePharma not more than once annually in connection with the audit of KV's financial statements for its March 31 fiscal year, KV shall cause its independent certified public accountants to confirm in writing to FemmePharma the accuracy of the calculations and payments of amounts owed and paid by KV to FemmePharma under this Agreement. The terms of this Section 4.3 shall survive any termination or expiration of this Agreement for a period of three years. 19 5. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF FEMMEPHARMA. --------------------------------------------------------- FemmePharma hereby represents and warrants to and agrees with KV as follows: 5.1. FemmePharma is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania. FemmePharma has the corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of FemmePharma, and this Agreement has been duly executed and delivered and is a legal, valid and binding obligation of FemmePharma, enforceable against FemmePharma in accordance with its terms, except as such enforcement may be limited by applicable laws relating to creditors' rights or principles of equity affecting the availability of remedies. 5.2. The execution, delivery and performance of this Agreement do not and will not conflict with or contravene any provision of the charter documents or by-laws of FemmePharma or any agreement, document, instrument, indenture or other obligation of FemmePharma or to which it or its assets are subject. 5.3. FemmePharma owns, and, subject to the terms and conditions of this Agreement, during the term of this Agreement will continue to own, the Patent Rights, the Trademark and the FemmePharma Technology, free and clear of all liens, charges, encumbrances and rights of third parties; provided, however, that the foregoing shall not prevent or restrict FemmePharma from licensing Patent Rights to Third Parties in arms length transactions in the ordinary course of its business. In the event the provisions of this Section 5.3 are violated by FemmePharma during the term of this Agreement, the Patent Assignment provided for under Section 2.8(a) shall automatically accelerate and become immediately effective as of the date of such violation by FemmePharma, and FemmePharma shall immediately take such steps as are necessary to complete the Patent Assignment. 5.4. FemmePharma has the full right, power and authority to license all of the Patent Rights that are being licensed to KV under this Agreement. 5.5. The FemmePharma Technology: (a) includes all Technology owned or controlled by FemmePharma that, to the knowledge of FemmePharma, is necessary for the completion, manufacture, use or sale of any KV Product, (b) is the property of FemmePharma and (c) to the knowledge of FemmePharma, does not infringe upon the intellectual property rights of any other Person and no Person has alleged any such infringement. 5.6. To the knowledge of FemmePharma, no other Person or product infringes upon any of the Patent Rights or the Trademark. 5.7. To the knowledge of FemmePharma, the Patent Rights are enforceable and are not invalid. 20 5.8. FemmePharma is not in default (nor has there transpired an event which with notice or the lapse of time or both would become a default) under any agreement, document, instrument, indenture or other obligation of FemmePharma which affects or could affect the KV Products, the FemmePharma Technology, the Trademark or the performance of this Agreement by FemmePharma. 5.9. FemmePharma hereby grants KV and its sublicensees, subcontractors and assignees immunity from suit by FemmePharma and its Affiliates and licensors and other licensees for infringement by KV or any such sublicensee, subcontractor or assignee of any patents now or hereafter owned or licensed by FemmePharma relating to the use by KV or any such sublicensee, subcontractor or assignee, in accordance with the terms and subject to the conditions of this Agreement, of the FemmePharma Technology or Trademark for the purpose of, or otherwise for, the making, use, sale, offer for sale or importation of any KV Product. 5.10. Gerianne DiPiano ("DiPiano") is the principal owner and officer of FemmePharma. FemmePharma has entered into an employment agreement with DiPiano, pursuant to which DiPiano has agreed that all present and future Patent Rights, FemmePharma Technology and the Trademark are owned, and all FemmePharma Improvements hereafter developed by DiPiano while DiPiano is an employee, officer, director or shareholder of FemmePharma will be owned, by FemmePharma during the Term. 5.11. THE LIMITED WARRANTIES CONTAINED IN THIS SECTION 5 ARE THE SOLE WARRANTIES GIVEN BY FEMMEPHARMA AND ARE MADE EXPRESSLY IN LIEU OF AND EXCLUDE ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND ALL OTHER EXPRESS AND IMPLIED REPRESENTATIONS AND WARRANTIES PROVIDED BY COMMON LAW, STATUTE OR OTHERWISE ARE HEREBY DISCLAIMED BY FEMMEPHARMA. FEMMEPHARMA, ITS DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS SHALL NOT BE LIABLE TO KV OR ITS AFFILIATES, SUBLICENSEES, SUCCESSORS OR ASSIGNS, OR ANY THIRD PARTY (IF SUCH THIRD PARTY'S CLAIM RESULTS FROM KV'S OR ITS AFFILIATES' OR SUBLICENSEES' OR ITS AGENTS' ACTIVITIES) WITH RESPECT TO ANY CLAIM FOR LOSS OF PROFITS, LOSS OR INTERRUPTION OF BUSINESS, OR FOR INCIDENTAL, INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING, WITHOUT LIMITATION, ECONOMIC DAMAGE OR INJURY TO PROPERTY AND LOST PROFITS, REGARDLESS OF WHETHER FEMMEPHARMA SHALL BE ADVISED, SHALL HAVE REASON TO KNOW, OR IN FACT SHALL KNOW OF THE POSSIBILITY OF SUCH DAMAGES OR INJURY. 6. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF KV. ------------------------------------------------ KV hereby represents and warrants to and agrees with FemmePharma as follows: 6.1. KV is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. KV has the corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of 21 KV, and this Agreement has been duly executed and delivered and is a legal, valid and binding obligation of KV, enforceable against KV in accordance with its terms, except as such enforcement may be limited by applicable laws relating to creditors' rights or principles of equity affecting the availability of remedies. 6.2. The execution, delivery and performance of this Agreement do not and will not conflict with or contravene any provision of the charter documents or by-laws of KV or any agreement, document, instrument, indenture or other obligation of KV or to which it or its assets are subject. 6.3. KV will manufacture or cause the manufacture of each KV Product in the United States in accordance with the requirements of the Act. 6.4. KV is not in default (nor has there transpired an event which with notice or the lapse of time or both would become a default) under any agreement, document, instrument, indenture or other obligation of KV which affects or could affect the Product or the performance of this Agreement by KV. 7. INTELLECTUAL PROPERTY; PATENT PROSECUTION. ----------------------------------------- 7.1. Technology Delivery. Upon the execution of this Agreement and ------------------- as and when hereafter available to FemmePharma, FemmePharma shall make available to KV, for its use in accordance with the terms and conditions of this Agreement, the FemmePharma Technology, including the Patent Rights, and the Trademark, including, but not limited to, providing KV with copies of all test results and all relevant portions of laboratory notebooks, designs, Specifications, formulas, procedures, clinical and preclinical data, and other relevant information. 7.2. Patent Rights; Trademark. FemmePharma shall direct and cause ------------------------ appropriate patent applications to be prepared, prosecuted and maintained in the United States and the world, in a timely fashion, to protect and cover the KV Products, the FemmePharma Products and the FemmePharma Technology. The expenses of preparing, prosecuting and maintaining such patent applications and patents shall be paid by FemmePharma. Notwithstanding the foregoing, however, the expenses of preparing, prosecuting and maintaining patent applications and patents designated by KV outside the United States shall be paid by KV. Not less than 10 business days prior to the filing or other use thereof with a Third Party or the taking of any other action which may jeopardize the same, FemmePharma will provide KV with a copy of any such filing or other documents (and any supporting documentation) and with any amendment thereto or other modification thereof, all correspondence with the filing authority or other Person, and such other information as is applicable thereto and shall give KV the opportunity to review and comment thereon and to discuss the same with the appropriate persons within FemmePharma who are responsible therefor and with its counsel. FemmePharma agrees to cause the Patent Rights to be maintained and enforced and in full force and effect, without encumbrance (subject, however, to FemmePharma's rights under Section 2.1(b)), at all times, in each case including such foreign 22 jurisdictions in the Territory as are designated and paid for by KV in connection with the sale or anticipated sale of any KV Product, unless in FemmePharma's reasonable judgment and with the prior informed written consent of KV, KV's best interests would be served by not obtaining, maintaining or enforcing such patents. All patent applications and patents relating to FemmePharma Improvements shall be automatically incorporated in and become part of and covered by this Agreement. In the event that FemmePharma elects not to prepare, prosecute or maintain any patent applications or patents constituting the Patent Rights, including the Patent Rights covering the KV Products, FemmePharma Products or the FemmePharma Technology, FemmePharma shall promptly notify KV in sufficient time in advance to enable KV to do so without the loss of any rights thereunder, and KV shall have the right to prepare, prosecute and maintain any such applications or patents on behalf of and in the name of KV and FemmePharma, and may deduct the cost thereof from any amounts otherwise payable by KV to FemmePharma hereunder. KV's obligations under Section 2.8(b) of this Agreement shall not apply with respect to such applications or patents. All patent applications and patents relating to FemmePharma Improvements shall be automatically incorporated in and become part of and covered by this Agreement. FemmePharma has taken or promptly after the execution of this Agreement will take all steps necessary to register (to the extent registrable) or file applications for registration of the Trademark and during the Term will take all steps necessary to maintain all registrations for or comprising the Trademark in the Territory. 7.3. Cooperation. Each party agrees to cause each of its officers, ----------- employees and agents to take all actions and to execute, acknowledge and deliver all instruments or agreements reasonably requested by the other and necessary or desirable for the preparation, filing and prosecution of any Patent Rights under this Agreement and otherwise contemplated by Sections 7.1 and 7.2. 8. TERM AND TERMINATION. -------------------- 8.1. Term. This Agreement shall be effective as of the date hereof ---- and shall continue in full force and effect for the life of the Patent Rights unless and to the extent earlier terminated in accordance with or as contemplated by this Article 8 (the "Term"). 8.2. Termination of License to Danazol Product. In the event KV ----------------------------------------- terminates this Agreement with respect to the Danazol Product under Section 2.2(a) or 2.2(b), the exclusive right, license and privilege to use the Patent Rights and FemmePharma Technology in the Territory to make, have made, import, use, offer for sale, sell, market, distribute, reproduce and otherwise exploit the Danazol Product under Section 2.1(a)(i) shall automatically terminate and be of no further force or effect under this Agreement and shall thereupon automatically and fully revert to and be owned by FemmePharma. Notwithstanding the foregoing, this Agreement shall thereafter remain in effect with respect to the Anti-infective Products. 23 8.3. Effect of Termination of Agreement. The expiration or ---------------------------------- termination of this Agreement shall not relieve the parties of any obligation accruing prior to or in connection with such expiration or termination or which, from the context of this Agreement, are intended to survive expiration or termination of this Agreement. 8.4. Material Breach. Either party may terminate this Agreement --------------- upon 15 days prior written notice to the other party upon the material breach by the other party of any of its obligations under this Agreement preceding the Initial Sale Date; provided, however, that such termination shall become effective only if the other party shall fail to remedy or cure the breach within such 15 day period. Either party may terminate this Agreement upon 120 days prior written notice to the other party upon the material breach by the other party of any of its obligations under this Agreement from or after the Initial Sale Date; provided, however, that such termination shall become effective only if the other party shall fail to remedy or cure the breach within such 120 day period. Notwithstanding the preceding sentence, if at any time from or after the Initial Sale Date KV has failed to pay FemmePharma any amount due hereunder on the date due and FemmePharma has reason to believe that insolvency, receivership or bankruptcy proceedings or other proceedings for the settlement of KV's debts are pending or imminent, then FemmePharma shall have the right to terminate this Agreement upon 10 days prior written notice to KV; provided, however, that such termination shall become effective only if KV shall fail to pay the amounts due within such 10 day period. 8.5. Bankruptcy of FemmePharma. ------------------------- (a) KV shall have the right to terminate this Agreement immediately upon the occurrence of any of the following: (i) FemmePharma shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator, or other similar official for it or for all or any substantial part of its assets, or FemmePharma shall make a general assignment for the benefit of its creditors; (ii) there shall be commenced against FemmePharma any case, proceeding or other action of a nature referred to in clause (i) above that (1) results in the entry of an order for relief of any such adjudication or appointment or (2) remains undismissed, undischarged or unbonded for a period of 60 days; (iii) there shall be commenced against FemmePharma any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets that results in the entry of an order for any such relief that shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; (iv) FemmePharma shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii) or (iii) above; or (v) FemmePharma shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due. (b) In the event that FemmePharma as a debtor in possession, or a trustee in bankruptcy under the U.S. Bankruptcy Code, 11 U.S.C. Sections 101 et seq. (the "Bankruptcy 24 Code"), rejects this Agreement or KV's right to continue the licenses under this Agreement, KV may elect to retain its license rights under this Agreement in accordance with Section 365(n) of the Bankruptcy Code, provided KV continues to meet its obligations under this Agreement and pays FemmePharma (or as otherwise directed by the Bankruptcy Court or provided under the Bankruptcy Code) the amounts payable by KV hereunder, minus any costs incurred by KV in connection with its performance of obligations required to be performed under this Agreement by FemmePharma and not performed by it. Thereafter, neither FemmePharma as debtor in possession, nor a trustee in bankruptcy, shall interfere with the license rights of KV to use the FemmePharma Technology under this Agreement. 9. PATENT OR TRADEMARK INFRINGEMENT. -------------------------------- 9.1. Notification of Infringement. FemmePharma and KV shall each ---------------------------- notify the other of any infringement known to it by any Person of any Patent Rights or the Trademark and shall provide the other with the available evidence, if any, of such infringement. 9.2. Enforcement of Patent Rights and Trademark. FemmePharma agrees ------------------------------------------ to enforce and defend the Patent Rights and the Trademark, as appropriate, against third parties, at its own expense. All amounts recovered in any action to enforce Patent Rights or the Trademark undertaken by FemmePharma, whether by judgment or settlement, shall be applied first to the repayment to FemmePharma of its expenses incurred in connection with prosecuting such action and thereafter shared by FemmePharma and KV as apportioned by the court or other body rendering judgment, or if no such allocation is made, in accordance with the interests of the parties; provided, however, that if the parties cannot agree on the allocation thereof, the allocation will be determined in accordance with the provisions of Section 13.2. However, if, within ninety (90) days after notice of infringement or thirty (30) days after notice of filing of a product approval application containing a certification under Section 505(j)(2)(A)(vii)(IV) or Section 505(b)(2)(A)(iv) of the Act, whichever is earlier, FemmePharma has not commenced action to enforce the Patent Rights or the Trademark or thereafter ceases to diligently pursue any such action, KV shall have the right, at its expense, to take appropriate action to enforce the Patent Rights or the Trademark. All amounts recovered in any action to enforce Patent Rights or the Trademark solely undertaken by KV at its expense, whether by judgment or settlement, shall be retained by KV. FemmePharma and KV shall fully cooperate with each other in any action to enforce any Patent Rights or the Trademark at their own expense. The parties shall keep each other informed of the status of any litigation or settlement thereof concerning Patent Rights; provided, however, that no settlement or consent judgment or other voluntary final disposition of a suit under this Section 9.2 may be undertaken without the consent of the other party if such disposition would require the other party to be subject to an injunction or to make a monetary payment or would otherwise adversely affect the other party's rights. In the event that neither FemmePharma nor KV takes action in respect to any such material infringement, the royalties payable by KV to FemmePharma under Section 4.2(d)(i) and 4.2(g) shall be reduced by one-half during any period that such infringement continues. 25 10. ADVERSE DRUG EVENTS; REPORTING. ------------------------------ 10.1. (a) Each party shall promptly notify the other party of any significant event(s) that affects the marketing of the Product, including, but not limited to, adverse drug experiences and governmental inquiries, whether within or outside the Territory. (b) Serious adverse events for the Product (as defined in section 10.6) learned by FemmePharma shall be submitted to KV within two (2) working days but no more than four (4) calendar days from the receipt date of notice of any such event(s) by FemmePharma. (c) Non-serious adverse events for the Product (as defined in section 10.6) that are reported to FemmePharma shall be submitted to KV not more than 10 days from the date notice of any such event is received by FemmePharma; provided, however, that reasonable medical and scientific judgment shall be exercised by FemmePharma in deciding whether expedited reporting is appropriate in other situations, such as important medical events that may not be immediately life-threatening or result in death or hospitalization but may jeopardize the patient or may require intervention to prevent a serious adverse event outcome. (d) KV shall have the reporting responsibility for such events to applicable regulatory health authorities anywhere in the Territory. FemmePharma shall report all such adverse events involving the Product learned by it to: Vice President, Regulatory & Clinical Affairs KV Pharmaceutical Company 2503 S. Hanley Road St. Louis, MO 63144 An FDA Form 3500A form or a form that contains the data elements of an FDA Form 3500A is recommended. (e) Serious adverse events concerning the Product learned by KV shall be reported by KV to FemmePharma at the time that KV reports such events to the FDA, but in no event more than four (4) calendar days from the receipt date of notice of any such event by KV. FemmePharma shall have the reporting responsibility for such events to applicable regulatory health authorities anywhere outside the Territory. KV shall report all such adverse events involving the Product learned by it to: Chief Executive Officer FemmePharma, Inc. 37 West Avenue Suite 101 Wayne, Pennsylvania 19087 26 (f) Non-serious adverse events concerning the Product learned by KV shall be submitted to FemmePharma not more than 10 days from the date notice of any such event is received by KV; provided, however, that reasonable medical and scientific judgment shall be exercised by KV in deciding whether expedited reporting is appropriate in other situations, such as important medical events that may not be immediately life-threatening or result in death or hospitalization but may jeopardize the patient or may require intervention to prevent a serious adverse event outcome. 10.2. Each Party shall promptly notify the other Party in writing of any order, request or directive of a court or other governmental authority to recall or withdraw the Product in any jurisdiction. KV shall be responsible for any recall or withdrawal of the Product in the Territory and shall pay the cost of any recall or withdrawal of any Product required as a result of the manufacture of the Product by KV, serious or non-serious adverse events not caused by improper manufacture or handling by FemmePharma or for which KV is otherwise responsible. The cost of any other recall or withdrawal shall be borne by the responsible party or by both parties in accordance with its or their relative responsibility therefor. 10.3. Upon being contacted by the FDA or any other governmental authority inside or outside the Territory for any regulatory purpose pertaining to this Agreement or to the Product, FemmePharma shall, if not prohibited by applicable law, immediately notify KV and will not respond to the agency until consulting with KV, to the maximum feasible extent; provided, however, that the foregoing shall not be construed to prevent FemmePharma in any way from complying with applicable law, and FemmePharma may permit unannounced FDA or similar inspections authorized by law and respond to any agency request to the extent necessary to comply with its obligations under applicable law. FemmePharma, or its designee, may, at its own expense, with prior reasonable notice and during regular business hours, visit and inspect the facilities used by KV to manufacture the Product to review the Product related records and the facilities. 10.4. FemmePharma shall inform KV's Vice President, Quality Assurance/Quality Control, of any Product Quality Complaint received within two (2) working days but no more than four (4) calendar days from the receipt date by FemmePharma. A Product Quality Complaint is defined as any complaint that questions the purity, identity, potency or quality of the Product, its packaging, or labeling, or any complaint that concerns any incident that causes the Product or its labeling to be mistaken for, or applied to, another article or any bacteriological contamination, or any significant chemical, physical or other change or deterioration in the distributed drug product, or any failure of one or more distributed batches of the drug product to meet the Specifications therefor. Such information shall be sent to the same address as set forth in Section 10.1(d) above. 10.5. KV shall handle all medical inquiries concerning the Product. FemmePharma shall refer all routine medical information requests in writing to: 27 KV Pharmaceutical Company 2503 S. Hanley Road St. Louis, MO 63144 Attention: Vice President, Scientific Affairs Urgent medical information requests shall be referred by telephone to: Vice President, Scientific Affairs KV Pharmaceutical Company 314-645-6600 10.6. A "serious adverse event" for the Product is defined as any untoward medical occurrence that at any dose of the Product: (i) results in death; (ii) is life-threatening; (iii) requires inpatient hospitalization or prolongation of existing hospitalization; (iv) results in persistent or significant disability/incapacity; (v) is a congenital anomaly/birth defect; (vi) results in drug dependency or drug abuse; (vii) is cancer, (viii) is an overdose, or (ix) is otherwise considered a serious adverse drug experience under the definition in FDA regulations at 21 CFR section 314.80(a). A "nonserious adverse event" is defined as any adverse event for the Product which is not a "serious adverse event", as defined in the preceding sentence. 11. INDEMNIFICATION. --------------- 11.1. KV Right to Indemnification. FemmePharma shall indemnify the --------------------------- KV Indemnitees, pay on demand and protect, defend, save and hold harmless each KV Indemnitee from and against any and all Claims incurred by or asserted against any KV Indemnitee of whatever kind or nature, including, without limitation, any claim or liability based upon negligence, warranty, strict liability, product liability, violation of government regulation or infringement of patent, trademark or other proprietary rights and unfair competition claims, arising from or occurring as a result of: (a) the use of the FemmePharma Technology, the Trademark or any KV Improvement by FemmePharma or any Affiliate, licensee (other than KV and its Affiliates, sublicensees and assignees), sublicensee or agent thereof, or (b) any breach of or misrepresentation under this Agreement by FemmePharma, except in any case to the extent such Claims are based upon the breach of this Agreement, illegal acts, willful misconduct or gross negligence of KV. KV shall promptly notify FemmePharma of any Claim with respect to which KV is seeking indemnification hereunder, upon becoming aware thereof, and permit FemmePharma at FemmePharma's cost to defend against such Claim and shall cooperate in the defense thereof. Neither FemmePharma nor KV shall enter into, or permit, any settlement of any such Claim without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed. KV may, at its option and expense, have its own counsel participate in any proceeding which is under the direction of FemmePharma and will cooperate with FemmePharma in the disposition of any such matter. If FemmePharma shall not defend any such Claim, KV shall have the right to defend the Claim itself and recover from FemmePharma all reasonable attorneys' fees and costs incurred by it during the course of such defense. 11.2. FemmePharma Right to Indemnification. KV shall indemnify the ------------------------------------ FemmePharma Indemnitees, pay on demand and protect, defend, save and hold harmless each FemmePharma 28 Indemnitee from and against any and all Claims incurred by or asserted against any FemmePharma Indemnitee of whatever kind or nature, including, without limitation, any claim or liability based upon negligence, warranty, strict liability, product liability, violation of government regulation or infringement of patent, trademark or other proprietary rights and unfair competition claims, arising from or occurring as a result of: (a) the use of the FemmePharma Technology, the Trademark or any KV Improvement by KV or any Affiliate, licensee, sublicensee or agent thereof, or (b) any breach of or misrepresentation under this Agreement by KV, except in any case to the extent such Claims are based upon the breach of this Agreement, illegal acts, willful misconduct or gross negligence of FemmePharma. FemmePharma shall promptly notify KV of any Claim with respect to which FemmePharma is seeking indemnification hereunder upon becoming aware thereof, and permit KV at KV's cost to defend against such Claim and shall cooperate in the defense thereof. Neither FemmePharma nor KV shall enter into, or permit, any settlement of any such Claim without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed. FemmePharma may, at its option and expense, have its own counsel participate in any proceeding which is under the direction of KV and will cooperate with KV in the disposition of any such matter. If KV shall not defend such Claim, FemmePharma shall have the right to defend any such Claim itself and recover from KV all reasonable attorneys' fees and costs incurred by it during the course of such defense. 12. CONFIDENTIALITY. --------------- 12.1. Both KV and FemmePharma recognize that information heretofore or hereafter disclosed orally or in writing or in tangible or intangible form and information developed under this Agreement will be of proprietary value to each party, and thus is to be considered confidential ("Confidential Information"). Each party agrees not to disclose the Confidential Information of the other party to others, except to its officers, employees, agents, representatives and consultants for the specific purpose of fulfilling such party's obligations hereunder who reasonably require the same for the purpose hereof and who are bound to treat such information as confidential by a like obligation of confidentiality which extends to the benefit of the other party hereto, and otherwise as necessary or desirable to the performance of this Agreement, without the express written permission of the other party, except that neither party shall be prevented from disclosing that portion of the Confidential Information received from the other which is at the time of receipt or later becomes publicly known without breach of its obligations hereunder by the receiving party. 12.2. Anything to the contrary in this section notwithstanding, FemmePharma or KV shall be permitted to disclose, on a confidential basis to the extent possible, Confidential Information of the other party received hereunder to regulatory agencies in support of applications to manufacture, use, sell or import any KV Product or FemmePharma Product or (pursuant to obligations of confidentiality comparable to those contained herein) to clinicians or others in connection with the completion of clinical studies or the filing of such applications, or otherwise as reasonably necessary for purposes of the manufacture, import, use and sale of any KV Product or FemmePharma Product under this Agreement or as required by law. 29 12.3. Notwithstanding anything to the contrary herein, KV shall be permitted to disclose, on a confidential basis, Confidential Information received hereunder to Affiliates, licensees, sublicensees, suppliers and subcontractors who become assignees of some or all of KV's manufacturing and/or marketing rights or obligations under this Agreement and to regulatory authorities. 12.4. FemmePharma and KV shall cooperate in good faith with one another with respect to the preparation and issuance of any press release with regard to the execution of this Agreement at such time and in such form and substance as is agreed upon by the parties, which shall not require the parties to issue a press release, except as may be required by law. Notwithstanding the foregoing, the existence, nature and content of this Agreement and the transactions contemplated hereby shall be considered the Confidential Information of each party and shall be disclosed only as contemplated in this Article 12. 12.5. In furtherance of this Agreement, it is expected that KV and FemmePharma may, from time to time, disclose to one another privileged communications with counsel, including opinions, memoranda, letters and other written, electronic and verbal communications. Such disclosures are made with the understanding that they shall remain confidential and that they are made in connection with the shared community of legal interests existing between FemmePharma and KV, including the community of legal interests in avoiding any infringement of any valid, enforceable patents. 12.6. Each of the parties to this Agreement acknowledges and agrees that any breach by either of them of this Article 12 shall cause the other party irreparable harm which may not be adequately compensable by money damages. Accordingly, in the event of a breach or threatened breach of a provision of this Article 12 by either party, the other party shall be entitled to the remedies of specific performance, injunction or other preliminary or equitable relief, in addition to such other rights and remedies as may be available to the party for any such breach or threatened breach, including but not limited to, the recovery of money damages. 12.7. The provisions of this Article 12 will survive the expiration or termination of this Agreement for a period of five years. 13. APPLICABLE LAW AND DISPUTE RESOLUTION. ------------------------------------- 13.1. Applicable Law. This Agreement shall be governed by and -------------- construed under the laws of the State of Delaware (regardless of the choice of law principles of Delaware or any other jurisdiction). 13.2. Dispute Resolution. ------------------ (a) FemmePharma and KV recognize that disputes as to certain matters may from time to time arise which relate to either party's rights or obligations hereunder. It is the objective of the parties to establish procedures to facilitate the resolution of such disputes in an expedient manner by mutual cooperation and without resort to litigation. To accomplish this 30 objective, the parties agree to follow the procedures set forth in this Section 13.2 if and when such a dispute arises between them. (b) If any dispute arises between the parties relating to the interpretation, breach or performance of this Agreement or the grounds for the termination thereof, and the parties cannot resolve the dispute within thirty (30) days of a written request by either party to the other party, the parties agree to hold a meeting, attended by the Chief Executive Officer or President of each party (or other senior executive appointed by either of them), to attempt in good faith to negotiate a resolution of the dispute prior to pursuing other available remedies. If, within sixty (60) days after such written request, the parties have not succeeded in negotiating a resolution of the dispute, the dispute shall be submitted to final and binding arbitration under the then current Commercial Arbitration Rules (the "Rules") of the American Arbitration Association ("AAA") relating to voluntary major commercial arbitrations. Each party consents to the jurisdiction and administration of the AAA for purposes of the arbitration proceedings contemplated hereby. The arbitration proceedings shall be held in Philadelphia, Pennsylvania, if initiated by KV, and in St. Louis, Missouri, if initiated by FemmePharma. Each party hereby expressly waives any right to object to such jurisdiction on the basis of venue or forum non conveniens. One arbitrator shall be selected by FemmePharma, one arbitrator shall be selected by KV, and the third arbitrator shall be chosen by the first two arbitrators chosen or, if they fail to do so within ten (10) business days of their appointment, shall be appointed by the AAA at the request of either party. The arbitrators shall be independent and disinterested third parties, knowledgeable in the subject matter at issue in the dispute. The arbitration shall be conducted in accordance with the following time schedule unless otherwise mutually agreed to in writing by the parties: (i) the parties to the arbitration proceeding shall each appoint their respective arbitrator within fifteen (15) business days after the date the dispute is submitted to arbitration; (ii) within ten (10) business days thereafter, such arbitrators shall appoint the third arbitrator (who shall chair the arbitration panel) or, if they fail to do so, the third arbitrator shall be appointed by the AAA upon the request of either party; (iii) within fifteen (15) business days after the appointment of the third arbitrator (the "Document Production Period"), each party to the arbitration proceeding shall provide all documents, records and supporting information it believes to be necessary to resolve the dispute; (iv) if requested by either party during the Document Production Period, a hearing (the "Hearing") will be held by the arbitrators as promptly as practicable at such dates and times as shall be established by the arbitrators, in accordance with the Hearing Procedures provided below. (c) The "Hearing Procedures" to be followed in the event a Hearing is held shall be as follows: (i) Briefs may be submitted by the parties prior to the Hearing, setting forth their position in regard to the matters to be considered by the arbitrators. (ii) Interrogatories and requests for admissions or production of documents may be submitted by either party to the other and, subject to the jurisdiction of the arbitrators, shall be responded to by the other party. Each party shall have the right to request the arbitrators to issue subpoenas for documents in accordance with the Rules. 31 (iii) A list of proposed witnesses to be presented by each party shall be delivered by it to the other party not less than twenty (20) business days prior to the commencement date set for the hearing by the arbitrators, and depositions of any such proposed witnesses of a party may be taken by the other party during the twenty (20) business day period, and the party proposing any witness shall assure the reasonable availability of each of its witnesses to the other party for deposition during such twenty (20) business day period. (iv) Each party shall be entitled, but not required, to make an opening statement at the Hearing, to present regular and rebuttal testimony, documents or other evidence, to cross-examine witnesses, and to make a closing argument. (v) The party requesting the Hearing shall begin the Hearing and, if it chooses to make an opening statement, shall address not only issues it raised but also any issues raised by the other party. The responding party, if it chooses to make an opening statement, also shall address issues raised by the parties. Thereafter, the presentation of regular and rebuttal testimony and documents, other evidence, and closing arguments shall proceed in the same sequence. Except for one representative of each party who shall be entitled to be present at all proceedings or when testifying, witnesses shall be excluded from the Hearing until closing arguments. (d) Within ten (10) business days following the completion of the Hearing, each party may submit to the arbitrators and the other party a post-hearing brief in support of its proposed rulings and remedies; provided, however, that such briefs shall not contain any new evidence. (e) The arbitrators shall rule on each of the disputed issues within fifteen (15) business days after the end of the Document Production Period or, if a Hearing is held, the date the Hearing is concluded. The decision of a majority of the arbitrators shall be final and binding on the parties. The arbitrators shall prepare and deliver to the parties a written, reasoned opinion conferring their decision. Except as provided in Section 16.3, the arbitrators shall not be entitled to modify this Agreement or the transactions contemplated hereby. (f) Each of the parties shall initially pay its own expenses. The fees of arbitrators, expenses of a court reporter and hearing room, and the reasonable legal fees and expenses of the prevailing party (including expert witness fees and expenses) shall be paid as follows: (i) If the arbitrators rule in favor of one party on all disputed issues, the losing party shall pay all of such fees and expenses. (ii) If the arbitrators rule in favor of one party on some issues and the other party on other issues, the arbitrators shall issue with their rulings a written determination as to how the fees and expenses shall be allocated between the parties. The arbitrators shall allocate fees and expenses in a way that bears a reasonable relationship to the outcome of the proceedings, with the party prevailing on more issues, or on issues of greater value or gravity, recovering a relatively larger share of its legal fees and expenses. 32 (g) The rulings of the arbitrators and allocation of fees and expenses shall be binding, non-reviewable and non-appealable, and may be entered as a final judgment in any court having jurisdiction and shall be enforceable under the Federal Arbitration Act. Except as provided in this Section 13.2 or as required by law, the existence of the dispute, any settlement negotiations, the Hearing or other proceedings, any submissions (including exhibits, testimony, proposed rulings and briefs), and the rulings of the arbitrators shall be deemed Confidential Information of each party and shall not be disclosed by the other party or other participants therein, except as required or permitted under the provisions of Article 12. (h) Notwithstanding the provisions of this Section 13.2, any party may apply to a court of competent jurisdiction for an order in the nature of a temporary restraining order or preliminary injunction for purposes of maintaining the status quo pending the final resolution of any dispute pursuant to the dispute resolution procedures provided herein. 14. NOTICE. ------ 14.1. All notices, requests, consents, and other communications required or permitted hereunder shall be in writing and shall be delivered, or mailed first class postage prepaid, Express, registered or certified mail, or sent by prepaid next business day courier: (a) If to FemmePharma at the address set forth for FemmePharma at the beginning of this Agreement; (b) If to KV at the address set forth for KV at the beginning of this Agreement; or such other address as to which FemmePharma or KV shall have specified by written notice to the other in accordance with this Section 14.1; and such notices and other communications shall for all purposes of this Agreement be treated as being effective or having been given when delivered, if delivered personally, or, if sent by mail, at the earlier of their receipt or 72 hours after the same have been deposited in the United States Mail, addressed and postage prepaid as aforesaid, or if sent by prepaid next business day courier on the business day following delivery thereof to the courier. 15. FORCE MAJEURE. ------------- 15.1. Neither party shall be responsible for delay or failure in performance of any of the obligations imposed upon it by this Agreement occasioned by fire, flood, explosion, lightning, windstorm, earthquake, failure of machinery or equipment or supply of materials or utilities, court order or governmental interference, civil commotion, riot, war, labor disturbances, transportation difficulties, labor shortage or by any cause of like or unlike nature beyond the control of such party, whether or not foreseeable; provided, however, that the provisions of this Section shall not affect the obligation to pay money which is due and payable under this Agreement. 33 16. MISCELLANEOUS PROVISIONS. ------------------------ 16.1. Non-Competition. FemmePharma agrees that during the term of --------------- this Agreement and for three (3) years after the termination of this Agreement, neither FemmePharma nor its Affiliates shall: (i) manufacture, offer for sale, sell or distribute or assist or enable any Third Party to manufacture, offer for sale, sell of distribute any KV Product in the Territory, or (ii) license, directly or indirectly, any KV Product in the Territory; provided, however, that the provisions of this Section 16.1 shall be inapplicable with respect to the Danazol Product if the Danazol Product is terminated from this Agreement under Section 2.2(a) or 2.2(b) or this Agreement is terminated by FemmePharma under Section 8.4. 16.2. Further Assurances. Each of FemmePharma and KV agrees to duly ------------------ execute and deliver, or cause to be duly executed and delivered, such further instruments and do and cause to be done such further acts and things, including, without limitation, the filing of such additional assignments, agreements, documents and instruments, that may be necessary or as the other party hereto may at any time and from time to time reasonably request in connection with this Agreement or to carry out more effectively the provisions and purposes of, or to better assure and confirm unto such other party its rights and remedies under, this Agreement. 16.3. Entire Agreement; Amendment. Together with the CDA, this --------------------------- Agreement, including the Appendices hereto, which are incorporated herein as if set forth in their entirety at the point of reference thereto, constitutes the entire understanding between the parties with respect to any Product or Additional Product and the FemmePharma Technology and the Trademark and supersedes all prior contracts, agreements and understandings (with the exception of the CDA) related to the same subject matter between the parties. No change or modification of any of the provisions hereof shall be effective unless in writing and signed by a duly authorized officer of each of the parties. 16.4. No Strict Construction; Legality; Severability. This ---------------------------------------------- Agreement has been prepared jointly and shall not be strictly construed against either party. Should any one or more of the provisions of this Agreement be determined by a judicial or administrative authority having jurisdiction thereof to be illegal or unenforceable, such illegal or unenforceable provisions shall be so modified by the authority making such determination, if and to the extent possible, so as to give effect to the intentions of the parties expressed herein, and all other provisions of this Agreement shall be given effect separately from the provision or provisions determined to be illegal or unenforceable and shall not be affected thereby. 16.5. No Waiver. No failure or delay of any party hereto in --------- exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. 16.6. Cumulative Effect. The rights and remedies herein provided ----------------- shall be cumulative and not exclusive of any other rights or remedies provided by law or otherwise. 34 16.7. No Agency. Nothing herein contained shall be deemed to create --------- an agency, joint venture, amalgamation, partnership or similar relationship between FemmePharma and KV. Notwithstanding any of the provisions of this Agreement, neither party shall at any time enter into, incur, or hold itself out to third parties as having authority to enter into or incur, on behalf of the other party, any commitment, expense, or liability whatsoever, and all contracts, expenses and liabilities undertaken or incurred by one party in connection with or relating to the development, manufacture or sale of Products shall be undertaken, incurred or paid exclusively by that party, and not as an agent or representative of the other party. 16.8. Headings. The Section headings are for convenience only and -------- will not be deemed to affect in any way the language of the provisions to which they refer. 16.9. Counterparts/Facsimile Signatures. This Agreement may be --------------------------------- executed in any number of counterparts, each of which, when so executed and delivered, shall be deemed to be an original, and all of which, taken together, shall constitute one and the same instrument. Facsimile signatures shall be as effective as original signatures. 16.10. Copies. Copies of this Agreement which are true copies of ------ the original and are manually signed by the parties shall be deemed duplicate originals. THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK 35 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first set forth herein. FEMMEPHARMA, INC. KV PHARMACEUTICAL COMPANY By: /s/ Gerianne DiPiano By: /s/ Alan G. Johnson ---------------------------------- ---------------------------- Gerianne DiPiano, President Alan G. Johnson, Senior Vice President 36 EX-10.(UU) 14 exh10puu.txt Exhibit 10(uu) STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (this "Agreement") is made and entered into as of April 18, 2002, by and between FEMMEPHARMA, INC., a Pennsylvania corporation ("FemmePharma") whose address is 37 West Avenue, Suite 101, Wayne, Pennsylvania 19087, and KV PHARMACEUTICAL COMPANY ("KV"), 2503 S. Hanley Rd., St. Louis, Missouri 63144. 1. CONTEMPORANEOUS PRODUCT LICENSE AGREEMENT; DUE DILIGENCE REVIEW. --------------------------------------------------------------- 1.1. On or about the date of this Agreement, FemmePharma and KV have entered into a license agreement (the "License Agreement") under which FemmePharma has granted KV marketing rights relating to a Danazol containing product, all as more fully set forth in the License Agreement (the "Danazol Product"). The Product is to be manufactured and sold under certain technology which is the subject of U.S. Patent #5,993,856 and U.S. Patent Application 09-355,213 filed June 27, 1999 (the "Patent") owned by FemmePharma (as defined in the License Agreement, the "Technology"). 2. PURCHASE AND SALE OF SHARES. --------------------------- 2.1. SALE AND ISSUANCE OF INITIAL SHARES - INITIAL CLOSING. (a) Subject to the terms and conditions of this Agreement, KV agrees to purchase from FemmePharma, and FemmePharma agrees to issue and sell to KV 34,965 shares (the "INITIAL SHARES") of Series C Preferred Stock of FemmePharma, which shall be issued pursuant to the Designation Statement attached hereto as Exhibit A ("Series C Stock"), for an aggregate purchase --------- price of Two Million Dollars ($2,000,000), or a price per share of $57.20 (the "Per Share Price"). (b) The closing of the purchase and sale of the Initial Shares (the "INITIAL CLOSING") shall take place by teleconference call and telecopier on the date of this Agreement (the "Initial Closing Date"). (c) At the Initial Closing FemmePharma shall deliver to KV: (i) a stock certificate representing the Initial Shares being purchased by KV; (ii) an Amended and Restated Stockholders Agreement in the form of Exhibit B hereto (the "Stockholders Agreement") duly executed --------- by all of the parties thereto other than KV; and (iii) a Registration Rights Agreement in the form of Exhibit C hereto (the "Registration Rights Agreement") duly executed by --------- all of the parties thereto other than KV. (d) If the issuance and sale of the Initial Shares is not consummated at the Initial Closing, either party not then in breach of this Agreement can terminate this Agreement by written notice to the other party of its election to so terminate. (e) At the Initial Closing KV shall deliver to FemmePharma: (i) the purchase price for the Initial Shares by wire transfer in accordance with wire transfer instructions which shall be furnished to KV by FemmePharma prior to the Closing; (ii) the Stockholders Agreement duly executed by KV; and (iii) the Registration Rights Agreement duly executed by KV. 2.2. SALE AND ISSUANCE OF SUBSEQUENT SHARES - SECOND CLOSING. (a) Subject to the terms and conditions set forth herein, at a second closing (the "Second Closing") which shall be held on a date and time mutually agreed to by FemmePharma and KV not later than fifteen (15) business days following the commencement of the Phase III Studies, as contemplated by the License Agreement, and provided that the License Agreement remains in effect, KV agrees to purchase from FemmePharma, and FemmePharma agrees to issue and sell to KV, 52,447.5 shares of Series C Stock (the "SECOND CLOSING SHARES") at the Per Share Price, for an aggregate purchase price of Three Million Dollars ($3,000,000). Conversely, this Agreement shall automatically terminate and be of no further force or effect if and upon the termination of the Danazol Product from the License Agreement prior to the Second Closing. (b) The purchase and sale of the Second Closing Shares shall take place in person or by teleconference call and telecopier at the offices of Morgan, Lewis & Bockius or other location mutually acceptable to the parties. (c) At the Second Closing, FemmePharma shall deliver to KV a stock certificate representing the Second Closing Shares. (d) At the Second Closing KV shall deliver the purchase price for the Second Closing Shares by wire transfer in accordance with wire transfer instructions which shall be furnished to KV by FemmePharma at least three business days prior to the Second Closing. 3. REPRESENTATIONS AND WARRANTIES OF KV. ------------------------------------ KV hereby represents and warrants to, and agrees with, FemmePharma as follows: 3.1. KV is duly authorized to execute this Agreement, and this Agreement constitutes the legal, valid and binding obligation of KV enforceable against KV in accordance with its terms, except as such enforcement may be limited by applicable laws relating to creditors' rights or principles of equity affecting the availability of remedies. 3.2. KV will acquire the Series C Stock for its own account for investment and not with a view to the sale or distribution thereof or the granting of any participation therein, and has no present intention of distributing or selling to others any of such interest or granting any participation therein. -2- 3.3. KV has such knowledge and experience in finance, securities, investments and other business matters so as to be able to protect the interests of KV in connection with its purchase of the Series C Stock. KV is aware that an investment in the Series C Stock is speculative and subject to substantial risks. KV has no present or contemplated future need to dispose of any of the Series C Stock and is capable of bearing the economic risks of an investment in the Series C Stock, including, but not limited to, the possibility of the complete loss of the purchase price of the Series C Stock and the limited transferability of the Series C Stock, which may make the liquidation of its investment impossible for the indefinite future. 3.4. KV acknowledges that no market exists for the Series C Stock, that it is unlikely that a market will develop in the foreseeable future, and that KV may find it impossible to liquidate its investment at a time when it may desire to do so, or at any other time. 3.5. KV has been advised by FemmePharma that none of the Series C Stock to be issued to KV, or any stock or securities in which it may hereafter be converted, will be registered under the Securities Act of 1933 (the "Act"), that the Series C Stock, or any stock or securities in which it may hereafter be converted, will be issued on the basis of the statutory exemptions provided by Section 4(2) of the Act and/or Regulation D thereunder relating to transactions by an issuer not involving any public offering and under similar exemptions under certain state securities laws, that this transaction has not been reviewed by, passed upon or submitted to any federal or state agency or self-regulatory organization where an exemption is being relied on; and that FemmePharma's reliance thereon is based in part upon the representations made by KV in this Agreement. KV acknowledges that KV has been informed by FemmePharma of, or is otherwise familiar with, the nature of the limitations imposed by the Act and the rules and regulations thereunder on the transfer of the Series C Stock. In particular, KV agrees that no sale, assignment or transfer of any of the Series C Stock or any stock or securities in which it may hereafter be converted, shall be valid or effective, and FemmePharma shall not be required to give any effect to such sale, assignment or transfer, in the absence of: (i) the sale, assignment or transfer of the Series C Stock or any stock or securities in which it may hereafter be converted, is registered under the Act, it being understood that the Series C Stock or any stock or securities in which it may hereafter be converted, is not currently registered for sale and that FemmePharma has no obligation or intention to so register the Series C Stock (except as provided in Article 6), (ii) the shares of Series C Stock are sold, assigned or transferred in accordance with all of the requirements and limitations of Rule 144 of the Act, it being understood that Rule 144 is not available at the present time for the sale of the Series C Stock, or (iii) such sale, assignment or transfer is otherwise exempt from registration under the Act. KV further understands that an opinion of counsel and other documents shall be required to transfer the Series C Stock. KV acknowledges that the Series C Stock shall be subject to a stop transfer order and the certificate or certificates evidencing shares of the Series C Stock shall bear the following or a substantially similar legend or other legend as may appear on the forms of stock certificates and such other legends as may be required by state securities laws: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act"), or any state securities laws and neither such shares nor any interest therein may be offered, sold, pledged, assigned or otherwise transferred in the absence of: (i) a registration statement with respect thereto is effective under the Act and any applicable state securities laws or (ii) the issuer of the shares receives an opinion of counsel to the holder of such shares, -3- which counsel and opinion are reasonably satisfactory to the issuer, that such shares may be offered, sold, pledged, assigned or transferred in the manner contemplated without an effective registration statement under the Act or applicable state securities laws." 3.6. During the negotiation of the transactions contemplated herein, KV and KV's representatives and legal counsel have been afforded access to corporate books, financial statements, records, contracts, documents and other information concerning FemmePharma and to its offices and facilities, have been afforded an opportunity to ask such questions of FemmePharma's officers, employees, agents, counsel, accountants and representatives concerning FemmePharma's business, operations, financial condition, assets, liabilities and other relevant matters as they have deemed necessary or desirable, and have been given all such information as has been requested, in order to evaluate the merits and risks of the prospective investments contemplated herein. In taking any action or performing any role relative to the arranging of the proposed investment, KV has acted solely in KV's own interest, and neither KV nor any agents or employees of KV has acted as an agent of FemmePharma. KV acknowledges that it has no assurances that the forecasts in the Business Plan provided to KV by FemmePharma in connection with the Due Diligence Review will be the same as the actual results achieved by FemmePharma. 4. REPRESENTATIONS AND WARRANTIES OF FEMMEPHARMA. --------------------------------------------- In order to induce KV to enter into this Agreement, FemmePharma represents and warrants to KV that, except as disclosed in the Disclosure Statement attached hereto, the statements contained in this Article 4 are true and correct as of the date hereof. 4.1. FemmePharma is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania, with full corporate power and authority to own, lease, use and operate its properties and to conduct its business as and where now owned, leased, used, operated and conducted. 4.2. FemmePharma does not own, directly or indirectly, any equity or other ownership interest in any corporation, partnership, joint venture or other entity or enterprise. FemmePharma is not subject to any obligation or requirement to provide funds to or make any investment (in the form of a loan, capital contribution, guarantee or otherwise) in any other person or entity. 4.3. FemmePharma has provided KV with information related to the Danazol Product (including its formulation and delivery method), the Technology, the Patent, related clinical information (including the results of a primate study conducted by FemmePharma), the market for the Danazol Product, FemmePharma's business, business plans, financial condition, results of operation and projections therefor, and such other information as has been requested by KV in connection with the License Agreement and KV's proposed investment in FemmePharma contemplated by this Agreement. The information provided also included complete and accurate copies of the written information provided to certain independent investors (the "Independent Investors") by FemmePharma in connection with the investment by the Independent Investors in FemmePharma on or about November 13, 2000, and December 29, 2000, respectively, in an aggregate amount of $700,000 and $750,000, respectively (the "Independent Investor -4- Investments") under agreements with the Independent Investors for the Independent Investor Investments (the "Independent Investor Agreements"). The execution and delivery of the Independent Investors Agreements and the consummation of the transactions contemplated thereby were duly authorized by the Board of Directors of FemmePharma. The Independent Investor Agreements were duly executed and delivered by FemmePharma and constitute the legal, valid and binding obligation of FemmePharma, enforceable against it in accordance with its terms, except as such enforcement may be limited by applicable laws relating to creditors' rights or principles of equity affecting the availability of remedies. 4.4. FemmePharma has all of the corporate power and authority required to enter into this Agreement and to complete the transactions contemplated by this Agreement. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by the Board of Directors and, if necessary, the shareholders of FemmePharma. This Agreement has been duly executed and delivered by FemmePharma and constitutes the legal, valid and binding obligation of FemmePharma, enforceable against it in accordance with its terms, except as such enforcement may be limited by applicable laws relating to creditors' rights or principles of equity affecting the availability of remedies. 4.5. (a) (i) FemmePharma's authorized capital stock consists solely of: (A) 19,000,000 shares of Common Stock, no par value, of which 1,429,379 shares are issued and outstanding, Management Options (the "Management Options") are outstanding for the purchase of 925,823 shares and Warrants (the "Warrants") are outstanding for the purchase of 200,000 shares, and (B) 2,000,000 shares of Preferred Stock, no par value, of which: (x) 713,500 shares are designated Series A Preferred Stock (and 713,375 shares are issued and outstanding), (y) 713,500 shares are designated Series B Preferred Stock (and 713,500 shares are issued and outstanding), and (z) 130,000 shares are designated Series C Preferred Stock, no par value (none of which shares are issued and outstanding). The registered shareholders of the currently outstanding Common Stock and Preferred Stock and the holders of the issued and outstanding Management Options and Warrants are as set forth in Schedule 4.5. Gerianne M. DiPiano ("DiPiano") owns the shares of ------------ Common Stock shown to be owned by her in Schedule 4.5, free and clear of all ------------ pledges, liens or encumbrances and such shares are not subject to any agreement regarding the sale, transfer or voting thereof. (ii) No shares of capital stock of FemmePharma have been issued and are held in its treasury. (iii) Except for the shares of Common Stock reserved for the conversion of the Preferred Stock purchased by the Independent Investors and upon the exercise of the Management Options and the Warrants, and the shares of Common Stock reserved for issuance upon the conversion of shares of Series C Stock issuable pursuant to this Agreement (including shares of Series C Stock which may be issued in respect of dividend payments), no shares of Common Stock have been reserved for issuance upon the exercise of stock purchase options or any other rights to purchase Common Stock or otherwise promised to be issued or sold. The issuance of all of such shares of Common Stock that are so issuable has been duly authorized, and such shares have been duly reserved for issuance, by the Board of Directors of FemmePharma. -5- (iv) Each outstanding share of FemmePharma Common Stock is duly authorized and validly issued, fully paid and non-assessable, and has not been issued in violation of any preemptive rights, rights of first refusal or similar rights. (b) FemmePharma has paid no cash dividends on any Common Stock and has entered into no agreement for the payment of any future dividends. (c) FemmePharma knows of no agreements among the holders of the Common Stock which limit or control the manner in which the parties thereto vote their Common Stock. 4.6. Upon the payment by KV of the Per Share Price for the Series C Stock to be purchased by KV and the issuance and delivery of such shares of Series C Stock to KV by FemmePharma contemplated hereunder, all of such shares of Series C Stock will be duly authorized, validly issued, fully paid and non-assessable, and no further governmental authorization or approval of FemmePharma is or will be required in connection with the issuance thereof. 4.7. Neither the execution and delivery of this Agreement by FemmePharma, nor the completion of the transactions contemplated hereby by FemmePharma, will: (i) Conflict with or result in a breach of the Articles of Incorporation or Bylaws of FemmePharma; (ii) Violate, or conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with the giving of notice, the passage of time or otherwise, would constitute a default) under, or entitle any party (with the giving of notice, the passage of time or otherwise) to terminate, accelerate or call a default under, or result in the creation of any encumbrance upon any of the properties or assets of FemmePharma under, any of the terms or conditions of any note, bond, mortgage, indenture, deed of trust, license, contract, undertaking, agreement, lease or other instrument or obligation to which FemmePharma is a party or by which it or its assets are bound or subject; (iii) Violate any law applicable to FemmePharma or any of its assets; or (iv) Require any action or consent or approval of, or review by, or registration or filing by FemmePharma with, any third party or any governmental authority. 4.8. The books of account and financial records of FemmePharma are currently maintained on a cash basis and fairly reflect the assets and liabilities of FemmePharma on a cash basis, but do not include accruals for any items of income or expense, and the Income and Expense Statements and balance sheets for the years ended December 31, 2000 and December 31, 2001, respectively, provided to KV by FemmePharma fairly present the financial condition, assets and liabilities of FemmePharma as at the respective dates and the results of its operations and cash flows for the periods covered thereby. FemmePharma has provided to KV projections of its future business and results of operation for 2002 (the "Projections"). FemmePharma has used its current knowledge in preparing the Projections; however, there is no assurance that the Projections will be achieved by FemmePharma. FemmePharma owns all of its assets free and clear of all liens, claims and encumbrances. -6- 4.9. Since December 31, 2000, FemmePharma has conducted its business in the ordinary course, consistent with past practice, and, to its knowledge, there has been no material adverse change in the assets, liabilities, results of operation, prospects, business or financial condition of FemmePharma, or any event, occurrence or development which may reasonably be expected to result in such a change or which would adversely affect the ability of FemmePharma to consummate the transactions contemplated hereby; provided, that since December 31, 2000 FemmePharma's financial condition has deteriorated due to continued operations without revenues. 4.10. FemmePharma maintains and operates a single location for the conduct of its business in the Commonwealth of Pennsylvania and is licensed to transact business in the states set forth in Schedule 4.10. ------------- FemmePharma has all licenses, permits, authorizations and administrative approvals ("Authorizations") required for the conduct of its business in each state in which FemmePharma conducts its business, except where the failure to have any such Authorization would not have a material adverse effect on FemmePharma or the business conducted by FemmePharma. FemmePharma is in compliance, in all material respects, with all laws, regulations and orders applicable to it or to the conduct or operation of its business or the ownership or use of its assets. 4.11. There are no legal proceedings pending or, to the knowledge of FemmePharma, threatened against FemmePharma or its assets. 4.12. Schedule 4.12 contains a list of all material ------------- trademarks, trade names, copyrights, patents and other intellectual property assets owned by FemmePharma, except for licenses implied by the sale of a product and perpetual, paid-up licenses for commonly available software programs under which FemmePharma is the licensee ("FemmePharma's Intellectual Property"). There are no outstanding or, to the knowledge of FemmePharma, threatened disputes or disagreements with respect to any such intellectual property assets. To its knowledge, none of FemmePharma's Intellectual Property infringes or is alleged to infringe the intellectual property rights of any other person. 4.13. FemmePharma has filed or caused to be filed on a timely basis all tax returns and reports which have been required to be filed by FemmePharma and has paid or made provision for the payment, when due, of all taxes payable by FemmePharma pursuant thereto or otherwise, the failure of which would have a material adverse affect on FemmePharma. 4.14. FemmePharma has no obligation or liability to any broker, finder or agent in connection with the License Agreement or this Agreement. 5. INDEMNIFICATION. --------------- 5.1. By KV. KV agrees to indemnify, defend and hold ----- harmless FemmePharma and each officer, director, partner, employee, agent and controlling person of FemmePharma, past, present or future, from and against any and all loss, damage or liability due to or arising out of a breach of any representation or warranty made by KV in Article 3 hereof. 5.2. By FemmePharma. FemmePharma agrees to indemnify, -------------- defend and hold harmless KV and each officer, director, partner, employee, agent and controlling person of KV, -7- past, present or future, from and against any and all loss, damage or liability due to or arising out of a breach of any representation or warranty of FemmePharma made in Article 4 hereof. 6. COVENANT OF FEMMEPHARMA. ----------------------- 6.1. FemmePharma covenants and agrees with KV that subsequent to the closing of the transactions contemplated by this Agreement (the "Closing"), FemmePharma will provide KV with a copy of FemmePharma's financial statements, including a balance sheet, income statement and statement of cash flows, prepared in accordance with generally accepted accounting principles (GAAP), consistently applied from period to period, for each of the first three fiscal quarters of FemmePharma not later than 30 days after the end of each such quarter and for each fiscal year of FemmePharma not later than 75 days after the end of the fiscal year. If the financial statements of FemmePharma for the fiscal year are audited, FemmePharma shall provide KV with a copy of such audited financial statements and of the auditors' opinion related thereto. In addition, FemmePharma shall provide KV or a representative of KV; (i) reasonable access from time to time (but not necessarily more often than quarterly following the receipt of such financial statements) during normal business hours to the chief executive officer and chief financial officer of FemmePharma in order to keep KV informed of and to review the status of FemmePharma's business, results of operation and financial condition; and (ii) such additional access to FemmePharma's records as is necessary to allow KV to comply with requirements of any applicable law or administrative or regulatory requirement applicable to KV; provided that, any such information shall be held by KV in confidence and not used or disclosed by KV except to the extent it is legally compelled to do so. In addition, FemmePharma shall provide KV with a copy of all notices and other communications by FemmePharma with the holders of its common stock generally. This covenant shall terminate at the earlier of such time as: (a) FemmePharma has a public offering of securities registered under the Securities Act of 1933; provided, however, that FemmePharma will continue thereafter to provide KV copies of such financial information at such times as are required by KV to comply with applicable securities laws, or (b) KV no longer owns any shares of Series C Stock or Common Stock of FemmePharma. 7. CONDITIONS PRECEDENT TO KV'S OBLIGATION TO CLOSE. ------------------------------------------------ KV's obligation to purchase the Series C Stock and to take any other actions required to be taken by KV at either the Initial Closing or the Second Closing is subject to the satisfaction, at or prior to the applicable Closing, of each of the following conditions (any of which may be waived by KV, in whole or in part): 7.1. Accuracy of Representations. The representations and --------------------------- warranties of FemmePharma in this Agreement shall have been accurate as of the date of this Agreement and shall continue to be accurate as of the Closing Date as if made on the Closing Date, and FemmePharma shall have delivered to KV at the Closing a Certificate that such representations and warranties are true and correct on the Closing Date. 7.2. No Proceedings. There shall not be outstanding or -------------- then threatened against FemmePharma or KV any proceeding by a third party: (a) involving any challenge to, or seeking damages or other relief in connection with, any of the transactions contemplated by this Agreement -8- or the License Agreement, or (b) that prevents, delays, makes illegal or otherwise interferes with the sale and delivery of the Series C Stock contemplated hereby. 7.3. License Agreement. The License Agreement shall have ----------------- been entered into by FemmePharma and KV and shall be in full force and effect, and FemmePharma shall not be in breach thereof. 7.4. Second Closing. With respect to the Second Closing, -------------- (i) the Initial Closing shall have been consummated, and (ii) the Phase III Studies shall have commenced pursuant to and as defined in the License Agreement. 7.5. Performance. FemmePharma shall have performed all of ----------- the covenants required by this Agreement to be performed by it on or before the Closing. 8. CONDITIONS PRECEDENT TO FEMMEPHARMA'S OBLIGATION TO CLOSE. --------------------------------------------------------- FemmePharma's obligation to sell the Series C Stock to KV hereunder and to take the other actions required to be taken by FemmePharma at either the Initial Closing or the Second Closing is subject to the satisfaction, at or prior to such Closing, of each of the following conditions (any of which may be waived by FemmePharma in whole or in part): 8.1. Accuracy of Representations. KV's representations and --------------------------- warranties in this Agreement shall have been accurate as of the date of this Agreement and as of the Closing Date as if made on the Closing Date, and KV shall have delivered to FemmePharma at the Closing a certificate that such representations and warranties are true and correct on the Closing Date 8.2. KV's Performance. The covenants and obligations that ---------------- KV is required to perform or to comply with pursuant to this Agreement at or prior to the Closing shall have been performed and complied with. 8.3. No Proceedings. There shall not be outstanding or -------------- then threatened against FemmePharma or KV any proceeding: (a) involving any challenge to, or seeking damages or other relief in connection with, any of the transactions contemplated by this Agreement or the License Agreement, or (b) that prevents, delays, makes illegal or otherwise interferes with the sale and delivery of the Series C Stock contemplated hereby. 8.4. License Agreement. The License Agreement shall have ----------------- been entered into by FemmePharma and KV and shall be in full force and effect, and KV shall not be in breach thereof. 8.5. Second Closing. With respect to the Second Closing, -------------- (i) the Initial Closing shall have been consummated, and (ii) the License Agreement shall not have been terminated with respect to the Danazol Product. 8.6. Performance. KV shall have performed all of the ----------- covenants required by this Agreement to be performed by it on or before the Closing. -9- 9. MISCELLANEOUS PROVISIONS. ------------------------ 9.1. All warranties, representations, indemnities and agreements hereunder shall survive any termination or revocation of this Agreement for a period of two years. 9.2. Should any one or more of the provisions of this Agreement be determined by a judicial or administrative authority having jurisdiction thereof to be illegal or unenforceable, such illegal or unenforceable provisions shall be so modified by the authority making such determination, if and to the extent possible, so as to give effect to the intentions of the parties expressed herein, and all other provisions of this Agreement shall be given effect separately from the provision or provisions determined to be illegal or unenforceable and shall not be affected thereby. 9.3. Except as otherwise provided herein, all the terms, provisions, representations and warranties of this Agreement shall be binding upon, inure to the benefit of, and be enforceable by the respective successors and assigns of the parties hereto. 9.4. It is the intention of the parties hereto that the laws of Pennsylvania should govern the validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties hereto, without regard to conflict or choice of law principles. 9.5. This Agreement contains the entire agreement between the parties hereto relating to the sale by FemmePharma and purchase by KV of the Series C Stock and may be amended only by a written amendment signed by all the parties hereto. 9.6. No failure or delay of any party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. 9.7. The rights and remedies herein provided shall be cumulative and not exclusive of any other rights or remedies provided by law or otherwise. 9.8. All notices, requests, consents, and other communications required or permitted hereunder shall be in writing and shall be delivered, or mailed first class postage prepaid, Express, registered or certified mail, or sent by prepaid next business day courier: (i) If to FemmePharma at the address set forth for FemmePharma at the beginning of this Agreement; (ii) If to KV at the address set forth for KV at the beginning of this Agreement; or such other address as to which FemmePharma, or KV shall have specified by written notice to the other in accordance with this Section 9.8; and such notices and other communications shall for all purposes of this Agreement be treated as being effective or having been given when delivered, if delivered personally, or, if sent by mail, at the earlier of their receipt or 72 hours after the same have been deposited in the United States Mail, addressed and postage prepaid as aforesaid, or if -10- sent by prepaid next business day courier on the business day following delivery thereof to the courier. 9.9. This Agreement may be executed in two or more counterparts with the same effect as if all parties hereto had signed the same documents. All such counterparts shall be deemed an original, shall be construed together and shall be considered one and the same instrument. Facsimile signatures shall be as effective as original signatures hereto. 9.10. Copies of this Agreement which are true copies of the original and are manually signed by the parties shall be deemed duplicate originals. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed on the date and year first above written. FEMMEPHARMA, INC. By: /s/ Gerianne M. DiPiano ------------------------------ Gerianne M. DiPiano President KV PHARMACEUTICAL COMPANY By: /s/ Alan G. Johnson ------------------------------- Alan G. Johnson Senior Vice President -11- EX-10.(VV) 15 exh10pvv.txt Exhibit 10(vv) [Execution Copy] PRODUCT ACQUISITION AGREEMENT This Product Acquisition Agreement (this "Agreement") is made and --------- entered into as of March 31, 2003, by and among Schwarz Pharma Manufacturing, Inc., an Indiana corporation ("SPM"), 1101 "C" Avenue West, --- Seymour, Indiana 47274, SRZ Properties, Inc., a Delaware corporation ("SRZ" --- and, together with SPM, "Schwarz"), 1101 "C" Avenue West, Seymour, Indiana ------- 47274, and KV Pharmaceutical Company, a Delaware corporation ( "KV"), 2503 -- S. Hanley Road, St. Louis, Missouri 63144. W I T N E S S E T H: - - - - - - - - - - WHEREAS, KV desires to purchase, and Schwarz desires to sell, Schwarz's Niferex(R) product line, subject to the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Schwarz and KV agree as follows: 1. CERTAIN TERMS. 1.1. Definitions. The terms defined in Schedule 1.1, when used ----------- ------------ in this Agreement, shall have the meanings set forth therein. 1.2. Terminology. All section, subsection, schedule, appendix ----------- and exhibit references used in this Agreement are to this Agreement unless otherwise specified. All schedules and exhibits attached to this Agreement constitute an integral part of this Agreement and are incorporated herein. Unless the context of this Agreement clearly requires otherwise, (a) the singular shall include the plural and the plural shall include the singular wherever and as often as may be appropriate, (b) the masculine shall include the feminine and the feminine shall include the masculine wherever or as often as may be appropriate, (c) the words "include" and "including" shall mean "including without limitation" and (d) the words "hereof," "herein," "hereunder," and similar terms in this Agreement shall refer to this Agreement as a whole and not any particular section or article in which such words appear. 2. ACQUISITION OF PRODUCTS. 2.1. Sale of Assets. Upon the terms and subject to the conditions -------------- of this Agreement, (i) Schwarz shall sell, assign, transfer and deliver to KV or its designee at Closing, free and clear of all encumbrances (other than encumbrances created in connection with any Transaction Document), all of Schwarz's right, title and interest in the Assets (subject to Assumed Liabilities but excluding all Excluded Assets and Excluded Liabilities) and the Inventory and (ii) KV or its designee shall purchase and accept all of Schwarz's right, title and interest in the Assets (subject to Assumed Liabilities but excluding all Excluded Assets and Excluded Liabilities) and Inventory from Schwarz. 2.2. Assumption of Liabilities. With respect to the purchase ------------------------- and sale of the Assets, KV will, in addition to payment of the Purchase Price, assume at the Closing and subsequently, in due course, pay, honor and discharge, the Assumed Liabilities. 3. CONSIDERATION; ALLOCATION OF PURCHASE PRICE. 3.1. Purchase Price. In consideration of the sale of the Assets -------------- hereunder at the Closing, KV shall pay Schwarz at the Closing the sum of $14,300,000 (the "Purchase Price") plus the Inventory Price. Payment of the -------------- Purchase Price and the Inventory Price shall be made by wire transfer of immediately available funds in accordance with the Wire Transfer Instructions. 3.2. Inventory. The Inventory Price shall be determined by --------- multiplying (i) the amount of finished Product units included in Schwarz's inventory on the Closing Date (the "Inventory") by (ii) the applicable price --------- therefor set forth on Schedule 3.2 hereto. ------------ 3.3. Tax Reporting and Allocation of Consideration. KV and --------------------------------------------- Schwarz recognize their mutual obligations pursuant to Section 1060 of the Code to timely file IRS Form 8594 (the "Asset Acquisition Statement") with --------------------------- each of their respective federal income tax returns. 4. CLOSING. 4.1 The Closing. The closing of the sale and purchase of the ----------- Assets (the "Closing") shall take place on the date of this Agreement (the ------- "Closing Date") by teleconference call and facsimile. At the Closing, the ------------ Parties to this Agreement will exchange the funds, certificates and other documents specified in this Agreement. The Closing shall be deemed to have occurred at 11:59 PM EST on the Closing Date. 4.2. Proceedings at Closing. All proceedings to be taken and ---------------------- all documents to be executed and delivered by Schwarz in connection with the consummation of the transactions contemplated hereby shall be reasonably satisfactory in form and substance to KV and its counsel. All proceedings to be taken and all documents to be executed and delivered by KV in connection with the consummation of the transactions contemplated hereby shall be reasonably satisfactory in form and substance to Schwarz and its counsel. All proceedings to be taken and all documents to be executed and delivered by all parties at the Closing shall be deemed to have been taken, executed and delivered simultaneously, and no proceedings shall be deemed taken nor any documents executed or delivered until all have been taken, executed and delivered. 4.3. Deliveries by Schwarz at the Closing. At the Closing, ------------------------------------ Schwarz shall deliver to KV the following: (a) a receipt for the Purchase Price and the Inventory Price; (b) the Trademark Transfer Agreement, duly executed on behalf of SPM, SRZ and Schwarz Pharma, Inc.; 2 (c) certified copies of the resolutions of the Boards of Directors of each of SPM and SRZ approving this Agreement, the other Transaction Documents and the transactions contemplated hereby and thereby; and (d) such other instruments and documents, in form and substance reasonably acceptable to KV, as may be reasonably necessary to effect the Closing. 4.4. Deliveries by KV at the Closing. At the Closing, KV shall ------------------------------- deliver to Schwarz the following: (a) the Purchase Price and the Inventory Price, as provided in Section 3.1; - ----------- (b) the Assumption Agreement, duly executed on behalf of KV; (c) a certified copy of the resolutions of the Board of Directors of KV approving this Agreement, the other Transaction Documents to which it is a party and the transactions contemplated hereby and thereby; and (d) such other instruments and documents, in form and substance reasonably acceptable to Schwarz, as may be reasonably necessary to effect the Closing. 5. COVENANTS AND AGREEMENTS. 5.1. Limited License. Schwarz hereby grants to KV a non-exclusive, --------------- non-transferable, royalty-free license (the "License") to use Schwarz's ------- existing NDC(s) for each of the Products to the extent such NDC(s) are applied to the existing packaging and labeling of the Inventory and the Products supplied to KV pursuant to Section 5.6. The License shall ----------- automatically expire upon the earlier to occur of (i) the date on which KV sells all of the Inventory and (ii) the date that is 180 days after the Closing Date. 5.2. Chargebacks, Rebates, Returns. ----------------------------- (a) Chargebacks. Schwarz will be responsible for administering ----------- and satisfying all chargebacks, allowances, administrative fees and similar arrangements (collectively "Chargebacks") in each case arising with respect ----------- to Products that are sold by Schwarz on or before the Closing Date. KV shall be solely responsible for administering and satisfying all requests for Chargebacks arising with respect to Products that are sold by KV after the Closing Date. (b) Rebates. ------- (i) Medicaid and State Rebate Programs. Until such date ---------------------------------- that is ninety (90) days following the Closing Date (the "Cut-Off Date"), Schwarz shall be responsible for paying for ------------ all Medicaid and state rebate programs for the Products sold and paid for by Medicaid or state rebate programs and for which a qualified invoice is issued. Schwarz shall be responsible for all Medicaid and state rebate reporting activity for Schwarz-labeled Products before and after the Closing Date. KV shall be responsible for paying for all rebates for Products sold 3 and paid for by Medicaid or state rebate programs, and for all related reporting activities, after the Cut-Off Date. Schwarz shall pay rebates for Schwarz-labeled Product(s) after the Closing and KV would reimburse Schwarz for post-Closing rebates paid on KV's behalf (in accordance with Section 5.2(d)) after the Cut-Off Date. Quarterly, on or -------------- before the tenth (10th) day following the end of any calendar quarter in which KV has sold Schwarz-labeled Products, KV will provide Schwarz with the appropriate pricing information (i.e., average manufacturer's price and best price) related to the Schwarz-labeled Products sold by KV to be combined with Schwarz pricing information for the quarter and reported to the appropriate agency. (ii) Managed Care, Retail Pharmacy and Other Customer ------------------------------------------------ Rebates. After the Closing Date, Schwarz shall be responsible ------- for all managed care rebates and GPO administrative fees for the Products sold by Schwarz and paid for by a managed care or retail pharmacy entity or other customer, or otherwise pursuant to a customer agreement and for which a qualified rebate invoice is issued. KV shall be responsible to pay rebates and GPO administrative fees for Products sold by KV or its Affiliates that are paid for by a managed care or retail pharmacy entity or otherwise pursuant to a customer agreement. (c) Returns. Any Products sold by Schwarz that are returned to ------- either KV or Schwarz following the Closing Date shall be for the account of Schwarz; provided, however, that, once the aggregate value of all such returns accepted by KV and Schwarz after the Closing Date equals $400,000, all returns accepted by either KV or Schwarz shall thereafter be allocated 100% for the account of KV. Schwarz or KV, as applicable, shall be entitled for reimbursement in accordance with Section 5.2(d) for the cost of any -------------- returns that it accepts for the account of the other Party. Schwarz and KV shall destroy such returned Products. KV shall not, and shall not cause any of its Affiliates or any Third Party to encourage any purchaser of Products sold by Schwarz to return such Products. (d) Reimbursement. KV or Schwarz, as the case may be, shall, ------------- on a monthly basis, submit to the other Party a written request for any amount for which it is entitled to reimbursement pursuant to this Section 5.2, ----------- together with all supporting documentation reasonably necessary to verify such claim. The Party receiving such a request shall make payment thereof within thirty (30) days of receipt of such documentation. (e) Identification. For purposes of determining whether -------------- Product was sold by Schwarz or KV pursuant to this Section 5.2, Schwarz and ----------- KV shall refer to lot numbers under which Product was sold, if available. In case of split lots that can not be identified or attributed to Schwarz or KV, the relevant cost or expense shall allocated pro rata between Schwarz and KV in the same ratio as the parties' share of the split lot. 5.3. Promotional Materials. Schwarz shall take all commercially --------------------- reasonable steps necessary or reasonably requested by KV to cease all promotional, marketing and sales efforts in respect of the Products as of the Closing Date, including, without limitation, removing all references to the Products from Schwarz's (and its Affiliates') websites and destroying all promotional, sales and marketing materials relating to the Products in Schwarz's possession; 4 provided, however, that Schwarz reserves the right to retain one copy of any written materials in respect of the Products, which materials shall remain subject to the confidentiality provisions contained herein and, provided further, that nothing in this Section 5.3 shall apply to any activities in ----------- respect of, or materials used in, the continents of Asia or Australia by Schwarz or any of its Affiliates, including, without limitation, Schwarz Pharma Co., Ltd. and Schwarz Pharma Philippines Inc. 5.4. Transitional Assistance. Schwarz shall use commercially ----------------------- reasonable efforts to: (a) except as otherwise instructed by KV, notify customers for the Products of the transfer of sales of the Products to KV; provided that KV shall have the right to approve any written communication for such purpose; and (b) maintain Schwarz's medical inquiry support for each of the Products for forty-five (45) days after the Closing and refer persons who call with medical inquiries regarding any Product to KV or as otherwise designated by KV. 5.5. Disclosure of Know-How and Regulatory Materials. To the ----------------------------------------------- extent not heretofore provided or disclosed, at or promptly following the Closing, Schwarz shall provide or disclose to KV (i) all of the materials and information constituting the Know-How and (ii) any written correspondence between Schwarz and the FDA and any other reports, filings or other materials furnished by Schwarz to the FDA in respect of the Products during the past three (3) years. 5.6. Supply Obligation. ----------------- (a) SPM shall, pursuant to a written purchase order from KV received by SPM no later than twenty (20) days following the Closing Date, supply to KV the amounts of the Products set forth on Schedule 3.2. Such ------------ Products shall be supplied at the applicable prices set forth on Schedule 3.2 ------------ and shall be delivered EXW (Incoterms 2000) SPM's facility located at the address set forth in the first paragraph of this Agreement no later than ninety (90) days after the date of SPM's receipt of the purchase order therefor. Payment for Products supplied pursuant to this Section 5.6 shall ----------- be due and payable no later than thirty (30) days after KV's receipt of SPM's invoice therefor. (b) All Products supplied pursuant to this Section 5.6 shall ----------- (i) be manufactured in accordance with cGMP, (ii) conform to the Specifications, (iii) have at least 12 months dating and (iv) not be adulterated within the meaning of the Act. EXCEPT AS EXPRESSLY SET FORTH IN THIS SECTION 5.6(b), SCHWARZ MAKES NO REPRESENTATIONS OR WARRANTIES TO KV IN -------------- RESPECT OF ANY PRODUCTS SUPPLIED PURSUANT TO THIS SECTION 5.6 AND ----------- SPECIFICALLY DISCLAIMS ANY STATUTORY OR IMPLIED WARRANTIES, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A SPECIFIC PURPOSE. 5.7. Liability Insurance. For at least two (2) years following the ------------------- Closing Date, each of Schwarz and KV shall maintain in full force and effect product liability insurance in respect of the Products in the amount of $10,000,000 per occurrence and in the aggregate. 5.8. Merz Agreement. Schwarz shall issue a written termination -------------- notice to Merz Pharmaceuticals, LLC ("Merz") in respect of, and shall ---- thereafter terminate, that certain 5 Framework Agreement, dated September 30, 2002, between SPM and Merz (the "Merz Agreement") in accordance with the terms thereof promptly after the - ---------------- date hereof. 5.9. Opti-Med Agreement. Schwarz shall cause Schwarz Pharma, ------------------ Inc. ("SPI") to issue a written termination notice to Opti-Med CR Labs, Inc. ("Opti-Med") in respect of, and thereafter terminate, that certain License -------- Agreement, dated February 7, 2001, between SPI and Opti-Med (the "Opti-Med -------- Agreement") in accordance with the terms thereof promptly after the date - --------- hereof. Prior to termination of the Opti-Med Agreement in accordance with this Section 5.9, Schwarz shall ensure that SPI does not approve any Sales ----------- Agreement (as defined in the Opti-Med Agreement) as contemplated by the Opti-Med Agreement. 6. REGULATORY MATTERS. 6.1. ADE Reporting. SPM acknowledges its responsibility for any ------------- ADEs in respect of Products manufactured by SPM and shall be responsible for any reports in respect thereof required by Applicable Laws. KV shall be solely responsible for all ADEs and such reporting obligations in respect of Products manufactured by KV. Schwarz shall provide oral notice to KV of any ADE in respect of the Products promptly after becoming aware thereof and thereafter shall furnish to KV a copy of any report to a Regulatory Authority in respect of such ADE promptly after such report is made. 6.2. Notices. ------- (a) Within seven (7) days after the Closing Date, both KV and Schwarz will inform the FDA of the ownership transfer of the Products as provided for in 21 CFR 207. (b) KV shall, as promptly as practicable following the Closing Date, file the Trademark Transfer Agreement with the U.S. Patent and Trademark Office and take such additional actions as may be necessary to transfer the foreign Trademarks under the laws of the applicable non-U.S. jurisdictions. 7. REPRESENTATIONS AND WARRANTIES. 7.1. Representations and Warranties of KV. KV hereby represents ------------------------------------ and warrants to Schwarz as follows: (a) Organization, Qualification and Good Standing. KV is a --------------------------------------------- corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and is duly qualified to transact business in each jurisdiction in which the failure to so qualify would reasonably be expected to have a material adverse effect on its business, properties, assets or condition (financial or otherwise). (b) Authority. KV has the corporate power and authority to --------- execute and deliver this Agreement and the other Transaction Documents to which it is a party and to perform its obligations hereunder and thereunder and has taken all requisite corporate action to execute and deliver this Agreement and the other Transaction Documents to which it is a party. This Agreement and the other Transaction Documents to which KV is a party have been or at the Closing will be duly and validly executed and delivered by KV and are, or upon the execution 6 thereof will be, the legal, valid and binding obligations of KV, enforceable against KV in accordance with their terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and to general principles of equity. (c) No Violation. The execution, delivery and performance by ------------ KV of this Agreement and the other Transaction Documents to which it is a party and its compliance with the terms and conditions hereof and thereof do not and will not conflict with or result in a breach of any of the terms and conditions of or constitute a default, with or without the passage of time, the giving of notice or both, under: (i) any loan agreement, guaranty, financing agreement, license, or other agreement or instrument binding or affecting it or its property; (ii) the provisions of its certificate of incorporation or bylaws; or (iii) any judgment, order, writ, injunction or decree of any court or governmental or administrative authority entered against it or by which it or any of its property is bound. (d) Consents. To KV's knowledge, no consent, waiver, approval, -------- order, permit or authorization of, or declaration or filing with, or notification to, any Person or governmental body is required on the part of KV in connection with the execution and delivery of this Agreement or the other Transaction Documents to which KV is a party or the compliance by KV with any of the provisions hereof or thereof, other than (i) the notices contemplated in Section 6.1 and (ii) any such permit, authorization, ----------- declaration, filing or notification which would not reasonably be expected to have a material adverse effect on KV or its ability to enter into the Transaction Documents or consummate the transactions contemplated thereby. (e) Litigation. There is no pending or, to the knowledge of ---------- KV, threatened legal proceeding, action, arbitration or court, governmental or administrative judgment, order or ruling that seeks to enjoin or obtain damages in respect of the consummation of the transactions contemplated by this Agreement or that questions the validity of this Agreement, the other Transaction Documents to which KV is a party or any action taken or to be taken by KV in connection with the consummation of the transactions contemplated hereby or thereby. (f) Brokers. No Person has acted directly or indirectly as a ------- broker, finder or financial advisor for KV in connection with the negotiations relating to, or the transactions contemplated by, this Agreement and no Person is entitled to any fee, commission or like payment in respect thereof based in any way on any agreement, arrangement or understanding made by or on behalf of KV. EXCEPT AS EXPRESSLY SET FORTH IN THIS SECTION 7.1, KV MAKES NO ----------- REPRESENTATIONS OR WARRANTIES TO SCHWARZ AND SPECIFICALLY DISCLAIMS ANY STATUTORY OR IMPLIED WARRANTIES, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A SPECIFIC PURPOSE. 7.2. Representations and Warranties of Schwarz. Schwarz hereby ----------------------------------------- represents and warrants to KV as follows: (a) Organization, Qualification and Good Standing. SPM is a --------------------------------------------- corporation duly organized, validly existing and in good standing under the laws of the State of Indiana and SRZ is a corporation duly organized, validly existing and in good standing under the laws of 7 the State of Delaware and each of SPM and SRZ is duly qualified to transact business in each jurisdiction in which the failure to so qualify would reasonably be expected to have a material adverse effect on its business, properties, assets or condition (financial or otherwise). (b) Authority. Each of SPM and SRZ has the power and authority --------- to execute and deliver this Agreement and the other Transaction Documents to which it is a party and to perform its obligations hereunder and thereunder and has taken all requisite corporate action to execute and deliver this Agreement and the other Transaction Documents to which it is a party. This Agreement and the other Transaction Documents to which SPM or SRZ, as applicable, is a party have been, or at the Closing will be, duly and validly executed and delivered by SPM or SRZ, as the case may be, and are, or upon the execution thereof will be the legal, valid and binding obligations of SPM or SRZ, as applicable, enforceable against such party in accordance with their terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and to general principles of equity. (c) No Violation. The execution, delivery and performance of ------------ this Agreement and the other Transaction Documents to which SPM or SRZ is a party and the compliance with the terms and provisions hereof and thereof by SPM and SRZ do not and will not conflict with or result in a breach of any of the terms or conditions of or constitute a default, with or without the passage of time, the giving of notice or both, under: (i) any agreement, license, document, instrument, indenture, guarantee or other agreement or instrument binding on or affecting Schwarz or its assets; (ii) the provisions of its charter, bylaws or similar corporate governing instruments of SPM or SRZ, as applicable; or (iii) any order, writ, injunction or decree of any court or governmental or administrative authority, which affects or could affect the Products, the Know-How, the Trademarks, the Copyrights or the performance of this Agreement or the other Transaction Documents to which SPM or SRZ is a party by SPM or SRZ or the rights being transferred by Schwarz hereunder and thereunder, except, in each case, as would not reasonably be expected to have a material adverse effect on Schwarz or its ability to enter into the Transaction Documents or to consummate the transactions contemplated thereby. (d) Information and Records. Schwarz has provided to KV: ----------------------- (i) a list of substantially all Third Party purchasers of each of the Products, together with amounts purchased, by quarter, since January 1, 2002, (ii) a list of all chargeback, rebate, discount, allowance, Third Party reimbursement or administrative fee or other agreements or arrangements relating to the sale of each of the Products, and price changes, including (but not limited to) any agreements for extended payment terms or other unusual terms or conditions of sale of the Products agreed to by Schwarz, as well as Schwarz's return policies with respect to the Products, since January 1, 2002 and (iii) a list of ADEs. Such information shall be considered Confidential Information subject to the terms of Section 10. ---------- (e) Returns. Schwarz has provided KV information regarding the ------- level of returns of each of the Products since January 1, 2002, which information is complete and accurate in all material respects. (f) Certain Changes. Except as disclosed in Schedule 7.2(f), --------------- --------------- since October 1, 2002, Schwarz has not made any material deviation from the ordinary and usual course of the manufacture or sale of the Products, including selling and pricing. 8 (g) Financial Information. The Product Financial Information in --------------------- respect of the period from January 1, 2002 to December 31, 2002 and for the period from January 1, 2003 to February 28, 2003 has been prepared in good faith from the books and records of Schwarz in accordance with the standard accounting procedures of Schwarz, consistently applied, and fairly presents, in all material respects, the information contained therein. The Product Financial Information in respect of the period from January 1, 2002 to December 31, 2002 has been used in preparing the audited financial statements of Schwarz and its Affiliates for fiscal year 2002. (h) Extensions; Generics. Schwarz has not developed or planned: -------------------- (i) any unlaunched extension or improvement of any Product for sale in North America, or (ii) a generic alternative product to any Product. (i) Litigation. There are no pending or, to the knowledge of ---------- Schwarz, threatened product liability or other claims, actions, arbitrations, administrative or other proceedings affecting Schwarz, the Products, the Know-How, the Trademarks or the Copyrights or which could materially and adversely affect either: (i) the transactions contemplated by this Agreement or the other Transaction Documents to which SPM or SRZ is a party or (ii) the manufacture, packaging, use, offer for sale, sale or distribution of the Products. Neither Schwarz nor its insurer has made any payment with respect to any product liability claims relating to the Products under any insurance policy (including self-insurance). (j) Inventory. All Products included in the Inventory were --------- manufactured in accordance with cGMP, meet the Specifications, have a remaining dating of not less than 12 months, and are not adulterated within the meaning of the Act. (k) No Conflicting Rights. Except as contemplated by those --------------------- certain agreements between Schwarz and its Affiliates and Opti-Med CR Labs, Inc. which are disclosed on Schedule 7.2(l), Schwarz owns and has not sold, --------------- transferred, sublicensed, pledged, encumbered or granted any rights or interest in or to the Know-How, the Trademarks, the Copyrights or the Products to any Third Party inconsistent with the provisions of this Agreement. The rights of Schwarz's Affiliates to use the Trademarks are limited to the manufacture, use and sale of the Products by such Affiliates in the continents of Asia, Australia and in Denmark, Estonia, Iceland, Latvia, Lithuania, Norway or Sweden. SPI has not heretofore approved any Sales Agreements (as defined in the Opti-Med Agreement) as contemplated by the Opti-Med Agreement. (l) Contracts. Set forth on Schedule 7.2(l) hereto is a list of --------- --------------- (i) each written or other binding agreement, commitment or understanding with any Third Party pertaining to the manufacture, packaging, labeling, filling, marketing, sale or distribution of the Products, other than purchase orders entered into by Schwarz in the ordinary course of business and (ii) each agreement between Schwarz and any Third Party pursuant to which Schwarz is obligated to sell any Product or to pay or credit reimbursements, rebates, chargebacks, discounts, refunds or other arrangements relating to the sale of a Product to Third Party buyers or users of any Product (collectively, the "Contracts"). Schwarz has not ----------- experienced any material adverse change in the existence or terms of the Contracts with respect to the Products since January 1, 2002. 9 (m) Compliance With Laws. Except as set forth on -------------------- Schedule 7.2(m), no Regulatory Approvals have been obtained with respect to - --------------- the manufacture, marketing, promotion, sale or distribution of the Products. To its knowledge, Schwarz has complied in all material respects with all other Applicable Laws in connection with the development, manufacture, testing, import, export, marketing, advertising, offer for sale, sale and distribution of the Products. (n) Infringement. The Trademarks are owned by Schwarz and ------------ constitute the only trademarks, except for variations of the corporate name "Schwarz", under which the Products are or have been sold by Schwarz. Schwarz has no knowledge and has received no written allegation or claim from any Third Party that any Product, Know-How, Trademarks or other intellectual property related to the Products infringes upon the intellectual property rights of any other Person, and Schwarz has the right to sell and transfer the same to KV, as provided hereunder. (o) Brokers. No Person has acted directly or indirectly as a ------- broker, finder or financial advisor for Schwarz in connection with the negotiations relating to, or the transactions contemplated by, this Agreement and no Person is entitled to any fee, commission or like payment in respect thereof based in any way on any agreement, arrangement or understanding made by or on behalf of Schwarz. EXCEPT AS EXPRESSLY SET FORTH IN THIS SECTION 7.2, SCHWARZ MAKES NO ----------- REPRESENTATIONS OR WARRANTIES TO KV AND SPECIFICALLY DISCLAIMS ANY STATUTORY OR IMPLIED WARRANTIES, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A SPECIFIC PURPOSE. 7.3. Survival of Representations and Warranties. The respective ------------------------------------------ representations and warranties of the Parties hereto shall survive the Closing until June 30, 2004. 8. NON-COMPETITION. 8.1. Schwarz agrees that for the five (5) year period following the Closing Date, Schwarz will not offer for sale, sell or distribute or assist or enable any Affiliate to offer for sale, sell or distribute or license, directly or indirectly, in or in respect of North America (i) any generic version of any Products or (ii) any Competing Product; provided, however, -------- ------- that nothing contained herein shall preclude Schwarz or its Affiliates from (i) any activity in respect of Ferro Sanol, (ii) licensing the Niferex trademark to OY Verman, AB for use in Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway and Sweden, but not outside such countries, (iii) subject to Section 5.8, supplying any of the Products to Merz, in accordance ----------- with Schwarz's obligations under the Merz Agreement, (iv) manufacturing the Products for sale in, or the marketing, distribution or sale of the Products solely in, the continents of Asia or Australia, it being understood that neither Schwarz nor its Affiliates shall encourage the resale of such Products in North America, or (v) filling the Excluded Purchase Orders. 8.2. In the event Schwarz or any of its Affiliates acquires a Third Party which has filed an application for Regulatory Approval for or makes or sells one or more product that would violate Section 8.1, Schwarz or any of its ----------- Affiliates shall be permitted to make, have made, 10 market, use, sell and offer for sale such products, whether or not the period specified in Section 8.1 has expired and whether or not such products ----------- compete directly or indirectly with any Product; provided, however, that Schwarz shall or shall cause its applicable Affiliate to use commercially reasonable efforts to divest itself of such products within nine months after the closing of such acquisition or merger. 8.3. Because of the immediate and irreparable damage that would be caused to KV for which monetary damages would not be a sufficient remedy, the Parties agree that KV will be entitled to seek specific performance, temporary and permanent injunctive relief, and other equitable remedies against Schwarz in the event of the breach or threatened breach of the provisions of Section 8.1, without any obligation to post a bond or other ----------- security in connection therewith. This Section shall not limit any other legal or equitable remedies that KV may have against Schwarz for violation of the restrictions herein or otherwise under this Agreement. The performance of this Article 8 by Schwarz's Affiliates is hereby guaranteed --------- by Schwarz. 9. INDEMNIFICATION. 9.1. Indemnification by Schwarz. Schwarz shall indemnify, defend and -------------------------- hold harmless the KV Indemnitees from and against any and all Claims to which the KV Indemnitees may become subject or incur, suffer or be required to pay resulting from or arising in connection with: (a) the misrepresentation or breach by Schwarz of any obligation, covenant, representation or warranty contained in this Agreement or the other Transaction Documents and (b) the Excluded Liabilities. Notwithstanding the foregoing, Schwarz shall have no obligation under this Agreement to indemnify, defend or hold harmless the KV Indemnitees with respect to Claims to the extent they are caused by the willful misconduct or negligent acts or omissions of a KV Indemnitee or the misrepresentation or breach by KV of any obligation, covenant, representation or warranty contained in this Agreement or any other Transaction Document to which KV is a party. 9.2. Indemnification by KV. KV shall indemnify, defend and hold --------------------- harmless the Schwarz Indemnitees from and against any Claims which the Schwarz Indemnitees may become subject or incur, suffer or be required to pay resulting from or arising in connection with: (a) the misrepresentation or breach by KV of any obligation, covenant, representation or warranty contained in this Agreement or any other Transaction Document to which KV is a party and (b) the Assumed Liabilities. Notwithstanding the foregoing, KV shall have no obligation under this Agreement or any other Transaction Document to which KV is a party to indemnify, defend or hold harmless any Schwarz Indemnitee with respect to Claims to the extent they are caused by a misrepresentation under or breach of any Transaction Document by Schwarz or the willful misconduct or negligent acts or omissions of a Schwarz Indemnitee. 9.3. Determination of Damages and Related Matters. In calculating any -------------------------------------------- amount payable to KV pursuant to Section 9.1 or payable to Schwarz pursuant to ----------- Section 9.2, Schwarz or KV, as the case may be, such amount shall be reduced - ----------- by (i) any tax benefit allowable as a result of the facts giving rise to the claim for indemnification, and (ii) any insurance proceeds recovered. Schwarz and KV agree that, except as specifically set forth in this Agreement and the Schedules hereto, neither party (including its representatives) has made or shall have liability for any representation or warranty, express or implied, in connection with the transactions 11 contemplated by this Agreement. ANYTHING TO THE CONTRARY HEREIN NOTWITHSTANDING, NO PARTY SHALL BE LIABLE TO ANY OTHER PARTY FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL, INDIRECT OR PUNITIVE DAMAGES OR ANY AMOUNT ATTRIBUTABLE TO LOST PROFITS. 9.4. Limitation on Indemnification Liabilities. The indemnification ----------------------------------------- rights in favor of KV Indemnitees contained in Section 9.1 shall terminate ----------- once the dollar amount of all direct or indirect losses, liabilities, damages and expenses (including reasonable attorneys' fees) indemnified against under such Section reaches Five Million Dollars ($5,000,000) in the aggregate. Any indemnity payment made pursuant to this Agreement will be treated as an adjustment to the Purchase Price for tax purposes, unless a determination (as defined in Section 1313 of the Code) with respect to the indemnified party causes such payment not to constitute an adjustment to the Purchase Price for United States federal income tax purposes. 9.5. Notice and Assistance. Each Party shall promptly notify the --------------------- other, in writing, if it learns of any Claim related to any Product, the Intellectual Property, any Applicable Laws or any other matter asserted or threatened against such Party (the "Defending Party") with respect to which --------------- it expects to seek indemnification from the other Party hereunder (an "Indemnifiable Claim"). With respect to any Indemnifiable Claims asserted ------------------- against a Defending Party, the other Party shall, at no out-of-pocket expense to it except as provided in this Article 9, reasonably cooperate --------- with and provide such reasonable assistance to the Defending Party as such Defending Party may reasonably request in connection with its defense against such Indemnifiable Claim. Such reasonable assistance shall include, but is not limited to, providing copies of all relevant documents, correspondence and other materials that the Defending Party may reasonably request; provided, however, that any Confidential Information so provided shall be treated in accordance with the provisions of Article 10. ---------- 9.6. Conditions to Indemnification. The obligations of the ----------------------------- indemnifying Party under Sections 9.1 and 9.2 are conditioned upon the ------------ --- delivery of written notice to the indemnifying Party of any potential Indemnifiable Claim within twenty (20) days after the indemnified Party receives actual knowledge of the potential Indemnifiable Claim; however, the failure to give notice within such twenty (20) day period shall be a defense only to the extent the indemnifying Party is actually prejudiced thereby. 9.7. Indemnification Procedure for Third-Party Claims. Except as ------------------------------------------------ otherwise provided herein, in the event of the initiation of any legal proceeding against an indemnified Party by a Third Party, the indemnifying Party shall have the absolute right after the receipt of notice, at its option and at its own expense, to be represented by counsel of its choice, and to defend against, negotiate, settle (subject to Section 9.8) or ----------- otherwise deal with any proceeding, claim, or demand which relates to any loss, liability or damage indemnified against hereunder; provided, however, -------- ------- that the indemnified Party may participate in any such proceeding with counsel of its choice and at its expense. The parties hereto agree to cooperate fully with each other in connection with the defense, negotiation or settlement (subject to Section 9.8) of any such legal proceeding, claim ----------- or demand. To the extent the indemnifying Party elects not to defend such proceeding, claim or demand, and the indemnified Party defends against or otherwise deals with any such proceeding, claim or demand, the indemnified Party may retain counsel, at the expense of the indemnifying Party, and control the defense of such proceeding. If the indemnifying Party elects not to defend 12 any such proceeding, the indemnified Party may settle, subject to Section 9.8, such proceeding without the consent of the indemnifying Party, - ----------- and the indemnifying Party shall indemnify and hold the indemnified Party harmless with respect to any loss, liability, claim, obligation, damage and expense occasioned by such settlement. 9.8. Settlements. Neither Party may settle an Indemnifiable Claim ----------- without the consent of the other Party if such settlement would impose any monetary obligation on the other Party, require the other Party to submit to an injunction, limit the other Party's rights under this Agreement or another Transaction Document or otherwise adversely affect the rights, claims or interests of the other Party unless the indemnified Party is unconditionally released from all liability in respect of such Indemnifiable Claim. 9.9. Exclusive Remedy. The indemnification provided in this Article 9, ---------------- --------- subject to the limitations set forth herein, shall be the exclusive post-Closing remedy for damages available to any KV Indemnitee or Schwarz Indemnitee arising out of or relating to the Transaction Documents and the transactions contemplated thereunder. 10. CONFIDENTIALITY. 10.1. Nondisclosure Obligation. Prior to the date that is five (5) ------------------------ years after the Closing Date, neither Party shall disclose to any Third Party or use, except as contemplated by this Agreement, any Confidential Information (as defined below) of the other Party without the prior written consent of the other Party. For purposes of this Agreement, "Confidential ------------ Information" shall mean information of either Party disclosed to the other - ----------- Party that was marked "confidential," "trade secret" or a similar designation if in tangible form, designated as confidential at time of disclosure whether in oral or written form or which by its nature should be understood by a reasonable party in the pharmaceutical industry to constitute confidential information. For purposes of this Section 10.1, ------------ Confidential Information of KV shall include the proprietary information included in the Assets, which information shall not be subject to the exception set forth in clause (a), below. Except as set forth in the foregoing sentence, "Confidential Information" shall not include any information that: (a) is known by the receiving Party and is not subject to an obligation of confidentiality to a Third Party or was not obtained through a prior disclosure by the disclosing Party; (b) is at the time of disclosure or thereafter becomes published or otherwise part of the public domain without breach of this Agreement by the receiving Party; (c) is subsequently disclosed to the receiving Party on a non-confidential basis by a Third Party who has the right to make such disclosure; (d) is required by law, regulation, rule, act or order of any governmental authority or agency or administrative or self-regulatory body with applicable authority to be disclosed by a Party, provided that notice is promptly delivered to the other Party in order to provide an opportunity to seek a protective order or other similar order with respect to such information and thereafter the disclosing Party discloses to the requesting entity only the 13 minimum information required to be disclosed in order to comply with the request, whether or not a protective order or other similar order is obtained by the other Party. 10.2. Permitted Disclosures. Notwithstanding the provisions of --------------------- Section 10.1, Information may be disclosed to employees, agents, - ------------ consultants, financing sources, vendors or suppliers of the recipient Party, but only to the extent required for performance of the Transaction Documents; provided, however, that the recipient Party obtains prior -------- ------- agreement from its employees, agents, consultants, financing sources, vendors or suppliers to whom such disclosure is to be made to hold in confidence and not make use of such Information for any purpose other than those permitted by this Agreement and subject to the provisions of Section ------- 10.1, and provided further, that the recipient Party shall be responsible - ---- and liable for any breach of Section 10.1 to the same extent as if the acts ------------ of such employees, agents, consultants, financing sources, vendors or suppliers were the acts of the recipient Party. Each Party will use at least the same standard of care as it uses to protect proprietary or confidential information of its own to ensure that such employees, agents, consultants, financing sources, vendors or suppliers do not disclose or make any unauthorized use of the Confidential Information. 10.3. Privileged Communications. Notwithstanding any other provision ------------------------- of this Article 10, it is expected that KV and Schwarz will, from time to time, ---------- disclose to one another privileged communications with counsel in furtherance of this Agreement, including opinions, memoranda, letters and other written, electronic and verbal communications. Such disclosures are made with the understanding that they shall remain confidential and that they are made in connection with the shared community of legal interests existing between Schwarz and KV, including the community of legal interests in avoiding any infringement of any patents. 11. MISCELLANEOUS. 11.1. Notices. All notices and other communications hereunder shall be ------- in writing and shall be deemed to have been duly given if delivered personally, mailed by generally recognized next business day courier or certified or registered mail or sent by facsimile, receipt acknowledged, to the parties at the following addresses or at such other addresses as shall be specified by the parties by like notice: If to KV, to: KV Pharmaceutical Company 2503 South Hanley Road St. Louis, Missouri 63144-2555 Attention: Chief Executive Officer Telefax: (314) 645-4705 If to Schwarz, to: Schwarz Pharma Manufacturing, Inc. 1101 "C" Avenue West Seymour, Indiana 47274 Attention: President Telefax: (812) 523-1887 14 11.2. Press Releases. On or after the date of this Agreement, neither -------------- Party may issue a press release announcing the transactions agreed to hereunder, except to the extent necessary to comply with applicable legal requirements. Any such press release shall be subject to the prior review of the other Party in accordance with any legally required timing of the release, which approval shall not be unreasonably withheld. Subject to the foregoing, KV shall have the right to issue the initial press release, it being understood that such initial press release shall be issued promptly following the Closing and that Schwarz shall issue its press release promptly following KV's issuance of such initial press release. 11.3. Payment of Fees and Expenses. Each Party shall pay all fees and ---------------------------- expenses of its respective counsel, accountants, advisors and other expenses incurred by the Party incident to the consummation of the transactions contemplated by this Agreement and, except as expressly provided in the Transaction Documents, in performing its respective obligations under this Agreement and the other Transaction Documents. 11.4. Representation by Legal Counsel. Each Party hereto represents ------------------------------- that it has been represented by legal counsel in connection with this Agreement and the other Transaction Documents and acknowledges that it has participated in the drafting hereof and thereof. In interpreting and applying the terms and provisions of this Agreement and the other Transaction Documents, the Parties agree that no presumption shall exist or be implied against the Party which drafted such terms and provisions. 11.5. Binding Effect; No Assignment. This Agreement shall be binding ----------------------------- upon and inure to the benefit of the Parties and their respective successors and assigns. No assignment of this Agreement or of any rights or obligations hereunder may be made by any Party (by operation of law or otherwise) without the prior written consent of each of the other Parties hereto and any attempted assignment without such required consents shall be void. 11.6. Choice of Law. ------------- (a) This Agreement and the other Transaction Documents shall be deemed to be made and entered into and shall be governed, construed and enforced exclusively in accordance with the laws of the State of Delaware. The Parties expressly agree that no conflict of laws provision shall be applied to make the laws of any other jurisdiction applicable hereto and waive the right to claim the application of any other laws hereto. (b) The parties agree for the purpose of any legal action on or relating to this Agreement or the other Transaction Documents, the parties expressly waive trial by jury. (c) Should legal action be taken by either party to enforce the terms of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and any related costs. 11.7. Arbitration. Any dispute, controversy or claim arising out of ----------- or in connection with this Agreement shall be determined and settled by arbitration in Chicago, Illinois, pursuant to the Rules of Arbitration then in effect of the American Arbitration Association. Any award rendered shall be final and conclusive upon the parties and a judgment thereon may be entered in a court having competent jurisdiction. Any arbitration hereunder shall (i) be submitted to an 15 arbitration tribunal comprised of three (3) independent members knowledgeable in the pharmaceutical industry, one of whom shall be selected by Schwarz, one of whom shall be selected by KV, and one of whom shall be selected by the other two arbitrators; (ii) allow for the parties to request discovery pursuant to the rules then in effect under the Federal Rules of Civil Procedure for a period not to exceed 90 days; and (iii) require the award to be accompanied by findings of fact and a statement of reasons for the decision. Each Party shall bear its own costs and expenses incurred in any dispute which is determined and/or settled by arbitration pursuant to this Section 11.7; provided, however, that the arbitration panel may award ------------ to the prevailing party the attorneys fees and expenses incurred by it in connection with the proceedings. Except where clearly prevented by the area in dispute, both parties agree to continue performing their respective obligations under this Agreement while the dispute is being resolved. Arbitration shall not prevent any Party from seeking injunctive relief where such remedy is an appropriate form of remedy under the circumstances. 11.8. Entire Agreement; Amendment; Interpretation. This Agreement, ------------------------------------------- together with the other Transaction Documents, sets forth the complete and final agreement between the Parties with respect to the subject matter hereof and thereof and supersedes and terminates all prior and contemporaneous agreements and understandings between the Parties, whether oral or in writing. No subsequent alteration, amendment, change, waiver or addition to this Agreement and the other Transaction Documents shall be binding upon the Parties unless reduced to writing and signed by an authorized officer of each Party. No understanding, agreement, promise, representation or warranty not explicitly set forth in this Agreement or any other Transaction Document has been relied on by any Party in deciding to execute this Agreement or any other Transaction Document. Whenever possible, each provision of this Agreement or any other Transaction Document and any portion thereof shall be interpreted and applied in such a manner as to be effective and valid under Applicable Law. If any provision of this Agreement or any other Transaction Document (or portion thereof or thereof) is determined by a court or other body having appropriate jurisdiction to be invalid, illegal or incapable of being enforced, by reason of any rule of law, administrative order, judicial decision, public policy or otherwise, all other provisions of this Agreement or such other Transaction Document shall, nevertheless, remain in full force and effect, and no provision (or portion thereof) shall be deemed dependent upon any other provision (or portion thereof), unless so expressed herein. The Parties desire and consent that the court or other body making such determination shall, to the minimum extent necessary to avoid any unenforceability, so reform any such provision or portion thereof so as to render the same enforceable in accordance with the intent herein expressed. 11.9. Counterparts; Facsimile Signatures; Copies. This Agreement and ------------------------------------------ any other Transaction Document may be executed in any number of counterparts, each of which, when so executed and delivered, shall be deemed to be an original, and all of which, taken together, shall constitute one and the same instrument. Facsimile copies of original, manually signed signatures shall be as effective as original signatures. Copies of this Agreement or any other Transaction Document, including telefax copies, which are true copies of the original which has been manually signed by the Parties shall be deemed duplicate originals. 11.10. Further Actions. Each Party agrees, subject to its rights --------------- under this Agreement and each other Transaction Document, to promptly execute, acknowledge and deliver such further 16 instruments, and to do all other acts, as may be requested by any other Party and necessary or appropriate to implement the terms of this Agreement or any other Transaction Document. [Signatures next page] 17 IN WITNESS WHEREOF, SPM, SRZ and KV have entered into this Agreement as of the date first set forth above. KV PHARMACEUTICAL COMPANY By: /s/ Alan G. Johnson ------------------------------- Name: Alan G. Johnson Title: Senior Vice President SCHWARZ PHARMA MANUFACTURING, INC. By: /s/ Ronald Stratton ------------------------------- Name: Ronald Stratton Title: President SRZ PROPERTIES, INC. By: /s/ Jonathan Thiel ------------------------------- Name: Jonathan Thiel Title: Vice President 18 EX-10.(WW) 16 exh10pww.txt Exhibit 10(ww) PRODUCT ACQUISITION AGREEMENT This Agreement is made and entered into as of the 31st day of March 2003, by and between Altana Inc., a New York corporation (together with its Affiliates, referred to herein as "Altana"), and KV Pharmaceutical Company, a Delaware corporation (together with its Affiliates, referred to herein as "KV"). In consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Altana and KV agree as follows: 1. DEFINED TERMS. 1.1. The terms defined in Schedule 1.1, when used in this ------------ Agreement, shall have the meanings set forth therein. 2. ACQUISITION OF PRODUCTS. 2.1. Purchase of Products. Upon the execution of this Agreement, a -------------------- closing (the "Closing") will be held, at which KV will purchase from Altana, and Altana will sell, transfer and convey to KV, the Product Ownership of each of the Products, free and clear of all liens, claims, taxes, charges and encumbrances and subject to no liabilities or rights or interests of any Third Party, except as expressly contemplated herein. 2.2. Expenses. The transfer of the Product Ownership at the Closing -------- shall be made by Altana without charge to KV for any incidental expenses in respect of the sale, transfer and conveyance thereof, which expenses shall be paid by Altana. 3. CONSIDERATION; ALLOCATION OF PURCHASE PRICE. 3.1 Purchase Price. In consideration of the purchase of the Product ------------- Ownership hereunder at the Closing, KV shall pay Altana a purchase price of $27,000,000 (the "Purchase Price"). The Purchase Price shall be payable $13,000,000 at the Closing, $7,000,000 one year following the Closing, and $7,000,000 two years following the Closing, with the obligation to make each of the latter two payments to be represented in the form of a Promissory Note. Each such payment shall be made according to the Wire Transfer Instructions of Altana. 3.2. Tax Matters: All payments under this Agreement will be made ----------- without any deduction or withholding for or on account of any tax unless such deduction or withholding is required by applicable laws or regulations. If the paying Party is so required to deduct or withhold, such Party will: (i) pay to the relevant authorities the full amount required to be deducted or withheld, (ii) forward to the other Party documentation reasonably acceptable to the other Party evidencing such payments to such authorities and (iii) reasonably cooperate in completing and filing documents required under the provisions of any applicable tax treaty or under any other applicable law in order to make such payments without any deduction or withholding. 4. CLOSING. 4.1. The Closing. The Closing shall take place on the date of ----------- execution of this Agreement by the Parties (the "Closing Date") by teleconference call and telecopier or, if the Parties agree to the execution of this Agreement and the Closing in person, at the offices of Alston & Bird LLP, 90 Park Avenue, New York, New York, 10016, or other place mutually agreed upon by the Parties. For purposes of this Agreement, the Closing will be treated as if it occurred at 11:59 p.m. on the Closing Date. 4.2 Closing Transactions. At the Closing, and as a condition -------------------- thereto, all of the following shall occur: (a) Transfer and Sale of Product Ownership. Altana shall -------------------------------------- transfer, convey and deliver, and hereby transfers, conveys and delivers, to KV: (i) full, marketable right, title and interest in and to the Product Ownership of each of the Products, and (ii) the Know-How applicable to each of the Products, free and clear of all liens, claims, taxes, charges and encumbrances and subject to no liabilities or rights or interests of any Third Party, except as expressly contemplated herein. In addition, Altana shall grant, and hereby grants, to KV a non-exclusive, non-transferable, royalty-free license until: (A) KV is in a position to distribute the Products without the use of packaging and labeling materials of Altana, or (B) 180 days following the Closing, whichever is earliest, to use the existing NDC(s) of Altana for each of the Products to the extent necessary to distribute and sell the Product using the existing packaging and labeling and other materials in substantially the same manner as the Product is sold as of the Closing; provided, that KV shall use its reasonable efforts to make all necessary arrangements as soon as possible to enable KV to ship each of the Products without the use of such Altana materials or the existing NDC of Altana for the Product. (b) Trademark Transfer Agreement. Altana and KV will ---------------------------- execute and deliver the Trademark Transfer Agreement, under which Altana shall sell, transfer and convey to KV all right, title and interest in and to the Trademarks. (c) Customer Contracts. Altana and KV will execute and ------------------ deliver the Assignment and Assumption Agreement, under which Altana will assign and transfer to KV, and KV will assume and agree to thereafter perform, the Customer Contracts, but only as and to the extent that the Customer Contracts are applicable to the sale of the Products, for the period provided in Section 5.1(a)(iii). (d) Other Documents. Altana and KV shall have executed and --------------- delivered and shall execute and deliver to each other, as applicable, such other documents and instruments as are necessary to effect the Closing and to consummate the transactions contemplated herein and therein to be consummated contemporaneously at the Closing. (e) Purchase of Inventories. At the Closing, KV shall ----------------------- purchase all inventory of finished Products and in-process Products and Product materials owned by Altana and 2 used and usable in the manufacture and packaging of the Products which are in Altana's inventory and meet Altana's conditions for sale in terms of specifications and remaining dating (but not less than six months prior to the expiration date thereof) and otherwise as of the Closing at Altana's Cost of Goods thereof (as documented by Altana to KV, but not to exceed the amount and cost thereof reflected in the Product Financial Information). 4.3. Retained Ownership. Upon completion of the Closing, Altana ------------------ shall retain all rights not specifically transferred to KV under this Agreement and the Trademark Transfer Agreement at or before the Closing, including without limitation: (a) all accounts receivable from sales of the Products by or on behalf of Altana on or before the Closing Date, (b) the NDC numbers of the Products of Altana, and (c) any Customer Contracts which remain in effect if and to the extent they are applicable to products other than the Products. 5. COVENANTS AND AGREEMENTS. 5.1. Mutual Covenants and Agreements. Each of Altana and KV ------------------------------- covenants to and agrees with the other as follows: (a) Customers; Customer Contracts. ----------------------------- (i) Prior to the execution of this Agreement, Altana has provided to KV: (A) a complete and accurate copy of each Customer Contract, except that such copies may have information redacted if and to the extent, but only to the extent, that they include information regarding the sale of products other than the Products, (B) complete and accurate customer lists and all sales, promotional and marketing data, for the Products, including (but not limited to) a list of all purchasers of each of the Products, together with amounts purchased, by quarter, since January 1, 2000, and (C) a list and explanation of all chargeback, rebate, Third Party reimbursement, price discount or other agreements or arrangements relating to the sale of each of the Products, and price changes, including (but not limited to) any agreements for extended payment terms or other unusual terms or conditions of sale of the Products agreed to by Altana, as well as Altana's return policies with respect to the Products, since January 1, 2000. Such Customer Contract information shall be considered Confidential Information for the purposes of Section 12. (ii) As provided in Section 4.2(c), at the Closing, Altana will assign and transfer or cause to be assigned and transferred to KV, and KV will assume and accept and agree to thereafter perform the Customer Contracts (but only as and to the extent the same are applicable to the Products, provided that a complete and correct copy thereof has been provided to KV by Altana prior to the execution of this Agreement), and Altana will continue to comply with the Customer Contracts in respect to its obligations thereunder relating to products covered thereby other than the Products. The Parties agree to cooperate and work together subsequent to the Closing to resolve any questions, complaints or 3 issues which arise thereafter under the Customer Contracts which could have an effect on the manufacture, use or sale of any Product. (iii) The Parties understand and agree that at the Closing, the right to sell and distribute the Products under the Customer Contracts will be transferred to KV by Altana under the Assignment and Assumption Agreement, as and to the extent agreed to by KV and Altana, and Altana will no longer have the right to sell or distribute the Products under the Customer Contracts or otherwise, except as expressly provided in the Assignment and Assumption Agreement; provided further, however, that KV covenants and agrees that, as provided in subsection (ii) above and in the Assignment and Assumption Agreement, it will continue to honor Altana's commitments made in each such Customer Contract with respect to supplying the Products, including, without limitation, the sale price, during the term of each such Customer Contract, but not for any extension in the term thereof or other adverse change in the terms thereof applicable to the Product that will cover any period after the Closing, if and to the extent such extension or change is not included in a Customer Contract as of the date of this Agreement, and Altana agrees not to make any such extension or change to a Customer Contract without the prior written consent of KV. (c) Government Approvals. Altana and KV will cooperate and -------------------- use all reasonable efforts to make all registrations, filings and applications, to give all notices and to obtain as soon as practicable all governmental, administrative, judicial or other consents, transfers, approvals, orders, qualifications, authorizations, permits and waivers, if any, and to do all other things necessary or desirable for the consummation of the transactions contemplated hereby. 5.2. Covenants and Agreements of Altana. Altana covenants to and ---------------------------------- agrees with KV that during the period following the Closing that Altana remains obligated to continue to supply the Products to KV under Section 7.2, Altana will comply in all material respects with all Applicable Laws applicable thereto. 6. POST-CLOSING. 6.1. Purchase of Products Subject to Existing Purchase Orders. -------------------------------------------------------- Subsequent to the Closing, KV shall purchase all inventory of finished and in-process Products which are subject to and completed and delivered under the purchase orders therefor set forth in Schedule 6.1 as of the Closing ------------ Date in accordance with the terms of such purchase orders. 6.2. Chargebacks, Rebates, Returns. ----------------------------- (a) Chargebacks. Subsequent to the Closing, Altana will ----------- continue to be responsible for all customer chargebacks for Products sold by Altana or included in the inventories purchased by KV under Section 4.2(e), and will reimburse KV for all such customer chargebacks as are paid by KV on behalf of Altana, upon receipt of KV's 4 documentation thereof and request for payment thereof. Altana will make payment thereof within 30 days of the date of such request. (b) Rebates. Subsequent to the Closing, KV will be ------- responsible for all Federal and State rebate programs and managed care rebate programs for Products sold by Altana, including all reporting activities associated with such programs; provided, however, that Altana will reimburse KV for all qualified Federal and State rebates ("Government Rebates") and all managed care, retail pharmacy or other customer rebates or discounts ("Non-Government Rebates") having Report Dates prior to or within 270 days after the Closing Date in the case of Government Rebates and within 120 days after the Closing Date in the case of Non-Government Rebates. For purposes of this Section 6.2(b), the "Report Date" is the date a qualified rebate invoice is issued under applicable Federal or State rebate programs or managed care, retail pharmacy or other customer rebate or discount programs. The Parties will provide reasonable assistance, data and information to each other in order to meet their respective responsibilities for such programs. To be a "qualified" rebate or discount, KV must submit a request for the rebate to Altana and provide Altana with all related supporting documentation reasonably requested by Altana and in the possession or control of KV and Altana will make payment thereof within 30 days of the date of such request. (c) Returns. Subsequent to the Closing, Altana will ------- continue to be responsible for all returns of Products sold by Altana and will reimburse KV for inventories purchased by KV under Section 4.2(e) which are not sold by KV prior to becoming obsolete or out-dated or are returned as obsolete or out-dated by the purchasers thereof, upon the documentation thereof by KV to Altana and request for payment thereof by KV. Altana will make payment thereof within 30 days of the date of such request. 6.3. Web-Site Link. Subsequent to the Closing, subject to ------------- reasonable usage and web site security guidelines established by Altana: (a) Altana shall continue its existing web site information relating to the Products for a period of not less than 180 days, and KV shall have the right to create a hypertext reference link, through any text or symbol on KV's web sites, including but not limited to "www.kvpharmaceutical.com", "www.kvph.com" and "www.Ther-Rx.com", to any page within the Altana web site located at www.Savagelabs.com relating to the Products during this period (the "Web Site Transition Period"). If Altana has or establishes any additional web sites which contain information relating to the Products at a different DNS address(es), KV shall have the right to establish links to these web sites as well. During the Web Site Transition Period, Altana agrees to transfer its web site soft ware relating to the Products to KV, and Altana shall thereafter maintain a forwarding link to KV relating to the Products for the balance of the Web Site Transition Period. 6.4. Rights Following the Closing. As of and following the Closing, ---------------------------- except as otherwise expressly contemplated by this Agreement, Altana shall have no further rights to manufacture, promote, market, offer for sale, sell or distribute the Products. 5 7. DISCLOSURE/TRANSFER OF KNOW-HOW, REGULATORY INFORMATION. 7.1. Disclosure of Know-How, Regulatory Documents and Other ------------------------------------------------------ Information. Upon the execution of this Agreement, Altana will provide KV - ----------- with all Regulatory Documents and Know-How related to the Products not heretofore provided by it to KV, including, but not limited to, all formulation, validation, manufacturing, processing, product testing, stability, material and product supplier, customer, marketing, advertising, promotional (including all past advertising and promotional information available to Altana and access to Altana's internal and outside marketing and advertising personnel), sales (including territorial representative allocation and sales information) and distribution information related to each of the Products and to any current and past proposed product improvements and product line extensions and additions, including, if applicable (but not limited to), copies (including electronic files) thereof. Such information shall include complete copies of any documents, reports or correspondence under Applicable Laws relating to the development, manufacture, use, marketing, sale or distribution of the Products, including (but not limited to) all correspondence or other documents between Altana and any Regulatory Authorities. 7.2. Supply Agreements. During the 180 day period following the ----------------- Closing (or such longer period not to exceed 270 days in the aggregate, provided KV has used its diligent efforts to transfer the manufacture of the Products to KV or another source selected by KV), Altana shall, at the election of KV: (a) purchase from Cardinal Distribution and supply to KV, after packaging by Sonic, at Altana's Cost of Goods thereof, KV's requirements of the Chromagen Products. Altana will not agree to an increase in the price of the Chromagen Products from Cardinal Distribution or Sonic without the prior written consent of KV; and (b) purchase from Sonic and supply to KV, after packaging by Sonic, at Altana's cost thereof, KV's requirements of the StrongStart Products. Altana will not agree to an increase in the price of the StrongStart Products from Sonic without the prior written consent of KV. 7.3. Transitional Assistance. Altana shall provide transitional ----------------------- assistance to KV as follows: (a) notify all customers for the Products of the transfer of sales of the Products to KV (subject to the prior review and approval by KV of the form and content of such notification); (b) assist KV in applying for and obtaining any approvals as are necessary for KV to develop, manufacture, have manufactured, use, import, export, market, promote, offer to sell, sell and distribute the Products; and (c) refer persons who call Altana with inquiries regarding any Product to KV. For the six (6) month period following the Closing, Altana shall provide KV reasonable on-going telephone access to and assistance relating to the matters indicated below, and communications between KV and Altana relating to the Products in the following areas shall be conveyed, conducted and determined primarily between, the following three persons from each of Altana and KV, each of whom on the part of Altana is familiar with the respective issues relating to each of the Products: 6
Altana KV --------------------------- ------------------------- (i) Clinical/Regulatory Rob Anderson, Senior Elio Mariani, Ph.D. Director-Scientific Affairs Vice President-Scientific Affairs (ii) Marketing/Sales Ms. Jennifer Seeforf, Mike Allen, Product Manager Executive Vice President, Ther-Rx Corporation (iii) Manufacturing/ Ms. Ellen Gambichler, Ron Pressley, Purchasing Director of Purchasing Director, Project Management and Technical Sales
8. REGULATORY MATTERS. 8.1. Reporting Obligations, ADE and Related Information and ------------------------------------------------------ Training. Prior to the transfer of each of the Products to KV hereunder, - -------- Altana shall be responsible for making all reports to the appropriate Regulatory Authorities and shall provide a copy thereof, or memorandum thereof if not in writing, at the time it files or otherwise makes any such report, including information relating to any ADE relating to the Products known to Altana ("ADE Information"), as are required by any Regulatory Authority and for conducting all pharmacovigilence activities in connection with each of the Products. Upon the delivery thereof, Altana will designate a person from Altana who is responsible for dealing with ADE's relating to the Products who will meet and review the ADE Information with a person designated by KV. Subsequent to the Closing and transfer of the manufacture of each of the Products to KV, as provided in Section 4.2(a), and thereafter, KV shall be responsible for making all reports to the appropriate Regulatory Authorities as are required and for conducting all pharmacovigilence activities in connection with the Products. After the Closing, Altana will advise any person making an inquiry or report in connection with a Product to contact KV. 9. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. 9.1. Representations, Warranties and Agreements of KV. KV hereby ------------------------------------------------ represents, warrants and agrees with Altana as follows: (a) KV is a corporation duly organized and validly existing under the laws of the state of Delaware and is duly qualified to transact business in each jurisdiction in which the failure to so qualify would reasonably be expected to have a material adverse effect on its business, properties, assets or condition (financial or otherwise). (b) KV has the corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder and has taken all requisite corporate action to execute and deliver this Agreement. This Agreement and the Assignment and Assumption Agreement have been or at the Closing will be duly and validly executed and delivered by KV and are or upon the execution thereof will be the legal, valid and binding obligations of KV, enforceable against KV in accordance with their terms, 7 subject to such applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and to general principles of equity. (c) The execution, delivery and performance of this Agreement and the Assignment and Assumption Agreement by KV and its compliance with the terms and conditions hereof and thereof do not and will not conflict with or result in a breach of any of the terms and conditions of or constitute a default, with or without the passage of time, the giving of notice or both, under: (i) any loan agreement, guaranty, financing agreement, license, or other agreement or instrument binding or affecting it or its property; (ii) the provisions of its certificate of incorporation or bylaws; or (iii) any order, writ, injunction or decree of any court or governmental or administrative authority entered against it or by which it or any of its property is bound. 9.2. Representations, Warranties and Agreements of Altana. Altana ---------------------------------------------------- hereby represents, warrants and agrees with KV as follows: (a) Altana is a corporation duly organized and validly existing under the laws of New York and is duly qualified to transact business in each jurisdiction in which the failure to so qualify would reasonably be expected to have a material adverse effect on its business, properties, assets or condition (financial or otherwise). (b) Altana has the power and authority to execute and deliver this Agreement and to perform its obligations hereunder and has taken all requisite corporate action to execute and deliver this Agreement. This Agreement, the Trademark Transfer Agreement and the Assignment and Assumption Agreement have been or at the Closing will be duly and validly executed and delivered by Altana and are or upon the execution thereof will be the legal, valid and binding obligations of Altana, enforceable against Altana in accordance with their terms, subject to such applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and to general principles of equity. The execution of this Agreement, the Trademark Transfer Agreement and the Assignment and Assumption Agreement on behalf of Altana have been duly authorized by Altana's Board of Directors and the undersigned officer of Altana is duly authorized to act on Altana's behalf in this regard and to take all steps and to execute and deliver all instruments and documents as shall be necessary or desirable to transfer the Product Ownership to KV in accordance with the terms and conditions of Sections 2.1 and 4.2 and otherwise to effect the transactions contemplated hereby. (c) The Trademarks transferred by the Trademark Transfer Agreement represent all of the Trademarks which are applicable to the Products. There are no Copyrights which are applicable to the Products. The execution, delivery and performance of this Agreement, the Trademark Transfer Agreement and the Assignment and Assumption Agreement and the compliance with the terms and provisions hereof and thereof by Altana do not and will not conflict with or result in a breach of any of the terms or conditions of or constitute a default, with or without the passage of time, the giving of notice or both, under: (i) any agreement, license, document, instrument, indenture, guarantee or other agreement or instrument binding on or affecting Altana or its 8 assets; (ii) the provisions of its charter, bylaws or similar corporate governing instruments of Altana; or (iii) any order, writ, injunction or decree of any court or governmental or administrative authority, which affects or could affect the Products, the Know-How, the Trademarks or the performance of this Agreement, the Trademark Transfer Agreement and the Assignment and Assumption Agreement by Altana or rights being transferred by Altana hereunder and thereunder. (d) Altana has provided KV complete and accurate information regarding the level of returns of each of the Products since January 1, 2000. (e) Except as disclosed in Schedule 9.2(e), since January 1, --------------- 2000, Altana: (i) has continued to operate its business as it relates to the Products in the ordinary course of business, (ii) has complied in all material respects with its obligations pertaining to the Products under the Customer Contracts, and (iii) has not increased or announced an increase in the price of any Product, engaged in any promotional effort or otherwise taken any action which has or would have the effect of temporarily increasing the demand for the Product. (f) The Product Financial Information provided to KV by Altana for the period subsequent to January 1, 2000 has been prepared in accordance with GAAP, consistently applied, and is true, complete and correct in all material respects and does not omit any information required to be included therein in order to make the same not materially misleading. Except as disclosed in the Product Financial Information, there has been no material adverse change in the marketing, sales, import, export, customers or distribution of the Products since January 1, 2000. (g) Except as set forth on Schedule 9(g), Altana has not developed or planned and has no knowledge of any Third Party which has or is developing or planning: (i) any product which would be an extension or improvement of or replacement for any Product, or (ii) a generic alternative product to any Product. (h) There are no pending or, to the knowledge of Altana, threatened product liability, breach of warranty or other claims, actions, arbitrations, administrative or other proceedings affecting Altana, the Products, the Know-How or the Trademarks or which could materially affect either: (i) the transactions contemplated by this Agreement, the Trademark Transfer Agreement or the Assignment and Assumption Agreement or (ii) the manufacture, packaging, use, offer for sale, sale or distribution of the Products. Neither Altana nor its insurer has made any payment with respect to any product liability claims relating to the Products under any insurance policy (including self-insurance). (i) Altana owns and has not sold, transferred, sublicensed, pledged, encumbered or granted any rights or interest in or to the Know-How, the Trademarks or the Products to any Third Party inconsistent with the provisions of this Agreement. (j) Other than the Customer Contracts and purchase orders entered by Altana with Cardinal Distribution and Sonic in the ordinary course of business for the 9 manufacture of the Products, there are no written or other binding agreements, commitments or understandings with Third Parties pertaining to the manufacture, packaging, labeling, filling, marketing, sale or distribution of the Products. The Customer Contracts constitute all of the agreements between Altana and Third Parties pursuant to which Altana is obligated to sell any Product or to pay or credit reimbursements, rebates, chargebacks, discounts, refunds or other arrangements relating to the sale of a Product to Third Party buyers or users of any Product. Altana has not experienced any material adverse change in the existence or terms of the Customer Contracts with respect to the Products since January 1, 2000. (k) No Regulatory Approvals are required or have been obtained with respect to the manufacture, marketing, promotion, sale or distribution of the Products. Altana has complied with all other Applicable Laws in connection with the development, manufacture, testing, import, export, marketing, advertising, offer for sale, sale and distribution of the Products. Altana has provided KV with a list of all reports, correspondence and other communications with any Regulatory Authority relating to the Product and a copy of all written documents, correspondence, memoranda, reports, legal files and other written information in the possession or control of Altana related thereto, including (but not limited to) any ADE information relating to the Products known to Altana. (l) The Trademarks are owned by Altana and constitute the only trademarks, except for the corporate names Altana and Savage, under which the Products are or have been sold by Altana. Altana has no knowledge and has received no allegation or claim from any Third Party that any Product, Know-How, Trademarks or other Intellectual Property related to the Products infringes upon the intellectual property rights of any other Person, and Altana has the right to sell and transfer the same to KV, as provided hereunder. Altana has no knowledge of any product that would be an infringement or threatened infringement by any Third Party of the Trademarks or any other Intellectual Property related to the Products. 9.3. Survival of Representations and Warranties. The respective ------------------------------------------ representations and warranties of the Parties hereto shall survive the Closing for two years. 10. NON-COMPETITION. 10.1. Altana agrees that for the five year period following the Closing, Altana will not offer for sale, sell or distribute or assist or enable any Third Party to offer for sale, sell or distribute or license, directly or indirectly, any product with substantially the same indications as any Product. 10.2. The covenants in Section 10.1 shall be construed as an agreement independent of any other provision of this Agreement and having been given for independent consideration, and the existence of any claim or cause of action of Altana against KV, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by KV of such covenants. 10 10.3. Because of the immediate and irreparable damage that would be caused to KV for which monetary damages would not be a sufficient remedy, the Parties agree that KV will be entitled to seek specific performance, temporary and permanent injunctive relief, and other equitable remedies against Altana in the event of the breach or threatened breach of the provisions of Section 10.1, without any obligation to post a bond or other security in connection therewith. This Section shall not limit any other legal or equitable remedies that KV may have against Altana for violation of the restrictions herein or otherwise under this Agreement. The performance of this Article 10 by Altana's Affiliates is hereby guaranteed by Altana. 11. INDEMNIFICATION. 11.1. Indemnification by Altana. Altana shall indemnify, defend and ------------------------- hold harmless the KV Indemnitees from and against any and all Claims to which the KV Indemnitees may become subject or incur, suffer or be required to pay resulting from or arising in connection with: (a) the manufacture, sale and distribution of the Products prior to the Closing, (b) the misrepresentation or breach by Altana of any obligation, covenant, representation or warranty contained in this Agreement, the Trademark Transfer Agreement or the Assignment and Assumption Agreement; (c) any claim of infringement by any Product, the Intellectual Property or the Know-How of the intellectual property rights of any Third Party (an "Infringement Action") alleged to have arisen or occurred on or before the Closing; and (d) Altana's failure to comply with any Applicable Laws. Notwithstanding the foregoing, Altana shall have no obligation under this Agreement to indemnify, defend or hold harmless the KV Indemnitees with respect to Claims to the extent they are caused by the wrongful acts, willful misconduct or negligent acts or omissions of a KV Indemnitee or the misrepresentation or breach by KV of any obligation, covenant, representation or warranty contained in this Agreement or the Assignment and Assumption Agreement, other than as the same arise as a result of a misrepresentation under or breach of this Agreement, the Trademark Transfer Agreement or the Assignment and Assumption Agreement or Applicable Laws by an Altana Indemnitee or an Infringement Action. Altana agrees to maintain product liability insurance applicable to the Products in full force and effect for the period of the statute of limitations applicable to Products sold by Altana. 11.2. Indemnification by KV. KV shall indemnify, defend and hold --------------------- harmless the Altana Indemnitees from and against any Claims which the Altana Indemnitees may become subject or incur, suffer or be required to pay resulting from or arising in connection with: (a) the misrepresentation or breach by KV of any obligation, covenant, representation or warranty contained in this Agreement or the Assignment and Assumption Agreement; (b) the marketing, sale, distribution, use or other disposition of the Products by KV subsequent to the Closing (except in respect of an Infringement Action which arises or occurs on or before the Closing); (c) the use of the Know-How by KV subsequent to the Closing; (d) any Infringement Action which arises or occurs after the Closing; and (e) KV's failure to comply with any Applicable Laws. Notwithstanding the foregoing, KV shall have no obligation under this Agreement or the Assignment and Assumption Agreement to indemnify, defend or hold harmless any Altana Indemnitee with respect to Claims to the extent they are caused by a misrepresentation under or breach of this Agreement, the Trademark Transfer Agreement or the Assignment and Assumption Agreement by Altana or the wrongful acts, willful misconduct or negligent acts or 11 omissions of an Altana Indemnitee. KV agrees to maintain product liability insurance in full force and effect applicable to Products sold by KV. 11.3. Limitation of Consequential and Other Damages. --------------------------------------------- Notwithstanding anything in this Agreement to the contrary, in no event shall KV or Altana be liable for indirect, special, incidental, exemplary, consequential or punitive damages suffered by the other Party or by any Altana Indemnitees or KV Indemnitees, respectively; provided, however, that nothing in this Section 11.3 shall be deemed to limit the indemnification obligations of Altana or KV hereunder if and to the extent a Third Party recovers any indirect, special, incidental, exemplary, consequential or punitive damages from a KV Indemnitee or Altana Indemnitee, respectively. 11.4. Notice and Assistance. Each Party shall promptly notify the --------------------- other, in writing, if it learns of any Claim related to any Product, the Know-How, the Intellectual Property, any Applicable Laws or any other matter asserted or threatened against such Party (the "Defending Party") with respect to which it expects to seek indemnification from the other Party hereunder (an "Indemnifiable Claim"). With respect to any Indemnifiable Claims asserted against a Defending Party, the other Party shall, at no out-of-pocket expense to it except as provided in this Article 11, reasonably cooperate with and provide such reasonable assistance to the Defending Party as such Defending Party may reasonably request in connection with its defense against such Indemnifiable Claim. Such reasonable assistance shall include, but is not limited to, providing copies of all relevant documents, correspondence and other materials that the Defending Party may reasonably request; provided, however, that any Confidential Information so provided shall be treated in accordance with the provisions of Article 12. 11.5. Conditions to Indemnification. The obligations of the ----------------------------- indemnifying Party under Sections 11.1 and 11.2 are conditioned upon the delivery of written notice to the indemnifying Party of any potential Indemnifiable Claim within twenty (20) days after the indemnified Party receives actual knowledge of the potential Indemnifiable Claim; however, the failure to give notice within such twenty (20) day period shall be a defense only to the extent the indemnifying Party is actually prejudiced thereby. The indemnifying Party shall have the right to assume and control the negotiation, defense and settlement of any Indemnifiable Claim; however, if in the reasonable judgment of the indemnified Party, such Indemnifiable Claim involves an issue or matter which could have a materially adverse effect on the business operations or assets of the indemnified Party, the indemnified Party may waive the right to have the indemnifying Party defend it under this Agreement and control the negotiation, defense or settlement thereof, at its expense, but in no event shall any such waiver otherwise be construed as a waiver of any indemnification rights such Party may have under this Agreement or otherwise at law or in equity. The indemnifying Party which does not control the negotiation, defense and settlement of the Indemnifiable Claim may participate in (but not control) the negotiation, defense and settlement thereof at its sole cost and expense. 11.6. Settlements. Neither Party may settle an Indemnifiable Claim ----------- without the consent of the other Party if such settlement would impose any monetary obligation on the other Party, require the other Party to submit to an injunction, limit the other Party's rights under this Agreement, the Trademark Transfer Agreement or the Assignment and Assumption Agreement or otherwise have a materially adverse effect on the rights, claims or interests of the other Party 12 unless the indemnified Party is unconditionally released from all liability in respect of such Indemnifiable Claim. 12. CONFIDENTIALITY. 12.1. Nondisclosure Obligation. Each of the Parties shall use only ------------------------ in accordance with this Agreement and shall not disclose to any Third Party or use, except as contemplated by this Agreement, any confidential information of the other Party (which, in the case of Altana's nondisclosure obligation, shall include the Know-How and other confidential and proprietary information sold, transferred or otherwise granted access by it to KV hereunder, which shall be deemed to be KV's confidential information subsequent to the Closing) (the "Information"), without the prior written consent of the other Party. These obligations shall not apply to Information that: (a) Is known by the receiving Party and is not subject to an obligation of confidentiality to a Third Party or was not obtained through a prior disclosure by the disclosing Party, as documented by business records (provided that this exception shall not apply to Altana with respect to confidential or proprietary information provided or transferred by Altana to KV pursuant to this Agreement); (b) Is at the time of disclosure or thereafter becomes published or otherwise part of the public domain without breach of this Agreement by the receiving Party; (c) Is subsequently disclosed to the receiving Party on a non-confidential basis by a Third Party who has the right to make such disclosure; (d) Is required by law, regulation, rule, act or order of any governmental authority or agency or administrative or self-regulatory body with applicable authority to be disclosed by a Party, provided that notice is promptly delivered to the other Party in order to provide an opportunity to seek a protective order or other similar order with respect to such Information and thereafter the disclosing Party discloses to the requesting entity only the minimum Information required to be disclosed in order to comply with the request, whether or not a protective order or other similar order is obtained by the other Party. 12.2. Permitted Disclosures. Notwithstanding the provisions of --------------------- Section 12.1, Information may be disclosed to employees, agents, consultants, financing sources, vendors or suppliers of the recipient Party, or as required by any Regulatory Authorities or other governmental, judicial, regulatory or administrative body having appropriate jurisdiction, but only to the extent required for performance of this Agreement, the Trademark Transfer Agreement or the Assignment and Assumption Agreement or as legally required; provided, however, that the recipient Party obtains prior agreement from its employees, agents, consultants, financing sources, vendors or suppliers to whom such disclosure is to be made to hold in confidence and not make use of such Information for any purpose other than those permitted by this Agreement and subject to the provisions of Section 12.1, and provided further, that the recipient Party shall be responsible and liable for any breach of Section 12.1 to the same 13 extent as if the acts of such employees, agents, consultants, financing sources, vendors or suppliers were the acts of the recipient Party. Each Party will use at least the same standard of care as it uses to protect proprietary or confidential information of its own to ensure that such employees, agents, consultants, financing sources, vendors or suppliers do not disclose or make any unauthorized use of the Information. 12.3. Privileged Communications. Notwithstanding any other ------------------------- provision of this Article 12, it is expected that KV and Altana will, from time to time, disclose to one another privileged communications with counsel in furtherance of this Agreement, including opinions, memoranda, letters and other written, electronic and verbal communications. Such disclosures are made with the understanding that they shall remain confidential and that they are made in connection with the shared community of legal interests existing between Altana and KV, including the community of legal interests in avoiding any infringement of any valid, enforceable patents. 13. CORRESPONDENCE AND NOTICES. 13.1. Ordinary Notices. Correspondence, reports, documentation, and ---------------- any other communication in writing between the Parties in the course of ordinary implementation of this Agreement shall be delivered by hand, sent by facsimile, e-mail, next business day delivery service or by mail to the employee or representative of the other Party who is designated by such other Party to receive such written communication. 13.2. Extraordinary Notices. Extraordinary notices and --------------------- communications (including, without limitation, notices of termination, breach of agreement, change of address) shall be in writing and personally delivered or sent by prepaid registered, certified or Express mail or next business day delivery service, or by telefax with confirmed answer back, and shall be deemed to have been properly served to the addressee upon receipt of such personal delivery or when such other written communication is sent as herein provided. 13.3. Addresses. In the case of KV, the proper address for --------- communications shall be: KV Pharmaceutical Company 2503 South Hanley Road St. Louis, Missouri 63144-2555 Attention: Chief Executive Officer Telefax: (314) 645-4705 and in the case of Altana, the proper address for communications shall be: Altana Inc. 60 Baylis Road Melville, New York 11747 Attention: Senior Vice President and Treasurer Telefax: 631-753-2532 14 14. MISCELLANEOUS. 14.1. Press Releases. On or after the date of this Agreement, -------------- either Party may issue a press release announcing the transactions agreed to hereunder to comply with applicable legal requirements. Such press release shall be subject to the prior review and approval of the other Party in accordance with any legally required timing of the release, which approval shall not be unreasonably withheld. Notwithstanding the foregoing, KV shall have the right to make the initial public release of information relating to this Agreement and the transactions contemplated hereby, and Altana agrees not to release information regarding the financial terms of the transaction without the prior approval of KV, which approval shall not be unreasonably withheld. 14.2. Payment of Fees and Expenses. Each Party shall pay all fees ---------------------------- and expenses of the Party's respective counsel, accountants, advisors and other expenses incurred by the Party incident to the consummation of the transactions contemplated by this Agreement. Each Party represents to the other Party that to the best of its knowledge, no finders or others have been involved who may seek compensation as a result of these transactions. 14.3. Representation by Legal Counsel. Each Party hereto represents ------------------------------- that it has been represented by legal counsel in connection with this Agreement and acknowledges that it has participated in the drafting hereof. In interpreting and applying the terms and provisions of this Agreement, the Parties agree that no presumption shall exist or be implied against the Party which drafted such terms and provisions. 14.4. Choice of Law, Service. ---------------------- (a) This Agreement shall be deemed to be made and entered into and shall be governed, construed and enforced in accordance with the laws of the State of Delaware. The Parties expressly agree that no conflict of laws provision shall be applied to make the laws of any other jurisdiction applicable hereto and waive the right to claim the application of any other laws hereto. (b) The parties agree for the purpose of any legal action on or relating to this Agreement, the parties expressly waive trial by jury. (c) If legal action on this Agreement is instituted, the parties waive personal service of process and consent to service of process by next business day courier, or by registered or certified mail, return receipt requested, directed to the recipient at the address and to the attention specified in Section 13.3. Service so made shall be deemed completed one business day after it has been delivered to the next business day courier service or three business days after the date of mailing. (d) Should legal action be taken by either party to enforce the terms of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and any related costs. 15 14.5. Entire Agreement; Amendment; Interpretation. This Agreement, ------------------------------------------- the Trademark Transfer Agreement and the Assignment and Assumption Agreement set forth the complete and final agreement between the Parties and supersede and terminate all prior and contemporaneous agreements and understandings between the Parties, whether oral or in writing, except as expressly set forth in this Agreement, the Trademark Transfer Agreement and the Assignment and Assumption Agreement. No subsequent alteration, amendment, change, waiver or addition to this Agreement, the Trademark Transfer Agreement or the Assignment and Assumption Agreement shall be binding upon the Parties unless reduced to writing and signed by an authorized officer of each Party. No understanding, agreement, promise, representation or warranty not explicitly set forth in this Agreement, the Trademark Transfer Agreement or the Assignment and Assumption Agreement has been relied on by any Party in deciding to execute this Agreement, the Trademark Transfer Agreement or the Assignment and Assumption Agreement. Whenever possible, each provision of this Agreement and any portion thereof shall be interpreted and applied in such a manner as to be effective and valid under Applicable Law. If any provision of this Agreement (or portion thereof) is determined by a court or other body having appropriate jurisdiction to be invalid, illegal or incapable of being enforced, by reason of any rule of law, administrative order, judicial decision, public policy or otherwise, all other provisions of this Agreement shall, nevertheless, remain in full force and effect, and no provision (or portion thereof) shall be deemed dependent upon any other provision (or portion thereof), unless so expressed herein. The Parties desire and consent that the court or other body making such determination shall, to the minimum extent necessary to avoid any unenforceability, so reform any such provision or portion thereof so as to render the same enforceable in accordance with the intent herein expressed. 14.6. Counterparts; Facsimile Signatures; Copies. This Agreement ------------------------------------------ may be executed in any number of counterparts, each of which, when so executed and delivered, shall be deemed to be an original, and all of which, taken together, shall constitute one and the same instrument. Facsimile copies of original, manually signed signatures shall be as effective as original signatures. Copies of this Agreement, including telefax copies, which are true copies of the original which has been manually signed by the Parties shall be deemed duplicate originals. 14.7. Further Actions. Each Party agrees, subject to its rights --------------- under this Agreement, the Trademark Transfer Agreement and the Assignment and Assumption Agreement, to promptly execute, acknowledge and deliver such further instruments, and to do all other acts, as may be necessary or appropriate to implement the terms of this Agreement, the Trademark Transfer Agreement and the Assignment and Assumption Agreement. In witness whereof, Altana and KV have entered into this Agreement as of the date first set forth above. ALTANA INC. KV PHARMACEUTICAL COMPANY By: /s/ Art Dulick By: /s/ Alan G. Johnson ----------------------------- -------------------------------- 16 EX-10.(XX) 17 exh10pxx.txt Exhibit 10(xx) March 31, 2003 K-V Pharmaceutical Company 2503 South Hanley Road St. Louis, MO 63144 Attention: Mr. Marc S. Hermelin Vice Chairman of the Board and Chief Executive Officer Dear Marc: I hereby offer to extend the Consulting Agreement dated May 1, 1999 and expiring on April 30, 2004 for an additional seven year term through April 30, 2011. /s/ Victor M. Hermelin ------------------------------ Victor M. Hermelin K-V Pharmaceutical Company By: /s/ Gerald R. Mitchell -------------------------- Gerald R. Mitchell V-P, Treasurer and CFO EX-10.(YY) 18 exh10pyy.txt Exhibit 10(yy) AMENDMENT TO EMPLOYMENT AGREEMENT --------------------------------- THIS AMENDMENT is made and entered into this 3rd day of APRIL 2003, by and ------- ---------- between K-V PHARMACEUTICAL COMPANY, a Delaware Corporation (the "Company") and VICTOR M. HERMELIN (the "Employee"). WITNESSETH THAT: WHEREAS, the Company and Employee entered into an Employment Agreement, dated February 20, 1974 (the "Employment Agreement"), pursuant to which the Company agreed to pay monthly salary continuation payments upon retirement for a term of twelve (12) years from the date of his retirement; which was amended on August 12, 1986, to Employee's lifetime in an amount equal to forty percent (40%) of Employee's base compensation at retirement, increased annually by the percentage increase in the cost of living and also provided that in the event of Employee's death, salary continuation of compensation would be paid to Employee's widow equal to one-half of the amount otherwise payable to Employee until October 30, 1990. WHEREAS, in consideration of continuing valuable services performed by Employee for the Company after his retirement, as Chairman of the Board, a Consultant to the Company and his ongoing role as confidante to the Company and contributions that could not be contemplated, as well as his continuous service as Chairman of the Board, the Company hereby agrees to give consideration to his surviving spouse through reinstating the surviving spouse provision which provides for one-half (1/2) of the retirement benefit, which is currently $61,148.10 annually and would be payable as a surviving spouse benefit on the terms set forth in this Amendment; NOW, THEREFORE, in consideration of the premises herein contained, it is agreed by and between the parties hereto as follows: 1. Section 4(b) of the Agreement, as amended, is hereby deleted in its entirety and the following is inserted in lieu thereof: 4. Salary continuation Benefits. ---------------------------- (b) In the event of Employee's death, Company agrees to thereafter pay to Employee's widow, during the period commencing on the date of Employee's death and ending on March 31, 2020, salary continuation compensation equal to one-half (1/2) of the amount otherwise payable to Employee under the provisions of Section 4(a) of the Agreement, as amended. 2. Except as expressly provided herein, this Amendment is not intended to amend or modify any other provisions of the Employment Agreement, as amended, all of which except as provided herein will remain in full force and effect. 3. This Amendment shall be construed in accordance with and governed by the laws of the State of Missouri. 4. This Amendment shall be binding upon and inure to the benefit of the Company and its successors and assigns and Employee and his heirs, executors, administrators, and personal or legal representatives. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first above. K-V PHARMACEUTICAL COMPANY BY: /s/ Gerald R. Mitchell --------------------------------------- Vice President, Treasurer & CFO "Company" /s/ Victor M. Hermelin ------------------------------------------- Victor M. Hermelin "Employee" EX-21 19 exh21.txt Exhibit 21 LIST OF SUBSIDIARIES ETHEX Corporation, a Missouri corporation Ther-Rx Corporation, a Missouri corporation Particle Dynamics, Inc., a New York corporation DrugTech Corporation, a Delaware corporation SPI - Sub, Inc., a Delaware corporation EX-23 20 exh23.txt Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS K-V 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, 333-00199, 333-48252 and 333-85516) and Registration Statement on Form S-3 (File Number 333-87402 and 333-106294) of our reports dated May 23, 2003, relating to the consolidated financial statements and schedule of K-V Pharmaceutical Company appearing in the Company's Annual Report on Form 10-K as of and for the year ended March 31, 2003. /s/ BDO SEIDMAN, LLP Chicago, Illinois June 26, 2003 EX-99.1 21 exh99p1.txt Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of K-V Pharmaceutical Company (the "Company") on Form 10-K for the fiscal year ended March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Marc S. Hermelin, Vice Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: June 27, 2003 /s/ Marc S. Hermelin ------------------------------------------ Marc S. Hermelin Vice Chairman and Chief Executive Officer (Principal Executive Officer) EX-99.2 22 exh99p2.txt Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of K-V Pharmaceutical Company (the "Company") on Form 10-K for the fiscal year ended March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gerald R. Mitchell, Vice President, Treasurer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: June 27, 2003 /s/ Gerald R. Mitchell ----------------------------------------------------- Gerald R. Mitchell Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----