SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Mark One
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from to
Commission file number 1-9601
K-V PHARMACEUTICAL COMPANY
2503 SOUTH HANLEY ROAD
ST. LOUIS, MISSOURI 63144
(314) 645-6600
Incorporated in Delaware I.R.S. Employer Identification No. 43-0618919
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock par value $.01 per share American Stock Exchange
Class B Common Stock par value $.01 per share American Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
7% Cumulative Convertible Preferred, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the 5,554,663 shares of Class A and
2,164,366 shares of Class B Common Stock held by nonaffiliates of the Registrant
as of June 6, 1997 was $90,957,607 and $36,253,131 respectively. As of June 6,
1997, the Registrant had outstanding 7,709,147 and 4,338,950 shares of Class A
and Class B Common Stock, respectively, exclusive of treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated into this Report by reference:
Part III: Portions of the definitive proxy statement of the Registrant
(to be filed pursuant to Regulation 14(A) for Registrant's 1997 Annual Meeting
of Shareholders, which involves the election of directors), are incorporated by
reference into Items 10, 11, 12 and 13 to the extent stated in such items.
<PAGE>
Any forward-looking statements set forth in this Report are necessarily
subject to significant uncertainties and risks. When used in this Report, the
words "believes," "anticipates," "intends," "expects," and similar expressions
are intended to identify forward-looking statements. Actual results could be
materially different as a result of various possibilities. Readers are cautioned
not to place undue reliance on forward-looking statements, which speak only as
of the date hereof. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Item 1. Description of Business.
(a) General Development of Business.
K-V Pharmaceutical Company ("KV") was incorporated under the laws of
Delaware in 1971 as a successor to a business originally founded in 1942. Victor
M. Hermelin, KV's Chairman and founder, obtained initial patents for early
controlled release and enteric coated technologies in the early 1950's.
KV is a pioneer in the area of advanced drug delivery technologies
which enhance the effectiveness of new therapeutic agents, existing
pharmaceutical products and nutritional supplements. The Company has developed a
diverse portfolio of ten technologies, including three oral controlled release
technologies, four site-specific oral and topical delivery technologies, and
three tastemasking technologies. These systems, which are used in the Company's
products and the products of its marketing licensees, are designed to improve
and control the absorption and utilization by the human body of active
pharmaceutical compounds, allowing the compounds to be administered less
frequently with potentially reduced side effects, improved drug efficacy and/or
enhanced patient compliance. Additionally, the Company continually applies its
scientific expertise and development experience to refine and enhance its
existing drug delivery systems and formulation technologies and to create new
technologies that may be used in its drug development programs.
KV licenses the marketing rights for products developed with these drug
delivery technologies to major domestic and international brand name
pharmaceutical marketers in return for license fees, milestone payments,
research reimbursement and manufacturing and royalty revenues.
In February, 1990, KV established a generic marketing capability
through a wholly-owned subsidiary, ETHEX Corporation ("ETHEX"), which makes KV
one of the only drug delivery research and development companies that also
markets "technology distinguished" generic products.
KV's other wholly-owned subsidiary, Particle Dynamics, Inc. ("PDI"),
formerly known as Desmo Chemical Corporation, was incorporated in New York in
1948 and acquired by KV in 1972. Through PDI, the Company develops and markets
specialty pharmaceutical compounds, including directly compressible and
microencapsulated ingredients used in pharmaceutical processing, and tastemasked
vitamins and minerals for the pharmaceutical, nutritional and food industries.
(Hereinafter, KV, ETHEX and PDI are sometimes referred to collectively
as "KV" or the "Company.")
2
<PAGE>
(b) Industry Segments
The Company operates principally in one industry segment, consisting of
pharmaceutical development, manufacturing and marketing. Revenues are received
from customers for the development, manufacture and sale of drug products to
pharmaceutical marketers and from directly marketing its own technology
distinguished generic products. Revenues may be received in the form of
licensing revenues and/or royalty payments to KV based upon a percentage of the
licensee's sales of the product, in addition to manufacturing revenues, when
marketing rights to products using KV's advance drug delivery technologies are
licensed.
(c) Narrative Description of Business
The Company is engaged in the formulation and commercialization of
brand name prescription, generic prescription and over-the-counter ("OTC")
products utilizing the Company's proprietary drug delivery technologies.
The Company develops generic drugs using its proprietary technologies
that it markets and distributes through its wholly-owned subsidiary, ETHEX
Corporation. ETHEX currently sells 40 products, 20 of which were launched over
the past two fiscal years and many of which utilize KV's drug delivery systems.
Approximately 10 additional products are expected to be launched during fiscal
1998. ETHEX Corporation distributes and markets these technology distinguished
generic products directly to various markets and classes of trade customers,
including wholesalers, chains, distributors, mail order houses, independent
pharmacies, large HMOs and PPOs. ETHEX has achieved a 100% penetration in the 25
largest wholesalers and chains. Development of generic versions of existing
brand name products is typically less costly and time consuming than the
development of new drug products, because generic drugs typically contain
pharmaceutical compounds previously approved by the FDA and generally qualify
for the use of an abbreviated testing and approval process.
The Company also enters into development and licensing arrangements
with companies that (i) hold patent or marketing exclusivity rights to existing
pharmaceutical products that may benefit from the application of KV's
proprietary drug delivery technologies, (ii) are developing new therapeutic
agents that require delivery systems or formulation capabilities such as those
offered by the Company, and/or (iii) can market and sell the products developed
by the Company. To date, KV has entered into agreements with various
pharmaceutical marketers, including Roche Holding Ltd., Sandoz (Novartis),
Janssen Pharmaceutical (Johnson & Johnson) and Taisho Ltd. of Japan. Under these
agreements, KV generally develops a product which utilizes its drug delivery
system in return for license fees, milestone payments, research reimbursement
and manufacturing and royalty revenues. The Company's licensee is generally
responsible for clinical trials, regulatory approvals and marketing activities.
In certain cases, the Company may develop a product, conduct clinical trials and
seek regulatory approval before entering into a licensing arrangement.
Particle Dynamics, Inc. has developed and markets to the
pharmaceutical, nutritional and food industries four distinct lines of specialty
raw material products. DESCOTE(R) is a family of tastemasked vitamin and mineral
products particularly applicable to chewable children's vitamins. DESTAB(TM) is
a family of direct compression products which enable pharmaceutical
manufacturers to produce tablets and caplets in a more efficient manner.
DESTRIT(TM) is a family of low dose vitamin products for direct compression into
vitamin tablets and VITACOTE(TM) is a line of stabilized vitamins for use in the
pharmaceutical and food industries.
3
<PAGE>
During the mid-1990's, the Company implemented an integrated business
strategy to commercialize its drug delivery technologies in a variety of ways,
principally through the development and marketing of both brand name and generic
pharmaceutical products. During fiscal 1997, 1996 and 1995, revenues from the
implementation of these strategies were approximately 91%, 90% and 84%,
respectively, of the Company's total net revenues.
The Company's strategy is to maintain its position as a leading
developer of innovative drug delivery systems and to apply its technologies to
the formulation and commercialization of brand name and generic drugs and
specialty raw materials. This strategy is comprised of four main components:
The Development and Marketing of Technologically Distinguished Generic
Drugs. The Company applied and continues to apply its drug delivery systems and
formulation capabilities to develop and market technologically distinguished
generic drugs. The Company does so by (i) identifying and replicating brand name
drugs that are either off patent or are approaching patent expiration and which
require or can utilize advanced drug delivery systems, or (ii) applying the
Company's tastemasking formulations to an off patent drug in order to
meaningfully increase patient compliance and the drug's commercial appeal.
The Development of Brand Name Pharmaceuticals. The Company applies its
proprietary drug delivery technologies in the formulation and development of
brand name prescription and OTC pharmaceutical products. The Company plans to
continue to enter into long term licensing agreements with pharmaceutical
marketing companies under which the Company develops products which utilize its
drug delivery systems in return for license fees, milestone payments, research
reimbursement and manufacturing and royalty revenues on sales of the products.
Selective Acquisitions and In-Licensing Opportunities. The Company is
actively seeking opportunities to acquire additional products, product rights,
technologies, and distribution channels that complement the Company's business
and which can be integrated into the Company's existing research, manufacturing,
marketing and distribution capabilities.
Development and Marketing of Technologically Differentiated Specialty
Raw Materials. The Company combines its advanced technologies with the
utilization of its expertise in micro encapsulation and particle coating to
strategically develop new products that improve taste, tableting efficiencies
and stability while reducing manufacturing costs and increasing product quality.
DRUG DELIVERY TECHNOLOGIES
KV's proprietary drug delivery and formulation technologies enhance the
effectiveness of new therapeutic agents, existing pharmaceutical products and
nutritional supplements, such as vitamins and minerals. During the 1990's, KV
has continued to develop and introduce important new generations of technologies
which represent significant advancements in the field of drug delivery systems.
These drug delivery systems are generally organized in the areas of "controlled
release", "tastemasking" and "site specific" technologies. Many of these
technologies have been used successfully for the commercialization of products
currently being marketed by the Company and its pharmaceutical marketing
licensees. The following describes the Company's principal drug delivery
technologies.
4
<PAGE>
Controlled Release Technologies
The Company has developed a number of controlled release drug delivery
systems and formulation techniques that tailor the drug release profiles of
certain orally administered pharmaceuticals and nutritional supplements. These
systems, which provide for a single oral dose that releases the active
ingredient over periods ranging from 12 to 24 hours, are designed to improve
patient compliance, improve drug effectiveness and reduce potential side
effects. These technologies have been used to formulate tablets, capsules and
caplets that deliver single therapeutic compounds, as well as multiple active
compounds, each requiring different release patterns within a single dosage
form.
KV/24(R) is a precisely controlled drug delivery system that can be
taken orally once every 24 hours, affording the patient a reduced dosing regimen
and dramatically reducing commonly reported side effects. KV/24(R) is also a
multi-particulate technology that can combine several different drug compounds,
each requiring its own unique release profile, in a single dosage form. KV/24(R)
systems have been developed in capsule and tablet form for a number of
prescription and OTC products.
METER RELEASE(R) is a twice a day dosing, polymer-based drug delivery
system which offers different release characteristics than KV/24(R) and is used
for products that require a drug release rate of between eight and 12 hours.
METER RELEASE(R) systems have been developed in tablet, capsule and caplet form
and have been commercialized in the cardiovascular, gastrointestinal and upper
respiratory categories through products marketed by ETHEX Corporation and under
licensing agreements in various therapeutic categories.
MICRO RELEASE(R) is a micro-particulate formulation that employs
smaller particles than KV/24(R) and METER RELEASE(R). MICRO RELEASE(R)
encapsulates therapeutic agents which improve a drug's absorption in the body
where precise release profiles are less important. MICRO RELEASE(R) has been
commercialized in prescription and OTC nutritional products, including various
prescription prenatal vitamins marketed through ETHEX Corporation.
Site Specific Technologies
KV's site specific technologies use advanced polyphasic principles that
result in a complex emulsion which adheres to the desired tissue and controls
the release of the drug. The Company has developed a number of site specific
systems and formulations that it tailors to the desired route of administration.
To date, the Company has applied its site specific technologies in cream,
lotion, lozenge and suppository form to deliver therapeutic agents to vaginal,
rectal, oral, skin, pharyngeal and esophageal tissues.
SITE RELEASE(R) is a patented, controlled release bioadhesive delivery
system which incorporates advanced polyphasic principles to create a
bio-emulsion system capable of delivering therapeutic agents in oral, topical
and vaginal forms. To the Company's knowledge, SITE RELEASE(R) is the only
bioadhesive delivery system that is clinically proven.
SITE RELEASE(R) is the subject of licensing and development agreements
with such companies as Roche Holding Ltd., Taisho Ltd. of Japan, J. Uriach & Cia
of Spain and others, to develop products for the treatment of topical and
vaginal fungal infections.
5
<PAGE>
OraSite(R) is a controlled released mucoadhesive delivery system
administered orally in a solid or liquid form. A drug formulated with the
OraSite(R) technology may be formulated as a liquid or as a lozenge in which the
dosage form liquefies upon insertion and adheres to the mucosal surface of the
mouth, throat and esophagus. OraSite(R) possesses characteristics particularly
advantageous to therapeutic areas such as oral hygiene, sore throat and
periodontal and upper gastrointestinal tract disorders.
Trans-E(TM) (for transesophageal) is a new and novel bio-adhesive,
controlled release delivery system which may permit oral delivery of compounds
that normally would be degraded if administered orally, such as growth hormone,
calcitonin and other protein/peptides and other complex compounds. Trans-E(TM)
was specifically designed to provide an oral delivery alternative for
biotechnology and other compounds that currently are injected or infused.
BioSert(R) is a patented, bio-adhesive, controlled release system which
at room temperature is a solid rectal or vaginal suppository and after insertion
becomes a bioadhesive long acting cream. BioSert(R) has particular applications
to therapeutic areas such as antifungals, narcotic analgesics and
anti-arthritics.
Tastemasking Technologies
KV has been at the forefront in the development of pharmaceutical
formulations capable of improving the flavor of unpleasant tasting drugs. The
Company has developed numerous platforms for its tastemasking technologies,
including liquid, chewable and dry powder formulations.
FlavorTech(R) is a liquid formulation technology designed to reduce bad
tasting therapeutic products. FlavorTech(R) has been commercialized in
cough/cold syrup products marketed through ETHEX Corporation and has special
application to other products, such as antibiotic, geriatric and pediatric
pharmaceuticals. FlavorTech(R) has also been commercialized through a licensing
agreement with Sandoz (Novartis) for a liquid cough cold product.
TASTELESSE(R) is a tastemasking technology which incorporates a dry
powder, microparticulate approach to reducing objectionable tastes by
sequestering the unpleasant drug agent in a specialized matrix. The
TASTELESSE(R) technology can be formulated into chewable tablets or into packets
that can be sprinkled on food, taken directly into the mouth, or stirred into
water or other liquid before swallowing. This formulation technique has the
effect of "shielding" the drug from the taste receptors without interfering with
the dissolution and ultimate absorption of the agent within the gastrointestinal
tract. TASTELESSE(R) may be used in connection with such products as macrolide
antibiotics, amino acids, vitamins and other unpleasant tasting drug compounds.
LIQUETTE(R) is a tastemasking system which incorporates unpleasant
tasting drugs into a hydrophilic and lipophilic polymer matrix to suppress the
taste of a drug. This technology is used for mildly to moderately distasteful
drugs. The LIQUETTE(R) technology has been successfully commercialized in Japan
through a licensing agreement with SS Pharmaceutical.
6
<PAGE>
COMPETITION
Competition in the development and marketing of pharmaceutical products
is intense and characterized by extensive research efforts and rapid
technological progress. Many companies, including those with financial and
marketing resources and development capabilities substantially greater than
those of the Company, are engaged in developing, marketing and selling products
that compete with those offered by the Company. There are also a few companies,
including KV, which specialize in drug delivery technology and the development
of products derived from those technologies for sale/licensing to pharmaceutical
marketers. The Company believes that its patents, proprietary trade secrets,
technological expertise, and product development and manufacturing capabilities
position it to continue to develop products to compete effectively in the
marketplace and maintain a leadership position in the field of advanced drug
technologies.
The Company also markets, sells and distributes generic products
directly to various markets and classes of customers through ETHEX Corporation.
ETHEX is subject to active competition from numerous firms. The primary
competitive factors in this area are customer service, quality of products and
price. The nature and level of competition varies among products, markets and
classes of customers. The Company is subject to potential additional competition
from firms who are able to obtain the necessary governmental approvals to
manufacture and distribute similar products.
REGULATION
The design, development and marketing of pharmaceutical compounds are
intensively regulated by the Federal Food and Drug Administration ("FDA") and
comparable agencies in foreign countries. For example, The Federal Food, Drug
and Cosmetic Act, the Controlled Substances Act and other United States federal
statutes and regulations impose requirements on the testing, manufacturing and
approval of the Company's products before a drug can be marketed in the United
States. Obtaining FDA approvals is a costly, time-consuming process and there is
no guarantee that such approval will be obtained with respect to an individual
product. All companies in the pharmaceutical industry are subject to FDA
inspections for compliance with current Good Manufacturing Practice ("cGMP"),
which encompasses all aspects of the production process as interpreted by the
FDA and involves changing and evolving standards. FDA inspections are a part of
a continuing effort by the FDA to oversee and upgrade the level of industry-wide
compliance with cGMP, with an emphasis on increased validation of products and
increased stringency of Standard Operating Procedures. The Company undergoes FDA
inspections at all of its facilities.
Since 1992, the Company has implemented new programs to ensure full
compliance with all of the FDA's regulatory requirements and their increasingly
vigorous interpretation by the government. In addition, KV has agreed with the
FDA in a June 1993 Consent Decree to operate in compliance with FDA requirements
and, in the event of violations of FDA requirements, has agreed to certain
procedures with respect to corrective actions that may be warranted.
With respect to potential new products, there are two principal ways
for the Company to satisfy the FDA's safety and efficacy requirements for a new
drug product, a new drug application (an "NDA") and an abbreviated new drug
application (an "ANDA"). In recent years, the Company has experienced delays in
obtaining FDA approvals. In certain instances, KV's customers have been
responsible for obtaining such FDA approvals and have been similarly delayed. A
number of products KV anticipated would be introduced to the pharmaceutical
7
<PAGE>
market by KV or its client pharmaceutical companies in fiscal 1992 through 1997
were delayed. The Company follows a policy of not disclosing information on the
specific products covered by its FDA applications in order to protect the
confidentiality and competitive position of the Company and its customers with
respect to products which it has developed and expects to be the subject of
future market introductions.
As a consequence of the uncertainties inherent in the drug approval
process, an applicant is not in the position to predict in advance all of the
substantive and procedural requirements for FDA approval of a particular
product. In addition, the Company believes that under the agency's invocation of
its "Application Integrity Policy", the FDA will not process the Company's
applications until the Company has satisfied the FDA with respect to data
previously submitted and has implemented any additional procedures necessary to
assure the accuracy of information furnished by the Company. However, the FDA
has specifically advised the Company that the Application Integrity Policy does
not adversely delay any of its clients' NDA and ANDA submissions for products KV
has developed and will manufacture for such clients. Currently, it is the
applications of KV's clients which have the greatest value to the Company.
Therefore, the Company believes that any delay in processing the Company's own
applications will not have a material adverse effect on the Company.
The Company also cannot predict whether future legislative or
regulatory developments might have an adverse effect on the Company. It is the
Company's belief that generic drugs and drug delivery products can provide cost
savings opportunities which the Company could benefit from in its ETHEX
Corporation subsidiary's growth as well as in its drug delivery research
business.
During fiscal 1997, the Company encountered no serious shortages of any
particular raw materials and has no indications that significant shortages will
occur. However, a serious shortage of certain raw materials could have a
material adverse effect upon the Company.
The Company regards its drug delivery technologies as proprietary and
maintains an extensive trade secret and patent protection program based on
patent laws, trade secret laws and restrictions on disclosure and
transferability contained in its product license agreements. Internal safeguards
incorporated in its technologies also serve to protect the proprietary nature of
its programs. In addition, employees with access to proprietary information and
potential customers who evaluate KV's products are required to execute
non-disclosure agreements. The Company intends to maintain and enforce the
proprietary nature of its technologies. In addition to its patent and trade
secret protection, KV believes that the collective knowledge and experience of
its management and personnel and their ability to develop and enhance drug
delivery technologies and products developed from such technologies are also of
competitive significance.
The Company presently owns 38 domestic and foreign patents expiring
through 2013 and 24 trademarks expiring through 2012 (which are renewable
assuming continuous use), none of which is considered material to the continuing
operations and success of the Company. The Company considers its proprietary
know-how and processing techniques to be of greater importance to its continuing
operations than such patents.
In order to protect its goodwill, the Company has applied for trademark
protection for its technology names such as SITE RELEASE(R), KV/24(R),
FlavorTech(TM) , OraSite(R), METER RELEASE(R), MICRO RELEASE(R), DESCOTE(R), and
others. The Company intends to continue to trademark new technology and product
names as they are developed.
8
<PAGE>
The business of the Company is generally not seasonal, although a
number of new cough/cold products marketed through ETHEX Corporation can be
subject to seasonal demand.
The nature of the Company's business does not involve unusual working
capital requirements. Inventories are maintained at sufficient levels to support
current production and sales levels.
Customers of the Company consist of large and small pharmaceutical
marketing companies, drug chains and wholesalers. During fiscal 1997 and 1996,
one unaffiliated customer, McKesson Drug Company, accounted for 15% of the
Company's consolidated revenues. During fiscal 1996, no one customer accounted
for 10% or more of consolidated revenues.
The majority of the Company's sales are related to directly marketed
generic products through ETHEX Corporation where backlog measurements are not
meaningful, due to the short lead time required (days) in filling orders at any
point in time relative to sales or income for a full 12-month period.
Research and development spending, including overhead, spent by KV on
research activities relating to the development of new products or services or
the improvement of existing products or services was approximately $4,835,000 in
fiscal 1997, $4,559,000 in fiscal 1996, and $4,525,000 in fiscal 1995. The
estimated dollar amount contributed by customers to these amounts was $4,000 in
fiscal 1997, $70,000 in fiscal 1996 and $271,000 in fiscal 1995.
Spending for KV products comes from KV internal funding and from its
major drug Company customers who have licensed marketing rights to KV-developed
products. KV's internally funded research and development spending, which does
not include licensing partners sponsored sources of funds, is approximately 8%
of current revenues.
The Company does not expect that compliance with federal, state or
local provisions regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment will have a material
effect on the Company's capital expenditures, earnings or competitive position.
As of May 25, 1997, the Company had 333 employees. The Company is
subject to a new five year collective bargaining agreement which was ratified in
July, 1996 and covers 61 employees. The Company believes that its relations with
its employees are good.
The Company presently does not have material operations or sales in
foreign countries and its domestic sales are not subject to unusual geographic
concentration.
Item 2. Properties.
The Company's corporate headquarters is located in a two-story brick
building at 2503 South Hanley Road in St. Louis County, Missouri, containing
approximately 25,000 square feet of floor space. The Company has a lease on the
building for a period of ten years expiring December 31, 2005, with one
five-year option to renew.
9
<PAGE>
In addition, the Company has the leases and the owned facility shown in
the following table:
SQ FT LEASE RENEWAL
FACILITY USAGE LEASED EXPIRES OPTIONS
============================== =========== ======== ========= =======
2629 S. Hanley Road Mfg. Oper. 18,000 11/30/97 5 years(1)
821 Hanley Industrial Court Mfg. Oper. 5,000 11/30/97 3 years
8046-50 Litzsinger Road Mfg. Oper. 17,000 12/31/96 5 years(1)
8056 Litzsinger Road Office/Maint. 3,000 12/31/96 5 years(1)
2635 S. Hanley Road Mfg. Oper. 12,150 11/30/97 5 years(1)
819 Hanley Ind'l Ct. Mfg. Oper. 5,000 11/30/97 3 years
2525 S. Hanley Road Mfg. Oper. 16,800 06/30/97 5 Years
8054 Litzsinger Road Office 3,000 12/31/96 5 years(1)
2601 S. Hanley Road PDI Office 1,480 04/30/97 5 years(1)
10888 Metro Court Office/ 81,810 Owned N/A
Warehouse
2303 Schuetz Rd. Mfg. Oper. 90,000 Owned N/A
- ------------------------------------------------------
1 Three five-year options.
Properties used in the Company's operations are considered suitable for
the purposes for which they are used and are believed to be adequate to meet the
Company's needs for the reasonably foreseeable future. However, the Company has
considered leasing additional facilities from time to time when attractive
facilities appeared to be available to accommodate the consolidation of certain
operations and to meet future expansion plans.
Item 3. Legal Proceedings.
On April 6, 1995, the Company entered into a plea agreement with the
U.S. Department of Justice under which the Company agreed to plead guilty to (1)
two misdemeanor violations of the Federal Food, Drug and Cosmetic Act involving
the failure to file certain required reports with the FDA in 1991 with respect
to two lots of an erythromycin oral suspension product previously manufactured
by the Company and (2) two misdemeanor counts involving the shipment of two lots
of the same product, inappropriately labeled as to their shelf life. Under the
plea agreement, the Company agreed to pay a fine of $500,000 and costs of
$100,000 in installments of $75,000 every six months over 3 and one-half years,
beginning in July 1995 and was placed on probation during the payment period.
10
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 4(a). Executive Officers of the Registrant1
The following is a list of the current executive officers of the
Company, their ages, their positions with the Company and their principal
occupations for at least the past five years.
NAME AGE POSITION HELD AND PAST EXPERIENCE
- ------------------------- --------- --------------------------------------------
Victor M. Hermelin 83 Director, Chairman of the Board and
Treasurer of the Company.
Marc S. Hermelin 55 Director, Vice-Chairman of the Board and
Chief Executive Officer(2).
Alan G. Johnson 62 Director and Secretary of the Company.
Attorney at Law and Member in the law firm
of Gallop, Johnson & Neuman, L.C. since
1976; Director of MRL, Inc.; and Siboney
Corporation.
Garnet E. Peck, Ph.D. 66 Director of the Company since 1994.
Professor of Industrial Pharmacy and
Director of Industrial Pharmacy for Purdue
University School of Pharmacy and Pharmacal
Sciences since 1967.
Raymond F. Chiostri 63 Vice President and Group President of KV
since 1986 and Chief Executive Officer of
Particle Dynamics, Inc. since 1995.
President - Pharmaceutical Division of KV
1986 to 1995.
Gerald R. Mitchell 58 Vice President of Finance since 1981.
Mitchell I. Kirschner 51 Corporate Vice President of Business
Development since 1989.2
The term of office for each executive officer of the Company expires at
the next annual meeting of the directors or at such time as his successor has
been elected and qualified.
(1) This information is included in Part I as a separate item in accordance
with Instruction 3 to Item 401(b) of Regulation S-K and General Instruction
G to Form 10-K.
(2) Victor M. Hermelin is the father of Marc S. Hermelin and father-in-law of
Mitchell I. Kirschner.
11
<PAGE>
PART II
Item 5. Market for the Company's Common Stock and Related Security Holder
Matters
a) Principal Market
The Company's Class A Common Stock and Class B Common
Stock are traded on the American Stock Exchange under the
symbols KV.A and KV.B, respectively.
b) Stock Price and Dividend Information
High and low closing sales prices on the American Stock
Exchange of the Company's Class A and Class B Common Stock
during each quarter of fiscal 1997 and 1996 were as
follows:
CLASS A COMMON STOCK
FISCAL 1997 FISCAL 1996
------------------------ ------------------------
QUARTER High Low High Low
------- ---------- ----------- ----------- ----------
First 15 7/8 11 7/8 8 1/2 5 3/8
Second 14 3/8 7 5/8 10 1/8 6 3/4
Third 12 7/8 10 3/4 13 3/8 7 3/4
Fourth 21 1/8 11 5/8 17 7/8 11 1/4
CLASS B COMMON STOCK
FISCAL 1997 FISCAL 1996
------------------------ -------------------------
QUARTER High Low High Low
------- --------- ----------- ----------- ----------
First 15 3/4 12 8 1/2 5 5/8
Second 14 1/4 7 1/2 10 7 1/2
Third 12 3/4 10 3/4 13 3/8 7 3/4
Fourth 21 11 1/2 17 7/8 11 1/2
No cash dividends were paid on the Company's Class A or Class B Common
Stock in fiscal 1997 or 1996. Dividends on Preferred Stock in the amount of
$105,437 were paid during the fourth quarter of fiscal 1997, but no other
dividends were paid during the above periods. See Note 8 to the Financial
Statements regarding limitations on the payment of dividends.
(c) Approximate Number of Holders of Common Stock
The number of holders of record of the Company's Class A and Class B
Common Stock as of June 6, 1997 was 689 and 621, respectively (not separately
counting shareholders whose shares are held in "nominee" or "street" names,
which are estimated to represent approximately 4,000 additional shareholders for
each class of common stock).
12
<PAGE>
<TABLE>
Item 6. Selected Financial Data
<CAPTION>
($ in 000's, except per share data)
Years Ended March 31,
---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $58,037 $49,789 $39,743 $38,171 $43,496
% Change 16.6 25.3 4.1 (12.2) 3.5
Net income
(loss) 8,924 4,043 (5,375) (8,181) 1,055
Net income (loss) per
common share (a)
(b) 0.70 0.31 (.52) (.78) .06
Total assets 41,362 27,948 27,975 31,802 39,331
Long-term debt and
other 3,071 3,452 12,153 13,323 11,886
Shareholders' Equity 33,084 20,550 9,974 13,343 21,631
<FN>
NOTES:
(a) After deducting preferred dividends of $421,750 or $.04 per common share in
1997, 1996, 1995, 1994 and 1993.
(b) Dividends were paid on the Preferred Stock in the fourth quarter of fiscal
1997 in the amount of $105,437, but no other cash dividends were paid on
any shares of common or preferred stock during the five years ended March
31, 1997.
</FN>
</TABLE>
13
<PAGE>
Item 7. Management's Discussion and Analysis of Results of Operations, and
Liquidity and Capital Resources
(a) Results of Operations
The following table summarizes the Company's historical results of
operations as a percentage of revenues for fiscal years 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Fiscal Year Ended
1997 1996 1995
-------------------------- ------------------------- ---------------------------
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ETHEX (generic products) $40,225 69% $34,498 69% $24,939 63%
KV (manufacturing & licensing)
9,124 16 7,430 15 7,729 19
PDI (pharmaceutical compounds)
8,688 15 7,861 16 7,075 18
-------- -- ------- --- ------- ----
Net Revenues $58,037 100% $49,789 100% $39,743 100%
Costs and Expenses:
Manufacturing costs $29,478 51% $26,260 53% $26,066 66%
Research and development
4,835 8 4,559 9 4,525 11
Selling and administrative
13,818 24 12,749 25 11,979 30
Other, Net 599 1 2,088 4 2,548 6
-------- --- ------- ---- ------- ---
Total costs & expenses 48,730 84% $45,656 91% $45,118 113%
Income (loss) before income
taxes 9,307 16 4,133 9 (5,375) (13)
Net income (loss) $8,924 15% $4,043 8% $(5,375) (13)%
====== === ====== == ======== =====
</TABLE>
FISCAL 1997 COMPARED TO FISCAL 1996
Revenues. Net revenues increased $8.2 million, or 17%, to $58 million
during fiscal 1997 from $49.8 million in fiscal 1996. This sales growth was
primarily due to an increase in the volume of new and existing generic products
sold by ETHEX, increased licensing revenues as well as increased sales volume in
contract services and Particle Dynamics. Net revenues from ETHEX increased $5.7
million, or 17%, to $40.2 million during fiscal 1997 from $34.5 million in
fiscal 1996. This increase was primarily due to the launch of ten new generic
products during fiscal 1997, in addition to increased sales in products
introduced in the prior year. Net revenues derived from the sale of
pharmaceutical compounds by PDI increased $.8 million, or 11%, to $8.7 million
during fiscal 1997. This increase was attributable to increased sales volumes
related to the prior years' introduction of new products for the
over-the-counter DESCOTE(R) and DESTAB(TM) product lines. Contract services
increased $1.7 million or 23% to $9.1 million in fiscal 1997 from $7.4 million
in fiscal 1996, primarily due to increased licensing revenues of $1.3 million
resulting from an agreement concluded with Roche Holding Ltd.
14
<PAGE>
Costs and Expenses. Manufacturing costs increased $3.2 million, or 12%,
to $29.5 million during fiscal 1997 from $26.3 million in fiscal 1996.
Manufacturing costs as a percentage of revenues decreased to 51% from 53%. This
percentage decrease was primarily due to the continued growth in sales of higher
margin products by ETHEX and increased margins in the Contract manufacturing
business.
Research and development costs increased $.2 million, or 6%, to $4.8
million during fiscal 1997 from $4.6 million in fiscal 1996. This increase was
due to higher personnel costs. The Company expects to continue spending for
research and development in the future, emphasizing the development of
additional products for sale by ETHEX, as well as new drug delivery
technologies.
Selling and administrative expenses increased $1.1 million, or 8%, to
$13.8 million during fiscal 1997 from $12.7 million in the same period in fiscal
1996. However, as a percentage of revenue, selling and administrative expenses
decreased to 24% from 25%. The increase in selling and administrative expenses
was primarily related to the Company's selling and promotional activities
associated with the significant growth experienced in the sales of new and
existing generic products marketed by ETHEX and additional personnel to support
the Company's continued growth.
Interest expense decreased $1 million, or 70%, to $.4 million during
fiscal 1997 from $1.4 million in fiscal 1996. This decrease resulted from lower
effective interest rates and lower levels of average borrowing during the fiscal
1997 period. The income tax provision was $383,000 for fiscal 1997 compared to
$90,000 in fiscal 1996. The tax provision of $383,000 is for state income taxes,
while the $90,000 in 1996 was due to the effect of the alternative minimum tax.
Net Income. As a result of the factors described above, net income
improved $4.9 million or 121%, to $8.9 million for fiscal 1997 from net income
of $4.0 million in fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues. Net revenues increased $10.1 million, or 25%, to $49.8
million during fiscal 1996 from $39.7 million in fiscal 1995. This sales growth
was primarily due to an increase in the volume of new and existing generic
products sold by ETHEX and increased licensing revenue. Net revenues from ETHEX
increased $9.6 million, or 39%, to $34.5 million during fiscal 1996 from $24.9
million in fiscal 1995. This increase was primarily due to the launch of ten new
generic products during fiscal 1996, in addition to increased sales of products
introduced in the prior year. Licensing revenues increased $1.5 million to $2.3
million during fiscal 1996 due to an agreement concluded with a major
pharmaceutical manufacturer to explore the development of products utilizing
KV's drug delivery technologies. The Company recognized $1.7 million of
licensing revenue from this transaction. Net revenues derived from the sale of
pharmaceutical compounds by PDI increased $.8 million, or 11%, to $7.9 million
during fiscal 1996. This increase is attributable to the introduction of new
products for the over-the-counter DESCOTE(R) and DESTAB(TM) product lines. Those
increases were partially offset by an expected decrease in revenues derived from
contract services to $5.1 million in fiscal 1996 from $7 million in fiscal 1995
primarily due to the Company's continued de-emphasis of its lower margin
contract manufacturing business in order to develop and market higher margin
technologically distinguished generic products through ETHEX.
15
<PAGE>
Costs and Expenses. Manufacturing costs increased $.2 million, or less
than 1%, to $26.3 million during fiscal 1996 from $26.1 million in fiscal 1995.
Manufacturing costs as a percentage of revenues decreased to 53% from 66%. This
percentage decrease was primarily due to the continued growth in sales of higher
margin generic products by ETHEX.
Research and development costs increased $34,000, or less than 1%, to
$4.6 million during fiscal 1996 from $4.5 million in fiscal 1995. This increase
was due to higher personnel costs. The Company expects to continue spending for
research and development in the future, emphasizing the development of
additional generic products for sale by ETHEX as well as new drug delivery
technologies.
Selling and administrative expenses increased $.7 million, or 6%, to
$12.7 million during fiscal 1996 from $12 million in the same period in fiscal
1995. However, as a percentage of revenue, selling and administrative expenses
decreased to 25% from 30%. The increase in selling and administrative expenses
was primarily related to the Company's selling and promotional activities
associated with the significant growth experienced in the sales of new and
existing generic products marketed by ETHEX.
Interest expense increased $.1 million, or 8%, to $1.4 million during
fiscal 1996 from $1.3 million in fiscal 1995. Such increase resulted from higher
effective interest rates and higher levels of average borrowing to support
growth in the fiscal 1996 period. The income tax provision was $90,000 for
fiscal 1996 compared to zero in fiscal 1995. The tax provision of $90,000 was
due to the effect of the alternative minimum tax. Otherwise, no provision was
made for income taxes as a result of available net operating loss carryforwards.
As of March 31, 1996, the Company's net operating loss carryforwards were $8.9
million.
Net Income (Loss). As a result of the factors described above, net
income improved $9.4 million to $4 million for fiscal 1996 from a net loss of
$5.4 million in fiscal 1995.
16
<PAGE>
(b) Liquidity and Capital Resources
The following table sets forth selected balance sheet data and ratios
for fiscal years 1997, 1996 and 1995.
<TABLE>
<CAPTION>
At March 31,
($ in 000's)
------------
1997 1996 1995
------------------- -------------------- -------------------
<S> <C> <C> <C>
Working Capital Ratio 5.8 to 1 4.6 to 1 2.5 to 1
Quick Ratio 3.1 to 1 2.4 to 1 1.4 to 1
Debt to Debt Plus Equity .07 to 1 .14 to 1 .57 to 1
Total Liabilities to Equity .25 to 1 .36 to 1 1.80 to 1
Cash and Equivalents $ 7,628 $ 2,038 $ 1,076
Working Capital 25,017 14,053 8,927
Long Term Liabilities 3,071 3,452 12,153
Stockholders' Equity 33,084 20,550 9,974
</TABLE>
Working capital for fiscal 1997 increased $11 million, or 78%, to $25
million due to an increase in current assets of $12.2 million and an increase in
current liabilities of $1.3 million. Net cash provided by operating activities
for fiscal 1997 included increases in receivables of $1.3 million and
inventories of $4.3 million to improve service levels, which resulted primarily
from increased sales volume of ETHEX products, and an increase in accounts
payable and accrued liabilities of $1.6 million. These changes in receivables,
inventories and payables were more than offset by net income and non-cash
charges aggregating $10.6 million, resulting in cash provided by operating
activities of $5.6 million for fiscal 1997.
At the end of fiscal 1997, the Company's "quick assets", cash, cash
equivalents and accounts receivable increased $6.9 million (74%) from the prior
year, while current liabilities increased $1.3 million (32%) resulting in a
"quick ratio" of 3.1 to 1 compared to 2.4 to 1 at the end of 1996.
The debt to debt plus equity and total liabilities to equity ratios for
fiscal 1997 decreased because of the impact of the net income for the year, the
repayment of debt and $3.5 million proceeds from the private placement sale of
200,000 shares of Class A Common Stock to Roche Holding Ltd., completed in
March, 1997.
Investing activities in fiscal 1997 reflected capital expenditures of
$2 million and net expenditures for other assets of $.8 million, which were
provided for through operations.
In January, 1996 the Company concluded an agreement with a major
pharmaceutical marketer whereby the Company received $5,000,000 and certain
other considerations, plus $5,000,000 for the sale of certain Class A common
stock options exercisable in various periods through September, 1998 (See Note
12). Under the transaction, which was entered into between the parties partially
in consideration of and replacing certain other products, the two companies
entered into an agreement for future royalties and product opportunities. The
Company gave the marketer the right to explore the Company's drug delivery
technologies with the possibility of entering into future agreements for
individual products. The transaction (other than the sale of the options) was
recorded as a reimbursement to the Company for, and thus the removal from its
balance sheet, of approximately $2,500,000 of Deferred Improved Drug
17
<PAGE>
Entities(TM), receivables and inventory of approximately $400,000, and patents
and trademarks relating to the Company's technologies of approximately $200,000.
As a result, approximately $1,700,000 was included in licensing revenues and
$200,000 as a reimbursement of expenses.
In January, 1997, the Company concluded a broad-based agreement with
Roche Holding Ltd. of Basel, Switzerland. (Roche). As part of the agreement,
Roche purchased 200,000 shares of Common Class A stock for $3,500,000. In
addition, the agreement included an initial cash payment of $3 million on
January 1, 1997. Two additional payments of $3 million annually will be received
through January 1, 1999, unless regulatory approval of a potential follow on
product in the same therapeutic area is received prior to these dates. The
initial $3,000,000 payment has been included in revenue, while the future
payments will be similarly treated, when received. Upon approval, KV will
receive royalties on sales of the product.
The Company's cash and cash equivalents on hand at year-end were $7.6
million. The Company also had in place at March 31, 1997, a secured credit
facility aggregating $17.5 million, which is in the process of being replaced by
an unsecured revolving line of credit and letter of credit facility aggregating
$22,600,000 with LaSalle National Bank. Completion of the transition in credit
facilities occurred as of June 18, 1997. The Company's capital equipment
commitments at year-end totaled approximately $1.7 million and a planned
expansion of its corporate headquarters approximating $1.8 million is expected
to occur in fiscal 1998.
On June 15, 1997, the Company exercised its right of first refusal to
purchase for $4,300,000 the facility it had been renting at 10888 Metro Court
and a separate long-term financing of the purchase has been arranged with
LaSalle National Bank in the amount of $3,500,000. This transaction was
completed on June 24, 1997.
Although the Company generally has been able to pass along to its
customers at least a portion of cost increases in labor, manufacturing and raw
material costs under its agreements, in certain instances no increases have been
effected due to market conditions. It is not meaningful to compare changing
prices over the past three years because the products, product formulas, product
mix and sources of raw materials have varied substantially.
The Company has transitioned its revenue structure from one based on
lower margin, highly competitive, short-term contract manufacturing to focusing
on higher margin, drug delivery product marketing through ETHEX Corporation and
Particle Dynamics, Inc., its wholly-owned subsidiaries, as well as advanced
technology drug delivery products to be marketed and co-marketed under long-term
licensing agreements. These advanced technology drug delivery products and
systems are the subject of a number of long-term business arrangements and
provide differentiated and/or improved benefits derived from incorporating KV's
drug delivery system technologies. For the most part, these products can be
produced with existing manufacturing processes. The Company expects to continue
a relatively high level of expenditures and investment for research, clinical
and regulatory efforts relating to the development and commercialization of
proprietary new products and advanced technology products and their approval for
marketing.
The implementation of these strategies of focusing on drug delivery
technology distinguished product marketing capabilities through its ETHEX and
Particle Dynamics, Inc. subsidiaries and drug delivery licensing arrangements
18
<PAGE>
with brand pharmaceutical marketing clients has allowed the Company to
de-emphasize contract services. Consequently, the Company has shifted its future
growth internally, with drug delivery product marketing capabilities and drug
delivery licensing activities constituting 91% of KV's total business
The Company believes funds generated from operating activities and
existing cash, together with the funds available under its new credit facility
and the funds provided from licensing agreements will be adequate to fund the
Company's requirements for short term needs due to the continued sales growth
being experienced.
(c) New Accounting Standards
In March 1997, the Financial Accounting Standards Board issued
Statement Number 128, Earnings Per Share. This pronouncement provides for a
different method of calculating earnings per share than is currently used.
Management feels that the adoption of this pronouncement will not have a
significant effect on its earnings per share.
Item 8. Financial Statements and Supplementary Data.
19
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of KV Pharmaceutical Company:
We have audited the consolidated balance sheets of KV Pharmaceutical Company and
Subsidiaries as of March 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended March 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of KV Pharmaceutical
Company and Subsidiaries as of March 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1997, in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
St. Louis, Missouri
June 18, 1997
20
<PAGE>
<TABLE>
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1997 and 1996
<CAPTION>
ASSETS 1997 1996
- ------
------------------- ------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 7,627,523 $ 2,038,069
Receivables, less allowance for doubtful accounts of
$129,055 and $570,498 in 1997 and 1996, respectively 8,579,598 7,281,459
Inventories 12,785,588 8,450,162
Prepaid and other current assets 1,230,193 229,358
------------------ -----------------
Total Current Assets 30,222,902 17,999,048
------------------ -----------------
Net Property and Equipment 8,117,809 7,621,217
------------------ -----------------
Goodwill and other assets 3,021,009 2,328,190
------------------ -----------------
TOTAL ASSETS $ 41,361,720 $ 27,948,455
=================== =================
LIABILITIES
Current Liabilities:
Current maturities of long-term debt $ 351,316 $ 712,328
Accounts payable 2,045,048 2,068,265
Accrued liabilities 2,809,571 1,165,506
------------------- ------------------
Total Current Liabilities 5,205,935 3,946,099
Long-term debt 2,158,025 2,541,216
Other long-term liabilities 913,319 911,230
------------------- ------------------
TOTAL LIABILITIES 8,277,279 7,398,545
------------------- ------------------
Commitments and Contingencies
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; $25.00
stated and liquidation value; 840,000
shares authorized; issued and outstanding -
241,000 shares in 1997 and 1996 2,410 2,410
Class A and Class B Common Stock, $.01 par value;
60,000,000 shares of each authorized;
Class A-issued 7,717,487 and 7,120,614 in 1997 and 1996 77,175 71,207
Class B-issued 4,376,570 and 4,747,357 in 1997 and 1996 43,766 47,474
Additional paid-in capital 33,844,685 30,235,926
Retained deficit (828,642) (9,752,154)
Less: Treasury stock, 23,746 shares each of
Class A and Class B common stock, at cost (54,953) (54,953)
-------------------- -------------------
TOTAL SHAREHOLDERS' EQUITY 33,084,441 20,549,910
------------------- ------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 41,361,720 $ 27,948,455
=================== ==================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
21
<PAGE>
<TABLE>
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
For the Years Ended March 31, 1997 1996 and 1995
1997 1996 1995
---------------------- ------------------------ -----------------------
<S> <C> <C> <C>
Net Revenues $ 58,037,159 $ 49,788,635 $ 39,742,554
Costs and Expenses:
Manufacturing costs 29,478,372 26,259,638 26,065,642
Research and development 4,835,478 4,559,360 4,524,956
Selling and administrative 13,817,802 12,748,726 11,978,564
Interest expense 411,237 1,377,604 1,275,622
Amortization of intangible assets 187,758 710,647 672,571
Litigation settlement - - 600,000
---------------------- ------------------------ -----------------------
Total costs and expenses 48,730,647 45,655,975 45,117,355
---------------------- ------------------------ -----------------------
Income (Loss) before income taxes 9,306,512 4,132,660 (5,374,801)
Provision for income taxes 383,000 90,000 -
---------------------- ------------------------ -----------------------
Net Income (Loss) $ 8,923,512 $ 4,042,660 $ (5,374,801)
===================== ======================== =======================
Net Income (Loss) per Common Share
(after deducting preferred dividends
of $421,750 in 1997, 1996 and 1995): $ 0.70 $ 0.31 (0.52)
===================== ======================== =======================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
22
<PAGE>
<TABLE>
PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended March 31, 1997, 1996 and 1995
<CAPTION>
Class A Class B Additional Retained Total
Preferred Common Common Paid-In Earnings Treasury Shareholders'
Stock Stock Stock Capital (Deficit) Stock Equity
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 $2,410 $63,050 $48,011 $21,704,514 $(8,420,013) $(54,953) $13,343,019
Stock Options exercised,
420 shares of Class A and 370 shares
of Class B, less 150 shares of each
class repurchased - 3 2 (239) - - (234)
Sale of 375,000 shares of Class A - 3,750 - 2,002,448 - - 2,006,198
Conversion of 826,000 shares of Class B
Shares to Class A shares - 826 (826) - - - -
Net Loss for 1995 - - - - (5,374,801) - (5,374,801)
---------- ------------ --------- ------------- -------------- ----------- -------------
Balance at March 31, 1995 2,410 67,629 47,187 23,706,723 (13,794,814) (54,953) 9,974,182
---------- ------------ --------- ------------- -------------- ----------- -------------
Stock Options issued - - - 5,000,000 - - 5,000,000
Stock Options exercised,
194,242 shares of Class A - 1,943 - 772,107 - - 774,050
192,122 shares of Class B - - 1,922 757,096 759,018
Conversion of 163,475 shares of
Class B shares to Class A shares - 1,635 (1,635) - - - -
Net Income for 1996 - - - - 4,042,660 - 4,042,660
---------- ------------ --------- ------------- -------------- ----------- -------------
Balance at March 31, 1996 2,410 71,207 47,474 30,235,926 (9,752,154) (54,953) 20,549,910
---------- ------------ --------- ------------- -------------- ----------- -------------
Sale of 200,000 Class A shares - 2,000 - 3,498,000 - - 3,500,000
Stock Options issued as compensation - - - 114,300 - - 114,300
Stock Options exercised,
13,125 shares of Class A - 130 - 50,188 - - 50,318
13,195 shares of Class B - - 130 51,708 - - 51,838
Less 177 shares of each class
repurchased
Conversion of 383,925 shares of
Class B shares to Class A shares - 3,838 (3,838) - - - -
Dividends paid on preferred stock - - - (105,437) - - (105,437)
Net income for 1997 - - - - 8,923,512 - 8,923,512
---------- ------------ --------- ------------- ------------- --------- --------------
Balance at March 31, 1997 $2,410 $77,175 $43,766 $33,844,685 $(828,642) $(54,953) $33,084,441
---------- ------------ --------- ------------- -------------- ---------- -------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
23
<PAGE>
<TABLE>
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended March 31, 1997, 1996, and 1995
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income (Loss) $ 8,923,512 $ 4,042,660 $ (5,374,801)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation, amortization and other non-cash charges 1,594,300 1,961,975
Stock options issued as compensation 114,300 2,098,622 -
-
Changes in operating assets and liabilities:
(Increase) in receivables (1,298,139) (440,836) (448,347)
(Increase) decrease in inventories and other current
assets (5,336,261)
(1,820,982) 3,212,927
(Increase) decrease in accounts payable and
accrued liabilities 1,620,848 483,761
(799,676)
Other 2,089 (7,861) 574,991
------------------ ------------------ -----------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 5,620,649 3,071,927 410,506
------------------ ----------------- -----------------
INVESTING ACTIVITIES
Purchase of property and equipment (1,903,134) (841,318) (334,404)
Decrease in Deferred Improved Drug Entities - 2,450,241 -
Other (880,577) (457,006) (315,840)
------------------- ------------------ ------------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (2,783,711) 1,151,917 (650,244)
------------------- ----------------- ------------------
FINANCING ACTIVITIES
Proceeds from credit facilities - 28,311,372 6,086,046
Repayment of credit facilities - (34,130,635) (6,800,000)
Proceeds from term loan facility - 6,820,189 -
Principal payments on long-term debt (744,203) (10,795,482) (483,541)
Proceeds from sale of common stock 3,500,000 - 2,006,198
Dividends paid on preferred stock (105,437) - -
Exercise (repurchase) of common stock options 102,156 1,533,068 (234)
Proceeds from sale of stock options - 5,000,000 -
------------------ ----------------- -----------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 2,752,516 (3,261,488) 808,469
------------------ ------------------ -----------------
INCREASE IN CASH AND CASH EQUIVALENTS 5,589,454 962,356 568,731
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,038,069 1,075,713 506,982
------------------ ----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,627,523 $ 2,038,069 $ 1,075,713
================== ================= =================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of KV
Pharmaceutical Company (the Company) and its wholly-owned subsidiaries. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Cash Equivalents
Cash equivalents consist of highly liquid instruments that have an
original maturity of three months or less.
Inventories
Inventories are stated at the lower of cost or market, with the cost
determined on the first-in, first-out (FIFO) basis.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed
over the estimated useful lives using the straight line method.
Goodwill and other assets
The excess of cost of investment over the fair value of net assets of
the subsidiaries at the time of acquisition is being amortized on a straight
line basis over 40 years. All other deferred charges are being amortized over
periods varying from 5 to 17 years on a straight line basis.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment to its
customer. Provisions for estimated sales allowances, returns and losses are
accrued at the time revenues are recognized. The Company also enters into
long-term agreements under which it assigns marketing rights for the products it
has developed to pharmaceutical marketers. The Company recognizes royalties and
other payments specified in the agreements as income when the earnings process
is completed.
Earnings Per Share
Earnings (Loss) per share after deducting/adding preferred dividends
are based on the weighted average number of common and common equivalent share
outstanding during each year. Common equivalent shares consist of the dilutive
effect of unissued shares that would be issued upon the exercise of outstanding
stock options. The weighted average number of shares aggregated 12,106,992,
11,814,097 and 11,178,495 in 1997, 1996 and 1995, respectively.
25
<PAGE>
Income Taxes
The Company accounts for income taxes on the liability method. Deferred
income taxes are provided on the differences between the tax basis of assets and
liabilities and their financial reporting amounts based on enacted tax rates.
These temporary differences relate primarily to depreciation, accounts
receivable and inventory reserves, deferred compensation, net operating loss
carryforward and various tax credits.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable through the estimated
un-discounted future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to fair value in
accordance with Statement of Financial Accounting Standards No 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." No impairment losses have been necessary through March 31, 1997.
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to
employees with an exercise price greater than or equal to the fair value of the
shares at the date of grant. The Company accounts for stock option grants in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees "(APB Opinion No. 25"). That Opinion requires that
compensation cost related to fixed stock options plans be recognized only to the
extent that the fair value of the shares at the grant date exceeds the exercise
price. Accordingly, the Company recognizes no compensation expense for its stock
option grants.
In October 1995, the Financial Accounting Standards Board, issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). SFAS No. 123 allows companies to continue to
account for their stock option plans in accordance with APB Opinion No. 25, but
encourages the adoption of a new accounting method based on the estimated fair
value of employee stock options. Pro forma net income and income per share,
determined as if the Company had applied the new method, are disclosed within
Note 10.
26
<PAGE>
New Accounting Standards
In March 1997, the Financial Accounting Standards Board issued
Statement Number 128, Earnings Per Share. This pronouncement provides for a
different method of calculating earnings per share than is currently used.
Management feels that the adoption of this pronouncement will not have a
significant effect on its earnings per share.
Reclassifications
Certain amounts from the prior years' financial statements have been
reclassified to conform to the current year presentation.
Fair Value of Financial Instruments
The carrying amounts of all short-term asset and liability financial
instruments are reasonable estimates of their fair value because of the short
maturity of these items. The carrying amount of all long term financial
instruments approximates their fair value because their terms are similiar to
those which can be obtained for similar financial instruments in the current
marketplace.
2. Nature of Operations
The Company and its subsidiaries develop, manufacture and market
technology-distinguished pharmaceuticals and pharmaceutical compounds.
Prescription pharmaceuticals are sold primarily to domestic wholesalers,
drugstore chains, distributors and independent pharmacies nationwide. Contract
manufacturing and pharmaceutical compounds are sold to major domestic drug,
nutritional and food companies.
Sales to a single company aggregated 15% for the year ended March 31,
1997. No single customer accounted for 10% or more of consolidated revenues in
fiscal 1996. In addition, the balance due from this company represented
approximately 23% and 15% of consolidated accounts receivables as of March 31,
1997 and 1996, respectively.
The Company extends unsecured credit to its customers.
3. Inventories
Inventories as of March 31 consist of the following:
1997 1996
---- ----
Finished goods $ 6,941,864 $ 4,087,636
Work-in-process 1,645,879 1,772,711
Raw materials 4,494,167 2,814,815
----------- ------------
13,081,910 8,675,162
Reserves for obsolescence (296,322) (225,000)
------------- ------------
$12,785,588 $ 8,450,162
=========== ===========
27
<PAGE>
4. Property and Equipment
Property and equipment as of March 31 consists of:
1997 1996
---- ----
Land and improvements $ 499,567 $ 499,567
Building and building
improvements 3,482,812 3,439,159
Machinery and equipment 11,792,688 11,386,962
Office furniture and equipment 3,403,378 3,053,811
Leasehold improvements 2,363,555 2,281,162
Construction-in-progress
(estimated costs to
complete at March 31,
1997 - $1,700,000) 1,114,837 176,026
--------- -------
22,656,837 20,836,687
Less accumulated depreciation
and amortization
(14,539,028) (13,215,470)
------------ ------------
Net property and equipment
$ 8,117,809 $ 7,621,217
============ ============
Depreciation of property and equipment was $1,406,542, $1,390,790 and
$1,259,922 for 1997, 1996 and 1995, respectively.
5. Other Assets
Other assets include goodwill, deferred financing charges, cash
surrender value of life insurance, deposits, trademarks and patents. As of March
31, 1997 and 1996, the unamortized excess of purchase price over net assets
acquired, net of accumulated amortization of $1,305,092 and $1,249,688, was
$833,469 and $888,873, respectively. Amortization of goodwill is being charged
to operations at $55,404 per year. Amortization of all other deferred charges
was $132,354, $655,244 and $646,439 for 1997, 1996 and 1995, respectively.
6. Accrued Liabilities
Accrued liabilities as of March 31, consist of the following:
1997 1996
---- ----
Salaries, wages and
benefits $1,352,951 $ 279,385
Interest 85,777 153,159
Income Taxes 476,000 -
Other 894,843 732,962
----------- ------------
$ 2,809,571 $ 1,165,506
=========== ============
28
<PAGE>
7. Long Term Debt
Long-term debt at March 31 consists of the following:
1997 1996
---- ----
Industrial revenue bonds 2,480,000 2,805,000
Capital lease 29,341 448,544
---------- ---------
Total 2,509,341 3,253,544
Less current portion 351,316 712,328
---------- ---------
Long-term debt $2,158,025 $2,541,216
========== ==========
The industrial revenue bonds, which bear interest at 7.35% per annum
mature serially through 2004 and are collateralized by certain property and
equipment, as well as through a letter of credit.
The capital lease at March 31, 1997, which bears interest at 11%, is
payable monthly over the next two years.
The aggregate maturities of long-term debt as of March 31, 1997 are as
follows:
1998 $ 351,316
1999 328,025
2000 325,000
2001 325,000
2002 325,000
Later Years 855,000
----------
$2,509,341
==========
The Company paid interest of $482,471, $1,352,823, and $1,420,581
during the years ended March 31, 1997, 1996 and 1995, respectively.
8. Commitments and Contingencies
Leases
The Company has noncancelable commitments for rental of office space,
plant and warehouse facilities, transportation equipment and other personal
property under operating leases. Future minimum lease commitments under all
noncancelable operating leases are as follows:
1998 $ 744,206
1999 625,679
2000 578,811
2001 543,685
2002 514,366
Later Years 2,676,236
----------
$5,682,983
==========
29
<PAGE>
Total rent expense for the years ended March 31, 1997, 1996 and 1995
was $1,189,349, $1,229,881 and $1,260,026, respectively.
On June 15, 1997, the Company exercised its right of first refusal to
purchase for $4,300,000 the facility it had been renting at 10888 Metro Court
and a separate long-term financing of the purchase has been arranged with
LaSalle National Bank in the amount of $3,500,000. This transaction was
completed on June 24, 1997.
Contingencies
The Company currently carries product liability coverage of $10,000,000
per occurrence and $10,000,000 in the aggregate on a "claims made" basis. There
is no assurance that the Company's present insurance will cover any potential
claims that may be asserted in the future. In addition, the Company is subject
to legal proceedings and claims which arise in the ordinary course of business.
Employment Agreements
The Company has employment agreements with certain officers and key
employees which extend for one to five years. These agreements provide for base
levels of compensation and, in certain instances, also provide for incentive
bonuses and separation benefits. Also, the agreement with one officer contains
provisions for partial salary continuation under certain conditions contingent
upon noncompete restrictions and providing consulting services to the Company as
specified in the agreement. The Company accrued $152,089 and $142,139 for this
liability in 1997 and 1996, respectively.
Credit Facility
As of March 31, 1997, the Company had a loan agreement expiring in May
1998. The agreement provided for (1) a revolving line of credit for borrowings
up to $17,500,000, subject to certain collateral requirements, (2) a term loan
which was fully amortized as of March 31, 1997, and (3) letters of credit up to
$6,000,000. The aggregate amount of outstanding debt under this agreement cannot
exceed $17,500,000. At March 31, 1997 there was no outstanding debt under this
agreement. Interest charged has been renegotiated to its current level of prime
plus 1/2 percent. Accounts receivable, inventories, equipment, real estate and
intangibles are pledged as collateral on the agreement. Certain covenants
require minimum levels of operating ratios, working capital, capital
expenditures, net worth and restrict payment of dividends. As of March 31, 1997,
the Company had approximately $4,500,000 of open letters of credit under this
agreement that reduced the total available to $13,000,000. The Company's current
credit facility is being replaced by an unsecured revolving line of credit and
letter of credit facility aggregating $22,600,000 with LaSalle National Bank,
with a three-year term and interest charged at the prime rate. Closing of this
transaction occurred as of June 18, 1997.
9. Income Taxes
The provision for income taxes consists of state taxes for 1997 and
alternative minimum tax for 1996. No provision for income taxes was required for
1995.
30
<PAGE>
The reasons for the differences between the provision for income taxes
and the expected federal income taxes at the statutory rate are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed income tax expense
(benefit) at statutory rate $3,164,000 $1,536,211 $(2,062,000)
Change in valuation allowance (3,392,000) (1,596,200) 1,926,100
Alternative minimum tax - 90,000 -
State income taxes, less
federal income tax benefit 383,000 - -
Other 228,000 59,989 135,900
----------- ------------- ----------
Provision for income taxes $ 383,000 $ 90,000 $ 0
=========== ============ ================
</TABLE>
31
<PAGE>
As of March 31, 1997, and 1996, the tax effect of temporary differences
between the tax basis of assets and liabilities and their financial reporting
amount are as follows:
<TABLE>
<CAPTION>
1997 1997 1996 1996
Current Non-Current Current Non-Current
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Fixed asset basis
differences $ - $(1,132,000) $ - $(1,052,400)
Reserve for inventory and
receivables 775,000 - 302,300 -
Capitalized inventory costs 228,000 - 163,600 -
Vacation pay reserve 203,000 - - -
Deferred compensation - 290,000 - 232,300
Reserve for medical
self insurance 47,500 - 34,300 -
Net operating loss
carryforward - - - 3,369,300
Research and development
credit - 958,000 - 1,594,000
Minimum tax credit - 963,000 - 129,000
Other 125,500 - - 187,700
------------ ----------- -------------- -----------
1,379,000 1,079,000 500,200 4,459,900
Valuation allowance (1,379,000) (189,000) (500,200) (4,459,900)
----------- ----------- --------- -----------
Net deferred taxes $ 0 $ 890,000 $ 0 $ 0
================= =========== ============== ============
</TABLE>
The components of deferred taxes are as follows as of March 31, 1997
and 1996:
1997 1996
---- ----
Deferred tax liability $(1,132,000) $(1,052,400)
Deferred tax asset 3,590,000 6,012,500
Valuation allowance (1,568,000) (4,960,100)
---------- -----------
$ 890,000 $ 0
=========== ===========
The valuation allowance decreased by approximately $3,392,100 and
$1,596,200 during 1997 and 1996 respectively.
At March 31, 1997, the Company has the following income tax
carryforwards available:
Amount Expiration Dates
------ ----------------
Regular tax credit carryforwards
(primarily research &
development credits) $958,000 1998-2010
AMT credit carryforwards $963,000 N/A
The Company paid income taxes of $846,000, $90,000 and $0, during the
years ended March 31, 1997, 1996 and 1995 respectively.
32
<PAGE>
10. Employee Benefits
Stock Option Plan
The Company has established the KV Pharmaceutical Company Incentive
Stock Option Plan for key employees and reserved 1,965,000 shares of common
stock for such plan. Under the plan, the Stock Option Committee may grant stock
options to key employees at not less than one hundred percent (100%) of the fair
market value of the Company's Common Stock at the date of grant. The durations
and exercisability of the grants vary over a period of up to ten years from the
date of grant. During 1997 the Company granted options for 391,932 shares, but
had 46,550 shares forfeited. As of March 31, 1997, options with remaining
contractual lives of up to ten years to purchase 828,087 shares at the fair
market value at the grant date were outstanding, 342,323 of which were
exercisable.
The following summary shows the transactions for the fiscal years 1997,
1996, and 1995 under option arrangements:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Average Average
No. of Price Per No. Price per
Shares Share of Shares Share
------ ----- --------- -----
<S> <C> <C> <C> <C>
Balance, March 31, 1994 753,876 5.29 461,731 4.33
Options granted 52,500 6.94
Options becoming exercisable 64,573 5.13
Options exercised (790) 2.65 (790) 2.65
Options canceled (125,870) 7.99 (26,267) 5.71
------------- -------------
Balance, March 31, 1995 679,716 4.92 499,247 4.36
Options granted 239,825 7.29
Options becoming exercisable 86,599 6.75
Options exercised (386,364) 3.97 (386,364) 3.97
Options canceled (24,032) 6.35 (10,773) 4.66
------------- -------------
Balance, March 31, 1996 509,145 6.70 188,709 6.25
Options granted 391,932 12.00
Options becoming exercisable 205,529 10.58
Options exercised (26,440) 3.91 (26,440) 3.91
Options canceled (46,550) 8.44 (25,475) 7.89
------------- -------------
Balance, March 31, 1997 828,087 9.20 342,323 8.91
======= =======
</TABLE>
As discussed in the Summary of Accounting Policies, the Company applies
APB Opinion No. 25 and related interpretations in accounting for this plan.
Accordingly, no compensation cost has been recognized for its incentive stock
option plan.
33
<PAGE>
The weighted-average grant date fair value per share of stock options
granted during the year was $5.23 for A options, $4.02 for B options, and $2.79
for A options, and $1.78 for B options in 1997 and 1996, respectively. The
weighted-average significant assumptions used to determine those values using
the Black-Sholes option pricing model for 1997 and 1996, respectively, were:
Volatility of .6212 and .4972; dividend yield of 0% in both years; risk-free
interest rate of return of 6.6% and 6.0% and expected option lives of 5 or 10
years.
The following table summarizes information about stock options
outstanding at March 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------- ----------------------------------
Range of Exercise Number Weighted Average Weighted Number Weighted
Prices Outstanding Remaining Average Exercisable Average
at 3/31/97 Contractual Life Exercise Price at 3/31/97 Exercise Price
- ---------------------------------------------------------------------------------------- ---------------------------------
<C> <C> <C> <C> <C> <C>
$3.00 to $6.00 103,405 4 years $4.09 86,860 $3.65
$6.00 to $9.00 349,470 6 years $7.30 144,946 $7.26
$9.00 to $12.00 356,712 7 years $12.03 32,023 $10.52
$12.00 to $16.43 18,500 10 years $16.43 78,494 $12.89
------- -------
828,087 342,323
</TABLE>
The fair market value of options granted during the years ended March
31, 1997 and 1996 was $1,754,000 and $467,000, respectively.
The pro-forma effect on earnings for the year ended March 31, 1997 and
1996 of the method consistent with SFAS No. 123 would be to reduce reported net
income by approximately $1.7 million and $.4 million, respectively, to
approximately $7.2 million and $3.7 million.
The pro-forma effect on earnings per share for the years ended March
31, 1997 and 1996 of this method was to reduce net income per share by $.13 per
share and $.03 per share, respectively, to $.57 per share and $.28 per share.
34
<PAGE>
Profit Sharing Plan
The Company has a qualified trustee profit sharing plan (the "Plan")
covering substantially all non-union employees. The Company's annual
contribution to the Plan, as determined by the Board of Directors, is
discretionary and was $50,000 for fiscal 1997. No profit sharing contribution
was made in fiscal years 1996 and 1995. The Plan includes features as described
under Section 401(k) of the Internal Revenue Code. The Company is required to
make contributions to the 401(k) investment funds quarterly in an amount equal
to twenty-five (25%) of the first 4% of the salary amount contributed by each
participant. Contributions to the 401(k) investment funds of approximately
$78,000, $71,000 and $103,000 were made in 1997, 1996 and 1995, respectively.
The Plan was amended as of April 1, 1997, to require the Company to
make contributions to the 401(k) investment funds quarterly in an amount equal
to fifty percent (50%) of the first 7% of the salary contributed by each
participant.
Health and Medical Insurance Plan
The Company contributes to health and medical insurance programs for
its non-union and union employees. For non-union employees, the Company self
insures the first $50,000 of each employee's covered medical claims annually.
The Company has recorded approximately $125,000 and $90,000 of accrued health
insurance expense reserves as of March 31, 1997 and 1996, respectively, for
incurred but not reported claims. For union employees, the Company participates
in a fully funded insurance plan sponsored by the union. Expenses related to
both plans charged to operations was approximately $1,200,840, $1,058,000, and
$1,375,000 in fiscal 1997, 1996 and 1995, respectively.
11. Related Party Transactions
A director of the Company is associated with a law firm that rendered
various legal services for the Company. The Company paid the firm, in the
aggregate, approximately $257,216, $243,512 and $122,000 during the years ended
March 31, 1997, 1996 and 1995, respectively.
In addition, the Company currently leases certain real property from an
affiliated partnership of another director of the Company. Lease payments made
for this property during the years ended March 31, 1997, 1996 and 1995 totaled
approximately $231,885, $222,910 and $199,000, respectively.
12. Equity Transactions
As of March 31, 1997, the Company has outstanding 241,000 shares of 7%
Cumulative Convertible preferred stock (par value $.01 per share) at a stated
value of $25 per share. The preferred stock is non-voting with dividends payable
quarterly. The preferred stock is redeemable at its stated value. Each share of
preferred stock is convertible into Class A Common Stock at a conversion price
of $10 per share. The preferred stock has a liquidation preference of $25 per
share plus all accrued but unpaid dividends prior to any liquidation
distributions to holders of Class A or Class B Common Stock. Undeclared and
unaccrued cumulative preferred dividends at March 31, 1997 and 1996 were
$2,203,644 and $1,887,331, respectively.
35
<PAGE>
Holders of Class A Common Stock are entitled to receive dividends per
share equal to 120% of the dividends per share paid on the Class B Common Stock
and have one-twentieth vote per share. No dividends may be paid on Class A or
Class B Common Stock unless all dividends on the convertible preferred stock
have been declared and paid.
Under the terms of the Company's current loan and replacement loan
agreements (See Note 8), the Company has limitations on paying dividends, except
in stock, on its Class A and B Common Stock. Payment of dividends may also be
restricted under Delaware Corporation law.
In connection with an agreement entered into in January, 1996 (See Note
14), the Company received $5,000,000 for the purchase of Class A Common Stock
options exercisable through September 29, 1998. Options valued at $1,150,000
expired at March 31, 1997. Of the funds received for the common stock purchase
options, $1,250,000 was allocated to an option to purchase shares of Class A
Common Stock at a minimum price of $40 per share, exercisable for a 30 day
period ending September 29, 1997. An additional $1,300,000 was allocated to an
option to purchase Class A Common Stock at a minimum purchase price of $45 per
share, exercisable for a 30 day period ending March 30, 1998. The final
$1,300,000 was allocated to an option to purchase Class A Common Stock at a
minimum price of $50 per share, exercisable for a 30 day period ending September
29, 1998. The actual exercise price and number of shares of Class A Common Stock
to be purchased are dependent on the fair market value of the stock for a ten
day period prior to exercise.
In January 1997, the Company entered into an agreement under which it
agreed to sell 200,000 shares of Class A Common Stock (par value $.01 per
share). The sale was completed in March of 1997, with proceeds aggregating
$3,500,000 (See note 14).
13. Litigation
In April, 1995, a plea agreement was entered into with the U.S.
Department of Justice. Under the agreement, the Company agreed to plead guilty
to certain misdemeanor violations and to pay a fine of $500,000 and cost
reimbursements of $100,000. Payments are to be made in eight semi-annual,
interest free installments of $75,000 beginning in July 1995. The Company was
also placed on probation by the FDA during the payment period. The full amount
of all costs associated with the plea agreement was also recorded in the
Company's statement of operations for the fiscal year ended March 31, 1995.
From time to time, the Company becomes involved in various legal
matters which it considers to be in the ordinary course of business. While the
Company is not presently able to determine the potential liability, if any,
related to such matters, the Company believes none of the matters, individually
or in the aggregate, will have a material adverse effect on its financial
position.
14. Agreements
In January, 1996 the Company concluded an agreement with a major
pharmaceutical marketer whereby the Company received $5,000,000 and certain
other considerations, plus $5,000,000 for the sale of certain Class A common
stock options exercisable in various periods through September, 1998 (See Note
12). Under the transaction, which was entered into between the parties partially
in consideration of and replacing certain other products, the two companies
entered into an agreement for future royalties and product opportunities. The
Company gave the marketer the right to explore the Company's drug delivery
technologies with the possibility of entering into future agreements for
individual products. The transaction (other than the sale of the options) was
36
<PAGE>
recorded as a reimbursement to the Company for, and thus the removal from its
balance sheet, of approximately $2,500,000 of Deferred Improved Drug
Entities(TM), receivables and inventory of approximately $400,000, and patents
and trademarks relating to the Company's technologies of approximately $200,000.
As a result, approximately $1,700,000 was allocated to licensing revenues and
$200,000 as a reimbursement of expenses.
In January, 1997, the Company concluded a broad-based agreement with
Roche Holding, Ltd. Of Basel, Switzerland (Roche). Included in the terms of the
agreement, Roche purchased 200,000 shares of Common Class A Stock for
$3,500,000. The agreement also provides for the marketing by Roche, or its
licensee, of a prescription, one dose cure vaginal antifungal product. The
product combines Roche's proprietary butoconazole nitrate with KV's proprietary
SITE RELEASE(R) drug delivery technology. The product was originally developed
by KV for Syntex (U.S.A.), Inc., which was acquired by a Roche affiliate in
1995. The product received FDA approval in February, 1997. The agreement also
gives KV the right to market the product in North America and the exclusive
right to market or license the prescription product in the rest of the world.
The agreement included an initial cash payment of $3 million made in
January 1997. Two additional payments of $3 million annually will be received
through January 1, 1999, unless regulatory approval of a potential follow-on
product in the same therapeutic area is received prior to these dates. The
initial $3,000,000 payment has been included in revenue, while the future
payments will be similarly treated, when received. Upon approval, KV will
receive royalties on the sales of the follow-on product. Under the agreement, KV
also has the exclusive right to market or license the follow-on product outside
of North America.
Also, as part of the agreement, three additional products will be
developed for Roche using KV's proprietary drug delivery technologies. KV would
receive manufacturing revenues and royalties at the time the products are
marketed under separate agreements for each product.
As part of a further collaboration under the agreement, KV's
wholly-owned subsidiary, ETHEX Corporation, will market two of Roche's brand
name products generically.
15. Industry Segments
The Company operates in one industry segment, "Pharmaceutical
Development, Manufacturing and Marketing."
37
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The information contained in Registrant's Report on [Form 8-K-A
(Amendment No. 1) filed June 18, 1996] under Item 4, entitled "Changes in
Registrant's Certified Accountant," is incorporated herein by this reference.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information contained under the caption "INFORMATION CONCERNING
NOMINEE AND DIRECTORS CONTINUING IN OFFICE" in the Company's definitive proxy
statement to be filed pursuant to Regulation 14(a) for the Company's 1997 annual
meeting of shareholders, which involves the election of directors, is
incorporated herein by this reference. Also see Item 4(a) of Part I hereof.
Item 11. Executive Compensation.
The information contained under the captions "EXECUTIVE COMPENSATION"
and "INFORMATION AS TO STOCK OPTIONS" in the Company's definitive proxy
statement to be filed pursuant to Regulation 14(a) for the Company's 1997 annual
meeting of shareholders, which involves the election of directors, is
incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information contained under the caption "SECURITY OWNERSHIP OF
PRINCIPAL HOLDERS AND MANAGEMENT" in the Company's definitive proxy statement to
be filed pursuant to Regulation 14(a) for the Company's 1997 annual meeting of
shareholders, which involves the election of directors, is incorporated herein
by this reference.
Item 13. Certain Relationships and Related Transactions
The information contained under the caption "TRANSACTIONS WITH ISSUER"
in the Company's definitive proxy statement to be filed pursuant to Regulation
14(a) for the Company's 1997 annual meeting of shareholders, which involves the
election of directors, is incorporated herein by this reference.
38
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements: Page
The following consolidated financial statements of the
Company are included in Part II, Item 8:
Report of Independent Certified Public Accountants 20
Consolidated Balance Sheets as of
March 31, 1997 and 1996 21
Consolidated Statements of Operations
for the Years Ended March 31, 1997, 1996 and 1995 22
Consolidated Statements of Shareholders'
Equity for the Years Ended March 31,
1997, 1996 and 1995 23
Consolidated Statements of Cash Flows
for the Years Ended March 31, 1997, 1996 and 1995 24
Notes to Financial Statements 25-38
39
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of KV Pharmaceutical Company:
The audits referred to in our report dated June 18, 1997 relating to the
consolidated financial statements of KV Pharmaceutical Company which is
contained in Item 8 of this Form 10-K included the audit of the financial
statement schedule listed in the accompanying index. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based upon our
audits.
In our opinion such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO SEIDMAN, LLP
St. Louis, Missouri
June 18, 1997
40
<PAGE>
2. Financial Statement Schedules:
<TABLE>
<CAPTION>
Schedule II
Valuation and Qualifying Accounts
Balance at Additions charged Amounts Balance
beginning to costs and charged to at end
of year expenses reserves of year
------- -------- -------- -------
<S> <C> <C> <C> <C>
Year Ended March 31, 1995:
Allowance for doubtful accounts $ 83,633 $ 135,000 $ 49,446 $ 169,187
Inventory obsolescence 710,089 2,735,154 1,559,672 1,885,571
------- --------- --------- ---------
793,722 2,870,154 1,609,118 2,054,758
======= ========= ========= =========
Year Ended March 31, 1996:
Allowance for doubtful accounts 169,187 736,757 335,446 570,498
Inventory obsolescence 1,885,571 1,399,966 3,060,537 225,000
--------- --------- --------- --------
2,054,758 2,136,723 3,395,983 795,498
========= ========= ========= =======
Year Ended March 31, 1997:
Allowance for doubtful accounts 570,498 440,911 882,355 129,054
Inventory obsolescence 225,000 1,180,516 1,109,194 296,322
--------- --------- --------- -------
795,498 1,621,427 1,991,549 425,376
======== ========= ========= =======
</TABLE>
Financial Statements of KV Pharmaceutical Company (separately) are omitted
because KV is primarily an operating company and its subsidiaries included in
the financial statements are wholly-owned and are not materially indebted to any
person other than through the ordinary course of business.
3. Exhibits:
See Exhibit Index on pages 43 through 49 of this Report. Management contracts
and compensatory plans are designated on the Exhibit Index.
(b) Reports on Form 8-K:
One report on Form 8-K was filed on March 20, 1997 disclosing the
sale of 200,000 Class A shares.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
KV PHARMACEUTICAL COMPANY
Date: June 27, 1997 By /s/ Marc S. Hermelin
---------------------
Vice Chairman of the Board
(Principal Executive Officer)
Date: June 27, 1997 By /s/ Gerald R. Mitchell
-----------------------
Vice President, Finance
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on the dates indicated by the following persons on behalf
of the Company and in their capacities as members of the Board of Directors of
the Company:
Date: June 27, 1997 By /s/ Marc S. Hermelin
---------------------
Marc S. Hermelin
Date: June 27, 1997 By /s/ Victor M. Hermelin
-----------------------
Victor M. Hermelin
/s/ Garnet E. Peck, Ph.D.
-------------------------
Garnet E. Peck, Ph.D.
Date: June 27, 1997 By /s/ Alan G. Johnson
--------------------
Alan G. Johnson
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
----------- ----------- ----
3(a) The Company's Certificate of Incorporation, which
was filed as Exhibit 3(a) to the Company's Annual
Report on Form 10-K for the year ended March 31,
1981, is incorporated herein by this reference.
3(b) Certificate of Amendment to Certificate of
Incorporation of the Company, effective March 7,
1983, which was filed as Exhibit 3(c) to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1983, is incorporated herein by
this reference.
3(c) Certificate of Amendment to Certificate of
Incorporation of the Company, effective June 9,
1987, which was filed as Exhibit 3(d) to the
Company's Annual Report on From 10-K for the year
ended March 31, 1987, is incorporated herein by
this reference.
3(d) Certificate of Amendment to Certificate of
Incorporation of the Company, effective September
24, 1987, which was filed as Exhibit 3(f) to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1988, is incorporated herein by
this reference.
3(e) Certificate of Amendment to Certificate of
Incorporation of the Company, which was filed as
Exhibit 3(e) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1996, is
incorporated herein by this reference.
3(f) Certificate of Amendment to Certificate of
Incorporation of the Company, which was filed as
Exhibit 3(f) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1996, is
incorporated herein by this reference.
3(g) Bylaws of the Company, as amended through
November 18, 1982, which was filed as Exhibit
3(e) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1993, is
incorporated hereby by this reference.
3(h) Amendment to Bylaws of the Company, which was
filed as Exhibit 3(h) to the Company's Annual
Report on Form 10-K for the year ended March 31,
1996, is incorporated herein by this reference.
<PAGE>
4(a) Certificate of Designation of Rights and
Preferences of 7% Cumulative Convertible
preferred stock of the Company, effective June 9,
1987, and related Certificate of Correction,
dated June 17, 1987, which was filed as Exhibit
4(f) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1987, is
incorporated herein by this reference.
4(b) Loan Agreement dated as of November 1, 1989, with
the Industrial Development Authority of the
County of St. Louis, Missouri, regarding private
activity refunding and revenue bonds issued by
such Authority, including form of Promissory Note
executed in connection therewith, which was filed
as Exhibit 4(b) to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31,
1989, is incorporated herein by this reference.
4(c) Loan and Security Agreement, dated as of April
27, 1995, between the Company and its
subsidiaries and Foothill Capital Corporation,
which was filed as Exhibit 4(n) to the Company's
Annual Report on Form 10-K for the year ended
March 31, 1995, is incorporated herein by this
reference.
4(d) Revolving Loan Note, dated as of April 27, 1995,
by the Company and its subsidiaries in favor of
Foothill Capital Corporation, which was filed as
Exhibit 4(c) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1995, is
incorporated herein by this reference.
4(e) Term Note, dated as of April 27, 1995, by the
Company and its subsidiaries in favor of Foothill
Capital Corporation, which was filed as Exhibit
4(d) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1995, is
incorporated herein by this reference.
4(f) Form of Capital Equipment Note to be executed by
the Company and its subsidiaries in favor of
Foothill Capital Corporation, which was filed as
Exhibit 4(e) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1995, is
incorporated herein by this reference.
4(g) Deed of Trust and Security Agreement, dated as of
April 27, 1995, in favor of Foothill Capital
Corporation, which was filed as Exhibit 4(f) to
the Company's Annual Report on Form 10-K for the
year ended March 31, 1995, is incorporated herein
by this reference.
<PAGE>
4(h) First Amendment to Loan and Security Agreement,
dated as of April 27, 1995, between the Company
and its subsidiaries and Foothill Capital
Corporation, dated as of March 29, 1996, which
was filed as Exhibit 4(s) to the Company's Annual
Report on Form 10-K for the year ended March 31,
1996, is incorporated herein by this reference.
4(i) Loan Agreement dated June 18, 1997 between the
Company and its subsidiaries and LaSalle National
Bank, filed herewith.
4(j) Revolving Note, dated June 18, 1997, by the
Company and its subsidiaries in favor of LaSalle
National Bank, filed herewith.
4(k) Term Note, dated June 24, 1997, by the Company
and its subsidiaries in favor of LaSalle National
Bank, filed herewith.
10(a)* Stock Option Agreement between the Company and
Marc S. Hermelin, Vice Chairman and Chief
Executive Officer, dated February 18, 1986, is
incorporated herein by this reference.
10(b)* First Amendment to and Restatement of the KV
Pharmaceutical 1981 Employee Incentive Stock
Option Plan, dated March 9, 1987 (the "Restated
1981 Option Plan"), which as filed as Exhibit
10(t) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1988, is
incorporated herein by this reference.
10(c)* Second Amendment to the Restated 1981 Option
Plan, dated June 12, 1987, which was filed as
Exhibit 10(u) to the Company's Annual Report on
Form 10- K for the year ended March 31, 1988, is
incorporated herein by this reference.
- --------
* Management contract or compensation plan.
<PAGE>
10(d)* Revised Form of Stock Option Agreement, effective
June 12, 1987, for the Restated 1981 Option Plan,
which was filed as Exhibit 10(v) to the Company's
Annual Report on From 10-K for the year ended
March 31, 1988, is incorporated herein by this
reference.
10(e)* Consulting Agreement between the Company and
Victor M. Hermelin, Chairman of the Board, dated
October 30, 1978, as amended October 30, 1982,
and Employment Agreement dated February 20, 1974,
referred to therein (which was filed as Exhibit
10(m) to the Company's Annual Report on From 10-K
for the year ended March 31, 1983) and subsequent
Amendments dated as of August 12, 1986, which was
filed as Exhibit 10(f) to the Company's Annual
Report on Form 10-K for the year ended March 31,
1987, and dated as of September 15, 1987 (which
was filed as Exhibit 10(s) to the Company's
Annual Report on Form 10-K for the year ended
March 31, 1988), and dated October 25, 1988
(which was filed as Exhibit 10(n) to the
Company's Annual Report on Form 10- K for the
year ended March 31, 1989), and dated October 30,
1989 (which was filed as Exhibit 10(n) to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1990), and dated October 30, 1990
(which was filed as Exhibit 10(n) to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1991), and dated as of October
30, 1991 (which was filed as Exhibit 10(i) to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1992), are incorporated herein by
this reference.
10(f)* Restated and Amended Employment Agreement between
the Company and Gerald R. Mitchell, Vice
President, Finance, dated as of March 31, 1994,
is incorporated herein by this reference.
10(g)* Employment Agreement between the Company and
Raymond F. Chiostri, Corporate Vice-President and
President-Pharmaceutical Division, which was
filed as Exhibit 10(l) to the Company's Annual
Report on Form 10-K for the year ended March 31,
1992, is incorporated herein by this reference.
- --------
* Management contract or compensation plan.
<PAGE>
10(h) Lease of the Company's facility at 2503 South
Hanley Road, St. Louis, Missouri, and amendment
thereto, between the Company as Lessee and Marc
S. Hermelin as Lessor, which was filed as Exhibit
10(n) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1983, is
incorporated herein by this reference.
10(i) Amendment to the Lease for the facility located
at 2503 South Hanley Road, St. Louis, Missouri,
between the Company as Lessee and Marc S.
Hermelin as Lessor, which was filed as Exhibit
10(p) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1992, is
incorporated herein by this reference.
10(j) Amendment to Lease Agreement, dated as of
September 30, 1985, between the Industrial
Development Authority of the County of St. Louis,
Missouri, as Lessor and KV Pharmaceutical Company
as Lessee, regarding lease of facility located at
2303 Schuetz Road, St. Louis County, Missouri,
which was filed as Exhibit 10(q) to the Company's
Report on Form 10-Q for the quarter ended
December 31, 1985, is incorporated herein by this
reference.
10(k)* KV Pharmaceutical Company Fourth Restated Profit
Sharing Plan and Trust Agreement dated September
18, 1990, which was filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-8 No.
33-36400, is incorporated herein by this
reference.
10(l)* First Amendment to the KV Pharmaceutical Company
Fourth Restated Profit Sharing Plan and Trust
dated September 18, 1990, is incorporated herein
by this reference.
10(m)* KV Pharmaceutical Company 1991 Incentive Stock
Option Plan, adopted as of October 7, 1991, which
was filed as Exhibit 4 to the Company's Form S-8
Registration Statement No. 33-44927, filed
January 6, 1992, is incorporated herein by this
reference.
10(n) Consent Decree and Civil Actions Nos. 4:93CV00918
and 4:93CV00919 filed June 14, 1993, in
connection with Complaint of Forfeiture on behalf
of FDA, which was filed as Exhibit 10(s) to the
Company's Annual Report on Form 10- K for the
year ended March 31, 1993, is incorporated herein
by this reference.
- --------
* Management contract or compensation plan.
<PAGE>
10(o) Modification of Consent Decree of Condemnation
and Permanent Injunction filed December 13, 1993,
which was filed as Exhibit 10(r) to the Company's
Annual Report on From 10-K for the year ended
March 31, 1994, is incorporated herein by this
reference.
10(p) Second Modification of Consent Decree of
Condemnation and Permanent Injunction filed April
6, 1994, which was filed as Exhibit 10(s) to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1994, is incorporated herein by
this reference.
10(q)* Employment Agreement between the Company and Marc
S. Hermelin, Vice- Chairman, dated November 15,
1993, which was filed as Exhibit 10(u) to the
Company's Annual Report on Form 10-K for the year
ended March 31, 1994, is incorporated herein by
this reference.
10(r)* Amendment to Consulting Agreement between the
Company and Victor M. Hermelin, Chairman of the
Board, dated October 30, 1978, which was filed as
Exhibit 10(v) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1994, is
incorporated herein by this reference.
10(s)* Stock Option Agreement dated June 1, 1995,
granting stock option to Marc S. Hermelin, which
was filed as Exhibit 10(w) to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996, is incorporated herein by
this reference.
10(t)* Second Amendment dated as of June 1, 1995, to
Employment Agreement between the Company and Marc
S. Hermelin, which was filed as Exhibit 10(x) to
the Company's quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, is incorporated
herein by this reference.
- --------
* Management contract or compensation plan.
<PAGE>
10(u)* Amendment to and Restatement of the KV
Pharmaceutical Company's 1991 Incentive Stock
Optation Plan dated as of November 1, 1995, which
was filed as Exhibit 10(y) to the Company's
Annual Report on Form 10-K for the year ended
March 31, 1996, is incorporated herein by this
reference.
10(v)* Stock Option Agreement dated as of January 22,
1996, granting stock options to MAC & Co., which
was filed as Exhibit 10(z) to the Company's
Annual Report on Form 10-K for the year ended
March 31, 1996, is incorporated herein by this
reference.
10(w)* Third Amendment dated as of November 22, 1995, to
Employment Agreement between the Company and Marc
S. Hermelin, which was filed as Exhibit 10(aa) to
the Company's Annual Report on Form 10-K for the
year ended March 31, 1996, is incorporated herein
by this reference.
10(x)* Stock Option Agreement dated as of November 22,
1995, granting a stock option to Victor M.
Hermelin, which was filed as Exhibit 10(bb) to
the Company's Annual Report on Form 10-K for the
year ended March 31, 1996.
10(y)* Fourth Amendment to and Restatement, dated as of
January 2, 1997, of the KV Pharmaceutical Company
1991 Incentive Stock Option Plan, filed herewith.
10(z)* Agreement between the Company Marc S. Hermelin,
Vice Chairman, dated December 16, 1996, with
supplemental letter attached, filed herewith.
10(aa) Amendment to Lease dated February 17, 1997, for
the facility located at 2503 South Hanley Road,
St. Louis, Missouri between the Company as Lessee
and Marc S. Hermelin as Lessor, filed herewith.
11 Computation of per share earnings, filed
herewith.
21 List of Subsidiaries, filed herewith.
23 Consent of BDO Seidman, L.L.P., filed herewith.
27 Financial Data Schedule, filed herewith.
- --------
* Management contract or compensation plan.
LOAN AGREEMENT
Dated as of June 18, 1997
among
K-V PHARMACEUTICAL COMPANY,
PARTICLE DYNAMICS, INC.
and ETHEX CORPORATION
as Borrowers,
and
LASALLE NATIONAL BANK
as Bank
<PAGE>
TABLE OF CONTENTS
This Table of Contents is not part of the Agreement to which it is attached but
is inserted for convenience only.
1. DEFINITIONS AND TERMS......................................................2
1.1 Certain Definitions......................................2
1.2 Certain UCC and Accounting Terms........................12
2. LOANS: BANK'S COMMITMENTS AND BORROWING PROCEDURES.......................13
2.1 Revolving Credit Commitment.............................13
2.2 Term Loan Commitment....................................13
2.3 Borrowing Procedures under the Revolving Credit
Commitment..............................................13
2.4 Letters of Credit.......................................14
2.5 Borrowing Procedure Under the Term Loan Commitment......14
3. LOANS: NOTES EVIDENCING LOANS............................................14
3.1 Revolving Note..........................................14
3.2 Term Note...............................................15
3.3 Recordation.............................................15
4. LOANS: AMOUNTS; INTEREST; BALANCES.......................................15
4.1 Applicable Borrowing Amounts; Interest Rates; Default
Rate....................................................15
4.2 Computation of Interest.................................16
4.3 Conversion and Reborrowing of Loans.....................16
4.4 Change of Law...........................................17
4.5 Unavailability of Deposits or Inability to Ascertain
the LIBOR Rate or Adjusted LIBOR Rate...................17
4.6 Yield Protection, Etc...................................18
4.7 Funding Indemnity.......................................19
4.8 Discretion of Bank as to Manner of Funding..............19
4.9 Interest Laws...........................................20
4.10 Letter of Credit Fees...................................20
5. LOANS: GENERAL TERMS.....................................................21
5.1 Payments to Bank........................................21
5.2 Automatic Debit.........................................21
5.3 Application of Payment..................................21
5.4 Reserved................................................21
5.5 Conditions Precedent Events.............................21
5.6 Offset..................................................22
5.7 Credit Termination Date; Continuance of Obligations,
Etc.....................................................22
5.8 Loan Evidence...........................................22
i
<PAGE>
5.9 Over-Advances...........................................22
5.10 Unused Portion Fee......................................22
5.11 Prepayment..............................................23
5.12 Transaction Fee.........................................24
6. LOANS: CONDITIONS TO LENDING.............................................24
6.1 Initial Loan Conditions Precedent.......................24
7. COLLATERAL FOR TERM LOAN: GENERAL TERMS..................................27
7.1 Grant of Security Interest..............................27
7.2 Perfection of Security Interests........................28
7.3 Inspection of Collateral................................28
7.4 First Lien and Location of Collateral...................28
7.5 Constructive Trust......................................29
7.6 Application of Proceeds of Collateral...................29
7.7 Third Party Collateral Claims...........................29
7.8 Additional Collateral...................................29
7.9 No Custom or Waiver.....................................29
8. REPRESENTATIONS AND WARRANTIES; COVENANTS;
INDEMNIFICATION; CONTINUING OBLIGATION....................................30
8.1 Representations and Warranties of Borrower..............30
8.2 Affirmative Covenants...................................35
8.3 Negative Covenants......................................42
8.4 Maintenance of Accounts.................................43
9. DEFAULT...................................................................44
9.1 Events of Default.......................................44
9.2 Cumulative Remedies.....................................45
9.3 Acceleration and Termination of Loans...................45
9.4 Rights of Creditor......................................45
9.5 Injunctive Relief.......................................45
10. GENERAL..................................................................45
10.1 Payment Application Date................................45
10.2 Statement of Account....................................45
10.3 Manner of Application; Waiver of Setoff Prohibition.....46
10.4 Survival of Representations and Warranties..............46
10.5 Integration; Amendment; Assignment; Participation.......46
10.6 No Waiver...............................................47
10.7 Severability............................................47
10.8 Successors and Assigns..................................47
10.9 Conflict with Other Agreements..........................47
10.10 No Impairment by Termination............................47
ii
<PAGE>
10.11 Waivers.................................................48
10.12 Costs, Fees and Expenses Related to Agreement and
Other Agreements........................................48
10.13 Environmental Indemnity.................................48
10.14 Release.................................................48
10.15 Governing Law...........................................49
10.16 Notices.................................................49
10.17 Forum; Bank; Venue; Jury Trial Waiver...................49
10.18 Other Costs, Fees and Expenses..........................49
10.19 Revival.................................................50
10.20 Acknowledgments.........................................50
10.21 Section Headings........................................50
10.22 Counterparts............................................50
10.23 Effectiveness...........................................50
10.24 Joint and Several Liability.............................50
iii
<PAGE>
LOAN AGREEMENT
THIS LOAN AGREEMENT (this "Agreement") is made as of the 18th day of
June, 1997, by and among K-V PHARMACEUTICAL COMPANY, a Delaware corporation
("K-V"), PARTICLE DYNAMICS, INC., a New York corporation ("PDI"), ETHEX
CORPORATION, a Missouri corporation ("ETHEX"), jointly and severally (K-V, PDI
and ETHEX are sometimes referred to herein collectively as the "Borrowers" and
individually as "Borrower"), and LASALLE NATIONAL BANK, a national banking
association ("Bank").
W I T N E S E T H:
WHEREAS, K-V owns 100% of the issued and outstanding capital stock of
PDI and 100% of the issued and outstanding capital stock of ETHEX;
WHEREAS, Borrowers desire to borrow funds and obtain other financial
accommodations from Bank for (i) working capital and (ii) to purchase two (2)
real estate parcels located at 10876 Metro Court and 10850-62 Metro Court,
Maryland Heights, Missouri, pursuant to which K-V will be jointly and severally
liable for the total amount of all borrowings hereunder and each of PDI and
ETHEX shall be liable only to the extent of their applicable use of the
borrowings hereunder;
WHEREAS, K-V directly markets and distributes generic pharmaceutical
products through Ethex, its wholly-owned subsidiary;
WHEREAS, K-V develops and markets specialty pharmaceutical raw
materials, including directly compressible and microencapsulated ingredients
used in pharmaceutical processing through its other wholly-owned subsidiary,
PDI;
WHEREAS, K-V manufactures such pharmaceutical products for itself, for
ETHEX and for PDI, and ETHEX and PDI purchase certain products from K-V;
WHEREAS, K-V, PDI and Ethex each derive and shall all derive a material
benefit from their respective relationships with each other and from the funds
to be borrowed and the other financial accommodations from Bank to Borrowers;
WHEREAS, neither K-V, PDI nor Ethex could borrow the necessary funds
from the Bank on as favorable terms as herein set forth without the benefits of
the co- obligations of the other entities; and
WHEREAS, pursuant to Borrowers' request, Bank is willing to lend monies
to Borrowers under the terms and conditions set forth herein;
1
<PAGE>
NOW, THEREFORE, in consideration of the premises, the mutual covenants
and agreements set forth herein, Borrowers agree to borrow from Bank, and Bank
agrees to lend to Borrowers, subject to and upon the following terms and
conditions:
1. DEFINITIONS AND TERMS
1.1 Certain Definitions. The following words, terms and/or phrases
shall have the meanings set forth thereafter and such meanings shall be
applicable to the singular and plural form thereof, giving effect to the
numerical difference.
"Adjusted LIBOR Rate" shall mean a rate per annum
determined pursuant to the following formula:
Adjusted LIBOR Rate = LIBOR
100% - Reserve Percentage
"Affiliate" means any Person (a) that directly or
indirectly, through one or more intermediaries, controls or is
controlled by, or is under common control with any Borrower or one or
more Affiliates, (b) that directly or beneficially owns or holds 10% or
more of any equity interest in any Borrower or one or more Affiliates
or (c) 10% or more of whose voting stock (or in the case of a Person
which is not a corporation, 10% or more of any equity interest) is
owned directly or beneficially or held by any Borrower or one or more
Affiliates. For purposes of this definition and this Agreement, the
term "control" shall mean, directly or indirectly, the power to direct
or cause the direction of the management or policies of a Person,
whether through ownership interest or otherwise, including without
limitation the power to elect or appoint, directly or indirectly, a
majority of the members of its governing board or body; provided,
however, the term "Affiliate" shall not include ETHEX or PDI for
purposes of this Agreement.
"Applicable Lending Office" means the "Lending
Office" of Bank (or an Affiliate thereof) designated on the signature
pages hereof or such other office of Bank (or an Affiliate thereof) as
Bank may from time to time specify to Borrowers as the office by which
its Loans are to be made and maintained.
"Assignment of Rents" means those certain Assignments
of Rents and Leases to be delivered subsequent to the date hereof
between K-V and Bank for each of the Mortgaged Properties, as the same
may be amended, restated and modified from time to time.
"Authorized Officer" means Victor M. Hermelin,
Chairman of the Board of K-V, Marc S. Hermelin, Vice Chairman and CEO
2
<PAGE>
of K-V, Gerald R. Mitchell, Vice President, Finance and CFO of K-V and
Richard H. Chibnall, Corporate Controller of K-V.
"Base Rate" means the rate of interest (expressed as
a percentage per annum) most recently announced or published publicly
from time to time by Bank as its prime lending rate of interest, which
is not necessarily the lowest or most favorable rate of interest
charged by Bank on commercial loans at any one time. The rate of
interest shall change automatically and immediately as and when the
Base Rate shall change, without notice to Borrower, and any notice to
which it may be entitled is hereby waived, and any such change in the
Bank's Base Rate shall not affect any of the terms and conditions of
this Agreement, all of which shall remain in full force and effect.
"Base Rate Loan" shall mean a Loan bearing interest
as specified in Paragraph 4.1(a).
"Borrowers' Liabilities" means all obligations and
liabilities of each Borrower in the aggregate to Bank (including,
without limitation, all debts, claims and indebtedness) whether
primary, secondary, direct, contingent, fixed or otherwise, heretofore,
now and/or from time to time hereafter owing, due or payable, however
evidenced, created, incurred, acquired or owing and however arising,
whether under this Agreement or the Other Agreements, or by oral
agreement or operation of law or otherwise.
"Business Day" means (i) for all purposes other than
as covered by clause (ii) below, any day on which commercial banking
institutions are open for the transaction of commercial banking
business in Chicago, Illinois other than a Saturday or Sunday, and (ii)
with respect to all notices and determinations in connection with, and
payments of principal and interest on, a LIBOR Loan, any day which is a
Business Day described in clause (i) and which is also a day for
trading by and between banks in U.S. dollar deposits in the interbank
eurodollar market.
"Capital Expenditures" means the cost of acquiring
any fixed assets, or any improvements, replacements, substitutions,
accessions or additions thereto or therefor which have a useful life of
more than one year, including without limitation, the cost of direct or
indirect acquisitions of such assets by way of purchase, capital lease
or otherwise.
"Charges" means all national, federal, state, county,
city, municipal and/or other governmental (or any instrumentality,
division, agency, body or department thereof, including, without
limitation, the PBGC) taxes, levies, assessments, charges, liens,
3
<PAGE>
claims or encumbrances upon and/or relating to Borrowers' Liabilities,
Borrowers' businesses, Borrowers' ownership and/or use of Borrowers'
assets, income and/or gross receipts.
"Closing Date" means June 18, 1997.
"Code" means the Internal Revenue Code of 1986, as
amended from time to time and the regulations promulgated and the
rulings issued thereunder.
"Collateral" shall have the meaning assigned to such
term in Paragraph 7.1 hereof.
"Conversion Date" means the Business Day on which a
Base Rate Loan is converted to a LIBOR Loan.
"Debt" means all of a Person's liabilities,
obligations and indebtedness to any Person of any and every kind and
nature, whether primary, secondary, direct, indirect, absolute,
contingent, fixed or otherwise, heretofore, now and/or from time to
time hereafter owing, due or payable, however evidenced, created,
incurred, acquired or owing and however arising, whether under written
or oral agreement, by operation of law or otherwise. Without in any way
limiting the generality of the foregoing, Debt specifically includes
(i) Funded Debt and (ii) liabilities in respect of unfunded vested
benefits under Plans and Multiemployer Plans covered by Title IV of
ERISA.
"Default Rate" shall have the meaning assigned to
such term in Paragraph 4.1(d) hereof.
"Early Termination Date" means the date, pursuant to
Paragraph 9.3, upon which, whether by notice or by right hereunder, the
Banks' obligation to extend credit hereunder is terminated.
"EBITDA" means, with respect to any fiscal period of
Borrowers, Borrowers' aggregate (a) net income for such period, plus
(b) the aggregate amounts deducted in determining such net income in
respect of (i) Interest Expense, (ii) income taxes, (iii) depreciation
and (iv) amortization minus (c) extraordinary gains, each determined on
a consolidated basis and in accordance with GAAP consistently applied.
"Environmental Claim" means any notice of violation,
claim, demand, abatement order or other order or direction (conditional
or otherwise) by any Governmental Authority for any damage, including,
without limitation, personal injury (including sickness, disease or
death), tangible or intangible property damage, contribution,
4
<PAGE>
indemnity, indirect or consequential damages, damage to the
environment, nuisance, pollution, release of any Hazardous Material to
the environment, contamination or other adverse effects on the
environment, or for fines, penalties or restrictions, resulting from or
based upon (i) the occurrence of a Release by any Borrower (whether
sudden or non-sudden or accidental or non-accidental) of, or exposure
to, any Hazardous Material, in, into or onto the environment at, in,
by, from, onto or related to any Facility, (ii) the generation, use,
handling, transportation, storage, treatment or disposal of Hazardous
Materials by any Borrower in connection with the operation of any
Facility, or (iii) the violation, or alleged violation, of any
Environmental Laws or any Governmental Authorizations by any Borrower
relating to environmental matters in connection with the Facilities.
"Environmental Indemnity Agreement" means that
certain Environmental Indemnity Agreement between K-V and Bank to be
delivered subsequent to the date hereof, as the same may be amended,
restated and modified from time to time.
"Environmental Laws" means all applicable statutes,
ordinances, orders, rules, regulations, or decrees and the like
relating to (i) fines, injunctions, penalties, damages, contribution,
cost recovery compensation, losses or injuries resulting from the
Release or threatened Release of Hazardous Materials, (ii) the
generation, use, handling, transportation, storage, treatment or
disposal of Hazardous Materials or (iii) occupational safety and
health, industrial hygiene, land use or the protection of human, plant
or animal health or welfare related to Hazardous Materials, in any
manner applicable to any Borrower or the Facilities, including, without
limitation, the Comprehensive Environmental Response, Compensation, and
Liability Act (42 U.S.C. ss.9601 et seq.), the Hazardous Materials
Transportation Act (49 U.S.C. ss.1801 et seq.), the Resource
Conservation and Recovery Act (42 U.S.C. ss.6901 et seq.), the Federal
Water Pollution Control Act (33 U.S.C. ss.1251 et seq.), the Clean Air
Act (42 U.S.C. ss.7401 et seq.), the Toxic Substances Control Act (15
U.S.C. ss.2601 et seq.), the Occupational Safety and Health Act (29
U.S.C. ss.651 et seq.) and the Emergency Planning and Community
Right-To-Know Act (42 U.S.C. ss.11001 et seq.), each as amended or
supplemented.
"ERISA" means the Employee Retirement Income Security
Act of 1974, as the same may be amended from time to time and, unless
the context otherwise requires, the regulations promulgated thereunder
and any successor statute.
"ERISA Affiliate" means each trade or business
(whether or not incorporated) which together with any Borrower or an
Affiliate would be deemed to be a "single employer" within the meaning
5
<PAGE>
of Section 4001(b) of ERISA or, where applicable, would be treated as a
"single employer" under Section 412(c)(11) of the Code.
"ERISA Termination Event" means (i) a "Reportable
Event" described in Section 4043 of ERISA (other than a "Reportable
Event" not subject to the 30-day reporting requirement to the PBGC
under applicable regulations), (ii) the withdrawal under Section 4063
or Section 4064 of ERISA of any Borrower or any Affiliate from a Plan
during a plan year in which it was a "substantial employer," as defined
in Section 4001(a)(2) of ERISA, including a cessation of operations
that is treated as a withdrawal by a "substantial employer" under
Section 4062(e) of ERISA, (iii) the filing of a notice of intent to
terminate a Plan or the treatment of a Plan amendment as a termination
under Section 4041 of ERISA, (iv) the institution of proceedings under
Section 4042 of ERISA to terminate a Plan by the PBGC, (v) any other
event or condition which in the reasonable judgment of any Borrower is
likely to constitute grounds under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to or any ERISA
administer, any Plan, or (vi) the partial or complete withdrawal
pursuant to Section 4203 or Section 4205 of ERISA of any Borrower or
any ERISA Affiliate from a Multiemployer Plan.
"ETHEX" means ETHEX Corporation, a Missouri
corporation and wholly-owned Subsidiary of K-V.
"Event of Default" shall have the meaning assigned to
such term in Paragraph 9.1 hereof.
"Excess Interest" shall have the meaning assigned to
such term in Paragraph 4.9 hereof.
"Facilities" means any and all real property
(including, without limitation, all buildings, or other improvements
located thereon) now, hereafter or heretofore, owned, leased, operated
or used by Borrower or any of its respective successors and assigns,
including, but not limited to, the Mortgaged Properties.
"Financials" means those consolidated and
internally-prepared consolidating financial statements of Borrowers
heretofore or concurrently herewith delivered by or on behalf of
Borrowers to Bank.
"Fixed Rate" means the rate determined two (2)
Business Days prior to the date of the execution and delivery by K-V of
the Term Note, as set forth in the Term Note.
6
<PAGE>
"Fixed Rate Loan" shall mean a Loan bearing interest
at the Fixed Rate, as described in more detail in Paragraph 4.1(b)
below.
"Funded Debt" means, without duplication, (i)
indebtedness for borrowed money, (ii) obligations evidenced by bonds,
debentures, notes or other similar instruments, (iii) the face amount
of all letters of credit issued for the account of any Borrower and,
without duplication, all drafts drawn thereunder, (iv) obligations to
pay the deferred purchase price of property or services, (v)
obligations as lessee under leases which have been or should be, in
accordance with GAAP, recorded as capital leases, (vi) obligations
under direct or indirect guaranties in respect of, and obligations
(contingent or otherwise) to purchase or otherwise acquire, or
otherwise to assure a creditor against loss in respect of, indebtedness
or obligations of other of the kinds referred to in clauses (i) through
(v) above, (vii) all net obligations under any interest rate swap
agreements, any interest rate cap agreement, any interest rate collar
agreement or other similar agreement or arrangement, and (viii) all
obligations to pay a specified purchase price for goods or services
whether or not delivered or accepted (i.e., take-or-pay and similar
obligations).
"GAAP" shall mean generally accepted accounting
principles as in effect from time to time.
"Governmental Authority" means any federal, state or
local governmental authority, department, agency or court.
"Governmental Authorization" means any permit,
license, authorization, plan, directive, consent order or consent
decree of or from any Governmental Authority.
"Hazardous Materials" means (i) any chemical,
material or substance defined as or included in the definition of
"hazardous substances," "hazardous wastes," "hazardous materials,"
"extremely hazardous waste," "restricted hazardous waste," "infectious
waste," "toxic substances" or any other formulations intended to
define, list or classify substances by reason of deleterious properties
such as ignitability, corrosivity, reactivity, carcinogenicity,
toxicity, reproductive toxicity, "TCLP toxicity" or "EP toxicity" or
words of similar import under any applicable Environmental Laws or
publications promulgated pursuant thereto, (ii) any oil, petroleum or
petroleum derived substance, (iii) any drilling fluids, produced waters
and other wastes associated with the exploration, development or
production of crude oil, natural gas or geothermal resources, (iv) any
flammable substances or explosives, (v) any radioactive materials, (vi)
asbestos in any form (which is or could become friable), (vii) urea
formaldehyde foam insulation, (viii) electrical equipment which
contains any oil or dielectric fluid containing levels of
7
<PAGE>
polychlorinated biphenyls in excess of fifty parts per million, (ix)
pesticides or (x) any other chemical, material or substance, exposure
to which is prohibited, limited or regulated by any governmental
authority or which may or could pose a hazard to the health and safety
of the owners, occupants or any Persons.
"Interest Expense" means, for any period, the sum of
all interest in respect of Debt of Borrowers accrued or capitalized
during such period (whether or not actually paid during such period),
determined on a consolidated basis and in accordance with GAAP.
"Interest Period" means with respect to the LIBOR
Loans, the period used for the computation of interest commencing on
the date the relevant LIBOR Loan is effected by conversion or continued
and concluding on the date thirty (30), sixty (60) or ninety (90) days
thereafter, at Borrowers' option, with any subsequent Interest Period
commencing on the last day of the immediately preceding Interest Period
and concluding thirty (30), sixty (60) or ninety (90) days thereafter,
at Borrowers' option; provided, however, that no Interest Period for
any LIBOR Loan made under the Commitment may extend beyond the
Revolving Credit Maturity Date or the Term Loan Maturity Date, as the
case may be. Each Interest Period for a LIBOR Loan which would
otherwise end on a day which is not a Business Day shall end on the
next succeeding Business Day (unless such next succeeding Business Day
is the first Business Day of a calendar month, in which case such
Interest Period shall end on the next preceding Business Day).
"K-V" means K-V Pharmaceutical Company, a Delaware
corporation.
"Leases" means (a) that certain Metro Court
Office/Warehouse Lease Agreement by and between Public Employee
Retirement System of Nevada, as Landlord, and Designer Blinds of Omaha,
Inc., as Tenant, dated August 14, 1993 for approximately 9,117 square
feet of space at 10850 Metro Court, Maryland Heights, Missouri; (b)
that certain Metro Court Office/Warehouse Lease Agreement by and
between Metro Court Corporation, as Landlord, and Custom Floor Centre,
Inc., as Tenant, dated March 18, 1994 for approximately 4,800 square
feet of space at 10854 Metro Court, Maryland Heights, Missouri; (c)
that certain Metro Court Office/Warehouse Lease Agreement by and
between Metro Court Corporation, as Landlord, and Clean Harbors
Environmental Services, Inc., as Tenant, dated June 1, 1994 for
approximately 11,762 square feet of space at 10862 Metro Court,
Maryland Heights, Missouri; (d) that certain Metro Court
Office/Warehouse Lease Agreement by and between Public Employee
Retirement System of Nevada, as Landlord, and American Remodeling,
8
<PAGE>
Inc., as Tenant, dated July 1, 1991 for approximately 10,493 square
feet at 10858 Metro Court, Maryland Heights, Missouri.
"Letter of Credit" means a standby, commercial import
or other letter of credit at any time issued by Bank for the account of
any Borrower.
"Letter of Credit Maturity Date" means June 18, 2000.
"Letter of Credit Termination Date" means the
earliest to occur of (i) the Letter of Credit Maturity Date or (ii) the
Early Termination Date.
"Leverage Ratio" means, as of any date, the ratio of
(i) Liabilities to (ii) Tangible Net Worth.
"Liabilities" means, as of any date, the aggregate
amount of all liabilities of Borrowers, determined on a consolidated
basis and in accordance with GAAP.
"LIBOR" means for each Interest Period the rate of
interest per annum as determined by Bank (rounded upward, if necessary,
to the nearest whole multiple of one-sixteenth of one percent (1/16th
of 1%) or such other integral multiple thereof at which interest rates
for LIBOR-based loans are commonly quoted to major banks in the
interbank eurodollar market) at which deposits of United States Dollars
in immediately available and freely transferable funds would be offered
at 11:00 a.m., Chicago time, three (3) Business Days prior to the
commencement of such Interest Period by the principal offshore funding
office of Bank to major banks in the interbank eurodollar market upon
request by such major banks for a period equal to such Interest Period
and in an amount equal to the principal amount of the LIBOR Loan to be
outstanding from Bank during such Interest Period. Each determination
of LIBOR made by Bank in accordance with this paragraph shall be
conclusive and binding on Borrowers except in the case of manifest
error.
"LIBOR Loan" means all or a portion of a Loan bearing
interest with respect to the Adjusted LIBOR Rate as specified in
Paragraph 4.1(c).
"LIBOR Margin" means two percent (2.00%).
"Lien" means, with respect to any asset of Borrower,
any mortgage, pledge, security interest, encumbrance, lien or charge of
any kind (including any agreement to give any of the foregoing, any
conditional sale or other title retention agreement, any lease in the
nature thereof and the filing of or agreement to give any financing
statement under the Uniform Commercial Code in effect in any
jurisdiction).
9
<PAGE>
"Loan" or "Loans" means and includes Letters of
Credit issued and all Base Rate Loans, Fixed Rate Loans and LIBOR Loans
made hereunder, unless the context in which such term is used shall
otherwise require.
"Make Whole Amount" shall have the meaning assigned
to such term in Paragraph 5.11 hereof.
"Maximum Rate" shall have the meaning assigned to
such term in Paragraph 4.9 hereof.
"Mortgages" means those certain Deeds of Trust made
by K-V in favor of Bank to be delivered subsequent to the date hereof
for each of the Mortgaged Properties, as the same may be amended,
restated or modified from time to time.
"Mortgaged Properties" means those certain parcels of
real estate located at 10876-10888 Metro Court and 10850-10862 Metro
Court, in the City of Maryland Heights, St. Louis County, Missouri, in
which K-V has granted a first priority security interest to Bank
pursuant to the Mortgage.
"Multiemployer Plan" means a plan defined as such in
Section 4001(a)(3) of ERISA to which contributions have been made by
Borrower or an ERISA Affiliate.
"Net Worth" means, as of any date of determination
thereof, the total stockholders' equity of Borrowers, all as determined
on a consolidated basis and in accordance with GAAP.
"Notes" means the Revolving Note and the Term Note.
"Other Agreements" means all agreements, instruments
and documents, including, without limitation, letters of credit,
mortgages, deeds of trust, guaranties, pledges, powers of attorney,
consents, assignments, contracts, notices, security agreements, leases,
financing statements and all other written matter heretofore, now
and/or from time to time hereafter executed by and/or on behalf of
Borrowers and delivered to Bank including, without limitation, the
Revolving Note, the Term Note, the Mortgage, the Assignment of Rents
and the Environmental Indemnity Agreement.
"PBGC" means the Pension Benefit Guaranty Corporation
and any entity succeeding to any or all of its functions under ERISA.
"PDI" means Particle Dynamics, Inc., a New York
corporation and wholly-owned Subsidiary of K-V.
10
<PAGE>
"Permitted Debt" means (a) Debt incurred pursuant to
this Agreement or the Other Agreements, (b) Debt incurred pursuant to
purchase money mortgages (including, without limitation, capitalized
lease obligations) not to exceed $750,000.00 at any time outstanding in
the aggregate, (c) trade payables, accrued expenses and obligations not
yet due and payable incurred in the ordinary course of business, and
(d) Subordinated Debt.
"Permitted Investments" shall have the meaning
assigned to such term in Paragraph 8.3(d) hereof.
"Permitted Liens" shall have the meaning assigned to
such term in Paragraph 8.3(a) hereof.
"Person" means and includes an individual, a
partnership, a joint venture, a corporation (whether or not for
profit), a trust, an unincorporated organization, any Governmental
Authority or any other entity or organization.
"Plan" means, at any time, any single-employer plan,
as defined in Section 4001(a)(15) and subject to Title IV of ERISA,
which is maintained, or at any time during the five calendar years
preceding the time in question was maintained, for employees of any
Borrower or an ERISA Affiliate.
"Release" means any actual release, spill, emission,
leaking, pumping, pouring, injection, escaping, deposit, disposal,
discharge, dumping, leaching, or migration of Hazardous Materials into
the indoor or outdoor environment (including, without limitation, the
abandonment or disposal of any barrels, containers or other closed
receptacles containing any Hazardous Materials in violation of any
Environmental Laws), or into or out of any Facility.
"Representative" shall have the meaning assigned to
such term in Paragraph 2.3 hereof.
"Reserve Percentage" means, for the purpose of
computing the Adjusted LIBOR Rate, the reserve requirement imposed by
the Board of Governors of the Federal Reserve System (or any successor)
under Regulation D on Eurocurrency liabilities (as such term is defined
in Regulation D) for the applicable Interest Period as of the first day
of such Interest Period, but subject to any amendments of such reserve
requirement by such Board or its successor, and taking into account any
transitional adjustments thereto becoming effective during such
Interest Period. For purposes of this definition, LIBOR Loans shall be
deemed to be Eurocurrency liabilities as defined in Regulation D
without benefit of or credit for prorations, exemptions or offsets
under Regulation D.
11
<PAGE>
"Revolving Credit Commitment" shall have the meaning
assigned to such term in Paragraph 2.1 hereof.
"Revolving Credit Maturity Date" means June 18, 2000.
"Revolving Credit Termination Date" means the
earliest to occur of (i) the Revolving Credit Maturity Date or (ii) the
Early Termination Date.
"Revolving Loan" means and includes all Loans made
under the Revolving Credit Commitment, unless the context in which such
term is used shall otherwise require.
"Revolving Note" means that certain Revolving Note of
even date herewith in the original aggregate maximum principal amount
of TWENTY MILLION DOLLARS ($20,000,000), as the same may be amended,
modified or supplemented from time to time, and together with any
renewals thereof or exchanges or substitutes therefor.
"Subordinated Debt" means, as of any date, the amount
of Debt which is subordinated in right of payment to Borrowers'
Liabilities on terms satisfactory to Bank in each particular case.
"Subsidiary" means any corporation of which a Person
owns, directly or indirectly through one or more intermediaries, more
than 50% of the voting stock at the time of determination.
"Tangible Net Worth" means as of any date, Net Worth
minus intangible assets (as defined in accordance with GAAP).
"Term Loan Commitment" shall have the meaning
assigned to such term in Paragraph 2.2 hereof.
"Term Loan" means and includes all Loans made under
the Term Loan Commitment, unless the context in which such term is used
shall otherwise require.
"Term Loan Maturity Date" means the earlier to occur
of (i) ninety (90) days after Bank has indicated in writing to K-V that
it is unwilling to renew the Revolving Credit Commitment at the
maturity thereof, (ii) ninety (90) days after Borrowers refinance the
Revolving Loans with any other Person, and (iii) June 18, 2002.
"Term Loan Termination Date" means the earliest to
occur of the (i) Term Loan Maturity Date or (ii) Early Termination
Date.
12
<PAGE>
"Term Note" means that certain Term Note to be
delivered subsequent to the date hereof in accordance with the terms of
this Agreement in the original principal amount of THREE MILLION FIVE
HUNDRED THOUSAND DOLLARS ($3,500,000), payable by K-V to Bank, as the
same may be amended, modified or supplemented from time to time, and
together with any renewals thereof or exchanges or substitutes
therefor.
"Transaction Fee" shall have the meaning assigned to
such term in Paragraph 5.12 below.
"Unused Portion Fee" shall have the meaning assigned
to such term in Paragraph 5.10 below.
1.2 Certain UCC and Accounting Terms. Except as otherwise defined in
this Agreement or the Other Agreements, all words, terms and/or phrases used
herein and therein shall be defined by the applicable definition therefor (if
any) in the Uniform Commercial Code as adopted by the State of Illinois.
Notwithstanding the foregoing, any accounting terms used in this Agreement which
are not specifically defined herein shall have the meaning customarily given to
them in accordance with GAAP. All financing computations hereunder shall be
computed, unless otherwise specifically provided herein, in accordance with GAAP
as consistently applied.
2. LOANS: BANK'S COMMITMENTS AND BORROWING PROCEDURES
2.1 Revolving Credit Commitment. On the terms and subject to the
conditions set forth in this Agreement, Bank agrees to make revolving credit
available and Letters of Credit available to Borrowers from time to time prior
to the Revolving Credit Termination Date with respect to revolving credit loans
and the Letter of Credit Termination Date with respect to Letters of Credit in
such aggregate amounts as Borrowers may from time to time request but in no
event exceeding TWENTY MILLION DOLLARS ($20,000,000) (the "Revolving Credit
Commitment"). The Revolving Credit Commitment shall be available to Borrowers by
means of Revolving Loans and Letters of Credit, it being understood that
Revolving Loans may be repaid and used again during the period from the date
hereof to and including the Revolving Credit Termination Date, at which time the
Revolving Credit Commitment shall expire.
2.2 Term Loan Commitment. On the terms and subject to the conditions
set forth in this Agreement, Bank agrees to make the Term Loan to K-V in the
principal amount of THREE MILLION FIVE HUNDRED THOUSAND DOLLARS ($3,500,000)
(the "Term Loan Commitment"). Amounts borrowed in respect of the Term Loan and
repaid may not be reborrowed. The Term Loan Commitment shall be used to purchase
the Mortgaged Properties and for no other purpose.
13
<PAGE>
2.3 Borrowing Procedures under the Revolving Credit Commitment.
Representative shall give Bank irrevocable telephonic notice, written notice or
telecopied notice by no later than 11:00 a.m., Chicago time, on the date it
requests Bank to make a Base Rate Loan hereunder. Representative shall give Bank
irrevocable telephonic notice (which notice shall be promptly confirmed in
writing) no later than 10:00 a.m., Chicago time, three (3) Business Days prior
to the date that it requests Bank to make a LIBOR Loan hereunder or effect a
conversion from a Base Rate Loan to a LIBOR Loan, including a reborrowing as
provided in Paragraph 4.3 below. Each such notice shall be effective upon
receipt by Bank and shall specify the date of the Loan (which shall be a
Business Day), the amount of such Loan, whether the Loan is a Base Rate Loan or
LIBOR Loan and, with respect to a LIBOR Loan, the Interest Period applicable
thereto. Representative agrees that Bank may rely on any notice given by any
person it reasonably believes to be an Authorized Officer of Representative
without the necessity of independent investigation. Each borrowing shall be on a
Business Day. Notwithstanding anything contained in this Agreement to the
contrary, the Borrowers hereby appoint K-V (the "Representative") to act as
their sole and exclusive representative under this Agreement for all purposes,
including without limitation, to receive funds advanced hereunder, to receive
notices and other communications from the Bank hereunder, to make requests for
advances of funds hereunder and to amend this Agreement. The Bank shall have (i)
no obligation to communicate with any Borrower other than the Representative
concerning this Agreement, any note or any matter related to Borrowers'
Liabilities and (ii) no responsibility with respect to the allocation among
Borrowers of the funds advanced hereunder.
2.4 Letters of Credit. (a) Subject to all of the terms and conditions
of this Agreement, if requested to do so by any Borrower, Bank shall issue its,
or cause to be issued, Letters of Credit for the account of such Borrower;
provided that the aggregate face amount of all Letters of Credit outstanding at
any time shall not exceed the availability under the Revolving Credit
Commitment. No Letter of Credit may have an expiration date that is either
greater than one (1) year from the date of issuance of such Letter of Credit or
later than the Letter of Credit Termination Date. Any amounts paid by Bank in
connection with any Letter of Credit (i) shall become part of Borrowers'
Liabilities, (ii) shall be paid from the proceeds of a Revolving Loan requested
pursuant to Paragraph 2.1 above, to the extent Bank is required to make a
Revolving Loan pursuant to the terms hereof, and (iii) otherwise, shall be
payable on demand. In no event shall Bank be required to issue or cause to be
issued Letters of Credit at any time there exists an Event of Default or an
event which with passage of time or giving of notice or both would mature into
an Event of Default.
(b) K-V and any Subsidiary for whose account a Letter of
Credit is issued, jointly and severally, agree to unconditionally, irrevocably
and absolutely pay immediately to Bank the amount drawn under a Letter of
Credit. If any Borrower at any time fails to make such payment, Borrowers shall
14
<PAGE>
be deemed to have elected to borrow from Bank on such date Revolving Loans equal
in aggregate amount to the amount paid by Bank under such Letter of Credit.
2.5 Borrowing Procedures Under the Term Loan Commitment. Provided that
all of the conditions precedent to making the Term Loan described in Paragraph
5.5 and 6.1(B) are satisfied, K-V shall give Bank irrevocable telephonic notice
(which notice shall promptly be confined in writing) no later than 10:00 a.m.,
Chicago time, two (2) Business Days prior to the date K-V requests Bank to make
the Term Loan hereunder. K-V agrees that Bank may rely on any notice given by
any person Bank reasonably believes to be an Authorized Officer of K-V, without
the necessity of independent investigation.
3. LOANS: NOTES EVIDENCING LOANS
3.1 Revolving Note. The Revolving Loans made by Bank under the
Revolving Credit Commitment shall be evidenced by the Revolving Note
substantially in the form set forth in Exhibit 3.1 dated the date hereof (or
such other date prior thereto as shall be satisfactory to Bank), payable to the
order of Bank in the maximum principal amount of TWENTY MILLION DOLLARS
($20,000,000). The unpaid principal amount of the Revolving Loan shall bear
interest and be due and payable as provided in this Agreement and the Revolving
Note. Payments to be made by Borrowers under the Revolving Note shall be made at
the time, in the amounts and upon the terms set forth herein and therein.
3.2 Term Note. The Term Loan made by Bank under the Term Loan
Commitment shall be evidenced by the Term Note substantially in the form set
forth in Exhibit 3.2 dated the date hereof (or such other date subsequent hereto
as shall be satisfactory to Bank), payable to the order of Bank in the principal
amount of THREE MILLION FIVE HUNDRED THOUSAND DOLLARS ($3,500,000). The unpaid
principal amount of the Term Loan shall bear interest and be due and payable as
provided in this Agreement and the Term Note. Payments to be made by K-V under
the Term Note shall be made at the time, in the amounts and upon the terms set
forth herein and therein.
3.3 Recordation. The type, date and amount of each Loan made by Bank,
the interest rate, and the date and amount of each repayment of principal
received by Bank shall be recorded by Bank in its records. The aggregate unpaid
principal amount so recorded shall be prima facia evidence of the principal
amount owing and unpaid on the Revolving Note and the Term Note. The failure to
so record any such amount or any error in so recording any such amount shall not
limit or otherwise affect the obligations of Borrowers hereunder or under the
Revolving Note and the Term Note to repay the principal amount of the Loans
together with all interest accrued thereon.
15
<PAGE>
4. LOANS: AMOUNTS; INTEREST; BALANCES
4.1 Applicable Borrowing Amounts; Interest Rates; Default Rate
(a) Borrowers hereby promise to pay interest on the unpaid
principal amount of each Revolving Loan at a rate per annum equal to the Base
Rate from time to time in effect (the "Base Rate Loan") for the period
commencing on the date of such Loan until such Base Rate Loan is (A) converted
to a LIBOR Loan pursuant to Paragraph 4.3 hereof, or (B) paid in full. Accrued
interest on the outstanding principal amount of Loans shall be payable (i)
monthly in arrears on the last Business Day of each calendar month in the case
of a Base Rate Loan, (ii) on the last day of the applicable Interest Period in
the case of a LIBOR Loan, (iii) upon conversion of any Loan into a LIBOR Loan
(such amount of accrued interest then coming due to be calculated based on the
principal amount of the Loan so converted) and (iv) upon the Revolving Credit
Termination Date (in the case of a Revolving Loan), which payments shall
commence with the last Business Day of June, 1997 in the case of a Base Rate
Loan. After the Revolving Credit Termination Date (in the case of a Revolving
Loan) or the Conversion Date (with respect to accrued interest coming due as a
result of the conversion), as applicable, accrued interest on such Loans shall
be payable on demand.
(b) K-V hereby promises to pay interest on the unpaid
principal amount of the Term Loan at a rate per annum equal to the Fixed Rate
for the period commencing on the date of such Loan until such Fixed Rate Loan is
paid in full. Accrued interest and principal on the outstanding principal amount
of the Term Loan shall be payable monthly in arrears on the last Business Day of
each calendar month which payments shall commence with the last Business Day of
the calendar month in which such Loan is made, with a final payment of accrued
and unpaid interest due on the Term Loan Maturity Date. After the Term Loan
Maturity Date, accrued interest and principal on such Loan shall be payable on
demand.
(c) Each LIBOR Loan shall be in a minimum amount of
$1,000,000 or such greater amount which is an integral multiple of $100,000 and
shall bear interest (computed on the basis of a year of 360 days and actual days
elapsed) on the unpaid principal amount thereof from the date such LIBOR Loan is
effected by conversion or continued until maturity (whether by acceleration or
otherwise) at a rate per annum equal to the sum of the LIBOR Margin plus the
Adjusted LIBOR Rate, with such interest payable in accordance with Paragraph
4.1(a) above.
(d) If an Event of Default shall have occurred and be
continuing hereunder, the Loans shall bear interest from the date of such Event
of Default, payable on demand, at a rate per annum (the "Default Rate") equal to
the sum of two percent (2%) plus the applicable interest rate from time to time
in effect (computed on the basis of a 360 day year and actual days elapsed).
16
<PAGE>
4.2 Computation of Interest. Interest on each Loan shall be computed
for the actual number of days elapsed on the basis of a 360-day year. The
interest rate applicable to each Base Rate Loan shall change simultaneously with
each change in such Base Rate. Upon conversion of less than all the aggregate
principal amount of Base Rate Loans outstanding at any one time to a LIBOR Loan,
interest on the remaining principal amount of Base Rate Loans shall continue to
bear interest at the Base Rate.
4.3 Conversion and Reborrowing of Loans.
(a) Provided that no Event of Default has occurred and is
continuing, Base Rate Loans may, subject to Paragraphs 2.3 and 4.1(a) hereof, at
any time be converted by any Borrower to LIBOR Loans, which LIBOR Loans shall
mature and become due and payable on the last day of the Interest Period
applicable thereto. Provided that no Event of Default has occurred and is
continuing, Borrower shall have the right, subject to the terms and conditions
of this Agreement, to reborrow through a new LIBOR Loan in whole or in part,
subject to Paragraph 4.1(c), any LIBOR Loan from any current Interest Period
into a subsequent Interest Period, provided that Borrower shall give Bank notice
of the reborrowing of any such LIBOR Loan as provided in Paragraph 2.3 hereof.
(b) In the event that (i) Representative fails to give notice
pursuant to Paragraph 2.3 hereof of the reborrowing of any LIBOR Loan or fails
to specify the Interest Period applicable to such reborrowing or (ii) an Event
of Default has occurred and is continuing at the time any such LIBOR Loan is to
be reborrowed hereunder, then such LIBOR Loan shall be automatically reborrowed
as a Base Rate Loan, subject to Paragraphs 4.1(d) (in the case of subpart (ii)
of this Paragraph 4.3(b)) and 9.3 hereof if an Event of Default has occurred and
is continuing, whichever is applicable, unless the relevant LIBOR Loan is paid
in full on the last day of the then applicable Interest Period.
(c) Notwithstanding anything contained herein to the
contrary, Borrowers may not have outstanding at any one time more than four (4)
LIBOR Loans.
4.4 Change of Law. Notwithstanding any other provisions of this
Agreement or the Notes, if at any time Bank shall determine in good faith that
any change in applicable law or regulation or in the interpretation thereof
makes it unlawful or impossible for Bank to effect a conversion of a Base Rate
Loan into a LIBOR Loan or to continue to maintain any LIBOR Loan, Bank shall
promptly give notice thereof (together with an explanation of the reasons
therefor) to Borrowers, and the obligation of Bank to effect by conversion or
continue such LIBOR Loan under this Agreement shall terminate until it is no
longer unlawful or impossible for Bank to effect by conversion or maintain such
LIBOR Loan. Upon the receipt of such notice, Borrowers may elect to either (i)
17
<PAGE>
pay or prepay, as the case may be, the outstanding principal amount of any such
LIBOR Loan, together with all interest accrued thereon and all other amounts
payable to Bank under this Agreement, or (ii) convert the principal amount of
such affected LIBOR Loan to a Base Rate Loan available hereunder, subject to the
terms and conditions of this Agreement.
4.5 Unavailability of Deposits or Inability to Ascertain the LIBOR Rate
or Adjusted LIBOR Rate. Notwithstanding any other provision of this Agreement or
the Notes to the contrary, if prior to the commencement of any Interest Period
Bank shall determine in good faith (i) that deposits in the amount of any LIBOR
Loan scheduled to be outstanding are not available to Bank in the relevant
market or (ii) by reason of circumstances affecting the relevant market,
adequate and reasonable means do not exist for ascertaining the LIBOR rate or
Adjusted LIBOR Rate, then Bank shall promptly give notice thereof to Borrowers,
and the obligation of Bank to effect by conversion or continue any such LIBOR
Loan in such amount and for such Interest Period shall terminate until deposits
in such amount and for the Interest Period selected by Borrower shall again be
readily available in the relevant market and adequate and reasonable means exist
for ascertaining the LIBOR rate or Adjusted LIBOR Rate, as the case may be. Upon
the giving of such notice, Borrowers may elect to either (i) pay or prepay, as
the case may be, the outstanding principal amount of any such LIBOR Loan,
together with all interest accrued thereon and all other amounts payable to Bank
under this Agreement or (ii) convert the principal amount of such affected LIBOR
Loan to a Base Rate Loan available hereunder, subject to all the terms and
conditions of this Agreement.
4.6 Yield Protection, Etc.
(a) Increased Costs. If (x) Regulation D of the Board of
Governors of the Federal Reserve System, or (y) the adoption of any applicable
law, treaty, rule, regulation or guideline, or any change therein, or any change
in the interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by any Bank or its lending branch with any
request or directive (whether or not having the force of law) of any such
authority, central bank or comparable agency,
(i) shall subject Bank, its lending branch or any
Loan to any tax, duty, change, stamp tax, fee, deduction, withholding
or other charge in respect of this Agreement, any Loan, the Notes or
the obligation of Bank to make or maintain any Loan, or shall change
the basis of taxation of payments to Bank of the principal of or
interest on any Loan or any other amounts due under this Agreement in
respect of any Loan or its obligation to make or maintain any Loan
(except for changes in the rate of tax on the overall net income of
Bank imposed by the federal, state or local jurisdiction in which
Bank's principal executive office or its lending branch is located);
18
<PAGE>
(ii) shall impose, modify or deem applicable any
reserve (including, without limitation, any reserve imposed by the
Board of Governors of the Federal Reserve System), special deposit or
similar requirement against assets of, deposits with or for the account
of, or credit extended by, Bank; or
(iii) shall impose on Bank any penalty with respect
to the foregoing or any other condition affecting this Agreement, any
Loan, the Notes or the obligation of Bank to make or maintain any Loan;
and the result of any of the foregoing is to increase the cost to (or to impose
a cost on) Bank of making or maintaining any Loan, or to reduce the amount of
any sum received or receivable by Bank under this Agreement or under the Notes
with respect thereto, then Bank shall notify Borrowers after it receives final
notice of any of the foregoing and, within forty-five (45) days after demand by
Bank (which demand shall be accompanied by a statement setting forth the basis
of such demand), Borrowers shall pay directly to Bank for such additional amount
or amounts as will compensate Bank for such increased cost or such reduction.
(b) Capital Adequacy. If, after the date hereof, either (i)
the introduction of or any change in or change in the interpretation of any law
or regulation or (ii) compliance by Bank with any guideline or request from any
central bank or other governmental authority (whether or not having the force of
law) affects or would affect the amount of capital required or expected to be
maintained by Bank or any corporation controlling Bank and Bank determines that
the amount of such capital is increased solely by or solely based upon the
existence of Bank's commitment to lend hereunder and other commitments of this
type, then, upon demand by Bank, Borrower shall immediately pay to Bank, from
time to time as specified by Bank, additional amounts sufficient to compensate
Bank in the light of such circumstances, to the extent that Bank reasonably
determines such increase in capital to be allocable to the existence of Bank's
commitment to lend hereunder.
4.7 Funding Indemnity. In the event Bank shall incur any loss, cost or
expense (including, without limitation, any loss of profit and any loss, cost or
expense incurred by reason of the liquidation or re-employment of deposits or
other funds acquired by Bank to fund or maintain any LIBOR Loan or the relending
or reinvesting of such deposits or amounts paid or prepaid to Bank) as a result
of:
(a) any payment of a LIBOR Loan on a date other than the last
day of the then applicable Interest Period;
(b) any failure by any Borrower to effect by conversion or
continue any LIBOR Loan on the date specified in the notice given pursuant to
Paragraph 2.3 hereof;
19
<PAGE>
(c) any failure by any Borrower to make any payment of
principal or interest when due on any LIBOR Loan, whether at stated maturity, by
acceleration or otherwise; or
(d) the occurrence of any Event of Default;
then, upon the demand by Bank, Borrowers shall pay to Bank such amount as will
reimburse Bank for such loss, cost or expense. If Bank makes such a claim for
compensation under this Paragraph 4.7, Bank shall provide to Borrower a
certificate setting forth the amount of such loss, cost or expense in reasonable
detail.
4.8 Discretion of Bank as to Manner of Funding. Notwithstanding any
provision of this Agreement to the contrary other than Paragraph 4.7, Bank shall
be entitled to fund and maintain its funding of all or any part of the Loans in
any manner it sees fit, it being understood, however, that for the purposes of
this Agreement all determinations hereunder shall be made as if Bank had
actually funded and maintained each LIBOR Loan during each Interest Period for
such LIBOR Loan through the purchase of deposits in the London Interbank Market
having a maturity corresponding to such Interest Period and bearing an interest
rate equal to the Adjusted LIBOR Rate for such Interest Period.
4.9 Interest Laws. Notwithstanding any provision to the contrary
contained in this Agreement or the Other Agreements, Borrowers shall not be
required to pay, and Bank shall not be permitted to collect, any amount of
interest in excess of the maximum amount of interest permitted by law ("Excess
Interest"). If any Excess Interest is provided for or determined by a court of
competent jurisdiction to have been provided for in this Agreement or in any of
the Other Agreements, then in such event: (a) the provisions of this Paragraph
shall govern and control; (b) Borrowers shall not be obligated to pay any Excess
Interest; (c) any Excess Interest that Bank may have received hereunder shall
be, at Bank's option, (i) applied as a credit against the outstanding principal
balance of Borrowers' Liabilities or accrued and unpaid interest (not to exceed
the maximum amount permitted by law), (ii) refunded to the payor thereof, or
(iii) any combination of the foregoing; (d) the interest rate(s) provided for
herein shall be automatically reduced to the maximum lawful rate allowed from
time to time under applicable law (the "Maximum Rate"), and this Agreement and
the Other Agreements shall be deemed to have been and shall be reformed and
modified to reflect such reduction; and (e) Borrowers shall not have any action
against Bank for any damages arising out of the payment or collection of any
Excess Interest. Notwithstanding the foregoing, if for any period of time
interest on any Borrowers' Liabilities is calculated at the Maximum Rate rather
than the applicable rate under this Agreement, and thereafter such applicable
rate becomes less than the Maximum Rate, the rate of interest payable on such
Borrowers' Liabilities shall remain at the Maximum Rate until Bank shall have
20
<PAGE>
received the amount of interest which Bank would have received during such
period on such Borrowers' Liabilities had the rate of interest not been limited
to the Maximum Rate during such period.
4.10 Letter of Credit Fees. As additional consideration for issuing, or
causing to be issued, Letters of Credit for Borrowers at Borrowers' request
pursuant to Paragraph 2.4 hereof, Borrower agrees to pay fees in respect to each
Letter of Credit so issued. Said fees shall be payable on the date which such
Letter of Credit is issued and (a) for "standby" Letters of Credit shall be in
an amount equal to one percent (1.0%) per annum of the amount of the Letter of
Credit multiplied by a fraction, the numerator of which is the number of days in
the term of the applicable Letter of Credit and the denominator of which is 360,
payable quarterly in advance, and (b) for "trade" or other Letters of Credit, in
accordance with Bank's published fee schedule then in effect. In the event a
Letter of Credit is renewed or extended, a fee calculated in the manner provided
above shall be payable for any such renewal or extended period. Further,
Borrowers shall pay and/or reimburse Bank for all fees and charges paid by Bank
on account of any Letter of Credit, and Borrowers shall pay to Bank its usual
and customary charges in respect to the issuance, or renewal, of Letters of
Credit.
5. LOANS: GENERAL TERMS
5.1 Payments to Bank. That portion of Borrowers' Liabilities consisting
of: (a) principal payable on account of the Loans made by Bank to Borrowers
pursuant to this Agreement shall be payable by Borrowers to Bank (i) as provided
in the Revolving Note or any Letter of Credit in respect of the Revolving Loans
and (ii) as provided in the Term Note in respect of the Term Loan; (b) costs,
fees and expenses payable pursuant to this Agreement shall be payable by
Borrowers to Bank on demand (except the Unused Portion Fee which shall be
payable as described in Paragraph 5.10 below); (c) interest payable pursuant to
this Agreement shall be payable by Borrowers to Bank as provided in Paragraph
4.1; and (d) the balance of Borrowers' Liabilities, if any, shall be payable by
Borrowers to Bank as and when provided in this Agreement.
5.2 Automatic Debit. In order to cause timely payment to be made to
Bank, for the account of Bank, of all Borrowers' Liabilities as and when due,
Borrowers hereby authorize and direct Bank, at Bank's option, to debit the
amount of such Borrowers' Liabilities to any ordinary deposit account of
Borrowers (including, without limitation, by increasing the principal balance
due under the Revolving Loan).
5.3 Application of Payment. Each Borrower shall, at the time of making
each payment under this Agreement or any Note (whether by account debit or
otherwise), specify to Bank the Loan or other amounts payable by Borrowers
hereunder to which such payment is to be applied (and in the event that it fails
to so specify, or if an Event of Default has occurred and is continuing, Bank
may distribute such payment in such manner as Bank may determine to be
appropriate.
21
<PAGE>
5.4 Reserved.
5.5 Conditions Precedent Events. Each Loan made by Bank to Borrowers at
the request of Borrowers pursuant to this Agreement or the Other Agreements
shall in any event be subject to the following conditions precedent: (a) there
shall not then exist an Event of Default (as hereinafter defined) or any event
or condition which with notice, lapse of time and/or the making of such Loan
would constitute an Event of Default; (b) the representations, warranties and
covenants of each Borrower contained in this Agreement shall be true and correct
as of the date of such Loan except for those made as of a particular date with
the same effect as though made on such date; (c) all of the covenants and
agreements of each Borrower in this Agreement, and all of the requirements of
this Agreement with respect to such Loan, shall have been complied with; and (d)
there shall not have occurred, since the date of this Agreement, any material
adverse change in the financial condition, results of operations or business of
any Borrower. Each borrowing by any Borrower hereunder shall be deemed a
representation and warranty by such Borrower that the foregoing conditions have
been fulfilled as of the date of such borrowing. Bank shall have received upon
request a certificate signed by an Authorized Officer of such Borrower dated the
date of such requested Loan certifying satisfaction of the conditions specified
in clauses (a)-(d) of this Paragraph 5.5.
5.6 Offset. Each Borrower agrees that, in addition to (and without
limitation of) any right of set-off, bankers' lien or counterclaim Bank may
otherwise have, Bank shall be entitled, at its option, to offset balances held
by it for account of such Borrower at any of its offices, in United States
Dollars or in any other currency, against any principal of or interest on any of
its Loans, or any other amount payable to Bank hereunder, which is not paid when
due (regardless of whether such balances are then due to such Borrower).
5.7 Credit Termination Date; Continuance of Obligations, Etc. This
Agreement, Bank's obligation to loan monies to Borrowers, and each Borrower's
ability to borrow monies from Bank shall be in effect until the Revolving Credit
Termination Date or Term Loan Termination Date, as applicable. Notwithstanding
the foregoing and until such date when Borrowers' Liabilities shall be paid in
full, each Borrower's obligations hereunder and under the Other Agreements shall
continue, interest shall continue to be paid in accordance with the foregoing
and Bank shall retain all of its rights and remedies under this Agreement.
5.8 Loan Evidence. Loans made by Bank to Borrowers pursuant to this
Agreement may or may not (at Bank's sole and absolute discretion) be evidenced
by notes or other instruments issued or made by Borrowers to Bank. Where such
loans are not so evidenced, such loans shall be evidenced solely by entries upon
the ledgers, books, records and/or computer records of Bank maintained for that
22
<PAGE>
purpose, which entries shall be rebuttably presumptive evidence of such loans in
the absence of manifest error.
5.9 Over-Advances. If, at any time and for any reason, the aggregate
amount of Borrowers' Liabilities outstanding hereunder in respect of the
Revolving Loans exceeds the Revolving Credit Commitment (an "Over-Advance"),
then Borrowers shall immediately pay to Bank, in cash, the amount of such
Over-Advance. If such Over-Advance remains outstanding for more than three (3)
Business Days until such Over-Advance is so repaid to Bank, the amount of such
Over-Advance shall bear interest at the applicable Default Rate.
5.10 Unused Portion Fee. To compensate Bank for the cost of reserving
funds to be made available to Borrowers under this Agreement, Borrowers shall
pay to Bank, on the last day of each calendar quarter an unused revolving line
fee (the "Unused Portion Fee") equal to the sum of the daily amounts by which
the maximum aggregate principal amount of the Revolving Credit Commitment
exceeds the actual principal amount of Revolving Loans made hereunder. The
Unused Portion Fee is calculated for each applicable day of such quarter in an
amount equal to the excess of the maximum aggregate principal amount of the
Revolving Credit Commitment over the principal amount of all outstanding
advances under the Revolving Loans on such day, multiplied by one-eighth of one
percent (1/8%) and divided by three hundred sixty (360). All fees and charges
imposed on Borrowers pursuant to this Agreement including, without limitation,
the Unused Portion Fee accrued through the date of termination, shall be
nonrefundable to Borrowers, notwithstanding any prepayment and termination by
Borrowers of this Agreement.
5.11 Prepayment. (a) Term Loan Prepayment. K-V may, from time to time,
prepay the Loan evidenced by the Term Note in whole or in part and the same
shall pay, subject to Section 5.7 hereof, the Make-Whole Amount (as defined
below) plus a prepayment fee equal to (i) two percent (2%) of the unpaid
principal balance of the Term Loan prior to the first (1st) anniversary of the
Closing Date, and (ii) one percent (1%) of the unpaid principal balance of the
Term Loan prior to the second (2nd) anniversary of the Closing Date; provided,
however, that, prior to the occurrence of an Event of Default, such prepayment
fee shall not be due and payable upon prepayment under circumstances where Bank
has been requested by Borrowers to renew the Revolving Credit Commitment at the
expiration or maturity thereof and either (a) Bank has refused to do so or (b)
Bank has offered such renewal upon terms materially different and adverse to
Borrowers. For the purposes hereof, the "Make- Whole Amount" shall be the amount
calculated as follows:
(i) There shall first be determined, as of the date
fixed for prepayment (the "Prepayment Date"), the amount, if any, by which (A)
the Fixed Rate exceeds (B) the yield to maturity percentage for the United
States Treasury Note maturing June, 2002 (the "Treasury Note") as published in
23
<PAGE>
The Wall Street Journal on the fifth business day preceding the Prepayment Date
plus Two Hundred and Twenty-Five basis points (2.25%) (the "Current Yield"). If
(A) publication of The Wall Street Journal is discontinued, or (B) publication
of the Treasury Note in The Wall Street Journal is discontinued, Bank, in its
sole discretion, shall designate another daily financial or governmental
publication of national circulation to be used to determine the Current Yield;
(ii) The difference calculated pursuant to clause (i)
above shall be multiplied by the outstanding principal balance hereof as of
Prepayment Date;
(iii) The product calculated pursuant to clause (ii)
above shall be multiplied by the quotient, rounded to the nearest one-hundredth
of one percent, obtained by dividing (A) the number of days from and including
the Prepayment Date to and including the Maturity Date, by (B) 365; and
(iv) The sum calculated pursuant to clause (iii)
above shall be discounted at the annual rate of the Current Yield to the present
value thereof as of the Prepayment Date, on the assumption that said sum would
be received in equal monthly installments on each monthly anniversary of the
Prepayment Date prior to the Maturity Date, with the final such installment to
be deemed received on the Maturity Date; provided that Borrowers shall not be
entitled in any event to a credit against, or a reduction of, the Debt being
prepaid if the Current Yield exceeds the Fixed Rate or for any other reason.
(b) Revolving Loan Prepayment. The Revolving Loan may be
prepaid in full, and the Revolving Credit Commitment extinguished, if and only
if the Term Loan has been paid in full in accordance with Paragraph 5.11(a)
above.
5.12 Transaction Fee. On or prior to the Closing Date, Borrowers shall
pay an aggregate fee of $85,000, comprised of a fee of $50,000 in respect of the
Revolving Loan and $35,000 in respect of the Term Loan (the "Transaction Fee")
to Bank, of which $25,000 in respect of the Revolving Loan has been previously
paid by K-V.
6. LOANS: CONDITIONS TO LENDING
6.1 Initial Loan Conditions Precedent. In addition to those conditions
set forth in Paragraph 5.5 above with respect to all Loans and advances
hereunder, prior to or contemporaneously with the making of the initial advance
of funds, Bank's obligation to make any Loan is subject to the satisfaction of
the following conditions precedent:
(a) Fees and Expenses. Borrowers shall have paid all fees
owed to Bank and reimbursed Bank for all expenses due and payable hereunder on
or before the date hereof including, but not limited to, counsel fees provided
24
<PAGE>
for in Paragraph 10.12 hereof and the Transaction Fee provided for in Paragraph
5.12 hereof.
(b) Documents. (A) Bank shall have received the following
documents with respect to the closing of the Revolving Loan on the Closing Date,
in form and substance satisfactory to Bank, and all of the transactions
contemplated by each such document shall have been consummated or each condition
contemplated by each such document shall have been satisfied (with the exception
of transactions and conditions associated with the closing of the Term Loan,
which will close at a later date as provided in Subparagraph (B) below):
(i) Related Documents. Copies of this Agreement as
required by Bank and one copy of the Revolving Note payable to Bank
conforming to the requirements hereof duly executed by each Borrower,
as applicable.
(ii) Legal Opinion. The Revolving Loan legal opinion
of Borrowers' counsel.
(iii) Officer's Certificate. A certificate executed
by an Authorized Officer of each Borrower stating that (A) no default
or Event of Default has occurred and is continuing, (B) no material
adverse change in the financial condition or operations of the business
of any Borrower has occurred since December 31, 1996, (C) the
representations, warranties and covenants of each Borrower contained
herein are true and correct, and (D) each condition precedent of each
Borrower to the consummation of the Loans contemplated hereby has been
met or satisfied.
(iv) Insurance Policies. Certificates from each
Borrower's insurance carriers evidencing that all insurance policies
and coverage required by Paragraph 8.2(h) below is in effect.
(v) Certificate of Incorporation and Bylaws. A copy
of each Borrower's Articles or Certificate of Incorporation, and all
amendments, certified by the Secretary of State of the applicable
jurisdiction of incorporation and a copy of each of Borrower's Bylaws
certified by an Authorized Officer.
(vi) Good Standing Certificate. A Good Standing
Certificate for each Borrower from the applicable jurisdiction of
incorporation and each state in which each Borrower is required to be
qualified to transact business as a foreign corporation.
(vii) Board Resolutions. Certified copies of
resolutions of the Board of Directors of each Borrower authorizing the
execution and delivery of and the consummation of the transactions
25
<PAGE>
contemplated by this Agreement and the Other Agreements and all other
documents or instruments to be executed and delivered in conjunction
herewith and therewith on behalf of each Borrower.
(viii) Incumbency Certificates. A certificate of the
Secretary or an Assistant Secretary of each Borrower certifying the
names of the officer or officers of each Borrower authorized to sign
this Agreement and the Other Agreements on behalf of each Borrower
together with a sample of the true signature of each such officer.
(ix) Pay-Off Letter. Pay-off letter with respect to
all Debt of Borrower previously owed to Foothill Capital Corporation
and a Form UCC-3 Termination Statement with respect to Liens granted in
favor of such lender.
(x) Lender's Loss Payable Endorsement. A Lender's
Loss Payable Endorsement in favor of Bank for each insurance policy of
each Borrower naming Bank as loss payee and additional insured.
(xi) Other Documents. Such other documents as Bank
may reasonably request.
(B) Bank shall have received the following documents on or
before June 30, 1997 with respect to the closing of the Term Loan, in form and
substance satisfactory to Bank, and all of the transactions contemplated by each
such document shall have been consummated or each condition contemplated by each
such document shall have been satisfied:
(i) Mortgages. A Deed of Trust duly executed by K-V
in favor of Bank for each Mortgaged Property.
(ii) Assignment of Rents. An Assignment of Rents and
Leases duly executed by K-V in favor of Bank for each Mortgaged
Property.
(iii) Environmental Indemnity Agreement. An
Environmental Indemnity Agreement duly executed by K-V in favor of
Bank.
(iv) Collateral Assignments of Leases. Collateral
Assignments of leasehold interests and leases from each lessee under
the Lease of each Mortgaged Property;
(v) Estoppel Letters and Leases. A fully executed
original copy by each lessor and lessee under the Leases of an estoppel
letter, and a true and correct copy of each Lease of Borrower related
to each Mortgaged Property.
26
<PAGE>
(vi) Title Policy. A loan policy for each Mortgaged
Property issued by a title insurance company acceptable to Bank in the
amount of $3,500,000, which policies shall be in form and substance
acceptable to Bank.
(vii) Form UCC-1 and Form UCC-2 Financing Statements
for each Mortgaged Property to be filed with the Secretary of State of
Missouri and the Recorder of Deeds of St. Louis County, Missouri.
(viii) Survey. ALTA Survey for each Mortgaged
Property in form and substance acceptable to Bank.
(ix) Appraisal and Environmental Report. Appraisal
and Phase I Environmental Assessment covering each Mortgaged Property,
satisfactory in each case to Bank.
(x) ALTA Statement. An ALTA Statement acceptable to
Chicago Title Insurance Company ("Title Company") duly executed by K-V.
(xi) Purchase Contract. Purchase contract for the
purchase of each of the Mortgaged Properties, together with evidence of
transfer of each Mortgaged Property to K-V.
(xii) Environmental Reports. Environmental Reports
for each of the Mortgaged Properties.
(xiii) Gap-Personal Undertaking. A statement by K-V
that, among other things, it shall be liable to Title Company and Bank
for any liens or other title defects placed on the Mortgaged Properties
between the date of the title commitment issued by Title Company and
the date of the recording of the Mortgages.
(xiv) Officer's Certificate. A certificate executed
by an Authorized Officer of K-V stating that (A) no default or Event of
Default has occurred and is continuing, (B) no material adverse change
in the financial condition or operations of the business of K-V has
occurred since December 31, 1996, (C) the representations, warranties
and covenants of K-V contained herein are true and correct, and (D)
each condition precedent of K-V to the consummation of the Term Loan
contemplated hereby has been met or satisfied.
(xv) Good Standing Certificate. A Good Standing
Certificate for K-V from the Secretary of State of Delaware and each
state in which K-V is required to be qualified to transact business as
a foreign corporation.
27
<PAGE>
(xiv) Other Documents. Such other documents as Bank
may reasonably request.
7. COLLATERAL FOR TERM LOAN: GENERAL TERMS
7.1 Grant of Security Interest. To secure the prompt payment of
Borrowers' Liabilities in respect of the Term Loan and the prompt, full and
faithful performance by K-V of all of the provisions to be kept, observed or
performed by K-V under the Term Loan, K-V does hereby pledge, assign, transfer
and deliver to Bank, for the benefit of Bank, and grant to Bank, for the benefit
of Bank, a security interest in and to and a first mortgage on each parcel of
Mortgaged Property pursuant to the Mortgage and Assignment of Rents. (All of the
foregoing personal property and real property securing Borrowers' Liabilities in
respect of the Term Loan hereunder, in addition to all rents and proceeds
thereof including, without limitation, proceeds of insurance policies insuring
the same, is hereinafter sometimes individually and sometimes collectively
referred to as "Collateral"). K-V shall make appropriate entries upon its
financial statements and books and records disclosing Bank's security interest
in the Collateral.
7.2 Perfection of Security Interests. K-V shall execute and/or deliver
to Bank, at any time and from time to time hereafter at the request of Bank, all
agreements, instruments, financing statements, documents and other written
matter (sometimes hereinafter individually and collectively referred to as
"Supplemental Documentation") that Bank reasonably may request, in form and
substance acceptable to Bank, to perfect and maintain perfected Bank's security
interest in the Collateral and to consummate the transactions contemplated in or
by this Agreement and the Other Agreements. After an Event of Default, K-V,
irrevocably, hereby makes, constitutes and appoints Bank (and all Persons
designated by Bank for that purpose) as K-V's true and lawful attorney and
agent-in-fact to sign the name of K-V on the Supplemental Documentation and to
deliver the Supplemental Documentation to such Persons as Bank may reasonably
elect. K-V agrees that a carbon, photographic or photostatic copy or other
reproduction of this Agreement or of any financing statement shall be sufficient
as a financing statement.
7.3 Inspection of Collateral. Bank (by any of its officers, employees
and/or agents) shall have the right to inspect the Collateral and all related
records (and the premises upon which it is located) and to verify the amount and
condition of or any other matter relating to the Collateral. After an Event of
Default, all costs, fees and expenses incurred by Bank, or for which Bank has
become obligated, in connection with such inspection and/or verification shall
constitute part of Borrowers' Liabilities, payable by each Borrower to Bank on
demand. Notwithstanding any other provision hereof, the provisions of this
Paragraph 7.3 shall govern and control with respect to matters concerning
inspection and verification of the Collateral.
28
<PAGE>
7.4 First Lien and Location of Collateral. K-V warrants and represents
to and covenants with Bank that: (a) as of the Closing Date, Bank's security
interest in the Collateral is and at all times hereafter shall be perfected and
have a first priority; (b) the offices and/or locations where K-V keeps the
Collateral consisting of personal property, and the books and records concerning
the Collateral, consisting of books and records with respect to both real and
personal property, are at the locations specified on Exhibit 7.4 and K-V shall
not remove such books and records and/or the Collateral therefrom and shall not
keep any of such books and records and/or the Collateral at any other office or
location without the prior written consent of Bank; and (c) the addresses
specified on Exhibit 7.4 include and designate K-V's executive offices, chief
place of business and other offices and places of business and are K-V's sole
offices and places of businesses. K-V, by written notice delivered to Bank at
least thirty (30) days prior thereto, shall advise Bank of K-V's opening of any
new office or place of business or its closing of any existing office or place
of business and any new office or place of business shall be within the
continental United States of America. There are no liens on the Collateral other
than the lien of Bank pursuant hereto.
7.5 Constructive Trust. Borrowers shall receive, as the sole and
exclusive property of Bank, and as trustee for Bank, all monies, checks, notes,
drafts and all other payment for and/or proceeds of Collateral which come into
the possession or under the control of Borrowers (or any of its partners,
officers, employees, agents or those Persons acting for or in concert with
Borrowers) and immediately upon receipt thereof, Borrowers shall remit the same
(or cause the same to be remitted), in kind, to Bank at the address described
herein.
7.6 Application of Proceeds of Collateral. Bank, at any time or times
in its sole and absolute discretion, may take control of, in any manner, and may
endorse any Borrower's name, as appropriate, to any of the items of payment or
proceeds described in Paragraph 7.5 above and, pursuant to the provisions of
this Agreement, Bank may, in its sole and absolute discretion, apply the same to
and on account of Borrowers' Liabilities in respect of the Term Loan. For the
purposes of this Paragraph, each Borrower, irrevocably, hereby makes,
constitutes and appoints Bank (and all persons designated by Bank for that
purpose) as each Borrower's true and lawful attorney and agent-in-fact with
power, without notice to any Borrower, to take any such actions.
7.7 Third Party Collateral Claims. Bank, in its sole and absolute
discretion, without waiving or releasing any Event of Default or obligation,
liability, or duty of any Borrower under this Agreement or the Other Agreements,
may at any time or times hereafter, but shall be under no obligation to, pay,
acquire and/or accept an assignment of any security interest, lien, encumbrance,
or claim asserted by any Person against the Collateral. All sums paid by Bank in
respect thereof and all costs, fees and expenses, including reasonable
29
<PAGE>
attorney's fees, court costs, expenses and other charges relating thereto that
are incurred by Bank on account thereof shall be part of Borrowers' Liabilities
payable by Borrower to Bank on demand.
7.8 Reserved.
7.9 No Custom or Waiver. No authorization given by Bank pursuant to
this Agreement or the Other Agreements to sell any specified portion of
Collateral or any items thereof, and no waiver by Bank in connection therewith
shall establish a custom or constitute a waiver of the limitation contained in
this Agreement against such sales, with respect to any portion of the Collateral
or any item thereof not covered by said authorization.
8. REPRESENTATIONS AND WARRANTIES; COVENANTS;
INDEMNIFICATION; CONTINUING OBLIGATION
8.1 Representations and Warranties of Borrower. Each Borrower hereby
represents and warrants to Bank as of the date hereof and with respect to
subsections (a) through (d) and subsections (f) through (y) below, the date of
disbursement of each Loan or advance hereunder, as follows:
(a) Corporate Existence and Authority. Each of K-V, PDI and
ETHEX are corporations duly organized, validly existing and in good standing
under the laws of the State of Delaware, New York and Missouri, respectively,
and each is duly qualified to do business and is in good standing under the laws
of each state in which the ownership of its properties and the nature and extent
of the activities transacted by it makes such qualification necessary except
where the failure to be so qualified could not reasonably be expected to have a
material adverse effect on its performance, business, assets, liabilities,
operations, properties, financial condition or prospects. Each Borrower has the
requisite corporate power and authority to conduct its activities as presently
conducted, to own its properties and to perform its obligations under this
Agreement.
(b) Authorization; No Conflict. The execution, delivery and
performance by each Borrower of this Agreement and the Other Agreements to which
each is a party are within each Borrower's corporate powers, have been duly
authorized by all necessary corporate action and do not contravene (i) any
Borrower's Certificate or Articles of Incorporation or Bylaws or (ii) any law or
any contractual restriction binding on or affecting each of K-V, PDI and ETHEX
or their respective properties, and do not result in or require the creation of
any Lien (except as may be created under this Agreement or the Other Agreements)
upon or with respect to any of its properties.
(c) No Approval. No authorization or approval or other action
by, and no notice to or filing with, any governmental authority or regulatory
30
<PAGE>
body is required for the due execution, delivery and performance by each
Borrower of this Agreement or any Other Agreement to which each Borrower is a
party.
(d) Validity and Binding Nature. This Agreement is, and the
Other Agreements to which each Borrower is a party when delivered hereunder will
be, legal, valid and binding obligations of each Borrower, enforceable against
each Borrower in accordance with their respective terms, except as such
enforcement is limited by bankruptcy, insolvency, rehabilitation or moratorium
laws or general principles of equity.
(e) Financial Statements and Condition. The balance sheet
(including the notes thereto) of K-V and its Subsidiaries on a consolidated
basis as at March 31, 1997, and the related statements of operations and
stockholders' equity and statements of cash flows of K-V and its consolidated
Subsidiaries for the fiscal year then ended, have been audited by BDO Seidman,
LLP and are complete and correct, in accordance with GAAP, and fairly present
the financial condition of K-V and its Subsidiaries on a consolidated basis as
at such date and the results of the operations of Borrower for the period ended
on such date and since March 31, 1997, there has been no material adverse change
in any Borrower's financial condition, business, properties or operations. The
interim balance sheet (including the notes thereto) of K- V and its Subsidiaries
on a consolidated basis as at April 30, 1997, and the related statements of
operations and stockholders' equity and statements of cash flows for the period
then ended, are complete and correct and fairly present the financial condition
of K-V and its Subsidiaries on a consolidated basis at such date, in accordance
with GAAP (subject to normal year-end audit adjustments and except as specified
in the notes thereto). No Borrower has on the date hereof, nor will have on the
date of any Loan or advance made by Bank hereunder, any material contingent
obligations, long-term leases or material forward or long-term commitments,
which are required to be reflected in the foregoing statements (and the related
notes thereto) and are not so reflected.
(f) Litigation. There is no pending or, to the best knowledge
of each Borrower, threatened action, suit, inquiry, investigation, or proceeding
affecting, directly or indirectly, any Borrower before any court, governmental
agency or arbitrator, which, in any case, (i) is reasonably likely to materially
and adversely affect the financial condition or operations of any Borrower, (ii)
seeks to restrain or would otherwise have a material adverse effect on the
transactions contemplated herein, or (iii) would affect the validity or
enforceability of this Agreement or the Other Agreements.
(g) Securities Transaction. No proceeds of any Loan or
advance made by Bank to any Borrower hereunder will be used to acquire any
security in any transaction which is subject to Section 13 or 14 of the
Securities Exchange Act of 1934, as amended.
31
<PAGE>
(h) Regulation U. No Borrower is engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation U issued by the Board of Governors of the Federal
Reserve System), and no proceeds of any Loan or advance made by Bank to any
Borrower hereunder will be used to purchase or carry any margin stock or to
extend credit to others for the purpose of purchasing or carrying any margin
stock.
(i) ERISA Termination Event and Funding. No ERISA Termination
Event has occurred with respect to any Plan and all Plans, to the extent
governed by ERISA, meet the minimum funding standards of Section 302 of ERISA.
(j) Withdrawal Liability and Reportable Events. No Borrower
or any ERISA Affiliate has incurred, or expects to incur, any withdrawal
liability under Section 4201 of ERISA to any Multiemployer Plan. No Reportable
Event (as defined in ERISA Section 4043, other than a Reportable Event not
subject to the 30-day reporting requirement to the PBGC under applicable
regulations) has occurred with respect to any Plan.
(k) Taxes. Each Borrower has filed all tax returns (Federal,
state and local) required to be filed and paid all taxes shown thereon to be
due, including interest and penalties, other than such taxes that a Borrower is
contesting in good faith by appropriate legal proceedings and as to which proper
reserves therefor have been established on the books of each Borrower.
(l) Liens. There are no Liens upon or with respect to any of
the properties of any Borrower or the Collateral or any right to receive
revenues of any Borrower or the Collateral other than Permitted Liens.
(m) Conflicts. No Borrower or any Subsidiary thereof is a
party to any indenture, loan or credit agreement or any lease or other agreement
or instrument (including corporate charters) which is likely to have a material
adverse effect on the ability of any Borrower to perform its obligations under
this Agreement or the Other Agreements or which would restrict or otherwise
limit the incurring of the Debt represented by this Agreement and the Other
Agreements.
(n) Environmental Matters. Except as disclosed on Exhibit
8.1(n) hereto,
(i) the operations of each Borrower and each
Subsidiary, (including, without limitation, all operations and
conditions at or in the Facilities) and the Mortgaged Properties comply
with all Environmental Laws;
32
<PAGE>
(ii) Each Borrower and each Subsidiary have obtained
or have timely applied for all Governmental Authorizations under
Environmental Laws necessary to their respective operations, if any,
and all such Governmental Authorizations as have been obtained are in
good standing, and each Borrower and each Subsidiary is in compliance
with all terms and conditions of such Governmental Authorizations;
(iii) No Borrower nor any Subsidiary has received
from any Person (A) any notice or claim to the effect that it is or may
be liable to any Person as a result of the Release or threatened
Release of any Hazardous Materials or (B) any letter or request for
information under Section 104 of the Comprehensive Environmental
Response, Compensation, and Liability Act (42 U.S.C. ss.9604) or
comparable state laws, and none of the operations of any Borrower or
any Subsidiary is the subject of any federal or state investigation
evaluating whether any remedial action is needed to respond to a
Release or threatened Release of any Hazardous Materials at any
Facility, the Mortgaged Properties or at any other location;
(iv) no operations of any Borrower or any Subsidiary
are subject to any investigation or judicial or administrative
proceeding alleging the violation of or liability under any
Environmental Laws;
(v) no Borrower nor any Subsidiary or any of their
respective Facilities or operations or the Mortgaged Properties are
subject to any outstanding written order or agreement with any
governmental authority or private party relating to (a) any
Environmental Laws or (b) any Environmental Claims;
(vi) no Borrower nor any Subsidiary has any
contingent liability in connection with any Release or threatened
Release of any Hazardous Materials;
(vii) no Borrower nor any Subsidiary or any of their
respective predecessors has filed any notice under any Environmental
Law indicating past or present treatment, storage, disposal or Release
of Hazardous Materials at any Facility or the Mortgaged Properties
except in accordance with Environmental Laws, and no Borrower's nor any
Subsidiary's operations involve the generation, transportation,
treatment, storage or disposal of hazardous waste, as defined under 40
C.F.R. Parts 260-270 or any state equivalent;
(viii) no Hazardous Material exists on, under or
about any Facility or the Mortgaged Properties in a manner that is
reasonably likely to give rise to an Environmental Claim no Borrower
33
<PAGE>
nor any Subsidiary has filed any notice or report of a Release of any
Hazardous Materials that is reasonably likely to give rise to an
Environmental Claim;
(ix) no Borrower nor any Subsidiary or any of their
respective predecessors has disposed of any Hazardous Materials in a
manner that is reasonably likely to give rise to an Environmental
Claim;
(x) no underground storage tanks or surface
impoundments are on or at any Facility or the Mortgaged Properties; and
(xi) no lien in favor of any Person for (a) any
liability under any Environmental Laws or (b) damages arising from or
costs incurred by such Person in response to a Release or threatened
Release has been filed or has been attached to any Facility or the
Mortgaged Properties.
(o) Investment Company Act. No Borrower nor any Subsidiary is
an "investment company" or a company "controlled by an "investment company,"
within the meaning of the Investment Company Act of 1940, as amended.
(p) Compliance with Laws. Each Borrower is in compliance with
all laws, orders, regulations and ordinances of all federal, foreign, state and
local governmental authorities binding upon or affecting the business, operation
or assets of each Borrower including, without limitation, zoning or other
ordinances relating to permissive non-conforming uses of property, except where
the failure to be in compliance could not reasonably be expected to have a
material adverse effect on the business, financial condition or operations of
each Borrower.
(q) Other Agreements. Each Borrower makes each of the
representations and warranties of Borrower contained in the Other Agreements to
which each Borrower is a party operative and applicable for the benefit of Bank
as if the same were set forth at length herein.
(r) Subsidiaries. Except as disclosed on Exhibit 8.1(r), no
Borrower has any Subsidiaries.
(s) Labor. Except as disclosed on Exhibit 8.1(s), none of the
employees of any Borrower is subject to any collective bargaining agreement, and
there are no strikes, work stoppages, election or decertification petitions or
proceedings pending or, to any Borrower's knowledge, threatened involving any
Borrower and any of its employees and no Borrower has received notice of unfair
labor charges, equal employment opportunity proceedings, wage payment or
material unemployment compensation proceedings, material workmen's compensation
proceedings or other material labor or employee-related controversies pending or
threatened involving any Borrower and any of its employees, except for any of
34
<PAGE>
of foregoing which would not in the aggregate have a material adverse effect on
the financial condition, results of operations or business of any Borrower.
(t) Solvency. Each Borrower has capital sufficient to carry
on its business and transactions and all businesses and transactions in which it
is about to engage and is solvent and able to pay its debts as they mature, and
each Borrower owns property the fair saleable value of which is greater than the
amount required to pay each Borrower's Debt. No transfer of property is being
made and no Debt is being incurred in connection with the transactions
contemplated by this Agreement with the intent to hinder, delay or defraud
either present or future creditors of any Borrower or any Affiliate.
(u) Title. Each Borrower has good and merchantable title to
and ownership of its assets, free and clear of all Liens, claims, security
interests and other encumbrances except for Permitted Liens.
(v) Credit Agreements. Exhibit 8.1(v) hereto is a complete
and correct list, as of the date of this Agreement, of each credit agreement,
loan agreement, indenture, guarantee or other arrangement providing for or
otherwise relating to any Debt or any extension of credit (or commitment for any
extension of credit) to, or guarantee by, each Borrower (other than this
Agreement) in each case involving, in the aggregate, more than $250,000, and the
aggregate principal or face amount outstanding or which may become outstanding
under each such arrangement is correctly described in such exhibit.
(w) Debt. As of the date of this Agreement, no Borrower has
any Debt except for the Permitted Debt or Debt otherwise permitted by this
Agreement.
(x) Insurance. Each Borrower is adequately insured under its
policies of insurance currently in effect, no notice of cancellation has been
received with respect to such policies and each Borrower is in material
compliance with all conditions contained in such policies.
(y) Accuracy of Information. All factual information
heretofore or contemporaneously furnished by or on behalf of each Borrower to
Bank for purposes of or in connection with this Agreement or any transaction
contemplated hereby (excluding projections referred to below in this Paragraph
and factual information superseded or replaced prior to the date hereof) is, and
all other factual information (taken as a whole) hereafter furnished by or on
behalf of each Borrower to Bank will be true and accurate in every material
respect on the date as of which such information is dated or certified, and no
Borrower has omitted and nor will omit any material fact necessary to prevent
such information from being false or misleading.
35
<PAGE>
8.2 Affirmative Covenants. At all times prior to the later of the Term
Loan Termination Date or the Revolving Credit Termination Date and thereafter
for so long as any amounts are due or owing to Bank hereunder, each Borrower
hereby covenants that it will, unless Bank otherwise consents in writing:
(a) Existence, Etc. Do or cause to be done all things
necessary to preserve and maintain each Borrower's corporate existence in good
standing.
(b) Compliance with Laws, Etc. Comply with all applicable
present and future laws, rules, ordinances, regulations and orders including,
without limitation, laws, rules, ordinances, regulations and orders regarding
the operation and maintenance of each Borrower's business.
(c) Payment of Taxes and Other Claims. Pay or discharge or
cause to be paid or discharged, before the same shall become delinquent, all
material Charges levied or imposed upon any Borrower or upon the income, profits
or property of any Borrower, provided, however, that Borrowers shall not be
required to pay or discharge or cause to be paid or discharged any such Charge
or claim whose amount, applicability or validity is being contested in good
faith by appropriate proceedings to the extent adequate reserves have been
established on the books of Borrowers.
(d) Reporting Requirements. Maintain a system of accounting
in accordance with GAAP consistently applied and shall furnish to Bank:
(i) as soon as possible and in any event within ten
(10) days after the occurrence of an Event of Default or any event
which, with the giving of notice, lapse of time, or both, would
constitute an Event of Default, the statement of an Authorized Officer
setting forth details of such Event of Default or event and the action
which Borrowers have taken or propose to take to cure the same;
(ii) as soon as available, copies of the periodic
Form 10-Q quarterly report or comparable successor report filed by K-V
with the Securities and Exchange Commission or any successor agency;
provided, that if such report is not made available within forty-five
(45) days after the end of each of the first three quarterly accounting
periods in each fiscal year of K-V beginning with the quarter ending
June 30, 1997, K-V shall immediately deliver to Bank an
internally-prepared balance sheet of K-V and its Subsidiaries on a
consolidated basis as at the end of such quarter and the related
statements of operations and statements of cash flows of K-V and its
Subsidiaries on a consolidated basis for such quarter and for the
portion of the fiscal year ended at the end of such quarter, setting
forth in each case in comparative form the figures for the
corresponding quarter and the corresponding portion of the previous
fiscal year, all in reasonable detail and certified (subject to normal
36
<PAGE>
year-end adjustments) as to fairness of presentation, in accordance
with GAAP (other than footnotes thereto), by an Authorized Officer or
Controller (if such Controller is a corporate officer) of K-V;
(iii) as soon as available, copies of the Form 10-K
Annual Report or comparable successor report filed by K-V with the
Securities and Exchange Commission or any successor agency; provided,
that if such report is not made available within ninety (90) days after
the close of each fiscal year of K-V, K-V shall immediately deliver to
Bank a balance sheet and the related consolidated statements of
operations and stockholders' equity and statements of cash flows of
Borrower and its Subsidiaries on a consolidated basis as of the end of
such fiscal year, fairly and accurately presenting the financial
condition of K-V and its Subsidiaries on a consolidated basis as at
such date and the results of operations of Borrower and its
Subsidiaries for such fiscal year and setting forth in each case in
comparative form the corresponding figures for the corresponding period
of the preceding fiscal year, all in reasonable detail, prepared in
accordance with GAAP consistently applied, and audited by BDO Seidman,
LLP or such other independent certified public accountants acceptable
to Bank (the "Accountants");
(iv) Together with each delivery of the Annual
Reports or financial statements required by subsection (v) above, K-V
shall deliver to Bank a certificate executed by the President or Chief
Financial Officer of each Borrower stating whether any Event of
Default, or event which, with the passage of time or giving of notice
or both, would constitute such an Event of Default, currently exists
and is continuing and what activities, if any, Borrowers are taking or
proposing to take with respect thereto;
(v) concurrently with the delivery of the reports
and/or financial statements referred to in Sub-paragraphs (ii) and
(iii), a compliance certificate duly completed and executed by both the
Chairman of the Board or President and the Chief Financial Officer of
each Borrower (a) stating that Borrower has observed and performed all
of its covenants and other agreements and satisfied every condition,
contained in this Agreement, the Term Note, the Revolving Note and all
Other Agreements to which Borrower is a party to be observed, performed
or satisfied by it and that such officer has no knowledge of any Event
of Default except as specified in such certificate, (b) stating that,
to the best of such officer's knowledge, all such financial statements
are complete and correct in all respects and have been prepared in
accordance with GAAP consistently applied throughout the periods
reflected therein, and (c) showing calculations of compliance with the
financial covenants set forth in Paragraph 8.2(g) below;
37
<PAGE>
(vi) promptly upon receipt and, in any event, within
fifteen (15) days after receipt thereof, copies of all auditors'
letters to management and management's response thereto pertaining to
the balance sheet and related financial statements of K-V and its
Subsidiaries;
(vii) (A) as soon as possible and in any event (i)
within thirty (30) days after any Borrower or any ERISA Affiliate knows
or has reason to know that any ERISA Termination Event described in
clause (i) of the definition of ERISA Termination Event with respect to
any Plan has occurred and (ii) within ten (10) days after any Borrower
or any ERISA Affiliate knows or has reason to know that any other ERISA
Termination Event with respect to any Plan has occurred, a statement of
the Chief Financial Officer (or designee) of such Borrower describing
such ERISA Termination Event and the action, if any, which Borrower, or
any such ERISA Affiliate proposes to take with respect thereto;
(B) promptly and in any event within fifteen
(15) Business Days after receipt thereof by any Borrower or any ERISA
Affiliate from the PBGC, copies of each notice received of the PBGC's
intention to terminate any Plan or to have a trustee appointed to
administer any Plan; and
(C) promptly and in any event within fifteen
(15) Business Days after receipt thereof by any Borrower or any ERISA
Affiliate from a Multiemployer Plan sponsor, a copy of each notice
received concerning the imposition or amount of withdrawal liability
which has been assessed pursuant to Section 4202 of ERISA;
(viii) within fifteen (15) Business Days after notice
to any Borrower of the commencement thereof, notice, in writing, of any
action, suit, arbitration or other proceeding instituted, commenced or
threatened against or affecting any Borrower with an amount in
controversy in excess of $750,000;
(ix) at Bank's request, each Borrower's federal,
state and local tax returns as soon as said returns are completed in
the form said returns will be filed with the Internal Revenue Service
and any state or local department of revenue or taxing authority;
(x) promptly upon their becoming available, copies of
(A) all registration statements and regular periodic reports which K-V
shall have filed with the Securities and Exchange Commission (or any
governmental agency substituted therefor) or any national securities
exchange and (B) all financial statements, reports and proxy statements
so mailed; and
38
<PAGE>
(xi) such other information respecting the condition
or operations, financial or otherwise, of any Borrower or any Affiliate
as Bank may from time to time reasonably request.
(e) Visitation Rights. At least once annually, at any time or
times during the regular business hours of Borrowers, permit Bank or any agents
or representatives thereof to perform a field audit with respect to the records
and books of account of and visit and inspect the properties and assets of each
Borrower, and to discuss the affairs and finances and the Mortgaged Properties
of Borrowers with each Borrower's officers or directors.
(f) Environmental Disclosure and Inspection.
(i) Exercise due diligence in order to comply with
all Environmental Laws.
(ii) Permit Bank, from time to time and in their sole
and absolute discretion, to retain, at Bank's expense, an independent
professional consultant to review any report relating to Hazardous
Materials prepared by or for any Borrower and at reasonable times and
subject to reasonable conditions to conduct their own investigation at
Bank's expense of any Facility currently owned, leased, operated or
used by Borrowers or any Subsidiary, and each Borrower agrees to use
its respective best efforts to obtain permission for Bank's
professional consultant to conduct its own investigation of any
Facility previously owned, leased, operated or used by Borrowers or any
Subsidiary. Borrowers hereby grant to Bank, its agents, employees,
consultants, and contractors the right to enter into or on to, at
reasonable times, the Facilities currently owned, leased, operated or
used by Borrowers or any Subsidiary to perform such tests on such
property as are reasonably necessary to conduct such a review and/or
investigation.
(iii) Promptly advise Bank in writing and in
reasonable detail upon obtaining knowledge of (i) any Release of any
Hazardous Materials required to be reported to any federal, state or
local governmental or regulatory agency under any applicable
Environmental Laws, (ii) any and all written communications with
respect to Environmental Claims or any Release of Hazardous Material
required to be reported to any federal, state or local governmental or
regulatory agency, (iii) any remedial action taken by Borrowers or any
other person in response to (1) any Hazardous Material on, under or
about any Facility, the existence of which is reasonably likely to give
rise to an Environmental Claim, or (2) any Environmental Claim that
could have a material adverse effect on Borrowers or any Subsidiary,
(iv) any Borrower's discovery of any occurrence or condition on any
real property adjoining or in the vicinity of any Facility that could
39
<PAGE>
cause such Facility or any part thereof to be subject to any
restrictions on the ownership, occupancy, transferability or use there
of under any Environmental Laws, and (v) any request for information
from any governmental agency indicating that such agency has initiated
an investigation as to whether Borrower or any Subsidiary may be
potentially responsible for a Release or threatened Release of
Hazardous Materials.
(iv) Promptly notify Bank of (i) any acquisition of
stock, assets, or property by any Borrower or any Subsidiary that
reasonably could be expected to expose such Borrower to, or result in,
Environmental Claims that could have a material adverse effect or that
could be expected to have a material adverse effect on any Governmental
Authorization then held by any Borrower or any Subsidiary, and (ii) any
proposed action outside of the normal course of business to be taken by
any Borrower or any Subsidiary to commence industrial or other
operations that could subject any Borrower or such Subsidiary to
additional laws, rules or regulation, including, without limitation,
laws, rules and regulations requiring additional environmental permits
or licenses.
(v) At its own expense, provide copies of such
documents or information as Bank may reasonably request in relation to
any matters disclosed pursuant to this Paragraph 8.2(f).
(vi) Promptly take any and all necessary remedial
action in connection with the presence, storage, use, disposal,
transportation, Release or threatened Release of any Hazardous
Materials on, under or about any Facility in order to comply with all
applicable Environmental Laws and Governmental Authorizations. In the
event any Borrower or any Subsidiary undertakes any remedial action
with respect to any Hazardous Material on, under or about any Facility,
such Borrower or such Subsidiary shall conduct and complete such
remedial action in compliance with all applicable Environmental Laws
and in accordance with the policies, orders and directives of all
federal, state and local governmental authorities.
(g) Financial Covenants. Each Borrower warrants and
represents to and covenants with Bank that they shall maintain the following
financial covenants on a consolidated basis:
40
<PAGE>
(i) Maintain, at all times, a Tangible Net Worth of
not less than the amounts set forth below, during the following
periods:
Fiscal Year Ended Amount
1997 $23,000,000
1998 $23,500,000
1999 $32,000,000
2000 and thereafter $40,000,000
(ii) Maintain EBITDA, at all times, of not less than
the amounts set forth below, calculated each month for the preceding
twelve-month period on a trailing twelve month basis:
Fiscal Year Ended Amount
1997 $10,000,000
1998 $13,000,000
1999 $25,000,000
2000 and thereafter $40,000,000
(iii) Maintain a Leverage Ratio, at all times, of not
greater than 1.10 to 1.0.
(iv) Not permit Capital Expenditures to exceed the
following amounts for the periods set forth below:
Fiscal Year Ended Amount
1997 $6,500,000
1998 $7,000,000
1999 $14,000,000
2000 and thereafter $17,000,000
41
<PAGE>
provided, however, that the amount of Capital Expenditures may exceed
the limits set forth above on a cumulative basis so long as the
aggregate amount of Capital Expenditures are (a) made with funds other
than Loan proceeds or other Funded Debt and (b) at all times do not
exceed $7,900,000 plus 75% of Borrower's net income, in accordance with
GAAP, for the period from the Closing Date and thereafter.
Notwithstanding the foregoing, to the extent that the proceeds of the
Term Loan are used to purchase the Mortgaged Properties, the amount of
such proceeds shall not be included within the calculation of Capital
Expenditures hereunder.
(h) Insurance.
(i) At its sole cost and expense, keep and maintain
business interruption insurance and public liability and property
damage insurance relating to its business and properties and its
ownership and use of its assets. All such policies of insurance shall
be in form and with insurers recognized as adequate by prudent business
persons and all such policies shall be in amounts as may be reasonably
satisfactory to Bank. Each Borrower shall deliver to Bank a certificate
of insurance, and evidence of payment of all premiums then due and
owing for each such policy on or prior to the date of this Agreement.
Such policies shall: (A) contain a lender's loss payable clause naming
Bank as loss payee and additional insured as its interest may appear;
and (B) provide that the insurance companies will give Bank at least
thirty (30) days written notice before any such policy or policies of
insurance shall be altered or canceled.
(ii) In the event any Borrower at any time or times
hereafter shall fail to obtain or maintain any of the policies of
insurance required above or to pay any premium in whole or in part
relating thereto, then Bank, without waiving or releasing any
obligation or Event of Default by any Borrower hereunder, may at any
time or times thereafter (but shall be under no obligation to) obtain
and maintain such policies of insurance and pay such premium and take
any other action with respect thereto which Bank deems advisable. All
sums so disbursed by Bank, including reasonable attorneys fees, court
costs, expenses and other charges relating thereto, shall be part of
Borrowers' Liabilities, payable by Borrowers to Bank on demand.
Borrowers authorize Bank, in Bank's sole discretion, to cause such sums
to be paid by making an advance in the amount thereof to the applicable
Borrower under the Revolving Loan.
8.3 Negative Covenants. Prior to the later of the Term Loan Termination
Date or the Revolving Credit Termination Date and thereafter for so long as any
amount is due or owing to Bank hereunder, unless Bank shall otherwise consent in
writing, no Borrower nor any Subsidiary shall:
42
<PAGE>
(a) Liens, Etc. Create or suffer to exist any Lien or any
other type of preferential arrangement, upon or with respect to any of its
assets or properties, whether now owned or hereafter acquired, or assign any
right to receive income, except for Permitted Liens in each case to secure or
provide for the payment of any Debt of any Person, except for the permitted
Liens set forth on Exhibit 8.3(a) ("Permitted Liens").
(b) Maintain Existence, Merger, Etc. (i) dissolve or
liquidate or amend or modify its Articles or Certificate of Incorporation, as
applicable, or the Articles or Certificate of Incorporation of any Affiliate or
Subsidiary; or (ii) convey, transfer, lease or otherwise dispose of (whether in
one transaction or in a series of transactions) any assets (whether now owned or
hereafter acquired) to any Person except in the ordinary course of business; or
(iii) together with one or more Affiliates convey, transfer, lease or otherwise
dispose of (whether in one transaction or in a series of transactions) all or
substantially all of the assets of any Borrower and such Affiliates (whether now
owned or hereafter acquired) to any Person; or (iv) purchase, lease or otherwise
acquire all or substantially all of the assets or properties of, or acquire any
capital stock, equity interests, debt or other securities of any Person, or
enter into any joint venture or become a partner in any partnership; (v) engage
in any transaction out of the ordinary course of business; or (vi) merge or
consolidate with any Person, except as permitted under Exhibit 8.3(b).
(c) Debt. Incur, create, assume, become or be liable in any
manner with respect to or permit to exist, any Debt except for Permitted Debt.
(d) Investments or Loans. Make or permit to exist investments
or loans in or to any other Person, except for (i) salaries and reasonable
advances of money to its employees in payment of reasonable expenses incurred by
such employees in the ordinary course of business and consistent with past
practices, (ii) investments in certificates of deposits of a banking institution
having a net worth in excess of $100,000,000 or in securities of the United
States of America or commercial paper with a P1 rating (all of the foregoing
maturing within one year) and (iii) investments already made as of the Closing
Date as set forth or as otherwise listed on Exhibit 8.3(d) ("Permitted
Investments").
(e) Guaranties. Guaranty, endorse or otherwise in any way
directly, indirectly or contingently become liable for the obligations or
liabilities of any other Person, except endorsements of negotiable instruments
for collection in the ordinary course of business.
(f) Stock and Dividends. Redeem, retire, purchase or
otherwise acquire, directly or indirectly, any common capital stock of any
Borrower or other evidence of ownership interest, or declare or pay dividends
upon any common capital stock of any Borrower or make any distribution of
43
<PAGE>
Borrowers' property or assets to any stockholders except Ethex and PDI may
declare and pay dividends to K-V. Notwithstanding the foregoing, if no Event of
Default has occurred and is continuing, K-V may pay dividends or make
distributions up to an amount not to exceed twenty-five percent (25%) of K-V's
prior fiscal year's consolidated net income, determined in accordance with GAAP,
in any one fiscal year.
(g) Transactions with Affiliates or Insiders. Enter into, or
be a party to, any transaction with any Affiliate of any Borrower, except in the
ordinary course of and pursuant to the reasonable requirements of Borrowers'
businesses and upon fair and reasonable terms which are fully disclosed to Bank
and are no less favorable to Borrower than would obtain in a comparable arm's
length transaction with a Person not an Affiliate of such Borrower.
8.4 Maintenance of Accounts. Each Borrower agrees to maintain its
primary operational accounts with Bank and shall maintain an average balance of
collected, available funds in a non-interest bearing demand deposit account with
Bank (the "Operating Account") in an amount at least equal to that amount
required to compensate Bank for its services in maintaining such account.
Borrowers acknowledge that Bank will charge Borrowers standard service charges
in effect from time to time for various services performed by Bank in connection
with any aspect of the relationship between Borrowers and Bank, and Borrowers
hereby agree that if such service charges exceed the credit to Borrowers arising
from earnings attributable to funds on deposit with Bank in the applicable
Operating Account, such service charge deficiency shall be deducted by Bank from
any Borrower's Operating Account, monthly, in arrears, within ten (10) days
following the end of each month. Bank may cause interest and other amounts
payable on the obligations of Borrowers to Bank hereunder to be paid by making a
direct charge to the applicable Operating Account in accordance with the terms
hereof.
9. DEFAULT
9.1 Events of Default. The occurrence of any one of the following
events shall constitute a default (an "Event of Default") under this Agreement:
(a) if any Borrower fails or neglects to perform, keep or observe any covenant
or agreement contained in this Agreement or in the Other Agreements which is
required to be performed, kept or observed by any Borrower and such failure
continues for thirty (30) days thereafter; (b) any representation or warranty
made by any Borrower herein or in any Other Agreement is untrue in any material
respect, or any exhibit or certificate furnished by any Borrower or any of its
Affiliates, directors, officers, employees, or agents to Bank is untrue in any
material respect on the date as of which the facts therein set forth are stated
or certified; (c) if any Borrower fails to pay Borrower's Liabilities when due
and payable or declared due and payable; (d) if a material portion of any
Borrower's assets or the Collateral is attached, seized, subjected to a writ or
distress warrant or is levied upon, or come within the possession of any
44
<PAGE>
receiver, trustee, custodian or assignee for the benefit of creditors and the
same is not terminated or dismissed within thirty (30) days thereafter; (e) if a
petition under any section or chapter of the Bankruptcy Reform Act of 1978, as
amended, or any similar law or regulation shall be filed by Borrower or if
Borrower shall make an assignment for the benefit of its creditors or if any
case or proceeding is filed by Borrower for its dissolution or liquidation; (f)
if a petition under any section or chapter of the Bankruptcy Reform Act of 1978,
as amended, or any similar law or regulation is filed against any Borrower or if
any case or proceeding is filed against Borrower for its dissolution or
liquidation and the same is not terminated or dismissed within forty-five (45)
days of filing; (g) if an application is made by any Borrower for the
appointment of a receiver, trustee or custodian for any of Borrowers' assets or
the Collateral; (h) if an application is made by any Person other than such
Borrower for the appointment of a receiver, trustee or custodian for the assets
of any Borrower or the Collateral and the same is not dismissed within
forty-five (45) days after the application therefor; (i) if any Borrower is
adjudicated insolvent or admits its inability to pay its debts as they become
due; (j) if any Borrower is in default in the payment of Debt in an amount in
excess of $750,000; (k) if Borrower is in default in the payment of any Debt to
Bank including, without limitation, any reimbursement obligations for letters of
credit issued or to be issued by Bank subsequent to the date hereof in
connection with the Industrial Development Authority of the County of St. Louis,
Missouri, Private Activity Refunding and Revenue Bonds, Series 1989(f) (K-V
Pharmaceutical Company Project); or (l) if a conservator is appointed for all or
any material portion of the assets of any Borrower or the Collateral.
9.2 Cumulative Remedies. All of Bank's rights and remedies under this
Agreement and the Other Agreements are cumulative and non-exclusive.
9.3 Acceleration and Termination of Loans. Upon the occurrence and
during the continuance of an Event of Default, (a) upon notice by Bank to
Borrowers, Borrowers' Liabilities shall be immediately due and payable, unless
there shall have occurred an Event of Default under subparagraphs 9.1(d), (e),
(f), (g), (h), (i) or (l), in which case Borrowers' Liabilities shall
automatically become due and payable without notice or demand, and (b) without
notice by Bank to or demand by Bank of Borrowers, Bank shall have no further
obligation to and may then forthwith cease advancing monies or extending credit
to or for the benefit of Borrowers under this Agreement and the Other
Agreements.
9.4 Rights of Creditor. Upon an Event of Default, Bank, in its sole and
absolute discretion, may exercise any one or more of the rights and remedies
accruing (a) under applicable law upon default by a debtor, (b) under any
instrument, including, without limitation, the Mortgage and the Assignment of
Rents, or (c) under any document or agreement. Nothing contained herein shall
interfere with Bank's right under law to set-off the balances of any deposit
accounts maintained by any Borrower with Bank against Borrowers' Liabilities.
45
<PAGE>
9.5 Injunctive Relief. Each Borrower recognizes that in the event any
Borrower fails to perform, observe or discharge any of its obligations or
liabilities under this Agreement or the Other Agreements, no remedy of law will
provide adequate relief to Bank, and agrees that Bank shall be entitled to
temporary and permanent injunctive relief in any such case without the necessity
of proving actual damages or the posting of bond, surety or other security.
10. GENERAL
10.1 Payment Application Date. Any check, draft, or similar item of
payment by or for the account of any Borrower delivered to Bank on account of
Borrowers' Liabilities shall be applied by Bank on account of Borrowers'
Liabilities on the date final settlement thereof is reflected by irrevocable
credit to Bank.
10.2 Statement of Account. Each statement of account by Bank delivered
to any Borrower relating to Borrowers' Liabilities shall be presumed correct and
accurate, absent manifest error, and shall constitute an account stated between
Borrowers and Bank unless, within ninety (90) days after Borrowers' receipt of
said statement, Borrowers deliver to Bank, by registered or certified mail
addressed to Bank at its Address for Notices specified on the signature pages
hereto, written objection thereto specifying the error or errors, if any,
contained in any such statement.
10.3 Manner of Application; Waiver of Setoff Prohibition. Upon the
occurrence and during the continuance of an Event of Default, each Borrower
waives the right to direct the application of any and all payments at any time
or times hereafter received by Bank on account of Borrowers' Liabilities and
Borrower agrees that Bank shall have the right, in its absolute and sole
discretion, to apply and re-apply any and all such payments toward Borrowers'
Liabilities in such manner as Bank may deem advisable, notwithstanding any entry
by Bank upon any of its books and records. Each Borrower further waives any
right under or benefit of any law that would restrict or limit the right or
ability of Bank to obtain payment of Borrowers' Liabilities, including any law
that would restrict or limit Bank in the exercise of its right to appropriate
any indebtedness owing from Bank to Borrower and any deposits or other property
of Borrower in the possession or control of Bank and apply the same toward or
setoff the same against the payment of Borrowers' Liabilities.
10.4 Survival of Representations and Warranties. Each Borrower
covenants, warrants and represents to Bank that all representations and
warranties of Borrower contained in this Agreement and the Other Agreements
shall be true at the time of each Borrower's execution of this Agreement and the
Other Agreements and shall survive the execution, delivery and acceptance
thereof by the parties thereto and the closing of the transactions described
therein or related thereto.
46
<PAGE>
10.5 Integration; Amendment; Assignment; Participation.
(a) This Agreement and the Other Agreements constitute the
entire agreement and understanding between the parties relating to the subject
matter hereof and supersede all prior agreements, whether oral or written. This
Agreement and the Other Agreements may not be modified, altered or amended
except by an agreement in writing signed by each Borrower and Bank, and no
provision of this Agreement may be waived except with the consent in writing of
Bank.
(b) Bank shall have the right to assign to one or more banks
or other financial institutions all or a portion of its rights and obligations
under this Agreement (including, without limitation, the Loans and the Other
Agreements). Upon any such assignment, (i) the assignee shall become a party
hereto and, to the extent of such assignment, have all rights and obligations of
Bank hereunder and under the Other Agreements and (ii) Bank shall, to the extent
of such assignment, relinquish its rights and be released from its obligations
hereunder and under the Other Agreements; provided, however, in the event Bank
assigns all or a portion of its rights and obligations hereunder pursuant to a
transaction in which Bank (including successors thereto) is not the lead agent,
Borrowers will not be subject to the prepayment fee provided for in Paragraph
5.11 hereof as long as K-V has paid in full all Borrowers' Liabilities due and
owing in respect of the Term Loan within ninety (90) days of the date of such
assignment. Each Borrower hereby agrees to execute and deliver such documents,
and to take such other actions, as Bank may reasonably request to accomplish the
foregoing.
(c) In addition to the assignments permitted in subsection
(b) of this Paragraph 10.5, Bank and any assignee pursuant to subsection (b)
above shall have the right to grant participations to one or more banks or other
financial institutions in or to any Loan hereunder (and the Other Agreements)
without notice to or consent from any Borrower.
10.6 No Waiver. Bank's failure at any time or times hereafter to
require strict performance by Borrowers of any provision of this Agreement shall
not waive, affect or diminish any right of Bank thereafter to demand strict
compliance and performance therewith. Any suspension or waiver by Bank of an
Event of Default by Borrowers under this Agreement or the Other Agreements shall
not suspend, waive or affect any other Event of Default by Borrowers under this
Agreement or the Other Agreements, whether the same is prior or subsequent
thereto and whether of the same or of a different type. None of the
undertakings, agreements, warranties, covenants or representations of Borrowers
contained in this Agreement or the Other Agreements and no Event of Default by
Borrowers under this Agreement or the Other Agreements shall be deemed to have
been suspended or waived by Bank unless such suspension or waiver is by an
instrument in writing by Bank specifying such suspension or waiver and given
pursuant to the requirements of Paragraph 10.16 hereof.
47
<PAGE>
10.7 Severability. If any provision of this Agreement or the Other
Agreements or the application thereof to any Person or circumstance is held
invalid or unenforceable, the remainder of this Agreement and the Other
Agreements and the application of such provision to other Persons or
circumstances will not be affected thereby and the provisions of this Agreement
and the Other Agreements shall be severable in any such instance.
10.8 Successors and Assigns. This Agreement and the Other Agreements
shall be binding upon and inure to the benefit of the successors and assigns of
each Borrowers and Bank. This provision, however, shall not be deemed to modify
Paragraph 10.5 hereof.
10.9 Conflict with Other Agreements. The provisions of the Other
Agreements are incorporated in this Agreement by this reference thereto. Except
as otherwise provided in the Other Agreements by specific reference to the
applicable provision of this Agreement, if any provision contained in this
Agreement is in conflict with, or inconsistent with, any provision in the Other
Agreements, the provision contained in this Agreement shall govern and control.
10.10 No Impairment by Termination. Except to the extent provided to
the contrary in this Agreement and in the Other Agreements, no termination or
cancellation (regardless of cause or procedure) of this Agreement or the Other
Agreements shall in any way affect or impair the powers, obligations, duties,
rights and liabilities of Borrowers or Bank in any way or respect relating to
(a) any transaction or event occurring prior to such termination or cancellation
and/or (b) any of the undertakings, agreements, covenants, warranties and
representations of Borrowers contained in this Agreement or the Other
Agreements. All such undertakings, agreements, covenants, warranties and
representations shall survive such termination or cancellation.
10.11 Waivers. Except as otherwise specifically provided in this
Agreement, Borrowers waive any and all notice or demand which Borrowers might be
entitled to receive with respect to this Agreement or the Other Agreements by
virtue of any applicable statute or law and waives presentment, demand and
protest and notice of presentment, protest, default, dishonor, non-payment,
maturity, release, compromise, settlement, extension or renewal of any or all
commercial paper, accounts, contract rights, documents, instruments, chattel
paper and guaranties at any time held by Bank on which Borrowers may in any way
be liable and hereby ratifies and confirms whatever Bank may do in this regard.
10.12 Costs, Fees and Expenses Related to Agreement and Other
Agreements. In accordance with this Agreement on or prior to the date hereof and
thereafter upon demand by Bank therefor, Borrowers shall pay or reimburse Bank
for all reasonable costs, fees and expenses incurred by Bank, or for which Bank
48
<PAGE>
becomes obligated, in connection with the negotiation, preparation and
consummation of this Agreement and the Other Agreements, including but not
limited to, attorneys' fees, costs and expenses; search fees, costs and
expenses; and all taxes payable in connection with this Agreement or the Other
Agreements. That portion of Borrowers' Liabilities consisting of costs, expenses
or advances to be reimbursed by Borrowers to Bank pursuant to this Agreement or
the Other Agreements which are not paid on or prior to the date hereof shall be
payable by Borrower to Bank on demand.
10.13 Environmental Indemnity. Borrowers agree to indemnify and save
Bank, its officers, directors, employees and agents, harmless of, from and
against any liability, loss, damage or expense (including reasonable attorneys'
fees) to which Bank or any of such persons may become subject, arising from or
based upon (a) any violation, or claim of violation, by Borrowers of any laws,
regulations or ordinances relating to Hazardous Materials, or (b) any Hazardous
Materials located or disposed of on or released or transported from any property
owned, leased or operated by Borrowers, or any claim of any of the foregoing.
10.14 Release. Borrowers release Bank from any and all causes of
action, claims or rights which Borrowers may now or hereafter have for, or which
may arise from, any loss or damage caused by or resulting from any act or
omission to act on the part of Bank, its officers, agents or employees, except
in each instance for willful misconduct and gross negligence.
10.15 Governing Law. This Agreement and the Other Agreements shall be
governed and controlled by the internal laws of the State of Illinois without
regard to principles of conflicts of laws as to interpretation, enforcement,
validity, construction, effect, and in all other respects including, but not
limited to, the legality of the interest rate and other charges.
10.16 Notices. All notices, consents, requests, demands and other
communications hereunder shall be in writing and shall be deemed duly given to
any party or parties (a) upon delivery to the address of the party or parties as
specified in the "Address for Notices" below such party or parties' name on the
signature pages hereof if delivered in person or by courier or if sent by
certified or registered mail (return receipt requested), or (b) upon dispatch if
transmitted by telecopy or other means of facsimile transmission, in any case to
the party or parties at the telecopy numbers specified on the same, or to such
other address or telecopy number as any party may hereafter designate by written
notice in the aforesaid manner.
10.17 FORUM; BANK; VENUE; JURY TRIAL WAIVER. TO INDUCE BANK TO ACCEPT
THIS AGREEMENT AND THE OTHER AGREEMENTS, BORROWERS, IRREVOCABLY AGREE THAT ALL
ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER, OR RESPECT, ARISING OUT OF OR FROM OR
RELATED TO THIS AGREEMENT OR THE OTHER AGREEMENTS SHALL BE LITIGATED ONLY IN
49
<PAGE>
COURTS HAVING SITUS WITHIN CHICAGO, ILLINOIS. BORROWERS HEREBY CONSENT AND
SUBMIT TO THE JURISDICTION OF ANY LOCAL, STATE, OR FEDERAL COURT LOCATED WITHIN
SAID CITY AND STATE. BORROWERS HEREBY IRREVOCABLY APPOINT AND DESIGNATE KURTIS
B. REEG OF GALLOP, JOHNSON & NEUMAN, L.C. WHOSE ADDRESS IS 33 BRONZE POINT,
SUITE 1D, BELLEVILLE, ILLINOIS, OR ANY OTHER PERSON HAVING AND MAINTAINING A
PLACE OF BUSINESS IN SUCH STATE, WHOM BORROWERS MAY FROM TIME TO TIME HEREAFTER
DESIGNATE (HAVING GIVEN FIVE (5) DAYS' WRITTEN NOTICE THEREOF TO BANK) AS
BORROWERS' TRUE AND LAWFUL ATTORNEY AND DULY AUTHORIZED BANK FOR ACCEPTANCE OF
SERVICE OF LEGAL PROCESS. BORROWERS AGREE THAT SERVICE OF SUCH PROCESS UPON SUCH
PERSON SHALL CONSTITUTE PERSONAL SERVICE OF SUCH PROCESS UPON EACH BORROWER.
BORROWERS HEREBY WAIVE ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF
ANY LITIGATION BROUGHT AGAINST BORROWERS BY BANK IN ACCORDANCE WITH THIS
PARAGRAPH. BORROWERS HEREBY IRREVOCABLY WAIVE THE RIGHT TO TRIAL BY JURY WITH
RESPECT TO ANY ACTION IN WHICH A BORROWER IS A PARTY.
10.18 Other Costs, Fees and Expenses. If at any time or times hereafter
Bank: (a) employs counsel for advice or other representation (i) with respect to
this Agreement or the Other Agreements, (ii) to represent Bank in any
litigation, contest, dispute, suit or proceeding or to commence, defend, or
intervene or to take any other action in or with respect to any litigation,
contest, dispute, suit, or proceeding (whether instituted by Bank, any Borrower,
or any other Person) in any way or respect relating to this Agreement or the
Other Agreements or (iii) to enforce any rights of Bank against Borrowers or any
other Person which may be obligated to Bank by virtue of this Agreement or the
Other Agreements; and/or (b) attempts to or enforces any of Bank's rights or
remedies under the Agreement or the Other Agreements, the reasonable costs and
expenses incurred by Bank in any manner or way with respect to the foregoing,
shall be part of Borrowers' Liabilities, payable by Borrower to Bank on demand.
10.19 Revival. To the extent that Bank receives any payment on account
of Borrowers' Liabilities and any such payment(s) and/or proceeds or any part
thereof are subsequently invalidated, declared to be fraudulent or preferential,
set aside, subordinated and/or required to be repaid to a trustee, receiver or
any other party under any bankruptcy act, state or federal law, common law or
equitable cause, then, to the extent of such payment(s) and/or proceeds
received, Borrowers' Liabilities or part thereof intended to be satisfied shall
be revived and continue in full force and effect, as if such payment(s) and/or
proceeds had not been received by Bank and applied on account of Borrowers'
Liabilities.
10.20 Acknowledgments. Each Borrower acknowledges that (i) it has been
advised by counsel of its choice with respect to this Agreement and the
50
<PAGE>
transactions contemplated hereby, (ii) each of the waivers set forth herein was
knowingly and voluntarily made; and (iii) the obligations of Bank hereunder,
including the obligation to advance and lend funds to Borrowers in accordance
herewith, shall be strictly construed and shall be expressly subject to each
Borrower's compliance in all respects with the terms and conditions herein set
forth.
10.21 Section Headings. Section headings used in this Agreement are for
convenience only and shall not effect the construction or interpretation of this
Agreement.
10.22 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which taken
together shall constitute one and the same instrument.
10.23 Effectiveness. This Agreement shall become effective upon the
execution and delivery to Bank of counterparts of this Agreement by each
Borrower and Bank.
10.24 Joint and Several Liability. The liability of each Borrower for
Borrowers' Liabilities in respect of the Revolving Loan under this Agreement and
the Other Agreements in general shall be joint and several, and each reference
to Borrowers herein shall be deemed to refer to each such Borrower. In
furtherance and not in limitation of Bank's rights and remedies hereunder or at
law, Bank may proceed under this Agreement and the Other Agreements against one
or more of the Borrowers in its absolute and sole discretion for any of
Borrowers' Liabilities in respect of the Revolving Loan.
51
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed as of the day
and year specified at the beginning hereof.
ATTEST: K-V PHARMACEUTICAL COMPANY
By:/s/ Gerald R. Mitchell
Title: Vice-President, Finance
Address for Notices:
2503 South Hanley
St. Louis, Missouri 63144-2555
Telephone No.: (314) 645-6600
Telecopier No.: (314) 645-6732
Attention: President
With a copy to:
Title: Secretary
Address for Notices:
2503 South Hanley
St. Louis, Missouri 63144-2555
Telephone No.: (314) 645-6600
Telecopier No.: (314) 645-6732
Attention: President
52
<PAGE>
With a copy to:
John P. Walsh, Esq.
Gallop, Johnson & Neuman, L.C.
Interco Corporate Tower
101 South Hanley
St. Louis, Missouri 63105
Telephone No.: (314) 862-1200
Telecopier No.: (314) 862-1219
ATTEST: ETHEX CORPORATION
By: /s/ Gerald R. Mitchell
Title: Vice-President
Address for Notices:
2503 South Hanley
St. Louis, Missouri 63144-2555
Telephone No.: (314) 645-6600
Telecopier No.: (314) 645-6732
Attention: President
With a copy to:
John P. Walsh, Esq.
Gallop, Johnson & Neuman, L.C.
Interco Corporate Tower
101 South Hanley
St. Louis, Missouri 63105
Telephone No.: (314) 862-1200
Telecopier No.: (314) 862-1219
53
<PAGE>
LASALLE NATIONAL BANK
By:
Title: Vice President
Address for Notices:
LaSalle National Bank
135 South LaSalle Street
Chicago, Illinois 60603
Telecopier No.: (312) 904-6546
Telephone No.: (312) 904-2766
Attention: Mr. Charles E. Schroeder, Jr.
Vice President
With a copy to:
Michael A. Nemeroff, Esq.
Vedder, Price, Kaufman & Kammholz
222 N. LaSalle Street
Chicago, Illinois 60601-1003
Telecopy No.: (312) 609-5005
Telephone No.: (312) 609-7500
54
<PAGE>
LIST OF EXHIBITS
Exhibit 3.1 Form of Revolving Note
Exhibit 3.2 Form of Term Note
Exhibit 7.4 Location of Collateral
Exhibit 8.1(n) Environmental Matters
Exhibit 8.1(r) Subsidiaries
Exhibit 8.1(s) Labor
Exhibit 8.1(v) Credit Agreements
Exhibit 8.3(a) Permitted Liens
Exhibit 8.3(b) Permitted Acquisitions
Exhibit 8.3(d) Permitted Investments
<PAGE>
EXHIBIT 3.1
to
Loan Agreement
REVOLVING NOTE
$20,000,000 Chicago, Illinois
June 18, 1997
FOR VALUE RECEIVED, on or before June 18, 2000 (or, if such day is not
a Business Day, on the next following Business Day), the undersigned, K-V
PHARMACEUTICAL COMPANY, a Delaware corporation; PDI DYNAMICS, INC., a New York
corporation; and ETHEX CORPORATION, a Missouri corporation, jointly and
severally (herein, collectively and together with their successors and assigns,
called "Borrowers"), promise to pay to the order of LASALLE NATIONAL BANK, a
national banking association (herein, together with its successors and assigns,
called the "Bank"), the maximum principal sum of TWENTY MILLION and 00/100
DOLLARS ($20,000,000) or, if less, the aggregate unpaid principal amount of all
Revolving Loans made by Bank to the undersigned pursuant to that certain Loan
Agreement of even date herewith between Borrowers and Bank (herein, as the same
may be amended, modified or supplemented from time to time, called the "Loan
Agreement") as shown in Bank's records.
The Borrower further promises to pay to the order of Bank interest on
the aggregate unpaid principal amount hereof from time to time outstanding from
the date hereof until paid in full at such rates and at such times as shall be
determined in accordance with the provisions of the Loan Agreement. Accrued
interest shall be payable on the dates specified in the Loan Agreement.
Payments of both principal and interest are to be made in the lawful
money of the United States of America in immediately available funds at Bank's
principal office at 135 South LaSalle Street, Chicago, Illinois 60603; or at
such other place as may be designated by Bank to the Borrower in writing.
This Note is the Revolving Note referred to in, evidences indebtedness
incurred under, and is subject to the terms and provisions of, the Loan
Agreement. The Loan Agreement, to which reference is hereby made, sets forth
said terms and provisions, including those under which this Note may or must be
paid prior to its due date or may have its due date accelerated. Terms used but
not otherwise defined herein are used herein as defined in the Loan Agreement.
1
<PAGE>
In addition to, and not in limitation of, the foregoing and the
provisions of the Loan Agreement hereinabove referred to, the Borrower further
agrees, subject only to any limitation imposed by applicable law, to pay all
expenses, including attorneys' fees and expenses, incurred by the holder of this
Note in seeking to collect any amounts payable hereunder which are not paid when
due, whether by acceleration or otherwise.
All parties hereto, whether as makers, endorsers or otherwise,
severally waive presentment, demand, protest and notice of dishonor in
connection with this Note.
The liability of each Borrower under this Note in general shall be
joint and several, and each reference herein to the Borrowers shall be deemed to
refer to each such Borrower. In furtherance and not in limitation of Bank's
rights and remedies hereunder or at law, Bank may proceed under this Note
against any one or more of the Borrowers in its absolute and sole discretion for
any of Borrowers' Liabilities or any other liability or obligation of the
Borrowers arising hereunder.
This Note is binding upon the undersigned and its successors and
assigns, and shall inure to the benefit of Bank and its successors and assigns.
This Note is made under and governed by the laws of the State of Illinois
without regard to conflict of laws principles.
ATTEST: K-V PHARMACEUTICAL COMPANY, a
Delaware Corporation
By:
Secretary
Borrower's Address: By:
Title:
2503 South Hanley
St. Louis, Missouri 63144-2555
2
<PAGE>
ATTEST: PARTICLE DYNAMICS, INC.,
a New York corporation
By:
Secretary
By:
Borrower's Address: Title:
2503 South Hanley
St. Louis, Missouri 63144-2555
ATTEST: ETHEX CORPORATION, a
Missouri corporation
By:
Secretary
Borrower's Address: By:
2503 South Hanley Title:
St. Louis, Missouri 63144-2555
3
<PAGE>
EXHIBIT 3.2
to
Loan Agreement
TERM NOTE
$3,500,000 Chicago, Illinois
June __, 1997
FOR VALUE RECEIVED, the undersigned, K-V PHARMACEUTICAL COMPANY, a
Delaware corporation (herein, together with its successors and assigns, called
the "Borrower"), promises to pay to the order of LASALLE NATIONAL BANK, a
national banking association (herein, together with its successors and assigns,
called the "Bank"), the principal sum of THREE MILLION FIVE HUNDRED THOUSAND
DOLLARS ($3,500,000), plus interest at the rate of ___________ percent (___%)
per annum, payable in monthly installments commencing June ___, 1997 of
principal of [NINETEEN THOUSAND FOUR HUNDRED FORTY-FOUR AND 44/100 DOLLARS
($19,444.44),] on the last Business Day of each month through ___________,
_____, with a final payment of the entire principal balance outstanding
hereunder due on ____________, _____, pursuant to that certain Loan Agreement of
even date herewith between the Borrower, Particle Dynamics, Inc., a New York
corporation, ETHEX Corporation, a Missouri corporation, and Bank (herein, as the
same may be amended, modified or supplemented from time to time, called the
"Loan Agreement") as shown in Bank's records, plus interest as described below.
The Borrower further promises to pay to the order of Bank interest on
the aggregate unpaid principal amount hereof from time to time outstanding from
the date hereof until paid in full at the Fixed Rate described above and at such
times as shall be determined in accordance with the provisions of the Loan
Agreement. Accrued interest shall be payable on the dates specified in the Loan
Agreement.
Payments of both principal and interest are to be made in the lawful
money of the United States of America in immediately available funds at Bank's
principal office at 135 South LaSalle Street, Chicago, Illinois 60603, or at
such other place as may be designated by Bank to the Borrower in writing.
This Note is the Term Note referred to in, evidences indebtedness
incurred under, and is subject to the terms and provisions of, the Loan
Agreement. The Loan Agreement, to which reference is hereby made, sets forth
said terms and provisions, including those under which this Note may or must be
paid prior to its due date or may have its due date accelerated. Terms used but
not otherwise defined herein are used herein as defined in the Loan Agreement.
1
<PAGE>
In addition to, and not in limitation of, the foregoing and the
provisions of the Loan Agreement hereinabove referred to, the Borrower further
agrees, subject only to any limitation imposed by applicable law, to pay all
expenses, including attorneys' fees and expenses, incurred by the holder of this
Note in seeking to collect any amounts payable hereunder which are not paid when
due, whether by acceleration or otherwise.
All parties hereto, whether as makers, endorsers or otherwise,
severally waive presentment, demand, protest and notice of dishonor in
connection with this Note.
This Note is binding upon the undersigned and its successors and
assigns, and shall inure to the benefit of Bank and its successors and assigns.
This Note is made under and governed by the laws of the State of Illinois
without regard to conflict of laws principles.
K-V PHARMACEUTICAL COMPANY, a
Delaware corporation
ATTEST:
By: By:
Secretary Title:
Borrower's Address:
2503 South Hanley
St. Louis, Missouri 63144-2555
2
REVOLVING NOTE
$20,000,000 Chicago, Illinois
June 18, 1997
FOR VALUE RECEIVED, on or before June 18, 2000 (or, if such day is not
a Business Day, on the next following Business Day), the undersigned, K-V
PHARMACEUTICAL COMPANY, a Delaware corporation; PARTICLE DYNAMICS, INC., a New
York corporation; and ETHEX CORPORATION, a Missouri corporation, jointly and
severally (herein, collectively and together with their successors and assigns,
called "Borrowers"), promise to pay to the order of LASALLE NATIONAL BANK, a
national banking association (herein, together with its successors and assigns,
called the "Bank"), the maximum principal sum of TWENTY MILLION and 00/100
DOLLARS ($20,000,000) or, if less, the aggregate unpaid principal amount of all
Revolving Loans made by Bank to the undersigned pursuant to that certain Loan
Agreement of even date herewith between Borrowers and Bank (herein, as the same
may be amended, modified or supplemented from time to time, called the "Loan
Agreement") as shown in Bank's records.
The Borrower further promises to pay to the order of Bank interest on
the aggregate unpaid principal amount hereof from time to time outstanding from
the date hereof until paid in full at such rates and at such times as shall be
determined in accordance with the provisions of the Loan Agreement. Accrued
interest shall be payable on the dates specified in the Loan Agreement.
Payments of both principal and interest are to be made in the lawful
money of the United States of America in immediately available funds at Bank's
principal office at 135 South LaSalle Street, Chicago, Illinois 60603; or at
such other place as may be designated by Bank to the Borrower in writing.
This Note is the Revolving Note referred to in, evidences indebtedness
incurred under, and is subject to the terms and provisions of, the Loan
Agreement. The Loan Agreement, to which reference is hereby made, sets forth
said terms and provisions, including those under which this Note may or must be
paid prior to its due date or may have its due date accelerated. Terms used but
not otherwise defined herein are used herein as defined in the Loan Agreement.
In addition to, and not in limitation of, the foregoing and the
provisions of the Loan Agreement hereinabove referred to, the Borrower further
agrees, subject only to any limitation imposed by applicable law, to pay all
expenses, including attorneys' fees and expenses, incurred by the holder of this
Note in seeking to collect any amounts payable hereunder which are not paid when
due, whether by acceleration or otherwise.
All parties hereto, whether as makers, endorsers or otherwise,
severally waive presentment, demand, protest and notice of dishonor in
connection with this Note.
1
<PAGE>
The liability of each Borrower under this Note in general shall be
joint and several, and each reference herein to the Borrowers shall be deemed to
refer to each such Borrower. In furtherance and not in limitation of Bank's
rights and remedies hereunder or at law, Bank may proceed under this Note
against any one or more of the Borrowers in its absolute and sole discretion for
any of Borrowers' Liabilities or any other liability or obligation of the
Borrowers arising hereunder.
This Note is binding upon the undersigned and its successors and
assigns, and shall inure to the benefit of Bank and its successors and assigns.
This Note is made under and governed by the laws of the State of Illinois
without regard to conflict of laws principles.
ATTEST: K-V PHARMACEUTICAL COMPANY, a
Delaware Corporation
By: /s/ John P. Walsh
Assistant Secretary
Borrower's Address: By: /s/ Gerald R. Mitchell
Title: Vice-President, Finance
2503 South Hanley
St. Louis, Missouri 63144-2555
ATTEST: PARTICLE DYNAMICS, INC.,
a New York corporation
By: /s/ John P. Walsh
Secretary
Borrower's Address: By: /s/ Gerald R. Mitchell
Title: Vice-President
2503 South Hanley
St. Louis, Missouri 63144-2555
ATTEST: ETHEX CORPORATION, a
Missouri corporation
By: /s/ John P. Walsh
Secretary
Borrower's Address: By: /s/ Gerald R. Mitchell
Title: Vice-President
2503 South Hanley
St. Louis, Missouri 63144-2555
2
TERM NOTE
$3,500,000 Chicago, Illinois
June 24, 1997
FOR VALUE RECEIVED, the undersigned, K-V PHARMACEUTICAL COMPANY, a
Delaware corporation (herein, together with its successors and assigns, called
the "Borrower"), promises to pay to the order of LASALLE NATIONAL BANK, a
national banking association (herein, together with its successors and assigns,
called the "Bank"), the principal sum of THREE MILLION FIVE HUNDRED THOUSAND
DOLLARS ($3,500,000), plus interest at the rate of Eight and 53/100 Percent
(8.53%) per annum, payable in monthly installments commencing June 18, 1997 of
principal of NINETEEN THOUSAND FOUR HUNDRED FORTY-FOUR AND 44/100 DOLLARS
($19,444.44), plus interest as described below, on the last Business Day of each
month through May, 2002, with a final payment of the entire principal balance
outstanding, plus accrued and unpaid interest, hereunder due on June 18, 2002.
This Note is made pursuant to that certain Loan Agreement dated June 18, 1997
between the Borrower, Particle Dynamics, Inc., a New York corporation, ETHEX
Corporation, a Missouri corporation, and Bank (herein, as the same may be
amended, modified or supplemented from time to time, called the "Loan
Agreement").
The Borrower further promises to pay to the order of Bank interest on
the aggregate unpaid principal amount hereof from time to time outstanding from
the date hereof until paid in full at the Fixed Rate described above and at such
times as shall be determined in accordance with the provisions of the Loan
Agreement. Accrued interest shall be payable on the dates specified in the Loan
Agreement.
Payments of both principal and interest are to be made in the lawful
money of the United States of America in immediately available funds at Bank's
principal office at 135 South LaSalle Street, Chicago, Illinois 60603, or at
such other place as may be designated by Bank to the Borrower in writing.
This Note is the Term Note referred to in, evidences indebtedness
incurred under, and is subject to the terms and provisions of, the Loan
Agreement. The Loan Agreement, to which reference is hereby made, sets forth
said terms and provisions, including those under which this Note may or must be
paid prior to its due date or may have its due date accelerated. Terms used but
not otherwise defined herein are used herein as defined in the Loan Agreement.
This Note is further secured by those certain Missouri Future Advance
Deed of Trust and Security Agreements and those certain Assignment of Rents and
Leases, each of even date herewith made by Borrower to Bank, encumbering the
1
<PAGE>
property commonly known as 10876 Metro Court and 10862 Metro Court, each as
legally described therein.
In addition to, and not in limitation of, the foregoing and the
provisions of the Loan Agreement hereinabove referred to, the Borrower further
agrees, subject only to any limitation imposed by applicable law, to pay all
expenses, including attorneys' fees and expenses, incurred by the holder of this
Note in seeking to collect any amounts payable hereunder which are not paid when
due, whether by acceleration or otherwise.
All parties hereto, whether as makers, endorsers or otherwise,
severally waive presentment, demand, protest and notice of dishonor in
connection with this Note.
This Note is binding upon the undersigned and its successors and
assigns, and shall inure to the benefit of Bank and its successors and assigns.
This Note is made under and governed by the laws of the State of Illinois
without regard to conflict of laws principles.
K-V PHARMACEUTICAL COMPANY, a
Delaware corporation
ATTEST:
By: /s/ John P. Walsh By: /s/ Gerald R. Mitchell
Assistant Secretary Title: Vice-President, Finance
Borrower's Address:
2503 South Hanley
St. Louis, Missouri 63144-2555
2
FOURTH AMENDMENT to
AND RESTATEMENT
OF
K-V PHARMACEUTICAL COMPANY
1991 INCENTIVE STOCK OPTION PLAN
1. Purpose of the Plan
The K-V Pharmaceutical Company Amended and Restated 1991 Stock Option
Plan ("Plan") is intended to provide additional incentive to certain valued and
trusted employees of K-V Pharmaceutical Company, a Delaware corporation, and its
subsidiaries (the "Company"), by encouraging them to acquire shares of the $.01
par value Class B common stock of the Company (the "Stock") through options to
purchase Stock granted pursuant to the Plan ("Options"), thereby increasing such
employees' proprietary interest in the business of the Company and providing
them with an increased personal interest in the continued success and progress
of the Company, the result of which will promote both the interests of the
Company and its shareholders.
Options granted under the Plan will be intended to qualify as
"incentive stock options" ("1505") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"). Each employee granted an
Option shall enter into an agreement with the Company (the "Option Agreement")
setting forth the terms and conditions of the Option, as determined in
accordance with this Plan.
2. Administration of Plan
This Plan shall be administered by the Compensation and Stock Option
Committee appointed by the Board of Directors of the Company (the "Committee"),
to be composed of at least two (2) members of the Board of Directors of the
Company. Members of the Committee shall not be eligible to receive Options under
this Plan. The Committee shall have the sole power:
(a) Subject to the provisions of the Plan, to determine the terms and
conditions of all Options; to construe and interpret the Plan and Options
granted under it; to determine the time or times an Option may be exercised, the
number of shares as to which an Option may be exercised at any one time, and
when an Option may terminate; to establish, amend and revoke rules and
regulations relating to the Plan and its administration; and to correct any
defect, supply any omission, or reconcile any inconsistency in the Plan, or in
any Option Agreement, in a manner and to the extent it shall deem necessary, all
of which determinations and interpretations made by the Committee shall be
conclusive and binding on all Optionees and on their legal representatives and
beneficiaries; and
<PAGE>
(b) To determine all questions of policy and expediency that may arise
in the administration of the Plan and generally exercise such powers and perform
such acts as are deemed necessary or expedient to promote the best interests of
the Company.
3. Shares Subject to the Plan
(a) Subject to the provisions of paragraph 13 below, the Stock which
may be issued pursuant to Options granted under the Plan shall not exceed in the
aggregate seven hundred fifty thousand (750,000) shares of Class A Common Stock
of the Company and six hundred seventy-five thousand (675,000) shares of Class B
Common Stock of the Company. If any Options granted under the Plan terminate,
expire or are surrendered without having been exercised in full, the number of
shares of Stock not purchased under such Options shall be available again for
the purpose of the Plan.
(b) At any time that the Committee determines that there exists a
public market for Class A Common Stock of the Company, it may designate that an
Option to purchase shares of Class B Common Stock of the Company shall be
exercisable to purchase shares of Class A Common stock of the Company instead of
Class B Common Stock. Such redesignation of an Option shall not affect the
purchase price under such Option or the number of shares with respect to which
such Option has been granted. Notwithstanding the foregoing, no redesignation of
an Option shall be effective if such redesignation constitutes a modification of
such Option within the meaning of Section 424(h) of the Code.
4. Persons Eligible for Options
All employees of the Company who are not members of the Committee shall
be eligible to receive the grant of Options under the Plan. The Committee shall
determine the employees to whom Options shall be granted, the time or times such
Options shall be granted, the number of shares to be subject to each Option and
the times when each Option may be exercised. The Committee shall seek
information, advice and recommendations from management to assist the Committee
in its independent determination as to the employees to whom Options shall be
granted. An employee who has been granted an Option (an "Optionee"), if he or
she is otherwise eligible, may be granted additional Options.
5. Purchase Price
The purchase price of each share of Stock covered by each ISO
("Purchase Price") shall not be less than one hundred percent (100%) of the Fair
Market Value Per Share (as defined below) of the Stock on the date the ISO is
granted; provided, however, if when an ISO is granted the Optionee receiving the
ISO owns or will be considered to own by reason of Section 424(d) of the Code
more than ten percent (10%) of the total combined voting power of all classes of
stock of the Company, the purchase price of the Stock covered by such ISO shall
not be less than one hundred and ten percent (110%) of the Fair Market Value Per
Share of the Stock on the date the ISO is granted.
-2-
<PAGE>
"Fair Market Value Per Share" of the Stock shall mean: (i) if the Stock
is not publicly traded, the amount determined by the Committee on the date of
the grant of the Option; (ii) if the Stock is traded only otherwise than on a
securities exchange and is not quoted on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ"), the closing quoted selling price
of the Stock on the date of grant of the Option as quoted in "pink sheets"
published by the National Daily Quotation Bureau; (iii) if the Stock is traded
only otherwise than on a securities exchange and is quoted on NASDAQ, the
closing quoted selling price of the Stock on the date of grant of the Option, as
reported by the Wall Street Journal; or (iv) if the Stock is admitted to trading
on a securities exchange, the closing quoted selling price of the Stock on the
date of grant of the Option, as reported in the Wall Street Journal. For
purposes of Items (i) through (iv) of this paragraph, if there were no sales on
the date of the grant of an Option, the Fair Market Value Per Share shall be
determined by the Committee in accordance with Section 20.2031-2 of the Federal
Estate Tax Regulations.
6. Duration of Options
Any outstanding Option and all unexercised rights thereunder shall
expire and terminate automatically upon the earliest of: (i) the cessation of
the employment or engagement of the Optionee by the Company for any reason other
than retirement (as provided by contract between the Company any such person or
otherwise under normal Company policies), death or disability; (ii) the date
which is three months following the effective date of the Optionee's retirement
from the Company's service; (iii) the date which is one year following the date
on which the Optionee's service with the Company ceases due to disability (or
due to the death with respect to Options issued prior to the date of this
amendment); (iv) the date of expiration of the Option determined by the
Committee at the time the Option is granted and specified in such Option; and
(v) in any event, the tenth annual anniversary date of the granting of the
Option, or, if when an ISO is granted the Optionee owns (or would be considered
to own by reason of Section 424(d) of the Code) more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company, then on
the fifth such anniversary; provided, however, that the Committee shall have the
right, but not the obligation, to extend the expiry of the Options held by an
Optionee whose service with the Company has ceased for any reason to the end of
their original terms (either upon issuance of the Option or at such time as the
Option would otherwise terminate), notwithstanding that such Options may no
longer qualify as ISOs under the Code.
7. Exercise of Options
(a) An Option may be exercisable in installments or otherwise upon such
terms as the Committee shall determine when the Option is granted. In the event
that an Option is exercisable only in installments and the Optionee has been
employed by the Company for five or more years as of the date such Option was
granted, such Option shall become fully exercisable upon the termination of
-3-
<PAGE>
employment of the Optionee by reason of death or disability, if and to the
extent that such acceleration would not cause a violation of the limitations
contained in Section 422(b)(7) of the Code. If acceleration by reason of
termination because of disability would cause a violation of the limitations
contained in Section 422(b)(7) of the Code, acceleration shall occur only in
amount such that such acceleration does not cause a violation of Section
422(b)(7) of the Code and the acceleration of the exercisability of any portion
of the Option which would be in violation of such limitation shall be deferred
until January 1 of the year following that in which termination of employment
occurs. In the event termination of employment occurs by reason of death,
acceleration of the exercisability of any portion of the Option shall occur only
as and to the extent that such acceleration will not cause a violation of the
limitations contained in Section 422(b)(7) of the Code. Notwithstanding anything
to the contrary contained in this Plan, the Committee at any time may accelerate
the time at which any Option granted hereunder is exercisable.
(b) No Option will be exercisable (and any attempted exercise will be
deemed null and void) if such exercise would create a right of recovery for
"short-swing profits" under Section 16(b) of the Securities Exchange Act of
1934, unless the Optionee pays the Company the amount of such "short-swing
profits" at the time of the exercise of the Option.
(c) In the event that a portion of an ISO which first becomes
exercisable exceeds the limitations contained in Section 422(b)(7) of the Code,
the shares purchased pursuant to Options in excess of such limitation shall be
deemed to be non-qualified stock options and shall be identified accordingly on
the certificates representing such shares and in the stock transfer records of
the Company.
8. Method of Exercise
(a) When the right to purchase shares accrues, Options may be exercised
by giving written notice to the Company stating the number of shares for which
the Option is being exercised, accompanied by payment in full by cash, or its
equivalent, acceptable to the Company, of the purchase price for the shares
being purchased. The Company shall issue a separate certificate or certificates
of Stock for each Option exercised by an Optionee.
(b) In the Committee's discretion, determined at the time the Option is
granted, payment of the purchase price for the shares may be made in whole or in
part with other shares of Stock of the Company which are free and clear of all
liens and encumbrances. The value of the shares of Stock tendered in payment for
the shares being purchased shall be the Fair Market Value Per Share on the date
of the Optionee's notice of exercise.
(c) Notwithstanding the foregoing, the Company shall have the right to
postpone the time of delivery of the shares for such period as may be required
for the Company, with reasonable diligence, to comply with any applicable
listing requirements of any national securities exchange or the National
Association of Securities Dealers, Inc. or any Federal, state or local law. If
-4-
<PAGE>
the Optionee, or other person entitled to exercise the Option, fails to timely
accept delivery of and pay for the shares specified in such notice, the
Committee shall have the right to terminate the Option with respect to such
shares.
9. Nontransferability of Options
No Option granted under the Plan shall be assignable or transferable by
the Optionee, either voluntarily or by operation of law, other than by will or
the laws of descent and distribution, and, during the lifetime of the Optionee,
shall be exercisable only by the Optionee.
10. Continuance of Employment
Nothing contained in the Plan or in any Option granted under the Plan
shall confer upon any Optionee any rights with respect to the continuation of
employment by the Company or interfere in any way with the right of the Company
(subject to the terms of any separate employment agreement to the contrary) at
any time to terminate such employment or to increase or decrease the
compensation of the Optionee from the rate in existence at the time of the
granting of any Option.
11. Restrictions on Shares
If the Company shall be advised by counsel that certain requirements
under the Federal or state securities laws must be met before Stock may be
issued under this Plan, the Company shall notify all persons who have been
issued Options, and the Company shall have no liability for failure to issue
Stock under any exercise of Options because of delay while such requirements are
being met or the inability of the Company to comply with such requirements.
12. Privilege of Stock Ownership
No person entitled to exercise any Option granted under the Plan shall
have the rights or privileges of a stockholder of the Company for any shares of
Stock issuable upon exercise of such Option until such person has become the
holder of record of such shares. No adjustment shall be made for dividends or
other rights for which the record date is prior to the date on which such person
becomes the holder of record, except as provided in paragraph 13 below.
13. Adjustment
(a) If the number of outstanding shares of Stock are Increased or
decreased, or such shares are exchanged for a different number or kind of shares
or securities of the Company through reorganization, merger, recapitalization,
reclassification, stock dividend, stock split, combination of shares, or other
similar transaction, the aggregate number of shares of Stock subject to the Plan
-5-
<PAGE>
as provided in paragraph 3 above, and the shares of Stock subject to issued and
outstanding Options under the Plan shall be appropriately and proportionately
adjusted by the Committee. Any such adjustment in an outstanding Option shall be
made without change in the aggregate purchase price applicable to the
unexercised portion of the Option but with an appropriate adjustment in the
price for each share or other unit of any security covered by the Option.
(b) Notwithstanding paragraph (a), upon: (i) the dissolution or
liquidation of the Company, (ii) a reorganization, merger or consolidation of
the Company with one or more corporations in which the Company is not the
surviving corporation, (iii) a sale of substantially all of the assets of the
Company, or (iv) the transfer of more than 80% of the then outstanding Stock of
the Company to another entity or person in a single transaction or series of
transactions, the Plan shall terminate, and any outstanding Options granted
under the Plan shall terminate on the day before the consummation of the
transaction; provided that the Board shall have the right, but shall not be
obligated, to accelerate the time in which any Options may be exercised prior to
such a termination. However, the termination of such Options shall not occur if
provision is made in writing in connection with the transaction, in a manner
acceptable to the Board, for: (A) the continuance of the Plan and assumption of
outstanding Options, or (B) the substitution for such Options of new options to
purchase the stock of a successor corporation (or parent or subsidiary thereof),
with appropriate adjustments as to number and kind of shares and option price.
The Board of Directors shall have the authority to amend this paragraph to
provide for a requirement that a successor corporation assume any outstanding
Options.
(c) Adjustments under this paragraph 13 shall be made by the Committee
whose determination as to what adjustments shall be made, and the extent
thereof, shall be final, binding and conclusive. No fractional shares of Stock
shall be issued under the Plan or in connection with any such adjustment.
14. Holding Period and Forfeiture of Stock
(a) All Stock purchased pursuant to the exercise of an Option shall be
held by the Company for a period of two (2) years from the date of exercise (the
"Holding Period"). Notwithstanding anything contained herein to the contrary, if
an Optionee leaves the employ of the Company during the Holding Period for any
reason other than the retirement (under normal Company policies), death or
disability of such Optionee, the Optionee's purchase of such Stock shall be
voidable at the Committee's sole option and discretion. If any purchase of Stock
is voided by reason of the provisions of this paragraph 14, an amount determined
as provided in paragraph 14(d) shall thereupon be returned in full to the
Optionee. Notwithstanding the foregoing, the Committee at any time may waive the
Holding Period requirement set forth herein with respect to any outstanding
options.
(b) At any time within the Holding Period that the Committee determines
that there exists a public market for Class A Common Stock of the Company, it
-6-
<PAGE>
may cancel an Optionee's Class B Common Stock of the Company then being held,
and issue in lieu thereof an equivalent number of Class A Common Stock of the
Company.
(c) In the event that an Optionee incurs a financial hardship within
the Holding Period, which is determined by the Committee in its sole discretion
upon written application by the Optionee and after review of the facts and
circumstances to be of an immediate and heavy nature, the Committee may
authorize the repurchase of the Optionee's Stock by the Company at a price as
determined under paragraph 14(d) and payment of the proceeds of such repurchase
to the Optionee.
(d) In the event that a purchase of Stock is voided by reason of the
provisions of this paragraph 14(a) or repurchased by the Company by reason of
the financial hardship of an Optionee, the amount paid to such Optionee by
reason of the voided transaction or the repurchase of such Stock shall be the
least of: (i) the funds paid by the Optionee in connection with the voided
transaction; (ii) the value in cash of Stock used to purchase such Stock,
determined as of the date of such purchase, less any amount which would have
been forfeited by reason of this paragraph 14 relative to Stock used to purchase
the forfeited Stock if such Stock had not been so used and the Holding Period
relative to such Stock had not expired; or (iii) the Fair Market Value Per
Share, as determined in accordance with the provisions of paragraph 5 hereof, on
the termination date of the Optionee's employment with the Company or the date
of the repurchase made pursuant to paragraph 14(b), as the case may be.
(e) In order to facilitate the repurchase of Stock by the Company in
accordance with the terms of paragraph 14(a) hereof, if an Optionee leaves the
employ of the Company during the Holding Period and the Company rescinds the
purchase of Stock by such Optionee, each Optionee who exercises any Option or
portion thereof shall, at the time of payment thereof, as provided in paragraph
7(a) hereof, deliver to the Company a form of stock power and assignment signed
by such Optionee in form and substance satisfactory to the Company, rendering
the certificate representing the shares purchased negotiable to the Company. An
Optionee may at any time request delivery of Stock in payment of the Purchase
Price for additional Stock pursuant to paragraph 8(b) hereof notwithstanding the
fact that such Stock has not been held for two (2) years from the date of
exercise of the Option pursuant to which it was purchased.
15. Optionee's Right to Pledge
(a) Notwithstanding the provisions of paragraph 14(a) hereof, if any
Optionee who exercises an Option demonstrates to the Committee a need to obtain
financing for the purchase of Stock pursuant to such exercise and indicates his
good faith intention to remain in the employ of the Company during the Holding
Period, the Committee, in its sole discretion, may permit delivery of any Stock
purchased pursuant to the exercise of any Option to a financial institution for
use by such Optionee as collateral security for the purchase of the Stock,
-7-
<PAGE>
subject to any necessary or appropriate restrictions with respect thereto as may
be required to comply with applicable Federal and state securities laws and/or
the listing requirements of any national securities exchange.
(b) If Stock is delivered to an Optionee in order to facilitate a
pledge described in paragraph 15(a), the Company shall have the right to cancel
said Stock upon the exercise of the Company's election to void the purchase of
such Stock pursuant to the provisions of paragraph 14(a). Upon the cancellation
of such Stock and application by the holder thereof, the Company shall pay to
the holder the amount payable for such Stock as calculated under the provisions
of paragraph 14(c) hereof.
(c) Any Stock delivered to an Optionee pursuant to the provisions of
this paragraph 15 shall contain a legend stating that the Stock is subject to
cancellation pursuant to the terms of this Plan and that upon cancellation the
amount payable to the holder thereof shall be limited as provided in the Plan.
16. Delivery of Certificates
If the Optionee remains in the employ of the Company throughout the
Holding Period, or leaves the employ of the Company by reason of retirement
(under normal Company policies), death or disability, the Company shall deliver
to the Optionee or his personal representative (as the case may be), as soon as
practicable thereafter, certificates representing the Stock purchased by the
Optionee under the Option free and clear of restriction except for the
restrictions which are necessary to assure compliance by the Company and the
Optionee with applicable Federal and state securities laws and/or the listing
requirements of any national securities exchange (the "Certificates"). If the
Company fails or declines to exercise its right to void any purchase pursuant to
the terms of paragraph 14 hereof, the Company shall deliver the Certificates to
those Optionees as soon as practicable after the expiration of two (2) years
from the date of exercise of the applicable Option. In the event an Option is
exercised using Stock as consideration for the Purchase Price, the Company shall
issue separate certificates for each block of shares delivered in payment of the
Option Price and for the balance of shares purchased at such exercise.
17. Investment Purpose
Each Option granted hereunder may be issued on the condition that any
purchase of Stock pursuant to the exercise of an Option which shall not be the
subject of a registration statement permitting the sale or other distribution
thereof shall be for investment purposes and not with a view to resale or
distribution (the "Restricted Stock"). If requested by the Company, each
Optionee must agree, at the time of the purchase of any Restricted Stock, to
execute an "investment letter" setting forth such investment intent in the form
acceptable to the Company and must consent to any stock certificate issued to
him thereunder bearing a restrictive legend setting forth the restrictions
applicable to the further resale, transfer or other conveyance thereof without
-8-
<PAGE>
registration under the Securities Act of 1933, as amended, and under the
applicable securities or blue sky laws of any other jurisdiction (together, the
"Securities Laws"), or the availability of exemptions from registration
thereunder and to the placing of transfer restrictions on the records of the
transfer agent for such Stock. No Restricted Stock may thereafter be resold,
transferred or otherwise conveyed unless:
(1) an opinion of the Optionee's counsel is received, in form and
substance satisfactory to counsel for the Company, that
registration under the applicable Securities Laws is not
required; or
(2) such Stock is registered under the applicable Securities Laws;
or
(3) "no action" letters are received from the staff of the
Securities and Exchange Commission and from the administrative
agencies administering all other applicable securities or blue
sky laws, based on the option of counsel for Optionee in form
and substance reasonably satisfactory to counsel for the
Company, advising that registrations under the Securities Laws
are not required.
18. Amendment and Termination of Plan
(a) The Board of Directors of the Company may, from time to time, with
respect to any shares at the time not subject to Options, suspend or terminate
the Plan or amend or revise the terms of the Plan; provided that any amendment
to the Plan shall be approved by a majority of the shareholders of the Company
if the amendment would (i) materially increase the benefits accruing to
participants under the Plan; (ii) increase the number of shares of Stock which
may be issued under the Plan, except as permitted under the provisions of
paragraph 13 above; or (iii) materially modify the requirements as to
eligibility for participation in the Plan.
(b) Subject to the provisions in paragraph 13 above, the Plan shall
terminate ten (10) years from the earlier of the adoption of the Plan by the
Board of Directors or its approval by the shareholders.
(c) Subject to the provisions in paragraph 13 above, no amendment,
suspension or termination of this Plan shall, without the consent of the
Optionee, alter or impair any rights or obligations under any Option granted to
such Optionee under the Plan.
19. Effective Date of Plan
The Plan shall become effective upon adoption by the Board of Directors
of the Company and approval by the Company's shareholders; provided, however,
that prior to approval of the Plan by the Company's shareholders but after
adoption by the Board of Directors, Options may be granted under the Plan
subject to obtaining such approval.
-9-
<PAGE>
20. Term of Plan
No Option shall be granted pursuant to the Plan after ten (10) years
from the earlier of the date of adoption of the Plan by the Board of Directors
of the Company or the date of approval by the Company's shareholders.
-10-
AGREEMENT
THIS AGREEMENT ("Agreement") is effective as of the 16Th day of
December, 1996 (the "Effective Date"), by and between K-V PHARMACEUTICAL
COMPANY, 2503 South Hanley Road, St. Louis, Missouri 63144, a Delaware
corporation ("Employer"), and MARC S. HERMELIN ("Employee").
WHEREAS, Employee has been employed by Employer for twenty-three (23)
years and continues to serve as the Vice Chairman and Chief Executive Officer of
Employer and has made significant contributions to Employer during the term of
his employment;
WHEREAS, Employer desires to assure itself of the continued
availability of the services of Employee and Employee desires to be employed by
Employer;
WHEREAS, Employer and Employee executed an agreement of employment
dated November 15, 1991, which agreement amended and restated certain prior
agreements (collectively, the "Employment Agreement");
WHEREAS, Employer and Employee desire to amend and restate the terms of
the Employment Agreement and believe that it is to their mutual benefit to enter
into this Agreement.
NOW, THEREFORE, in consideration of the mutual promises herein
contained and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Employer and Employee agree as follows:
1. Affiliates. Employer has or may in the future have one or more
subsidiaries and/or affiliated companies (hereafter collectively referred to as
the "Companies"). From time to time, Employer and the Companies may exchange or
use facilities, technology and/or Confidential Information (as that term is
defined below) of the other.
2. Services. Employer hereby agrees to employ Employee and Employee
agrees to be employed by Employer for the term of this Agreement in the capacity
of Vice Chairman and Chief Executive Officer or in such other capacity as
Employer and Employee shall mutually agree. Employee shall be employed at
Employer's offices in St. Louis, Missouri, or such other location as shall be
mutually agreeable to Employee and Employer. During the term of this Agreement,
Employee agrees to devote his best efforts to the performance of such reasonable
duties, commensurate with his position(s), as shall be mutually agreed to by
Employer and Employee.
3. Term. The initial term of the Agreement shall begin on the Effective
Date, and shall extend through March 31, 2002, and shall thereafter be
automatically renewed for successive twelve (12) month periods, unless and until
terminated by either Employee or Employer upon written notice to the other given
not less than ninety (90) calendar days prior to the expiration of the initial
term of this Agreement or any such renewal term. Notwithstanding the foregoing,
<PAGE>
Employee may terminate this Agreement at any time and for any reason, and
Employer may terminate this Agreement at any time for Cause. For purposes of
this Agreement, "Cause" shall mean that (i) Employee has committed a breach of a
fiduciary duty, embezzlement, larceny, or has willfully failed to perform his
duties to Employer, and in so doing has acted with full knowledge of all
pertinent facts; and (ii) such act has had a material and demonstrable adverse
effect on Employer. For purposes of this Agreement, the phrase "term of this
Agreement" shall include the initial term and any and all renewal terms.
4. Compensation.
(a) Base Salary. For the fiscal year ending March 31, 1997, (the "Base
Year") Employee is being paid a base salary (the "Base Salary") at the annual
rate of Five Hundred Ninety Three Thousand Sixty-Eight Dollars ($593,068). As
compensation for his services under Paragraph 2, and in consideration of the
obligations undertaken by Employee, Employee shall receive annual compensation
in an amount equal to the Base Salary, increased, cumulatively, as of April 1 of
each year during the term of this Agreement subsequent to the Base Year by the
greater of eight percent (8%) or the percentage increase in the cost of living
for the preceding calendar year, as measured by the U.S. Department of Labor
Consumer Price Index for All Urban Consumers, U.S. City Average, All Items, or
comparable index then in use (the "C.P.I."), or at such other rate as shall be
mutually agreed to by Employer and Employee. For purposes of this Agreement,
Base Salary at any time shall mean Base Salary as adjusted annually in
accordance with the preceding sentence. All salary payments (whether under this
Paragraph or another Paragraph of this Agreement) shall be paid at such
intervals as Employer pays its other executive employees, unless otherwise
specifically agreed to by Employer and Employee.
(b) Annual Bonus. Employee shall receive an annual bonus equal to the
following percentage of the Employer's net income, calculated on and payable
with respect to each incremental level of net income:
Employer's Net Income Employee's Bonus Percentage
Below $200,000 0%
$200,000 - $600,000 5%
$600,000 - $3,000,000 7%
$3,000,000 -$5,000,000 6%
$5,000,000 - $10,000,000 5%
Over $10,000,000 4%
Employer and Employee agree to negotiate in advance of the final
determination of the bonus, mutually acceptable terms and conditions under which
Employer pays Employee the bonus, in one or more of the following forms:
2
<PAGE>
(i) Incentive Stock Options granted under Employer's existing
option plan or a similar plan applying the Black-Scholes option pricing
model to determine the number of options equivalent in value to the
Bonus to be paid by the delivery of Incentive Stock Options;
(ii) Shares of Restricted Stock equal in number to the portion
of the Bonus to be paid by the delivery of Restricted Stock, divided by
the fair market value of the same class of unrestricted shares of
Employer's common stock to be so delivered;
(iii) Discounted Stock Options applying a discount negotiated
by Employer and Employee and using the Black-Scholes option pricing
model to determine the number of discounted options equivalent in value
to the portion of the Bonus to be paid by the delivery of Discounted
Stock Options; and/or
(iv) Cash
For purposes of this Agreement, calculations based on the Black-Scholes
option pricing model shall be made in the same manner, applying the same
assumptions used in Employer's most recent annual proxy statement. Should
Employer and Employee fail to reach an agreement regarding the form of the Bonus
after negotiating in good faith, the Bonus as finally determined by the formula
provided in this Paragraph shall be paid in cash.
For purposes of calculating Employer's net income to determine the
amount of the annual bonus, the consolidated net income after taxes of Employer
and the Companies shall be calculated by the Independent Certified Public
Accountants regularly in the employ of Employer, based on generally accepted
accounting principles consistently applied, without regard to the payment of
such bonus. Employer shall promptly provide Employee with a written copy of all
calculations hereunder. Employee's bonus, if any, shall be payable within ninety
(90) calendar days following the end of each fiscal year of Employer during the
term of this Agreement.
Funds for the exercise of stock options under Paragraphs 4(b)(i) and
(iii) may be loaned by the Employer to Employee, at the agreement of Employer.
Such loans shall bear interest at the long-term federal rate published by the
Internal Revenue Service ("AFR") as of the date of the loan.
Notwithstanding the foregoing, consistent with his historical practice,
Employee may in his sole discretion elect to receive a lesser bonus based on
consideration for Employer.
(c) Expenses. Employer agrees to reimburse Employee for all reasonable
business expenses incurred by Employee in the performance of his services
hereunder, including, but not be limited to, business travel, association
membership dues and fees, subscriptions, and the maintenance of an office in his
home(s) for business use which expenses shall be substantiated to the reasonable
satisfaction of Employer.
3
<PAGE>
(d) Vacation. Employee shall be entitled to not less than eight (8)
weeks vacation during each fiscal year of Employer, during which time Employee's
compensation shall be paid in full. Vacations need not be taken over a
consecutive eight (8) week period or at any specific time or times during the
course of any fiscal year. If Employee takes less than eight (8) weeks vacation
during any fiscal year, he shall be entitled to carry over such days or to
receive a cash payment at such time as he elects equal to the pro rata amount of
his Base Salary for the portion of his vacation period not taken.
(e) Automobile. So long as Employee continues to fulfill the position
as Vice Chairman of the Board, Employer agrees to provide Employee with an
automobile (or comparable allowance) similar to the automobile presently
provided for Employee's use plus a reasonable estimate of the average expenses
of its operation, insurance, maintenance and repair.
(f) Financial Services. During the term of Employee's employment by
Employer under this Agreement, Employer agrees to provide Employee with an
annual allowance of up to Ten Thousand Dollars ($10,000) to be used for tax
preparation, estate planning and other similar financial services provided to
Employee by qualified consultants chosen by and in the sole discretion of
Employee.
(g) Deferred Compensation. During the term of Employee's employment by
Employer under this Agreement, Employee shall be entitled to participate in the
same qualified or nonqualified deferred compensation plans made available
generally to other executive employees of Employer. In addition, Employer agrees
to implement concurrent with this Agreement the Deferred Compensation Plan
effective January 1, 1997, providing Employee with the opportunity to defer up
to fifty percent (50%) of Base Salary and up to one hundred percent (100%) of
Employee's bonus during the term of Employee's employment by Employer.
(h) Charitable Contribution. In addition to any benefits that may be
payable to Employee on death pursuant to this Agreement, Employer shall make a
charitable gift at the time of Employee's death to the charity elected by
Employee in the amount of Five Hundred Thousand Dollars ($500,000). However,
such amount shall be reduced if Employee terminates employment under the terms
of Paragraph 2 prior to attaining age sixty (60) by twenty percent (20%) for
each complete twelve (12) month period between the retirement date and the date
that Employee attains age sixty (60). The charity selected by Employee shall be
a registered public charity, university or other organization approved by
Employer (which approval shall not be unreasonably withheld) and to which
contributions are tax deductible to Employer for federal income tax purposes.
(i) Miscellaneous. During the term of Employee's employment by Employer
under this Agreement, Employer agrees to provide Employee with all other fringe
benefits as are from time to time available generally to other executive
employees of Employer.
4
<PAGE>
5. Insurance Benefits.
(a) Life Insurance. Employee shall be entitled to the same group term
life insurance coverage provided by Employer to other executive employees of
Employer.
In addition, Employer shall continue and maintain two (2) life
insurance policies on Employee's life (the "Policies") subject to that certain
split dollar agreement dated July 1, 1990 and that certain split dollar
agreement dated November 8, 1991 as each agreement may be amended from time to
time by the mutual consent of the parties (the "Split Dollar Agreements").
In this connection, Employer agrees to continue to make the premium
payments contemplated by the Split Dollar Agreements except that such agreements
shall be amended to provide that Employee shall pay that portion of the annual
premiums due on the Policies equal to the economic benefit that would otherwise
be attributable to Employee by reason of the death benefits payable to Employee
under the Split Dollar Agreements (the "Economic Benefit"). The balance of the
annual premiums contemplated by the Split Dollar Agreements shall be paid by
Employer. Employer further agrees to pay Employee an additional amount equal to
the Economic Benefit to Employee grossed up to offset the federal and state
marginal income tax to Employee generated by this additional payment. Such
additional amount shall be paid to Employee in each year and at the same time
Employee is required to make an annual premium payment under the revised Split
Dollar Agreements.
Upon the death of Employee or upon cancellation of the Policies with
the mutual consent of Employee and Employer, Employer shall be entitled to
recover the greater of all premiums paid by Employer, net of reimbursements, or
the cash surrender value of the Policies as of the date of Employee's
retirement, net of any Employer loans or withdrawals. To assure the repayment of
such amounts, the owner(s) of the Policies shall collaterally assign the
Policies to Employer as security for Employer's interest in the Policies. In the
event Employer fails to make the premium payments required by the revised Split
Dollar Agreements or the additional bonus described in this paragraph, within
sixty (60) days of the date the premium is due, Employee shall be entitled to
submit a thirty (30) day demand letter to Employer requesting payment of such
amounts. If Employer fails to make such payments within the thirty (30) day
notice period, the Split Dollar Agreements shall terminate and the Policies
shall be distributed to Employee as provided in the Split Dollar Agreements.
However, Employer shall continue to be obligated to pay to Employee the amount
of the premium payments and additional bonus which would otherwise be required
by this Agreement and the Split Dollar Agreements for the period contemplated by
the Split Dollar Agreements.
(b) Disability. If and to the extent obtainable by Employer, Employer
shall provide Employee with one or more noncancellable policies of disability
insurance or a mutually acceptable equivalent thereof which provides for the
5
<PAGE>
payment, in the event of the disability of Employee in accordance with the terms
of such policies, of monthly installments equal to sixty percent (60%) of the
Base Salary of Employee, as in effect under Paragraph 4, for the longer of: (A)
the benefit period provided under the insurance contracts, or (B) until Employee
reaches (or would have reached) sixty-five (65) years of age, which amounts
shall continue to be payable to such beneficiary or beneficiaries as are
designated by Employee in the event of Employee's death during the period
provided for the payment thereof. The value of the disability protection
provided to Employee shall be imputed to Employee currently in order that the
ultimate disability benefits shall be income tax free.
(c) Medical. Employer shall provide Employee, at Employer's expense,
with health, accident, major medical and such other insurance coverage of a kind
and in amounts not less than those presently being provided Employee and no less
than those provided by Employer to other executive employees during the term of
this Agreement.
(d) Continuation of Coverage. After Employee is no longer in the active
employ of Employer, to the extent permitted by Employer's insurer, Employee
shall continue to participate in Employer's regular life and health insurance
programs at Employer's expense. Such continued insurance shall continue for so
long as permitted by Employer's insurer but in no event for longer than Employee
is receiving payments under this Agreement or under any other employment of
consulting agreement between Employer and Employee, or, if earlier, in the event
of Employee's voluntary retirement or permanent disability, until Employee
reaches age seventy (70).
6. Pre-retirement Voluntary Termination. If Employee voluntarily
terminates his employment prior to attaining age sixty-five (65), Employee may
elect to provide consulting services in the areas described in Paragraph 7(a)
between the date of such voluntary termination and thereafter until not later
than the age of sixty-five (65), provided that such services may be terminated
by Employer upon not less than ninety (90) days' notice at any time: (i) after
such services have been provided by Employee for five (5) years, or (ii) if
Employee is terminated under Paragraph 3 during the initial five (5) years, or
(iii) if Employee is unwilling to devote the minimum hours under Paragraph 6(a),
when and if needed, at mutually agreed upon times, and Employee has not elected
to retire and receive payments under Paragraph 7 (such period is hereinafter
referred to as the "Pre-retirement Period"), then during such Pre-retirement
Period, Employee's employment shall be subject to the following terms and
conditions:
(a) Employee shall devote a minimum of three hundred (300) hours
annually, on an as-needed basis as Employer and Employee shall agree, for the
benefit of Employer. Additional hours worked over three hundred (300) shall be
compensated on a pro-rata basis. Employee shall be compensated in an amount
equal to fifty percent (50%) of the Base Salary being paid to Employee at the
time of his voluntary termination, adjusted annually, as of April 1 of each year
during the Pre-retirement Period, by the greater of eight percent (8%) or the
6
<PAGE>
C.P.I. Employee shall also be compensated in an amount equal to fifty percent
(50%) of the annual bonus under Paragraph 4(b) or on a pro-rata basis for hours
worked in excess of three hundred (300).
(b) Additionally, during the Pre-retirement Period, Employee shall be
entitled to participate in and continue to vest in all benefits he was entitled
to and was receiving during his employment period.
(c) Employee's termination under this Paragraph shall be considered
voluntary only if such termination is by Employee without duress from Employer,
its directors, officers, or shareholders, or any federal or state agency, its
officers, agents, employees or directors.
7. Retirement Benefits and Continued Services. Any time after reaching
age fifty-five (55), Employee may, as this sole option, retire from performing
services under the terms of Paragraph 2 or 6, and shall (except in the case of
complete disability discussed in Paragraph 7(c)) perform services as provided
under this Paragraph 7.
(a) Consulting Services. After retirement, Employee agrees to perform
consulting services at the request of Employer for a ten (10) year period in the
following areas:
(i) Industry and customer relations;
(ii) Strategic and financial planning and commercial business
development;
(iii)Mergers, Acquisitions and Divestitures;
(iv) Application of Employer and Industry knowledge;
(v) Assistance in respect of the continuity of Employer's
operations;
(vi) Investment community relations.
Employee agrees to devote up to three hundred (300) hours annually for the
benefit of Employer and to serve on the Board of Directors, at the request of
Employer. Additional hours worked over three hundred (300) shall be compensated
on a pro-rata basis. To assist Employee in the performance of his duties,
Employer shall provide Employee with internal support services consisting of one
(1) full-time employee as Project Coordinator, and administrative and
secretarial services as needed. Employee shall have final approval with respect
to the selection of the Project Coordinator.
(b) Consulting Compensation. Employee shall be entitled to compensation
for his consulting services to be paid in the form of a single life annuity
equal to fifteen percent (15%) of Employee's Base Salary for the year in which
retirement occurs ("Final Base Salary") payable each year beginning at age
sixty-five (65) and continuing for the longer of ten (10) years or the life of
Employee. Such payments shall continue to be payable to such beneficiary or
beneficiaries as are designated by Employee in the event of Employee's death
during the period provided for the payment thereof. In addition, for each
additional complete year of employment under the terms of Paragraph 2 or 6 after
attaining age fifty- five (55), Employee shall be entitled to an increased
annual benefit based on the following percentage (the "Vested Percentage") of
7
<PAGE>
the difference between (i) fifteen percent (15%) of Employee's Final Average
Compensation, and (ii) fifteen percent (15%) of Employee's Base Salary.
Post 55 years
of Employment Vested %
--------------------------------------------
1 40%
2 60%
3 80%
4 90%
5 or More 100%
In addition, each annual benefit shall be increased by the C.P.I. as defined in
Paragraph 4(a).
For purposes of this Agreement, "Final Average Compensation" shall mean
Employee's average annual compensation (including bonuses and other non-regular
forms of compensation and adding back voluntary deferrals under any Employer
benefit plans) earned from Employer during the highest three (3) consecutive
years of the five (5) year period ending coincident with or immediately prior to
the retirement date. If, prior to retirement under this Paragraph 7, Employee
was performing services under Paragraph 6, "Final Average Compensation" shall be
calculated using one hundred percent (100%) of the Employee's Base Salary plus
bonuses as if Employee was performing services on a full-time basis during such
years.
(c) Disability. In the event of Employee's retirement from performing
services under Paragraph 2 or 6 as a result of disability, Employee shall
continue to perform the consulting services specified in Paragraph 7(a) to the
extent Employee is able to do so. In the event of Employee's complete disability
on or after retirement, Employee shall nevertheless be entitled to the
consulting compensation provided in Paragraph 7(b). In the event of Employee's
disability on or after retirement, Employee shall continue to be entitled to the
benefits provided under Paragraphs 7(d) and (e) below. Notwithstanding the
foregoing, the total annual benefits for any year payable under Paragraphs 7(c),
(d) and (e) shall be offset by the amount of any disability benefits payable for
such year under Paragraph 5(b).
(d) Restrictive Covenants. After retirement, in consideration for
complying with the restrictive covenants described in Paragraph 12, Employee
shall receive additional compensation in the form of a single life annuity equal
to fifteen percent (15%) of Employee's Final Base Salary payable each year
beginning at age sixty-five (65) and continuing for the longer of ten (10) years
or the life of Employee. Such payments shall continue to be payable to such
beneficiary or beneficiaries as are designated by Employee in the event of
Employee's death during the period provided for the payment thereof. In
addition, for each additional complete year of employment under the terms of
Paragraph 2 or 6 after attaining age fifty-five (55), Employee shall be entitled
8
<PAGE>
to an increased annual benefit based on the Vested Percentage of the difference
between (i) fifteen percent (15%) of Employee's Final Average Compensation, and
(ii) fifteen percent (15%) of Employee's Final Base Salary. In addition, each
annual benefit shall be increased cumulatively by the C.P.I.
(e) Retirement Compensation. In addition to the compensation provided
for in (b) and (c) above, Employee shall be entitled to receive retirement
compensation paid in the form of a single life annuity equal to thirty percent
(30%) of Employee's Final Base Salary payable each year beginning at retirement
and continuing for the longer of ten (10) years or the life of Employee. Such
payments shall continue to be payable to such beneficiary or beneficiaries as
are designated by Employee in the event of Employee's death during the period
provided for the payment thereof. In addition, for each additional complete year
of employment under the terms of Paragraph 2 or 6 after attaining age fifty-
five (55), Employee shall be entitled to an increased annual benefit based on
the Vested Percentage of the difference between (i) thirty percent (30%) of
Employee's Final Average Compensation, and (ii) thirty percent (30%) of
Employee's Final Base Salary. In addition, each annual benefit shall be
increased cumulatively by the C.P.I.
(f) Election of Alternative Form of Payment. Notwithstanding the
foregoing, for each of the above pieces of compensation payable over the life of
Employee, Employee shall be entitled to elect an earlier start date after
retirement or an alternative form (such as joint and survivor) of annuity which
shall be actuarially adjusted to equate to the original benefit provided for in
this Paragraph 7. Such actuarial calculations shall be performed by a qualified
actuary based on generally accepted actuarial principles.
8. Termination Benefits.
(a) Triggering Event. A "Triggering Event" shall mean (i) termination
of this Agreement by its terms and with no renewal, or (ii) termination of
Employee's employment with Employer in the capacity described in Paragraph 2
during the term of this Agreement for any reason whatsoever other than
Employee's voluntary termination of employment or retirement, as contemplated
under Paragraph 6 or 7, respectively, or Employee's death or disability, or
(iii) even if this Agreement is still in force and Employee has not been
terminated, failure of Employer to maintain the Letter of Credit required by
Paragraph 9.
(b) Termination Payments. Employer shall pay Employee, on the date of
the Triggering Event, a lump sum cash payment (the "Lump Sum Payment") equal to
one (1) times Employee's Base Salary as in effect on the date of the Triggering
Event; and Employer shall make monthly cash payments to Employee or his assigns,
on the first day of each of the thirty-six (36) calendar months following the
date of the Triggering Event, equal to seventy-five percent (75%) of the Lump
Sum Payment divided by twelve (12). If Employee shall die during the thirty-six
(36) month period, any payments remaining due hereunder shall be accelerated and
9
<PAGE>
shall become immediately due and payable to Employee's beneficiaries, or if none
have been designated by Employee, to the estate of Employee.
(c) Adjustment of Stock Options and Restricted Stock. With respect to
any stock options or restricted stock held by Employee at the occurrence of the
Triggering Event, such options or restricted stock agreements shall be amended
by Employer, as of such time, provided that the provisions of the applicable
stock optionor restricted stock plans or agreements provide for such amendment
and the employment record of Employee over the full tenure of such Employee's
employment so justifies (the determination of which shall be made by the Board
of Directors of Employer, but shall not be unreasonably withheld) and provided
Employee has not been terminated for Cause, to provide that upon the occurrence
of the Triggering Event: (i) Employee shall have the right to exercise such
options for up to a two (2) year period following the Triggering Event, (ii) all
such stock options and restricted stock shall become immediately fully vested,
and (iii) any Holding Period requirement with regard to any restricted stock or
shares purchased pursuant to the exercise of a stock option shall be waived and
shall be inapplicable to such shares.
(d) Payments Not Conditioned on Services. Employer's obligations under
his Paragraph 8, including the making of any monetary payments, shall be
independent of, and not conditioned upon, Employee's rendering services under
Paragraph 6 or 7.
9. Letter of Credit.
(a) Terms. Employer has delivered to Employee and will continue to
maintain in effect during the term of Employee's employment under Paragraph 2
and for the period of any unfilled obligation of Employer to make payments to
Employee under Paragraph 8 an irrevocable letter of credit (the "Letter of
Credit"), form a bank mutually acceptable to Employer and Employee (the "Bank")
for an amount which at all times during the term thereof shall be equal to the
lesser of: (A) three (3) times Employee's Base Salary, or (B) the amount payable
by Employer under Paragraph 8 after deducting any amounts actually paid to
Employee thereunder. Employer shall provide Employee with a copy of any amended,
extended or replacement Letter of Credit not later than ten (10) business days
prior to the effective date thereof and shall notify Employee in writing of any
impending expiration of the Letter of Credit, as in effect at any time, no later
than forty-five (45) days prior to the expiration date of the Letter of Credit.
The Letter of Credit shall provide that Employee may draw upon the
Letter of credit the aggregate amount of all payments to be made by Employer to
Employee under Paragraph 8 and not previously paid, in lieu of such payments, if
the following conditions exist:
(A) (I) Employee's employment with Employer has been
terminated during the term of this agreement for any reason whatsoever
(other than voluntary retirement, death, or permanent disability); or
10
<PAGE>
(II) This Agreement has not been renewed upon the
expiration of the initial term or any renewal term; or
(III) Employer has ceased operations; and
(B) Employer shall have failed, refused, or been unable to
make the Lump Sum Payment or any monthly payment to Employee required
by Paragraph 8, for any reason whatsoever.
Notwithstanding the foregoing, whether or not a condition described in
subparagraph (A) or (B) exists, and whether or not Employee's employment has
been terminated, if the Letter of Credit is not renewed by the Bank or replaced
by Employer within twenty (20) days prior to the expiration of the Letter of
Credit at any time during the term of Employee's employment under Paragraph 2,
Employee shall be entitled to draw upon the Letter of Credit the aggregate
amount of all payments to be made by Employer to Employee under Paragraph 8.
The Letter of Credit shall further provide that funds represented by
the Letter of Credit shall be available to Employee thereunder against:
(A) Employee's sight draft drawn on the bank, bearing the
number of the Letter of Credit; and
(B) Employee's signed certificate, in one of the forms
attached to the Letter of Credit, stating that one or more of the
event(s) specified in Paragraph 9(a) has occurred and the date of such
occurrence.
Payment of the Letter of Credit shall not require any other
documentation or the fulfillment of any other conditions of any kind.
(b) Limitation on Use. Notwithstanding anything to the contrary
contained in this Paragraph 9, Employee agrees that if a Triggering Event, as
defined in Paragraph 8, has occurred and Employer has not employed a replacement
chief executive officer, Employee will not exercise his rights to draw against
the Letter of Credit for a period not to exceed four (4) months from the date of
such Triggering Event. Provided, however, that Employee shall not be prohibited
from exercising his right to draw against the Letter of Credit during the four
(4) month period if:
(i) the Letter of credit will expire in less than twenty (20)
days or is in jeopardy of not being maintained for any reason, and is not
scheduled to be renewed or replaced by Employer;
(ii) Employer is adjudicated a bankrupt or makes an assignment
for the benefit of creditors;
11
<PAGE>
(iii) Bankruptcy, insolvency, reorganization, arrangement,
debt adjustment, liquidation or receivership proceedings, in which Employer is
alleged to be insolvent or unable to pay its debts as they mature, are
instituted by or against Employer, and Employer consents thereto or admits in
writing the material allegations of the petitions filed in said proceedings or
said proceedings remain undismissed for sixty (60) days;
(iv) There is an entry of a decree or order for relieve by a
court having jurisdiction with respect to Employer in an involuntary case under
the federal bankruptcy laws against Employer, or Employer commences voluntary
proceedings under federal bankruptcy laws;
(v) A significant portion of the assets of Employer is
attached;
(vi) A judgment is obtained in a legal or equitable proceeding
against Employer and the sale of a significant portion of Employer's assets is
contemplated or threatened under legal process as a result of such judgment; or
(vii) an execution process is issued against Employer which
affects a significant portion of Employer's assets or the existence or operation
of the Letter of Credit, which is not removed or satisfied within twenty (20)
days.
(c) Employee's Election. If at any time Employee: (i) has exercised his
right to draw against the Letter of Credit provided for under this Paragraph 9,
and (ii) there is a Change of Control and Employee becomes eligible for benefits
under Paragraph 10 of this Agreement, then the benefits which Employee would be
entitled to receive under Paragraph 10 shall be reduced by the proceeds Employee
received when Employee exercised his rights to draw against the Letter of
Credit; provided, however, that if the proceeds received from the Letter of
Credit exceed the benefits to be received under Paragraph 10, this Paragraph
shall not be construed to require Employee to repay any amounts to Employer.
10. Change of Control.
(a) Definition. For purposes of this Agreement, a "Change of Control"
of Employer shall mean the occurrence of any one of the following events:
(i) any "person," as such term is used in Sections 3(a)(9) and
13(d) of the Securities Exchange Act of 1934, becomes a "beneficial owner," as
such term is used in Rule 13d-3 promulgated under that Act, of twenty percent
(20%) or more of the voting stock of Employer.
(ii) the majority of the Board consists of individuals other
than Incumbent Directors, which term means the members of the Board on the date
of this Agreement; provided that any person becoming a director subsequent to
12
<PAGE>
such date whose election or nomination for election was supported by two-thirds
(2/3) of the directors who then comprised the Incumbent Directors shall be
considered to be an Incumbent Director;
(iii) Employer adopts any plan of liquidation providing for
the distribution of all or substantially all of its assets;
(iv) all or substantially all of the assets or business of
Employer is disposed of pursuant to a merger, consolidation or other transaction
(unless the shareholders of Employer immediately prior to such merger,
consolidation or other transaction beneficially own, directly or indirectly, in
substantially the same proportion as they owned the voting stock of the company,
all of the voting stock or other ownership interests of the entity or entities,
if any; that succeed to the business of Employer); or
(v) Employer combines with another company and is the
surviving corporation but, immediately after the combination, the shareholders
of Employer, immediately prior to the combination hold, direct or indirectly,
fifty percent (50%) or less of the voting stock of the combined company (there
being excluded from the number of shares held by such shareholders, but not from
the voting stock of the combined company, any shares received by affiliates of
such other company in exchange for stock of such other company).
(b) Termination After Change in Control. In the event of a Change of
Control of Employer, if (i) immediately preceding such Change of Control,
Employee was providing services under Paragraph 2, 6, or 13, and (ii) Employee's
employment in such capacity terminates within three (3) years after such Change
of Control ("Termination"), voluntarily or involuntarily, with or without cause,
for any reason whatsoever, except for the death or disability of Employee,
Employee shall be entitled to the benefits provided in Paragraph 10(c). For
purposes of this Agreement, "Date of Termination" shall mean the date on which a
Notice of Termination is given, unless the parties agree to another date, and
"Notice of Termination" shall mean a written notice communicated by either party
to the other party which indicates that Employee's employment with Employer is
being terminated.
(c) Payments on Termination After Change in Control.
(i) Employee's Base Salary through the Date of Termination at
the rate in effect on the date Notice of Termination is given, including
expenses, vacation pay, allowances and other compensation and benefits under
Paragraphs 4 and 5, and (ii) the amount, if any, of any bonus for a past fiscal
year (and pro rata for any portion of the then current fiscal year through the
Date of Termination) which has not been awarded or paid under any bonus plans in
which Employee is entitled to participate at the time of the Change of Control
or under other bonus plans at least as beneficial to Employee. In addition,
Employer shall continue in full force and effect for the benefit of Employee
through the Date of Termination all stock ownership, purchase or option plans,
13
<PAGE>
employee benefit or compensation plans, and insurance or disability plans in
effect immediately preceding the Change of Control or plans substantially
similar thereto.
(ii) In lieu of any further payments or benefits to be paid or
otherwise provided under Paragraph 4 (excluding any stock option or restricted
stock grants and any deferred compensation benefits payable under Paragraphs
4(b) and (g)) for any period subsequent to the Date of Termination, Employer
shall pay as severance pay ("Severance Pay") to Employee a lump sum payment
equal to the sum of: (A) two and one-half (2-1/2) times the greater of: (x)
Employee's Base Salary immediately prior to the Date of Termination, or (y)
Employee's Base Salary in effect immediately prior to the date on which the
Change of Control occurred, and (B) Employee's bonus, if any, which would be
payable in respect of the thirty (30) month period beginning on the Date of
Termination as if Employee had continued his position, computed based upon the
formula in Paragraph 4(b). Such Severance Pay shall be subject to all applicable
federal and state income taxes. The portion of the Severance Pay based upon
Employee's Base Salary shall be paid on or before the fifth (5th) day following
the Date of Termination, and the portion of the Severance Pay based upon any
bonus plan shall be paid to Employee as and when payable under the terms of the
applicable plan had Employee's employment continued. Employee, by written notice
to Employer at any time prior to a Change of Control of Employer or the Date of
Termination, may elect, in his sole discretion, to receive said Severance Pay
interest-free at a future time, but in no event any later than twenty-four (24)
months after the Date of Termination.
(iii) To the extent not otherwise provided for under the terms
of any of Employer's stock option agreements, all stock options and restricted
stock granted by Employer or any predecessor of Employer to Employee shall vest
and be exercisable or transferable as of the Date of Termination and, except for
"incentive stock options" within the meaning of 26 U.S.C. ss.422, all options
shall remain fully exercisable for six (6) months following the Date of
Termination. In addition, any holding period for the underlying shares specified
under any of Employer's stock option agreements or restricted stock agreements
with Employee shall automatically be amended and deemed to be the earlier of:
(i) two (2) years from the date of exercise of the stock option, or (ii) the
Date of Termination.
(iv) Employer shall maintain in full force and effect, for the
continued benefit of Employee and members of Employee's family, for a period of
thirty (30) months after the Date of Termination, all employee benefit plans and
programs, including, but not limited to plans and programs provided under
Paragraphs 4, 5, 6, and 7 concerning profit-sharing, retirement, life insurance,
medical, health and accident, automobile and disability plans or programs in
which he or such family members were entitled to participate immediately prior
to: (i) the Date of Termination, or (ii) the date of Change of Control,
whichever plans provide greater benefits, provided that continued participation
is possible under the general terms and provisions of such plans and programs.
To the extent the terms of the individual agreements or policies contemplated by
Paragraph 5 require benefits to be provided for a period which would be less
14
<PAGE>
than thirty (30) months after the Date of Termination, then notwithstanding the
terms of Paragraph 5 to the contrary, Employer shall provide benefits for a
period of time no less than thirty (30) months from and after the date of
Termination. If Employee's participation in any such plan or program is barred,
Employer shall arrange to provide Employee with benefits substantially similar
to those which Employee would be entitled to receive under such plans and
programs as if Employee's participation was not barred.
(v) In lieu of the compensation and retirement benefits
provided under Paragraph 7, Employee shall be entitled to receive an annual
retirement benefit equal to sixty percent (60%) of Employee's Final Average
Compensation (as defined in Paragraph 7) payable in the form of a single life
annuity over the life of Employee beginning at age sixty-five (65). Such benefit
shall not be conditioned on the covenants described in Paragraph 7. If Employee
has elected an actuarially reduced alternative form of benefit as provided in
Paragraph 7(e), the retirement benefit shall be paid in such alternative form.
(d) Coordination with Paragraph 8. The benefits provided under this
Paragraph 10 shall be in lieu of the benefits provided under Paragraph 8.
Notwithstanding the foregoing, the Employee may elect, by written notice to
Employer given within thirty (30) days after the date of the Notice of
Termination to receive the benefits provided under Paragraph 8 in lieu of the
benefits provided under this Paragraph 10.
(e) Mitigation. Employee shall not be required to mitigate the amount
of any payment provided for in this Paragraph 10 by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this Paragraph 10
be reduced by any compensation earned by Employee as a result of employment by
another employer after the Date of Termination, or otherwise.
(f) Application of Section 280G.
(i) If it shall be determined that any payment or distribution
by Employer to or for the benefit of Employee (whether paid or payable or
distributable pursuant to the terms of this Paragraph 10, but determined without
regard to any additional payments required under subparagraph (c) above) (a
"Payment"), would be subject to the payment by Employee of the excise tax
imposed by Section 280G(b)(2) of the Internal Revenue Code of 1987, as amended
(the "Code"), or any interest or penalties is alleged to be due from Employee
with respect to such excise tax (such excise tax, together with any interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
Employee shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by Employee of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes and excise tax imposed upon the
Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to
the Excise Tax payable by Employee upon the Payment.
15
<PAGE>
(ii) Subject to the provisions of subparagraph (c)(1) above,
all determinations required to be made under subparagraph (c), including whether
and when a Gross-Up Payment is required and the amount of such Gross-Up Payment
and the assumptions to be utilized in arriving at such determination, shall be
made by a nationally recognized accounting firm mutually acceptable to Employee
and Employer (the "Accounting Firm"), which shall provide detailed supporting
calculations both to Employer and Employee within fifteen (15) business days of
the receipt of notice from Employee that there has been a Payment, or such
earlier time as is requested by Employer. All fees and expenses of the
Accounting Firm shall be borne solely by Employer. Any Gross-Up Payment, as
determined pursuant to subparagraph (c), shall be paid by Employer to Employee
within five (5) days of the receipt of the Accounting Firm's determination. If
the Accounting Firm determines that no Excise Tax is payable by Employee, it
shall furnish Employee with a written opinion that failure to report the Excise
Tax on Employee's applicable federal income tax return would not result in the
imposition of a negligence or similar penalty. Any determination by the
Accounting Firm shall be binding upon Employer and Employee. As a result of the
uncertainty in the application of Code Section 280G at the time of the initial
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by Employee should have been made
("Underpayment"), consistent with the calculations required to be made
hereunder. If Employer exhausts its remedies pursuant to subparagraph (c)(3) and
Employee thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has occurred
and any such Underpayment shall be promptly paid by Employer to or for the
benefit of Employee.
(iii) Employee shall notify Employer in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by
Employer of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten (10) business days after Employee is informed
in writing of such claim, and shall apprise Employer of the nature of such claim
and the date on which such claim is requested to be paid. Employee shall not pay
such claim prior to the expiration of the thirty (30) day period following the
date on which Employee gives such notice to Employer (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If Employer notifies Employee in writing prior to the expiration of such period
that it desires to contest such claim, Employee shall:
(A) give Employer any information reasonably requested by
Employer relating to such claim;
(B) take such action in connection with contesting such claim
as Employer shall reasonably request in writing from time to time,
including without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by Employer;
(C) cooperate with Employer to contest such claim; and
16
<PAGE>
(D) permit Employer to participate in any proceedings relating
to such claim;
provided, however, that Employer shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Employee harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this subparagraph (c)(3), Employer shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forego any
and all administrative appeals, proceedings, hearings or conferences with the
taxing authority in respect of such claim and may, at its sole option, either
direct Employee to pay the tax claimed and sue for a refund, or contest the
claim in any permissible manner. Employee agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as Employer shall determine;
provided, however, that if Employer directs Employee to pay such claim and sue
for a refund, Employer shall advance the amount of such payment to Employee,
interest-free, and shall indemnify and hold Employee harmless on an after-tax
basis) from any Excise Tax or income tax (including interest or penalties with
respect thereto) imposed with respect to such advance or with respect to any
imputed income with respect to such advance; and further provided that any
extension of the statute of limitations relating to the payment of taxes for the
taxable year of Employee with respect to which such contested amount is claimed
to be due is limited solely to such contested amount. Furthermore, Employer's
control of a contest shall be limited to issues with respect to which a Gross-Up
Payment would be payable hereunder, and Employee shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(iv) If, after the receipt by Employee of an amount advanced
by Employer pursuant to subparagraph (c)(3). Employee becomes entitled to
receive any refund with respect to such claim, Employee shall (subject to
Employer's complying with the requirements of subparagraph (c)(3) promptly pay
to Employer the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by
Employee of an amount advanced by Employer pursuant to subparagraph (c)(3), a
determination is made that Employee shall not be entitled to any refund with
respect to such claim and Employer does not notify Employee in writing of its
intent to contest such denial or refund prior to the expiration of thirty (30)
days after such determination, then such advance shall be forgiven and shall not
be required to be repaid and the amount of such advance shall offset, to the
extent thereof, the amount of Gross-Up Payment required to be paid.
(g) Adjustment of Index. In the event of a Change of Control of
Employer has occurred and Employee is providing services under Paragraph 2 or 6,
then notwithstanding anything herein to the contrary, annual adjustments to
continuing payments due under Paragraph 4, shall thereafter be the greater of
17
<PAGE>
ten percent (10%) or the percentage increase in the costs of living based on the
U.S. Department of Labor Consumer Price Index for All Urban Consumers, U.S. City
Average, All Items, or comparable successor index.
11. Indemnity. Upon the termination of Employee's employment hereunder
by any party and for any reason, Employer shall immediately, to the fullest
extent permitted by applicable law, indemnify and hold Employee and Employee's
estate, heirs, personal representatives, successor and assigns, harmless from
and against any and all losses, costs, expenses, claims, damages, demands,
liabilities, derivative and other suits, actions and/or judgments of any nature
and description (including, without limitation, attorneys' fees) arising in
connection with any of Employee's past or present services as a director,
officer and/or employee of Employer or the Companies. Immediately upon such
termination, Employer shall obtain a rider to its errors and omissions insurance
policy covering Employer's obligations pursuant to the Paragraph 11.
12. Restrictive Covenants. During the term of Employee's employment
under this Agreement (including, for the purposes of this Paragraph 12, any
period during which Employee is providing services to Employer under Paragraph
7, and for a period of three (3) years after the termination of such employment,
unless Employer experiences a Change of Control or fails to make the payments
required to be made to Employee by Employer under Paragraph 8 for reasons other
than the breach of the Agreement by Employee, Employee covenants and agrees that
Employee will not, in any manner directly or indirectly:
(a) Except as required in his duties to Employer or as required by law
(in which case Employee shall give Employer notice in advance of such disclosure
in sufficient time to permit Employer to take such legal action as may be
necessary to prevent such disclosure, unless the circumstances under which such
disclosure is required make it impracticable for Employee to give such notice to
Employer ), disclose or divulge to any person, entity, firm or company, directly
or indirectly, any privileged knowledge, formulae, devices, confidential
information, proprietary business methods, unique techniques, customer lists,
supplier lists or other data of Employer ("Confidential Information").
(b) Solicit, divert, take away or interfere with: (i) any of the
employees or agents of Employer, or (ii) any customer of or supplier to Employer
with respect to any area of business which is competitive with the business of
Employer at the date of such termination of employment.
(c) Engage, directly or indirectly, either personally or as an
employee, partner, associate partner, manager, agent, advisor, consultant or
otherwise, or by means of any corporate or other device, in any business which
is competitive with the business of Employer at the date of such termination of
employment; provided nothing contained herein shall restrict Employee from
owning securities of a competitor of Employer which are listed on any National
Securities Exchange or actively traded over the counter, if Employee has no
other connection or relationship, direct or indirect, with the issuer o such
securities.
18
<PAGE>
(d) It is the intention of the parties to restrict the activities of
Employee under Paragraphs 11(a), (b) and (c) only to the extent necessary, after
a review of all facts and circumstances, for the protection of legitimate
business interests of Employer, and the parties specifically covenant and agree
that should any of the provisions set forth herein, under any set of
circumstances not now foreseen by the parties, be deemed too board for that
purpose, said provisions will nevertheless be valid and enforceable to the
extent necessary for such protection. It is also agreed that Employee may engage
in activities which would be covered by Paragraph 12(c), with the written
consent of Employer.
(e) To the extent that Employer Patent and Confidential Information
Agreement and Agreement to assign Inventions with Employer, entered into between
Employer and Employee, which shall remain in full force and effect, shall impose
any other or greater obligations on Employee (and/or any obligations of greater
duration) than those set forth in this Paragraph 12, then such greater (and/or
longer) obligations: (i) shall prevail (in addition to those set forth in this
Paragraph 12); and (ii) shall survive any expiration or termination of this
Agreement for any reason whatsoever.
(f) If Employee breaches any of the terms of this Paragraph 12, in
addition to any other rights which Employer may have against Employee, any
amounts due Employee under Paragraph 6 or 7 shall be suspended for so long as
such violation continues and are forfeited if the violation is not cured within
six (6) months, or waived, at Employer's option, based on a review of the facts
and circumstances.
13. Succession. If Employee shall voluntarily terminate his employment
under Paragraph 2, as provided in Paragraph 6 and 7, and a period of transition
is needed for a successor chief executive officer, Employee may, at his
election, provide services, in his position as Vice Chairman of the Board to
assist the successor chief executive officer in the transition, for a period of
one (1) year or such lesser period as Employee shall agree. If Employee provides
such services, then he shall receive compensation for such period, in accordance
with Paragraph 4, instead of Paragraph 6 or 7, as the case may be, and only
thereafter the provisions of Paragraphs 6 and 7 shall apply.
14. Miscellaneous.
(a) Remedies. Employee acknowledges and agrees that any breach or
evasion of any of the terms of Paragraph 12 of this Agreement by Employee will
result in immediate and irreparable injury to Employer for which Employer cannot
be adequately protected or compensated by the payment of damages and therefore
shall authorize recourse by Employer to injunction and/or specific performance
as well as to all other legal or equitable remedies to which Employer may be
entitled. No remedy conferred by any of the specific provisions of this
Agreement is intended to be exclusive of any other remedy, and each and every
remedy shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity, by statute or
19
<PAGE>
otherwise. The election of any one or more remedies by either party shall not
constitute a waiver of the right to pursue other available remedies.
(b) Severability. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof. Any
provision which is invalid or unenforceable (whether generally or limited to one
or more individual jurisdictions) shall be modified in its scope and/or
application in such a manner and to such an extent (either generally or in such
individual jurisdictions as is necessary) as to be valid and enforceable as
nearly as possible consistent with its stated purpose and intent or, if such
modification is not possible, shall be construed (generally or in such
jurisdiction(s)) as if such invalid or unenforceable provisions were omitted.
(c) Waiver. No waiver, modification or amendment of this Agreement or
of any covenant, condition or limitation herein contained shall be effective
unless in writing specifically referring thereto, and duly executed by the
parties hereto. The failure of either party to exercise or otherwise act with
respect to any of its rights hereunder in the event of a breach of any of the
terms or conditions hereof by the other party shall not be construed as a waiver
of such breach, nor prevent the nonbreaching party from thereafter enforcing
strict compliance with any and all of the terms and conditions hereof.
(d) Complete Agreement. Except for the agreements specifically referred
to in this Agreement, and the provisions contained in Employer's profit sharing,
stock option and other employee benefit plans, this Agreement contains the
complete agreement concerning the employment arrangement between the parties and
shall, as of the effective date hereof, supersede all other agreements, oral or
written, between the parties. The parties stipulate that neither of them has
made any representations or warranties with respect to the subject matter of
this Agreement, including the execution and delivery hereof, except as are
specifically set forth herein.
(e) Controlling Law. This Agreement shall be governed by, construed and
interpreted according to the laws of the State of Missouri, notwithstanding the
place of execution hereof, nor the performance of any acts in connection
herewith or hereunder in any other jurisdiction.
(f) Successors; Binding Agreement.
(i) Employer shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of Employer, by agreement in form
and substance satisfactory to Employee, to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that Employer would be
required to perform if no such succession had taken place. As used in this
Agreement, "Employer" shall mean Employer, as hereinbefore defined, and any
successor to its business or assets as aforesaid which executes and delivers the
20
<PAGE>
agreement provided for in this Paragraph 14 or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.
(ii) This Agreement shall inure to the benefit of and be
enforceable by Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Employee should die while any amount would still be payable to him hereunder if
he had continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to his devisee,
legatee or other designee or, if there be no such designee, to his estate.
(g) Notice. Any notice given by either party hereunder shall be in
writing and shall be personally delivered or shall be mailed, Express, certified
or registered mail, or sent by a generally recognized next business day courier,
postage or other charges prepaid, as follows:
To Employer:
K-V Pharmaceutical Company
2503 South Hanley Road
St. Louis, Missouri 63144
Attention: Director, Human Resources
To Employee:
At his address as set forth on the payroll records
of Employer,
or to such other address as may have been furnished to the other party by
written notice. Notice shall be deemed given on the date personally delivered,
or if sent by Express Mail or next business day courier on the business day
following the date sent, or if otherwise mailed, two calendar days after the
date postmarked.
(h) Accounting. If Employee does not agree with any calculation by
Employer hereunder, within thirty (30) calendar days after Employee has received
written notice of the calculation, Employee may notify Employer's Board of
Directors of his disagreement and thereby cause an independent review to be made
by an accountant selected by Employee. If such accountant determines that the
calculation is in error and Employee is entitled to additional compensation and
Employee's accountant cannot agree as to the amount, the two accountants shall
select an independent third accountant to review the calculation and any payment
made, whose decision shall be binding on both parties. If as a result of such
review employee's payment is increased, Employer shall bear the expense of the
review, including the cost of Employee's accountant and the third account.
21
<PAGE>
(i) Headings. The headings herein are for convenience only and shall
not affect the interpretation of this Agreement.
(j) Stock Options. Except for "incentive stock options" within the
meaning of 26 U.S.C. ss. 422, Employer agrees to continue in effect in
accordance with the terms and conditions thereof (other than the requirement of
Employee's continuing employment with Employer) during the term of this
Agreement and subsequent to Employee's retirement and so long as Employee
remains a director or a consultant to Employer, all stock options for the
purchase of Employer's shares held by Employee at the date of his Agreement. In
addition, upon Employee's retirement, any period provided for Employer to
continue to hold shares subsequent to the prior exercise of any stock option
shall terminate and be of no further force or effect, and any such shares then
held by Employer shall be delivered to Employee, subject to Employee's agreement
to comply with applicable securities laws and the provisions of any restrictive
legend required to be included on any certificate(s) issued therefor under such
securities laws.
(k) Attorney's Fees. If Employee retains legal counsel as a result of
the termination of his employment by Employer, or to enforce any term of this
Agreement, by reason of Employer's alleged failure to perform or alleged breach
of this Agreement, Employer shall pay to Employee all such attorneys' fees and
costs associated with such legal counsel, whether or not litigation shall be
commenced.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first above written.
"EMPLOYEE"
/s/ Marc S. Hermelin
MARC S. HERMELIN
"EMPLOYER"
K-V PHARMACEUTICAL COMPANY
By: /s/ Gerald R. Mitchell
(Name)
Vice-President, Finance
(Title)
22
<PAGE>
STATE OF MISSOURI )
) ss.
COUNTY OF ST. LOUIS )
I, Chris Lahar, do hereby certify that on this 16th day of December,
1996, before me personally appeared Marc S. Hermelin, to me known to be the
person described in and who executed the foregoing instrument and who
acknowledged that he executed the same as his free act and deed.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed by official
seal in said County and State on the day and year above written.
/s/ Chris Lahar
My Commission Expires:
STATE OF MISSOURI )
) ss.
COUNTY OF ST. LOUIS )
I, Chris Lahar, do hereby certify that on this 16th day of December,
1996, before me personally appeared Gerald R. Mitchell, to me known to be the
VP, Finance of KV Pharmaceutical Company, a Delaware corporation, and known to
me to be the same person whose name is subscribed to the foregoing instrument,
who acknowledged that he signed and delivered said instrument pursuant to
authority given by the Board of Directors of said corporation, as his free act
and deed, as the free act and deed of said corporation for the uses and purposes
therein set forth.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed by official
seal in said County and State on the day and year above written.
/s/ Chris Lahar
My Commission Expires:
23
<PAGE>
KV PHARMACEUTICAL COMPANY
December 16, 1996
Mr. Marc S. Hermelin
2503 S. Hanley Road
St. Louis, MO 63144
RE: Agreement between KV Pharmaceutical Company
and Marc S. Hermelin, dated December 16, 1996
Dear Mr. Hermelin:
This letter will confirm our understanding that your Annual Bonus for Fiscal
Year 1997 will be calculated and paid to you under your old Agreement, dated
November 15, 1993 and the Amendments attached thereto.
Except as specifically modified by this letter, it is agreed that the Agreement
will remain in full force and effect as originally written.
If this accurately reflects our understanding, please sign one copy of this
letter and return it to me for our files.
Sincerely,
KV PHARMACEUTICAL COMPANY
/s/ Gerald R. Mitchell
Gerald R. Mitchell
Vice-President, Finance
AGREED: /s/ Marc S. Hermelin DATE: 12/16/96
Marc S. Hermelin
24
KV PHARMACEUTICAL COMPANY
February 17, 1997
Marc S. Hermelin
General Partner
Rosh Chodesh
c/o KV Pharmaceutical Company
2503 South Hanley Road
St. Louis, MO 63144
RE: Lease of 2503 South Hanley Road
Dear Marc:
Reference is hereby made to the Commercial Lease (the "Lease") dated March 11,
1971 for the premises located at 2503 South Hanley Road, Brentwood, MO 63144
(the "Premises"), as amended by the Supplement to the Lease, dated November 9,
1972, entered into by your predecessor-in-interest in the Premises, as Landlord
and KV Pharmaceutical Company, as tenant, and by letter agreement dated November
12, 1979 and five (5) year extension dated November 20, 1986 to the term of the
Lease through December 31, 1991 signed by you and KV Pharmaceutical Company and
a five (5) year extension dated November 20, 1991 to the term of the lease
signed by you and the Company, and a five (5) year extension to the term of the
Lease through December 31, 2001.
KV Pharmaceutical Company has a need for additional office and lab space at the
2503 South Hanley location. The Landlord is not currently in a position to
finance such an expansion, but is willing to entertain a proposal to expand such
facilities by the tenant and grant certain lease concessions to the tenant as
consideration for the investment by KV. The cost of the expansion approximates
$1,800,000.
In consideration of the tenant investing in the proposed improvements, Landlord
agrees to an addendum to the lease to reflect the following:
1. The expiration date of the lease extension effective January
1, 1997 shall be extended to December 31, 2006.
2. One additional five (5) year option to extend the term of the lease
beginning January 1, 2007 shall be added under the same terms as the
prior lease extensions.
3. KV shall have a right of first refusal to purchase the property upon
notification of an offer to purchase the property by a bona fide third
party. KV shall have 30 calendar days to match the bona fide third
party offer.
<PAGE>
4. Rentals for the first seven (7) years after the completion of the
construction will be at the current rate, effective January 1, 1997
(adjusted for the Consumer Price Index, U.S. City Average, All Items)
on 25,000 square feet. At the end of the seven (7) year period from
completion of construction, rentals shall be increased to a fair market
rate on the total expanded square footage of approximately 35,000
square feet, but not less than the rate per square foot being charged.
5. KV agrees that at the request of the lessor, an appraisal or third
party real estate opinion may be requested and the lease rates adjusted
to such higher rate as supported by the appraisal/opinion. Lessor may
request such appraisal/third party real estate opinion not more
frequently than once every four years.
6. If for any reason during the current lease extension or additional
option period, KV elects to vacate the premises, KV will be responsible
for remodeling the special use laboratory space up to a maximum
liability of $300,000.
Please indicate your acceptance and agreement of the terms of this letter by
signing and returning the enclosed copy of this letter to the undersigned.
Very truly yours,
KV PHARMACEUTICAL COMPANY
/s/ Gerald R. Mitchell
----------------------------
Gerald R. Mitchell
Vice President, Finance
Accepted and agreed:
/s/ Marc S. Hermelin 2/17/97
- --------------------------- -------
Marc S. Hermelin Date
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
EARNINGS (LOSS) PER SHARE CALCULATIONS
<TABLE>
<CAPTION>
Year Ended March 31,
1997 1996 1995
------------------- --------------------- ---------------------
<S> <C> <C> <C>
Calculation of Primary Earnings (Loss) per Share:
Net Income (Loss) $ 8,923,512 $ 4,042,660 $ (5,374,801)
(Less) plus dividends on preferred stock (421,750) (421,750) 421,750
-------------------- ---------------------- ---------------------
Earnings (Loss) Attributed to Common Stock 8,501,762 3,620,910 (5,796,551)
=================== ===================== =====================
Average Number of Common Shares and
Common Share Equivalents Outstanding:
Average common shares outstanding 11,839,328 11,521,884 11,178,495
Common share equivalents (after application
of treasury stock method) 267,664 292,213 N/A
------------------- --------------------- ---------------------
Average Common Shares and Common
Share Equivalents Outstanding 12,106,992 11,814,097 11,178,495
=================== ===================== =====================
Primary Earnings (Loss) per Share(1) $ 0.70 $ 0.31 $ (0.52)
=================== ===================== =====================
Calculations of Fully-Diluted Earnings (Loss) per Share:
Earnings (Loss) per Share:
Net income (Loss) $ 8,923,512 $ 4,042,660 $ (5,374,801)
(Less) plus dividends on preferred stock (421,750) (421,750) 421,750
Plus (less) dividends not payable due to preferred
stock conversion 421,750 421,750 (421,750)
------------------- --------------------- ---------------------
Earnings (Loss) Attributed to Common Stock 8,923,512 4,042,660 (5,374,801)
=================== ===================== =====================
Average Number of Shares Outstanding on a
Fully-Diluted Basis:
Average common shares outstanding 11,839,328 11,521,884 11,178,495
Shares issuable upon conversion of stock options 268,733 354,593 182,842
Common equivalent shares for preferred stock 602,500 602,500 602,500
------------------- --------------------- ---------------------
Average Number of Shares Outstanding on
a Fully-Diluted Basis 12,710,561 12,478,977 11,963,837
=================== ===================== =====================
Fully-Diluted Earnings (Loss) per Share(2) $ 0.70 $ 0.32 $ (0.45)
=================== ===================== =====================
<FN>
(1) The two-class method for Class A and Class B Common Stock is not presented
because the earnings (loss) per share is equivalent to the if-converted
method since dividends were not declared or paid and each class of common
stock has equal ownership of the Company.
(2) This calculation is submitted although it is contrary to Paragraph 40 of
APB Opinion No. 15 as it produces an anti-dilutive result. Also, the
preferred stock would not qualify as a common share equivalent because the
cash yield at issuance was not less than 66 2/3% of the then current
average Aa corporate bond yield.
</FN>
</TABLE>
LIST OF SUBSIDIARIES
Particle Dynamics, Inc. (formerly known as Desmo Chemical Corporation), a New
York Corporation, a wholly-owned subsidiary of KV Pharmaceutical Company.
ETHEX Corporation, (formerly known as KV Pharmaceuticals International, Inc.) a
Missouri Corporation, a wholly-owned subsidiary of KV Pharmaceutical Company.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
KV Pharmaceutical Company
St. Louis, Missouri
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Numbers 2-56793, 2-76173, 33-36400, 33-44927 and
333-199) of our report dated June 18, 1997, relating to the consolidated
financial statements of KV Pharmaceutical Company appearing in the Company's
Annual Report on Form 10-K for the year ended March 31, 1997.
BDO SEIDMAN, LLP
St. Louis, Missouri
June 18, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1.00
<CASH> 7,627,523
<SECURITIES> 0
<RECEIVABLES> 8,579,598
<ALLOWANCES> 0
<INVENTORY> 10,785,588
<CURRENT-ASSETS> 30,222,902
<PP&E> 8,117,809
<DEPRECIATION> 0
<TOTAL-ASSETS> 41,361,720
<CURRENT-LIABILITIES> 5,205,935
<BONDS> 0
0
2,410
<COMMON> 120,941
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 41,361,720
<SALES> 58,037,159
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 29,478,372
<OTHER-EXPENSES> 18,841,038
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 411,037
<INCOME-PRETAX> 9,306,512
<INCOME-TAX> 383,000
<INCOME-CONTINUING> 8,923,512
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,923,512
<EPS-PRIMARY> .70
<EPS-DILUTED> .70
</TABLE>
