<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 8, 1997
REGISTRATION NO. 333-38753
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
KING PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TENNESSEE 2834 54-1684963
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
501 FIFTH STREET, BRISTOL, TENNESSEE 37620, (423) 989-8000
(Address, including zip code, and telephone number, including area code of
registrant's principal executive offices)
JOHN M. GREGORY
KING PHARMACEUTICALS, INC.
501 FIFTH STREET
BRISTOL, TENNESSEE 37620
(423) 989-8001
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------------
COPIES TO:
<TABLE>
<C> <C> <C>
LINDA M. CROUCH, ESQ. JOHN A. A. BELLAMY, ESQ. DAVID J. BEVERIDGE, ESQ.
BAKER, DONELSON, BEARMAN & KING PHARMACEUTICALS, INC. SHEARMAN & STERLING
CALDWELL 501 FIFTH STREET 599 LEXINGTON AVENUE
2000 FIRST TENNESSEE BUILDING BRISTOL, TENNESSEE 37620 NEW YORK, NEW YORK 10022
165 MADISON AVENUE (423) 989-8010 (212) 848-4000
MEMPHIS, TENNESSEE 38103
(901) 577-2262
</TABLE>
---------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
---------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 8, 1997
PROSPECTUS
8,919,000 SHARES
[KING PHARMACEUTICALS LOGO]
Common Stock
------------------------
Of the 8,919,000 shares of common stock, no par value per share (the
"Common Stock"), offered hereby, 6,000,000 shares are being sold by King
Pharmaceuticals, Inc. (the "Company") and 2,919,000 shares are being sold by
certain shareholders of the Company (the "Selling Shareholders"). See "Principal
and Selling Shareholders." The Company will not receive any proceeds from the
sale of the shares by the Selling Shareholders.
Prior to this offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price will be
between $16.50 and $19.50 per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
Common Stock has been approved, subject to official notice of issuance, for
listing on the Nasdaq National Market under the symbol "KING."
------------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
======================================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............. $ $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3).............. $ $ $ $
==================================================================================================================
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $1,825,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
1,000,000 additional shares of Common Stock on the same terms and conditions
as set forth above solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Shareholders will
be $ , $ , $ and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of certificates
representing the shares of Common Stock will be made at the offices of Lehman
Brothers Inc. in New York, New York, on or about , 1997.
------------------------
LEHMAN BROTHERS
CREDIT SUISSE FIRST BOSTON
HAMBRECHT & QUIST
, 1997
<PAGE> 3
Photo on inside Front cover top center: stacked tubes, bottles and boxes of
the Cortosporin(R) pharmaceutical products.
Caption above Photo: The Company markets the products shown below along with its
other branded pharmaceutical products through its wholly-owned subsidiary,
Monarch Pharmaceuticals, Inc.
AN EXPANDING PRODUCT LINE
In March 1997 the Company acquired a full line of prescription formulations of
ophthalmic ointments and suspensions, otic solutions and suspensions, and
dermatologic creams and ointments marketed under the brand-name
CORTISPORIN[R]. This topical antibiotic, anti-inflammatory prescription product
line, along with U.S. sales and marketing rights, was obtained from Glaxo
Wellcome, Inc.
Photo on inside Front cover mid-page left: two bottles of Thalitone(R) tablets.
In December 1996 the Company acquired the prescription brand-name product
THALITONE[R] (chlorthalidone tablets USP) from Horus Therapeutics, Inc.
Thalitone[R] is a low-dose, hypertension-diuretic. The Company also acquired
the patented formulation technology for the manufacture of this product from
Boehringer Ingelheim Inc.
Cortisporin(R), Pediotic(R), Thalitone(R), Viroptic(R), Quibron(R),
Proctocort(TM), Tussend(R), Nucofed(R), Monafed(TM), Royal Vet(R), and Show
Winner(TM) are registered or pending trademarks of the Company or its
wholly-owned subsidiary Monarch Pharmaceuticals, Inc. Anexsia(R) is a
registered trademark of Mallinckrodt Chemical, Inc.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE
PRICING OF THE OFFERING TO COVER THE SYNDICATE SHORT POSITION IN THE COMMON
STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK AND THE
IMPOSITION OF PENALTY BIDS. INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING
SYNDICATE COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF
THIS ACTIVITIES, SEE "UNDERWRITING."
Photo on gate-Fold page upper left and continuing onto adjacent page: King
Pharmaceuticals, Inc. building with King Pharmaceuticals (TM) logo on upper
left corner of photo.
A HIGH QUALITY, MULTI-DOSAGE FACILITY
The Company's approximately 500,000 square foot facilities include space for
manufacturing, packaging, laboratories, office and warehouse space. The
Company manufactures and packages a broad range of dosage formulations,
including sterile solutions, injectables, tablets and capsules, liquids, creams
and ointments, suppositories and powders. The Company believes its integrated
manufacturing capabilities and support systems allowing for higher margins and
enhanced ability to acquire and develop pharmaceutical products.
Monarch Pharmaceuticals (R) logo on bottom left gate-Fold page in blue box
which continues onto adjacent page.
A GROWING, DEDICATED SALES FORCE
The goal of Monarch Pharmaceuticals is to aggressively promote acquired branded
pharmaceutical products in order to increase sales. Monarch Pharmaceuticals has
48 sales representatives who market primarily in the southeastern and midwestern
United States. Marketing and sales promotions principally target physicians
through detailing and sampling to encourage physicians to prescribe the
Company's products.
Picture bottom right on gate-Fold page: map of continental United States with
States in which King Sales Force operates highlighted in green and certain
cities designed by circled stars.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus, including information under "Risk
Factors."
THE COMPANY
The Company is an integrated pharmaceutical company that manufactures,
markets and sells branded and generic prescription pharmaceutical products. The
Company seeks to capitalize on niche opportunities in the pharmaceutical
industry created by cost containment initiatives and consolidation among large
global pharmaceutical companies. The Company's strategy is to acquire branded
pharmaceutical products and increase their sales by focused promotion and
marketing, as well as by developing product line extensions and through product
life cycle management.
Since December 1994, the Company has acquired 15 branded pharmaceutical
products, developed one product internally, divested one product and introduced
seven product line extensions. On October 31, 1997, the Company entered into a
preliminary non-binding letter of intent with Warner-Lambert Company
("Warner-Lambert") for the acquisition of additional branded product lines, a
manufacturing facility and contracts for manufacturing products for third
parties (the "Sterile Products Acquisition"). See "Business -- Strategy."
The Company markets its branded pharmaceutical products through its
wholly-owned subsidiary, Monarch Pharmaceuticals, Inc. ("Monarch
Pharmaceuticals"). The goal of Monarch Pharmaceuticals is to aggressively
promote acquired branded pharmaceutical products in order to increase their
sales. Monarch Pharmaceuticals has 48 sales representatives who market primarily
in the southeastern and midwestern United States. This sales force is dedicated
to promoting and marketing branded pharmaceutical products and is supported by
telemarketers and customer service representatives who promote the Company's
products in territories not currently covered by field representatives. The
Company expects its sales and marketing staff to grow significantly as the
Company acquires additional branded pharmaceutical products.
The Company's current branded pharmaceutical products include, among
others, Cortisporin, acquired from Glaxo Wellcome Inc. ("Glaxo Wellcome") in
March 1997, Thalitone, acquired from Horus Therapeutics, Inc. in December 1996,
Viroptic and acquired from Glaxo Wellcome in May 1997. In addition the Company
acquired Septra, Proloprim, Mantadil and Kemadrin, as well as the exclusive
licenses, free of royalty obligations, to manufacture and market prescription
formulations of Neosporin and Polysporin from Glaxo Wellcome in November 1997.
Branded pharmaceutical products represented 79.8% of the net sales of the
Company for the first nine months ended September 30, 1997, with the Cortisporin
product line representing 60.7% of net sales. The Company acquired its first
branded product, Anexsia, and a related generic product line (the "Anexsia
Product Line") for $17.6 million in December 1994. During the 12 months
following its acquisition, the Company significantly increased annual sales of
the Anexsia Product Line through a combination of product development and
marketing. In December 1995, the Company sold the Anexsia Product Line to
Mallinckrodt Chemical, Inc. ("Mallinckrodt"), for $32.0 million in cash and
recognized a $13.1 million net gain (these transactions are hereinafter referred
to collectively as the "Anexsia Transaction").
The Company believes its integrated manufacturing capabilities and support
systems allow for higher margins and enhanced ability to acquire and develop
pharmaceutical products because it does not have to rely on third parties to
manufacture or develop products. The Company can produce a broad range of dosage
formulations, including sterile solutions, injectables, tablets and capsules,
liquids, creams and ointments, suppositories and powders, and is licensed by the
Drug Enforcement Agency ("DEA") to procure and produce controlled substances.
The Company's manufacturing capability is integrated with its support services,
including quality control, quality assurance, regulatory compliance, packaging,
distribution and inventory management and purchasing and production
3
<PAGE> 5
planning. These integrated services enable the Company to maintain high quality
standards for its products as well as provide reliable and timely service to its
customers. The Company currently manufactures certain of its own branded and
generic products and uses its excess manufacturing capacity to contract
manufacture for other pharmaceutical companies.
The Company's product development efforts are currently focused on
developing product line extensions, which allow the Company to enhance product
differentiation, create market exclusivity and minimize sales lost to generic
substitution. To date, the Company has introduced seven line extensions for its
acquired products.
The Company also manufactures and markets a number of generic
pharmaceutical products as well as a comprehensive line of nutritional
supplements for companion animals. The Company markets its generic
pharmaceutical products under the King Pharmaceuticals label and its companion
animal health products under the Royal Vet and Show Winner tradenames.
THE OFFERING
Common Stock offered by the Company......... 6,000,000 shares
Common Stock offered by the Selling
Shareholders.............................. 2,919,000 shares
Common Stock to be outstanding after the
offering.................................. 34,000,000 shares(1)
Use of proceeds............................. Acquisition of additional
branded products, repayment of
certain indebtedness and for
general corporate purposes
including investments in
facilities to accommodate new
products acquired, development
of branded product line
extensions and generic products
and expansion of sales force.
See "Use of Proceeds."
Nasdaq National Market symbol............... KING
- ------------------------------
(1) Excludes 3,500,000 shares of Common Stock available for future grants under
the Company's 1997 Incentive and Nonqualified Stock Option Plan for
Employees. No options are currently outstanding.
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
FOR RECENT
ACQUISITIONS
PRO FORMA AND STERILE PRO FORMA
FISCAL YEAR ENDED FOR RECENT PRODUCTS NINE MONTHS ENDED FOR RECENT
DECEMBER 31, ACQUISITIONS ACQUISITION SEPTEMBER 30, ACQUISITIONS
--------------------------- ------------ ------------ --------------------- ------------
1994 1995 1996 1996(1) 1996(2)(3) 1996 1997 1997(1)
------- ------- ------- ------------ ------------ ----------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................... $13,311 $25,441 $15,457 $ 39,459 $ 130,152 $11,310 $33,817 $ 46,965
Development revenue(4)......... -- -- 5,000 5,000 5,000 2,500 -- --
------- ------- ------- ---------- ---------- ------- ------- ----------
Total revenue, net..... 13,311 25,441 20,457 44,459 135,152 13,810 33,817 46,965
Costs of sales................. 9,754 12,130 8,782 12,257 64,438 7,050 9,538 13,066
Selling, general and
administrative............... 1,987 8,605 12,106 14,507 21,739 8,441 13,734 14,977
Depreciation and
amortization................. 639 1,777 982 2,850 8,343 655 1,631 2,558
------- ------- ------- ---------- ---------- ------- ------- ----------
Total costs and
expenses............. 12,380 22,512 21,870 29,614 94,520 16,146 24,903 30,601
Gain on sale of product line,
net(5)....................... -- 13,102 -- -- -- -- -- --
------- ------- ------- ---------- ---------- ------- ------- ----------
Operating income (loss)........ 931 16,031 (1,413) 14,845 40,632 (2,336) 8,914 16,364
Total other (expenses)
income....................... (515) (1,639) 1,066 (2,001) (5,011) 1,317 (1,519) (3,258)
Income tax (benefit) expense... (501) 5,058 (107) 5,169 14,280 (316) 2,840 5,124
------- ------- ------- ---------- ---------- ------- ------- ----------
Net income (loss) before
extraordinary gain........... 917 9,334 (240) 7,675 21,341 (703) 4,555 7,982
Extraordinary gain(6).......... -- 528 -- -- -- -- -- --
------- ------- ------- ---------- ---------- ------- ------- ----------
Net income (loss).............. $ 917 $ 9,862 $ (240) $ 7,675 $ 21,341 $ (703) $ 4,555 $ 7,982
======= ======= ======= ========== ========== ======= ======= ==========
Net income (loss) per
share(7)..................... $ 0.20 $ 0.79 $ (0.02) $ 0.35 $ 0.76 $ (0.06) $ 0.18 $ 0.29
======= ======= ======= ========== ========== ======= ======= ==========
Weighted average number of
common and common stock
equivalents(8)............... 4,538 12,446 13,631 22,163 28,163 12,572 25,656 28,000
<CAPTION>
PRO FORMA
FOR RECENT
ACQUISITIONS
AND STERILE
PRODUCTS
ACQUISITION
------------
1997(2)(3)
------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................... $ 94,465
Development revenue(4)......... --
----------
Total revenue, net..... 94,465
Costs of sales................. 49,929
Selling, general and
administrative............... 15,656
Depreciation and
amortization................. 6,678
----------
Total costs and
expenses............. 72,263
Gain on sale of product line,
net(5)....................... --
----------
Operating income (loss)........ 22,202
Total other (expenses)
income....................... (5,514)
Income tax (benefit) expense... 6,557
----------
Net income (loss) before
extraordinary gain........... 10,131
Extraordinary gain(6).......... --
----------
Net income (loss).............. $ 10,131
==========
Net income (loss) per
share(7)..................... $ 0.30
==========
Weighted average number of
common and common stock
equivalents(8)............... 34,000
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------------------------------------
AS FURTHER
AS ADJUSTED AS FURTHER ADJUSTED FOR THE
FOR THE GLAXO ADJUSTED FOR STERILE PRODUCTS
DECEMBER 31, 1996 ACTUAL ACQUISITION(9) THE OFFERING(10) ACQUISITION(11)
----------------- ------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 1,392 $ 35 $ 35 $ 95,137 $ 5,137
Working capital.......... 7,749 83 83 96,360 6,360
Total assets............. 39,279 74,253 97,253 192,355 227,355
Long-term debt (excluding
current portion and
line of credit)........ 13,980 22,913 43,913 41,575 76,575
Shareholders' equity..... 15,693 27,809 27,809 126,424 126,424
</TABLE>
- ------------------------------
(1) The pro forma consolidated information gives effect to the acquisitions of
(i) the Cortisporin product line on March 21, 1997 (the "Cortisporin
Acquisition") and (ii) six prescription branded product lines, including
Septra, Proloprim, Mantadil and Kemadrin, as well as, the exclusive
licenses, free of royalty obligations, for the prescription formulations of
Neosporin and Polysporin acquired from Glaxo Wellcome on November 14, 1997
(the "Glaxo Acquisition") (together, the "Recent Acquisitions"), in each
case as if the acquisitions had occurred on January 1, 1996. See "Pro Forma
Consolidated Financial Statements."
5
<PAGE> 7
(2) The pro forma consolidated information gives effect to the Recent
Acquisitions and to the Sterile Products Acquisition as if the acquisitions
had occurred on January 1, 1996. See "Pro Forma Consolidated Financial
Statements." There can be no assurance that the Sterile Products
Acquisition will occur or, if it occurs, there can be no assurance as to
the assets that may be acquired, the purchase price of such assets or the
terms of their acquisition. See "Risk Factors -- Dependence on Acquisition
of Products."
(3) The Sterile Products Acquisition includes one sterile product which had net
sales of approximately $20.0 million in each of 1995 and 1996, but which
was not sold in 1997. This product currently is subject to further FDA
review and approval, and there can be no assurance that it will be produced
or sold in 1998 or at any time in the future. As a result of this product
being discontinued, cost of goods sold in 1997 included approximately $5.5
million of unabsorbed overhead and approximately $4.3 million of obsolete
inventory. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business -- Strategy," "Business -- Products
and Product Development" and "Pro Forma Consolidated Financial Statements."
(4) In connection with the Anexsia Transaction, the Company agreed to develop
four Abbreviated New Drug Applications ("ANDAs") to be filed with the Food
and Drug Administration ("FDA") on Mallinckrodt's behalf for a maximum of
$2.5 million each due upon FDA approval. In 1996 the FDA approved two of
these ANDAs and as of September 30, 1997, the two additional ANDAs were on
file with the FDA.
(5) In December 1994, the Company acquired the Anexsia Product Line. The
Company sold the Anexsia Product Line to Mallinckrodt in December 1995 for
$32.0 million and recorded a $13.1 million net gain.
(6) Reflects gain from early extinguishment of debt in connection with the
disposition of the Anexsia Product Line.
(7) Because the Company does not have any dilutive securities, net income
(loss) per share on a fully diluted basis is the same as primary earnings
per share for all periods presented.
(8) Reflects retroactively the effects of a 15.0% stock dividend paid in 1996
and a 2.8 for 1 stock split.
(9) Gives effect to the Glaxo Acquisition as if it occurred on September 30,
1997.
(10) As adjusted to give effect to the sale of 6,000,000 shares of Common Stock
offered hereby, after deducting underwriting discounts and offering
expenses, at an assumed initial public offering price of $18.00 per share
and the application of the estimated net proceeds therefrom as set forth in
"Use of Proceeds."
(11) Gives effect to the Sterile Products Acquisition as if it occurred
subsequent to the sale of 6,000,000 shares of Common Stock noted in (10)
above.
------------------------------
Except as otherwise noted, all information in this Prospectus reflects a
2.8 for 1 stock split and assumes no exercise of the Underwriters'
over-allotment option. See "Description of Capital Stock," "Underwriting" and
Notes to Consolidated Financial Statements.
6
<PAGE> 8
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information in this Prospectus before purchasing the shares of Common
Stock offered hereby.
Dependence on Acquisition of Products. The Company has increased its sales
and net income in the first nine months of 1997 through a series of strategic
acquisitions of branded products and related internal growth initiatives
intended to develop marketing opportunities with respect to the acquired product
lines. The Company's strategy for growth is primarily dependent upon its
continued ability to acquire branded products that can be promoted through
existing marketing and distribution channels and, when appropriate, the
enhancement of such marketing and distribution channels. Because the Company is
not engaged in proprietary research activities leading to the introduction of
new products, it must rely upon the availability for purchase of product lines
of other manufacturers. Other companies, including those with substantially
greater financial, marketing and sales resources, are competing with the Company
for the right to acquire such products. There can be no assurance that the
Company will be able to acquire rights to additional products on acceptable
terms, if at all, or be able to obtain future financing for such acquisitions on
acceptable terms, if at all. On October 31, 1997, the Company entered into a
preliminary non-binding letter of intent for the Sterile Products Acquisition.
Although the Company has offered $125.0 million to Warner-Lambert for these
products and other assets, the Company has not completed due diligence and any
purchase price will be subject to the results of the Company's due diligence
process. In addition to due diligence, the proposed transaction is subject to
numerous conditions and contingencies, including internal approvals of both the
Company and Warner-Lambert, receipt of regulatory approvals, resolution of legal
and equitable matters relating to employees, supply and service agreements and
intellectual property rights and preparation and negotiation of documentation.
In addition, if the proposed transaction is consummated, the Company may incur
additional acquisition cost to purchase any related inventory, the cost of which
is subject to further negotiation. Accordingly, there can be no assurance that
this proposed transaction will occur or, if it occurs, there can be no assurance
as to the assets that may be acquired, the purchase price of such assets or the
terms of their acquisition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Indebtedness and Other
Matters" and "Business -- Strategy." The inability to effect acquisitions of
additional branded products would have a material adverse effect on the
Company's future business, financial condition and results of operations.
Furthermore, there can be no assurance that the Company, once it has obtained
rights to a pharmaceutical product and committed to payment terms, will be able
to generate sales sufficient to create a profit or otherwise avoid a loss. Any
inability to generate such sufficient sales or any subsequent reduction of sales
may cause an adjustment to the intangible value allocated to acquired products
resulting in increased expenses due to write-downs or write-offs. In addition,
the Company's marketing strategy, distribution channels and levels of
competition with respect to acquired products may be different than those of the
Company's current products and there can be no assurance that the Company will
be able to compete favorably in those product categories. See "Business."
Dependence on Cortisporin Sales and Other Key Products. The Company
acquired the Cortisporin product line from Glaxo Wellcome in March 1997 and
derives a substantial portion of its revenue from sales of the Cortisporin
product line. The Cortisporin product line accounted for 60.7% of net sales
during the nine months ended September 30, 1997. The Company believes that sales
of the Cortisporin product line will continue to constitute a significant
portion of net sales for the foreseeable future. Accordingly, any factor
adversely affecting the Cortisporin product line sales, including any
interruption in the supply of the Cortisporin product line, would have a
material adverse effect on the Company's business, financial condition and
results of operations. Three products proposed to be acquired in the Sterile
Products Acquisition accounted for approximately 46.0% of total sales of all
products proposed to be acquired. Accordingly, if these products are acquired,
any factor adversely affecting sales of such products could also have a material
adverse effect on the Company's business, financial condition and results of
operations. See "-- Competition; Uncertainty of Technological
7
<PAGE> 9
Change" "-- Reliance on Third Party Manufacturers" and "Business -- Products and
Product Development."
Generic Substitution. The Company's branded pharmaceutical products are
subject to competition from generic equivalents and alternate therapies. There
is no proprietary protection for most of the branded pharmaceutical products
sold by the Company and generic and other substitutes for most of its branded
pharmaceutical products are sold by other pharmaceutical companies. In addition,
governmental and other pressure toward the dispensing of generic equivalents
will likely result in generic substitution and competition generally for the
Company's branded pharmaceutical products. Increased competition in the sale of
generic pharmaceutical products may cause a decrease in revenue from the
Company's branded products. Any reduction of revenues may cause an adjustment to
the intangible value allocated to acquired products resulting in increased
expenses due to write-downs or write-offs. While the Company will seek to
mitigate the effect of this substitution through, among other things, creation
of strong brand name recognition and product line extensions for its branded
pharmaceutical products, there can be no assurance that the Company will be
successful in these efforts. See "-- Competition; Uncertainty of Technological
Change" and "Business -- Competition."
Managing Growth of Business. Due to the Company's business strategy to
acquire branded pharmaceutical products, the Company anticipates that the
integration of newly-acquired products, as well as other assets, will require
significant management attention and expansion of its sales force. The Company's
ability to manage its acquisitions will require it to continue to implement and
improve its operational, financial and management information systems and to
motivate and effectively manage an increasing number of employees. On October
31, 1997, the Company entered into a preliminary non-binding letter of intent
for the Sterile Products Acquisition, which, if consummated, could significantly
expand the Company's product offerings and operations. To date, the Company has
not made an acquisition of this size, and if this acquisition is consummated as
currently anticipated, the Company will acquire an additional manufacturing
facility. If this acquisition is consummated, the Company's future success will
depend in part on its ability to retain or hire qualified employees to operate
this facility and to operate such facility efficiently in accordance with
applicable regulatory standards. If the Company's management is unable to manage
such changes effectively and integrate its future acquisitions successfully,
such changes and acquisitions could materially adversely affect the Company's
business, financial condition and results of operations. See "-- Attraction and
Retention of Key Personnel" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Quarterly Fluctuation of Results; Uncertainty of Profitability. The
Company's results of operations may vary from quarter to quarter due to a
variety of factors including acquisitions and sales of branded pharmaceutical
products, expenditures incurred to acquire and promote additional pharmaceutical
products, changing customer base, the availability and cost of raw materials,
interruptions in supply by third-party manufacturers, the introduction of new
products by the Company or its competitors, the mix of products sold by the
Company, seasonality of certain product sales, changes in sales and marketing
expenditures, competitive pricing pressures and general economic and industry
conditions which affect customer demand. These factors could also affect annual
results of operations. The Company experienced an operating loss in the year
ended December 31, 1996. There can be no assurance that the Company will be
successful in maintaining or improving its profitability or avoiding losses in
any future period. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Reliance on Third-Party Manufacturers. Certain of the Company's recent
product acquisitions, including Cortisporin and all six of the branded
pharmaceutical products acquired in the Glaxo Wellcome Acquisition, are
presently manufactured by third parties until such products can be moved to the
Company's manufacturing facilities. Until such time, the Company's dependence
upon third parties for the manufacture of its products may adversely affect the
Company's profit margins and its ability to develop and deliver its products on
a timely and competitive basis. The Cortisporin product line accounted for 60.7%
of net sales during the nine months ended September 30, 1997. The
8
<PAGE> 10
Company's contract for the manufacture of Cortisporin expires December 31, 2002
but may be renewed with the consent of both parties for one-year periods
thereafter. If for any reason the Company is unable to obtain or retain
third-party manufacturers on commercially acceptable terms, it may not be able
to distribute its products as planned. If the Company should encounter delays or
difficulties with contract manufacturers in producing or packaging its products,
the distribution, marketing and subsequent sales of such products would be
adversely affected and the Company may have to seek alternative sources of
supply or abandon or sell a product line on unsatisfactory terms. No assurance
can be made that the Company will be able to enter into alternative supply
arrangements at commercially acceptable rates, if at all. No assurance can be
made that the manufacturers utilized by the Company will be able to provide the
Company with sufficient quantities of its products or that the products supplied
to the Company will meet the Company's specifications.
Uncertainties Related to Third-Party Reimbursement; Pricing Pressures. The
Company's commercial success in producing, marketing and selling generic
products will depend, in part, on the availability of adequate reimbursement
from third-party health care payers, such as government and private health
insurers and managed care organizations. Third-party payers are increasingly
challenging the pricing of medical products and services. There can be no
assurance that reimbursement will be available to enable the Company to achieve
market acceptance of its products or to maintain price levels sufficient to
realize an appropriate return on the Company's investment in product acquisition
and development. If adequate reimbursement levels are not provided, the
Company's business, financial condition and results of operations could be
materially adversely effected. The market for the Company's products may be
limited by actions of third-party payers. For example, many managed health care
organizations are now controlling the pharmaceutical products that are on their
formulary lists. The resulting competition among pharmaceutical companies to
place their products on these formulary lists has created a trend of downward
pricing pressure in the industry. In addition, many managed care organizations
are pursuing various ways to reduce pharmaceutical costs and are considering
formulary contracts primarily with those pharmaceutical companies that can offer
a full line of products for a given therapy sector or disease state. There can
be no assurance that the Company's products will be included on the formulary
lists of managed care organizations or that downward pricing pressures in the
industry generally will not negatively impact the Company's operations. Further,
a number of legislative and regulatory proposals aimed at changing the health
care system have been proposed. While the Company cannot predict whether any
such proposals will be adopted or the effect such proposals may have on its
business, the pending nature of such proposals, as well as the adoption of any
proposal, may exacerbate industry-wide pricing pressures and could have a
material adverse effect on the Company. See "Business -- Government Regulation."
Customer Concentration; Consolidation of Distribution Network. The Company
is currently dependent upon a small number of customers. In the first nine
months ended September 30, 1997, approximately 56.9% of the Company's sales were
to McKesson Corporation (19.5%), Cardinal/ Whitmire (13.4%), Bergen Brunswig
Corporation (13.1%), and Amerisource Health Corporation (10.9%) and for the year
ended December 31, 1996, approximately 69.7% of the Company's sales were to
SmithKline Beecham Corporation ("SmithKline Beecham") (18.1%), Mallinckrodt
(36.7%) and Novartis Animal Health US, Inc. ("Novartis") (14.9%). These
customers are primarily wholesale drug distributors through which the Company
distributes its products. The products that the Company is considering acquiring
in the Sterile Products Acquisition are sold by Warner-Lambert to many of the
same wholesale drug distributors to whom the Company currently sells its
products. The loss of any one of these customers could result in a material
adverse effect on the Company's business, financial condition or results of
operations. Additionally, the distribution network for pharmaceutical products
has in recent years been subject to increasing consolidation. As a result, a few
large wholesale distributors control a significant share of the market. In
addition, the number of independent drug stores and small chains has decreased
as retail consolidation has occurred. Further consolidation among, or any
financial difficulties of, distributors or retailers could result in the
combination or elimination of warehouses thereby stimulating product returns to
the Company. Further consolidation or financial difficulties could also cause
customers to reduce their inventory levels, or otherwise reduce
9
<PAGE> 11
purchases of the Company's products which could result in a material adverse
effect on the Company's business, financial condition and results of operations.
See "-- Product Liability; Product Recall; Product Returns" and
"Business -- Sales and Marketing."
Government Regulation. Virtually all aspects of the Company's activities
are regulated by federal and state statutes and government agencies. The
manufacturing, processing, formulation, packaging, labeling, distribution and
advertising of the Company's products, and disposal of waste products arising
from such activities, are subject to regulation by one or more federal agencies,
including the FDA, the DEA, the Federal Trade Commission ("FTC"), the Consumer
Product Safety Commission, the U. S. Department of Agriculture, the Occupational
Safety and Health Administration ("OSHA") and the U. S. Environmental Protection
Agency ("EPA") as well as by foreign governments. These activities are also
regulated by various agencies of the states and localities in which the
Company's products are sold. The Company believes that its facilities are in
substantial compliance with all provisions of federal and state laws concerning
the environment and does not believe that future compliance with such provisions
will have a material adverse effect on its financial condition or results of
operations.
All pharmaceutical manufacturers, including the Company, are subject to
regulation by the FDA under the authority of the Federal Food, Drug, and
Cosmetic Act ("FDC Act"). All "new drugs" must be the subject of an FDA approved
new drug application ("NDA") before they may be marketed in the United States.
Certain prescription drugs are not currently required to be the subject of an
approved NDA but, rather, may be marketed pursuant to an FDA regulatory
enforcement policy permitting continued marketing of those drugs until the FDA
determines whether they are safe and effective. The FDA has the authority to
withdraw existing NDA approvals and to review the regulatory status of products
marketed under the enforcement policy. The FDA may require an approved NDA for
any drug product marketed under the enforcement policy if new information
reveals questions about the drug's safety or effectiveness. All drugs must be
manufactured in conformity with current good manufacturing practices ("cGMP"),
and drug products subject to an approved NDA must be manufactured, processed,
packaged, held, and labeled in accordance with information contained in the NDA.
The Company and its third-party manufacturers are subject to periodic inspection
by the FDA to assure such compliance. Pharmaceutical products must be
distributed, sampled and promoted in accordance with FDA requirements. The FDA
also regulates the advertising of prescription drugs.
Under the FDC Act, the federal government has extensive enforcement powers
over the activities of pharmaceutical manufacturers to ensure compliance with
FDA regulations. Those powers include, but are not limited to, the authority to
initiate court action to seize unapproved or non-complying products, to enjoin
non-complying activities, to halt manufacturing operations that are not in
compliance with cGMP and to seek civil monetary and criminal penalties. The
initiation of any of these enforcement activities, including the restriction or
prohibition on sales of products marketed by the Company, could materially
adversely affect the Company's business, financial condition and results of
operations.
While the Company believes that all of its current pharmaceuticals are
lawfully marketed in the United States under current FDA enforcement policies or
have received the requisite agency approvals for manufacture and sale, such
marketing authority is subject to withdrawal by the FDA. In addition,
modifications or enhancements of approved products are in many circumstances
subject to additional FDA approvals which may or may not be received and which
may be subject to a lengthy application process. The Company's and the
third-party manufacturers' manufacturing facilities are continually subject to
inspection by such governmental agencies and manufacturing operations could be
interrupted or halted in any such facilities if such inspections prove
unsatisfactory. Any change in the FDA's enforcement policy or any decision by
the FDA to require an approved NDA for a Company product not currently subject
to the approved NDA requirements could have a material adverse effect on the
Company's business, financial condition and results of operations.
10
<PAGE> 12
The Company also manufactures and sells drugs which are "controlled
substances" as defined in the Controlled Substances Act, which establishes,
among other things, certain security and record keeping requirements
administered by the DEA. The Company has not experienced restrictions or fines
for non-compliance with the foregoing regulations but no assurance can be given
that restrictions or fines which could have a material adverse effect upon the
Company's business, financial condition, and results of operations will not be
imposed upon the Company in the future.
The Company may also be subject to fees under The Prescription Drug User
Fee Act of 1992 ("PDUFA"). PDUFA authorizes the FDA to collect three types of
user fees for: (i) certain types of applications and supplements for approval of
drug and biologic products, (ii) certain establishments where such products are
made, and (iii) certain marketed products. Fees for applications,
establishments, and products are determined by the FDA using criteria delineated
in the statute. When certain conditions are met, the FDA may waive or reduce
fees. To date, the Company has not been obligated to pay any such fee. There can
be no assurance, however, that the FDA will not impose such a fee in the future.
The Company cannot determine what effect changes in regulations or statutes
or legal interpretation, when and if promulgated or enacted, may have on its
business in the future. Changes could, among other things, require changes to
manufacturing methods, expanded or different labeling, the recall, replacement
or discontinuance of certain products, additional record keeping and expanded
documentation of the properties of certain products and scientific
substantiation. Such changes, or new legislation, could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Government Regulation" and "Business -- Environmental Matters."
Competition; Uncertainty of Technological Change. The Company competes
with other pharmaceutical companies, including large global pharmaceutical
companies with financial resources substantially greater than those of the
Company, for products and product line acquisitions. There can be no assurance
(i) that the Company will be able to acquire commercially attractive
pharmaceutical products, (ii) that additional competitors will not enter the
market, or (iii) that competition for products and product line acquisitions
will not have a material adverse effect on the Company's business, financial
condition and results of operations. The Company also competes with
pharmaceutical companies in developing, marketing and selling pharmaceutical
products. The selling prices of pharmaceutical products typically decline as
competition increases. Further, other products now in use, under development or
acquired by other pharmaceutical companies, may be more effective or offered at
lower prices than the Company's current or future products. The industry is
characterized by rapid technological change which may render the Company's
products obsolete, and competitors may develop their products more rapidly than
the Company. Competitors may also be able to complete the regulatory process
sooner, and therefore, may begin to market their products in advance of the
Company's products. The Company believes that competition in sales of its
products will be based on, among other things, product efficacy, safety,
reliability, availability and price. See "-- Generic Substitution," and
"Business -- Competition."
Product Liability; Product Recall; Product Returns. The Company faces an
inherent business risk of exposure to product liability claims in the event that
the use of its technologies or products is alleged to have resulted in adverse
effects. Such risks will exist even with respect to those products that receive
regulatory approval for commercial sale. While the Company has taken, and will
continue to take, what it believes are appropriate precautions, there can be no
assurance that it will avoid significant product liability exposure. The Company
currently has product liability insurance in the amount of $25.0 million for
aggregate annual claims with a $50,000 deductible per incident and a $500,000
aggregate annual deductible; however, there can be no assurance that the level
or breadth of any insurance coverage will be sufficient to fully cover potential
claims. There can be no assurance that adequate insurance coverage will be
available in the future at acceptable costs, if at all, or that a product
liability claim would not materially adversely affect the Company's business,
financial condition and results of operations of the Company. Product recalls
may be issued at the discretion of
11
<PAGE> 13
the Company, the FDA or other government agencies having regulatory authority
for pharmaceutical product sales. Recalls may occur due to disputed labeling
claims, manufacturing issues, quality defects or other reasons. No assurance can
be given that product recalls will not occur in the future. Any product recall
could materially adversely affect the Company's business, financial condition
and results of operations. The Company permits customers to return unused
pharmaceutical products under certain conditions. Although product returns were
less than 4.0% of revenues for the nine months ended September 30, 1997, there
can be no assurance that actual levels of returns will not increase or
significantly exceed the amounts anticipated by the Company. See "-- Customer
Concentration; Consolidation of Distribution Network," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
"Business -- Litigation."
Early Termination of Certain Licenses. The Company has exclusive licenses
expiring June 2036 for the recently acquired prescription formulations of
Neosporin and Polysporin. Such licenses are subject to early termination in the
event the Company breaches its obligations under the license agreement related
to these branded pharmaceutical products. Such early termination could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Patents, Trademarks and Proprietary
Property."
Attraction and Retention of Key Personnel. The Company is highly dependent
on the principal members of its management staff, the loss of whose services
might impede the achievement of acquisition and development objectives. Although
the Company believes that it is adequately staffed in key positions and that it
will be successful in retaining skilled and experienced management, operational
and scientific personnel, there can be no assurance that the Company will be
able to attract and retain such personnel on acceptable terms. The loss of the
services of key scientific, technical and management personnel could have a
material adverse effect on the Company, especially in light of the Company's
recent growth. The Company does not maintain key-person life insurance on any of
its employees. In addition, the Company does not currently have employment
agreements with any of its employees. See "Business -- Employees" and
"Management."
No Prior Public Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Common Stock of the Company,
and there can be no assurance that an active trading market will develop or be
sustained after this offering. The initial public offering price has been
determined by negotiations between the Company and the representatives of the
Underwriters and may not be indicative of the market price after the offering.
See "Underwriting" for the factors considered in determining the initial public
offering price. The stock prices of emerging growth companies, such as the
Company, have historically been volatile. Factors such as the announcements of
technological innovations or new products by the Company, its competitors and
other third parties, as well as variations in the Company's results of
operations, perceptions about market conditions in the pharmaceutical industry,
the impact of various regulatory proposals and general market conditions, many
of which are unrelated to the Company's operating performance, may cause the
market price of the Company's Common Stock to fluctuate significantly.
Market Risk of Shares Eligible for Future Sale. Sales of a substantial
number of shares of the Company's Common Stock in the public market following
this offering, or the perception that such sales could occur, could adversely
affect the market price of the Common Stock. Upon completion of this offering,
there will be 34,000,000 shares of Common Stock outstanding (35,000,000 shares
if the Underwriters' over-allotment option is exercised in full). Other than the
8,919,000 shares offered hereby, all shares of Common Stock held by the
Company's current shareholders are "restricted securities" within the meaning of
Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"),
and may only be sold subject to the provisions of Rule 144 under the Securities
Act.
Of the 34,000,000 shares of Common Stock to be outstanding after the
offering, approximately 22,000,000, or approximately 64.7%, of the outstanding
shares of Common Stock will be subject to lock-up agreements entered into by
certain officers, directors and other shareholders of the Company (the "Lock-up
Agreements"). The Company and its directors, officers and certain other
shareholders have,
12
<PAGE> 14
among other things, agreed not to, directly or indirectly, offer for sale, sell,
pledge or otherwise dispose of (or, during the term of the Lock-up Agreement,
enter into any transaction or device that is designed to, or could be expected
to, result in the disposition by any person at any time in the future of), any
Common Stock or securities convertible into or exchangeable for Common Stock,
with certain limited exceptions, or sell or grant options, rights or warrants
with respect to any shares of Common Stock or securities convertible into or
exchangeable for Common Stock, with certain limited exceptions, or enter into
any swap or other derivatives transaction that transfers to another, in whole or
in part, any of the economic benefits or risks of ownership of such shares of
Common Stock, for a period of 180 days after the date of this Prospectus without
the prior written consent of Lehman Brothers Inc. on behalf of the
Representatives (defined hereinafter). Of the approximately 12,000,000 shares of
Common Stock to be outstanding after the offering that are not subject to the
Lock-up Agreements, other than the 8,919,000 shares of Common Stock sold in the
offering, (i) approximately 1.1 million shares will be immediately eligible for
resale in the public market without restriction in reliance on Rule 144(k) under
the Securities Act, (ii) approximately 800,000 shares may be sold subject to the
volume and manner of sales restrictions of Rule 144 and (iii) the remaining
approximately 1.2 million shares may not be sold pursuant to Rule 144 prior to
the expiration of their one-year holding period.
Beginning 180 days after the date of this Prospectus, after the Lock-up
Agreements have expired, (i) approximately 10.0 million additional shares of
Common Stock will become eligible for resale into the public market in reliance
on Rule 144(k) and (ii) approximately 12.0 million additional shares may be sold
subject to the volume and manner of sales restrictions of Rule 144. See "Shares
Eligible for Future Sale" and "Underwriting."
Substantial Dilution; Absence of Dividends. Investors purchasing shares of
Common Stock in this offering will incur immediate substantial dilution of
$15.41 per share in the net tangible book value of the Common Stock from the
initial public offering price. The Company has never paid cash dividends on its
Common Stock. The Company currently anticipates that it will retain all
available funds for use in its business and does not expect to pay cash
dividends in the foreseeable future. Furthermore, the payment of cash dividends
from earnings is currently restricted by the Company's credit arrangements with
a commercial lender. See "Dilution" and "Dividend Policy."
Broad Discretion in Application of Proceeds. The Company intends to use
approximately $3.6 million of the net proceeds from the offering to repay
certain outstanding indebtedness. In addition, it is currently anticipated that
$90.0 million of the net proceeds of the offering will be used for the Sterile
Products Acquisition. However, there can be no assurance that the Sterile
Products Acquisition will occur or, if it occurs, there can be no assurance as
to the assets that may be acquired, the purchase price of such assets or the
terms of the acquisition. The Company intends to utilize the remaining $5.0
million of proceeds for general corporate purposes, and the Company has not yet
finally identified more specific uses for such proceeds. Should the Sterile
Products Acquisition not be consummated or should other suitable acquisition
opportunities not be available, the Company may apply the proceeds for general
corporate purposes, including investments in facilities, development of branded
product line extensions and internally developed generic products and expansion
of the sales force. Accordingly, the specific uses for the net proceeds will be
at the complete discretion of management of the Company and the Board of
Directors and may be allocated based upon circumstances arising from time to
time in the future. See "Use of Proceeds."
Concentration of Ownership; Lack of Independent Directors. Following this
offering, the present officers and directors of the Company and their affiliates
will beneficially own approximately 40.3% of the outstanding shares of Common
Stock. Accordingly, they will have the ability to exercise significant influence
over the management and policies of the Company. Following completion of the
offering, independent directors will not constitute a majority of the Board of
Directors and the Company's Board of Directors may not have a majority of
independent directors in the future. In the absence of a majority of independent
directors, the Company's executive officers, who also are principal shareholders
and directors, could establish policies and enter into transactions without
independent review and approval thereof. Transactions without an independent
review could present the potential for a
13
<PAGE> 15
conflict of interest between the Company and its shareholders generally and the
executive officers, shareholders or directors. The Company does not intend to
implement any formal procedures to address any such potential conflicts of
interest. For a description of the ownership interests of the Company's
directors, officers and their affiliates, see "Principal and Selling
Shareholders."
Antitakeover Effect of Certain Charter, Bylaws and Statutory Provisions;
Rights Agreement. The Company's Second Amended and Restated Charter (the
"Charter") and Amended and Restated Bylaws (the "Bylaws") provide for a
classified Board of Directors, restrict the ability of shareholders to call
special meetings and contain advance notice requirements for shareholder
proposals and nominations and special voting requirements for the amendment of
the Company's Charter and Bylaws. These provisions could delay or hinder the
removal of incumbent directors and could discourage or make more difficult a
proposed merger, tender offer or proxy contest involving the Company or may
otherwise have an adverse effect on the market price of the Common Stock. The
Company also is subject to provisions of Tennessee corporate law that provides
that a party owning 10.0% or more of stock in a "resident domestic corporation"
(such party is called an "interested shareholder") cannot engage in a business
combination with the resident domestic corporation unless the combination (i)
takes place at least five years after the interested shareholder first acquired
10.0% or more of the resident domestic corporation, and (ii) either (A) is
approved by at least two-thirds of the non-interested voting shares of the
resident domestic corporation or (B) satisfies certain fairness conditions
specified in the specific provisions. There are certain other Tennessee statutes
which provide antitakeover protection for Tennessee corporations. See
"Description of Capital Stock -- Certain Provisions of the Charter and Bylaws
and Statutory Provisions."
The Company's Board of Directors has declared a dividend of one preferred
share purchase right (a "Right") for each share of Common Stock outstanding. A
Right will also be attached to each share of Common Stock subsequently issued.
The Rights will have certain anti-takeover effects. If triggered, the Rights
would cause substantial dilution to a person or group of persons (other than
certain exempt persons) that acquires more than 15.0% of the Common Stock on
terms not approved by the Company's Board of Directors. The Rights could
discourage or make more difficult a merger, tender offer or other similar
transaction. See "Description of Capital Stock -- Rights Agreement."
Pursuant to the Charter, shares of preferred stock may be issued in the
future without shareholder approval and upon such terms and conditions, and
having such rights, privileges and preferences, as the Board of Directors may
determine in the exercise of its business judgment. The rights of the holders of
Common Stock are subject to, and may be adversely affected by, any preferred
stock that may be issued in the future. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions,
financings and other corporate transactions, could have the effect of
discouraging, or making more difficult, a third party's acquisition of a
majority of the Company's outstanding voting stock. The Company has no present
plans to issue any shares of preferred stock. See "Description of Capital
Stock -- Preferred Stock."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere, including statements regarding the
anticipated development and expansion of the Company's business; the products
which the Company expects to offer; anticipated development expenditures and
regulatory reform; the intent, belief or current expectations of the Company,
its directors or its officers, primarily with respect to the future operating
performance of the Company; and other statements contained herein regarding
matters that are not historical facts, are "forward-looking" statements (as such
term is defined in the Private Securities Litigation Reform Act of 1995). In
addition, when used in this Prospectus, the words "believe," "anticipate,"
"expect," "intend" and similar expressions are intended to identify
forward-looking statements. Because such statements include risks and
uncertainties, actual results may differ materially from those expressed or
implied by
14
<PAGE> 16
such forward-looking statements. Factors that could cause actual results to
differ materially from those expressed or implied by such forward-looking
statements include, but are not limited to, the factors set forth in "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." The safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 do not apply to initial public
offerings.
THE COMPANY
The Company was incorporated in the State of Tennessee in 1993. The
Company's executive offices are located at 501 Fifth Street, Bristol, Tennessee
37620. Its telephone number is (423) 989-8000.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of Common
Stock in this offering are estimated to be $98.6 million ($115.3 million if the
Underwriters' over-allotment option is exercised in full), after deducting the
underwriting discounts and estimated offering expenses payable by the Company,
assuming an estimated initial public offering price of $18.00 per share. The net
proceeds of this offering, together with the Company's existing cash and cash
equivalents, will be used for: (i) acquisition of additional branded products,
(ii) repayment of $3.6 million of certain indebtedness, and (iii) general
corporate purposes, including investments in facilities to accommodate any newly
acquired products, development of branded product line extensions and internally
developed generic products and expansion of the sales force. The Company is
actively pursuing the acquisition of rights to several products which may
require the use of substantial capital resources. There are no present
agreements or commitments with respect to any such acquisition. However, on
October 31, 1997, the Company entered into a preliminary non-binding letter of
intent for the Sterile Products Acquisition. It is currently anticipated that
$90.0 million of the net proceeds of this offering will be used for the Sterile
Products Acquisition. However, there can be no assurance that the Sterile
Products Acquisition will occur or, if it occurs, there can be no assurance as
to the assets that may be acquired, the purchase price of such assets or the
terms of the acquisition. See "Risk Factors -- Dependence on Acquisition of
Products" and "Business -- Strategy."
A portion of the proceeds will be used to repay the outstanding principal
balance and accrued interest of a promissory note in the aggregate amount of
$1.8 million payable to General Injectables and Vaccines, Inc. ("GIV"). This
note bears interest at the rate of 8.0% and matures on December 31, 1998. In
addition, a portion of the proceeds will be used to repay the outstanding
principal balance and accrued interest of a promissory note in the aggregate
amount of $1.8 million payable to The United Company. This note bears interest
at the rate of 10.0% and matures on April 1, 1999. Proceeds of the loan from The
United Company were used to fund, in part, the acquisition of the Cortisporin
Product Line from Glaxo Wellcome. See "Certain Transactions."
The cost, timing and amount of funds required for all specific uses by the
Company cannot be precisely determined by the Company at this time and is at
management's discretion. The rate of the Company's progress in acquiring new
branded products or acquiring companies with such products, the timing and
nature of regulatory action and the availability of alternative methods of
financing, will also determine the allocation and timing of the Company's use of
the proceeds from this offering. Pending application of the proceeds as
described above, the Company plans to invest the net proceeds of the offering in
short-term marketable securities. See "Risk Factors -- Broad Discretion in
Application of Proceeds."
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<PAGE> 17
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. Furthermore,
the payment of cash dividends from earnings is prohibited by the Company's
credit arrangements with a commercial lender. Assuming removal of this
prohibition, the payment of cash dividends is subject to the discretion of the
Board of Directors and will be dependent upon many factors, including the
Company's earnings, its capital needs, and its general financial condition. The
Company anticipates that for the foreseeable future, it will retain its
earnings, if any, in order to finance the expansion and development of its
business. See "Risk Factors -- Substantial Dilution; Absence of Dividends" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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<PAGE> 18
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of September 30, 1997, as adjusted to give effect to the Glaxo Acquisition as if
this transaction occurred on September 30, 1997, as further adjusted to reflect
the sale of 6,000,000 shares of Common Stock offered hereby at the assumed
public offering price of $18.00 per share and the application of the estimated
net proceeds of such sale (after deducting the underwriting discounts and
estimated offering expenses payable by the Company) and as further adjusted to
give effect to the Sterile Products Acquisition as if this transaction occurred
on September 30, 1997. See "Use of Proceeds." This table should be read in
conjunction with "Pro Forma Consolidated Financial Statements," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the Consolidated Financial Statements of the Company and Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------------------------------
AS FURTHER
ADJUSTED
AS ADJUSTED AS FURTHER FOR THE
FOR THE ADJUSTED STERILE
GLAXO FOR PRODUCTS
ACTUAL ACQUISITION THE OFFERING ACQUISITION
------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents.......................... $ 35 $ 35 $ 95,137 $ 5,137
======= ======== ======== ========
Current portion of long-term obligations and short
term debt(1)..................................... $ 9,090 $ 9,090 $ 7,915 $ 7,915
Long-term obligations (excluding current portion of
long-term obligations)(1)........................ 22,913 43,913 41,575 76,575
Line of credit(1).................................. 2,282 4,282 4,282 4,282
Shareholders' equity:
Common Stock, no par value; 150,000,000 shares
authorized; 28,000,000 issued and outstanding
(actual); 34,000,000 shares outstanding (as
adjusted)(2)(3)(4)............................ 16,455 16,455 115,070 115,070
Due from related party........................... (1,139) (1,139) (1,139) (1,139)
Retained earnings................................ 12,493 12,493 12,493 12,493
------- -------- -------- --------
Total shareholders' equity............... 27,809 27,809 126,424 126,424
------- -------- -------- --------
Total capitalization..................... $62,094 $ 85,094 $180,196 $215,196
======= ======== ======== ========
</TABLE>
- ------------------------------
(1) For additional information relating to long-term obligations, see Notes 9
and 10 to the Consolidated Financial Statements.
(2) In November 1997, shareholders of the Company approved an increase in the
number of authorized shares of Common Stock of the Company from 10,000,000
to 150,000,000 shares.
(3) Reflects a 2.8 for 1 stock split.
(4) Excludes 3,500,000 shares of Common Stock available for future grants under
the Company's 1997 Incentive and Nonqualified Stock Option Plan for
Employees. No options are currently outstanding.
17
<PAGE> 19
DILUTION
The net tangible book value of the Company as of September 30, 1997, was
approximately $(10.4) million, or $(0.37) per share. "Net tangible book value"
equals total tangible assets less total liabilities of the Company. The
calculation of net tangible book value on a per share basis is equal to net
tangible book value divided by the aggregate number of shares of Common Stock
outstanding. The calculation of aggregate shares outstanding gives effect to a
2.8 for 1 stock split. After giving effect to the sale of the 6,000,000 shares
of Common Stock offered by the Company hereby at an assumed Price to Public of
$18.00 per share, the pro forma net tangible book value of the Company as of
September 30, 1997 would have been $88.2 million, or $2.59 per share. This
represents an effective net increase in net tangible book value of $2.96 per
share to existing shareholders and an immediate dilution of $15.41 per share to
new investors purchasing shares at the initial public offering price. The
following table illustrates this per share dilution, after deduction of
underwriting discounts and offering expenses:
<TABLE>
<S> <C> <C>
Price to Public per share................................... $18.00
Net tangible book value per share before offering(1)...... $(0.37)
Increase per share attributable to price paid by
purchasers in this offering............................ 2.96
------
Pro forma net tangible book value per share after
offering(1)............................................... 2.59
------
Dilution in pro forma net book value per share to new
investors................................................. $15.41
======
</TABLE>
The following table sets forth, on a pro forma as adjusted basis as of
September 30, 1997, the differences between the existing shareholders and the
new investors with respect to the number of shares purchased from the Company,
the total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ----------------------
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.......... 28,000,000 82% $ 14,613,000 12% $ 0.52
New investors(1)............... 6,000,000 18% 108,000,000 88% 18.00
---------- --- ------------ ---
Total................ 34,000,000 100% $122,613,000 100%
========== === ============ ===
</TABLE>
- ------------------------------
(1) Sales by the Selling Shareholders in the offering will reduce the number of
shares held by the existing shareholders prior to the offering to
25,081,000, or 74% (or 72% if the over-allotment option is exercised in
full), and will increase the number of shares held by new investors of
Common Stock in the offering to 8,919,000, or 26% (9,919,000, or 28% if the
over-allotment option is exercised in full) of the total number of shares of
Common Stock outstanding after the offering. See "Principal and Selling
Shareholders."
The calculations in the tables set forth above do not reflect an aggregate
of 3,500,000 shares of Common Stock available for future grants under the
Company's 1997 Incentive and Nonqualified Stock Option Plan for Employees. No
options are currently outstanding.
18
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Pro Forma Consolidated Financial Statements" and the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus. The consolidated statement of operations data for each of the years
ended December 31, 1994, 1995 and 1996, and the nine months ended September 30,
1997, and the consolidated balance sheet data as of December 31, 1995 and 1996
and September 30, 1997, have been derived from the consolidated financial
statements of the Company that have been audited by Coopers & Lybrand L.L.P. and
included elsewhere in this Prospectus. The consolidated balance sheet data as of
December 31, 1994 have been derived from the consolidated financial statements
of the Company that have been audited by Coopers & Lybrand L.L.P. but not
included in this Prospectus. The consolidated statements of operations for the
nine months ended September 30, 1996 and the consolidated balance sheet data as
of September 30, 1996 have been derived from unaudited consolidated financial
statements prepared on the same basis as the audited consolidated financial
statements. The results of operations for the nine months ended September 30,
1997 are not necessarily indicative of results to be expected for the entire
year ending December 31, 1997 or any future period.
The statement of operations data for the fiscal years ended December 31,
1992 and 1993 and the balance sheet data as of December 31, 1992 and 1993, are
derived from unaudited financial statements of the Predecessor Company (defined
below).
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY THE COMPANY
------------------- -----------------------------------------------
NINE MONTHS
ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------- -----------------
1992(1) 1993(1) 1994 1995 1996 1996 1997
-------- -------- ------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales(2).......................................... $23,108 $24,637 $13,311 $25,441 $15,457 $11,310 $33,817
Development revenue(3)................................ -- -- -- -- 5,000 2,500 --
------- ------- ------- ------- ------- ------- -------
Total revenue, net............................ 23,108 24,637 13,311 25,441 20,457 13,810 33,817
Costs of sales........................................ 17,913 19,373 9,754 12,130 8,782 7,050 9,538
Selling, general and administrative................... 3,542 7,963 1,987 8,605 12,106 8,441 13,734
Depreciation and amortization......................... 469 489 639 1,777 982 655 1,631
------- ------- ------- ------- ------- ------- -------
Total costs and expenses...................... 21,924 27,825 12,380 22,512 21,870 16,146 24,903
Gain on disposition of net assets(4).................. -- 347 -- -- -- -- --
Sale of product line(2)............................... -- -- -- 13,102 -- -- --
------- ------- ------- ------- ------- ------- -------
Operating income (loss)............................... 1,184 (2,841) 931 16,031 (1,413) (2,336) 8,914
Gain on sale of investment in affiliate(5)............ -- -- -- -- 1,760 1,760 --
Interest expense...................................... (116) (96) (1,069) (2,006) (1,272) (850) (1,730)
Other (expenses) income............................... 60 (152) 554 367 578 407 211
Net income (loss) before income taxes and
extraordinary gain.................................. 1,128 (3,089) 416 14,392 (347) (1,019) 7,395
Income tax (benefit) expense.......................... 91 (186) (501) 5,058 (107) (316) 2,840
------- ------- ------- ------- ------- ------- -------
Net income (loss) before extraordinary gain........... 1,037 (2,903) 917 9,334 (240) (703) 4,555
Extraordinary gain on early extinguishment of
long-term debt, net of income taxes of $272(6)...... -- -- -- 528 -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)..................................... $ 1,037 $(2,903) $ 917 $ 9,862 $ (240) $ (703) $ 4,555
======= ======= ======= ======= ======= ======= =======
Net income (loss) per share(7)........................ N/A N/A $ 0.20 $ 0.79 $ (0.02) $ (0.06) $ 0.18
======= ======= ======= ======= =======
Weighted average number of common and common stock
equivalents(8)...................................... N/A N/A 4,538 12,446 13,631 12,572 25,656
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1992(1) 1993(1) 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 417 $ 501 $ 1,028 $10,568 $ 1,392 $ 5,543 $ 35
Working capital....................................... 1,582 (714) (2,408) 7,599 7,749 7,563 83
Total assets.......................................... 7,756 3,306 38,447 33,942 39,279 34,244 74,253
Long-term debt (excluding current portion)............ 630 750 27,065 9,497 13,980 11,029 22,913
Shareholders' equity.................................. 3,473 571 1,935 11,011 15,693 11,176 27,809
</TABLE>
- ------------------------------
(1) Effective December 31, 1993, the Company acquired certain assets and
assumed certain liabilities of RSR Laboratories, Inc. (the "Predecessor
Company"). The 1992 and 1993 financial data of the Predecessor Company is
not comparable to the Company's financial data for 1994 through 1997
because the 1992 and 1993 financial data of the Predecessor Company
includes the gross up of customer supplied materials in net sales and cost
of sales. Such costs were not paid by the Company or billed to the customer
and the Company's accounting practice does not include these costs in net
sales or cost of sales. The Company believes it is not possible to estimate
accurately the gross up of customer supplied materials in net sales and
cost of sales in 1992 and 1993 because the amount of customer supplied
materials included in both sales and cost of sales is not known.
(2) In December 1994, the Company acquired the Anexsia Product Line. The
Company sold the Anexsia Product Line to Mallinckrodt in December 1995 for
$32.0 million and recorded a $13.1 million net gain.
(3) In connection with the Anexsia Transaction, the Company agreed to develop
four ANDAs to be filed with the FDA on Mallinckrodt's behalf for a maximum
of $2.5 million each due upon FDA approval. In 1996 the FDA approved two of
these ANDAs and as of September 30, 1997, the two additional ANDAs were on
file with the FDA.
(4) The Predecessor Company sold the net assets of its over-the-counter human
and animal pharmaceutical and health products business to the Company in
December 1993 and early January 1994. The net assets sold had a recorded
book value of $4.2 million.
(5) In September 1996, the Company sold its entire 6.0% interest in an
affiliated, privately held pharmaceutical company. See Note 15 to the
Consolidated Financial Statements.
(6) Reflects gain from early extinguishment of debt in connection with the
disposition of the Anexsia Product Line.
(7) Because the Company does not have any dilutive securities, net income
(loss) per share on a fully diluted basis is the same as primary earnings
per share for all periods presented.
(8) Reflects retroactively the effects of a 15.0% stock dividend paid in 1996
and a 2.8 for 1 stock split.
20
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus. See "Risk Factors" for trends and uncertainties known to the Company
that could cause reported financial information to differ materially from future
results.
OVERVIEW
The Company is an integrated pharmaceutical company that manufactures,
markets and sells branded and generic prescription pharmaceutical products. The
Company seeks to capitalize on niche opportunities in the pharmaceutical
industry created by cost containment initiatives and consolidation among large
global pharmaceutical companies. The Company's strategy is to acquire branded
pharmaceutical products and increase their sales by focused promotion and
marketing, as well as by developing product line extensions and through product
life cycle management.
The Company began operations in January 1994 after acquiring its
manufacturing facility and assuming contracts to manufacture pharmaceutical
products and companion animal health products for pharmaceutical companies.
Initially, contract manufacturing made up a significant portion of the Company's
net sales. In December 1994, the Company acquired its first branded
pharmaceutical product line, the Anexsia Product Line, for $17.6 million. The
acquisition was funded by a note payable to the seller (the "Anexsia Note
Payable"). During the 12 months following its acquisition, the Company
significantly increased annual sales of Anexsia through a combination of product
development and marketing. In December 1995, the Company sold the Anexsia
Product Line to Mallinckrodt for $32.0 million in cash and recognized a $13.1
million net gain. In connection with the sale, the Company entered into a
manufacture and supply agreement with Mallinckrodt, with guaranteed minimum
revenues of $4.8 million through 1999, and an agreement to develop four ANDAs on
Mallinckrodt's behalf for a maximum of $2.5 million each due upon FDA approval.
In 1996 the FDA approved two of these ANDAs and, as of September 30, 1997, the
additional two ANDAs were on file.
The Company has used the proceeds from the sale of the Anexsia Product Line
to acquire additional branded pharmaceutical products. Since December 1994, the
Company has acquired 15 branded pharmaceutical products, developed one product
internally, divested one product and introduced seven product line extensions.
The Company has improved the sales of most of its acquired products. Branded
pharmaceutical products represented approximately 79.8% of the net sales of the
Company for the first nine months ended September 30, 1997, with the Cortisporin
product line representing 60.7% of net sales. As part of its business strategy,
the Company intends to continue to acquire branded pharmaceutical products and
to create value by leveraging its marketing, manufacturing and product
development capabilities.
The Company expects that its strategy of acquiring branded pharmaceutical
products will increase its revenues as a result of sales of such products and
will increase gross margins. In general, margins are higher on the Company's
branded pharmaceutical products than on the Company's other products, making
branded products attractive to the Company. In addition, as soon as practicable
after regulatory requirements are satisfied, the Company expects that using its
manufacturing capability to ultimately produce these acquired pharmaceutical
products will increase the Company's margins because the cost of producing
pharmaceutical products on its own is lower than the cost of having these
products manufactured by third parties.
The Company's strategy is also expected to increase its selling, general
and administrative expenses due to the hiring of additional sales
representatives and increased sampling, advertising and other marketing costs as
a result of more focused marketing efforts. In accordance with its focus on
branded pharmaceutical products, the Company expects that, over time, its
contract manufacturing and generic pharmaceutical and companion animal health
product lines will become a smaller percentage of revenues. The majority of the
Company's manufacturing contracts have historically
21
<PAGE> 23
been for the manufacture of branded ethical pharmaceutical products for human
consumption, although the Company has maintained one contract for the
manufacture of branded prescription products for consumption by companion
animals.
The Company has not accepted or renewed manufacturing contracts for third
parties where the Company perceived insignificant volumes or revenues. Prior to
the Company's acquisition of Nucofed in October 1996 from Roberts Pharmaceutical
Corporation ("Roberts"), the Company had a manufacturing contract for that
product for Roberts. In addition, a contract with SmithKline Beecham has
declined as SmithKline Beecham has moved a significant portion of the production
of its product to its own facility in Puerto Rico.
The Company has four primary manufacturing contracts remaining. A contract
with Novartis for two branded prescription companion animal products expires in
December 1999. The Company's manufacturing contract with Mallinckrodt expires in
December 2000 with an optional renewal at Mallinckrodt's discretion for three
years. Another contract with Roberts expires in December 2000 with automatic
renewals of two year periods on the parties' mutual consent. The Company's
manufacturing contract with SmithKline Beecham expires in December 1999, with
automatic renewals of one year upon agreement of the parties. The Company cannot
predict which, if any, of these contracts will be renewed or extended since the
consent of both parties is required in all instances.
Contract manufacturing related to the Sterile Products Acquisition
represented approximately 25% ($22.2 million) and 29% ($14.0 million) of net
sales of the Sterile Products Acquisition for the year ended December 31, 1996
and for the nine months ended September 30, 1997, respectively. The Company
anticipates that it may enter into additional manufacturing contracts with
Warner-Lambert in connection with the Sterile Products Acquisition, which would
increase revenue from contract manufacturing.
The following summarizes approximate net revenues by product categories.
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- -------------
1994 1995 1996 1997
------- ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Branded pharmaceuticals............................... $ 305 $ 5,921 $ 2,938 $26,972
Generic pharmaceuticals............................... 1,711 7,492 1,572 1,039
Contract manufacturing................................ 11,295 12,028 10,890 5,090
Companion animal health............................... -- -- 57 716
Development revenues.................................. -- -- 5,000 --
------- ------- ------- -------
Total revenues.............................. $13,311 $25,441 $20,457 $33,817
======= ======= ======= =======
</TABLE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Revenues
Net revenues increased $20.0 million, or 144%, to $33.8 million in the nine
months ended September 30, 1997 from $13.8 million in the nine months ended
September 30, 1996. This increase was due primarily to the acquisition of seven
branded products since October 1996. Of these acquired products, the Cortisporin
product line contributed $20.5 million in 1997, or 60.7% of total net sales,
while the Company's additional branded products contributed an additional $6.5
million, or 19.2%. Although there are two additional ANDAs on file with the FDA
in connection with the Anexsia Transaction in 1997, the Company did not
recognize any income in the first nine months ended September 30, 1997 related
to this contract, compared to $2.5 million recognized in the nine months ended
September 30, 1996. Revenues from contract manufacturing decreased $4.4 million,
or 46.3%, to $5.1 million in the nine months ended September 30, 1997 from $9.5
million in the nine months ended September 30, 1996, due primarily to the
expiration of a manufacturing contract.
22
<PAGE> 24
Operating Costs and Expenses
Total operating costs and expenses increased $8.8 million, or 54.7%, to
$24.9 million in the nine months ended September 30, 1997 from $16.1 million in
the nine months ended September 30, 1996. The increase was due to increases in
the costs of sales, selling, general and administrative expenses and
depreciation and amortization expenses.
Cost of sales increased $2.4 million, or 33.8%, to $9.5 million in the nine
months ended September 30, 1997 from $7.1 million in the nine months ended
September 30, 1996. The increase was due primarily to the costs associated with
the new branded product lines. Cost of sales increased more slowly than sales
because acquired branded product lines generally had higher margins than the
Company's other product lines. The Cortisporin product line contributed $18.7
million of gross profit in the nine months ended September 30, 1997,
representing a gross margin for the Cortisporin product line of 91.3%.
Selling, general and administrative expenses increased $5.3 million, or
63.1%, to $13.7 million in the nine months ended September 30, 1997 from $8.4
million in the nine months ended September 30, 1996. This increase was primarily
attributable to the hiring of additional field sales representatives during late
1996 and early 1997, other additional personnel costs and marketing, promotion
and sampling costs associated with the new branded product lines.
Depreciation and amortization expense increased $976,000, or 149%, to $1.6
million in the nine months ended September 30, 1997 from $655,000 in the nine
months ended September 30, 1996. This increase was primarily attributable to the
amortization of the purchase price of the new branded product lines.
Operating Income
Operating income increased $11.2 million to $8.9 million in the nine months
ended September 30, 1997 from an operating loss of $2.3 million in the nine
months ended September 30, 1996. As a percentage of net revenues operating
income was 26.3% in the nine months ended September 30, 1997. This increase was
primarily due to increased revenues from the acquisition of additional branded
products.
Gain on Sale of Investment in Affiliate
In September 1996, the Company sold its entire 6.0% interest in an
affiliated, privately-held pharmaceutical company, which had been co-founded by
the Company's Chief Executive Officer, for $2.0 million, resulting in a gain of
$1.8 million.
Interest Expense
Interest expense increased $880,000, or 104%, to $1.7 million in the nine
months ended September 30, 1997 from $850,000 in the nine months ended September
30, 1996, as a result of additional term loans used to finance, in part, the
acquisitions of branded product lines.
Income Tax (Benefit) Expense
The effective tax rate in 1997 of 38.4% was higher than the federal
statutory rate of 34.0% due to state income taxes.
Net Income
Due to the factors set forth above, net income increased $5.3 million to
$4.6 million in the nine months ended September 30, 1997 from a net loss of
$703,000 in the nine months ended September 30, 1996.
23
<PAGE> 25
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues
Net revenues decreased $4.9 million, or 19.3%, to $20.5 million in 1996
from $25.4 million in 1995 due primarily to the disposition of the Anexsia
Product Line, which had generated net revenues of $9.6 million in 1995. In
addition, the Company experienced a general decline in revenues from generic
pharmaceutical products as a result of erosion of generic pricing due to
competition as well as a decline in revenues from contract manufacturing as a
result of the expiration of a significant contract offset, in part, by the
addition of new contracts. These revenue decreases were offset by the
recognition of $5.0 million in developmental revenues from the Anexsia
Transaction and revenues from three branded pharmaceutical products acquired in
the fourth quarter of 1996. In 1996, the Company did not have any branded
pharmaceutical products that accounted for more than 15% of net revenues.
Operating Costs and Expenses
Total operating costs and expenses decreased $642,000, or 2.9%, to $21.9
million in 1996 from $22.5 million in 1995. The decrease was due to decreases in
both costs of sales and depreciation and amortization expenses, offset by an
increase in selling, general and administrative expenses.
Cost of sales decreased $3.3 million, or 27.3%, to $8.8 million in 1996
from $12.1 million in 1995. The decrease was due primarily to the sale of the
Anexsia Product Line, offset by the acquisition of a number of smaller product
lines in the fourth quarter of 1996.
Selling, general and administrative expenses increased $3.5 million, or
40.7%, to $12.1 million in 1996 from $8.6 million in 1995. This increase was
primarily attributable to the hiring of additional employees during 1996 and
late 1995 to support the Company's expansion, and increased costs associated
with marketing efforts relating to three branded pharmaceutical products
acquired by the Company in the fourth quarter of 1996 and additional product
development expenses incurred in developing branded and generic pharmaceutical
product reformulations in 1996.
Depreciation and amortization expense decreased $795,000, or 44.2%, to
$982,000 in 1996 from $1.8 million in 1995. This decrease was primarily
attributable to reduced amortization expense as a result of the disposition of
the Anexsia Product Line.
Operating Income
Operating income decreased $17.4 million to a loss of $1.4 million in 1996
from operating income of $16.0 million in 1995 and decreased as a percentage of
net revenues to (6.9%) from 63.0% in 1995. This decrease was primarily as a
result of greater selling, general and administrative expenses and lost revenues
and a 1995 nonrecurring gain due to the disposition of the Anexsia Product Line,
offset, in part, by an increase in development revenues.
Gain on Sale of Investment in Affiliate
In September 1996, the Company sold its entire 6.0% interest in an
affiliated, privately-held pharmaceutical company, which had been co-founded by
the Company's Chief Executive Officer, for $2.0 million, resulting in a gain of
$1.8 million.
Interest Expense
Interest expense decreased $734,000, or 36.7%, to $1.3 million in 1996 from
$2.0 million in 1995, primarily due to the repayment of the Anexsia Note Payable
in December 1995.
24
<PAGE> 26
Income Tax (Benefit) Expense
The effective tax rate was (30.8%) in 1996. In 1995, the effective tax rate
of 35.1% does not differ significantly from the federal statutory rate of 34.0%.
Net Income
Due to the factors set forth above, net income decreased $10.1 million, to
a net loss of $240,000 in 1996 from net income of $9.9 million in 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues
Net revenues increased $12.1 million, or 91.0%, to $25.4 million in 1995
from $13.3 million in 1994 due primarily to the acquisition of the Anexsia
Product Line as well as an increase in revenues from generic pharmaceutical
products. The Company also increased revenues from contract manufacturing due to
the renewal of contracts that had expired during 1995 under more favorable
terms. In 1995 the Anexsia Product Line and Bactroban, a product manufactured
under contract for a third party, accounted for 37.7% and 20.3% of net sales,
respectively. In 1994, Bactroban accounted for 37.4% of net sales.
Operating Costs and Expenses
Total operating costs and expenses increased $10.1 million, or 81.5%, to
$22.5 million in 1995 from $12.4 million in 1994. The increase was due to
increases in the costs of sales, selling, general and administrative expenses
and depreciation and amortization expense.
Cost of sales increased $2.3 million, or 23.5%, to $12.1 million in 1995
from $9.8 million in 1994. The increase was due primarily to costs associated
with the acquisition of the Anexsia Product Line prior to its disposition in
December 1995. The Anexsia Product Line and Bactroban contributed $7.4 million
and $3.3 million, respectively, of gross profit in 1995, representing gross
margins for the Anexsia Product Line and Bactroban of 77.1% and 64.6%,
respectively. Bactroban contributed $3.3 million of gross profit in 1994,
representing a gross margin for Bactroban of 66.8%.
Selling, general and administrative expenses increased $6.6 million, or
330%, to $8.6 million in 1995 from $2.0 million in 1994. This increase primarily
resulted from increased promotional costs attributable to marketing efforts
relating to branded pharmaceutical products acquired by the Company during 1995,
variable costs commensurate with increased sales volumes, and an increase in
personnel costs attributable to the hiring of additional employees during 1995.
Depreciation and amortization expense increased $1.1 million, or 172%, to
$1.8 million in 1995 from $639,000 in 1994. This increase was primarily
attributable to the amortization of the purchase price of the Anexsia Product
Line.
Operating Income
Operating income increased $15.1 million, or 1,622%, to $16.0 million in
1995 from $931,000 in 1994 and increased as a percentage of net revenues to
63.0% from 7.0% in 1994. This increase was due primarily to the gain on the sale
of the Anexsia Product Line.
Interest Expense
Interest expense increased $937,000, or 85.2%, to $2.0 million in 1995 from
$1.1 million in 1994, as a result of the Anexsia Note Payable issued in
connection with the purchase of the Anexsia Product Line.
25
<PAGE> 27
Income Tax (Benefit) Expense
The effective tax rate in 1995 approximated the federal statutory rate. In
1994 the rate was substantially lower than the statutory rate due to the basis
differences on certain assets purchased and the lower level of taxable income.
Net Income
Due to the factors set forth above, as well as the gain of $13.1 million
recognized by the Company as a result of the disposition of the Anexsia Product
Line, net income increased $8.9 million, or 971%, to $9.9 million in 1995 from
$917,000 in 1994.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company's liquidity requirements arise from net cash used in
operations, payments on outstanding indebtedness and funding of acquisitions of
branded products. The Company has met its cash requirements through 1996
primarily through bank borrowings and the proceeds from the disposition of the
Anexsia Product Line.
The Company's recent cash requirements arose primarily in connection with
the acquisition of branded pharmaceutical products. In 1995 the Anexsia Product
Line was acquired and financed with the Anexsia Note Payable. The Anexsia Note
Payable was repaid upon the completion of the disposition of the Anexsia Product
Line in December 1995. In 1996 the acquisition of two branded pharmaceutical
products for $7.0 million was financed with a combination of cash and seller
financing. In March 1997, the Company raised $23.0 million through a combination
of equity ($8.0 million) and notes payable with banks and borrowing under its
revolving line of credit to finance the acquisition of the Cortisporin product
line. Other product acquisitions in 1997, which totalled $6.6 million, were
financed primarily with notes payable from banks and internally generated funds.
As of September 30, 1997, the Company had available up to $6.2 million
under its revolving line of credit which allows for total borrowing of up to
$8.5 million.
Nine Months Ended September 30, 1997
Net cash provided by operating activities was $5.3 million for the nine
months ended September 30, 1997, which was primarily attributable to increased
operating income. Increases of receivables and inventory of $5.1 million and
$2.5 million, respectively, were offset by $1.6 million of depreciation and
amortization expenses, increases in accounts payable, accrued expenses and
income taxes payable of $2.7 million, $2.8 million and $1.7 million,
respectively.
Net cash used in investing activities was $32.5 million for the nine months
ended September 30, 1997, which consisted primarily of the purchase of the
Cortisporin product line for $23.7 million, two additional branded products at a
combined cost of $6.7 million, and the purchase of additional property and
equipment for $957,000 and deposit on equipment of $1.3 million.
Net cash provided by financing activities was $25.8 million for the nine
months ended September 30, 1997, which consisted of $13.2 million, $1.3 million
and $15.9 million in proceeds from the revolving line of credit, and additional
short-term and long-term debt to finance branded product acquisitions,
respectively, offset by payments of $10.9 million and $3.3 million on the
revolving line of credit and long-term debt, respectively. Further, the Company
received net proceeds of $8.0 million from the issuance of common shares and
received $2.1 million in payments from shareholders and members of management of
the Company on shareholder notes receivable.
As a result of the factors discussed above, cash and cash equivalents
decreased to $35,000 from $1.4 million as of December 31, 1996.
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Year ended December 31, 1996
Net cash used in operating activities was $6.0 million for the year ended
December 31, 1996. The Company's net use of operating cash in 1996 was primarily
a result of a $1.4 million operating loss, excluding the $1.8 million gain on
sale of investment in affiliate, offset by $1.0 million of depreciation and
amortization, an increase in income taxes receivable of approximately $3.6
million resulting from federal and state tax payments made by the Company in
1996, as well as an increase in inventory of $1.9 million due to the acquisition
of three branded pharmaceutical products and the internal development of a
complete generic product line in the fourth quarter of 1996.
Net cash used in investing activities for the year ended December 31, 1996
was $2.4 million and was primarily the result of cash paid of $3.3 million and
$1.0 million for the acquisition of three new branded product lines and costs
associated with generic pharmaceutical products as well as property and
equipment purchases, respectively. Additionally, the Company received $2.1
million from the sale of its 6.0% investment in an affiliated, privately-held
pharmaceutical company.
Net cash used in financing activities was $781,000 for the year ended
December 31, 1996, which was comprised of payments on the revolving line of
credit and other term loans of $3.4 million and $2.8 million, respectively,
offset by proceeds from a $2.5 million term loan used to finance, in part, the
acquisition of certain branded pharmaceutical products and $2.8 million raised
in an employee stock purchase plan and from shareholders and members of
management.
As a result of the factors discussed above, cash and cash equivalents
decreased from $10.6 million as of December 31, 1995, to $1.4 million as of
December 31, 1996.
Year ended December 31, 1995
Net cash used in operating activities was $2.6 million for the year ended
December 31, 1995 consisting primarily of net income of $9.9 million offset by
the gain on sale of product line of $15.6 million. The Company's net use of
operating cash in 1995 was also impacted by an increase in inventory and
receivables of $1.3 million and $876,000, respectively, due to increased
revenues during 1995. Additionally, the Company decreased its accounts payable
and accrued expenses by $288,000 and $220,000, respectively.
Net cash provided by investing activities was $30.3 million for the year
ended December 31, 1995 which consisted primarily of the $32.0 million in
proceeds received from the disposition of the Anexsia Product Line, offset by
the costs of improvements to the Company's manufacturing facility.
Net cash used in financing activities was $18.1 million for the year ended
December 31, 1995, which primarily was the repayment of the $17.5 million
Anexsia Note Payable. Additionally, the Company had proceeds from its revolving
line of credit and other term loans of $200.8 million and $329,000, and made
payments on such indebtedness of $198.4 million and $20.1 million, respectively.
Further, the Company paid $100,000 to retire preferred stock and paid $8,000
dividends on such stock.
As a result of the factors discussed above, cash and cash equivalents
increased from $1.0 million at December 31, 1994 to $10.6 million at December
31, 1995.
Year ended December 31, 1994
Net cash provided by operating activities was $672,000 for the year ended
December 31, 1994. Net cash provided by operating activities in 1994 was
primarily a result of net income plus depreciation and amortization of $639,000,
deferred tax expense of $629,000, offset by changes in working capital of
$706,000. Net cash used in investing activities was $890,000, consisting
primarily of purchases of property and equipment.
Net cash provided by financing activities was $927,000 for the year ended
December 31, 1994, which was primarily a result of borrowings on the Company's
revolving line of credit of $12.0 million offset by payments of $11.0 million.
Additionally, the Company received payments from the issuance of $800,000 in
preferred stock, and repaid $346,000 in indebtedness, and received an advance
from an affiliate of $520,000. In December 1994, the Company purchased the
Anexsia Product Line in exchange for the $17.5 million Anexsia Note Payable,
with no cash down.
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As a result of the factors discussed above, cash and cash equivalents
increased to $1.0 million as of December 31, 1994 from $319,000 as of December
31, 1993.
Certain Indebtedness and Other Matters
As of September 30, 1997, the Company had outstanding approximately $30.7
million of long-term debt, $1.3 million of short-term debt and $2.3 million in
borrowings under its revolving lines of credit agreements and term loans. Of
these amounts, approximately $12.2 million were at variable rates based on LIBOR
and the remainder at fixed rates. The Company does not believe its exposure to
changes in interest rates under these variable rate agreements will have a
material effect on its financial condition or results of operations. Certain
financing arrangements require the Company to maintain certain minimum net
worth, debt to equity, cash flow and current ratio requirements. The Company has
obtained waivers from its commercial lenders for violations of cash flow and
current ratio covenants.
On November 14, 1997, the Company acquired from Glaxo Wellcome certain
branded pharmaceutical product lines for $23.0 million. The Company used a new
credit facility to finance this acquisition. It also used the credit facility to
pay off approximately $19.0 million of long-term debt which had been outstanding
at September 30, 1997. This credit facility includes a five-year revolving line
of credit and term loan in the aggregate amount of $52.0 million with customary
covenants and with a floating interest rate based on either LIBOR, the prime
rate, or the fed funds rate, plus an applicable margin selected at the
discretion of the Company. As of December 1, 1997, after drawing down on the new
line of credit for working capital purposes, the Company had approximately $5.2
million of available borrowing capacity under the new credit facility.
The Company plans to use the proceeds from this offering primarily to fund
future acquisitions of branded pharmaceutical products and to repay certain
borrowings. On October 31, 1997, the Company entered into a preliminary
non-binding letter of intent for the Sterile Products Acquisition. Although the
Company has offered $125.0 million for these products and other assets and
Warner-Lambert has indicated that it is willing to finance up to $35.0 million
of the purchase price, the Company has not completed due diligence and any
purchase price will be subject to the results of the Company's due diligence
process. In addition to due diligence, the proposed transaction is subject to
numerous conditions and contingencies, including internal approvals of both the
Company and Warner-Lambert, receipt of regulatory approvals, resolution of legal
and equitable matters relating to employees, supply and service agreements and
intellectual property rights and preparation and negotiation of documentation.
In addition, if the proposed transaction is consummated, the Company may incur
additional acquisition cost to purchase any related inventory, the cost of which
is subject to further negotiation. Accordingly, there can be no assurance that
this proposed transaction will occur or, if it occurs, there can be no assurance
as to the assets that may be acquired, the purchase price of such assets or the
terms of their acquisition. See "Use of Proceeds," and "Business -- Strategy,"
and "Business -- Products and Product Development."
The Company believes that existing credit facilities and cash expected to
be generated from operations are sufficient to finance its current operations
and working capital requirements. However, in the event the Company makes
significant future acquisitions, it may be required to raise funds in addition
to those being raised in this offering, through additional borrowings or the
issuance of additional debt or equity securities. At present, the Company is
actively pursuing the acquisition of additional branded pharmaceutical products
which may require the use of substantial capital resources. There are, however,
no present agreements or commitments with respect to any such acquisitions
except for those described elsewhere in this Prospectus.
Capital Expenditures
Capital expenditures, including capital lease obligations, were $1.0
million for the nine months ended September 30, 1997 and $2.2 million, $1.7
million and $1.1 million in 1996, 1995 and 1994, respectively. The principal
capital expenditures included property and equipment purchases and building
improvements. The Company is anticipating total capital expenditures in the
final three months of 1997 to be approximately $500,000 and total capital
expenditures in 1998 to be approximately
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$3.0 million primarily to fund additional equipment purchases and building
improvements. The Company expects, if the Sterile Products Acquisition is
consummated, that it may need to incur additional capital expenditures over the
next few years in connection with the maintenance and operation of the
manufacturing facility it may acquire as part of such acquisition. While the
Company currently is not able to estimate the amount of such capital
expenditures, any such amounts could be material. In addition, the Company
expects to increase its capital expenditures over the next few years as a part
of its acquisition and growth strategy.
IMPACT OF INFLATION
The Company has experienced only moderate raw material and labor price
increases in recent years. While the Company has passed some price increases
along to its customers, the Company has primarily benefited from rapid sales
growth negating most inflationary pressures.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, effective
for fiscal periods ending after December 15, 1997. The new standard simplifies
the computation of earnings (loss) per share by replacing primary earnings
(loss) per share with basic earnings (loss) per share. Basic earnings (loss) per
share will not include the effect of any potentially dilutive securities, as
under the current accounting standard, and will be computed by dividing reported
income available to common shareholders by the weighted average number of common
shares outstanding during the period. Fully diluted earnings (loss) per share
will now be called diluted earnings (loss) per share and will reflect the
dilution of all potentially dilutive securities. The adoption of this standard
by the Company will have no impact on the historical reported earnings (loss)
per share amounts since the Company did not have any potentially dilutive
securities. In October 1997, the Board of Directors approved the 1997 Incentive
and NonQualified Stock Option Plan for Employees for which there are currently
no outstanding options.
Statement of Financial Accounting Standards (SFAS) No. 129 ("Statement
129") establishes standards for disclosing information about an entity's capital
structure and is effective for periods ending after December 15, 1997.
Management of the Company does not expect Statement 129 to have a significant
impact, if any, on the Company's Consolidated Financial Statements.
Statement of Financial Accounting Standards (SFAS) No. 130 ("Statement
130") establishes standards for reporting and display of comprehensive income
and its components (revenues, gains, expenses, losses) in a full set of general
purpose financial statements and is effective for fiscal years beginning after
December 15, 1997. Management of the Company does not expect Statement 130 to
have a significant impact, if any, on the Company's Consolidated Financial
Statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information ("Statement
131"). Statement 131 requires public business enterprises to adopt its
provisions for periods beginning after December 15, 1997, and to report certain
information about operating segments in complete sets of financial statements of
the enterprise and in condensed financial statements of interim periods issued
to shareholders. The Company is evaluating the provisions of Statement 131, but
has not yet determined if additional disclosures will be required.
YEAR 2000 COMPLIANCE
The Company is currently in the process of converting its computer systems
to year 2000 compliant software. The Company does not expect that the cost of
converting such systems will be material to its financial condition or results
of operations. The Company believes it will be able to achieve year 2000
compliance by the end of 1999, and does not currently anticipate any material
disruption in its operations as the result of any failure by the Company to be
in compliance. The Company does not currently have any information concerning
the year 2000 compliance status of its suppliers and customers.
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BUSINESS
COMPANY OVERVIEW
The Company is an integrated pharmaceutical company that manufactures,
markets and sells branded and generic prescription pharmaceutical products. The
Company seeks to capitalize on niche opportunities in the pharmaceutical
industry created by cost containment initiatives and consolidation among large
global pharmaceutical companies. The Company's strategy is to acquire branded
pharmaceutical products and increase their sales by focused promotion and
marketing, as well as by developing product line extensions and through product
life cycle management. Product life cycle management includes competitive
marketing efforts through pricing, placement, promotion and product positioning;
all product development strategies; manipulation of product packaging;
permutations to known or discovered formulations; extensions to product lines
through acquisitions or development; utilization of intellectual property to
maximize pharmaceutical product exclusivity; identification of new therapeutic
indications; and evaluation of competitors and possible sources for competition.
Since December 1994, the Company has acquired 15 branded pharmaceutical
products, developed one product internally, divested one product and introduced
seven product line extensions. On October 31, 1997, the Company entered into a
preliminary non-binding letter of intent for the Sterile Products Acquisition.
See "-- Business Strategy."
The Company markets its branded pharmaceutical products through its
wholly-owned subsidiary, Monarch Pharmaceuticals. The goal of Monarch
Pharmaceuticals is to aggressively promote acquired branded pharmaceutical
products in order to increase their sales. Monarch Pharmaceuticals has 48 sales
representatives who market primarily in the southeastern and midwestern United
States. This sales force is dedicated to promoting and marketing branded
pharmaceutical products and is supported by telemarketers and customer service
representatives who promote the Company's products in territories not currently
covered by field representatives. The Company expects its sales and marketing
staff to grow significantly as the Company acquires additional branded
pharmaceutical products.
The Company's current branded pharmaceutical products include, among
others, Cortisporin, acquired from Glaxo Wellcome in March 1997, Thalitone,
acquired from Horus Therapeutics, Inc. in December 1996, Viroptic and acquired
from Glaxo Wellcome in May 1997. In addition, the Company acquired Septra,
Proloprim, Mantadil and Kemadrin, as well as the exclusive licenses, free of
royalty obligations, to manufacture and market prescription formulations of
Neosporin and Polysporin from Glaxo Wellcome in November 1997. Branded
pharmaceutical products represented 79.8% of the net sales of the Company for
the first nine months ended September 30, 1997, with the Cortisporin product
line representing 60.7% of net sales. The Company acquired its first branded
product, the Anexsia Product Line for $17.6 million in December 1994. During the
12 months following its acquisition, the Company significantly increased annual
sales of the Anexsia Product Line through a combination of product development
and marketing. In December 1995, the Company sold the Anexsia Product Line to
Mallinckrodt for $32.0 million in cash and recognized a $13.1 million net gain.
The Company believes its integrated manufacturing capabilities and support
systems allow for higher margins and enhanced ability to acquire and develop
pharmaceutical products because it does not have to rely on third parties to
manufacture or develop products. The Company can produce a broad range of dosage
formulations, including sterile solutions, injectables, tablets and capsules,
liquids, creams and ointments, suppositories and powders, and is licensed by the
DEA to procure and produce controlled substances. The Company's manufacturing
capability is integrated with its support services, including quality control,
quality assurance, regulatory compliance, packaging, distribution and inventory
management and purchasing and production planning. These integrated services
enable the Company to maintain high quality standards for its products as well
as provide reliable and timely service to its customers. The Company currently
manufactures certain of its own branded and generic
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products and uses its excess manufacturing capacity to contract manufacture for
other pharmaceutical companies.
The Company's product development efforts are currently focused on
developing product line extensions, which allow the Company to enhance product
differentiation, create market exclusivity and minimize sales lost to generic
substitution. To date, the Company has introduced seven line extensions for its
acquired products.
The Company also manufactures and markets a number of generic
pharmaceutical products as well as a comprehensive line of nutritional
supplements for companion animals. The Company markets its generic
pharmaceutical products under the King Pharmaceuticals label and its companion
animal health products under the Royal Vet and Show Winner tradenames.
INDUSTRY BACKGROUND
Sales of pharmaceutical products in the United States were estimated to be
in excess of $98 billion in 1996. During the past decade, the pharmaceutical
industry has been faced with cost containment initiatives from government and
managed care organizations and has begun to consolidate. Consolidation is being
driven by a desire among pharmaceutical companies to reduce costs through
economies of scale and synergies, to add previously lacking U. S. or European
sales strength or to add promising product pipelines or manufacturing
capabilities in key therapeutic categories.
Industry consolidation and cost containment pressures have increased the
level of sales necessary for an individual product to justify active marketing
and promotion from large pharmaceutical companies. This has led large
pharmaceutical companies to focus their marketing efforts on drugs with high
sales and on newer drugs which have the potential for high sales. In addition,
in certain cases pharmaceutical companies may choose not to market or promote
products actively if such products do not fit with the Company's therapeutic or
marketing priorities. As a result of these factors, sales of certain
pharmaceutical products have stagnated or declined, which has caused large
pharmaceutical companies to consider divesting product lines that are not
strategically important. Because these product lines are generally small and may
not be cost-effective for large pharmaceutical companies, they can be profitable
for smaller companies to manufacture and market.
STRATEGY
The Company's strategy is to identify product opportunities that large
global pharmaceutical companies neglect and create value by leveraging its
marketing, manufacturing and product development capabilities. In order to
execute this strategy, the Company seeks to acquire branded pharmaceutical
products and increase their sales by focused promotion and marketing, as well as
by developing product line extensions and through product life cycle management.
The Company believes that there are substantial opportunities to acquire
branded pharmaceutical products at attractive prices from large global
pharmaceutical companies. The Company generally seeks branded pharmaceutical
products that (i) can benefit from focused marketing efforts in addition to
product development, (ii) complement the Company's existing product lines, and
(iii) have some patent protection or potential for market exclusivity or product
differentiation, such as through a delivery mechanism, as part of a combination
therapy or lack of a therapeutic substitute. Since December 1994, the Company
has acquired 15 branded pharmaceutical products. On October 31, 1997, the
Company entered into a preliminary non-binding letter of intent for the Sterile
Products Acquisition. To date, the Company has not made an acquisition of this
size, and if this acquisition is consummated as currently anticipated, the
Company will acquire an additional manufacturing facility. If this acquisition
is consummated, the Company's future success will depend in part on its ability
to retain or hire qualified employees to operate this facility and to operate
such facility efficiently in accordance with applicable regulatory standards.
See "Risk Factors -- Managing Growth of Business." Although the Company has
offered $125.0 million to Warner-Lambert for these products and other assets,
the Company has not completed due diligence and any purchase price will be
subject to the
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results of the Company's due diligence process. In addition to due diligence,
the proposed transaction is subject to numerous conditions and contingencies,
including internal approvals of both the Company and Warner-Lambert, receipt of
regulatory approvals, resolution of legal and equitable matters relating to
employees, supply and service agreements and intellectual property rights and
preparation and negotiation of documentation. In addition, if the proposed
transaction is consummated, the Company may incur additional acquisition cost to
purchase any related inventory, the cost of which is subject to further
negotiation. Accordingly, there can be no assurance that this proposed
transaction will occur or, if it occurs, there can be no assurance as to the
assets that may be acquired, the purchase price of such assets or the terms of
their acquisition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "-- Products and Product Development."
The Company believes that it can increase the sales of its branded
pharmaceutical products through focused promotion and marketing efforts. The
Company's wholly-owned subsidiary, Monarch Pharmaceuticals, has an established
sales force of 48 field representatives. This sales force is dedicated to
promoting and marketing branded pharmaceutical products. These efforts are
supported by telemarketers and customer service representatives who also promote
the Company's products in territories not currently covered by field
representatives by distributing samples to physicians selected using a computer
sampling system developed by the Company. The sales and marketing staff is
expected to grow significantly as the Company continues to acquire more branded
products.
A key component of the Company's strategy is its integrated manufacturing
capabilities and support systems. The Company's ability to manufacture products
enables the Company to capture higher margins and enhances the Company's ability
to acquire and develop products. The Company's plant manufactures a broad range
of dosage forms, including sterile solutions, injectables, tablets and capsules,
liquids and suspensions, creams and ointments, suppositories and powders. The
Company's support systems include quality assurance, quality control, regulatory
compliance, inventory control and packaging which are coordinated by the
Company's management information services. When the Company acquires a product,
it transfers production of such product to its manufacturing facilities as soon
as practicable after regulatory requirements are satisfied.
The Company also believes it can create value by utilizing its product
development capabilities to enhance product differentiation and to create market
exclusivity for its products. In particular, the Company seeks to develop new
combination therapies in order to broaden product lines and minimize generic
substitution. To date, the Company has introduced seven line extensions for its
acquired products.
PRODUCTS AND PRODUCT DEVELOPMENT
The Company develops, manufactures, packages, markets and distributes
branded and generic pharmaceutical products and companion animal health
products. It also manufactures certain pharmaceutical products for other
pharmaceutical companies.
The Company is focused primarily on the acquisition and development of
branded pharmaceuticals which are marketed through its wholly-owned subsidiary,
Monarch Pharmaceuticals. Since December 1994, the Company has acquired 15
branded pharmaceutical products, developed one product internally and divested
one product. The Company's current line of branded pharmaceutical products
include:
CORTISPORIN, acquired from Glaxo Wellcome in March 1997, includes
combination antibiotic and anti-inflammatory ophthalmic, otic and topical
formulations indicated for eye, ear and skin infections. The Cortisporin
product line represented 60.7% of the Company's net sales in the nine
months ended September 30, 1997.
NEOSPORIN, acquired under a license agreement from Glaxo Wellcome in
November 1997, includes prescription strength ophthalmic ointment and
solution indicated for the topical treat-
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ment of eye infections and the prescription strength genitourinary irrigant
sterile formulation of Neosporin indicated for short-term use as a
continuous irrigant or rinse to help prevent infections associated with the
use of indwelling catheters.
POLYSPORIN, acquired under a license agreement from Glaxo Wellcome in
November 1997, is a prescription strength antibacterial ointment indicated
for the topical treatment of superficial eye infections.
SEPTRA, acquired from Glaxo Wellcome in November 1997, is available in
both oral and parenteral dosage forms and strengths and is an antibiotic
indicated for the treatment of infectious diseases, including urinary tract
infections, pneumonia, enteritis and ear infections in adults and children.
PROLOPRIM, acquired from Glaxo Wellcome in November 1997, is an
antibiotic indicated for the treatment of uncomplicated urinary tract
infections.
PEDIOTIC, which is part of the Cortisporin product line, is an ear
infection preparation specially formulated for children.
THALITONE is a hypertension-diuretic produced in tablet form,
indicated for the management of hypertension and edema associated with
congestive heart failure and renal dysfunction.
VIROPTIC is a sterile solution indicated for the treatment of ocular
herpes simplex virus, idoxuridine-resistant herpes and vidarabine-resistant
herpes. In November 1997, the FDA approved the expanded use of Viroptic to
include pediatric patients, ages six and above.
QUIBRON is a respiratory preparation containing theophylline which is
produced in capsule, tablet and sustained release tablet forms indicated
for the relief and/or prevention of asthma, chronic bronchitis and
emphysema.
PROCTOCORT is a hemorrhoidal preparation which is produced in cream
and an internally developed suppository form.
TUSSEND is an internally developed cough/cold preparation containing
hydrocodone which is produced in syrup, tablet and elixir forms indicated
in the relief of cough and congestion due to colds, acute respiratory
infections, bronchitis and hay fever.
NUCOFED is a dye-free cough/cold preparation containing codeine which
is produced in syrup and capsule forms indicated in the treatment of
coughing and congestion associated with upper respiratory infections,
common cold, bronchitis, influenza and sinusitis.
MONAFED is an internally developed non-narcotic cough/cold preparation
in a sustained release tablet form.
KEMADRIN, acquired from Glaxo Wellcome in November 1997, is an
anti-parkinsonian medication.
MANTADIL, acquired from Glaxo Wellcome in November 1997, is an
antihistimine cream indicated in the treatment of pruritic skin eruptions,
such as eczema, and contact dermatitis, including poison ivy and poison
sumac.
In December 1994, the Company acquired its first branded product line, the
Anexsia Product Line for $17.6 million. Anexsia is a prescription branded
narcotic analgesic for mild to moderate skeletal muscular pain. The acquisition
was funded by the Anexsia Note Payable. During the 12 months following its
acquisition, the Company significantly increased annual sales of Anexsia through
a combination of product development and aggressive marketing. In December 1995,
the Company sold the Anexsia Product Line to Mallinckrodt for $32.0 million in
cash and recognized a $13.1 million net gain. In connection with the sale, the
Company entered into a manufacture and supply agreement with Mallinckrodt that
provided for guaranteed minimum revenues of $4.8 million through 1999 and an
agreement to develop four ANDAs on Mallinckrodt's behalf for a maximum of $2.5
million each due
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upon FDA approval. In 1996, the FDA approved two of these ANDAs and, as of
September 30, 1997, the additional two ANDAs were on file.
On October 31, 1997, the Company entered into a preliminary non-binding
letter of intent for the Sterile Products Acquisition. The fifteen products that
the Company is considering acquiring from Warner-Lambert (the "Warner-Lambert
Products") are branded prescription pharmaceutical products consisting primarily
of (i) biological products used to elicit immune responses and (ii) anti-
infective drug products. One of these Warner-Lambert Products is protected by a
patent, while the other products compete with generic substitutes that are
manufactured and sold by other pharmaceutical companies. The Warner-Lambert
Products are produced in a variety of dosage formulations including, among
others, tablets and capsules, injectables, and creams and ointments. The Warner-
Lambert Products are sold primarily to pharmaceutical wholesalers for use
primarily by family and general practitioners. Three of these products accounted
for 46% (approximately $21.9 million) of the total gross sales of the
Warner-Lambert Products in the first nine months of 1997, and another product,
which had net sales of approximately $20.0 million in each of 1995 and 1996, was
not sold in 1997. This product currently is subject to further FDA review and
approval, and there can be no assurance that it will be produced or sold in 1998
or at any time in the future. As a result of this product being discontinued,
cost of goods sold in 1997 included approximately $5.5 million of unabsorbed
overhead and approximately $4.3 million of obsolete inventory. There can be no
assurance that the acquisition will occur or, if it occurs, there can be no
assurance as to the assets that may be acquired, the purchase price of such
assets or the terms of their acquisition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "-- Strategy."
For the year ended December 31, 1996 and the nine months ended September
30, 1997, branded pharmaceutical products accounted for 19.0% and 79.8%,
respectively, of net sales of the Company.
The Company is engaged in the development, manufacturing, packaging,
marketing, distribution and sale of generic pharmaceutical products sold as
prescription drugs. The Company currently has two generic products on the market
and has five ANDAs on file. The Company will continue to add new development
projects as more pharmaceutical products lose their patent protection. For the
year ended December 31, 1996 and the nine months ended September 30, 1997,
generic products accounted for 10.2% and 3.1%, respectively, of net sales of the
Company.
King Pharmaceuticals Animal Health, a division of the Company, manufactures
and markets a comprehensive line of nutritional supplements for companion
animals which are marketed under the Royal Vet and Show Winner tradenames. The
Company is also developing a comprehensive line of over-the-counter companion
animal health pharmaceutical products. For the year ended December 31, 1996 and
the nine months ended September 30, 1997, companion animal health products
accounted for 0.4% and 2.1%, respectively, of net sales of the Company.
SALES AND MARKETING
The Company's principal marketing focus is on the sales of branded
pharmaceutical products through Monarch Pharmaceuticals. Monarch Pharmaceuticals
has 48 sales representatives who market primarily to the southeastern and
midwestern United States. The Company distributes its branded pharmaceutical
products primarily through wholesale drug distributors. These products are
ordinarily dispensed to the public through pharmacies on the prescription of a
physician. For branded pharmaceutical products, the Company's marketing and
sales promotions principally target physicians through detailing and sampling to
encourage physicians to prescribe more of the Company's products. The Company
markets its products to pharmacists to encourage them to fill prescriptions
using the Company's products. The Company also contacts wholesalers to promote
the Company's products. The sales force is supported and supplemented by
telemarketing and direct mail, as well as through advertising in trade
publications and representations at regional and national medical conventions.
The Company's telemarketing and direct mailing efforts are performed primarily
by using a computer sampling system which the Company developed to distribute
samples to physicians. The Company
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<PAGE> 36
intends to seek new markets in which to promote its product lines and will
continue expansion of its field sales force as product acquisitions warrant.
The Company also markets and sells generic pharmaceutical products as well
as companion animal health products. The Company markets and sells its generic
pharmaceutical products primarily to major hospitals and hospital buying groups.
These products are marketed and sold primarily through six additional full-time
sales representatives, telemarketing and by direct mail.
The Company's companion animal health care products are sold to retailers
such as pet store chains, grocery stores and mass merchandisers. The promotion
of its companion animal health care products is focused on obtaining shelf space
in retail outlets through sales representatives and direct mail advertising.
PETsMart, Inc., an international operator of pet care superstores, is the
principal purchaser of the Company's companion animal health care products under
the Show Winner label.
The Company is currently dependent upon a small number of customers. In the
nine months ended September 30, 1997, approximately 56.9% of the Company's sales
were attributable to four customers and for the year ended December 31, 1996,
approximately 69.7% of the Company's sales were attributable to three customers.
These customers are wholesale drug distributors through which the Company
distributes its products. The products that the Company is considering acquiring
in the Sterile Products Acquisition are sold by Warner-Lambert to many of the
same wholesale drug distributors to whom the Company currently sells it
products. The loss of any one of these customers could result in a material
adverse effect on the Company's business, financial condition and results of
operations. Additionally, the distribution network for pharmaceutical products
has in recent years been subject to increasing consolidation. As a result, a few
large wholesale distributors control a significant share of the market. In
addition, the number of independent drug stores and small chains has decreased
as retail consolidation has occurred. Further consolidation among, or any
financial difficulties of, distributors or retailers could result in the
combination or elimination of warehouses, thereby stimulating product returns to
the Company. Further consolidation or financial difficulties could also cause
customers to reduce their inventory levels, or otherwise reduce purchases of the
Company's products which could result in a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors -- Customer Concentration; Consolidation of Distribution Network."
MANUFACTURING
The Company's approximately 500,000 square foot facility includes
manufacturing, packaging, laboratory, office and warehouse space. The Company
manufactures its products in accordance with cGMP requirements and is licensed
by the DEA to procure and produce controlled substances. The Company
manufactures certain of its own branded and generic pharmaceutical products and
companion animal health products as well as products owned by other
pharmaceutical companies under manufacture and supply contracts which expire
over periods ranging from one to three years.
The Company can produce a broad range of dosage formulations, including
sterile solutions, injectables, tablets and capsules, liquids, creams and
ointments, suppositories and powders. The Company believes its manufacturing
capability allows it to capture higher margins and pursue product line
extensions more efficiently. The Company, however, cannot immediately begin
manufacturing the products it acquires. Currently ten of its product lines,
including Cortisporin and the six product lines acquired in the Glaxo
Acquisition, are manufactured in the same facilities in which they were
previously manufactured. The Company intends to transfer production of newly
acquired branded pharmaceutical products and their product line extensions to
its manufacturing facilities as soon as practicable after regulatory
requirements are satisfied.
In addition to manufacturing, the Company has fully integrated
manufacturing support systems including quality assurance, quality control
regulatory compliance, inventory control and packaging. These support systems
enable the Company to maintain high standards of quality for its products and
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<PAGE> 37
simultaneously deliver reliable services and goods to its customers on a timely
basis. Companies that do not have such support systems in-house must out source
these services.
The Company currently has manufacturing contracts with, among others,
Mallinckrodt, Roberts, SmithKline Beecham, Novartis and Milex Products, Inc.
These contracts represented in the aggregate approximately 53.2% and 15.1% of
the total revenues of the Company for the year ended December 31, 1996, and the
nine months ended September 30, 1997, respectively. In 1995, in conjunction with
the Anexsia Transaction, the Company entered into a manufacture and supply
contract with Mallinckrodt for the manufacture of the Anexsia Product Line,
which provides for a guaranteed minimum manufacturing fee of $4.8 million
through 1999 and renewals thereafter at the option of Mallinckrodt for up to an
additional three years.
The Company requires a supply of quality raw materials and components to
manufacture and package drug products for itself and for third parties with
which it has contracted. While the Company generally has not had difficulty
obtaining raw materials and components from suppliers in the past, there can be
no assurance that such raw materials and components will continue to be
available on commercially acceptable terms in the future. Currently, the Company
relies on approximately 100 suppliers to deliver the necessary raw materials and
components. The loss of any one of these suppliers is not expected to have a
material adverse effect on the Company's ability to acquire raw materials and
components. Although the Company has no reason to believe it will be unable to
procure adequate supplies of raw materials and components on a timely basis, if
for any reason the Company is unable to obtain sufficient quantities of any of
the raw materials or components required to produce and package its products, it
may not be able to distribute its products as planned, which could have a
materially adverse effect on the Company's business, financial condition and
results of operations.
BACKLOG
As of September 30, 1997, the Company had no material backlog.
RESEARCH AND DEVELOPMENT
At the present time, the Company is not engaged in substantial clinical
research activities. The Company, however, is involved in product development
and continually seeks to develop extensions to its product lines and to improve
the quality, efficiency and cost-effectiveness of its manufacturing processes.
The Company's laboratories and product development scientists have produced
several product line extensions to existing branded pharmaceutical products and
secured several ANDA approvals from the FDA. The Company currently has five ANDA
applications pending with the FDA.
GOVERNMENT REGULATION
The manufacture, testing, packaging, labeling, distribution and marketing
of the Company's products and its ongoing product development activities are
subject to extensive and rigorous regulation at both the federal and state
levels. At the federal level, the Company is principally regulated by the FDA as
well as by the DEA, the Consumer Product Safety Commission, the FTC, the U.S.
Department of Agriculture, OSHA and the EPA. The FDC Act, the regulations
promulgated thereunder, and other federal and state statutes and regulations,
govern, among other things, the development, testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of the Company's products and those manufactured by and for third
parties. Product development and approval within this regulatory framework
requires a number of years and involves the expenditure of substantial
resources.
The Company believes that it or its contract customers have the proper FDA
approvals or other marketing authority for the drugs that the Company currently
produces. When the Company acquires the right to market an existing approved new
drug, both it and the former application holder are required to submit certain
information to the FDA. The former application holder must submit a letter
stating that all rights to the application have been transferred to the Company.
Simultaneously, the
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<PAGE> 38
Company submits a form acknowledging the transfer of the application under which
the drug product is manufactured and packaged, and committing to honor the
agreements, promises and conditions made by the former application holder as
contained in the application. The Company is also required to advise the FDA
about any changes in certain conditions in the approved application as set forth
in the FDA's regulations. The Company's strategy focuses on acquiring branded
pharmaceutical products and transferring their manufacturing into the Company's
manufacturing facilities as soon as practicable after regulatory requirements
are satisfied. In order to transfer manufacturing of the acquired branded
products, the Company must demonstrate, by filing information with the FDA, that
it can manufacture the product in accordance with the specifications and
conditions of the approved NDA. With the recent FDA guidelines on Scale-Up and
Post-Approval Changes ("SUPAC") guidelines, the regulatory filing and approval
timelines on transfer of products from the former application holder's
facilities into the Company's facilities have been shortened. The FDA has
published SUPAC guidelines for immediate release and modified release, solid
oral dosage forms and semi-solid products. Guidelines for sterile aqueous dosage
forms exist only in draft format. These guidances provide recommendations to
holders of drug applications who intend, during the post-approval period, to
change: (i) the components or composition of a drug product under an approved
application; (ii) the site of manufacture; (iii) the scale-up or scale-down of
manufacture; and/or (iv) the manufacturing processes or equipment used in an
approved application. Federal regulations permit the Company to make changes to
an approved application in accordance with a guideline, notice, or regulation
published in the Federal Register that provides for a less burdensome
notification of the change.
The FDA regulatory regime applicable to the Company's generic
pharmaceutical products depends, on whether the branded drug is the subject of
an approved NDA or is marketed pursuant to the FDA's enforcement policy. If the
pharmaceutical product to be offered as a generic version of a branded product
is the subject of an approved NDA, the generic product must be the subject of an
ANDA and must be approved by the FDA prior to marketing. Pharmaceutical products
produced by any manufacturer and marketed in accordance with the FDA's
enforcement policy are not subject to ANDA filings and approval prior to
replication and introduction to the market.
The FDA also mandates that drugs be manufactured, packaged and labeled in
conformity with cGMP. In complying with cGMP regulations, manufacturers must
continue to expend time, money and effort in production, record keeping and
quality control to ensure that the product meets applicable specifications and
other requirements to ensure product safety and efficacy. The FDA periodically
inspects drug manufacturing facilities to ensure compliance with applicable cGMP
requirements. Failure to comply with the statutory and regulatory requirements
subjects the manufacturer to possible legal or regulatory action, such as
suspension of manufacturing, seizure of product or voluntary recall of a
product. Adverse experiences with the product must be reported to the FDA and
could result in the imposition of market restrictions through labeling changes
or in product removal. Product approvals may be withdrawn if compliance with
regulatory requirements is not maintained or if problems concerning safety or
efficacy of the product occur following approval.
The federal government has extensive enforcement powers over the activities
of pharmaceutical manufacturers, including authority to withdraw product
approvals, commence actions to seize and prohibit the sale of unapproved or
non-complying products, to halt manufacturing operations that are not in
compliance with cGMP, and to impose civil monetary penalties and seek criminal
penalties. Such a restriction or prohibition on sales or withdrawal of approval
of products marketed by the Company could materially adversely affect the
Company's business, financial condition and results of operation.
While the Company believes that all of its current pharmaceuticals are
legally marketed under applicable FDA enforcement policies or have received
requisite government approvals for manufacture and sale, such marketing
authority is subject to revocation by the applicable government agencies. In
addition, modifications or enhancements of approved products are in many
circumstances subject to additional FDA approvals which may or may not be
received and which may be subject to a lengthy application process. The
Company's manufacturing facilities are continually subject to inspection by
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such governmental agencies and manufacturing operations could be interrupted or
halted in any such facilities if such inspections prove unsatisfactory.
The Company also manufactures and sells drug products which are "controlled
substances" as defined in the Controlled Substances Act, which establishes
certain security and record keeping requirements administered by the DEA, a
division of the Department of Justice. The DEA has a dual mission -- law
enforcement and regulation. The former deals with the illicit aspects of the
control of abusable substances and the equipment and raw materials used in
making them. The DEA shares enforcement authority with the Federal Bureau of
Investigation, another division of the Department of Justice. The DEA's
regulatory responsibilities are concerned with the control of licensed handlers
of controlled substances, and with the substances themselves, equipment and raw
materials used in their manufacture and packaging, in order to prevent such
articles from being diverted into illicit channels of commerce. The Company has
not experienced restrictions or fines for non-compliance with the foregoing
regulations but no assurance can be given that restrictions or fines which could
have a material adverse effect upon the Company's business, financial condition
and results of operations will not be imposed upon the Company in the future.
State law generally controls the determination of who will be entitled to
registration under the Controlled Substances Act. In most cases, the DEA is
required by the Controlled Substances Act to register an entity to handle
controlled substances if the entity is licensed by a state to practice a
profession involving the possession or manufacture of controlled substances. The
Company maintains a State of Tennessee Board of Pharmacy License in order to
engage in pharmaceutical development, manufacturing and distribution.
The Company is licensed by the DEA to manufacture and distribute controlled
substances in Schedules II-V. The Schedules are used to classify substances by
various criteria. The Controlled Substances Act lists the following criteria for
Schedule II substances; (i) a high potential for abuse; (ii) a currently
accepted medical use in treatment in the United States or a currently accepted
medical use with severe restrictions; and (iii) abuse of the drug may lead to
severe psychological or physical dependence. Schedule III substances are
characterized by: (i) a potential for abuse less than substances in Schedules I
and II; (ii) currently accepted medical use for treatment in the United States;
and (iii) abuse of the drug may lead to moderate or low physical dependence or
high psychological dependence. Schedules IV, and V continue to use the same
criteria in decreasing order of potential for abuse or misuse.
In connection with the use of sampling of pharmaceutical products to
prescribing physicians, the Company's activities are subject to the Prescription
Drug Marketing Act ("PDMA") which permits regulation of such activities at both
the federal and state level. Under PDMA and its implementing regulations, states
are permitted to require registration of manufacturers and distributors who
provide sample pharmaceuticals even if such manufacturers or distributors have
no place of business within the state and states are also permitted to adopt
regulations limiting the distribution of sample products to licensed
practitioners. PDMA also imposes extensive licensing, personnel record keeping,
packaging, quantity, labeling product handling and facility storage and security
requirements intended to prevent sale of sampled pharmaceutical products or
other diversions from their intended use.
The Company may also be subject to fees under PDUFA. PDUFA authorizes the
FDA to collect three types of user fees for: (i) certain types of applications
and supplements for approval of drug and biologic products, (ii) certain
establishments where such products are made, and (iii) certain marketed
products. Fees for applications, establishments, and products are determined by
the FDA using criteria delineated in the statute. When certain conditions are
met, the FDA may waive or reduce fees. To date, the Company has not been
obligated to pay any such fee. There can be no assurance, however, that the FDA
will not impose such a fee in the future.
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The Company cannot determine what effect changes in regulations or legal
interpretations, when and if promulgated, may have on its business in the
future. Changes could, among other things, require expanded or different
labeling, the recall or discontinuance of certain products, additional record
keeping and expanded documentation of the properties of certain products and
scientific substantiation. Such changes, or new legislation, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors -- Government Regulation."
ENVIRONMENTAL MATTERS
The Company's operations are subject to substantial and evolving federal,
state and local environmental laws and regulations concerning, among other
things, the generation, handling, storage, transportation, treatment and
disposal of toxic and hazardous substances. The Company believes that its
facilities are in substantial compliance with all provisions of federal, state
and local laws concerning the environment and does not believe that future
compliance with such provisions will have a material adverse effect on its
financial condition or results of operations. In response to change in
environmental laws, the Company's environmental capital expenditures and costs
for environmental compliance may increase in the future.
Under the Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"), the EPA has the authority to impose joint and several liability
for the remediation of contaminated properties upon generators of waste, current
and former site owners and operators, transporters and other potentially
responsible parties, regardless of fault or the legality of the original
disposal activity. Many states, including Tennessee, have statutes and
regulatory authorities similar to CERCLA and to the EPA. The Company has a
hazardous waste hauling agreement with licensed third parties to properly
dispose of its hazardous substances. There can be no assurance, however, that
the Company will not be found to be potentially responsible under CERCLA for the
costs of undertaking a clean up at a site to which its waste products were
transported. See "Risk Factors -- Government Regulation."
COMPETITION
The Company competes with other pharmaceutical companies for product and
product line acquisitions. These competitors include Jones Medical Industries,
Inc., Dura Pharmaceuticals, Inc., Medicis Pharmaceutical Corporation, Forest
Laboratories, Inc., Watson Pharmaceuticals, Inc. and other companies which also
acquire branded pharmaceutical product lines from other pharmaceutical
companies. Additionally, since the Company's products are generally established
and commonly sold, they are subject to competition from products with similar
qualities. The Company's branded pharmaceutical products may be subject to
competition from alternate therapies during the period of patent protection and
thereafter from generic equivalents. The manufacturers of generic products
typically do not bear the related research and development costs and
consequently are able to offer such products at considerably lower prices than
the branded equivalents. There are, however, a number of factors which enable
products to remain profitable once patent protection has ceased. These include
the establishment of a strong brand image with the prescriber or the consumer,
supported by the development of a broader range of alternative formulations than
the manufacturers of generic products typically supply. As is the case for the
pharmaceutical industry in general, the introduction of new products and
processes by competitors may affect pricing levels or result in product
replacement for existing products, and there can be no assurance that any of the
Company's products may not become outmoded, notwithstanding patent or trademark
protection. In addition, increasing governmental and other pressure towards the
dispensing of generic pharmaceutical products in substitution for branded
pharmaceutical products may increase competition for products no longer covered
by patents. The Company's branded pharmaceutical products compete primarily with
products of other pharmaceutical companies, including large global
pharmaceutical companies. These competitors have substantially greater
financial, technical, research and other resources and larger, more established
marketing, sales, distribution and service organizations than the Company.
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Moreover, such competitors may offer broader product lines and have greater name
recognition than the Company. There can be no assurance that the Company's
competitors will not acquire branded pharmaceutical products which the Company
desires or will not develop or market products that are more effective or
commercially attractive than the Company's current or future products or that
would render the Company's products obsolete. There can be no assurance that the
Company will have the financial resources, technical expertise or marketing,
distribution or support capabilities to compete successfully. See "Risk
Factors -- Competition; Uncertainty of Technological Change."
PATENTS, TRADEMARKS AND PROPRIETARY PROPERTY
The Company considers the protection of discoveries in connection with its
development activities important to its business. The Company intends to seek
patent protection in the United States and selected foreign countries where
deemed appropriate. The Company owns a U.S. Patent for Novel Chlorthalidone
Process and Product which expires in 2007, covering the raw materials used in
the manufacture of Thalitone. Monarch also has a paid-up and non-exclusive
license to certain other patent rights owned or controlled by Bristol-Myers
Squibb which is used in the manufacture of Quibron. The Company has also applied
for patents for an analysis test and a certain manufacturing process for
products other than Quibron. There can be no assurance that the issued patent or
subsequent patents, if issued, will adequately protect the Company's design or
that such patents will provide protection against infringement claims by
competitors. There can be no assurance that additional patents will be obtained
covering the Company's products or that, if issued or licensed to the Company,
the patents covering the Company's products will provide substantial protection
or be of commercial benefit to the Company. The Company also relies upon trade
secrets, unpatented proprietary know-how and continuing technological
innovation, where patent protection is not believed to be appropriate or
attainable, to develop its competitive position. The Company enters into
confidentiality agreements with certain of its employees pursuant to which such
employees agree to assign to the Company any inventions relating to the
Company's business made by them while employed by the Company, as well as
certain confidentiality agreements related to the acquisition of its product
lines. There can be no assurance, however, that any confidentiality agreement
entered into by the Company with employees or third parties will not be
breached, that the Company will have adequate remedies for any breach, that
others may not acquire or independently develop similar technology or, if
patents are not issued with respect to products arising from research, that the
Company will be able to maintain information pertinent to such research as
proprietary technology or trade secrets.
There can be no assurance that the Company's technology does not infringe
upon any valid claims of patents owned by others. If the Company were found to
be infringing on a patent held by another, the Company might have to seek a
license to use the patented technology. There can be no assurance that, if
required, the Company would be able to obtain such a license on terms acceptable
to the Company, if at all. If a legal action were to be brought against the
Company, or its licensors, the Company could incur substantial costs in
defending itself, and there can be no assurance that such action would be
resolved in the Company's favor. If such a dispute were to be resolved against
the Company, the Company would be subject to significant damages and the
testing, manufacturing or sale of one or more of the Company's products or
proposed products, if developed, could be enjoined.
No assurance can be given as to the degree of protection any patents will
afford, whether patents will be issued or whether the Company will be able to
avoid violating or infringing upon patents issued to others. Despite the use of
confidentiality agreements, which themselves may be of limited effectiveness, if
may be difficult for the Company to protect its trade secrets.
The Company has exclusive licenses expiring June 2036 for the prescription
formulations of Neosporin(R) and Polysporin(R). Such licenses are subject to
early termination in the event the Company breaches its obligations under the
license agreement related to these branded pharmaceutical products. For example,
the licenses would be subject to early termination if the Company marketed
products under these trade names outside the prescription field.
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The branded products sold by the Company are sold under a variety of
trademarks. While the Company believes that it or its wholly-owned subsidiary,
Monarch Pharmaceuticals, has valid proprietary interests in all currently used
trademarks, only certain of the trademarks are registered with the U.S.
government, including Cortisporin(R), Neosporin(R), Polysporin(R), Septra(R),
Proloprim(R), Kemadrin(R), Prokemadrin(R), Mantadil(R), Thalitone(R),
Tussend(R), Nucofed(R), Quibron(R), Pediotic(R), Vita Care(R), Royal Vet(R),
Accudose(R) and Viroptic(R). Additionally, trademark applications for
Proctocort(TM), Virtopic(TM), Monarchpharm(TM), Petrin(TM), Vetrin(TM), Arthose
Chews(TM), Show Winner(TM) and Monahist(TM) are pending. The Company also owns
the registered service mark Secure-A-Sample(R).
EMPLOYEES
As of September 30, 1997, the Company employed 312 full-time and 8
part-time persons, including 86 in sales and marketing, 68 in manufacturing, 33
in Quality Assurance and 25 in finance and administration. None of the Company's
employees is covered by a collective bargaining agreement, and the Company
believes its employee relations are good. On October 31, 1997, the Company
entered into a preliminary non-binding letter of intent for the Sterile Products
Acquisition, which, if consummated, could substantially increase the number of
employees of the Company. In addition, a collective bargaining agreement is
currently in effect at Warner-Lambert's manufacturing facility. The Company
employs a full-time Chaplain and offers as part of its employee benefits package
access to additional counseling services.
LITIGATION
Except as described below, the Company has not been a party to litigation
or other legal proceedings. On October 16, 1997, the Company was named one of
many co-defendants in a purported class action filed in the Superior Court of
the State of Washington in connection with the Company's manufacture of
phentermine, an anorexigenic, under contract for a large pharmaceutical company
and its use in combination with other drugs. The suit does not demand monetary
damages but seeks court-supervised, defendant-funded, medical monitoring to
detect the existence of cardiac valvular disease alleged to have arisen from the
ingestion of the combination of drugs by residents of the State of Washington.
While the Company cannot predict the outcome of this suit, the Company believes
that the claims against it are without merit and intends to vigorously pursue
all defenses available to it. The Company is being indemnified in this suit by
the large pharmaceutical company for which it manufactures such product,
provided that neither the lawsuit nor the associated liabilities are based upon
the independent negligence or intentional acts of the Company, and intends to
submit a claim for all unreimbursed costs to its product liability insurance
carrier. See "Risk Factors -- Product Liability; Product Recall; Product
Returns."
PROPERTIES
The Company owns its approximately 500,000 square foot facility in Bristol,
Tennessee. This facility includes space for manufacturing, packaging,
laboratories, offices and warehouse. The Company believes such facility is
adequate for the conduct of its operations.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY EMPLOYEES
The executive officers, directors and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ---- --- -------------
<S> <C> <C>
John M. Gregory(2).......... 44 Chairman of the Board of Directors and Chief Executive
Officer
Jefferson J. Gregory........ 42 President and Chief Operating Officer of King
Pharmaceuticals, Inc. and Director
Joseph R. Gregory(1)........ 43 President and Chief Operating Officer of Monarch
Pharmaceuticals and Director
Brian G. Shrader............ 29 Chief Financial Officer
James E. Gregory............ 46 Executive Vice President, Production/Administration
R. Henry Richards, M.D. .... 52 Executive Vice President, Medical Affairs
J. Fred Pruden.............. 51 Executive Vice President, Manufacturing
John P. McCoy............... 49 Executive Vice President, Quality
Terri D. White-Gregory...... 34 Executive Vice President, Business Development
John A. A. Bellamy.......... 35 Executive Vice President, Legal Affairs and General
Counsel
Ronald C. Siegfried......... 55 Executive Vice President, Development
Michael R. Hilton........... 50 Vice President, Sales and Marketing
Thomas K. Rogers, III....... 44 Senior Director, Regulatory Affairs (Applications)
Norman T. Miller............ 64 Senior Director, Regulatory Affairs (Compliance)
Ernest C. Bourne............ 56 Director
Lois A. Clarke(3)........... 52 Director
Frank W. De Friece,
Jr.(1)(2)(3).............. 76 Director
D. Greg Rooker(1)(2)(3)..... 50 Director
Ted G. Wood................. 59 Director
</TABLE>
- ------------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Stock Option Committee.
John M. Gregory has served as Chairman of the Board of Directors since the
Company's inception in 1993 and Chief Executive Officer since 1994. He
previously co-founded GIV and served as President of GIV from 1984 through 1994.
Prior to co-founding GIV, he was the owner and registered pharmacist of a
pharmacy located in Bastian, Virginia. He graduated from the University of
Maryland School of Pharmacy with a B.S. in Pharmacy in 1976.
Jefferson J. Gregory has served as President and Chief Operating Officer of
King Pharmaceuticals, Inc., since 1993, and has served as a Director since 1995.
He was formerly the Director of Regulatory Affairs and Product Information for
GIV from 1991 to 1993 and was a consultant to the pharmaceutical industry from
1989 to 1991. He formerly served as a registered pharmacist in retail pharmacies
in the Washington D.C. and Baltimore, Maryland metropolitan areas. He graduated
from the University of Maryland School of Law with a Juris Doctor in 1985,
University of Maryland School of Pharmacy with a B.S. in Pharmacy in 1979, and
Montgomery College with an Associate of Arts in 1976.
Joseph R. Gregory has served as President and Chief Operating Officer of
Monarch Pharmaceuticals since 1994, and has served as a Director since 1993.
Prior to joining the Company, he was the Chief Operating Officer of GIV from
1987 to 1994 and also served as the President of Insource/Williams, Inc., a GIV
subsidiary, from 1989 to 1994. He previously served as President of The Buying
Group Network/A Service of Pharmacist Shared Services. He graduated from the
University of Maryland School of Business with a B.S. in Business Administration
in 1977.
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Brian G. Shrader, CPA, has served as Chief Financial Officer since 1993. He
was formerly the Manager of Accounting for GIV from 1990 to 1993. He is a
current member of the Virginia Society of CPA's. He graduated from the Virginia
Polytechnic Institute and State University with a B.S. in Accounting in 1990 and
a Masters of Accountancy in 1991.
James E. Gregory has served as Executive Vice President of
Production/Administration since February 1995. Previously, he was the Deputy
Executive Officer of the Washington D.C. Court system from 1990 through 1995 and
a senior administrator with that court from 1987 to 1990. He was responsible for
managing all business affairs for another major urban court system in Phoenix,
Arizona from 1982 to 1985 and was the Deputy County Recorder for Maricopa County
(Phoenix) from 1985 to 1987. Through management consulting firms, he provided
administrative systems consulting services to various state court systems from
1973 to 1982. He graduated from American University with a Masters of Public
Administration in 1979 and the University of Maryland with a B.A. in History in
1973.
R. Henry Richards, M.D. has served as Executive Vice President of Medical
Affairs since 1994. He also was the Medical Director/Director of Managed Care
for GIV during 1993. He served as the Vice President Medical Director for
Medical Dimensions, Inc. from 1991 to 1993, after having served as a M.D. in
private practice (Internal Medicine, Hypertension and Nephrology) since 1976. He
was also the Medical Director for the Hypertension Medical Clinic of San Jose
and Review Services Inc., Resource Consultant for Health Strategies in San Jose,
was associated with Samaritan Kidney Medical Associates, San Jose and Medical
Director, Hospital Private Review in Campbell, California. Dr. Richards
graduated from the University of Maryland with a M.D. in 1971, the Atlantic
Christian College with a B.S. in Biology in 1966, and Montgomery College with an
Associate of Arts in 1963.
J. Fred Pruden has served as Executive Vice President of Manufacturing
since 1995. He previously served as General Manager for Novo Nordisk
Pharmaceuticals, Inc., from 1988 to 1995, Vice President Operations for Fujisawa
U.S.A. from 1983 to 1988, Plant Manager for Sterling Drug from 1979 to 1983, and
served as Production Manager, Materials Manager and Process Engineering for
Abbott Laboratories for 8 years. During this time, he helped Abbott Laboratories
build a new manufacturing facility in Puerto Rico. He graduated from the
University of North Carolina in 1969 with a B.A. in Mathematics.
John P. McCoy has served as Executive Vice President of Quality since 1994.
He previously served as the Director of Total Quality
Management/Marketing/Logistics, Material Management and Planning for Connaught
Laboratories in Swiftwater, Pennsylvania from 1986 to 1993. He was the Group
Manager, Logistics Services Manager and Manufacturing Planner for McNeil
Pharmaceuticals from 1982 to 1986; Distribution Planning Manager from 1979 to
1982; and Manager, Marketing/Sales Systems, Distribution Center Manager and
Traffic Manager from 1971 to 1979. He graduated from Pennsylvania State
University with a B.S. in Business in 1970, and he also completed graduate work
at the University of Pennsylvania from 1983 to 1986.
Terri D. White-Gregory, CPA, has served as Executive Vice President of
Business Development since 1996. She served as a financial analyst for
Westinghouse Electric in 1995 and as a consultant and sole proprietor in public
accounting from 1993 to 1996. From 1988 to 1993, she was an audit manager and
supervisor in the Emerging Business Services Group of Coopers & Lybrand L.L.P.,
in Washington D.C. and Roanoke, Virginia and was a senior associate on the audit
staff of Ernst & Young LLP in Columbia, South Carolina from 1985 to 1988. She
graduated from The Ohio State University with a B.S. in Business Administration
in 1985.
John A. A. Bellamy has served as Executive Vice President of Legal Affairs
and General Counsel since February 1995. He was formerly a corporate attorney
with the law firm of Hunter, Smith & Davis in Kingsport, Tennessee from 1990 to
1995. He graduated from the University of Tennessee College of Law with a J.D.
with Honors in 1990, and graduated Summa Cum Laude with Honors in Independent
Study from King College in 1984 with a B. A. degree in Classics and English. He
is a member of the Licensing Executives Society.
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<PAGE> 45
Ronald C. Siegfried has served as Executive Vice President of Development,
Vice President of Development, Technical Services and Manufacturing since
December 1993. He previously served as Director of Manufacturing for RSR
Laboratories, Inc. ("RSR Laboratories"), from 1990 to 1993, was the Manager of
Manufacturing and a Product Development Chemist for Beecham Laboratories from
1972 to 1990, and was a Product Development Chemist for Bristol Laboratories, a
division of Bristol-Myers Squibb from 1964 to 1972. He graduated from the
Rochester Institute of Technology with a B.S. in Chemistry in 1964.
Michael R. Hilton has served as Vice President of Sales and Marketing and
Director of Marketing since July 1995. From 1991 to 1995, he served in the
capacity of Vice President -- Marketing and Business Development and marketing
director for Richwood Pharmaceuticals, KV Pharmaceuticals and RSR Laboratories.
From 1973 to 1990 he served in various sales and marketing and public relations
positions with Beecham Laboratories. He graduated from Ferris State University
with a B.S. in Marketing in 1970.
Thomas K. Rogers, III has served as Senior Director, Regulatory Affairs
(Applications), since April 1997. He previously served as Director of Regulatory
Affairs from 1995 to 1997 and as Manager of Regulatory Affairs from 1994 to
1995. Prior to joining the Company, he served RSR Laboratories as Manager of
Scientific Development from 1991 to 1993, and Manager of Quality Assurance from
1990 to 1991. He served Beecham Laboratories as Manager of Quality Assurance
from 1988 to 1990 and as Microbiologist from 1979 to 1988. He graduated from
East Tennessee State University with a M.S. in Microbiology in 1977 and from
Milligan College with a B.S. in Biology in 1975.
Norman T. Miller has served as Senior Director, Regulatory Affairs
(Compliance), since December 1993. He previously served as a Research Compliance
Specialist and as acting Director of Compliance for Beecham Laboratories from
1988 to 1990. From 1990 to 1993 he served as Manager of Regulatory Affairs for
RSR Laboratories. Prior to 1988, he served as Resident-in-Charge, Senior
Investigator and Inspector for the FDA for 28 years. He graduated from South
Dakota State University with a M.S. in Animal Science-Biochemistry minor in 1960
and a B.S. in Animal Husbandry in 1958.
Ernest C. Bourne has served as a Director since October 1997. He has been
employed since 1968 with Bourne & Co., Inc., an investment banking firm, where
he currently serves as President.
Lois A. Clarke has served as a Director of the Company since April 1997.
Presently she is Executive Vice President and Chief Financial Officer of The
United Company in Bristol, Virginia, one of the Company's principal
shareholders. She also serves as President of United Investment Corporation, a
registered investment advisor, and an affiliate of The United Company. Ms.
Clarke has been with The United Company since 1971 and has been responsible for
financial matters of the Company. She is a graduate of McClains College with a
degree in Accounting.
Frank W. De Friece, Jr. has served as a Director of the Company since
October 1997. He has served as President, Vice President, Fund Administrator and
Board member of the Massengill De Friece Foundation, Inc. since 1950. Since 1946
he served in various capacities with the S.E. Massengill Company. He served as
President of the S.E. Massengill Company from 1960 to 1971 when the company was
purchased by Beecham, Inc. From 1971 to 1973, he served as Board Member Vice
Chairman of Beecham, Inc. He graduated from Roanoke College with a B.S. in
Chemistry in 1946.
D. Greg Rooker has served as a Director of the Company since October 1997.
Mr. Rooker is the owner and President of Family Community Newspapers of
Southwest Virginia, Inc., Wytheville, Virginia ("FCN"). FCN consists of five
community newspapers and a national monthly motor sports magazine. Mr. Rooker is
a graduate of Northwestern University with a degree in Journalism.
Ted G. Wood has been a Director of the Company since April 1997. Presently,
he is affiliated with The United Company in Bristol, Virginia, one of the
Company's principal shareholders. From 1992 to 1993, he was President of
Boehringer Mannheim Pharmaceutical Corporation in Rockville, Maryland. From 1993
to 1994 he was President of KV Pharmaceuticals in St. Louis, Missouri. From 1975
to 1991, he was employed by SmithKline Beecham where he served as President of
Beecham Laboratories from
44
<PAGE> 46
1988 to 1989 and Executive Vice President of SmithKline Beecham from 1990 to
1991. He served as account supervisor at Frank J. Corbett, Inc. in Chicago,
Illinois from 1972 to 1974. From 1962 to 1971, he held various sales and
marketing management positions with The Dow Chemical Company. He graduated from
the University of Kentucky with a B.S. in Commerce in 1960. In 1986 he completed
the Advanced Management Program at Harvard University.
Messrs. John, Joseph, Jefferson, and James Gregory, and R. Henry Richards,
M.D., are brothers. Ms. Terri D. White-Gregory is the spouse of Jefferson
Gregory.
COMPENSATION OF DIRECTORS
Directors of the Company do not currently receive any fees for serving in
such capacity.
CLASSIFICATION OF BOARD OF DIRECTORS
Pursuant to the Company's Bylaws, the Board of Directors is divided into
three classes of directors each containing, as nearly as possible, an equal
number of directors. Directors within each class are elected to serve three-year
terms and approximately one-third of the directors sit for election at each
annual meeting of the Company's shareholders. A classified board of directors
may have the effect of deterring or delaying any attempt by any group to obtain
control of the Company by a proxy contest since such third party would be
required to have its nominees elected at two separate meetings of the Board of
Directors in order to elect a majority of the member of the Board of Directors.
See "Risk Factors -- Certain Charter, Bylaws and Statutory Provisions; Rights
Agreement."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has appointed an Audit Committee, a Compensation
Committee and a Stock Option Committee.
Audit Committee. The Audit Committee, which currently consists of Joseph
R. Gregory, D. Greg Rooker and Frank W. DeFriece, Jr., has the authority and
responsibility to hire one or more independent public accountants to audit the
Company's books, records and financial statements and to review the Company's
systems of accounting (including its systems of internal control); to discuss
with such independent accountants the results of such audit and review; to
conduct periodic independent reviews of the systems of accounting (including
systems of internal control); and to make reports periodically to the Board of
Directors with respect to its findings.
Compensation Committee. The Compensation Committee, which currently
consists of John M. Gregory, Frank W. DeFriece, Jr. and D. Greg Rooker, is
responsible for reviewing and approving compensation for the executive officers.
Stock Option Committee. The Stock Option Committee, which currently
consists of Lois A. Clarke, Frank W. DeFriece, Jr. and D. Greg Rooker, is
responsible for administering, and determining awards under, the Company's 1997
Incentive and Nonqualified Stock Option Plan for Employees.
DIRECTORS AND OFFICERS' INSURANCE
The Company maintains liability insurance for its directors and officers in
the aggregate amount of $8.0 million, subject to a $25,000 deductible loss per
occurrence payable by the Company. Upon the consummation of this offering, the
Company intends to increase its liability insurance for its directors and
officers up to an aggregate amount of $15.0 million.
45
<PAGE> 47
EXECUTIVE COMPENSATION
The following table summarizes all compensation earned by the Company's
Chief Executive Officer and by each of the Company's four other most highly
compensated executive officers whose total annual salary and bonus exceeded
$100,000 for services rendered in all capacities to the Company during the year
ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION($)(1)
- --------------------------- ---- ---------- --------- ------------------
<S> <C> <C> <C> <C>
John M. Gregory................................... 1996 360,000 -0- 4,500
Chairman of the Board and Chief Executive
Officer
Jefferson J. Gregory.............................. 1996 240,001 -0- 4,500
President and Chief Operating Officer,
King Pharmaceuticals, Inc.
Joseph R. Gregory................................. 1996 240,001 -0- 4,500
President and Chief Operating Officer,
Monarch Pharmaceuticals
James E. Gregory.................................. 1996 200,005 -0- 4,500
Executive Vice President
Production/Administration
R. Henry Richards, M.D............................ 1996 200,004 -0- 4,500
Executive Vice President
Medical Affairs
</TABLE>
- ------------------------------
(1) All Other Compensation reflects the Company's matching contributions to the
Company's 401(k) plan.
INCENTIVE STOCK OPTION PLAN
In October 1997, the Company adopted the 1997 Incentive and Nonqualified
Stock Option Plan for Employees (the "Plan") pursuant to which a committee of
the Board of Directors ("Stock Option Committee") may grant incentive stock
options (within the meaning of the Internal Revenue Code of 1986, as amended
(the "Code")) and nonqualified options (collectively, the "Options") to
employees of the Company for the purchase of Common Stock. The Plan is intended
to provide incentives to, and rewards for employees of the Company who have
contributed and will continue to contribute to the success of the Company. The
option prices are determined by the Stock Option Committee, but option prices
may not be less than 100% of the fair market value of the Common Stock on the
date the option is granted. An aggregate of 3,500,000 shares of Common Stock has
been reserved for issuance under the Plan subject to appropriate adjustments for
stock splits, dividends and other transactions or events as described in the
Plan. All options may be exercised at such times and in such amounts as may be
determined at the time of the granting of the options by the Stock Option
Committee; provided, however, that no options may be exercised later than ten
years after the date upon which they were granted.
Options may be exercised within 30 days, or such longer period as the Stock
Option Committee may determine, after retirement, resignation, or termination of
the option holder's employment or service with the Company, but only to the
extent that they had become exercisable at retirement, resignation or
termination. Any unexercised options shall expire in the event of an option
holder's retirement or dismissal or otherwise as described above. Under certain
circumstances involving change of control of the Company, the Board of Directors
may accelerate the exercisability and termination of the option. No awards can
be made under the Plan after October 2007.
46
<PAGE> 48
The Board of Directors may, at any time, amend, modify, suspend or
terminate the Plan; provided however, that no amendment, suspension or
termination of the Plan may alter or impair any rights or obligations under any
Option already granted except with the consent of the holder of the Option, and
no action of the Stock Option Committee or the Board of Directors may increase
the limit on the maximum number of shares which may be issued upon exercise of
Options, reduce the minimum option price requirements or extend the limit on the
period during which Options may be granted, without approval by the Company's
shareholders given within 12 months before or after such action by the Board of
Directors or the Stock Option Committee.
An employee to whom an incentive stock option ("ISO") which qualifies under
Section 422 of the Code is granted will not recognize income at the time of
grant or exercise of such Option. However, upon the exercise of an ISO, any
excess in the fair market price of the Common Stock over the option price
constitutes a tax preference item which may have alternative minimum tax
consequences for the employee. If the employee sells such shares more than one
year after the date of transfer of such shares and more than two years after the
date of grant of such ISO, the employee will generally recognize a long-term
capital gain or loss equal to the difference, if any, between the sale prices of
such shares and the option price. The Company will not be entitled to a federal
income tax deduction in connection with the grant or exercise of the ISO. If the
employee does not hold such shares for the required period, when the employee
sells such shares, the employee will recognize ordinary compensation income and
possibly capital gain or loss (long-term or short-term depending on the holding
period of the stock sold) in such amounts as are prescribed by the Code and the
regulations thereunder and the Company will generally be entitled to a Federal
income tax deduction in the amount of such ordinary compensation income
recognized by the employee.
An employee to whom a nonqualified stock option ("NSO") is granted will not
recognize income at the time of grant of such Option. When such employee
exercises such NSO, the employee will recognize ordinary compensation income
equal to the excess, if any, of the fair market value, as of the date of Option
exercise, of the shares the employee receives upon such exercise over the option
price paid. The tax basis of such shares to such employee will be equal to the
option price paid plus the amount, if any, includible in the employee's gross
income, and the employee's holding period for such shares will commence on the
date on which the employee recognizes taxable income in respect of such shares.
Gain or loss upon a subsequent sale of any Common Stock received upon the
exercise of a NSO generally would be taxed as capital gain or loss (long-term or
short-term, depending upon the holding period of the stock sold). Subject to the
applicable provisions of the Code and regulations thereunder, the Company will
generally be limited to a Federal income tax deduction in respect of a NSO in an
amount equal to the ordinary compensation income recognized by the employee.
This deduction will, in general, be allowed for the taxable year of the Company
in which the participant recognizes such ordinary income.
Currently there are no outstanding options granted under the Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors appointed the Compensation Committee in October
1997. For the year ended December 31, 1996, Messrs. John M., Jefferson J.,
Joseph R., James E. Gregory and R. Henry Richards, M.D. participated in
deliberations of the Board of Directors concerning executive officer
compensation.
47
<PAGE> 49
CERTAIN TRANSACTIONS
King Pharmaceuticals Benevolent Fund, Inc. (the "Benevolent Fund") is a
nonprofit corporation organized under the laws of the Commonwealth of Virginia
and is exempt from taxation under sec. 501(c)(3) of the Internal Revenue Code.
The Board of Directors of the Benevolent Fund includes John M. Gregory, Joseph
R. Gregory, Jefferson J. Gregory, James E. Gregory and R. Henry Richards, M.D.
who are also executive officers of the Company. The Company advanced $700,000 in
1995 and $400,000 in 1997 to the Benevolent Fund which was used for general
operating purposes. The Benevolent Fund has agreed to reimburse the Company for
those payments which totaled approximately $1.1 million, as of September 30,
1997. The Benevolent Fund is independent of the Company, maintains its own
accounting records and its activities are not directly related to the business
of the Company.
The United Company, a Virginia corporation, and certain of its
shareholders, officers, directors and employees are the beneficial owners of
approximately 30.5% of the Common Stock of the Company. Currently, two members
of the Company's Board of Directors, Lois A. Clarke and Ted G. Wood, are
affiliates of The United Company. As part of the sale of stock to The United
Company on March 17, 1997, the Company executed a Promissory Note in the amount
of $1.8 million payable to The United Company. The Promissory Note provides for
quarterly payments of interest, at a rate of 10.0% per annum, commencing on July
1, 1997, together with a single payment of principal and any accrued unpaid
interest on April 1, 1999. The Company is entitled to prepay the principal and
any accrued interest without penalty. Proceeds of the loan from The United
Company were used to fund, in part, the acquisition of the Cortisporin and
Pediotic product lines from Glaxo Wellcome.
In the past, pursuant to the terms of an Employee Stock Purchase Plan
adopted by the Company on January 1, 1996, and as later amended on October 1,
1996, employees were permitted to purchase shares of the Common Stock of the
Company through either cash payments or regular payroll deductions.
Additionally, certain shareholders and members of management purchased shares of
Common Stock and were permitted to execute promissory notes payable to the
Company. These purchasers included executive officers Joseph R. Gregory, also a
director, Jefferson J. Gregory, also a director, and Terri D. White-Gregory,
James E. and his spouse April Gregory, Brian G. Shrader and his mother Carol
Shrader and R. Henry Richards, M.D., also a director, and his spouse Jean
Richards who executed promissory notes payable to the Company in the amounts of
$300,000, $570,000, $165,180, $165,000, $150,000 and $276,000, respectively. The
interest rate charged on these promissory notes was 8% per annum. All such
persons have paid their notes in full. There are no outstanding promissory notes
payable to the Company for the purchase of Common Stock and the Company has no
obligation to sell any shares of its Common Stock to any person or entity. The
Employee Stock Purchase Plan has since been terminated.
The Company has entered into an agreement for consulting services with Mr.
Bourne, a director. The agreement provides that Bourne & Company, an affiliate
of Mr. Bourne, will receive upon consummation of the offering a fee equal to
1.0% of the net proceeds. The agreement is for a one-year term which began
August 1, 1997 and provides for a monthly retainer fee of $10,000 for the term
of the agreement. The 1.0% fee resulting from this offering will be offset by
the amount of the monthly retainer paid prior to the consummation of the
offering. Assuming the 6,000,000 shares offered hereby are priced at $18.00 per
share, Mr. Bourne would receive a fee of approximately $1.1 million offset by
the monthly retainer fee described above. See "Underwriting."
In addition, as of September 30, 1997, the Company had paid Mr. Bourne
approximately $743,000 and $58,000 for his advisory services in the acquisition
of the Cortisporin product line and consulting services, respectively. Mr.
Bourne provides consulting services to the Company in areas such as corporate
development, financing alternatives and strategies, and general business
planning.
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<PAGE> 50
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of the Common Stock as of October 24, 1997, and as adjusted to reflect the sale
of the shares of the Common Stock offered hereby by the Company and the Selling
Shareholders, for (i) each person who will beneficially own more than 5% of the
Common Stock, (ii) each director and executive officer of the Company, (iii) all
executive officers and directors of the Company as a group, and (iv) each of the
Selling Shareholders.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF BENEFICIAL OWNERSHIP OF
COMMON STOCK PRIOR TO COMMON STOCK AFTER THE
OFFERING(1) OFFERING(1)
------------------------ ------------------------
PERCENTAGE NUMBER OF PERCENTAGE
EXECUTIVE OFFICERS, DIRECTORS NUMBER OF OUTSTANDING SHARES TO BE NUMBER OF OUTSTANDING
AND 5% SHAREHOLDERS SHARES SHARES OFFERED SHARES SHARES
----------------------------- ---------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
John M. Gregory(2)................. 8,829,529 31.5% 295,137(3) 8,534,392 25.1%
Joseph R. Gregory(4)............... 2,943,150 10.5 60,000 2,883,150 8.5
Jefferson J. Gregory(5)............ 1,101,635 3.9 50,000 1,051,635 3.1
James E. Gregory(6)................ 196,048 * 42,000 154,048 *
R. Henry Richards, M.D.(7)......... 256,141 * 35,000 221,141 *
Brian G. Shrader(8)................ 572,510 2.0 65,000 507,510 1.5
J. Fred Pruden..................... 3,220 * -0- 3,220 *
John P. McCoy(9)................... 42,826 * -0- 42,826 *
Terri D. White-Gregory(5).......... -- -- -- -- --
John A. A. Bellamy................. 38,643 * -0- 38,643 *
Ernest C. Bourne................... 138,001 * -0- 138,001 *
Lois A. Clarke(10)(11)............. 95,200 * -0- 95,200 *
Ted G. Wood(10).................... 28,000 * -0- 28,000 *
All executive officers and
directors as a group (13
persons)......................... 14,244,903 50.9 547,137 13,697,766 40.3
The United Company(12)............. 5,172,594 18.5 -0- 5,172,594 15.2
OTHER SELLING SHAREHOLDERS
- ------------------------
King Pharmaceuticals Benevolent
Fund, Inc.(13)................... 186,246 * 175,000 11,246 *
Mary Ann and Herschel P.
Blessing(14)..................... 477,967 1.7 90,000 387,967 1.1
Mary and Fred Jarvis(15)........... 115,806 * 29,000 86,806 *
Randal J. Kirk(16)................. 1,358,863 4.9 1,358,863 -0- --
A. Willard Lester.................. 402,153 1.4 362,000 40,153 *
Peggy H. Sutphin................... 477,532 1.7 357,000 120,532 *
---------
Total shares sold by
Selling Shareholders... 2,919,000
=========
</TABLE>
- ------------------------------
* Less than 1%.
(1) Based on 28,000,000 shares of Common Stock outstanding prior to and
34,000,000 shares outstanding after the offering.
(2) Includes 6,855,660 shares jointly owned with Mr. Gregory's spouse;
1,852,539 shares owned by S.J., LLC, a limited liability company, the
primary members of which are Mr. Gregory's children; 84,000 shares
registered in the name of The Lazarus Foundation, Inc., a private
foundation controlled by John M. Gregory; and 37,330 shares held in trusts
for the benefit of Martha Rachel Richards and for Erin Spinner Richards,
for which Mr. Gregory serves as trustee. Mr. Gregory's address is 501 Fifth
Street, Bristol, Tennessee 37620.
(3) Includes 220,137 shares to be sold by Mr. Gregory and his spouse and 75,000
shares to be sold by The Lazarus Foundation, Inc.
(4) Includes 966,000 shares owned through Kingsway L.L.C., a limited liability
company, as Manager, the primary members of which are Mr. Gregory, his
spouse and his son. Mr. Gregory's address is 501 Fifth Street, Bristol,
Tennessee 37620.
(5) Ms. White-Gregory and Jefferson J. Gregory jointly beneficially own
1,045,523 of the shares shown above.
(6) All of these shares are jointly owned with Mr. Gregory's spouse.
(7) Includes 243,132 shares jointly owned with Dr. Richards' spouse.
49
<PAGE> 51
(8) Includes 241,500 shares owned by C.B.B., L.L.C., a limited liability
company, the primary members of which are Mr. Shrader and his parents;
56,000 shares held in the name of Mr. Shrader as custodian for Michael
Brian Shrader, a minor; and 10,623 shares jointly owned with Mr. Shrader's
mother.
(9) All of these shares are jointly owned with Mr. McCoy's spouse.
(10) Ms. Clarke and Mr. Wood are affiliates of The United Company.
(11) Includes 16,800 shares held in the name of Ms. Clarke as custodian for
Donald Alan Clarke, a minor.
(12) The United Company along with certain of its affiliates beneficially own in
the aggregate 8,532,595 representing approximately 30.5% of the outstanding
shares of the Company. The address of The United Company is 1005 Glenway
Avenue, Bristol, Virginia 24201.
(13) King Pharmaceuticals Benevolent Fund, Inc., is a nonprofit charitable
organization. See "Certain Transactions."
(14) Includes 369,068 shares jointly owned by Mr. and Mrs. Blessing; 55,863
shares owned by Mrs. Blessing; 52,934 owned by Mr. Blessing; 34 shares held
in the name of Mrs. Blessing as custodian for Benjamin Blessing, a minor;
34 shares held in the name of Mrs. Blessing as custodian for Gregory C.
Jones, a minor; and 34 shares held in the name of Mrs. Blessing as
custodian for Mary Beth Blessing, a minor. Mrs. Blessing is a sister to
Messrs. John M., Joseph R., Jefferson J. and James E. Gregory, and to R.
Henry Richards, M.D. She resigned from the Board of Directors in March
1997.
(15) Includes 79,428 shares owned by Mr. and Mrs. Jarvis and 36,378 shares owned
by Mrs. Jarvis. Mrs. Jarvis is the mother of Messrs. John M., Joseph R.,
Jefferson J. and James E. Gregory, and of R. Henry Richards, M.D.
(16) Includes 161,000 shares owned by Kirkfield, L.L.C.; 42,151 shares owned by
Rahn Labs; 322,000 shares owned by RJK, L.L.C.; 748 shares owned by the
estate of Carol Kirk; 3,220 shares owned by Joseph L. Kirk; and 5,474
shares owned by Julian Kirk, all of which are affiliates of Mr. Kirk. Mr.
Kirk was the co-founder with John M. Gregory of GIV.
Messrs. John M. Gregory, Joseph R. Gregory, Jefferson J. Gregory, James E.
Gregory, Richards, Shrader and Ms. White-Gregory, each of whom is a Selling
Shareholder, serve as executive officers of the Company. Messrs. John M.
Gregory, Joseph R. Gregory and Jefferson J. Gregory also serve as directors of
the Company. See "Management."
50
<PAGE> 52
DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
The total amount of authorized capital stock of the Company consists of
150,000,000 shares of Common Stock, no par value per share, and 15,000,000
shares of preferred stock, no par value per share (the "Preferred Stock"). Upon
consummation of the offering, 34,000,000 shares of Common Stock will be issued
and outstanding and no shares of Preferred Stock will be outstanding. The
following summary of certain provisions of the Company's capital stock describes
certain material provisions of, but does not purport to be complete and is
subject to and qualified in its entirety by, the Charter and the Bylaws of the
Company that are included as exhibits to the Registration Statement of which
this Prospectus forms a part and by the provisions of applicable law.
COMMON STOCK
The issued and outstanding shares of Common Stock are validly issued, fully
paid and nonassessable. Subject to the prior rights of any Preferred Stock, the
holders of outstanding shares of Common Stock are entitled to receive dividends
out of assets legally available therefor at such times and in such amounts as
the Board of Directors may from time to time determine. See "Dividend Policy."
The shares of Common Stock are not redeemable or convertible, and the holders
thereof have no preemptive or subscription rights to purchase any securities of
the Company. Upon liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive pro rata the assets of the
Company which are legally available for distribution after payment of all debts
and other liabilities and subject to the prior rights of any holders of
Preferred Stock then outstanding. Each outstanding share of Common Stock is
entitled to one vote on all matters submitted to a vote of shareholders. The
Common Stock has been approved, subject to official notice of issuance, for
listing on the Nasdaq National Market under the symbol "KING."
PREFERRED STOCK
The Board of Directors, without further action by the Company's
shareholders, from time to time, may authorize the issuance of shares of
Preferred Stock in series, and may, at the time of issuance, determine the
rights, preferences and limitations of each series. Satisfaction of any dividend
preferences of outstanding shares of Preferred Stock would reduce the amount of
funds available for the payment of dividends on shares of Common Stock. Holders
of shares of Preferred Stock may be entitled to receive a preference payment in
the event of any liquidation, dissolution or winding-up of the Company before
any payment is made to the holders of shares of Common Stock. Under certain
circumstances, the issuance of shares of Preferred Stock may render more
difficult or tend to discourage a merger, tender offer or proxy contest, the
assumption of control by holders of a large block of the Company's securities or
the removal of incumbent management. See "Risk Factors -- Certain Charter,
Bylaws and Statutory Provisions; Rights Agreement." The Board of Directors,
without shareholder approval, may issue shares of Preferred Stock with voting
and conversion rights which could adversely affect the holders of shares of
Common Stock. Currently, there are no shares of Preferred Stock outstanding, and
the Company has no present intention to issue any shares of Preferred Stock.
CERTAIN PROVISIONS OF THE CHARTER AND BYLAWS AND STATUTORY PROVISIONS
The Charter provides that the Board of Directors will be divided into three
classes, with each class serving for three years, and one class being elected
each year. A majority of the remaining directors then in office, though less
than a quorum, will be empowered to fill any vacancy on the Board of Directors
that arises during the term of a director. The provision for a classified board
may be amended, altered or repealed only upon the affirmative vote of the
holders of at least 80.0% of the outstanding shares of the voting stock of the
Company. The classification of the Board of Directors may discourage a third
party from making a tender offer or otherwise attempting to gain control of the
51
<PAGE> 53
Company and may have the effect of maintain the incumbency of the Board of
Directors. See "Risk Factors -- Antitakeover Effect of Certain Charter, Bylaws
and Statutory Provisions; Rights Agreement" and "Management."
The Bylaws provide that special meetings of the shareholders of the Company
be called only by a majority of the entire Board of Directors or by certain
officers. In addition, the Bylaws provide that shareholders seeking to bring
business before or to nominate directors at any annual meeting of shareholders
must provide timely notice thereof in writing. To be timely, the shareholders'
notice must be delivered to, or mailed and received at, the principal executive
offices of the Company not less than 60 days nor more than 90 days prior to such
meeting or, if less than 70 days' notice was given for the meeting, within 10
days following the date on which such notice was given. The Bylaws also specify
certain requirements for a shareholders' notice to be in proper written form.
These provisions restrict the ability of shareholders to bring matters before
the shareholders or to make nominations for directors at meetings of
shareholders.
The Company is subject to certain antitakeover provisions provided under
Tennessee law.
Business Combination Statute. Tennessee's Business Combination Act
provides that a party owning 10.0% or more of stock in a "resident domestic
corporation" (such party is called an "interested shareholder") cannot engage in
a business combination with the resident domestic corporation unless the
combination (i) takes place at least five years after the interested shareholder
first acquired 10.0% or more of the resident domestic corporation, and (ii)
either (A) is approved by at least two-thirds of the non-interested voting
shares of the resident domestic corporation or (B) satisfies certain fairness
conditions specified in the Business Combination Act.
These provisions apply unless one of two events occurs. A business
combination with an entity can proceed without delay when approved by the target
corporation's board of directors before that entity becomes an interested
shareholder, or the resident corporation may enact a charter amendment or bylaw
to remove itself entirely from the Business Combination Act. This charter
amendment or bylaw must be approved by a majority of the shareholders who have
held shares for more than one year prior to the vote. It may not take effect for
at least two years after the vote. The Company has not adopted a charter or
bylaw amendment removing the Company from coverage under the Business
Combination Act.
The Business Combination Act further provides an exemption from liability
for officers and directors of resident domestic corporations who do not approve
proposed business combinations or charter amendments and bylaws removing their
corporations from the Business Combination Act's coverage as long as the
officers and directors act in "good faith belief" that the proposed business
combination would adversely affect their corporation's employees, customers,
suppliers, or the communities in which their corporation operates and such
factors are permitted to be considered by the board of directors under the
charter.
Control Share Acquisition Act. The Tennessee Control Share Acquisition Act
("TCSAA") strips a purchaser's shares of voting rights any time an acquisition
of shares in a covered Tennessee corporation brings the purchaser's voting power
to one-fifth, one-third or a majority of all voting power. The purchaser's
voting rights can be established only by a majority vote of the other
shareholders. The purchaser may demand a meeting of shareholders to conduct such
a vote. The purchaser can demand such a meeting before acquiring a control share
only if it holds at least 10.0% of outstanding shares and announces a good faith
intention to make the control share acquisition. A target corporation may or may
not redeem the purchaser's shares if the shares are not granted voting rights.
Investor Protection Act. Tennessee's Investor Protection Act ("TIPA")
applies to tender offers directed at corporations (called "offeree companies")
that have "substantial assets" in Tennessee and that are either incorporated in
or have a principal office in Tennessee. The TIPA requires an offeror making a
tender offer for an offeree company to file with the Commissioner of Commerce
and
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<PAGE> 54
Insurance (the "Commissioner") a registration statement. When the offeror
intends to gain control of the offeree company, the registration statement must
indicate any plans the offeror has for the offeree. The Commissioner may require
additional information material to the takeover offer and may call for hearings.
The TIPA does not apply to an offer that the offeree company's board of
directors recommends to shareholders.
In addition to requiring the offeror to file a registration statement with
the Commissioner, the TIPA requires the offeror and the offeree company to
deliver to the Commissioner all solicitation materials used in connection with
the tender offer. The TIPA prohibits "fraudulent, deceptive, or manipulative
acts or practices" by either side, and gives the Commissioner standing to apply
for equitable relief to the Chancery Court of Davidson County, Tennessee, or to
any other chancery court having jurisdiction whenever it appears to the
Commissioner that the offeror, the offeree company, or any of its respective
affiliates has engaged in or is about to engage in a violation of the TIPA. Upon
proper showing, the Chancery Court may grant injunctive relief. The TIPA further
provides civil and criminal penalties for violations.
Authorized Corporation Protection Act. The Tennessee Authorized
Corporation Protection Act ("TACPA") is the vehicle through which the Tennessee
statutes attempt to permit the Business Combination Act and the TCSAA to govern
foreign corporations. The TACPA provides that an authorized corporation can
adopt a bylaw or a charter provision electing to be subject to the operative
provisions of the Business Combination Act and the TCSAA, which then become
applicable "to the same extent as such provisions apply to a resident domestic
corporation." Authorized corporations are those that are required to obtain a
Certificate of Authority from the Tennessee Secretary of State and that satisfy
any two of the following tests: having its principal place of business located
in Tennessee; having a significant subsidiary located in Tennessee; having a
majority of such corporation's fixed assets located in Tennessee; having more
than 10.0% of the beneficial owners of the voting stock or more than 10.0% of
such corporation's shares of voting stock beneficially owned by residents of
Tennessee; employing more than 250 individuals in Tennessee or having an annual
payroll paid to residents of Tennessee that is in excess of $5.0 million;
producing goods and/or services in Tennessee that result in annual gross
receipts in excess of $10.0 million; or having physical assets and/or deposits
located within Tennessee that exceed $10.0 million in value.
The U. S. Court of Appeals for the Sixth Circuit, however, has held the
TACPA unconstitutional as it applies to target corporations organized under the
laws of states other than Tennessee.
Greenmail Act. The Tennessee Greenmail Act ("TGA") applies to any
corporation chartered under the laws of Tennessee which has a class of voting
stock registered or traded on a national securities exchange or registered with
the Securities and Exchange Commission pursuant to Section 12(g) of the Exchange
Act. The TGA provides that it is unlawful for any corporation or subsidiary to
purchase, either directly or indirectly, any of its shares at a price above the
market value, as defined in the TGA, from any person who holds more than 3.0% of
the class of the securities purchased if such person has held such shares for
less than two years, unless either the purchase is first approved by the
affirmative vote of a majority of the outstanding shares of each class of voting
stock issued or the corporation makes an offer of at least equal value per share
to all holders of shares of such class.
RIGHTS AGREEMENT
The Company's Board of Directors has declared a dividend of one Right for
each share of Common Stock outstanding. The holders of any additional Common
Stock subsequently issued before the earliest of the Distribution Date, as
hereinafter defined, the redemption of the Rights, the exchange of the Rights or
the expiration of the Rights also will be entitled to one Right for each such
additional share. Such Rights entitle the registered holder under certain
circumstances to purchase from the Company one-thousandth of a share of Junior
Participating Preferred Stock, Series A, (the "Preferred Stock") at a price of
$60 per one-thousandth of a share of Preferred Stock (the "Purchase
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<PAGE> 55
Price"), subject to adjustment. The description and terms of the Rights are set
forth in the Rights Agreement.
The Rights will be evidenced by the Common Stock certificates and not by
separate certificates until the earlier of (i) the day following the first date
of public disclosure that a person or group other than an "Exempt Person" (the
"Acquiring Person"), together with persons affiliated, or associated with such
Acquiring Person (other than Exempt Persons), has acquired, or obtained the
right to acquire, beneficial ownership of 15.0% of the outstanding Common Stock
(the "Stock Acquisition Date") and (ii) the tenth business day after the date of
commencement or public disclosure of an intention to commence a tender offer or
exchange offer by a person other than an Exempt Person, the Company and certain
related entities if, upon consummation of the offer, such person or group,
together with persons affiliated or associated with it (other than those that
are Exempt Persons) would acquire beneficial ownership of 15.0% or more of the
outstanding Common Stock (the earlier of such dates being called the
"Distribution Date"). Until the Distribution Date (or earlier redemption,
exchange, or expiration of the Rights), (i) the Rights will be transferable only
with the Common Stock (except with redemption of the Rights); (ii) Common Stock
certificates will contain a notation incorporating the Rights Agreement by
reference; and (iii) the surrender for transfer of any certificates for Common
Stock will also constitute the transfer of the Right associated with the Common
Stock represented by such certificate. For purposes of the Rights Agreement
"Exempt Persons" is defined to include Messrs. John M., Joseph R. and Jefferson
J. Gregory (the "Gregory Entities").
As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Rights Certificates") will be mailed to
holders of record of the Common Stock as of the close of business on the
Distribution Date. From and after the Distribution Date, such separate Rights
Certificates alone will evidence the Rights.
The Rights will become exercisable on or after the Distribution Date
(unless sooner redeemed or exchanged). The Rights will expire at the close of
business on the tenth anniversary of the date of initial issuance (the
"Expiration Date") unless earlier redeemed or exchanged by the Company as
described below.
The Purchase Price payable and the number of shares of Preferred Stock or
other securities, cash or other property issuable upon exercise of the Rights
are subject to adjustment from time to time to prevent dilution (i) in the event
of a stock dividend or distribution on, or a subdivision or combination of, or
reclassification of the Preferred Stock, (ii) upon the grant to holders of the
Preferred Stock of certain rights, options, or warrants to subscribe for
Preferred Stock or securities convertible into Preferred Stock at less than the
current market price of the Preferred Stock, or (iii) upon the distribution to
holders of the Preferred Stock of other securities, cash (excluding regular
periodic cash dividends), property, evidences of indebtedness, or assets.
If a person becomes an Acquiring Person, the Rights will "flip-in" and
entitle each holder of a Right, except as provided below, to purchase, upon
exercise at the then-current Purchase Price, that number of shares of Common
Stock having a market value of two times such Purchase Price. In addition,
following a "flip-in," the Board has the option of exchanging all or part of the
Rights, except as provided below, for Common Stock.
In the event that, following a "flip-in," the Company is acquired in a
merger or other business combination in which the Common Stock does not remain
outstanding or is exchanged or 50% or more of its consolidated assets or earning
power is sold, leased, exchanged, mortgaged, pledged or otherwise transferred or
disposed of (in one transaction or a series of related transactions), the Rights
will "flip-over" and entitle each holder (other than the Acquiring Person and
certain related persons or transferees) of a Right to purchase, upon the
exercise of the Right at the then-current Purchase Price, that number of shares
of common stock of the acquiring company (or, in certain circumstances, one of
its affiliates) which at the time of such transaction would have a market value
of two times such Purchase Price.
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<PAGE> 56
Any Rights beneficially owned at any time on or after the earlier of the
Distribution Date and the Stock Acquisition Date by an Acquiring Person or an
affiliate or associate (other than an exempt person) of an Acquiring Person
(whether or not such ownership is subsequently transferred) will become null and
void upon the occurrence of a "Triggering Event," and any such holder of such
Rights will have no right to exercise such Rights or have such Rights exchanged
as provided above. A "Triggering Event" will be deemed to occur in the event
that any person becomes an Acquiring Person.
The number of outstanding Rights and the number of one-thousandths of a
share of Preferred Stock issuable upon exercise of each right and the Purchase
Price are subject to adjustment in the event of a stock dividend on the Common
Stock payable in Common Stock or subdivision or combination of the Common Stock
occurring, in any such case, prior to the Distribution Date.
At any time prior to the earlier of the Stock Acquisition Date and the
Expiration Date, the Company may redeem the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive the dividends or distributions.
At any time prior to the Stock Acquisition Date, a majority of the
Continuing Directors (as defined in the Rights Agreement) may, without the
approval of an holder of the Rights (except, in certain circumstances, an Exempt
Person), supplement or amend any provision of the Rights Agreement (including
the date on which the Distribution Date will occur after announcement of
commencement of a tender offer). Thereafter, the Rights Agreement may be amended
by a majority of the Continuing Directors without the approval of any holder of
the Rights only to cure ambiguities, to correct defective or inconsistent
provisions, or in ways that do not adversely affect the Rights holders.
Notwithstanding the foregoing, the Rights Agreement may not be amended to change
the Purchase Price, the number of shares of Preferred Stock, other securities,
cash or other property obtainable upon exercise of a Right, the redemption price
or the Expiration Date.
The Rights have certain anti-takeover effects. The Right may cause
substantial dilution to a person or group other than an Exempt Person that
attempts to acquire the Company on terms not approved by the Board, except
pursuant to an offer conditioned on a substantial number of Rights being
acquired. The Rights should not interfere with any merger or other business
combination approved by the Board of Directors prior to the time a person or
group other than an Exempt Person has acquired beneficial ownership of 15.0% or
more of the Common Stock, because until such time the Rights may be redeemed by
the Company at $.01 per Right.
The foregoing description of the Rights does not purport to be complete and
is qualified in its entirety by reference to the Rights Agreement (a copy of the
form of which is filed as an exhibit to the Registration Statement), including
the definitions therein of certain terms.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Charter limits the liability of directors to the fullest extent
permitted by the Tennessee Business Corporation Act. In addition, the Charter
provides that the Company shall indemnify directors and officers of the Company
to the fullest extent permitted by such law.
TRANSFER AGENT, REGISTRAR, RIGHTS AGENT AND CUSTODIAN
The transfer agent, registrar and Rights Agent for the Company's Common
Stock and the Preferred Stock Purchase Rights and the custodian for the Selling
Shareholders is Union Planters National Bank, Memphis, Tennessee.
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<PAGE> 57
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock of the Company. Sales of a substantial number of shares of the Company's
Common Stock in the public market following this offering, or the perception
that such sales could occur, could adversely affect the market price of the
Common Stock. Upon completion of this offering, there will be 34,000,000 shares
of Common Stock outstanding. Other than the 8,919,000 shares offered hereby, all
shares of Common Stock held by the Company's current shareholders are
"restricted securities" within the meaning of Rule 144 under the Securities Act
of 1933, as amended (the "Securities Act"), and may only be sold subject to the
provisions of Rule 144 under the Securities Act.
Of the 34,000,000 shares of Common Stock to be outstanding after the
offering, approximately 22,000,000 or 64.7%, of the outstanding shares of Common
Stock will be subject to lock-up agreements entered into by certain offers,
directors and other shareholders of the Company (the "Lock-up Agreements"). The
Company and its directors, officers and certain other shareholders have, among
other things, agreed not to, directly or indirectly, offer for sale, sell,
pledge or otherwise dispose of (or, during the term of the Lock-up Agreement,
enter into any transaction or device that is designed to, or could be expected
to, result in the disposition by any person at any time in the future of), any
Common Stock or securities convertible into or exchangeable for Common Stock,
with certain exceptions, or sell or grant options, rights or warrants with
respect to any shares of Common Stock or securities convertible into or
exchangeable for Common Stock, with certain limited exceptions, or enter into
any swap or other derivatives transaction that transfers to another, in whole or
in part, any of the economic benefits or risk of ownership of such shares of
Common Stock, for a period of 180 days after the date of this Prospectus without
the prior written consent of Lehman Brothers Inc. on behalf of the
Representatives. Of the approximately 12,000,000 shares of Common Stock to be
outstanding after the Offering that are not subject to the Lock-up Agreements,
other than the 8,919,000 shares of Common Stock sold in the Offering, (i)
approximately 1.1 million shares will be immediately eligible for resale in the
public market without restriction in reliance on Rule 144(k) under the
Securities Act, (ii) approximately 800,000 shares may be sold subject to the
volume and manner of sales restrictions of Rule 144 and (iii) the remaining 1.2
million shares may not be sold pursuant to Rule 144 prior to the expiration of
their one-year holding period.
Beginning 180 days after the date of this Prospectus, after the Lock-up
Agreements have expired, approximately (i) 10.0 million additional shares of
Common Stock will become eligible for resale into the public market in reliance
of Rule 144(k)and (ii) approximately 12.0 million additional shares may be sold
subject to the volume and manner of sales restrictions of Rule 144. See
"Underwriting."
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including affiliates, who has beneficially owned
shares for at least one year (including holding periods of prior owners other
than affiliates) is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of (i) one percent of the then
outstanding shares of the Company's Common Stock (approximately 34,000,000
shares immediately after this offering) or (ii) the average weekly trading
volume in the Company's Common Stock during the four calendar weeks preceding
such sale. A person (or persons whose shares are aggregated) who is not deemed
to be an affiliate of the Company and who has beneficially owned shares for at
least two years (including holding periods of prior owners other than
affiliates) is entitled to sell such shares under Rule 144 without regard to the
volume limitations described above.
The Company intends to file a registration statement under the Securities
Act on Form S-8 covering 3,500,000 shares of Common Stock reserved for issuance
under its Plan. See "Management -- Incentive Stock Option Plan." Such
registration statement is expected to be filed as soon as practicable after the
date of this Prospectus and will automatically become effective upon filing.
Accordingly, shares registered under such registration statement will be
available for sale in the open market, unless such shares are subject to vesting
restrictions with the Company or the contractual restrictions described above.
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<PAGE> 58
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of Common Stock by
"Non-U.S. Holders." In general, a "Non-U.S. Holder" is an individual or entity
other than: (i) a citizen or resident of the United States; (ii) a corporation
or partnership created or organized in the United States or under the laws of
the United States or of any state; (iii) an estate, the income of which is
includible in gross income for U.S. federal income tax purposes regardless of
its source; or (iv) a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more U.S. persons have the authority to control all substantial decisions of the
trust. This discussion does not address all aspects of U.S. federal income and
estate taxation and does not deal with foreign, state and local consequences
that may be relevant to Non-U.S. Holders in light of their personal
circumstances, or to certain types of Non-U.S. Holders which may be subject to
special treatment under U.S. federal income tax laws (for example, certain U.S.
expatriates, insurance companies, tax-exempt organizations, financial
institutions and broker-dealers). Furthermore, this discussion is based on
provisions of the Internal Revenue Code of 1986, amended (the "Code"), existing
and proposed regulations promulgated thereunder and administrative and judicial
interpretations thereof, all as of the date hereof, and all of which are subject
to change, possibly with retroactive effect. PROSPECTIVE INVESTORS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS REGARDING THE U.S. FEDERAL, STATE, LOCAL AND
NON-U.S. INCOME AND OTHER TAX CONSEQUENCES OF HOLDING AND DISPOSING OF SHARES OF
COMMON STOCK.
An individual may, subject to certain exceptions, be deemed to be a
resident alien (as opposed to a nonresident alien) by virtue of being present in
the United States for at least 31 days in the calendar year and for an aggregate
of at least 183 days during a three-year period ending in the current calendar
year (counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year and one-sixth of
the days present in the second preceding year). Resident aliens are subject to
U.S. federal tax as if they were U.S. citizens.
DIVIDENDS
The Company does not expect to pay any cash dividends in the foreseeable
future. See "Dividend Policy." In the event, however, that dividends are paid on
shares of Common Stock, dividends paid to a Non-U.S. Holder will generally be
subject to U.S. withholding tax at a 30% rate (or a lower rate prescribed by an
applicable tax treaty) unless the dividends are either (i) effectively connected
with a trade or business carried on by the Non-U.S. Holder within the United
States and the Non-U.S. Holder provides the payor with proper documentation, as
discussed below, or (ii) if certain income tax treaties apply, attributable to a
permanent establishment in the United States maintained by the Non-U.S. Holder.
Dividends effectively connected with such a U.S. trade or business or
attributable to such a U.S. permanent establishment generally will not be
subject to withholding tax (if the Non-U.S. Holder files certain forms,
including, currently, Internal Revenue Service ("IRS") Form 4224, and after
December 31, 1998, subject to certain transition rules, a Form W-8, with the
payor of the dividend) and generally will be subject to U.S. federal income tax
on a net income basis, in the same manner as if the Non-U.S. Holder were a
resident of the United States. In the case of a Non-U.S. Holder that is a
corporation, dividend income so connected or attributable may also be subject to
the branch profits tax (which is generally imposed on a foreign corporation on
the repatriation from the United States of its effectively connected earnings
and profits subject to certain adjustments) at a 30% rate (or a lower rate
prescribed by an applicable income tax treaty). For purposes of determining
whether tax is to be withheld at a 30% rate or at a lower rate as prescribed by
an applicable tax treaty, current law permits the Company to presume that
dividends paid prior to January 1, 1999 to an address in a foreign country are
paid to a resident of such country absent knowledge that such presumption is not
warranted. However, under newly issued regulations, in the case of dividends
paid after December 31, 1998, if a Non-U.S. Holder that is not a corporation or
other exempt recipient meeting certain requirements fails
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<PAGE> 59
to supply the Company with a valid Form W-8, the Non-U.S. Holder will be subject
to 31% backup withholding reporting rather than the 30% withholding (or
withholding at a reduced treaty rate) discussed above, unless the payment is
made through a foreign intermediary. For purposes of obtaining a reduced rate
under an income treaty, certain information concerning the Non-U.S. Holder's
country of residence must be provided. Prospective investors should consult with
their own tax advisors concerning the effect, if any, of the adoption of these
new regulations on an investment in the Common Stock.
A Non-U.S. Holder that is eligible for a reduced rate of U.S. withholding
tax pursuant to an income tax treaty may obtain a refund of any excess amounts
currently withheld by filing an appropriate claim for refund with the IRS.
SALE OF COMMON STOCK
In general, a Non-U.S. Holder will not be subject to U.S. federal income
tax on any gain recognized upon the disposition of Common Stock unless: (i) the
gain is effectively connected with a trade or business carried on by the
Non-U.S. Holder within the United States or, alternatively, if certain tax
treaties apply, attributable to a permanent establishment in the United States
maintained by the Non-U.S. Holder (and in either such case, the branch profits
tax may also apply if the Non-U.S. Holder is a corporation); (ii) in the case of
an individual Non-U.S. Holder who holds shares of Common Stock as capital
assets, such individual is present in the United States for 183 days or more in
the taxable year of disposition, and certain other conditions are met; or (iii)
the Company is or has been a United States real property holding corporation (a
"USRPHC") for United States federal income tax purposes at any time within the
shorter of the five-year period preceding such disposition or such Non-U.S.
Holder's holding period. A corporation is a USRPHC if the fair market value of
the U.S. real property interests held by the corporation is 50% or more of the
aggregate fair market value of certain assets of the corporation. The Company
believes that it is not likely to become and is not currently a USRPHC. If the
Company were or were to become a USRPHC, gains realized upon a disposition of
Common Stock by a Non-U.S. Holder which did not directly or indirectly own more
than 5% of the Common Stock during the shorter of the periods described above
generally would not be subject to U.S. federal income tax so long as the Common
Stock is "regularly traded" on an established securities market.
If a Non-U.S. Holder who is an individual falls under clause (i) above,
such individual generally will be taxed on the net gain derived from a sale of
Common Stock under regular graduated U.S. federal income tax rates. If an
individual Non-U.S. Holder falls under clause (ii) above, such individual
generally will be subject to a flat 30% tax on the gain derived from a sale,
which may be offset by certain U.S. capital losses (notwithstanding the fact
that such individual is not considered a resident alien of the United States).
Thus, individual Non-U.S. Holders who have spent (or expect to spend) more than
a de minimis period of time in the United States in the taxable year in which
they contemplate a sale of Common Stock are urged to consult their tax advisors
prior to the sale as to the U.S. tax consequences of such sale.
If a Non-U.S. Holder that is a foreign corporation falls under clause (i)
above, it generally will be taxed on its net gain under regular graduated U.S.
federal income tax rates and, in addition, will be subject to the branch profits
tax equal to 30% of its "effectively connected earnings and profits," within the
meaning of the code for the taxable year, as adjusted for certain items, unless
it qualifies for a lower rate under an applicable tax treaty.
ESTATE TAX
Common Stock owned or treated as owned by an individual who is not a
citizen or resident (as defined for U.S. federal estate tax purposes) of the
United States at the time of death will be includible in the individual's gross
estate for U.S. federal estate tax purposes, unless an applicable estate tax
treaty provides otherwise, and therefore may be subject to U.S. federal estate
tax.
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INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to, and the tax withheld with respect to, each Non-U.S.
Holder. These reporting requirements apply regardless of whether withholding was
not required because the dividends were effectively connected with a U.S. trade
or business of the Non-U.S. Holder or reduced or eliminated by an applicable tax
treaty. Copies of this information also may be made available under the
provisions of a specific treaty or agreement with the tax authorities in the
country in which the Non-U.S. Holder resides or is established.
Under current rules, United States backup withholding (which generally is
imposed at the rate of 31% on certain payments to persons that fail to furnish
the information required under the U.S. information reporting requirements)
generally will not apply (i) to dividends paid on Common Stock to a Non-U.S.
Holder that is subject to withholding at the 30% rate (or that is subject to
withholding at a reduced rate under an applicable treaty) or (ii) before January
1, 1999, to dividends paid to a Non-U.S. Holder at an address outside the United
States. However, under newly issued regulations, dividends paid after December
31, 1998 generally will be subject to backup withholding at a 31% rate, unless
the Non-U.S. Holder provides a valid Form W-8 or is a corporation or other
exempt recipient that meets certain requirements.
The payment of proceeds from the disposition of Common Stock to or through
a U.S. office of a broker will be subject to information reporting and backup
withholding unless either (i) the Non-U.S. Holder is a corporation or other
exempt recipient meeting certain requirements or (ii) the Non-U.S. Holder
provides a valid Form W-8. The payment of proceeds from the disposition of
Common Stock to or through a non-U.S. office of a non-U.S. broker generally will
not be subject to backup withholding and information reporting. Before January
1, 1999, however, in the case of proceeds from the disposition of Common Stock
effected at a non-U.S. office of a broker that is: (i) a U.S. person; (ii) a
"controlled foreign corporation" for U.S. federal income tax purposes or (iii) a
foreign person 50% or more of whose gross income from certain periods is
effectively connected with a U.S. trade or business, such payments will not be
subject to backup withholding unless such broker has actual knowledge that the
owner is not a Non-U.S. Holder but will be subject to information reporting,
unless such broker has documentary evidence in its files that the owner is a
Non-U.S. Holder and certain other conditions are met. Further, after December
31, 1998, under the newly issued regulations referred to above, information
reporting and backup withholding may apply to payments of the gross proceeds
from the sale or redemption of Common Stock effected through foreign offices of
brokers having any of a broader class of connections with the United States
unless certain certification requirements are complied with. Prospective
investors should consult with their own tax advisors regarding these
regulations, and in particular with respect to whether the use of a particular
broker would subject the investor to these rules.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to Non-U.S. Holder will be refunded or
credited against the Non-U.S. Holder's U.S. federal income tax liability, if
any, provided that the required information is furnished to the IRS.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement, dated , 1997 (the "Underwriting Agreement"), among the
Company, the Selling Shareholders and the underwriters named below (the
"Underwriters") for whom Lehman Brothers Inc., Credit Suisse First Boston
Corporation and Hambrecht & Quist LLC are acting as representatives (the
"Representatives"), the Underwriters have severally agreed to purchase from the
Company and the Selling Shareholders, and the Company and the Selling
Shareholders have agreed to sell to each Underwriter, the aggregate number of
shares of Common Stock set forth opposite the name of each such Underwriter
below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Lehman Brothers Inc. .......................................
Credit Suisse First Boston Corporation......................
Hambrecht & Quist LLC.......................................
---------
Total............................................. 8,919,000
=========
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price set forth on the cover page hereof, and to certain dealers at such public
offering price less a selling concession not in excess of $ per share.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain other Underwriters or to certain other
brokers or dealers. After the offering to the public, the offering price and
other selling terms may be changed by the Representatives.
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by counsel and
to certain other conditions, including the condition that no stop order
suspending the effectiveness of the Registration Statement is in effect and no
proceedings for such purpose are pending or threatened by the Securities and
Exchange Commission and that there has been no material adverse change or
development involving a prospective material adverse change in the condition of
the Company from that set forth in the Registration Statement otherwise than as
set forth or contemplated in this Prospectus, and that certain certificates,
opinions and letters have been received from the Company and its counsel, the
Selling Shareholders and their counsel and independent auditors. The
Underwriters are obligated to take and pay for all of the above shares of Common
Stock if any such shares are taken.
The Underwriters and each of the Company and the Selling Shareholders have
agreed in the Underwriting Agreement to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
The Company has granted to the Underwriters an option to purchase up to an
additional 1,000,000 shares of Common Stock, exercisable solely to cover
over-allotments, at the public offering price, less the underwriting discounts
and commissions shown on the cover page of this Prospectus. Such option may be
exercised at any time until 30 days after the date of the Underwriting
Agreement. To the extent that the option is exercised, each Underwriter will be
committed to purchase a number of additional shares of Common Stock
proportionate to such Underwriter's initial commitment as indicated in the table
above.
The Representatives have informed the Company and the Selling Shareholders
that the Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
Shareholders of the Company, including directors and officers, beneficially
owning an aggregate of approximately 22,000,000, or approximately 64.7%, of the
outstanding shares of Common Stock after giving effect to the offering have
agreed not to, directly or indirectly, offer for sale, sell, pledge or otherwise
dispose of (or,during the period of the Lock-up Agreement, enter into any
transaction or
60
<PAGE> 62
device that is designed to, or could be expected to, result in the disposition
by any person at any time in the future of) any shares of Common Stock or
securities convertible into or exchangeable for Common Stock, or sell or grant
options, rights or warrants with respect to any Shares of Common Stock or
securities convertible into or exchangeable for Common Stock, or enter into any
swap or other derivatives transaction that transfers to another, in whole or in
part, any of the economic benefits or risks of ownership of such shares of
Common Stock, for a period of 180 days after the date of this Prospectus without
the prior written consent of Lehman Brothers Inc. on behalf of the
Representatives. Except for the Common Stock to be sold in the offering, the
Company has agreed not to offer for sale, sell, pledge or otherwise dispose of
(or enter into any transaction or device that is designed to, or could be
expected to, result in the disposition by any person at any time in the future
of) any shares of Common Stock or securities convertible into or exchangeable
for Common Stock or other capital stock, with certain limited exceptions, or
sell or grant options, rights or warrants with respect to any shares of Common
Stock or securities convertible into or exchangeable for Common Stock, with
certain limited exceptions, or enter into any swap or other derivations
transactions that transfers to another in whole or in part, any of the economic
benefits or risks of ownership of such shares of Common Stock prior to the
expiration of 180 days from the date of this Prospectus without the prior
written consent of Lehman Brothers Inc. on behalf of the Representatives.
Prior to this offering, there has been no public market for the Common
Stock. The public offering price will be negotiated between the Company and the
Representatives. The material factors considered in determining the public
offering price of the Common Stock, in addition to the prevailing market
conditions, were the Company's historical performance, capital structure,
estimates of the business potential, revenues and earnings prospects of the
Company, an assessment of the Company's management and consideration of the
above factors in relation to the market values of companies in related
businesses.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase shares of Common Stock. As
an exception to these rules, the Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions may consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the offering, (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), the Representatives
may reduce that short position by purchasing Common Stock in the open market.
The Representatives also may elect to reduce any short position by exercising
all or part of the over-allotment option described herein.
The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
61
<PAGE> 63
The Company has agreed to pay Bourne & Company, an affiliate of Ernest C.
Bourne, a director, upon consummation of this offering, a fee equal to 1.0% of
the net proceeds. The agreement is for a one-year term which began August 1,
1997 and provides for a monthly retainer fee of $10,000 for the term of the
agreement. The 1.0% fee resulting from the offering will be offset by the amount
of the monthly retainer paid prior to the consummation of the offering. Assuming
the 6,000,000 shares offered hereby are priced at $18.00 per share, Mr. Bourne
would receive a fee of approximately $1.1 million offset by the monthly retainer
fee described above.
The Common Stock has been approved, subject to official notice of issuance,
for listing on the Nasdaq National Market under the symbol "KING."
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Baker, Donelson, Bearman & Caldwell, P.C., Memphis, Tennessee.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Shearman & Sterling, New York, New York.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1995 and 1996 and September 30, 1997 and for each of the three years in the
period ended December 31, 1996 and the nine months ended September 30, 1997, the
statement of gross profit of the Cortisporin Product Line for each of the two
years in the period ended December 31, 1996 and the combined statement of gross
profit for the Neosporin, Polysporin, Septra, Proloprim, Mantadil and Kemadrin
Product Lines for each of the two years in the period ended December 31, 1996
included in this Prospectus have been audited by Coopers & Lybrand L.L.P.,
independent auditors, as stated in their reports appearing herein and are
included in reliance upon such reports given upon the authority of that firm as
experts in accounting and auditing.
Warner-Lambert Company's Sterile Products Operations statement of gross
profit for each of the two years in the period ended December 31, 1996 and the
nine months ended September 30, 1997 and the statement of fixed assets as of
December 31, 1996 and September 30, 1997 included in this Prospectus have been
so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, exhibits and schedules thereto) under the Securities Act of 1933, as
amended, with respect to the Common Stock offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules filed therewith. For further information with respect to the Company
and the Common Stock offered hereby, reference is hereby made to such
Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus regarding the contents of any contract
or other document are not necessarily complete, and in each instance reference
is made to the copy of such contract or document filed as an exhibit to the
Registration Statement or the documents incorporated into the Prospectus by
reference, each such statement being qualified in all respects by such
reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected and copied at prescribed rates at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The
Commission maintains a World Wide
62
<PAGE> 64
Web site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by the Company's independent accountants
and to make available to its shareholders quarterly reports for the first three
quarters of each fiscal year containing unaudited interim financial information.
The Company is not affiliated with Warner-Lambert and, except as expressly
provided in this Prospectus, has no relationship with Warner-Lambert.
Warner-Lambert is making no representation or warranty, express or implied, to
any prospective investor as to any of the matters contained in this Prospectus.
63
<PAGE> 65
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
King Pharmaceuticals, Inc.
Report of Independent Accountants......................... F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and
1996 and September 30, 1997........................... F-3
Consolidated Statements of Operations for the years
ended December 31, 1994, 1995 and 1996 and for the
nine months ended September 30, 1996 (unaudited) and
1997.................................................. F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1994, 1995 and 1996 and for the
nine months ended September 30, 1996 (unaudited) and
1997.................................................. F-5
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1994, 1995 and
1996 and the nine months ended September 30, 1997..... F-7
Notes to Consolidated Financial Statements................ F-8
Cortisporin Product Line
Report of Independent Accountants......................... F-21
Statement of Gross Profit................................. F-22
Notes to Financial Statement.............................. F-23
Glaxo Wellcome Product Line
Report of Independent Accountants......................... F-24
Combined Statement of Gross Profit........................ F-25
Notes to the Combined Financial Statement................. F-26
Warner-Lambert Company's Sterile Products Operations
Report of Independent Accountants on Special Purpose
Financial Statements................................... F-27
Statement of Fixed Assets................................. F-28
Statement of Gross Profit................................. F-29
Notes to Financial Statement.............................. F-30
Pro Forma Consolidated Financial Statements................. F-32
Pro Forma Consolidated Statement of Operations for the
year ended December 31, 1996........................... F-33
Pro Forma Consolidated Statement of Operations for the
nine months ended September 30, 1997................... F-34
Pro Forma Consolidated Balance Sheet as of September 30,
1997................................................... F-35
Notes to Pro Forma Consolidated Financial Statements........ F-36
</TABLE>
F-1
<PAGE> 66
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
King Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of King
Pharmaceuticals, Inc. as of December 31, 1995 and 1996 and September 30, 1997,
and the related consolidated statements of operations, shareholders' equity and
cash flows for the years ended December 31, 1994, 1995 and 1996 and for the nine
months ended September 30, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 consolidated financial position of
King Pharmaceuticals, Inc. as of December 31, 1995 and 1996 and September 30,
1997, and the consolidated results of their operations and their cash flows for
the years ended December 31, 1994, 1995 and 1996 and for the nine months ended
September 30, 1997, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Greensboro, North Carolina
October 22, 1997, except for Note 17,
which is dated November 26, 1997.
F-2
<PAGE> 67
KING PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $10,568 $ 1,392 $ 35
Accounts receivable, net of allowance for doubtful
accounts of $93, $93 and $493, respectively............ 2,772 2,305 7,393
Inventories............................................... 4,202 6,097 8,622
Marketable securities..................................... -- 209 --
Deferred income taxes..................................... 308 499 1,135
Income taxes receivable................................... -- 652 --
Shareholder notes receivable.............................. -- 2,093 --
Prepaid expenses and other assets......................... 303 638 533
------- ------- -------
Total current assets.............................. 18,153 13,885 17,718
------- ------- -------
Property, plant and equipment, net.......................... 15,439 16,691 17,006
Investment in affiliated company............................ 292 -- --
Intangible assets, net...................................... 58 8,703 38,204
Other assets................................................ -- -- 1,325
------- ------- -------
Total assets...................................... $33,942 $39,279 $74,253
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt........................................... $ 3,403 $ -- $ 1,325
Current portion of long-term debt......................... 2,155 4,031 7,765
Accounts payable.......................................... 927 844 3,503
Accrued expenses.......................................... 1,098 1,261 4,027
Income taxes payable...................................... 2,971 -- 1,015
------- ------- -------
Total current liabilities......................... 10,554 6,136 17,635
------- ------- -------
Line-of Credit.............................................. -- -- 2,282
Long-term debt.............................................. 9,497 13,980 22,913
Deferred income taxes....................................... 2,880 3,470 3,614
------- ------- -------
Total liabilities................................. 22,931 23,586 46,444
------- ------- -------
Commitments
Shareholders' equity:
Common stock, no par value, 150,000,000 shares authorized,
12,320,000 19,467,406 and 28,000,000 shares issued and
outstanding, respectively.............................. 926 8,448 16,455
Retained earnings......................................... 10,763 7,938 12,493
Due from related party.................................... (678) (677) (1,139)
Unrealized loss on marketable securities, net of tax...... -- (16) --
------- ------- -------
Total shareholders' equity........................ 11,011 15,693 27,809
------- ------- -------
Total liabilities and shareholders' equity........ $33,942 $39,279 $74,253
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 68
KING PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- -------------------------
1994 1995 1996 1996 1997
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
REVENUES:
Net sales...................... $ 13,311 $ 25,441 $ 15,457 $ 11,310 $ 33,817
Development revenues........... -- -- 5,000 2,500 --
---------- ----------- ----------- ----------- -----------
Total revenues, net.... 13,311 25,441 20,457 13,810 33,817
---------- ----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of sales.................. 9,754 12,130 8,782 7,050 9,538
Selling, general and
administrative.............. 1,987 8,605 12,106 8,441 13,734
Depreciation and
amortization................ 639 1,777 982 655 1,631
---------- ----------- ----------- ----------- -----------
Total operating costs
and expenses......... 12,380 22,512 21,870 16,146 24,903
GAIN ON SALE OF PRODUCT LINE,
NET............................ -- 13,102 -- -- --
---------- ----------- ----------- ----------- -----------
OPERATING INCOME (LOSS).......... 931 16,031 (1,413) (2,336) 8,914
---------- ----------- ----------- ----------- -----------
OTHER (EXPENSES) INCOME:
Gain on sale of investment in
affiliate................... -- -- 1,760 1,760 --
Interest expense............... (1,069) (2,006) (1,272) (850) (1,730)
Other income, net.............. 554 367 578 407 211
---------- ----------- ----------- ----------- -----------
Total other (expenses)
income............... (515) (1,639) 1,066 1,317 (1,519)
---------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY GAIN......... 416 14,392 (347) (1,019) 7,395
Income tax (benefit) expense... (501) 5,058 (107) (316) 2,840
---------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
EXTRAORDINARY GAIN............. 917 9,334 (240) (703) 4,555
Extraordinary gain on early
extinguishment of long-term
debt, net of income taxes of
$272........................ -- 528 -- -- --
---------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)................ $ 917 $ 9,862 $ (240) $ (703) $ 4,555
========== =========== =========== =========== ===========
Income (loss) per common stock
before extraordinary gain... $ .20 $ .75 $ (.02) $ (.06) $ .18
Extraordinary gain, net........ -- .04 -- -- --
---------- ----------- ----------- ----------- -----------
Net income (loss) per share.... $ .20 $ .79 $ (.02) $ (.06) $ .18
========== =========== =========== =========== ===========
Weighted average number of
common and common stock
equivalents (Note 2)........ 4,537,555 12,445,993 13,630,813 12,572,103 25,655,881
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 69
KING PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ----------------------
1994 1995 1996 1996 1997
-------- -------- ------- ----------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 917 $ 9,862 $ (240) $ (703) $ 4,555
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization........................... 639 1,777 982 655 1,631
Loss on sale of marketable securities................... -- -- 1 1 32
Extraordinary gain on early extinguishment of long-term
debt.................................................. -- (800) -- -- --
Gain on sale of product line............................ -- (15,608) -- -- --
Gain on sale of property and equipment.................. -- -- (54) (54) --
Gain on sale of investment in affiliate................. -- -- (1,760) (1,760) --
Income from equity in earnings of affiliated company.... -- (166) -- -- --
Gain on conversion of accounts payable to long-term
debt.................................................. (25) -- -- -- --
Employee salaries and other benefits paid by
affiliate............................................. 250 -- -- -- --
Accrued interest added to amount due to affiliate....... 226 -- -- -- --
Deferred income taxes................................... (629) 2,193 410 447 (501)
Changes in operating assets and liabilities:
Accounts receivable..................................... (608) (876) 467 828 (5,088)
Inventories............................................. (770) (1,326) (1,895) (792) (2,525)
Prepaid expenses and other current assets............... (227) 12 (335) (695) 105
Accounts payable........................................ 209 (288) (83) (364) 2,659
Accrued expenses and other.............................. 690 (220) 163 (106) 2,766
Income taxes (receivable) payable....................... -- 2,855 (3,624) (3,896) 1,667
-------- -------- ------- ------- --------
Net cash provided by (used in) operating
activities........................................ 672 (2,585) (5,968) (6,439) 5,301
-------- -------- ------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (890) (1,672) (1,069) (705) (957)
Deposit on equipment...................................... -- (1,325)
Purchase of intangible assets............................. -- (60) (3,275) (1,153) (30,406)
Purchases of marketable securities........................ -- -- (307) (307) --
Proceeds from sales of marketable securities.............. -- -- 72 25 203
Proceeds from sale of product line........................ -- 32,000 -- -- --
Proceeds from sale of investment in affiliated company.... -- -- 2,052 2,052 --
Proceeds from sale of property and equipment.............. -- -- 100 100 --
-------- -------- ------- ------- --------
Net cash (used in) provided by investing
activities........................................ (890) 30,268 (2,427) 12 (32,485)
-------- -------- ------- ------- --------
Cash flows from financing activities:
Proceeds from revolving line of credit.................... 12,039 200,847 -- 72,142 13,219
Payments on revolving line of credit...................... (11,078) (198,405) (3,403) (72,402) (10,937)
Proceeds from issuance of preferred shares................ 800 -- -- --
Proceeds from issuance of common shares................... -- -- 2,844 190 8,007
Payments to retire 8% cumulative common shares............ -- (100) -- -- --
Repayment on shareholder notes receivable................. -- -- -- -- 2,093
Proceeds from short-term debt............................. -- -- -- -- 1,325
Proceeds from long-term debt.............................. -- 329 2,549 2,549 15,924
Payments on long-term debt and capital lease
obligations............................................. (346) (20,127) (2,772) (1,152) (3,342)
Dividends on preferred shares............................. (8) (8) -- -- --
Due from affiliate........................................ -- (679) 1 75 (462)
Advances from affiliate................................... 520 -- -- -- --
Payment of affiliated note payable........................ (1,000) -- -- -- --
-------- -------- ------- ------- --------
Net cash provided by (used in) financing
activities........................................ 927 (18,143) (781) 1,402 25,827
-------- -------- ------- ------- --------
Increase (decrease) in cash................................. 709 9,540 (9,176) (5,025) (1,357)
Cash and cash equivalents, beginning of period.............. 319 1,028 10,568 10,568 1,392
-------- -------- ------- ------- --------
Cash and cash equivalents, end of period.................... $ 1,028 10,568 $ 1,392 $ 5,543 $ 35
======== ======== ======= ======= ========
Supplemental disclosure of cash paid for:
Interest............................................ $ 439 $ 2,505 $ 1,170 $ 484 $ 1,059
======== ======== ======= ======= ========
Taxes............................................... $ 12 $ 283 $ 3,078 $ 3,078 $ 1,675
======== ======== ======= ======= ========
</TABLE>
F-5
<PAGE> 70
KING PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
Supplemental schedule of non-cash investing and financing activities:
During 1996 the Company issued 699,711 common shares for $2,093 in notes
receivable from shareholders. These notes were paid in full in 1997.
For the year ended December 31, 1996 and the nine months ended September
30, 1996 and 1997, the Company entered into capital leases totaling $1,082, $935
and $85, respectively.
The Company purchased intangible assets financed by the seller of $5,500
during 1996 and $750 during the nine months ended September 30, 1997.
The Company converted its 40,000 shares of Series B Preferred Stock into
400,000 common shares during 1995.
In 1994, the Company's acquisition of the exclusive right to manufacture
and distribute the product Anexsia was recorded as follows:
<TABLE>
<S> <C>
Intangible asset............................................ $17,600
Inventory................................................... 600
-------
$18,200
=======
Note payable................................................ $17,500
Other liabilities........................................... 700
-------
$18,200
=======
</TABLE>
During 1994, accounts payable of $313 were converted into a note payable to
vendor after reducing the payable by $120 for return of inventory to the vendor.
In 1994, the Company issued 2,660,000 common shares with a carryover basis
of $126 in exchange for common shares of an affiliated Company.
In 1994, certain equipment amounting to $161 was acquired on behalf of the
Company by an affiliate in exchange for a note payable that is included in due
to affiliate.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 71
KING PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
DUE
COMMON PREFERRED UNREALIZED FROM TOTAL
-------------------- ---------------- RETAINED LOSS ON RELATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS SECURITIES PARTY EQUITY
---------- ------- ------- ------ -------- ---------- ------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock granted at
formation................... 1,340,000 $ -- -- $ -- $ -- $ -- $ -- $ --
Exchange of King stock for
shares of an affiliated
Company..................... 2,660,000 126 -- -- -- -- -- 126
Issuance of preferred stock... -- -- 40,000 800 -- -- -- 800
Issuance of 8% preferred
stock....................... -- -- 10,000 100 -- -- -- 100
Dividends on preferred
stock....................... -- -- -- -- (8) -- -- (8)
Net income.................... -- -- -- -- 917 -- -- 917
---------- ------- ------- ----- ------- ---- ------- -------
Balance, December 31, 1994...... 4,000,000 126 50,000 900 909 -- -- 1,935
Conversion of Series B
preferred stock to common
stock....................... 400,000 800 (40,000) (800) -- -- -- --
Repurchase of 8% cumulative
preferred stock............. -- -- (10,000) (100) -- -- -- (100)
Dividends on preferred
stock....................... -- -- -- -- (8) -- -- (8)
Advances to Benevolent fund... -- -- -- -- -- -- (678) (678)
Net income.................... -- -- -- -- 9,862 -- -- 9,862
---------- ------- ------- ----- ------- ---- ------- -------
Balance, December 31, 1995...... 4,400,000 926 -- -- 10,763 -- (678) 11,011
Issuance of common stock...... 1,386,230 4,159 -- -- -- -- -- 4,159
Issuance of common stock under
employee stock purchase
plan........................ 259,532 778 -- -- -- -- -- 778
15% Stock Dividend............ 906,883 2,585 -- -- (2,585) -- -- --
Unrealized loss on securities,
net of tax.................. -- -- -- -- -- (16) -- (16)
Payments from Benevolent
Fund........................ -- -- -- -- -- -- 1 1
Net income (loss)............. -- -- -- -- (240) -- -- (240)
---------- ------- ------- ----- ------- ---- ------- -------
Balance, December 31, 1996...... 6,952,645 8,448 -- -- 7,938 (16) (677) 15,693
Issuance of common stock, net
of $743 of expenses......... 3,047,355 8,007 -- -- -- -- -- 8,007
Realized loss on securities... -- -- -- -- -- 16 -- 16
Advances to Benevolent Fund... -- -- -- -- -- -- (462) (462)
2.8 to 1 common stock split
(Note 17)................... 18,000,000 -- -- -- -- -- -- --
Net income.................... -- -- -- -- 4,555 -- -- 4,555
---------- ------- ------- ----- ------- ---- ------- -------
Balance, September 30, 1997..... 28,000,000 $16,455 -- $ -- $12,493 $ -- $(1,139) $27,809
========== ======= ======= ===== ======= ==== ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE> 72
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
1. THE COMPANY
King Pharmaceuticals, Inc. ("King" or the "Company") is an integrated
pharmaceutical company that manufactures, acquires, markets and sells branded
and generic form products. The Company also develops and markets
over-the-counter veterinary products. These products are marketed throughout the
United States to pharmaceutical wholesalers, retail pharmacies, and chain drug
stores. The Company also manufactures similar products for others on a contract
basis. Management of the Company believes that the unaudited information at
September 30, 1996, and for the nine months then ended contains all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of such consolidated financial statements.
These consolidated financial statements include the accounts of King and
its wholly owned subsidiaries, Monarch Pharmaceuticals, Inc. (formerly a
division of King) and King Pharmaceuticals of Nevada, Inc. All intercompany
transactions and balances have been eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates -- The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions. Assets, liabilities, revenues and
expenses, and disclosure of contingent assets and liabilities are affected by
such estimates and assumptions. Actual results could differ from those
estimates. The most significant estimates in the consolidated financial
statements relate to receivables, inventory, self-insurance and revenues.
Revenue Recognition -- Sales are reported net of an estimate for returns
and allowances and an estimate for chargebacks. Chargebacks and returns and
allowances are included in sales when goods are shipped to the customer. Product
sales and sales of manufactured products are recognized upon shipment.
Development revenue is recognized upon approval of the product from the FDA.
Cash and Cash Equivalents -- The Company considers all highly liquid
investments with an original maturity of three months or less when purchased to
be cash equivalents. The Company's cash and cash equivalents are placed in large
domestic banks which limit the amount of credit exposure.
Marketable Securities -- Marketable securities consisted of stock in
another pharmaceutical company, which management had classified as
available-for-sale in the accompanying consolidated financial statements. Such
securities were carried at fair value with the unrealized gains and losses
reported net of tax as a separate component of shareholders' equity. The
unrecognized loss on these securities at December 31, 1996 was $25 ($16, net of
tax). The Company sold these securities at a loss in 1997.
Inventories -- Inventories are stated at the lower of cost or market. Cost
is determined using the first-in, first-out (FIFO) method.
Income Taxes -- Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse (see Note 12).
Financial Instruments -- The fair value of financial instruments are
determined by reference to various market data or other valuation techniques as
appropriate. Unless otherwise disclosed, the fair values of financial
instruments approximate their recorded values (Note 11).
Property, Plant and Equipment -- Property, plant and equipment are stated
at cost. Maintenance and repairs are expensed as incurred. Depreciation is
computed over the estimated useful lives of the related assets using the
straight-line method for financial statement purposes and accelerated methods
for income tax purposes. Retirements, sales and disposals of assets are recorded
by removing the cost and accumulated depreciation with any resulting gain or
loss reflected in income.
F-8
<PAGE> 73
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the event that facts and circumstances indicate that the cost of
property, plant and equipment may be impaired, evaluation of recoverability is
performed using the estimated future undiscounted cash flows associated with the
asset compared to the asset's carrying amount to determine if a writedown is
required.
Intangible Assets -- Intangible assets are stated at cost, net of
accumulated amortization. Amortization is computed over the estimated useful
lives of 10 to 25 years using the straight-line method.
The Company continually reevaluates the propriety of the carrying amount of
intangibles as well as the related amortization period to determine whether the
current events and circumstances warrant adjustments to the carrying values
and/or revised estimates of useful lives. This evaluation is performed using the
estimated projected future undiscounted cash flows associated with the asset
compared to the asset's carrying amount to determine if a writedown is required.
To the extent such projection indicates that undiscounted cash flow is not
expected to be adequate to recover the carrying amounts the assets are written
down to discounted cash flows.
Other Assets -- Other assets includes a deposit of $1,325 for equipment
that will be leased back to the Company under an operating lease (Note 10).
Gain on Sale of Product Line/Development Revenue -- In December 1995, the
Company sold the Anexsia brand product line and related Abbreviated New Drug
Applications ("ANDA's"), both approved and in the process of development, for
$32,000, which resulted in a net gain of $13,102. As part of the agreement, the
Company entered into a manufacture and supply agreement with the purchaser, with
guaranteed minimum revenues of $4,750 over 4 years. Additionally, the Company
agreed to develop four ANDA's with the Food and Drug Administration ("FDA") on
the purchaser's behalf, for a maximum of $2,500 each, due upon FDA approval. In
1996, the Company recognized $5,000 as development revenue under this agreement.
In connection with the gain on the transaction, the Company incurred
certain non-recurring costs related to employee bonuses and charitable
contributions of $2,506.
Self-Funded Health Insurance -- The Company is self-insured with respect to
its health care benefit program. The Company contributes estimated amounts to a
third-party administrator on a monthly basis which are used to pay health care
claims during the year. Under the plan, the Company pays a minimum amount
annually and has an aggregate stop-loss limit based upon the number of
participants and their insured status. Self-insured costs are accrued based upon
reported claims and an estimated liability for claims incurred but not reported.
Research and Development -- The Company incurs research and development
costs that are expensed as incurred. These costs were approximately $543, $682,
$1,298, $704 and $660, for the years ended December 31, 1994, 1995 and 1996 and
the nine months ended September 30, 1996 and 1997, respectively.
Advertising and Promotion -- The Company expenses advertising and promotion
costs as incurred and these costs are included as selling, general and
administrative expenses. Advertising costs for the years ended December 31,
1994, 1995 and 1996 and the nine month period ended September 30, 1997 were $1,
$931, $1,283 and $1,178, respectively.
Income (Loss) Per Share -- Income (loss) per share is calculated by
dividing net income (loss), after deducting preferred stock dividends, by the
weighted average number of common shares outstanding during the period. The
weighted average shares outstanding includes the effects of the stock dividend
paid in December 1996 and the stock split in October 1997 for all periods on a
retroactive basis.
F-9
<PAGE> 74
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Statement of Accounting Standards Not Yet Adopted -- In February 1997, the
Financial Accounting Standards Board issued Statement Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share, effective for fiscal periods
ending after December 15, 1997. The new standard simplifies the computation of
earnings (loss) per share by replacing primary earnings (loss) per share with
basic earnings (loss) per share. Basic earnings (loss) per share will not
include the effect of any potentially dilutive securities, as under the current
accounting standard, and will be computed by dividing reported income available
to common shareholders by the weighted average number of common shares
outstanding during the period. Fully diluted earnings (loss) per share will now
be called diluted earnings (loss) per share and will reflect the dilution of all
potentially dilutive securities. Companies will be required to restate all prior
period earnings (loss) per share data. The adoption of this standard by the
Company will have no impact on the historical reported earnings (loss) per share
amounts since, prior to September 30, 1997, there were no potentially dilutive
securities.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 requires public business enterprises to adopt its provisions for periods
beginning after December 15, 1997, and to report certain information about
operating segments in complete sets of financial statements of the enterprise
and in condensed financial statements of interim periods issued to shareholders.
The Company is evaluating the provisions of SFAS No. 131, but has not yet
determined if additional disclosures will be required.
Reclassifications -- Certain amounts from the prior consolidated financial
statements have been reclassified to conform to the presentation adopted in
1997.
3. CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
A significant portion of the Company's sales are to customers in the
pharmaceuticals industry. Approximately 54%, 34% and 33% of accounts receivable
at December 31, 1995 and 1996 and September 30, 1997, respectively were due from
one customer. At December 31, 1995 and 1996 and September 30, 1997, an
additional 27%, 39% and 35%, respectively, were due from two other customers.
The Company monitors the extension of credit to customers and has not
experienced significant credit losses. Furthermore, the majority of sales are
made to large well-established companies.
The following table represents a summary of sales to significant customers
as a percentage of the Company's total revenues:
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEARS MONTHS
ENDED DECEMBER 31, ENDED
-------------------- SEPTEMBER 30,
1994 1995 1996 1997
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Customer A.................................... 66.6% 27.0% 18.1% n/a
Customer B.................................... n/a n/a 36.7 n/a
Customer C.................................... n/a 11.8 14.9 n/a
Customer D.................................... n/a 18.1 n/a n/a
Customer E.................................... n/a n/a n/a 19.5
Customer F.................................... n/a n/a n/a 13.4
Customer G.................................... n/a n/a n/a 13.1
Customer H.................................... n/a n/a n/a 10.9
</TABLE>
n/a -- sales were less than 10% for the period.
F-10
<PAGE> 75
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Land.............................................. $ 169 $ 306 $ 319
Buildings and improvements........................ 13,006 13,407 13,563
Machinery and equipment........................... 2,960 3,380 4,059
Equipment under capital lease..................... 406 1,488 1,573
Construction in progress.......................... 140 189 298
------- ------- -------
16,681 18,770 19,812
Less accumulated depreciation..................... (1,242) (2,079) (2,806)
------- ------- -------
$15,439 $16,691 $17,006
======= ======= =======
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1994, 1995 and 1996 and for the nine months ended September 30, 1996 and 1997
was $541, $701, $853, $654, and $726 respectively.
5. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Finished goods.................................. $1,603 $3,176 $5,239
Work-in-process................................. 675 525 646
Raw materials................................... 1,924 2,396 2,737
------ ------ ------
$4,202 $6,097 $8,622
====== ====== ======
</TABLE>
6. ACQUISITIONS/INTANGIBLE ASSETS
On May 15, 1997, the Company acquired the rights, title and interest in the
United States to the Viroptic(R) product line for $5,100, plus the assumption of
an estimated liability of $129 for returns of products shipped prior to the
acquisition. The entire purchase price was allocated to intangible assets and is
being amortized over its estimated useful life of 25 years. The purchase price
was financed from internally generated cash funds and borrowings under its
revolving line of credit agreement.
On March 21, 1997, the Company acquired the rights, title and interest in
the United States to the Cortisporin(R) product line for $22,845, plus the
assumption of an estimated $849 for returns of products shipped prior to the
acquisition. The entire purchase price was allocated to intangible assets and is
being amortized over its estimated useful life of 25 years. The purchase price
was financed principally through the raising of equity (Note 15), notes payable
to certain banks and borrowings under the Company's revolving line of credit
agreement.
On January 22, 1997, the Company acquired the rights, title and interest to
the Proctocort(TM) product line for approximately $1,500. The entire purchase
was allocated to intangible assets and is being amortized over its estimated
useful life of 20 years. The acquisition was financed with a note payable to a
bank.
On December 17, 1996, the Company acquired the rights, title and interests
to the Thalitone(R) product line for $1,000, including inventory valued at $268.
The remaining $832 was allocated to
F-11
<PAGE> 76
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
intangible assets and is being amortized over 10 years, the estimated remaining
useful life of its patent. The acquisition was financed with a note payable to a
bank.
On October 2, 1996, the Company acquired the rights, titles and interest to
the Nucofed(R) and Quibron(R) (United States only) product lines for $7,000,
plus the assumptions of an estimated $301 for returns of products shipped prior
to the acquisition. The entire purchase price was allocated to intangible assets
and is being amortized over its estimated useful life of 20 years. The purchase
price was financed by the seller for $5,500 and borrowings under the Company's
revolving line of credit.
The following unaudited pro forma summary presents net sales information as
if the above acquisitions had occurred on January 1, 1996. These pro forma
results have been prepared for comparative purposes and do not purport to be
indicative of what would have occurred had the acquisitions been made on January
1, 1996, nor is it indicative of future results.
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED NINE MONTHS
DECEMBER 31, ENDED
1996 SEPTEMBER 30, 1997
------------ ------------------
<S> <C> <C>
Net sales......................................... $33,484 $40,402
======= =======
</TABLE>
Historical cost data prior to the acquisition was not available, therefore
proforma net income amounts and per share amounts have not been disclosed.
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1995 1996 1997
---- ------ -------------
<S> <C> <C> <C>
Cortisporin........................................ $-- $ -- $23,694
Viroptic........................................... -- -- 5,229
Nucofed/Quibron.................................... -- 7,301 7,301
Proctocort......................................... -- -- 1,483
Thalitone.......................................... -- 832 832
Other.............................................. 60 702 702
--- ------ -------
60 8,835 39,241
Less accumulated amortization...................... (2) (132) (1,037)
--- ------ -------
$58 $8,703 $38,204
=== ====== =======
</TABLE>
Amortization expense for the years ended December 31, 1994, 1995, and 1996
and for the nine months ended September 30, 1996 and 1997 was $98, $1,076, $129,
$1, and $905, respectively.
7. LEASE OBLIGATIONS
The Company leases certain office and manufacturing equipment under
noncancelable operating leases with terms from one to five years. Estimated
future minimum lease payments, as of September 30, 1997 for leases with initial
or remaining terms in excess of one year are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998...................................................... $116
1999...................................................... 97
2000...................................................... 77
2001...................................................... 17
2002...................................................... 2
</TABLE>
F-12
<PAGE> 77
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense for the years ended December 31, 1994, 1995 and 1996, and for
the nine months ended September 30, 1996 and 1997 was approximately $131, $111,
$196, $131, and $148, respectively.
Additionally, the Company leases office space in its building to tenants
under agreements ranging from one to twenty years. Such leases are accounted for
as operating leases. Rental income for the years ended December 31, 1994, 1995
and 1996 and for the nine months ended September 30, 1996 and 1997 was
approximately $201, $87, $86, $68, and $33, respectively. As of September 30,
1997 estimated future minimum rental payments to be received are as follows:
<TABLE>
<S> <C>
1998...................................................... $ 18
1999...................................................... 18
2000...................................................... 16
2001...................................................... 16
2002...................................................... 16
Thereafter................................................ 189
</TABLE>
Capital lease obligations for certain equipment as of September 30, 1997
are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 404
1999........................................................ 385
2000........................................................ 366
2001........................................................ 332
2002........................................................ 49
------
Total minimum lease payments................................ 1,536
Less imputed interest....................................... (257)
------
Present value of minimum lease payments..................... 1,279
------
Less current maturities..................................... (295)
------
$ 984
======
</TABLE>
8. ACCRUED EXPENSES
Accrued expenses were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Payroll and outside personnel services................ $ 275 $ 346 $ 304
Returns and allowances and chargebacks................ 570 351 1,678
Accrued interest...................................... 7 110 803
Franchise taxes....................................... 52 24 47
Due to seller of Proctocort........................... -- -- 750
Incurred but not reported medical claims.............. 112 108 314
Other................................................. 82 322 131
------ ------ ------
$1,098 $1,261 $4,027
====== ====== ======
</TABLE>
F-13
<PAGE> 78
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Notes payable to former owners, due in equal annual
installments of principal and interest (at a rate
of 6%) of $1,226 through December 2003............ $ 7,611 $ 6,842 $ 6,842
Note payable to pharmaceutical company, due in 5
annual installments of principal and interest (at
a rate of 8%) of $1,378 through October 2, 2001,
collateralized by certain intangible assets....... -- 5,500 5,500
Note payable, due in semiannual installments of
$588, through December 1998, plus monthly interest
at 8%............................................. 3,525 2,350 1,763
Note payable to a bank, due in monthly installments
of $69 through May 15, 1999 with interest at a
rate of LIBOR plus 1.75%, collateralized by
accounts receivable, inventory, contract rights
and certain intangible assets..................... -- 2,014 1,389
Note payable to a bank, due in monthly installments
of $42 through April 1, 2000 with interest at a
rate of 8.25%, collateralized by various equipment
and machinery, accounts receivable, furniture and
intangibles....................................... -- -- 1,250
Note payable to a bank, due in monthly installments
of $49 through January 31, 2000 with interest at a
rate of LIBOR plus 1.75%, collateralized by the
Proctocort product line and associated rights..... -- -- 1,361
Note payable to a bank, due in monthly installments
of $49 through January 21, 2000 with interest at a
rate of LIBOR plus 1.75%, collateralized by the
Thalitone product line and associated rights...... -- -- 1,361
Note payable to a bank, due in monthly installments
of $139 through March 31, 2000 with interest at a
rate of LIBOR plus 1.75%, collateralized by the
Cortisporin product line and associated rights.... -- -- 4,167
Note payable to a bank, due in monthly installments
of $28 through August 1, 2000 with interest at a
rate of LIBOR plus 1.75%, collateralized by a
first deed of trust on a building................. -- -- 968
Note payable to a bank, due August 20, 2000 with
interest at a rate of LIBOR plus 1.75%,
collateralized by a first deed of trust on a
building.......................................... -- -- 2,975
Note payable to shareholder with quarterly interest
payments (interest rate of 10%) through January 1,
1999 with remaining principal due April 1, 1999,
collateralized by real estate of the Company...... -- -- 1,750
</TABLE>
F-14
<PAGE> 79
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Various capital leases with interest rates ranging
from 8.3% to 12.7% and maturing at various times
through 2002...................................... 320 1,237 1,279
Other notes payable................................. 196 68 73
------- ------- -------
11,652 18,011 30,678
Less current portion...................... 2,155 4,031 7,765
------- ------- -------
$ 9,497 $13,980 $22,913
======= ======= =======
</TABLE>
The notes payable to former owners are personally guaranteed by the
Company's Chairman of the Board and CEO.
During December 1995, a fixed rate term note payable of $17,500 to a
pharmaceutical company was retired in advance of maturity due to the sale of the
Anexsia product line. The gain associated with the retirement of the note
amounted to $800 ($528 net of taxes) and was recorded as an extraordinary gain
in the Consolidated Statements of Operations.
Certain financing arrangements of the Company require the Company to
maintain certain minimum net worth, debt to equity, cash flow and current ratio
requirements. As of September 30, 1997, the Company was in violation of the
current ratio requirements of certain debt instruments with balances outstanding
at September 30, 1997 of approximately $14.5 million; however, waivers have been
obtained from the appropriate lending institutions through September 30, 1998.
The aggregate maturities of long-term debt (including capital lease
obligations -- Note 7) at September 30, 1997 are as follows:
<TABLE>
<S> <C>
1998.................................... $ 7,470
1999.................................... 8,465
2000.................................... 6,752
2001.................................... 2,159
2002.................................... 2,305
Thereafter.............................. 2,248
-------
$29,399
=======
</TABLE>
10. LINE OF CREDIT AND SHORT-TERM DEBT
On April 30, 1996, the Company entered into a $3,500 revolving line of
credit facility with a bank. This line of credit was extended and increased to
$8,500 in September 1997. At September 30, 1997 $2,282 was outstanding under
this line of credit. At December 31, 1996 there were no borrowings outstanding
under this line of credit. The principal is due May 1999 and interest is payable
monthly at a rate of LIBOR plus 1.75%. Borrowings under the agreement are
limited to 85% of eligible accounts receivable and 60% of eligible inventory as
defined in the agreement. Collateral consists of accounts receivable, inventory,
and certain intangible assets.
The weighted average interest rate for this line of credit was 8.51% for
the nine months ended September 30, 1997.
During 1997, the Company entered into a financing arrangement to make
certain payments for machinery and equipment. As of September 30, 1997, the
Company had a demand note payable plus
F-15
<PAGE> 80
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest at prime plus .33% with $1,325 outstanding. The Company intends to
refinance this obligation under an operating lease (Note 14).
11. FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair values of financial
instruments are made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments." The estimated fair value amounts have been determined by
the Company using available market information and appropriate valuation
methodologies.
Cash and Cash Equivalents, Accounts Receivable and Accounts Payable -- The
carrying amounts of these items are a reasonable estimate of their fair values.
Long-Term Debt, Line of Credit and Short-Term Debt -- The carrying amounts
of the Company's line of credit and short-term debt approximates fair value. The
fair value of the Company's long-term debt including the current portion at
December 31, 1995 and 1996 and September 30, 1997 is estimated to be
approximately $11.1 million, $17.6 million and $30.6 million, respectively using
discounted cash flow analyses and based on the Company's incremental borrowing
rates for similar types of borrowing arrangements.
12. INCOME TAXES
The net income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
---------------------- ---------------------
1994 1995 1996 1996 1997
----- ------ ----- ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current................................ $ 128 $2,865 $(635) $(763) $3,332
Deferred............................... (629) 2,193 528 447 (492)
----- ------ ----- ----- ------
Total (benefit) expense...... $(501) $5,058 $(107) $(316) $2,840
===== ====== ===== ===== ======
</TABLE>
A reconciliation of the difference between the federal statutory tax rate
and the effective income tax rate as a percentage of income (loss) before income
taxes and extraordinary item is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------- ---------------------
1994 1995 1996 1996 1997
------- ------ ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal statutory tax rate..... (34.0)% 35.0% (34.0)% (34.0)% 34.0%
State income taxes, net of
federal benefit.............. 4.0 3.3 -- -- 4.0
Permanent differences.......... 1.0 (1.3) 2.3 .4 .6
Decrease in valuation
allowance.................... (89.3) -- -- -- --
Other.......................... (1.7) (1.9) .9 2.6 (.2)
------- ------ ------ ------ ------
Effective tax rate............. (120.0)% 35.1% (30.8)% (31.0)% 38.4%
======= ====== ====== ====== ======
</TABLE>
F-16
<PAGE> 81
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Allowance for doubtful accounts................. $ 35 $ 35 $ 35
Uniform cost capitalization..................... -- -- 36
Accrued expenses................................ 79 225 1,108
Intangible assets............................... 1,350 -- --
State net operating loss carryforward........... 65 261 431
------- ------- -------
Total deferred tax assets............. 1,529 521 1,610
------- ------- -------
Property, plant and equipment................... (4,023) (2,997) (3,825)
Miscellaneous................................... (78) (495) (264)
------- ------- -------
Total deferred tax liabilities........ (4,101) (3,492) (4,089)
------- ------- -------
Net deferred tax liability............ $(2,572) $(2,971) $(2,479)
======= ======= =======
</TABLE>
The Company's state net operating loss carryforward of approximately $13.0
million expires in 2011. Management has determined, based on both their ability
to carryback earnings to prior years and existing deferred tax liabilities, it
is more likely than not that the deferred tax assets will be realizable and no
valuation allowance has been recorded.
13. BENEFIT PLANS
The Company maintains a defined contribution employee benefit plan which
covers all employees over 21 years of age. The plan allows for employees' salary
deferrals, which are matched by the Company up to a specific amount under
provisions of the plan. The plan also provides for discretionary profit-sharing
contributions by the Company. Company contributions during the years ended
December 31, 1994, 1995 and 1996 and for the nine months ended September 30,
1996 and 1997 were $92, $197, $278, $197, and $155, respectively.
From January 1996 through October 1996, in connection with the Company's
Employee Stock Purchase Plan adopted in January 1996, the Company offered
275,000 and sold 259,532 common shares to employees of the Company. The selling
price was $3 per share. The Plan was terminated in October 1996.
14. COMMITMENTS
As of September 30, 1997 the Company has entered into a firm commitment to
obtain financing for capital expenditures under an operating lease of
approximately $3,500 for machinery and equipment.
15. RELATED PARTY TRANSACTIONS
AFFILIATED COMPANY
The Company owned a 6% interest in a privately held, affiliated
pharmaceutical company. In 1996, the Company sold its investment for $2,052,
resulting in a gain of $1,760. The Company's share of earnings in this
affiliated company was not material and was included in other income in the
consolidated statement of operations.
In connection with the Company's initial acquisition in 1993, 10,000 shares
of Preferred 8% Cumulative Stock were issued to the affiliated company for $100.
The shares were redeemed by the Company at the issue price during 1995.
F-17
<PAGE> 82
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THE UNITED COMPANY
In connection with its purchase of Cortisporin in 1997, the Company
received $8,750 from The United Company for 3,047,355 common shares. The common
share purchase agreement states that if the Company has not effected a public
offering by April 1, 1999 or has not achieved certain forecasted results, The
United Company can redeem the shares at an aggregate redemption price of $8,750
plus 10% interest per year from the date of the issuance of the shares or an
equivalent amount of convertible debt.
OTHER
Certain management and employees of the Company sit on the board of
directors of a private foundation. The Company made contributions to this
foundation and expensed approximately $52, $417, $245, $233, and $108 for the
years ended December 31, 1994, 1995 and 1996 and the nine months ended September
30, 1996 and 1997, respectively. At December 31, 1995 and 1996 and September 30,
1997, the Company had receivables from this foundation of approximately $678,
$677, and $1,139, respectively, for advances made by the Company on their
behalf. The receivables are collateralized by common shares of the Company held
by the foundation and are included in shareholders' equity.
On October 1, 1997 the Company appointed a new member to its' Board of
Directors. For the nine months ended September 30, 1997, the Company paid $743
and $58 to this director's company for assistance in raising capital for the
Cortisporin product line acquisition and consulting services, respectively.
In 1996, the Company issued 699,711 common shares which were financed by
notes receivable of approximately $2,100 from shareholders and members of
management. At December 31, 1996, the Company had notes receivable outstanding
of $2,093. As of August 5, 1997 these notes were paid in full.
The Company paid a certain shareholder $180 and $160 for consulting fees
during the years ended December 31, 1995 and 1996, respectively.
During 1995, the Company paid $70 to the members of its Board of Directors.
In December 1994, a shareholder of the Company contributed $800 of cash in
exchange for 40,000 shares of Series B Preferred Stock. The Series B Preferred
Stock was converted into 400,000 common shares during 1995.
16. STOCK DIVIDEND
The Company paid a 15% stock dividend on all common shares issued and
outstanding as of November 1, 1996. Common shares of 906,883 were distributed.
The dividend was charged to retained earnings in the amount of $2,585, which was
based on a recent common share purchase price of $3 per share. The weighted
average shares and all per share amounts included in the accompanying
consolidated financial statements and notes are based on the increased number of
shares giving retroactive effect to the stock dividend.
17. SUBSEQUENT EVENTS
Initial Public Offering: The Company has filed a Registration Statement
with the Securities and Exchange Commission for an initial public offering (the
"Offering") of 6,000,000 common shares. The Company's Offering is scheduled for
closing on or before December 15, 1997.
The following matters were voted upon and became effective at the Company's
Annual Meeting of the Shareholders on November 14, 1997.
- The authorization of a new class of preferred shares, with preference
terms and rights to be determined by the Board of Directors.
F-18
<PAGE> 83
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- An amendment to the Company's Articles of Incorporation to increase the
number of authorized common shares from 10 million shares of no par value
to 150 million shares of no par value.
- A stock split of 2.8 common shares for each share of the Company's common
shares outstanding. The stock split has been reflected in the average
shares outstanding, shares outstanding and income (loss) per share amounts
in the balance sheets, statements of operations and changes in
shareholders' equity. All other per share information included in the
footnotes do not reflect the affect of the stock split.
- A dividend of one preferred share purchase right (a "Right") for each
common share outstanding. Such rights entitle the registered holder under
certain circumstances to purchase from the Company one-thousandth of a
share of a newly created series of the Company's preferred shares, at a
price of $60 per one-thousandth shares of Preferred Stock, subject to
adjustment.
- A stock-option plan (the "Plan") for employees of the Company. The
aggregate number of shares which may be issued under the Plan shall not
exceed 3,500,000. The vesting of incentive stock options and nonqualified
stock options will be determined by the Board on an individual basis. The
Company plans to account for stock option grants to employees under the
intrinsic method, which does not result in compensation expense when the
option price is equal to the fair value of the shares at the date of
grant.
Product Acquisitions: On November 14, 1997, the Company acquired the
rights, titles and interest to the Septra(R), Proloprim(R), Mantadil(R)and
Kemadrin(R) product lines, as well as, the exclusive licenses, free of royalty
obligations, to manufacture and market the prescription formulations of
Neosporin and Polysporin for $23,000. The entire purchase price was allocated to
intangible assets and will be amortized over its estimated useful life of 25
years.
On October 31, 1997, the Company entered into a preliminary non-binding
letter of intent with Warner-Lambert for the acquisition of additional branded
product lines, a manufacturing facility and contracts for manufacturing for
third parties. Although the Company has offered $125.0 million for these
products and other assets and Warner-Lambert has indicated that it is willing to
finance up to $35.0 million of the purchase price, the Company has not completed
due diligence and any purchase price will be subject to the results of the
Company's due diligence process. In addition to due diligence, the proposed
transaction is subject to numerous conditions and contingencies, including
internal approvals of both the Company and Warner-Lambert, receipt of regulatory
approvals, resolution of legal and equitable matters relating to employees,
supply and service agreements and intellectual property rights and preparation
and negotiation of documentation.
The following unaudited pro forma summary presents net sales information as
if the above acquisition and non-binding letter of intent and the acquisitions
in Note 6 had occurred on January 1, 1996. These pro forma results have been
prepared for comparative purposes and do not purport to be indicative of what
would have occurred had the acquisitions been made on January 1, 1996, nor are
they indicative of future results.
<TABLE>
<CAPTION>
FOR THE YEAR NINE MONTHS
ENDED ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Net Sales................................................... $135,152 $94,465
======== =======
</TABLE>
On November 26, 1997, the Company entered into a $12 million Senior Secured
Revolving Credit Facility ("Revolver") and a $40 million Senior Secured Term
Loan ("Term Loan"), collectively referred to as the "Financing." The Financing
includes a five-year revolving line of credit and term
F-19
<PAGE> 84
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
loan with customary covenants and with a floating interest rate based on either
LIBOR, the prime rate, or the fed funds, rate plus an applicable margin selected
at the discretion of the Company. The borrowings under the Revolver are limited
to predetermined levels of trade accounts receivable and inventories. The
Financing is collateralized by all existing and after acquired tangible and
intangible assets of the Company. The Company used this Financing to finance the
November 14, 1997 acquisition and pay off approximately $19.0 million of
long-term debt which had been outstanding at September 30, 1997.
Litigation: On October 16, 1997, the Company was named one of many
co-defendants in a purported class action filed in the Superior Court of the
State of Washington in connection with the manufacture of phentermine, an
anorexigenic, under contract for a large pharmaceutical company and its use in
combination with other drugs. The suit does not demand monetary damages but
seeks court-supervised, defendent-funded, medical monitoring to detect the
existence of cardiac valvular disease, alleged to have arisen from the ingestion
of the combination of drugs by residents of the State of Washington. While the
Company cannot predict the outcome of this suit, the Company believes that the
claims against it are without merit and intends to vigorously pursue all
available defenses. In the opinion of management, the Company is being
indemnified by the large pharmaceutical company for which it manufactures such
product, provided that neither the lawsuit nor the associated liabilities are
based upon the independent negligence or intentional acts of the Company, and
intends to submit a claim for all unreimbursed costs to its product liability
insurance carrier. The Company does not believe that this claim will materially
affect the Company's operations or financial position.
F-20
<PAGE> 85
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Glaxo Wellcome, Inc. and King Pharmaceuticals, Inc.:
We have audited the accompanying Statement of Gross Profit of the
Cortisporin Product Line of Glaxo Wellcome Inc. ("Glaxo Wellcome") for the years
ended December 31, 1995 and 1996. The Statement of Gross Profit is the
responsibility of Glaxo Wellcome management. Our responsibility is to express an
opinion on this special purpose statement 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 Statement of Gross Profit is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Statement of Gross Profit. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the Statement of Gross Profit. We believe that our audit provides a reasonable
basis for our opinion.
The operations covered by the Statement of Gross Profit referred to above
have no separate legal status or existence. The accompanying statement was
prepared as described in Note 1 to present the Cortisporin Product Line and is
not intended to be a complete presentation of the Cortisporin Product Line.
Accordingly, the resulting statement is not necessarily indicative of the costs
and expenses that would have resulted if the Cortisporin Product Lines had been
operated as a separate entity.
In our opinion, the statement referred to above presents fairly, in all
material respects, the Statement of Gross Profit of the Cortisporin Product Line
for the years ended December 31, 1995 and 1996 in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Greensboro, North Carolina
October 20, 1997
F-21
<PAGE> 86
CORTISPORIN PRODUCT LINE
STATEMENT OF GROSS PROFIT
(NOTE 1)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net sales................................................... $14,083 $11,562
Cost of sales............................................... 2,376 1,445
------- -------
Gross profit...................................... $11,707 $10,117
======= =======
</TABLE>
The accompanying notes are an integral part of
the Statement of Gross Profit
F-22
<PAGE> 87
CORTISPORIN PRODUCT LINE
NOTES TO THE FINANCIAL STATEMENT
1. OWNERSHIP/BASIS OF PRESENTATION
The Cortisporin Product Line includes all rights, title and interest of
seven products within the United States. Effective March 21, 1997 Glaxo Wellcome
Inc. ("Glaxo Wellcome") sold the rights, title and interest of this Product Line
to Monarch Pharmaceuticals, Inc. ("Monarch"), a subsidiary of King
Pharmaceuticals Inc. Glaxo Wellcome continued to manufacture these products
until July 1997, at which point the facility was sold and Monarch was able to
negotiate an agreement with the buyer for which Monarch is charged an agreed
upon contractual amount.
Historically, financial statements were not prepared for the Cortisporin
Product Lines. These statements have been developed from the historical
accounting records of Glaxo Wellcome. All of estimates in the financial
statements, as described in Note 2, are based on the assumptions that Glaxo
Wellcome management believes are reasonable. However, these estimates are not
necessarily indicative of the net sales and costs that would have resulted if
the Cortisporin Product Line had been operated as a separate entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INCOME RECOGNITION
Sales and related cost of sales are included in income when goods are
shipped to the customer.
NET SALES
Net sales include the sales price, net of allowances specifically
identified by product, less an allocation of Glaxo Wellcome's returns and
chargebacks and other miscellaneous sales adjustments based on sales of the
Cortisporin Product Line to total sales of Glaxo Wellcome.
COST OF GOODS SOLD
Elements in cost of sales include raw materials, direct labor and plant
overhead. Certain of these costs are specifically identifiable to specific
brands, and the remaining costs are allocated based on sales for business
relative to total sales for Glaxo Wellcome.
Inventory from period to period was determined using the first-in,
first-out (FIFO) method of valuation.
Depreciation of plant facilities is computed using the straight-line method
based on estimated useful lives ranging from 5 to 40 years.
3. SIGNIFICANT CUSTOMER
The Cortisporin Product Line had net sales to four customers representing
approximately 18%, 16%, 11% and 10% of net sales for the year ended December 31,
1996. The Cortisporin Product Line had net sales to three customers representing
approximately 22%, 20% and 14% of net sales for the year ended December 31,
1995.
4. ESTIMATES
The preparation of the financial statement of Gross Profit in conformity
with generally accepted accounting principles require management to make
estimates and assumptions that affect certain reported amounts of gross profit
for the years ended December 31, 1995 and 1996. Actual results could differ from
those estimates.
F-23
<PAGE> 88
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Glaxo Wellcome, Inc. and King Pharmaceuticals, Inc.
We have audited the accompanying Combined Statement of Gross Profit for the
Neosporin, Polysporin, Septra, Proloprim, Mantadil and Kemadrin Product Lines
(the "Product Lines") of Glaxo Wellcome, Inc. ("Glaxo Wellcome") for the years
ended December 31, 1995 and 1996. The Combined Statement of Gross Profit is the
responsibility of Glaxo Wellcome management. Our responsibility is to express an
opinion on this special purpose statement 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 Combined Statement of Gross Profit is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the Combined Statement of
Gross Profit. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the Combined Statement of Gross Profit. We believe that our
audit provides a reasonable basis for our opinion.
The operations covered by the Combined Statement of Gross Profit referred
to above have no separate legal status or existence. The accompanying statement
was prepared as described in Note 1 to present the Product Lines and is not
intended to be a complete presentation of the Product Lines. Accordingly, the
resulting statement is not necessarily indicative of the costs and expenses that
would have resulted if the Product Lines had been operated as a separate entity.
In our opinion, the statement referred to above presents fairly, in all
material respects, the Combined Statement of Gross Profit for the Product Lines
for the years ended December 31, 1995 and 1996 in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Greensboro, North Carolina
November 17, 1997
F-24
<PAGE> 89
NEOSPORIN, POLYSPORIN, SEPTRA, PROLOPRIM, MANTADIL,
AND KEMADRIN PRODUCT LINES
COMBINED STATEMENT OF GROSS PROFIT
(NOTE 1)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net sales................................................... $18,562 $12,440
Cost of sales............................................... 3,665 2,030
------- -------
Gross profit...................................... $14,897 $10,410
======= =======
</TABLE>
The accompanying notes are an integral part of the Combined Statement of Gross
Profit
F-25
<PAGE> 90
NEOSPORIN, POLYSPORIN, SEPTRA, PROLOPRIM, MANTADIL,
AND KEMADRIN PRODUCT LINES
NOTES TO THE COMBINED FINANCIAL STATEMENT
1. OWNERSHIP/BASIS OF PRESENTATION:
The Neosporin, Polysporin, Septra, Proloprim, Mantadil and Kemadrin Product
Lines (the "Product Lines") include all rights, title and interest of six
product lines within the United States. Effective November 14, 1997 Glaxo
Wellcome, Inc. ("Glaxo Wellcome") sold the rights, title and interest of these
Product Lines to Monarch Pharmaceuticals, Inc. ("Monarch"), a subsidiary of King
Pharmaceuticals, Inc. Glaxo Wellcome has agreed to continue its current
manufacturing agreement with an outside company until December 31, 1998 or until
current orders expire and charge Monarch for the manufacturing.
Historically, financial statements were not prepared for the Product Lines.
This statement has been developed from the historical accounting records of
Glaxo Wellcome. All of the estimates in the combined financial statement, as
described in Note 2, are based on the assumptions that Glaxo Wellcome management
believes are reasonable. However, these estimates are not necessarily indicative
of the net sales and costs that would have resulted if the Product Lines had
been operated as a separate entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Income Recognition -- Sales and related cost of sales are included in
income when goods are shipped to the customer.
Net Sales -- Net sales include the sales price, net of allowances
specifically identified by product, less an allocation of Glaxo Wellcome's
returns and chargebacks and other miscellaneous sales adjustments are based on
sales of the Product Lines to total sales of Glaxo Wellcome.
Cost of Goods Sold -- Elements in cost of sales include raw materials,
direct labor and plant overhead. Certain of these costs are specifically
identifiable to specific brands, and the remaining costs are allocated based on
sales of the Product Lines to total sales of Glaxo Wellcome.
Inventory from period to period was determined using the first-in,
first-out (FIFO) method of valuation.
Depreciation of plant facilities is computed using the straight-line method
based on estimated useful lives ranging from 5 to 40 years.
3. SIGNIFICANT CUSTOMER:
Net sales to four customers represented approximately 18%, 16%, 12% and 11%
of net sales for the year ended December 31, 1996. Net sales to three customers
represented approximately 21%, 17% and 12% of net sales for the year ended
December 31, 1995.
4. ESTIMATES:
The preparation of the combined financial statement of Gross Profit in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect certain reported amounts of gross
profit for the year ended December 31, 1995 and 1996. Actual results could
differ from those estimates.
F-26
<PAGE> 91
REPORT OF INDEPENDENT ACCOUNTANTS
ON SPECIAL PURPOSE FINANCIAL STATEMENTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF WARNER-LAMBERT COMPANY
We have audited the accompanying Statement of Fixed Assets of
Warner-Lambert Company's Sterile Products Operations ("Sterile Products
Operations") as of September 30, 1997 and December 31, 1996 and the Statement of
Gross Profit of Sterile Products Operations for the nine months ended September
30, 1997 and the years ended December 31, 1996 and 1995. These statements are
the responsibility of Warner-Lambert Company management. Our responsibility is
to express an opinion on these statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Statement of Fixed Assets and Statement
of Gross Profit are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
Statement of Fixed Assets and Statement of Gross Profit. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the Statement of
Fixed Assets and Statement of Gross Profit. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying Statement of Fixed Assets and Statement of Gross Profit
reflect certain assets and gross profit attributable to the Sterile Products
Operations of Warner-Lambert Company as described in Note 1 and are not intended
to be a complete presentation of the assets or revenues and expenses of
Warner-Lambert Company's Sterile Product Operations.
In our opinion, the Statements referred to above present fairly, in all
material respects, the fixed assets as of September 30, 1997 and December 31,
1996 and gross profit for the nine months ended September 30, 1997 and the years
ended December 31, 1996 and 1995 of Sterile Products Operations, in conformity
with generally accepted accounting principles.
As explained in Note 1 to the financial statements, Warner-Lambert Company
signed a letter of intent on October 31, 1997 to sell Sterile Products
Operations.
/s/ Price Waterhouse LLP
Morristown, New Jersey
November 26, 1997
F-27
<PAGE> 92
WARNER-LAMBERT COMPANY'S STERILE PRODUCTS OPERATIONS
STATEMENT OF FIXED ASSETS (IN 000'S)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Buildings (including land of $8)............................ $38,158 $39,500
Machinery, furniture and fixtures........................... 43,274 48,608
Construction in progress.................................... 15,606 10,402
------- -------
97,038 98,510
Less accumulated depreciation............................... (46,118) (48,812)
------- -------
Property, plant and equipment, net.......................... $50,920 $49,698
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 93
WARNER-LAMBERT COMPANY'S STERILE PRODUCTS OPERATIONS
STATEMENT OF GROSS PROFIT (IN 000'S)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Gross Sales............................................ $120,554 $120,351 $67,610
Sales Deductions....................................... 30,765 29,658 20,110
-------- -------- -------
Net Sales.............................................. 89,789 90,693 47,500
Cost of goods sold..................................... 52,908 52,181 36,863
-------- -------- -------
Gross profit........................................... $ 36,881 $ 38,512 $10,637
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 94
WARNER-LAMBERT COMPANY'S STERILE PRODUCTS OPERATIONS
NOTES TO FINANCIAL STATEMENTS (IN 000'S)
NOTE 1 -- DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Warner-Lambert Company's Sterile Products Operations ("Sterile Products")
manufactures, sells and distributes certain sterile pharmaceutical products in
the U.S., primarily to large national wholesalers and retailers. Sterile
Products includes all rights, title and interest in the U.S. to 15 branded
product lines defined in the preliminary non-binding letter of intent discussed
below, a manufacturing facility in Rochester, Michigan and contracts for
manufacturing for third parties.
Historically, financial statements were not prepared for Sterile Products.
These special purpose statements have been developed from the historical
accounting records of Warner-Lambert Company (W-L). These statements may not
necessarily reflect the property, plant and equipment balances and net sales and
related costs that would have resulted had Sterile Products operated as an
independent entity for the periods presented.
On October 31, 1997, W-L signed a preliminary non-binding letter of intent
to sell to King Pharmaceuticals, Inc. the rights, title and interest of the
products in Sterile Products, the manufacturing facility in Rochester, Michigan,
and the contracts for manufacturing for third parties.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue is recognized upon shipment of product to the customer except in
limited instances where Sterile Products contract manufactures for third parties
and bills the customer upon completion of finished goods while awaiting shipping
instructions from the customer. Sterile Products warrants products against
defects and for specific quality standards, permitting the return of products
under certain circumstances.
Sales Deductions
Sales deductions are estimated and recognized at the time the applicable
sale is recognized. These deductions are comprised of sales returns and
allowances, customer rebates and cash discounts as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, NINE MONTHS ENDED
------------------ SEPTEMBER 30,
1995 1996 1997
------- ------- -----------------
<S> <C> <C> <C>
Sales Returns and Allowances....................... $14,141 $12,602 $ 6,974
Customer Rebates................................... 14,775 15,345 12,032
Cash Discounts..................................... 1,849 1,711 1,104
------- ------- -------
Total Sales Deductions............................. $30,765 $29,658 $20,110
======= ======= =======
</TABLE>
Cost of Goods Sold
Elements in cost of goods sold include raw materials, direct labor and
plant overhead.
Inventory from period to period is determined principally on the first-in,
first-out basis.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of
F-30
<PAGE> 95
WARNER-LAMBERT COMPANY'S STERILE PRODUCTS OPERATIONS
NOTES TO FINANCIAL STATEMENTS (IN 000'S) -- (CONTINUED)
revenues and expenses. Sterile Products' actual results in subsequent periods
may differ from the estimates and assumptions used in the preparation of the
accompanying financial statements.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, less accumulated
depreciation. The cost of maintenance, repairs, minor renewals and betterments
and minor equipment items is charged to income, the cost of major renewals and
betterments is capitalized. Depreciation is calculated on the straight-line
method over the estimated useful lives of the following classes of assets:
<TABLE>
<CAPTION>
<S> <C>
Buildings and improvements................................ 10 to 40 years
Machinery, furniture and fixtures......................... 5 to 15 years
</TABLE>
Depreciation expense totaled $3,307, $3,714 and $3,500 for the nine months
ended September 30, 1997 and the years ended December 31, 1996 and 1995,
respectively. Because Sterile Products does not have borrowings and there is no
allocation of W-L debt to Sterile Products' operations, no interest costs have
been capitalized by Sterile Products with respect to construction in progress.
NOTE 3 -- SIGNIFICANT CONCENTRATIONS
Purchases
All purchases are based on competitive bidding and there are a number of
alternative suppliers. Purchases from three suppliers accounted for
approximately 60% of inventory purchases for each of the periods presented.
Significant Products
For the nine months ended September 30, 1997 three products accounted for
approximately 18%, 17% and 11% of total sales, respectively. One product, which
had significant sales in 1996 and 1995, was not sold in 1997. As a result of
this product being discontinued, cost of goods sold in 1997 included $5,486 of
unabsorbed overhead and $4,266 of obsolete inventory.
For the years ended December 31, 1996 and 1995, one product accounted for
16% and 19% of sales, respectively and another product accounted for 19% and 22%
of sales, respectively.
Significant Customers
Sterile Products operates in one industry segment (the manufacture and
distribution of sterile pharmaceutical products) and sells products primarily to
pharmaceutical wholesalers. Sterile Products had sales to three customers each
representing approximately 17%, 14% and 12% of sales for the nine months ended
September 30, 1997. Sterile Products had sales to two customers representing
approximately 12% and 11% of sales in 1996 and each representing 11% of sales in
1995.
NOTE 4 -- VOLUNTARY SEVERANCE PROGRAM
In April 1997, Sterile Products offered voluntary severance to its
employees to reduce headcount. Based on the number of employees electing the
severance, Sterile Products recorded a charge of $2,484. This charge is not
included in the Statement of Gross Profit.
F-31
<PAGE> 96
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following Pro Forma Financial Statements of Operations for the year
ended December 31, 1996 and for the nine months ended September 30, 1997 have
been prepared to give effect to the Cortisporin Acquisition, the Glaxo
Acquisition and the Sterile Products Acquisition, collectively referred to as
the 1997 Acquisitions ("1997 Acquisitions") as if the 1997 Acquisitions had
occurred on January 1, 1996. The pro forma balance sheet as of September 30,
1997 gives effect to the 1997 Acquisitions and the net proceeds from the sale of
6,000,000 shares of common stock at an assumed initial public offering price of
$18.00 per share.
The pro forma adjustments are based upon available information and certain
assumptions that the Company believes are reasonable in the circumstances. Pro
forma adjustments are applied to the historical financial statements of the
Company and the 1997 Acquisitions. The 1997 Acquisitions were accounted for
under the purchase method of accounting. The Company's allocation of purchase
price was based upon the estimated fair value of assets acquired and liabilities
assumed in accordance with Accounting Principles Board Opinion No. 16.
The Pro Forma Financial Statements should be read in conjunction with the
Company's historical Consolidated Financial Statements and related Notes
thereto, Management's Discussion and Analysis of Financial Condition and Results
of Operations and other Financial information included elsewhere in this
Prospectus. The Pro Forma Financial Statements and related notes are provided
for information purposes only and do not purport to be indicative of the results
which would have actually been obtained had the 1997 Acquisitions been completed
on the dates indicated or which may be expected to occur in the future.
F-32
<PAGE> 97
KING PHARMACEUTICALS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
STERILE
CORTISPORIN PRODUCTS
ACQUISITION GLAXO ACQUISITION
THE COMPANY FOR THE FISCAL ACQUISITION FOR THE FOR THE FISCAL
FOR THE YEAR ENDED YEAR ENDED FISCAL YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, PRO FORMA
1996 1996 1996 1996 ADJUSTMENTS PRO FORMA
------------------ -------------- --------------------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:
Total revenues, net.. $ 20,457 $11,562 $12,440 $90,693 $ -- $ 135,152
Cost of sales........ 8,782 1,445 2,030 52,181(1) -- 64,438
---------- ------- ------- ------- -------- ----------
Gross profit..... 11,675 10,117 10,410 38,512 -- 70,714
Selling, general and
administrative..... 12,106 -- -- -- 9,633(2) 21,739
Depreciation and
amortization....... 982 -- -- -- 7,361(3) 8,343
---------- ------- ------- ------- -------- ----------
Operating income
(loss)............. (1,413) 10,117 10,410 38,512 (16,994) 40,632
Gain on sale of
investment in
affiliate.......... 1,760 -- -- -- -- 1,760
OTHER (EXPENSES)
INCOME:
Interest expense..... (1,272) -- -- -- (6,077)(4) (7,349)
Other income, net.... 578 -- -- -- -- 578
---------- ------- ------- ------- -------- ----------
Income (loss) before
income taxes....... (347) 10,117 10,410 38,512 (23,071) 35,621
Income tax (benefit)
expense............ (107) -- -- -- 14,387(6) 14,280
---------- ------- ------- ------- -------- ----------
Net income (loss).... $ (240) $10,117 $10,410 $38,512 $(37,458) $ 21,341
========== ======= ======= ======= ======== ==========
Net income (loss) per
common and common
stock
equivalents........ $ (0.02) $ 0.76
========== ==========
Weighted average
number of common
and common stock
equivalents........ 13,630,813 28,163,407
========== ==========
</TABLE>
See Notes to Pro Forma Consolidated Statement of Operations
F-33
<PAGE> 98
KING PHARMACEUTICALS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
STERILE
PRODUCTS
THE COMPANY CORTISPORIN GLAXO ACQUISITION
FOR THE NINE ACQUISITION ACQUISITION FOR THE FOR THE NINE
MONTHS ENDED JANUARY 1, 1997 NINE MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, THROUGH SEPTEMBER 30, SEPTEMBER 30, PRO FORMA
1997 MARCH 20, 1997 1997 1997 ADJUSTMENTS PRO FORMA
------------- --------------- ------------------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues, net........ $ 33,817 $4,262 $ 8,886 $47,500 $ -- $ 94,465
Cost of sales.............. 9,538 1,699 1,829 36,863(1) -- 49,929
---------- ------ ------- ------- -------- ----------
Gross profit........... 24,279 2,563 7,057 10,637 -- 44,536
Selling, general and
administrative........... 13,734 -- -- -- 1,922(2) 15,656
Depreciation and
amortization............. 1,631 -- -- -- 5,047(3) 6,678
---------- ------ ------- ------- -------- ----------
Operating income (loss).... 8,914 2,563 7,057 10,637 (6,969) 22,202
OTHER (EXPENSES) INCOME:
Interest expense........... (1,730) -- -- -- (3,995)(4) (5,725)
Other income, net.......... 211 -- -- -- -- 211
---------- ------ ------- ------- -------- ----------
Income (loss) before income
taxes.................... 7,395 2,563 7,057 10,637 (10,964) 16,688
Income tax (benefit)
expense.................. 2,840 -- -- -- 3,717(6) 6,557
---------- ------ ------- ------- -------- ----------
Net income (loss).......... $ 4,555 $2,563 $ 7,057 $10,637 $(14,681) $ 10,131
========== ====== ======= ======= ======== ==========
Net income per common and
common stock
equivalents.............. $ 0.18 $ 0.30
========== ==========
Weighted average number of
common and common stock
equivalents.............. 25,655,881 34,000,000
========== ==========
</TABLE>
See Notes to Pro Forma Consolidated Statement of Operations
F-34
<PAGE> 99
KING PHARMACEUTICALS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
STERILE
PRODUCTS
THE COMPANY GLAXO ACQUISITION ACQUISITION
AS OF AS OF AS OF
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, PRO FORMA
1997 1997 1997 ADJUSTMENTS PRO FORMA
------------- ------------------ ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...... $ 35 $ -- $(90,000) $95,102(5) $ 5,137
Accounts receivable............ 7,393 -- -- -- 7,393
Inventories(9)................. 8,622 -- -- 8,622
Deferred income taxes.......... 1,135 -- -- -- 1,135
Prepaid expenses and other
assets....................... 533 -- -- -- 533
------- ------- -------- ------- --------
Total current assets..... 17,718 -- (90,000) 95,102 22,820
------- ------- -------- ------- --------
Property, plant and equipment,
net............................ 17,006 -- 79,246(8) -- 96,252
Intangible assets, net........... 38,204 23,000(7) 45,754(8) -- 106,958
Other assets..................... 1,325 -- -- -- 1,325
------- ------- -------- ------- --------
Total assets............. $74,253 $23,000 $ 35,000 $95,102 $227,355
======= ======= ======== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt................ $ 1,325 $ -- $ -- $ -- $ 1,325
Current portion of long-term
debt......................... 7,765 -- -- (1,175)(5) 6,590
Accounts payable............... 3,503 -- -- -- 3,503
Accrued expenses............... 4,027 -- -- -- 4,027
Income taxes payable........... 1,015 -- -- -- 1,015
------- ------- -------- ------- --------
Total current
liabilities............ 17,635 -- -- (1,175) 16,460
------- ------- -------- ------- --------
Line-of Credit................... 2,282 2,000 -- -- 4,282
Long-term debt................... 22,913 21,000 35,000 (2,338)(5) 76,575
Deferred income taxes............ 3,614 -- -- -- 3,614
------- ------- -------- ------- --------
Total liabilities........ 46,444 23,000 35,000 (3,513) 100,931
------- ------- -------- ------- --------
Commitments
Shareholders' equity:
Common stock, no par value,
150,000,000 shares
authorized, 12,320,000
19,467,406 and 28,000,000
shares issued and
outstanding, respectively.... 16,455 -- -- 98,615(5) 115,070
Retained earnings.............. 12,493 -- -- -- 12,493
Due from related party......... (1,139) -- -- -- (1,139)
------- ------- -------- ------- --------
Total shareholders'
equity................. 27,809 -- -- 98,615 126,424
------- ------- -------- ------- --------
Total liabilities and
shareholders' equity... $74,253 $23,000 $ 35,000 $95,102 $227,355
======= ======= ======== ======= ========
</TABLE>
F-35
<PAGE> 100
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) The products that the Company is considering acquiring from
Warner-Lambert are branded prescription pharmaceutical products consisting
primarily of biological products used to elicit immune responses and
anti-infective products. Three of these products accounted for 46% of the total
sales of the Warner-Lambert Products, and one product, which had net sales of
approximately $20.0 million in each of 1995 and 1996, was not sold in 1997. This
product currently is subject to further FDA review and approval, and there can
be no assurance that it will be produced or sold in 1998 or at any time in the
future. As a result of this product being discontinued, until further FDA
review, cost of goods sold in 1997 included approximately $5.5 million of
unabsorbed overhead and approximately $4.3 million of obsolete inventory. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business -- Strategy" and "Business -- Products and Product
Development."
(2) The special purpose historical financial statements for the 1997
Acquisitions did not directly include allocations of selling, general and
administrative expenses, including distribution costs. Accordingly, such
historical expenses are not reflected in the pro forma statements of operations.
For purposes of the pro forma statements, additional selling, general and
administrative expenses that would have been incurred as a result of the 1997
Acquisitions were estimated by the Company to be approximately $9.6 million and
$1.9 million for the year ended December 31, 1996 and the nine month period
ended September 30, 1997, respectively. Subsequent to the Cortisporin
acquisition and in anticipation of further product acquisitions, the Company
established a sales force and distribution system to support the 1997 product
line acquisitions, including the Sterile Products and Glaxo acquisition. The
1997 and 1996 pro forma adjustments reflect the costs of this additional support
structure as of the beginning of the year. In addition, the Company estimated
incremental costs for information systems, insurance, bad debt, sampling and
administrative personnel.
(3) Includes amortization of intangible assets over 25 years and
depreciation of fixed assets over a period of 5 to 40 years, resulting from the
1997 Acquisitions.
(4) Assumes the additional interest costs on approximately $72 million of
additional indebtedness, incurred related to the 1997 Acquisitions at interest
rates ranging from 7.25% to 10.0%. The Company has recognized interest based on
committed rates received in the open market.
(5) Reflects the sale of 6,000,000 shares of Common Stock at the assumed
public offering price of $18.00 per share and the application of the estimated
net proceeds of such sale (after deducting the underwriting discounts and
estimated offering expenses payable by the Company).
(6) Adjustment to reflect a 40% effective tax rate applied to the
incremental pro forma income before income taxes. A reconciliation of the
statutory tax rate to the assumed pro forma tax rate is provided below:
<TABLE>
<S> <C>
Federal statutory rate...................................... 35.0%
State taxes, net of federal benefit......................... 4.0
Other....................................................... 1.0
----
40.0%
====
</TABLE>
(7) The purchase price of the Glaxo Acquisition of $23.0 million was
allocated to intangible assets and amortized over 25 years since no tangible
assets were purchased.
(8) The purchase price of the Sterile Products Acquisition of $125.0
million was allocated to property, plant and equipment ($79.2 million) based on
preliminary appraisal studies and intangible assets ($45.8 million) and
depreciated/amortized over a period of 5 to 40 years and 25 years, respectively.
(9) In addition to the Sterile Products Acquisition described in (8) above,
the letter of intent provides that the Company has a right to purchase
inventory, the terms and conditions of which are subject to further negotiation.
These amounts are not estimable by management and therefore have been excluded
from the pro formas.
F-36
<PAGE> 101
Photo inside back cover top center: pharmaceutical laboratory with lab
technicians performing various functions.
AN EXPERIENCED PRODUCT DEVELOPMENT TEAM
The Company's laboratories and experienced product development scientists focus
on product line extensions to existing branded products. The Company has filed a
number of abbreviated new drug applications with the FDA, several of which have
been approved.
<PAGE> 102
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER, OR ANY
OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, STOCK TO ANY PERSON IN ANY JURISDICTION WHERE
SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Cautionary Statement Regarding
Forward-Looking Statements.......... 14
The Company........................... 15
Use of Proceeds....................... 15
Dividend Policy....................... 16
Capitalization........................ 17
Dilution.............................. 18
Selected Consolidated Financial
Data................................ 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Business.............................. 30
Management............................ 42
Certain Transactions.................. 48
Principal and Selling Shareholders.... 49
Description of Capital Stock.......... 51
Shares Eligible for Future Sale....... 56
Certain United States Federal Tax
Considerations for Non-U.S. Holders
of Common Stock..................... 57
Underwriting.......................... 60
Legal Matters......................... 62
Experts............................... 62
Additional Information................ 62
Index to Financial Statements......... F-1
</TABLE>
------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
8,919,000 SHARES
[KING PHARMACEUTICALS LOGO]
COMMON STOCK
-------------------------
PROSPECTUS
, 1997
-------------------------
LEHMAN BROTHERS
CREDIT SUISSE
FIRST BOSTON
HAMBRECHT & QUIST
======================================================
<PAGE> 103
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 54,364
NASD Filing Fee............................................. 18,440
Nasdaq National Market Listing Fee.......................... 1,000
Transfer Agent's Fee........................................ 15,000
Blue Sky Fees and Expenses.................................. 10,000
Printing and Engraving...................................... 125,000
Accounting Fees and Expenses................................ 175,000
Legal Fees and Expenses..................................... 150,000
Advisor Fees................................................ 1,121,800
Miscellaneous............................................... 154,396
----------
Total....................................................... $1,825,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Tennessee Code Annotated Sections 48-18-501 through 48-18-509 authorize a
corporation to provide for the indemnification of officers, directors, employees
and agents in terms sufficiently broad to permit indemnification under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act of 1933, as amended. The Company has adopted
the provisions of the Tennessee statute pursuant to Paragraph 9 of its Amended
and Restated Charter. Also, the Company will have upon consummation of the
offering a "Directors' and Officers' Liability Insurance Policy" which provides
coverage sufficiently broad to permit indemnification under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act of 1933, as amended.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information reflects sales by the Company of unregistered
securities within the past three years. Share amounts and designations have been
adjusted for the stock split effected October 1997. The issuance by the Company
of the securities sold in the transactions referenced below were not registered
under the Securities Act of 1933, pursuant to the exemption contemplated in
Section 4(2) thereof, for transactions not involving a public offering. The
consideration paid to the Company in respect of each issuance was cash, unless
otherwise indicated.
In November 1994, an aggregate of 7,448,000 shares of the Company's Common
Stock was issued to Randall J. Kirk, Jefferson J. Gregory, C.B.B., L.L.C., A.
Willard Lester, John M. Gregory and Joseph R. Gregory in exchange for 76,000
shares of General Injectables and Vaccines, Inc. These securities were issued
pursuant to the exemption available under Section 4(2) of the Securities Act of
1933 (the "1933 Act").
In October 1995, an aggregate of approximately 1.1 million shares of the
Company's Common Stock was issued to John M. Gregory in exchange for 40,000
shares of the Company's Preferred Stock originally purchased for $800,000.00.
These securities were issued pursuant to the exemption available under Section
4(2) of the 1933 Act.
From January through October 1996, an aggregate of approximately 727,000
shares of the Company's Common Stock was issued to approximately 200 employees
of the Company under the Company's Employee Stock Purchase Plan. All such shares
were issued for $1.07 cash per share. These securities were issued pursuant to
the exemption available under Section 4(2) of the 1933 Act.
II-1
<PAGE> 104
In December 1996, the Company issued an additional approximately 2,500,000
shares of its Common Stock pursuant to a 15.0% stock dividend. These securities
were issued pursuant to the exemption available under Section 4(2) of the 1933
Act.
In October 1996, certain members of management and other existing
shareholders purchased approximately 3.9 million shares of the Company's Common
Stock for a purchase price of $1.07 per share. These securities were issued
pursuant to the exemption available under Section 4(2) of the 1933 Act.
In March 1997, 8,532,594 shares of the Company's Common Stock were issued
to The United Company in exchange for $8,750,000 in cash ($1.03 per share).
These securities were issued pursuant to the exemption available under Section
4(2) of the 1933 Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
*1.1 -- Form of Underwriting Agreement.
3.1 -- Amended and Restated Charter of King Pharmaceuticals, Inc.
3.1(a) -- Second Amended and Restated Charter of King Pharmaceuticals,
Inc.
3.2 -- Bylaws of King Pharmaceuticals, Inc., as amended.
3.2(a) -- Amended and Restated Bylaws of King Pharmaceuticals, Inc.
4.1 -- Specimen Common Stock Certificate.
4.2 -- Form of Rights Agreement by and between King
Pharmaceuticals, Inc. and Union Planters National Bank.
*5.1 -- Opinion of Baker, Donelson, Bearman & Caldwell, P.C.
10.1 -- Promissory Note between RSR Acquisition Corporation
(predecessor to King Pharmaceuticals, Inc.) and RSR
Laboratories, Inc., dated December 28, 1993, in the amount
of $3,500,000.
10.2 -- Promissory Note between King Pharmaceuticals, Inc., and
General Injectables and Vaccines, Inc., dated October 6,
1994, in the amount of $4,700,000.
10.3 -- Loan Agreement between King Pharmaceuticals, Inc., and First
Tennessee Bank National Association, dated April 30, 1996;
associated Master Note in the amount of $3,500,000;
associated Promissory Note in the amount of $2,500,000.
10.4 -- Promissory Note between Monarch Pharmaceuticals, Inc. and
Roberts Laboratories, Inc., dated October 2, 1996, in the
amount of $5,500,000.
10.5 -- Loan Agreement by and among Monarch Pharmaceuticals, Inc.,
King Pharmaceuticals, Inc., and First Tennessee Bank
National Association, dated January 21, 1997; associated
Promissory Note in the amount of $1,750,000.
10.6 -- Loan Agreement by and among Monarch Pharmaceuticals, Inc.,
King Pharmaceuticals, Inc., and First Tennessee Bank
National Association, dated January 29, 1997; associated
Promissory Note in the amount of $1,750,000.
10.7 -- Promissory Note between King Pharmaceuticals, Inc., and
Signet Bank in the amount of $1,500,000, dated March 19,
1997.
10.8 -- Promissory Note between King Pharmaceuticals, Inc., and The
United Company, dated March 17, 1997, in the amount of
$1,750,000.
10.9 -- Loan Agreement by and among Monarch Pharmaceuticals, Inc.,
King Pharmaceuticals, Inc., and First Tennessee Bank
National Association, dated March 20, 1997; associated
Promissory Note in the amount of $5,000,000.
10.10 -- Loan and Security Agreement by and between King
Pharmaceuticals, Inc. and First American National Bank,
dated August 21; associated Revolving Credit Note in the
principal amount of $2,975,000; and associated Term
Promissory Note in the principal amount of $1,025,000.
10.11 -- Loan Agreement by and among King Pharmaceuticals, Inc.,
Monarch Pharmaceuticals, Inc., and First Tennessee Bank
National Association, dated September 10, 1997; associated
Promissory Note in the amount of $8,500,000.
</TABLE>
II-2
<PAGE> 105
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.12 -- Asset Purchase Agreement by and among King Pharmaceuticals,
Inc., King Pharmaceuticals of Nevada, Inc. and Mallinckrodt
Chemical, Inc. for the disposition of the Anexsia Product
Line, dated December 13, 1995.
*10.12(a) -- Toll Manufacturing Agreement for APAP/Hydrocodone Bitartrate
Tablets by and between Mallinckrodt Chemical, Inc. and King
Pharmaceuticals, Inc.
10.13 -- Agreement between King Pharmaceuticals, Inc. and Ernest C.
Bourne dated July 30, 1997.
10.14 -- 1997 Incentive and Nonqualified Stock Option Plan for
Employees of King Pharmaceuticals, Inc.
*10.15 -- $52,000,000 Credit Agreement among King Pharmaceuticals,
Inc. and General Electric Capital Corporation, as Agent, for
certain Lenders dated November 26, 1997.
11.1 -- Statement regarding Computation of Per Share Earnings.
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of Baker, Donelson, Bearman & Caldwell, P.C.
(included as Exhibit 5.1).
**23.2 -- Consent of Coopers & Lybrand L.L.P.
**23.3 -- Consent of Price Waterhouse LLP.
24.1 -- Powers of Attorney (included on the signature page of this
Registration Statement).
27.1 -- Financial Data Schedule (for SEC use only).
27.2 -- Financial Data Schedule (for SEC use only).
</TABLE>
- ------------------------------
* To be filed by amendment.
** Filed herewith.
(b) Financial Statement Schedules -- Not applicable
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant for expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(iii) It will provide to the underwriters at the closing(s) specified
in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
II-3
<PAGE> 106
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement on Form S-1
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Bristol, State of Tennessee on December 8, 1997.
KING PHARMACEUTICALS, INC.
By: /s/ JOHN M. GREGORY
------------------------------------
John M. Gregory
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN M. GREGORY Chairman of the Board and December 8, 1997
- ----------------------------------------------------- Chief Executive Officer
John M. Gregory (principal executive
officer)
/s/ BRIAN G. SHRADER Chief Financial Officer December 8, 1997
- ----------------------------------------------------- (principal financial and
Brian G. Shrader accounting officer)
* Director December 8, 1997
- -----------------------------------------------------
Joseph R. Gregory
* Director December 8, 1997
- -----------------------------------------------------
Jefferson J. Gregory
* Director December 8, 1997
- -----------------------------------------------------
Ernest C. Bourne
* Director December 8, 1997
- -----------------------------------------------------
Lois A. Clarke
* Director December 8, 1997
- -----------------------------------------------------
D. Greg Rooker
* Director December 8, 1997
- -----------------------------------------------------
Ted G. Wood
Director
- -----------------------------------------------------
Frank W. De Friece, Jr.
* /s/ JOHN M. GREGORY
----------------------------------------------
As Attorney-in-Fact
</TABLE>
II-4
<PAGE> 107
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
*1.1 -- Form of Underwriting Agreement
3.1 -- Amended and Restated Charter of King Pharmaceuticals, Inc.
3.1(a) -- Second Amended and Restated Charter of King Pharmaceuticals,
Inc.
3.2 -- Bylaws of King Pharmaceuticals, Inc., as amended.
3.2(a) -- Amended and Restated Bylaws of King Pharmaceuticals, Inc.
4.1 -- Specimen Common Stock Certificate.
4.2 -- Form of Rights Agreement by and between King
Pharmaceuticals, Inc. and Union Planters National Bank.
*5.1 -- Opinion of Baker, Donelson, Bearman & Caldwell, P.C.
10.1 -- Promissory Note between RSR Acquisition Corporation
(predecessor to King Pharmaceuticals, Inc.) and RSR
Laboratories, Inc., dated December 28, 1993, in the amount
of $3,500,000.
10.2 -- Promissory Note between King Pharmaceuticals, Inc., and
General Injectables and Vaccines, Inc., dated October 6,
1994, in the amount of $4,700,000.
10.3 -- Loan Agreement between King Pharmaceuticals, Inc., and First
Tennessee Bank National Association, dated April 30, 1996;
associated Master Note in the amount of $3,500,000;
associated Promissory Note in the amount of $2,500,000.
10.4 -- Promissory Note between Monarch Pharmaceuticals, Inc. and
Roberts Laboratories, Inc., dated October 2, 1996, in the
amount of $5,500,000.
10.5 -- Loan Agreement by and among Monarch Pharmaceuticals, Inc.,
King Pharmaceuticals, Inc., and First Tennessee Bank
National Association, dated January 21, 1997; associated
Promissory Note in the amount of $1,750,000.
10.6 -- Loan Agreement by and among Monarch Pharmaceuticals, Inc.,
King Pharmaceuticals, Inc., and First Tennessee Bank
National Association, dated January 29, 1997; associated
Promissory Note in the amount of $1,750,000.
10.7 -- Promissory Note between King Pharmaceuticals, Inc., and
Signet Bank in the amount of $1,500,000, dated March 19,
1997.
10.8 -- Promissory Note between King Pharmaceuticals, Inc., and The
United Company, dated March 17, 1997, in the amount of
$1,750,000.
10.9 -- Loan Agreement by and among Monarch Pharmaceuticals, Inc.,
King Pharmaceuticals, Inc., and First Tennessee Bank
National Association, dated March 20, 1997; associated
Promissory Note in the amount of $5,000,000.
10.10 -- Loan and Security Agreement by and between King
Pharmaceuticals, Inc. and First American National Bank,
dated August 21; associated Revolving Credit Note in the
principal amount of $2,975,000; and associated Term
Promissory Note in the principal amount of $1,025,000.
10.11 -- Loan Agreement by and among King Pharmaceuticals, Inc.,
Monarch Pharmaceuticals, Inc., and First Tennessee Bank
National Association, dated September 10, 1997; associated
Promissory Note in the amount of $8,500,000.
10.12 -- Asset Purchase Agreement by and among King Pharmaceuticals,
Inc., King Pharmaceuticals of Nevada, Inc. and Mallinckrodt
Chemical, Inc. for the disposition of the Anexsia Product
Line, dated December 13, 1995.
*10.12(a) -- Toll Manufacturing Agreement for APAP/Hydrocodone Bitartrate
Tablets by and between Mallinckrodt Chemical, Inc. and King
Pharmaceuticals, Inc.
10.13 -- Agreement between King Pharmaceuticals, Inc. and Ernest C.
Bourne dated July 30, 1997.
10.14 -- 1997 Incentive and Nonqualified Stock Option Plan for
Employees of King Pharmaceuticals, Inc.
*10.15 -- $52,000,000 Credit Agreement among King Pharmaceuticals,
Inc. and General Electric Capital Corporation, as Agent, for
certain Lenders dated November 26, 1997.
11.1 -- Statement regarding Computation of Per Share Earnings
21.1 -- Subsidiaries of the Registrant
23.1 -- Consent of Baker, Donelson, Bearman & Caldwell, P.C.
(included as Exhibit 5.1)
**23.2 -- Consent of Coopers & Lybrand L.L.P.
**23.3 -- Consent of Price Waterhouse LLP.
24.1 -- Powers of Attorney (included on the signature page of this
Registration Statement).
27.1 -- Financial Data Schedule (for SEC use only)
27.2 -- Financial Data Schedule (for SEC use only)
</TABLE>
- ------------------------------
* To be filed by amendment.
** Filed herewith.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
King Pharmaceuticals, Inc.
We consent to the inclusion in this pre-effective amendment No. 2 to the
registration statement on Form S-1 (Registration No. 333-38753) of our reports
on:
- - Our audits of the consolidated financial statements of King Pharmaceuticals,
Inc. dated October 22, 1997, except for Note 17, which is dated November 26,
1997.
- - Our audits of the statement of Gross Profit for the Cortisporin Product Line
dated October 22, 1997.
- - Our audits of the Combined Statement of Gross Profit for the Neosporin,
Polysporin, Septra, Proloprim, Mantadil and Kemadrin Product Lines dated
November 17, 1997.
We also consent to the reference of our firm under the captions "Experts" and
"Selected Consolidated Financial Data."
Coopers & Lybrand L.L.P.
Greensboro, North Carolina
December 8, 1997
Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International,
a limited liability association incorporated in Switzerland.
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated November 26, 1997,
relating to the statement of gross profit for each of the two years in the
period ended December 31, 1996 and the nine months ended September 30, 1997 and
the statement of fixed assets as of December 31, 1996 and September 30, 1997 of
Warner-Lambert Company's Sterile Products Operations, which appears in such
Prospectus. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Morristown, New Jersey
December 8, 1997
