KING PHARMACEUTICALS INC, S-1/A, 1998-05-22

KING PHARMACEUTICALS INC
S-1/A, 1998-05-22
PHARMACEUTICAL PREPARATIONS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1998

REGISTRATION NO. 333-38753
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------

AMENDMENT NO. 7

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>
<S> <C> <C>
LINDA M. CROUCH, ESQ. JOHN A. A. BELLAMY, ESQ. STEPHEN T. GIOVE, 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 AN 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 MAY , 1998

6,580,000 Shares

[logo] KING PHARMACEUTICALS, INC.

Common Stock
(no par value)

------------------

Of the 6,580,000 shares of Common Stock ("Common Stock") offered hereby (the
"Offering"), 4,000,000 shares are being sold by King Pharmaceuticals, Inc. (the
"Company") and 2,580,000 shares are being sold by the Selling Shareholders named
herein under "Principal and Selling Shareholders" (the "Selling Shareholders").
The Company will not receive any of the proceeds of shares sold by the Selling
Shareholders. Prior to the Offering, there has been no public market for the
Common Stock. It is anticipated that the initial public offering price will be
between $16.50 and $19.50 per share. For information relating to the factors to
be considered in determining the initial public offering price to the public,
see "Underwriting."

The Common Stock has been approved, subject to official notice of issuance, for
quotation on the Nasdaq Stock Market's National Market under the symbol "KING."

FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" ON PAGE 8 HEREIN.
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 COMPANY(1) SHAREHOLDERS
-------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Per Share............................................ $ $ $ $
Total(2)............................................. $ $ $ $
</TABLE>

(1) Before deduction of expenses payable by the Company estimated at $2,325,000,
which includes a fee of approximately $654,000. See "Underwriting."

(2) The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase a maximum of 987,000
additional shares solely to cover over-allotments of shares. If the option
is exercised in full, the total Price to Public will be $ ,
Underwriting Discounts and Commissions will be $ , and Proceeds to
Company will be $ . See "Underwriting."

The shares of Common Stock are offered by the several Underwriters when, as
and if delivered to and accepted by the Underwriters and subject to their right
to reject orders in whole or in part. It is expected that the shares of Common
Stock will be ready for delivery on or about , 1998, against payment
in immediately available funds.

CREDIT SUISSE FIRST BOSTON HAMBRECHT & QUIST

Prospectus dated , 1998
<PAGE> 3

Photos on inside Front cover top center: bottles and boxes of pharmaceutical
products.

AN EXPANDING PRODUCT LINE

In March 1997 the Company acquired from Glaxo Wellcome Inc. 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 now includes a new product line extension
Cortisporin-TC(TM) otic suspension.

Photo on inside Front cover mid-page right: 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.

Photo on inside cover mid-page left: two bottles of Procanbid(R).

In February 1998 the Company acquired PROCANBID(R) (procainamide HCI
extended-release tablets) Procanbid(R) is the only procainamide approved for a
12 hour interval dosing schedule for cardiac arrhythmia. It utilizes a unique
and patented Poly-Matrix(TM) dual dosing release mechanism also owned by the
Company.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."

Cortisporin(R), Procanbid(R), Neosporin(R), Polysporin(R), Septra(R),
Anusol-HC(R), Fluogen(R), Chloromycetin(R), Vira-A(R), Coly-Mycin(R),
Pitocin(R), Pediotic(R), Thalitone(R), Viroptic(R), Quibron(R), Proctocort(R),
Adrenalin(R), Tussend(R), Nucofed(R), Monafed(R), Mantadil(R), Kemadrin(R),
Poly-Motrix(R), Classics That Work(R), Royal Vel(R), and Show Winner(R), are
registered, pending or licensed trademarks of the Company. Anexsia(R) is a
registered trademark of Mallinckrodt Chemical, Inc.

Photo on gate-Fold page upper right: King Pharmaceuticals, Inc. building with
King Pharmaceuticals (TM) logo on upper left corner of photo.

HIGH QUALITY, MULTI-DOSAGE FACILITIES

The Company's two manufacturing sites in Bristol, Tennessee, and in Rochester,
Michigan, are approximately 500,000 square feet and 432,000 square feet,
respectively. These facilities are utilized as manufacturing, laboratory, office
and warehouse space. The Company manufacturers and packages a broad range of
dosage forms including sterile solutions and injectables, lyophylized
(freeze-dried) products, tablets and capsules, creams and ointments, liquids and
suspensions, suppositories and powders. Key manufacturing, quality control,
quality assurance, regulatory, product development and sales management
personnel have extensive brand-name pharmaceutical industry experience. The
Company's excess manufacturing capacity provides it with expansion capabilities.

Parkedale Pharmaceuticals (TM) logo on bottom left gate-Fold page and photo of
Parkedale Pharmaceuticals, Inc. building.

Text across top of left of center gate-Fold page: The King Pharmaceuticals
Family of Companies.

A GROWING, DEDICATED SALES FORCE

Photo at center of center gate-Fold page: map of continental United States with
certain cities designed by circled stars.

The Company's current prescription, brand-name field sales force of 100
representatives in six districts is concentrated in the northeast, southeast,
north-central and south-central regions of the United States. The Company
markets its brand-name prescription pharmaceutical products through its
wholly-owned subsidiary, Monarch Pharmaceuticals, Inc. Marketing and sales
promotions principally target physicians through product detailing and sampling
to encourage physicians to prescribe the Company's products. The Company intends
to expand its sales force coverage in the United States as additional products
are acquired.

Monarch Pharmaceuticals (R) logo on lower right corner of center gate-Fold
page.

Photo on top of inside back cover page: one photo of laboratory with
workers performing various tasks; two photos of equipment and one photo of a
beaker.

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> 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." References in this Prospectus to the "Company" include its
wholly-owned subsidiaries, Monarch Pharmaceuticals, Inc. ("Monarch
Pharmaceuticals"), King Pharmaceuticals of Nevada, Inc. and Parkedale
Pharmaceuticals, Inc. ("Parkedale Pharmaceuticals") unless the context requires
otherwise. Unless otherwise indicated, all information in this Prospectus
assumes no exercise of the Underwriters' over-allotment option.

THE COMPANY

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 such
pharmaceutical companies to focus their marketing efforts on drugs with high
volume sales, newer or novel drugs which have the potential for high volume
sales and products which fit within core therapeutic or marketing priorities. As
a result, major pharmaceutical companies increasingly have sought to divest
small or non-strategic product lines, which can be profitable for niche
pharmaceutical companies like the Company to manufacture and market. Since
December 1994 the Company has successfully acquired 30 branded products from
pharmaceutical companies including Warner-Lambert Company ("Warner-Lambert") and
Glaxo Wellcome Inc. ("Glaxo Wellcome").

The Company markets a variety of branded prescription products, including a
broad line of ophthalmic and other anti-infective products (including
Cortisporin, Neosporin and Chloromycetin), cardiovascular products (Thalitone
and Procanbid), proctology products (Anusol-HC and Proctocort), and respiratory
products (including Quibron and Tussend). The Company also markets flu vaccine,
hormonal products and other prescription pharmaceutical products. In addition,
the Company manufactures and markets generic pharmaceutical products and
companion animal health and drug products.

The Company believes that its ability to identify and integrate promising
branded pharmaceutical products and to leverage its marketing and manufacturing
infrastructure uniquely positions the Company to continue to grow through
acquisitions and internal growth. Specifically, the Company will pursue the
following strategies:

- Seek Attractively Priced Product Acquisition Opportunities. 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.

- Enhance Sales Through Focused Marketing Efforts. The Company
currently has 100 sales representatives who market throughout the
United States. This sales force is dedicated to aggressively 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 continues to acquire additional
branded pharmaceutical products.

- Improve Margins Through Integrated Manufacturing. The Company
believes that its broad integrated manufacturing capabilities enhance
its ability to acquire a variety of pharmaceutical

3
<PAGE> 5

products and integrate such products at attractive operating margins,
and to develop product line extensions. The Company operates two
manufacturing plants and 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 produces a broad range of dosage forms, including sterile
solutions, freeze-dried (lyophylized) products, injectables, tablets
and capsules, liquids and suspensions, 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, purchasing, production planning, packaging, distribution
and inventory management. 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.

- Expand Through New Product Development. The Company's product
development efforts are currently focused on developing product line
extensions, which allow the Company to leverage its brand names,
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.

In February 1998, the Company acquired from Warner-Lambert 15 branded
pharmaceutical products, a manufacturing facility located in Rochester, Michigan
(the "Parkedale Facility") and certain manufacturing contracts for third parties
for $125.0 million (the "Sterile Products Acquisition"). The purchase price was
financed through borrowings from a group of financial institutions (the "Credit
Facility"). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
------------------

The Company was incorporated in the State of Tennessee in 1993. The
Company's principal executive offices are located at 501 Fifth Street, Bristol,
Tennessee 37620. Its telephone and facsimile numbers are (423) 989-8000 and
(423) 274-8677, respectively.

4
<PAGE> 6

THE OFFERING

Common Stock offered by:

The Company................ 4,000,000 shares

The Selling Shareholders... 2,580,000 shares

----------------------------------------

Total............ 6,580,000 shares
----------------------------------------

----------------------------------------

Common Stock to be
outstanding after the
Offering(1).............. 32,000,000 shares

Use of Proceeds............ Repayment of approximately $48.5 million of debt
outstanding pursuant to the Credit Facility 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 and
acquisition of additional branded products. See
"Use of Proceeds."

Nasdaq National Market
Symbol................... KING
- ---------------

(1) Does not include 3,500,000 shares of Common Stock available for future
grants under the Company's 1997 Incentive and Nonqualified Stock Option Plan
for Employees and its 1998 Non-Employee Director Stock Option Plan (the
"Stock Option Plans"). Options for 270,150 shares of Common Stock are
currently outstanding under the Stock Option Plans.

5
<PAGE> 7

SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED PRO FORMA ENDED PRO FORMA
DECEMBER 31, AS ADJUSTED MARCH 31, AS ADJUSTED
--------------------------- ------------- ----------------- -----------
1995 1996 1997 1997(1)(2)(3) 1997 1998 1998(1)(3)
------- ------- ------- ------------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................... $25,441 $15,457 $47,351 $122,504 $ 8,786 $22,319 $33,163
Development revenues(4)..................... -- 5,000 558 558 -- 2,658 2,658
------- ------- ------- -------- ------- ------- -------
Total revenue, net.................. 25,441 20,457 47,909 123,062 8,786 24,977 35,821
------- ------- ------- -------- ------- ------- -------
Cost of sales............................... 12,130 8,782 13,034 60,513 2,063 7,364 11,847
Selling, general and administrative......... 8,605 12,106 19,123 27,145 4,394 6,832 7,906
Depreciation and amortization............... 1,777 982 2,395 9,804 423 1,091 2,137
------- ------- ------- -------- ------- ------- -------
Total costs and expenses............ 22,512 21,870 34,552 97,462 6,880 15,287 21,890
------- ------- ------- -------- ------- ------- -------
Gain on sale of product line, net(5)........ 13,102 -- -- -- -- -- --
------- ------- ------- -------- ------- ------- -------
Operating income (loss)..................... 16,031 (1,413) 13,357 25,600 1,906 9,690 13,931
Total other (expenses) income............... (1,639) 1,066 (2,777) (11,512) (415) (2,679) (3,776)
Income tax benefit (expense)................ (5,058) 107 (3,968) (5,371) (570) (2,650) (3,908)
------- ------- ------- -------- ------- ------- -------
Net income (loss) before extraordinary
item...................................... 9,334 (240) 6,612 8,717 921 4,361 6,247
Extraordinary item(6)....................... 528 -- -- -- -- (286) --
------- ------- ------- -------- ------- ------- -------
Net income (loss)........................... $ 9,862 $ (240) $ 6,612 $ 8,717 $ 921 $ 4,075 $ 6,247
======= ======= ======= ======== ======= ======= =======
Diluted net income (loss) per share(7)...... $ 0.70 $ (0.02) $ 0.25 $ 0.29 $ 0.04 $ 0.15 $ 0.20
======= ======= ======= ======== ======= ======= =======
Weighted average common shares
outstanding(8)............................ 14,167 15,440 26,270 30,270 20,984 28,000 32,000
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1998
DECEMBER 31, ----------------------
1997 ACTUAL AS ADJUSTED
------------ -------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 69 $ 4 $ 16,163
Working capital............................................. (424) 6,865 23,024
Total assets................................................ 104,863 267,760 283,919
Long-term debt (excluding current portion).................. 48,289 187,206 138,730
Shareholders' equity........................................ 29,334 33,412 98,047
</TABLE>

- ---------------

(1) The pro forma consolidated information gives effect to the recent
acquisitions of the Company which include (i) the Proctocort product line
on January 22, 1997, (ii) the Viroptic product line on May 15, 1997, (iii)
the Cortisporin product line on March 21, 1997, (iv) the acquisition of
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
on November 14, 1997 (the "Glaxo Acquisition") (collectively, the "Recent
Acquisitions") and (v) the Sterile Products Acquisition on February 27,
1998, in each case as if the acquisitions had occurred on January 1, 1997.
See "Pro Forma Consolidated Financial Statements."

(2) The Sterile Products Acquisition includes Fluogen which had gross sales of
$23.0 million and $22.3 million in 1995 and 1996, respectively, but which
was not sold in 1997. Fluogen was subject to a voluntary recall due to
shelf life potency concerns in 1996. Subsequent testing has established
Fluogen's shelf life potency and the Company is currently marketing
Fluogen. As a result of Fluogen's being discontinued, cost of goods sold in
1997 included approximately $7.1 million of unabsorbed overhead and
approximately $4.0 million of obsolete inventory. If these costs were
excluded from cost of sales in 1997, pro forma earnings per share would
have been $0.49. 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."

(3) As adjusted to reflect estimated net proceeds of $64.6 million from the
sale of 4.0 million shares of Common Stock offered by the Company hereby
(after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company) and the application thereof as
set forth herein. See "Use of Proceeds." The adjustments include a
reduction in interest expense of $4.2 million

6
<PAGE> 8

and $696,000 for the year ended December 31, 1997 and the three months
ended March 31, 1998, respectively, and related tax effects of $1.7 million
and $278,000 for the year ended December 31, 1997 and the three months
ended March 31, 1998, respectively. These adjustments resulted in an
increase in basic and diluted income per share by $0.05 for the year ended
December 31, 1997 and no change for the three months ended March 31, 1998.

(4) 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"). 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 and
validation of the process. In 1996 Mallinckrodt paid the Company for two of
these ANDAs and as of March 31, 1998 Mallinckrodt had paid for a third. The
final ANDA was approved by the FDA in April 1998 and payment will be
received upon validation of the process. If the validation process is not
completed by June 13, 1998, the payment to the Company will be reduced to
$1.5 million.

(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 in 1995 and the loss on early
extinguishment of debt in connection with the Credit Facility in February
1998, net of income taxes of $272,000 and $175,000, respectively.
(7) Net income (loss) per share on a diluted basis is the same as basic
earnings per share for all periods presented except in 1995 when basic
earnings per share was $0.75 due to the assumed conversion of preferred
stock outstanding at that time.
(8) Reflects retroactively the effects of (i) a 15.0% stock dividend paid in
1996 and (ii) a 2.8 for 1 stock split.

7
<PAGE> 9

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.

SIGNIFICANT LEVERAGE AND DEBT SERVICE; ADDITIONAL CAPITAL REQUIREMENTS

The Company is highly leveraged. At March 31, 1998, on a pro forma basis
after giving effect to the application of the proceeds of the Offering, the
Company would have had total outstanding indebtedness of $147.6 million and a
total debt to total assets ratio of 0.52 to 1.0. Interest expense for the three
months ended March 31, 1998 and the year ended December 31, 1997 was $2.7
million and $2.7 million, respectively. At March 31, 1998 interest rates for the
various components for the Credit Facility ranged from approximately 8.4% to
8.9%. See "Selected Consolidated Financial Data." In addition, subject to
restrictions contained in instruments governing its indebtedness, the Company
may incur additional indebtedness from time to time to finance acquisitions or
capital expenditures or for general corporate purposes.

The level of the Company's indebtedness could have important consequences
to the business activities of the Company, including the following: (i) a
substantial portion of the Company's cash flow from operations must be dedicated
to debt service and will not be available for other purposes; (ii) the Company's
ability to obtain additional debt financing in the future for other
acquisitions, working capital or capital expenditures may be limited; (iii) the
Company's level of indebtedness could limit its flexibility in reacting to
changes in its industry or economic conditions generally and (iv) the Company's
leverage may be a competitive disadvantage.

The Company's ability to service its debt obligations will depend upon its
future operating performance, which will be affected by prevailing economic
conditions and financial, business, and other factors, certain of which are
beyond its control, as well as the availability of borrowings under the Credit
Facility or any other credit arrangement. The Company will require substantial
amounts of cash to fund scheduled payments of principal and interest on its
outstanding indebtedness, as well as future capital expenditures and any
increased working capital requirements. If the Company is unable to meet its
cash requirements out of cash flow from operations and its available borrowings,
there can be no assurance that it will be able to obtain alternative financing
or that it will be permitted to do so under the terms of the Credit Facility or
its other indebtedness. The Company intends to use approximately $48.5 million
of the net proceeds of the Offering to repay a portion of the outstanding debt
under the Credit Facility. See "Use of Proceeds." Depending upon, among other
things, the product acquisition opportunities available, the Company may need to
raise additional funds. The Company may seek such additional funds through
public offerings or private placements of debt or equity securities, bank loans
or additional capital contributions from new or existing shareholders. Issuance
of additional equity securities by the Company could result in substantial
dilution to shareholders. In the absence of such financing, the Company's
ability to make future acquisitions in accordance with its business strategy, to
absorb adverse operating results, to fund capital expenditures or to respond to
changing business and economic conditions may be adversely affected, all of
which may have a material adverse effect on the Company's business, financial
condition or results of operations. See "-- Dependence on Acquisition of
Products" and "Business -- Strategy." If the Company does not generate
sufficient increases in cash flow from operations to repay its indebtedness at
maturity, it could attempt to refinance such indebtedness; however, no assurance
can be given that such refinancing would be available on terms acceptable to the
Company, if at all.

DEPENDENCE ON ACQUISITION OF PRODUCTS

The Company has increased its sales and net income 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

8
<PAGE> 10

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.
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 require a write-off of the intangible
value allocated to acquired products resulting in a charge to earnings. 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 -- Strategy."

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
approximately 14.2% and 20.3% of net sales during the three months ended March
31, 1998 and the year ended December 31, 1997, respectively, on a pro forma
basis after giving effect to the Recent Acquisitions and the Sterile Products
Acquisition in each case as if the acquisition had occurred on January 1, 1997.
Three products acquired in the Sterile Products Acquisition, Procanbid,
Anusol-HC and Coly-Mycin-M Parenteral, accounted for approximately 34.3% and
31.7% of net sales during the three months ended March 31, 1998 and the year
ended December 31, 1997, respectively, on a pro forma basis after giving effect
to the Recent Acquisitions and the Sterile Products Acquisition in each case as
if the acquisition had occurred on January 1, 1997. The Company believes that
sales of the Cortisporin product line, Procanbid, Anusol-HC and Coly-Mycin-M
Parenteral will continue to constitute a significant portion of net sales for
the foreseeable future. Accordingly, 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 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 require a write-off of the
intangible value allocated to acquired products resulting in a charge to
earnings. 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," "Business -- Products
and Product Development" and "Business -- Competition."

MANAGING GROWTH OF BUSINESS; INTEGRATION OF ACQUISITIONS

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. The Sterile Products

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<PAGE> 11

Acquisition significantly expanded the Company's product offerings and
operations. The Company's future success will depend in part on its ability to
retain or hire qualified employees to operate its facilities and to operate such
facilities 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."

RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS

The Credit Facility restricts, among other things, the Company's ability to
incur additional indebtedness, incur liens, pay dividends or make certain other
restricted payments, consummate certain asset sales and enter into certain
transactions with affiliates. In addition, the Credit Facility contains other
financial and operating covenants.

The Credit Facility limits the type and amount of additional indebtedness
which the Company may incur. During the term of the Credit Facility, the Company
may incur, in the ordinary course of business, certain purchase money
Indebtedness (as defined in the Credit Facility) or Capital Lease Obligations
(as defined in the Credit Facility). These obligations are limited to $3,000,000
in the aggregate at any one time. At March 31, 1998, the Company had incurred
$339,017 in purchase money Indebtedness and Capital Lease Obligations. The
Company may incur other Indebtedness (as defined in the Credit Facility) in a
principal amount not exceeding $1,000,000, but such indebtedness must be
unsecured. From the beginning of the term of the Credit Facility to March 31,
1998, the Company had accumulated no unsecured indebtedness. During the term of
the Credit Facility, the Company may issue, in the aggregate, only $1,000,000 in
dividends and distributions (excepting, however, the granting of options and
distribution of capital stock upon the exercise thereof, pursuant to the 1997
Incentive and Nonqualified Stock Option Plan for Employees of King
Pharmaceuticals, Inc. and the 1998 Non-Employee Director Stock Option Plan). See
"Dividend Policy." The Credit Facility also requires that for the three months
ended March 31, 1998, the Consolidated Interest Expense Coverage Ratio (as
defined in the Credit Facility) shall not be less than 2.00 to 1.00. At March
31, 1998, the Consolidated Interest Expense Coverage Ratio was 3.89 to 1.00.

The Credit Facility further requires that, at any time between April 1,
1998 and June 30, 1998, the Leverage Ratio (as defined in the Credit Facility)
shall not exceed 6.00 to 1.00. Although the Credit Facility did not require any
particular Leverage Ratio to be maintained during the quarter ended March 31,
1998, the Leverage Ratio at March 31, 1998 would have been 4.38 to 1.00.

The Credit Facility also requires that on the last day of any fiscal
quarter, after the fiscal quarter ending March 31, 1998, the Consolidated Net
Worth (as defined in the Credit Facility) of the Company shall not be less than
the sum of (1) $25,000,000 plus (2) 75.0% of the cumulative Consolidated Net
Income (as defined in the Credit Facility) for each fiscal quarter ending after
March 31, 1998. For any four-fiscal-quarter period, beginning with the period
ending on June 30, 1998 (or such lesser number of quarters as have elapsed since
December 31, 1997), the Consolidated Fixed Charge Coverage Ratio (as defined in
the Credit Facility) shall not be less than 1.10 to 1.00.

The Company's ability to meet such financial ratios and tests may be
affected by events beyond its control. There can be no assurance that the
Company will meet such tests. A breach of any of these covenants could result in
a default under the Credit Facility. Upon the occurrence of any event of default
under the Credit Facility, the lenders could elect to declare all principal
amounts, together with accrued interest, to be immediately due and payable.
There can be no assurance that the assets of the Company would be sufficient to
repay in full such indebtedness. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

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<PAGE> 12

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. Although the Company had operating income of
approximately $13.4 million for the year ended December 31, 1997, 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

Currently 13 of the Company's product lines, including Cortisporin and five
of the branded pharmaceutical products acquired in the Glaxo Wellcome
Acquisition and four of the products acquired in the Sterile Products
Acquisition, are presently manufactured by third parties until such products can
be moved to the Company's manufacturing facilities. Until such time, there can
be no assurance that the Company's dependence upon third parties for the
manufacture of its products will not adversely affect the Company's profit
margins or its ability to develop and deliver its products on a timely and
competitive basis. These products accounted for 30.1% and 30.7% of net sales
during the three months ended March 31, 1998 and the year ended December 31,
1997, respectively, on a pro forma basis after giving effect to the Recent
Acquisitions and the Sterile Products Acquisition in each case as if the
acquisition had occurred on January 1, 1997. 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. See "-- Dependence on Cortisporin Sales and Other Key Products"
and "Business -- Manufacturing."

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

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<PAGE> 13

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. For
the year ended December 31, 1997, approximately 44.3% of the Company's sales
were to the following four customers: McKesson Corporation (16.7%),
Cardinal/Whitmire (14.0%), Bergen Brunswig Corporation (13.6%) Amerisource
(10.6%). These customers are primarily wholesale drug distributors through which
the Company distributes its products. For the year ended December 31, 1996,
approximately 69.7% of the Company's sales were to the following three
customers: SmithKline Beecham Corporation ("SmithKline Beecham") (18.1%),
Mallinckrodt (36.7%) and Novartis Animal Health US, Inc. ("Novartis") (14.9%).
Approximately 20% of the receivables of the Company at December 31, 1997 were
due from McKesson Corporation. Two other customers, Bergen Brunswig Corporation
and SmithKline Beecham, collectively accounted for another 22% of such
receivables. 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 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; CONSENT DECREE

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
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<PAGE> 14

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.

Companion animal drug products manufactured and sold by the Company also
must be the subject of an FDA approved new animal drug application ("NADA") or
abbreviated new animal drug application ("ANADA") before they may be marketed in
the United States. Certain companion animal drug products currently are not
required to be the subject of an approved NADA and may be marketed pursuant to
an FDA regulatory enforcement policy permitting continued marketing of those
animal drugs until the FDA determines whether they are safe and effective.

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.

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 FDA Modernization Act of
1997 ("FM Act"). The FM Act authorizes the FDA to collect three types of user
fees for prescription drugs through fiscal year 2002. Fees are imposed on: (i)
certain types of applications for approval of drug and biologic products, (ii)
certain establishments where such products are made, and (iii) certain products.
Fees for applications, establishments, and products are determined by the FDA
using criteria delineated in the statute. To date, the Company has paid fees of
approximately $139,000.

Certain pharmaceutical products of biological origin are regulated under
both the FDC Act and the Biological Products provisions of the Public Health
Service Act ("PHS Act"). The PHS Act imposes special additional licensing
requirements, known as Establishment Licenses and Product Licenses, or a new
substitute for those two, called a Biologic License. Those licenses impose very
specific requirements upon the facility and the manufacturing and marketing of
licensed products to assure their safety, purity, and potency. Some licensed
biological products are also subject to batch release by the FDA. That is, the
products from a newly manufactured batch cannot be shipped until the FDA has
evaluated either a sample or the specific batch records and given permission to
ship the batch of product. The PHS Act also grants the FDA mandatory product
recall authority and provides for civil and criminal penalties for violations.
The Company has acquired several biological products subject to licensing under
the PHS Act as part of the Sterile Products Acquisition.

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<PAGE> 15

Under the FM Act, antibiotic pharmaceutical products are now subject to the
same NDA and ANDA requirements as other pharmaceuticals. Therefore,
manufacturers seeking NDA approvals of antibiotics now can cause a delay in the
approval of generic copies of their products if the products are covered by
patents. Those manufacturers also can obtain up to five years of marketing
exclusivity for new antibiotics and certain new uses or forms of an antibiotic
irrespective of the presence or absence of patent coverage. While these changes
do not have an effect on the Company's current product line, they may affect the
Company's ability to acquire or develop other antibiotic pharmaceutical products
in the future.

The Parkedale Facility is one of six Warner-Lambert facilities subject to a
Consent Decree of Permanent Injunction issued August 1993 in United States of
America v. Warner-Lambert Company and Melvin R. Goodes and Lodewijk J.R. DeVink
(U.S. Dist. Ct., Dist. of N.J.) ("Consent Decree"). The Consent Decree prohibits
the manufacture and delivery of specified drug products produced at any of the
six sites unless, among other things, the products conform to current good
manufacturing regulations and are produced in accordance with an approved ANDA,
NDA or investigational new drug ("IND"). The Parkedale Facility was not the
cause of the Consent Decree but was included as one of the six Warner-Lambert
facilities. Specifically, at the Parkedale Facility, a neutral third party
expert must certify that the laboratories and laboratory personnel are in
compliance with federal regulations and gain FDA authorization to begin
distribution of any new products. Under its terms, a petition for relief from
the Consent Decree may be filed in August 1998, unless the FDA notifies
Warner-Lambert that there has been a significant failure to comply with certain
federal regulations and approved drug applications of certain pharmaceutical
products. The FDA has confirmed to the Company that the FDA does not intend to
seek a court order to amend the Consent Decree to add the Company as a party to
the Consent Decree as a result of the Company's acquisition of the Parkedale
Facility and the Company may petition for, and if appropriate, obtain relief
from the Consent Decree solely with respect to the Parkedale Facility without
regard to the status of Warner-Lambert's remaining facilities and products.
Management of the Company believes the Parkedale Facility is in compliance with
the requirements of the Consent Decree and intends to petition for relief from
the Consent Decree in August 1998. As a result of an FDA inspection in March and
April 1998, the Company received an FDA Form 483 with respect to the Parkedale
Facility. The Company is in the process of responding to the FDA. For the three
months ended March 31, 1998, approximately 43.2% of the Company's revenues, on a
pro forma basis, were attributable to the Parkedale Facility excluding products
that are not manufactured at the Parkedale Facility for the Company. While there
can be no assurance that the Consent Decree will be terminated with respect to
the Parkedale Facility, management of the Company does not believe continuation
of the Consent Decree will have a material adverse effect on its business,
financial condition and results of operations.

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

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<PAGE> 16

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 its insurance coverage will
be sufficient to cover fully 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.
Product recalls may be issued at the discretion of 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. The Company acquired the flu vaccine Fluogen in
the Sterile Products Acquisition. Fluogen had gross sales of $23.0 million and
$22.3 million in 1995 and 1996, respectively, but was not sold in 1997. Fluogen
was subject to a voluntary recall due to shelf life potency concerns in 1996.
Subsequent testing has established Fluogen's shelf life potency and the Company
is currently marketing Fluogen. However, there can be no assurance that the
Company will be able to produce the vaccine successfully, that it will not be
subject to a recall if produced or that, if produced and marketed, sales will
reach previous levels. 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 3.0% of revenues for the
three months ended March 31, 1998, 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," "Business -- Products and Product Development" and
"Business -- Litigation."

EARLY TERMINATION OF CERTAIN LICENSES

The Company has exclusive licenses expiring June 2036 for the prescription
formulations of Neosporin and Polysporin and expiring February 2038 for the
prescription formulation of Anusol-HC. 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 fails to meet
specified quality control standards, including cGMP, with respect to the
products, or commits a material breach of other terms and conditions of the
licenses which would have a significant adverse effect on the uses of the
licensed products retained by the licensor, which would include, among other
things, marketing products under these trade names outside the prescription
field, or undergoes a change in majority ownership. 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."

RISKS RELATED TO AMORTIZATION OF INTANGIBLE ASSETS

The Company's pro forma total assets reflect substantial intangible assets.
At March 31, 1998, pro forma net intangible assets including the Recent
Acquisitions and the Sterile Products Acquisition represent approximately 43.0%
of total assets and 349.6% of total shareholders' equity. The intangible asset
value

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<PAGE> 17

represents the excess of cost over the fair value of the separate assets
acquired by the Company since it began operation in 1994. There can be no
assurance that the value of such assets will ever be realized by the Company.
These intangible assets are amortized on a straight-line method over 10 to 25
years for certain assets and 25 years for the Glaxo and Sterile Products
Acquisitions. The Company evaluates on a regular basis whether events and
circumstances have occurred that indicate that all or a portion of the carrying
amount of the asset may no longer be recoverable, in which case a charge to
earnings could become necessary. Any determination requiring the write-off of a
significant portion of unamortized intangible assets would adversely affect the
Company's results of operations. See "Pro Forma Consolidated Financial
Statements."

RISKS RELATED TO LITIGATION

Many distributors and marketers of anorexigenic drugs have been subject to
claims relating to the use of these drugs, many of which purport to be class
actions. The Company is a defendant only in the suits described below, but it
expects it will be named in additional lawsuits related to the Company's
production of an anorexigenic drug under contract for SmithKline Beecham.

The actions generally have been brought by individuals in their own right
or on behalf of putative classes of persons who claim to have suffered injury or
who claim that they may suffer injury in the future due to use of one or more
anorexigenic drugs including phentermine. Plaintiffs' allegations of liability
are based on various theories of recovery, including, but not limited to,
product liability, strict liability, negligence, various breaches of warranty,
conspiracy, fraud, misrepresentation and deceit. These lawsuits typically allege
that the short and long-term use of certain anorexigenic drugs, independently or
in combination (including the combination of fenfluramine and phentermine
popularly known as "fen/phen"), causes, among other things, primary pulmonary
hypertension, valvular heart disease and/or neurological dysfunction. In
addition, some lawsuits allege emotional distress caused by the purported
increased risk of injury in the future. Plaintiffs typically seek relief in the
form of monetary damages (including economic losses, medical care and monitoring
expenses, loss of earnings and earnings capacity, other compensatory damages and
punitive damages), generally in unspecified amounts, on behalf of the individual
or the class. In addition, some actions seeking class certification ask for
certain types of purportedly equitable relief, including, but not limited to,
declaratory judgments and the establishment of a research program or medical
surveillance fund. On December 10, 1997, the federal Judicial Panel on
Multidistrict Litigation issued an Order allowing for the transfer or potential
transfer of the federal actions to the Eastern District of Pennsylvania for
coordinated or consolidated pretrial proceedings.

The Company has been named as a co-defendant in six lawsuits in connection
with the Company's manufacture of phentermine, an anorexigenic, under contract
for SmithKline Beecham and its use in combination with other drugs. In October
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. 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. In February 1998, the Company was named as a defendant in an
action in Jefferson Circuit Court, Louisville, Kentucky and a suit in Circuit
Court of Montgomery County, Alabama, both of which demand damages in an
unspecified amount. In March 1998, the Company was named as a co-defendant in
three additional actions. A suit in the Supreme Court of New York, County of
Suffolk, demands compensatory damages of $30.0 million and punitive damages of
$20.0 million. A suit in the Montana Eleventh Judicial District Court, Flathead
County, demands an unspecified amount of general and special compensatory
damages. A suit in the Superior Court of the State of California, County of Los
Angeles, demands damages in an unspecified amount.

While the Company cannot predict the outcome of these suits, 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 all of
these suits by SmithKline Beecham for which it manufactures the anorexigenic
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. However, in the event that SmithKline Beecham is unable to
satisfy or fulfill its
16
<PAGE> 18

obligations under the indemnity, the Company would have to defend the lawsuit
and be responsible for damages, if any, which are awarded against it or for
amounts in excess of the Company's product liability coverage. See "-- Product
Liability; Product Recall; Product Returns."

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 key
employees. See "-- Managing Growth of Business," "Business -- Employees" and
"Management."

NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to the 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 the Offering. The initial public offering price
has been determined by negotiations between the Company and Credit Suisse First
Boston Corporation ("CSFBC") and Hambrecht & Quist LLC 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 the Offering could adversely affect the market price
for the Common Stock. The Company and certain of its directors, officers and
shareholders have agreed with the Underwriters not to sell or otherwise dispose
of any shares of Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of CSFBC (the "Lock-Up"), except
issuance by the Company to optionees pursuant to the exercise of stock options
granted under the Stock Option Plans. Of the approximately 10,100,000 shares of
Common Stock to be outstanding after the Offering that are not subject to the
Lock-Up, other than the 6,580,000 shares of Common Stock sold in the Offering,
(i) approximately 1,520,000 shares will be immediately eligible for resale in
the public market without restriction in reliance on Rule 144(k) under the
Securities Act, and (ii) approximately 2,000,000 shares may be sold subject to
the volume and manner of sales restrictions of Rule 144. Beginning 180 days
after the date of this Prospectus, after the Lock-Ups have expired, (i)
approximately 13,400,000 additional shares of Common Stock will become eligible
for resale into the public market in reliance on Rule 144(k) and (ii)
approximately 8,500,000 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 the Offering will incur
immediate substantial dilution of $18.59 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
17
<PAGE> 19

Company's Credit Facility. See "Dilution," "Dividend Policy" and
"-- Restrictions Imposed by Terms of the Company's Indebtedness."

CONCENTRATION OF OWNERSHIP; LACK OF INDEPENDENT DIRECTORS

Following the Offering, the present officers and directors of the Company
and their affiliates will beneficially own approximately 41.8% 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 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. See
"Principal and Selling Shareholders."

RISKS RELATED TO YEAR 2000 ISSUES

The approaching year 2000 could result in challenges related to the
Company's computer software, manufacturing equipment, accounting records and
relationships with suppliers and customers. Management of the Company is
studying year 2000 issues and is seeking to avoid such problems. Based on the
Company's review of its business and operating systems, the Company does not
expect to incur material costs with respect to assessing and remediating year
2000 problems; however, there can be no assurance that such problems will not be
encountered or that the costs incurred to resolve such problems will not be
material. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Compliance."

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

18
<PAGE> 20

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 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.

19
<PAGE> 21

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 $64.6 million ($81.2 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 the Offering, together with the Company's existing cash and cash
equivalents, will be used for: (i) repayment of approximately $48.5 million of
debt outstanding pursuant to the Credit Facility, (ii) 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, and (iii)
acquisition of additional branded products. 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. See "Risk Factors -- Dependence on
Acquisition of Products" and "Business -- Strategy."

As required by the Credit Facility, the Company will use approximately
$48.5 million of the net proceeds of the Offering to repay a portion of the
outstanding debt under the Credit Facility. The Credit Facility includes a
six-year $20.0 million revolving line of credit, a six-year $90.0 million
amortizing Tranche A term loan facility and an eight-year $85.0 million Tranche
B term loan facility 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. At March 31, 1998 interest
rates for the various components of the Credit Facility ranged from
approximately 8.4% to 8.9%. A portion of the proceeds of the Credit Facility
were used to consummate the Sterile Products Acquisition, purchase the Parkedale
Facility and acquire certain contract manufacturing for third parties. Proceeds
of the Credit Facility were also used to pay off outstanding amounts of
approximately $48.2 million under a prior credit facility. The prior credit
facility was used to finance the Glaxo Acquisition and to pay off approximately
$19.0 million of long-term debt which had been outstanding. This credit facility
included 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.

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 the 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.

DIVIDEND POLICY

The Company has never paid cash dividends on its Common Stock. Furthermore,
the payment of any dividend or other distribution on any shares of the Company's
capital stock is limited by the Credit Facility to an aggregate amount of up to
$1.0 million provided that no event of default under the Credit Facility has
occurred or is continuing. Assuming removal of this limitation, 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."

20
<PAGE> 22

CAPITALIZATION

The following table sets forth the actual capitalization of the Company as
of March 31, 1998 and as adjusted to reflect the sale of 4,000,000 shares of
Common Stock offered hereby at the assumed initial 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). This table should be read in conjunction with "Summary
Consolidated Financial Information," "Selected Consolidated Financial Data,"
"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>
MARCH 31, 1998
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 4 $ 16,163
======== ========
Long-term obligations (including current portion)(1)........ $184,925 $136,449
-------- --------
Line of credit(1)........................................... 10,000 10,000
-------- --------
Shareholders' equity:
Common Stock, no par value; 150,000,000 shares authorized;
28,000,000 issued and outstanding (actual); 32,000,000
shares outstanding (as adjusted)(2)(3)................. 16,455 81,090
Due from related party.................................... (1,668) (1,668)
Retained earnings......................................... 18,625 18,625
-------- --------
Total shareholders' equity...................... 33,412 98,047
-------- --------
Total capitalization............................ $228,337 $244,496
======== ========
</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) Excludes 3,500,000 shares of Common Stock available for grants under the
Company's Stock Option Plans. Currently options for 270,150 shares are
outstanding pursuant to such Plans.

21
<PAGE> 23

DILUTION

The net tangible book value of the Company as of March 31, 1998, was
approximately $(83.4) million, or $(2.98) 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. After giving effect to the sale of the 4,000,000 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 March 31, 1998
would have been $(18.8) million, or $(0.59) per share. This represents an
effective net increase in net tangible book value of $2.39 per share to existing
shareholders and an immediate dilution of $18.59 per share to new investors
purchasing shares at the initial public offering price. See "Risk
Factors -- Substantial Dilution; Absence of Dividends." 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)..... $(2.98)
Increase per share attributable to price paid by
purchasers in the Offering............................. 2.39
------
Pro forma net tangible book value per share after
Offering(1)............................................ (0.59)
------
Dilution in pro forma net book value per share to new
investors.............................................. $18.59
======
</TABLE>

The following table sets forth, on a pro forma as adjusted basis as of
March 31, 1998, 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 87.5% $14,613,000 16.9% $ 0.52
New investors.................... 4,000,000 12.5% $72,000,000 83.1% 18.00
---------- ----- ----------- -----
Total.................. 32,000,000 100.0% $86,613,000 100.0%
========== ===== =========== =====
</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
25,420,000, or 79.4% (or 77.0% 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 6,580,000 or 20.6% (7,567,000 or 22.9% 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 grants under the Company's
Stock Option Plans. Currently options for 270,150 shares are outstanding
pursuant to such Plans.

22
<PAGE> 24

SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

The following selected financial data for the years ended December 31,
1995, 1996 and 1997 and as of December 31, 1996 and 1997 are derived from the
Consolidated Financial Statements of the Company, which have been audited by
Coopers & Lybrand L.L.P., independent certified public accountants, and are
included in this Prospectus. The following selected financial data for the year
ended December 31, 1994 and as of December 31, 1994 and 1995 are derived from
the Consolidated Financial Statements of the Company, which have been audited by
Coopers & Lybrand L.L.P. independent certified public accountants, and are not
included in this Prospectus. The following selected financial data for the three
months ended March 31, 1997 and 1998 are derived from unaudited financial
statements prepared by the Company. The unaudited financial statements include
all adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the Company's financial position
and results of operations for these periods. Operating results for the three
months ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the entire year ending December 31, 1998. The 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 Consolidated Financial Statements of
the Company and Notes thereto included in this Prospectus. The following
selected financial data as of and for the year ended December 31, 1993 are
derived from unaudited Financial Statements of the Predecessor Company (defined
below).

<TABLE>
<CAPTION>
PREDECESSOR
COMPANY(1) THE COMPANY(1)
----------- --------------------------------------------------------------------------------------
THREE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------------- ------------------------------
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
1993 1994 1995 1996 1997 1997(2)(3)(4) 1997 1998 1998(2)(4)
----------- ------- ------- ------- ------- ------------- ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.................. $24,637 $13,311 $25,441 $15,457 $47,351 $122,504 $8,786 $22,319 $ 33,163
Development revenues(5).... -- -- -- 5,000 558 558 -- 2,658 2,658
------- ------- ------- ------- ------- -------- ------ ------- --------
Total revenue,
net.............. 24,637 13,311 25,441 20,457 47,909 123,062 8,786 24,977 35,821
------- ------- ------- ------- ------- -------- ------ ------- --------
Cost of sales.............. 19,373 9,754 12,130 8,782 13,034 60,513 2,063 7,364 11,847
Selling, general and
administrative........... 7,963 1,987 8,605 12,106 19,123 27,145 4,394 6,832 7,906
Depreciation and
amortization............. 489 639 1,777 982 2,395 9,804 423 1,091 2,137
------- ------- ------- ------- ------- -------- ------ ------- --------
Total costs and
expenses......... 27,825 12,380 22,512 21,870 34,522 97,462 6,880 15,287 21,890
------- ------- ------- ------- ------- -------- ------ ------- --------
Gain on disposition of net
assets(6)................ 347 -- -- -- -- -- -- -- --
Sale of product line(7).... -- -- 13,102 -- -- -- -- -- --
------- ------- ------- ------- ------- -------- ------ ------- --------
Operating income (loss).... (2,841) 931 16,031 (1,413) 13,357 25,600 1,906 9,690 13,931
Gain on sale of investment
in affiliate(8).......... -- -- -- 1,760 -- -- -- -- --
Interest expense........... (96) (1,069) (2,006) (1,272) (2,749) (11,484) (450) (2,703) (3,800)
Other (expenses) income.... (152) 554 367 578 (28) (28) 35 24 24
------- ------- ------- ------- ------- -------- ------ ------- --------
Net income (loss) before
income taxes and
extraordinary item....... (3,089) 416 14,392 (347) 10,580 14,088 1,491 7,011 10,155
Income tax (benefit)
expense.................. (186) (501) 5,058 (107) 3,968 5,371 570 2,650 3,908
------- ------- ------- ------- ------- -------- ------ ------- --------
Net income (loss) before
extraordinary item....... (2,903) 917 9,334 (240) 6,612 8,717 921 4,361 6,247
Extraordinary item, net of
income taxes(9).......... -- -- 528 -- -- -- -- (286) --
------- ------- ------- ------- ------- -------- ------ ------- --------
Net income (loss).......... $(2,903) $ 917 $ 9,862 $ (240) $ 6,612 $ 8,717 $ 921 $ 4,075 $ 6,247
======= ======= ======= ======= ======= ======== ====== ======= ========
Diluted net income (loss)
per share(10)............ $ N/A $ 0.18 $ 0.70 $ (0.02) $ 0.25 $ 0.29 $ 0.04 $ 0.15 $ 0.20
======= ======= ======= ======= ======= ======== ====== ======= ========
Weighted average common
shares outstanding(11)... N/A 5,210 14,167 15,440 26,270 30,270 20,984 28,000 32,000
</TABLE>

23
<PAGE> 25

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1998
------------------------------------------------ ----------------------
1993(1) 1994 1995 1996 1997 ACTUAL AS ADJUSTED
------- ------- ------- ------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............ $ 501 $ 1,028 $10,568 $ 1,392 $ 69 $ 4 $ 16,163
Working capital...................... (714) (2,408) 7,599 7,749 (424) 6,865 23,024
Total assets......................... 3,306 38,447 33,942 39,279 104,863 267,760 283,919
Long-term debt (excluding current
portion)........................... 750 27,065 9,497 13,980 48,289 187,206 138,730
Shareholders' equity................. 571 1,935 11,011 15,693 29,334 33,412 98,047
</TABLE>

- ---------------

(1) Effective December 31, 1993, the Company acquired certain assets and
assumed certain liabilities of RSR Laboratories, Inc. (the "Predecessor
Company"). The 1993 financial data of the Predecessor Company is not
comparable to the Company's financial data for 1994 through 1997 fiscal
years because the 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 1993 because the amount of customer supplied materials
included in both sales and cost of sales is not known.
(2) The pro forma consolidated information gives effect to the Recent
Acquisitions and the Sterile Products Acquisition, in each case as if the
acquisitions had occurred on January 1, 1997. See "Pro Forma Consolidated
Financial Statements."

(3) The Sterile Products Acquisition includes Fluogen which had gross sales of
$23.0 million and $22.3 million in 1995 and 1996, respectively, but which
was not sold in 1997. Fluogen was subject to a voluntary recall due to
shelf life potency concerns in 1996. Subsequent testing has established
Fluogen's shelf life potency and the Company is currently marketing
Fluogen. As a result of Fluogen's being discontinued, cost of goods sold in
1997 included approximately $7.1 million of unabsorbed overhead and
approximately $4.0 million of obsolete inventory. If these costs were
excluded from cost of sales in 1997, pro forma earnings per share would
have been $0.49. 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) As adjusted to reflect estimated net proceeds of $64.6 million from the
sale of 4.0 million shares of Common Stock offered by the Company hereby
(after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company) and the application thereof as
set forth herein. See "Use of Proceeds." The adjustments include a
reduction in interest expense of $4.2 million and $696,000 for the year
ended December 31, 1997 and the three month ended March 31, 1998,
respectively, and related tax effects of $1.7 million and $278,000 for the
year ended December 31, 1997 and the three months ended March 31, 1998,
respectively. These adjustments resulted in an increase in basic and
diluted income per share by $0.05 for the year ended December 31, 1997 and
no change for the three months ended March 31, 1998.

(5) 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 and validation of the process.
In 1996 Mallinckrodt paid the Company for two of these ANDAs and as of
March 31, 1998, Mallinckrodt paid the Company for a third ANDA. The final
ANDA was approved by the FDA in April 1998 and payment will be received
upon validation of the process. If the validation process is not completed
by June 13, 1998, payment to the Company will be reduced to $1.5 million.

(6) 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.
(7) 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.
(8) 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.
(9) Reflects early extinguishment of debt in connection with the disposition of
the Anexsia Product Line in 1995 and the loss on early extinguishment of
debt in connection with the Credit Facility in February 1998.
(10) Net income (loss) per share on a fully diluted basis is the same as primary
earnings per share for all periods presented, except in 1995 when the basic
earnings per share was $.75 due to the assumed conversion of preferred
stock outstanding at that time.
(11) Reflects retroactively the effects of (i) a 15.0% stock dividend paid in
1996 and (ii) a 2.8 for 1 stock split.

24
<PAGE> 26

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 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.
All four ANDAs have been approved by the FDA. In 1996 Mallinckrodt paid the
Company for two of these ANDAs and as of March 31, 1998, Mallinckrodt paid the
Company for a third ANDA. The final ANDA was approved by the FDA in April 1998
and payment will be received upon validation of the process. If the validation
process is not completed by June 13, 1998, the payment to the Company will be
reduced to $1.5 million.

Since December 1994, the Company has acquired 30 branded pharmaceutical
products, developed three products internally, divested one product and
introduced seven product line extensions. Branded pharmaceutical products
represented approximately 70.3% of the net sales of the Company for the three
months ended March 31, 1998, with the Cortisporin product line representing
20.3% 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.

In February 1998, the Company consummated the Sterile Products Acquisition
acquiring 15 branded prescription pharmaceutical products from Warner-Lambert.
The Sterile Products Acquisition includes Fluogen which was not sold in 1997.
Fluogen was subject to a voluntary recall due to shelf life potency concerns in
1996. Subsequent testing has established Fluogen's shelf life potency and the
Company is currently marketing Fluogen in 1998. See "Risk Factors -- Product
Liability; Product Recall; Product Returns."

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 incremental 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

25
<PAGE> 27

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 Company has a number of manufacturing contracts with a variety of
pharmaceutical and biotechnology companies which expire at various times within
the next five years. The Company intends to enter into additional manufacturing
contracts in cases where the Company identifies contracts that offer significant
volumes and attractive margins. The Company has not accepted or renewed
manufacturing contracts for third parties where the Company perceived
insignificant volumes or revenues.

The following summarizes approximate net revenues by product categories.

<TABLE>
<CAPTION>
THREE
MONTHS
FISCAL YEAR ENDED DECEMBER 31, PRO FORMA ENDED PRO FORMA
------------------------------------- --------------- MARCH 31, --------------
1994 1995 1996 1997 1997 % 1998 1998 %
------- ------- ------- ------- -------- ---- --------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Branded pharmaceuticals................. $ 305 $ 5,921 $ 2,938 $37,912 $ 94,065 76.4% $17,569 $25,113 70.1%
Generic pharmaceuticals................. 1,711 7,492 1,572 1,658 1,658 1.4 132 132 0.4
Contract manufacturing.................. 11,295 12,028 10,890 6,982 25,982 21.1 4,518 7,818 21.8
Companion animal health................. -- -- 57 799 799 0.6 100 100 0.3
Development revenues.................... -- -- 5,000 558 558 0.5 2,658 2,658 7.4
------- ------- ------- ------- -------- ---- ------- ------- ----
Total........................... $13,311 $25,441 $20,457 $47,909 $123,062 100% $24,977 $35,821 100%
======= ======= ======= ======= ======== ==== ======= ======= ====
</TABLE>

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 1998 AND 1997

Revenues

Net revenues increased $16.2 million, or 184.1%, to $25.0 million in 1998
from $8.8 million in 1997, due primarily to the acquisition of branded products.
Of these acquired products, the Cortisporin product line contributed $5.1
million in 1998 compared to $3.8 million in 1997, while the acquisition of six
branded products in November 1997 and the Sterile Products Acquisition branded
products contributed $3.7 and $6.7 million in 1998, respectively.

Revenues from contract manufacturing increased $2.5 million, or 129.2%, to
$4.5 million in 1998 from $2.0 million in 1997, due primarily to the increased
contract manufacturing related to the Sterile Products Acquisition offset in
part by the expiration of a contract.

Additionally, the Company recognized $2.7 million in development revenues
primarily as a result of the FDA approval and validation of the process of one
additional ANDA related to the Anexsia Transaction during the three months ended
March 31, 1998.

Operating Costs and Expenses

Total operating costs and expenses increased $8.3 million, or 120.3%, to
$15.2 million in 1998 from $6.9 million in 1997. 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 $5.3 million, or 256.9%, to $7.4 million in 1998
from $2.1 million in 1997. The increase was due primarily to the costs
associated with the newly acquired branded product lines. In 1998, the
percentage increase in cost of sales was greater than the percentage increase in
net revenues due to the additional contract manufacturing related to the Sterile
Products Acquisition, which has lower gross margins than the branded products,
along with $1.1 million of unabsorbed overhead included in cost of sales in
1998, which resulted from lower than expected production of two branded products
and one contract at the Parkedale Facility. The Cortisporin product line
contributed $4.6 million of gross profit in 1998, representing a gross margin
for the Cortisporin product line of 91.6%. Cost associated with the development
revenues in 1998, consisting of an allocation of labor costs associated with the
personnel involved in the development and filing of ANDAs, was estimated by
management to be between $80,000 and $150,000, respectively.

Selling, general and administrative expenses increased $2.4 million, or
54.6%, to $6.8 million in 1998 from $4.4 million in 1997. This increase was
primarily attributable to the hiring of additional sales

26
<PAGE> 28

representatives during 1997, other additional personnel costs and marketing,
promotion and sampling costs associated with the new branded product lines.

Depreciation and amortization expense increased $668,000, or 157.9%, to
$1.1 million in 1998 from $423,000 in 1997. This increase was primarily
attributable to the depreciation and amortization of the intangible and fixed
assets acquired with the branded products acquisitions in 1997 and the Sterile
Products Acquisition in 1998.

Operating Income

Operating income increased $7.8 million, or 408.4% to $9.7 million in 1998
from $1.9 million in 1997. This increase was primarily due to increased revenues
from the acquisition of branded products. As a percentage of net revenues,
operating income increased to 39.0% in 1998 from 21.7% in 1997.

Interest Expense

Interest expense increased $2.3 million, or 500.7% to $2.7 million in 1998
from $450,000 in 1997, as a result of additional term loans used to finance, in
part, the acquisitions of branded products.

Income Tax (Benefit) Expense

The effective tax rate in 1998 of 37.8% and 1997 of 38.2% was higher than
the federal statutory rate of 34.0% primarily due to state income taxes.

Net Income

Due to the factors set forth above, net income increased $3.2 million, or
342.3%, to $4.1 million in 1998 from $921,000 in 1997.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

Revenues

Net revenues increased $27.4 million, or 133.7%, to $47.9 million in 1997
from $20.5 million in 1996. This increase was due primarily to the acquisition
of thirteen branded products since October 1996. Of these acquired products, the
Cortisporin product line contributed $21.7 million from the date of acquisition
(March 21, 1997) through December 31, 1997, or 45.3% of total net sales, while
the Company's additional branded products contributed an additional $15.5
million, or 32.4%. 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 1997 related to this contract, compared to $5 million
recognized in 1996. Revenues from contract manufacturing decreased $3.9 million,
or 35.8%, to $7.0 million in 1997 from $10.9 million in 1996, due primarily to
the expiration of a manufacturing contract.

Operating Costs and Expenses

Total operating costs and expenses increased $12.7 million, or 58.0%, to
$34.6 million in 1997 from $21.9 million in 1996. The increase was due to
increases in the costs of sales, selling, general and administrative expenses
and depreciation and amortization expenses.

Costs of sales increased $4.2 million, or 32.3%, to $13.0 million in 1997
from $8.8 million in 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 $19.8 million of gross profit in 1997, representing a gross margin
for the Cortisporin Product Line of 91.0%. Cost associated with the development
revenues in 1996, consisting of an allocation of labor costs associated with the
personnel involved in the development and filing of ANDAs, was estimated by
management to be between $70,000 and $130,000.

27
<PAGE> 29

Selling, general and administrative expenses increased $7.0 million, or
57.9%, to $19.1 million in 1997 from $12.1 million in 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 $1.4 million, or 142.6%, to
$2.4 million in 1997 from $982,000 in 1996. This increase was primarily
attributable to the amortization of the purchase price of the new branded
product lines.

Operating Income

Operating income increased $14.8 million to $13.4 million in 1997 from an
operating loss of $1.4 million in 1996. As a percentage of net revenues,
operating income was 28.3% in 1997. This increase was primarily due to increased
revenues from the acquisition of 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 $1.5 million, or 115.4%, to $2.8 million in 1997
from $1.3 million in 1996, as a result of additional term loans used to finance,
in part, the acquisitions of branded products.

Income Tax (Benefit) Expense

The effective tax rate in 1997 of 37.7% was higher than the federal
statutory rate of 34% due to state income taxes.

Net Income

Due to the factors set forth above, net income increased $6.8 million to
$6.6 million in 1997 from a net loss of $240,000 in 1996.

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

28
<PAGE> 30

smaller product lines in the fourth quarter of 1996. Cost associated with the
development revenues in 1996, consisting of an allocation of labor costs
associated with personnel involved in the development and filing of ANDAs was
estimated by management to be between $80,000 and $150,000.

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

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.

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.

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 1994 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

29
<PAGE> 31

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.

In November 1997, the purchase price of the Glaxo Acquisition of $23.0
million was financed with a new $40.0 million term loan and a related $12.0
million revolving line of credit, which was also used to refinance all existing
borrowings for product acquisitions. On February 27, 1998, the Company
consummated the Sterile Products Acquisition $125.0 million which was financed
with the Credit Facility. The Company also used a portion of the Credit Facility
to pay off approximately $50.0 million of long-term debt which was then
outstanding, including the borrowings used for the Glaxo Acquisition.

As of March 31, 1998, the Company had available up to $10.0 million under
its revolving line of credit which allows for total borrowing of up to $20.0
million.

THREE MONTHS ENDED MARCH 31, 1998

Net cash used in operating activities was $5.4 million for the three months
ended March 31, 1998. The Company's net use of operating cash was primarily a
result of increases in accounts receivable and inventory of $28.2 million offset
by increases in accounts payable, accrued expenses and income taxes of $18.4
million plus net income and depreciation and amortization.

Cash flows used in investing activities was $125.2 million due principally
to the Sterile Products Acquisition for $126.1 million including the costs, fees
and expenses of acquisition, and other purchases of equipment.

Net cash provided by financing activities was $130.5 million which was a
result of the Credit Facility in the amount of $167.7 million, net of $7.3
million of debt issuance costs, used to finance the Sterile Products Acquisition
and to repay the $40.0 million senior secured term loan. In addition, borrowings
under the revolving line of credit increased $3.8 million to fund increases in
working capital.

YEAR ENDED DECEMBER 31, 1997

Net cash provided by operating activities was $5.0 million for the year
ended December 31, 1997. The Company's net operating cash in 1997 was primarily
the result of $6.6 million in net income resulting from the purchase of
additional branded products, offset by $2.4 million in depreciation and
amortization, additional income taxes and deferred taxes of $1.5 million, and
related increases in accounts receivable, inventories, accounts payable and
accrued expenses of $6.3 million, $4.8 million, $3.6 million and $2.2 million,
respectively.

Net cash used in investing activities for the year ended December 31, 1997
was $54.0 million and was the result of cash of $52.4 million paid for the
acquisition of new branded product lines as well as cash of $1.4 million paid
for purchases of property and equipment.

Net cash provided by financing activities was $47.6 million, which was the
result of (i) aggregate borrowings of $14.0 million to finance the acquisition
of the Cortisporin product line in March 1997, other product acquisitions
totaling $6.6 million financed in 1997, the refinancing of all remaining
acquisition term loans along with the acquisition of six additional products for
$23.0 million in November 1997, and the net increase in the revolving line of
credit of $6.2 million, offset by payments on long-term debt and capital lease
obligations of $23.8 million, (ii) proceeds from issuance of common shares of
$8.0 million in connection with the acquisition of the Cortisporin product line
and (iii) repayment on shareholder notes receivable of $2.1 million.

As a result of the factors discussed above, cash and cash equivalents
decreased from $1.4 million at December 31, 1996 to $69,000 at December 31,
1997.

30
<PAGE> 32

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
the 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 $2.0
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.

Certain Indebtedness and Other Matters

As of March 31, 1998, the Company had outstanding approximately $184.9
million of long-term debt (including current portion), $1.1 million of
short-term debt and $10.0 million in borrowings under its revolving line of
credit agreement and term loans. Of these amounts, approximately $184.9 million
were at variable rates based on LIBOR and the remainder at fixed rates. The
Company has entered into a $50.0 million interest rate swap hedging transaction
with a commercial bank to exchange its variable LIBOR for fixed rate interest.
The Company does not believe its exposure to changes in interest rates under its
remaining 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.

31
<PAGE> 33

On February 27, 1998, the Company consummated the Sterile Products
Acquisition and, in addition, acquired the Parkedale Facility and certain
contract manufacturing for third parties for $125.0 million. The purchase price
was financed under the Credit Facility. The Company also used a portion of the
Credit Facility to pay off approximately $48.2 million of long-term debt which
was then outstanding. The Credit Facility includes a six-year $20.0 million
revolving line of credit, a six-year $90.0 million amortizing Tranche A term
loan facility and an eight-year $85.0 million Tranche B term loan facility 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 March 31, 1998, after drawing down on the new
line of credit for working capital purposes, the Company had approximately $10.0
million of available borrowing capacity under the Credit Facility.

The Company will use approximately $48.5 million of the proceeds from the
Offering to prepay a portion of the borrowings under the Credit Facility and to
fund future acquisitions of branded pharmaceutical products. See "Use of
Proceeds," "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 the Offering, through additional borrowings or the
issuance of additional debt or equity securities. Adequate funds for these
purposes, whether through the financial markets or from other sources, may not
be available when needed or on terms acceptable to the Company. Insufficient
funds may cause the Company to delay, scale back, or abandon some or all of its
future product acquisition opportunities. See "Risk Factors -- Dependence on
Acquisition of Products." 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.

Capital Expenditures

Capital expenditures, including capital lease obligations, were $73.6
million for the three months ended March 31, 1998 and $1.5 million, $2.2 million
and $1.7 million in 1997, 1996 and 1995, respectively. The principal capital
expenditures included property and equipment purchases and building
improvements. The Company is anticipating total capital expenditures in 1998 to
be approximately $5.0 million primarily to fund additional equipment purchases
and building improvements. As a result of the Sterile Products Acquisition, the
Company expects that it may need to incur additional capital expenditures over
the next few years in connection with the maintenance and operation of the
Parkedale Facility. 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.

SEASONALITY

Although the Company's business is generally non-seasonal, sales of certain
of its products, such as cough/cold products, increases slightly during the
winter months.

RECENT ACCOUNTING PRONOUNCEMENTS

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,
32
<PAGE> 34

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.

33
<PAGE> 35

BUSINESS

COMPANY OVERVIEW

The Company is a vertically 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 30 branded pharmaceutical
products, developed one product internally, divested one product and introduced
seven product line extensions. In February 1998, the Company consummated the
Sterile Products Acquisition, acquired the Parkedale Facility and certain
manufacturing contracts for third parties for $125.0 million. The purchase price
was financed through borrowings under the Credit Facility. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

Branded pharmaceutical products represented 70.1% and 76.4% of the net
sales of the Company during the three months ended March 31, 1998 and the year
ended December 31, 1997, respectively, on a pro forma basis after giving effect
to the Recent Acquisitions and the Sterile Products Acquisition, in each case as
if the acquisition had occurred on January 1, 1997. 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 also manufactures and markets a number of generic
pharmaceutical products and companion animal 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.

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<PAGE> 36

novel drugs which have the potential for high volume sales and products which
fit within core therapeutic or marketing priorities. As a result, major
pharmaceutical companies increasingly have sought to divest small or
non-strategic product lines, which can be profitable for niche pharmaceutical
companies like the Company to manufacture and market. Since December 1994 the
Company has successfully acquired 30 branded products from pharmaceutical
companies including Warner-Lambert and Glaxo Wellcome.

STRATEGY

- Improve Margins Through Integrated Manufacturing. The Company
believes that its broad integrated manufacturing capabilities enhance
its ability to acquire a wide variety of pharmaceutical products, to
integrate such products at attractive operating margins, and to
develop product line extensions. The Company operates two
manufacturing plants and 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 can produce a broad range of dosage forms, including
sterile solutions, freeze-dried (lyophylized) products, injectables,
tablets and capsules, liquids and suspensions, 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.

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<PAGE> 37

RECENT ACQUISITIONS

Certain information regarding the Company's material acquisitions is set
forth below:

<TABLE>
<CAPTION>
ACQUISITION(1) DATE OF ACQUISITION PURCHASE PRICE SOURCE OF FUNDS(2)
- -------------- ------------------- -------------- ------------------
<S> <C> <C> <C>
Anexsia Transaction(3)...... December 1994 $ 17.6 million Seller financing
Nucofed/Quibron............. October 1996 $ 7.0 million Seller financing and
cash from
operations
Proctocort.................. January 1997 $ 1.5 million Bank financing
Cortisporin product line.... March 1997 $ 22.8 million The United Company(4)
and bank financing
Viroptic.................... May 1997 $ 6.0 million Cash from operations
Glaxo Acquisition........... November 1997 $ 23.0 million Bank financing
Sterile Products
Acquisition............... February 1998 $125.0 million(5) Credit Facility
</TABLE>

- ---------------

(1) For additional information, see Note 6 to the Notes to Consolidated
Financial Statements.

(2) All bank financing has been repaid or refinanced with the Credit Facility,
except for the financing provided by The United Company.

(3) The Company sold the Anexsia Product Line to Mallinckrodt in December 1995
for $32.0 million in cash and reported a $13.1 million net gain.

(4) The United Company, along with certain of its affiliates, owns approximately
30.5% of the Common Stock of the Company. The Company sold 8,532,594 shares
to The United Company at a per share price of $1.03 and executed a
Promissory Note in the amount of $1.8 million payable to The United Company
in March 1997. The proceeds were used to fund, in part, the acquisition of
the Cortisporin and Pediotic product lines. See "Certain Transactions."
Based on the assumed initial public offering price of $18.00, the value of
the Common Stock held by The United Company and its affiliates is
approximately $153.6 million.

(5) The purchase price includes the acquisition of the Parkedale Facility and
certain manufacturing contracts for third parties.

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 30 branded pharmaceutical products, developed one product
internally and divested one product.

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<PAGE> 38

While the Company does not intend to limit its acquisition strategy to
specific therapeutic categories, its current branded pharmaceutical products can
be categorized principally as follows: ophthalmic and other anti-infective
products; cardiovascular products; proctology products; and respiratory
products. The Company also markets flu vaccine, hormonal products and other
prescription pharmaceutical products. Certain of the Company's products are:

<TABLE>
<CAPTION>
COMPANY ACQUIRED FROM
PRODUCT AND DATE OF ACQUISITION PRODUCT DESCRIPTION AND INDICATION
- ------- ----------------------- ----------------------------------
<S> <C> <C>
Ophthalmic and Other
Anti-Infective Products
Cortisporin.............. Glaxo Wellcome A full line of prescription antibiotic and
(November 1997) anti-inflammatory formulations of ophthalmic
ointments and suspensions, otic solutions and
suspensions, and topical creams and ointments
indicated for the treatment of
corticosteroid-responsive dermatoses with secondary
infections.
Viroptic................. Glaxo Wellcome A sterile solution indicated for the treatment of
(May 1997) 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.
Neosporin(1)............. Glaxo Wellcome A prescription strength ophthalmic ointment and
(November 1997) solution indicated for the topical treatment of
ocular infections. It is also formulated as a
prescription strength genito-urinary concentrated
sterile irrigant indicated for short-term use as a
continuous irrigant or rinse to help prevent
infections associated with the use of indwelling
catheters.
Polysporin(1)............ Glaxo Wellcome A prescription strength wide range antibacterial
(November 1997) sterile ointment indicated for the topical
treatment of superficial ocular infections.
Vira-A................... Warner-Lambert An antiviral ointment indicated for the topical
(February 1998) treatment of ocular infections caused by the Herpes
simplex virus types 1 and 2.
Chloromycetin............ Warner-Lambert A broad spectrum antibiotic ophthalmic ointment and
(February 1998) solution indicated for the treatment of serious
bacterial infections that are not responsive to
other antibiotics or when other antibiotics are
contraindicated. This product is also available in
an otic solution and sterile injectable form for
intravenous administration in the treatment of
acute infections caused by salmonella and meningeal
infections.

Cardiovascular Products
Procanbid................ Warner-Lambert A procainamide extended-release tablet indicated
(February 1998) for the treatment of documented ventricular
arrhythmia, such as sustained ventricular
tachycardia, that, in the judgment of a physician,
are life-threatening.
Thalitone................ Horus Therapeutics, A hypertension-diuretic tablet indicated for the
Inc. management of hypertension, either alone or in
(December 1996) combination with other antihypertensive drugs, and
for edema associated with congestive heart failure
and various forms of renal dysfunction.

Proctology Products
Anusol-HC(1)............. Warner-Lambert A suppository and cream indicated for the relief of
(February 1998) inflammation accompanying hemorrhoids (piles),
post-irradiation proctitis, cryptitis, and other
inflammatory conditions of the anorectum.
Proctocort............... Solvay Pharmaceuticals, A hemorrhoidal preparation cream with
Inc. hydrocortisone acetate which the Company has also
(January 1997) developed into a suppository form.
</TABLE>

37
<PAGE> 39

<TABLE>
<CAPTION>
COMPANY ACQUIRED FROM
PRODUCT AND DATE OF ACQUISITION PRODUCT DESCRIPTION AND INDICATION
- ------- ----------------------- ----------------------------------
<S> <C> <C>

Respiratory Products
Quibron.................. Roberts Pharmaceutical A respiratory preparation containing theophylline
Corporation produced in capsule, tablet and sustained-release
(October 1996) tablet forms; indicated for the relief, treatment
and/or prevention of asthma, chronic bronchitis,
emphysema, and similar chronic lung diseases.
Nucofed.................. Roberts Pharmaceutical A dye-free cough/cold preparation containing
Corporation codeine and pseudoephedrine hydrochloride produced
(October 1996) in syrup and capsule forms; indicated for the
treatment of coughing and congestion where both are
associated with upper respiratory infections and
related conditions, such as common cold,
bronchitis, influenza and sinusitis.
Tussend.................. Not applicable An internally developed cough/cold preparation
containing hydrocodone produced in syrup, tablet
and elixir forms; indicated for the relief and
treatment of nonproductive coughs accompanying
respiratory tract congestions due to colds, acute
respiratory infections, bronchitis, and hay fever.
Histoplasmin............. Warner-Lambert An aqueous solution used as an aid in the diagnosis
(February 1998) of histoplasmosis (a respiratory infection due to a
fungus) and to differentiate histoplasmosis from
other myotic or bacterial respiratory infections.
Monafed.................. Not applicable An internally developed non-narcotic cough/cold
preparation produced in sustained-release tablet
form indicated for the treatment of coughing and
related conditions associated with upper
respiratory infections, common cold, bronchitis,
influenza and sinusitis.
Other Key Products
Fluogen.................. Warner-Lambert A trivalent vaccine for immunization against
(February 1998) influenza (flu); composition of the vaccine is
determined each year by the Centers for Disease
Control and Center for Biologics Evaluation and
Research.
Septra................... Glaxo Wellcome An antibiotic indicated for the treatment of
(November 1997) infectious diseases, including urinary tract
infections, pneumonia, enteritis and ear infections
in adults and children.
Coly-Mycin............... Warner-Lambert An antibiotic sterile parenteral indicated for the
(February 1998) treatment of acute or chronic infections due to
sensitive strains of certain gram-negative bacteria
and a sterile aqueous suspension for the treatment
of superficial bacterial infections of the external
auditory canal.
Pitocin.................. Warner-Lambert A sterile hormone solution used to initiate or
(February 1998) improve uterine contractions during labor and to
control bleeding or hemorrhage in the mother after
childbirth.
Adrenalin................ Warner-Lambert A sterile solution made from the active principle
(February 1998) of the adrenal medulla used to relieve respiratory
distress and hypersensitivity reactions and restore
cardiac rhythm in cardiac arrest due to various
causes.
- ---------------
(1) The Company has exclusive licenses, free of royalty obligations, to manufacture and market
prescription formulations of these products.
</TABLE>

For the years ended December 31, 1996 and 1997, branded pharmaceutical
products accounted for 14.4% and 79.2%, respectively, of net sales of the
Company. On a pro-forma basis, after giving effect to the Recent Acquisitions
and the Sterile Products Acquisition in each case as if the acquisition had
occurred on January 1, 1997, branded pharmaceutical products would have
represented approximately 76.4% and 70.1% of net sales of the Company for the
year ended December 31, 1997 and the three months ended March 31, 1998,
respectively.

38
<PAGE> 40

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
under the FDA's enforcement policy, two other generic products subject to ANDAs
which have been approved by the FDA and four ANDAs on file. The Company intends
to continue to add new development projects as more pharmaceutical products lose
their patent protection. For the years ended December 31, 1996 and 1997, generic
products accounted for 7.7% and 3.5%, respectively, of net sales of the Company.
On a pro-forma basis, after giving effect to the Recent Acquisitions and the
Sterile Products Acquisition in each case as if the acquisition had occurred on
January 1, 1997, generic products would have represented approximately 1.4% and
0.4% of net sales to the Company for the year ended December 31, 1997 and the
three months ended March 31, 1998, respectively.

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 years ended December 31, 1996 and
1997, companion animal health products accounted for 0.3% and 1.7%,
respectively, of net sales of the Company. On a pro-forma basis, after giving
effect to the Recent Acquisitions and the Sterile Products Acquisition in each
case as if the acquisition had occurred on January 1, 1997, companion animal
health products would have represented approximately 0.6% and 0.3% of net sales
of the Company for the year ended December 31, 1997, and the three months ended
March 31, 1998, respectively.

SALES AND MARKETING

The Company's principal marketing focus is on the sale of branded
pharmaceutical products and it currently has 100 sales representatives who
market throughout the 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 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. For
the years ended December 31, 1996 and 1997, approximately 69.7% and 44.3%,
respectively, of the Company's sales were attributable to three customers. These
customers are wholesale drug distributors through which the Company distributes
its 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

39
<PAGE> 41

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 two manufacturing facilities are the Bristol facility,
located in Bristol, Tennessee (the "Bristol Facility") and the Parkedale
Facility, located in Rochester, Michigan. These facilities have in the aggregate
approximately 1.0 million square feet which include manufacturing, packaging,
laboratory, office and warehouse space. The Company manufactures its products
and products manufactured for third parties 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 five years.

The Company can produce a broad range of dosage formulations, including
sterile solutions, freeze-dried (lyophylized) products, 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. However, currently 13 of its
product lines, including Cortisporin and five of the product lines acquired in
the Glaxo Acquisition and four of the product lines acquired in the Sterile
Products Acquisition, are manufactured in the same facilities in which they were
previously manufactured as the Company has not yet received regulatory approval
for their manufacture at its facilities. Capacity utilization is approximately
50% at the Bristol Facility and is approximately 30% at the Parkedale Facility,
providing the Company with substantial capacity for future growth. 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 and contract manufacturing
requirements are satisfied. See "Risk Factors -- Reliance on Third-Party
Manufacturers."

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
simultaneously deliver reliable services and goods to its customers on a timely
basis. Companies that do not have such support systems in-house must outsource
these services.

The Company manufactures pharmaceutical products for, among others, Amgen,
Inc., Centocor, B.V., Fujisawa Pharmaceutical Company, Genentech, Inc., Genetics
Institute, Inc., Hoffman-LaRoche, Inc., Mallinckrodt, Milex Products, Inc.,
Novartis, Roberts Pharmaceutical Corporation, Santen Incorporated and SmithKline
Beecham. Contract manufacturing represented in the aggregate approximately 21.9%
and 21.2% of the net sales of the Company for the three months ended March 31,
1998 and the year ended December 31, 1997, respectively, on a pro forma basis
after giving effect to the Recent Acquisitions and the Sterile Products
Acquisition, in each case as if the acquisition had occurred on January 1, 1997.
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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview."

The Company requires a supply of quality raw materials and components to
manufacture and package pharmaceutical 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 330 suppliers to deliver the

40
<PAGE> 42

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 March 31, 1998, 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 four ANDA
applications pending with the FDA. In addition, 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 and validation of the process. The FDA has approved all four of these
ANDAs. In the event the validation process is not completed by June 13, 1998,
the payment to the Company for the final approval will be reduced to $1.5
million.

GOVERNMENT REGULATION

All aspects of the Company and its products 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 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
41
<PAGE> 43

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 pharmaceutical products
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 such
governmental agencies and its 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
42
<PAGE> 44

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 appropriate licenses and certificates with the States of
Tennessee and Michigan 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 the FDA Modernization Act of
1997 ("FM Act") The FM Act authorizes the FDA to collect three types of user
fees for prescription drugs through fiscal year 2002. Fees are imposed on: (i)
certain types of applications for approval of drug and biologic products, (ii)
certain establishments where such products are made, and (iii) certain products.
Fees for applications, establishments, and products are determined by the FDA
using criteria delineated in the statute. To date, the Company has paid fees of
approximately $139,000.

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<PAGE> 45

the Company believes the Parkedale Facility is in compliance with the
requirements of the Consent Decree and intends to petition for relief from the
Consent Decree as soon as possible in August 1998. As a result of an FDA
inspection in March and April 1998, the Company received an FDA Form 483 with
respect to the Parkedale Facility. The Company is in the process of responding
to the FDA. For the three months ended March 31, 1998, approximately 43.2% of
the Company's revenues, on a pro forma basis, were attributable to the Parkedale
Facility excluding products that are not manufactured at the Parkedale Facility
for the Company.

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; Consent
Decree."

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 changes 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 and Michigan, have statutes
and regulatory authorities similar to CERCLA and to the EPA. The Company has
hazardous waste hauling agreements 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; Consent Decree."

COMPETITION

The Company competes with other pharmaceutical companies for product and
product line acquisitions. These competitors include Jones Medical Industries,
Inc., ICN Pharmaceuticals, 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,
44
<PAGE> 46

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. 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 U.S. Patents covering the raw materials or
processes used in the manufacture of Thalitone and Procanbid. These patents
expire in 2007 and 2014, respectively. The Company 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 another product. 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, it
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) and a license expiring February
2038 for the prescription formulation of Anusol-HC(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 fails to meet
specified quality control standards, including cGMP with
45
<PAGE> 47

respect to the products, or commits a material breach of other terms and
conditions of the licenses which would have a significant adverse effect on the
uses of the licensed products retained by the licensor, which would include
among other things, marketing products under these trade names outside the
prescription field. See "Risk Factors -- Early Termination of Certain Licenses."

The branded products sold by the Company are sold under a variety of
trademarks. While the Company believes that it has valid proprietary interests
in all currently used trademarks, only certain of the trademarks are registered
with the U.S. government, including those for its principal branded
pharmaceuticals Coly-Mycin-M(R), Fluogen(R), Procanbid(R), Anusol-HC(R),
Cortisporin(R), Neosporin(R), Septra(R), Proctocort(R), Thalitone(R),
Pediotic(R) and Viroptic(R). Additionally, trademark applications for
Monarchpharm(TM), Show Winner(TM) and Monafed(TM) are pending. The Company
intends to market products under the following trademarks: Arthose Chews(TM),
Vetrin(TM), Monahist(TM) and Virtopic(TM). The Company also owns or has pending
the Pro-Kemadrin(R) and Petrin(TM) trademarks and owns the registered service
mark Secure-A-Sample(R).

EMPLOYEES

As of March 31, 1998, the Company employed 894 full-time and 24 part-time
persons. Of such employees, 352 employed at the Parkedale Facility, representing
approximately 39% of the employees of the Company, are covered by a collective
bargaining agreement with the Oil, Chemical & Atomic Workers, International
Union which expires February 28, 2003. The Company believes its employee
relations are good. The Company employs a full-time Chaplain and offers as part
of its employee benefits package access to additional counseling services.

LITIGATION

Many distributors and marketers of anorexigenic drugs have been subject to
claims relating to the use of these drugs, many of which purport to be class
actions. The Company is a co-defendant only in the suits described below, but
expects it may be named in additional lawsuits related to the Company's
production of an anorexigenic drug under contract for SmithKline Beecham.

46
<PAGE> 48

Kentucky and a suit in Circuit Court of Montgomery County, Alabama, both of
which demand damages in an unspecified amount. In March 1998, the Company was
named as a co-defendant in three additional actions. A suit in the Supreme Court
of New York, County of Suffolk, demands compensatory damages of $30.0 million
and punitive damages of $20.0 million. A suit in the Montana Eleventh Judicial
District Court, Flathead County, demands an unspecified amount of general and
special compensatory damages. A suit in the Superior Court of the State of
California, County of Los Angeles, demands damages in an unspecified amount.

PROPERTIES

The Company owns its manufacturing facilities in Bristol, Tennessee and
Rochester, Michigan which consist of, in the aggregate, approximately 1.0
million square feet. These facilities include space for manufacturing,
packaging, laboratories, offices and warehouse. The Company believes these
facilities are adequate for the conduct of its operations.

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<PAGE> 49

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)........................ 45 Chairman of the Board of Directors and Chief
Executive Officer
Jefferson J. Gregory...................... 42 President and Chief Operating Officer of King
Pharmaceuticals, Inc. and of Parkedale
Pharmaceuticals and Director
Joseph R. Gregory(1)...................... 44 Vice Chairman of the Board of Directors of the
Company, President and Chief Operating Officer of
Monarch Pharmaceuticals
Brian G. Shrader.......................... 29 Chief Financial Officer
James E. Gregory.......................... 47 Executive Vice President, General Manager (Bristol)
and Production/Administration
R. Henry Richards, M.D.................... 53 Executive Vice President, Medical Affairs
John P. McCoy............................. 49 Executive Vice President, Quality
Terri D. White-Gregory.................... 35 Executive Vice President, Financial Analyst
John A. A. Bellamy........................ 36 Executive Vice President, Legal Affairs and General
Counsel
Ronald C. Siegfried....................... 56 Executive Vice President, Development
Steven M. Samet........................... 48 Executive Vice President, General Manager
(Parkedale)
Kyle P. Macione........................... 34 Executive Vice President, Investor Relations
Michael R. Hilton......................... 51 Vice President, Sales and Marketing
Thomas K. Rogers, III..................... 44 Vice President, Regulatory Affairs
Norman T. Miller.......................... 64 Senior Director, Regulatory Affairs (Compliance)
Ernest C. Bourne.......................... 57 Director
Lois A. Clarke(3)......................... 53 Director
Frank W. DeFriece, Jr.(1)(2)(3)........... 77 Director
D. Greg Rooker(1)(2)(3)................... 51 Director
Ted G. Wood............................... 60 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

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<PAGE> 50

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, has served as a Director since 1993 and as
Vice Chairman of the Board of Directors of the Company since December 1997.
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.

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 as served as Executive Vice President, General Manager
(Bristol) and 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.

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/Financial Analyst and 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 1994 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

49
<PAGE> 51

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.

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.

Steven M. Samet has served as Executive Vice President, General Manager
(Parkedale Facility) since its acquisition by the Company in February 1998. For
the 12 years prior, he served as Vice President, General Manager of Parke-Davis
Sterile Products Operations, overseeing both Rochester, Michigan and Dublin,
Ireland operations. From 1973 to 1986, he held various operations positions with
both Elkins-Sinn, Inc. and Sterling Drugs. He received an M.B.A. from the
Michigan State Advanced Management Program in 1989 and a B.S. in Biology from
the State University of New York in 1972.

Kyle P. Macione has served as Executive Vice President, Investor Relations
since January 1998 and as Corporate Counsel since March 1996. He was formerly a
corporate attorney with the law firm of Elliott Lawson & Pomrenke in Bristol,
Virginia from 1992 to 1996. He graduated from Washington & Lee University School
of Law with a Juris Doctor in 1991, University of Alabama with a Masters of
Accountancy in 1987, and University of Mississippi with a Bachelor of
Accountancy in 1986. He is a Certified Public Accountant and licensed to
practice law in Tennessee and Virginia.

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 Vice President, Regulatory Affairs,
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.

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<PAGE> 52

Frank W. DeFriece, 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 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 members 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.
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<PAGE> 53

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 $10.0 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 $20.0 million.

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, 1997.

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..................................... 1997 360,918 -0- 4,800
Chairman of the Board and Chief Executive Officer
Jefferson J. Gregory................................ 1997 265,854 -0- 4,800
President and Chief Operating Officer, King
Pharmaceuticals, Inc. and Parkedale
Pharmaceuticals
Joseph R. Gregory................................... 1997 242,588 -0- 4,800
President and Chief Operating Officer, Monarch
Pharmaceuticals
Brian G. Shrader.................................... 1997 137,243 101,475 3,978
Chief Financial Officer
R. Henry Richards, M.D.............................. 1997 218,189 4,000 4,800
Executive Vice President, Medical Affairs
</TABLE>

- ---------------

(1) All Other Compensation reflects the Company's matching contributions to the
Company's 401(k) plan.

STOCK OPTION PLANS

Incentive and Nonqualified 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 3,200,000
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.

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<PAGE> 54

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.

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 options outstanding under the Plan for 220,150 shares
of Common Stock which includes options for shares granted in February 1998 to
Mr. Jefferson J. Gregory (25,000), Mr. Joseph R. Gregory (25,000), Mr. Shrader
(10,000) and Dr. Richards (7,500).

Non-Employee Director Plan. The 1998 Non-Employee Director Plan (the
"Director Option Plan") was adopted by the Board of Directors in February 1998
and is subject to approval of the shareholders at the next annual meeting. The
Director Option Plan is intended to encourage stock ownership by directors of
the Company and to provide those individuals with an additional incentive to
manage the Company in the shareholders' best interests and to provide a form of
compensation that will attract and retain highly qualified individuals as
members of the Board. The Director Option Plan will provide for the granting of
options to non-

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<PAGE> 55

employee directors, as defined, covering an aggregate of 300,000 shares of
Common Stock of the Company, subject to certain adjustments reflecting changes
in the Company's capitalization. The full Board is authorized under the Director
Option Plan to make discretionary grants of options and determine the terms and
conditions of such options. Each member of the Board of Directors who is not an
employee of the Company is eligible to participate; however, grants made must be
approved by the full Board of Directors with such member abstaining. The
Director Option Plan requires that the exercise price for each option granted
under the plan must equal 100% of the fair market value of the Company's Common
Stock on the date the option is granted. Nothing contained in the Director
Option Plan or any agreement to be executed pursuant to the Director Option Plan
will obligate the Company, its Board or its shareholders to retain an optionee
as a Director of the Company.

Currently there are options outstanding under the Director Option Plan for
50,000 shares of Common Stock.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Board of Directors appointed the Compensation Committee in October
1997. For the year ended December 31, 1997, 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.

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<PAGE> 56

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 $1.0 million in 1997 to the Benevolent Fund which was used for general
operating purposes. The Benevolent Fund repaid $571,000 in April 1998 and has
agreed to reimburse the Company for the remaining balance, as of April 30, 1998,
which was approximately $1.1 million. 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 were the beneficial owners of
approximately 30.5% of the Common Stock of the Company as of April 24, 1998.
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 his spouse, 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
Bourne & Co., Inc., an affiliate of Mr. Bourne, a director. The agreement
provides that Bourne & Co., Inc., will receive, upon consummation of the
Offering, a fee equal to 1.0% of the net proceeds to the Company. 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 4,000,000 shares offered
hereby are priced at $18.00 per share, Bourne & Co., Inc., would receive a fee
of approximately $654,000 offset by the monthly retainer fee described above.
See "Underwriting."

In addition, for the years ended December 31, 1996 and 1997, the Company
had paid Bourne & Co., Inc., approximately $92,000 and $651,000, respectively,
for its advisory services in the acquisition of the Cortisporin product line and
$62,000 for consulting services during the year ended December 31, 1997. During
the three months ended March 31, 1998, the Company paid Bourne & Co., Inc.,
approximately $1.9 million for services it provided the Company in connection
with the Credit Facility. Bourne & Co., Inc., 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> 57

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information regarding the ownership
of the Common Stock as of April 24, 1998, 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>
SHARES BENEFICIALLY OWNED(1)
-------------------------------------------------------------------------
NUMBER OF PERCENTAGE NUMBER OF NUMBER OF PERCENTAGE
SHARES PRIOR OUTSTANDING SHARES OFFERED SHARES AFTER OUTSTANDING
EXECUTIVE OFFICERS, DIRECTORS AND 5% SHAREHOLDERS TO OFFERING SHARES HEREBY OFFERING SHARES
- ------------------------------------------------- ------------ ----------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
John M. Gregory(2)........................... 8,468,429 30.2% 297,984(3) 8,170,445 25.5%
Joseph R. Gregory(4)......................... 2,943,150 10.5 60,000 2,883,150 9.0
Jefferson J. Gregory(5)...................... 1,081,635 3.9 50,000 1,031,635 3.2
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 1.6
John McCoy(9)................................ 42,826 * -0- 42,826 *
Terri D. White-Gregory(5).................... -- -- -- -- --
John A. A. Bellamy........................... 38,643 * -0- 38,643 *
Steven M. Samet.............................. 21,000 * -0- 21,000 *
Kyle P. Macione.............................. 10,733 * -0- 10,733 *
Ernest C. Bourne(10)......................... 148,001 * -0- 148,001 *
Frank W. DeFriece, Jr.(10)................... 10,000 * -0- 10,000 *
Lois A. Clarke(10)(11)(12)................... 105,200 * -0- 105,200 *
D. Greg Rooker(10)(13)....................... 50,000 * -0- 50,000 *
Ted G. Wood(10)(11).......................... 38,000 * -0- 38,000 *
---------
All executive officers and directors as
a group (16 persons)....................... 13,932,316 49.8 549,984 13,382,332 41.8
The United Company(14)....................... 5,172,594 18.5 -0- 5,172,594 16.2
OTHER SELLING SHAREHOLDERS:
King Pharmaceuticals Benevolent Fund,
Inc.(15)................................... 211,245 * 175,000 36,245 *
Mary Ann and Herschel P. Blessing(16)........ 471,967 1.7 90,000 381,967 1.2
Mary and Fred Jarvis(17)..................... 119,915 * 29,000 90,915 *
Randal J. Kirk(18)........................... 1,358,863 4.9 1,358,863 -0- *
A. Willard Lester............................ 377,153 1.3 377,153 -0- *
---------
Total shares sold by Selling
Shareholders...................... 2,580,000
=========
</TABLE>

- ---------------

* Less than 1%.
(1) Based on 28,000,000 shares of Common Stock outstanding prior to and
32,000,000 shares outstanding after the offering.
(2) Includes 6,475,660 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; 102,900 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 222,984 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.

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<PAGE> 58

(5) Includes 967,523 shares jointly beneficially owned by Ms. White-Gregory and
Jefferson J. Gregory and 58,000 shares beneficially owned by Gregory
Investments, L.P., the general partners of which are Mr. Gregory and Ms.
White-Gregory.
(6) All of these shares are jointly owned with Mr. Gregory's spouse.
(7) Includes 243,132 shares jointly owned with Dr. Richards' spouse.
(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; 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) Includes 10,000 shares issuable upon the exercise of options granted under
the Director Option Plan.
(11) Ms. Clarke and Mr. Wood are affiliates of The United Company.
(12) Includes 16,800 shares held in the name of Ms. Clarke as custodian for
Donald Alan Clarke, a minor.
(13) Includes 20,000 shares held in trust for the benefit of Mr. Rooker's
children.
(14) 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.
(15) King Pharmaceuticals Benevolent Fund, Inc., is a nonprofit charitable
organization. See "Certain Transactions."
(16) Includes 369,068 shares jointly owned by Mr. and Mrs. Blessing; 55,863
shares owned by Mrs. Blessing; 46,934 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.
(17) Includes 39,714 shares owned by Mr. Jarvis and 180,201 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.
(18) 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."

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<PAGE> 59

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, 32,000,000 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
Company and may have the effect of maintaining the incumbency of the Board of
Directors. See "Risk Factors--Antitakeover Effect of Certain Charter, Bylaws and
Statutory Provisions; Rights Agreement" and "Management."

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<PAGE> 60

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 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

59
<PAGE> 61

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.

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 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
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<PAGE> 62

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.

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 a 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.

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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.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to the Offering, there has not been any public market for the Common
Stock of the Company. No prediction can be made as to the effect, if any, that
market sales of shares or the availability of shares for sale will have on the
market price prevailing from time to time. Nevertheless, sales of substantial
amounts of Common Stock in the public market could adversely affect the
prevailing market price.

Upon completion of the Offering, the Company will have outstanding
32,000,000 shares of Common Stock. All 4,000,000 shares of Common Stock
(4,987,000 shares if the Underwriters' over-allotment option is exercised in
full) sold by the Company and 2,580,000 shares of Common Stock sold by the
Selling Shareholders in the Offering will be freely tradeable without
restriction or further registration under the Securities Act, except that shares
owned by affiliates may generally only be sold in compliance with applicable
provisions of Rule 144. The remaining 25,420,000 shares of Common Stock (the
"Restricted Shares") held by the existing shareholders upon completion of the
Offering will be "restricted" securities within the meaning of Rule 144 and may
not be sold except in compliance with the registration requirements of the
Securities Act or an applicable exemption under the Securities Act, including
sales pursuant to Rule 144.

The Company and certain of its directors, officers and shareholders have
agreed with the Underwriters not to sell or otherwise dispose of any shares of
Common Stock during the Lock-Up, except for issuance by the Company pursuant to
the exercise of stock options granted under the Stock Option Plans where the
person receiving the Common Stock agrees not to sell or otherwise dispose of
such shares until 180 days after the date of this Prospectus. See
"Underwriting." Of the approximately 10,100,000 shares of Common Stock to be
outstanding after the Offering that are not subject to the Lock-Ups, other than
the 6,580,000 shares of Common Stock sold in the Offering, (i) approximately
1,520,000 shares will be immediately eligible for resale in the public market
without restriction in reliance on Rule 144(k) under the Securities Act, and
(ii) approximately 2,000,000 shares may be sold subject to the volume and manner
of sales restrictions of Rule 144. Beginning 180 days after the date of this
Prospectus, after the Lock-Ups have expired, (i) approximately 13,400,000
additional shares of Common Stock will become eligible for resale into the
public market in reliance on Rule 144(k) and (ii) approximately 8,500,000
additional shares may be sold subject to the volume and manner of sales
restrictions of Rule 144. CSFBC may, in its sole discretion and at any time
without notice, waive the provisions of the Lock-Ups.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
Restricted Shares for at least one year (including holding periods of prior
owners) will be entitled to sell in "restricted brokers' transactions" or to
market makers, within any three-month period commencing 90 days after the
Company becomes subject to the reporting requirements of Section 13 of the
Exchange Act, a number of Restricted Shares that does not exceed the greater of
(i) 1% of the then outstanding shares of the Company's Common Stock
(approximately 320,000 shares immediately after the Offering) or (ii) the
average weekly trading volume in the Common Stock during the

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<PAGE> 64

four calendar weeks immediately preceding such sale, subject, generally, to the
filing of a Form 144 with respect to such sales and certain other limitations
and restrictions. In addition, a person (or persons whose shares are
aggregated), who is not deemed to have been an affiliate at any time during the
90 days immediately preceding the sale and who has beneficially owned the
Restricted Shares proposed to be sold for at least two years is entitled to sell
such shares under Rule 144 without regard to the volume limitations described
above.

The Company has granted options exercisable for 220,150 shares under its
Plan, subject to the consummation of the Offering, and options exercisable for
50,000 shares under its Non-Employee Director Plan. Giving effect to the
foregoing option grants, options to purchase an additional 3,229,850 shares of
Common Stock would remain available for issuance pursuant to the Stock Option
Plans. See "Management -- Stock Option Plans." Sales of shares of Common Stock
issuable under the Stock Option Plans are subject to the limitations and
restrictions under Rule 144. The Company intends to file registration statements
under the Securities Act on Form S-8 to register all shares of Common Stock
subject to outstanding options and future grants under the Stock Option Plans.

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

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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
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
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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.

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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NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company and the
Selling Shareholders prepare and file a prospectus with the securities
regulatory authorities in each province where trades of the Common Stock are
effected. Accordingly, any resale of the Common Stock in Canada must be made in
accordance with applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance
with available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the Common Stock.

REPRESENTATIONS OF PURCHASERS

Each purchaser of the Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company, the Selling
Shareholders and the dealer from whom such purchase confirmation is received
that (i) such purchaser is entitled under applicable provincial securities laws
to purchase such Common Stock without the benefit of a prospectus qualified
under such securities laws, (ii) where required by law, that such purchaser is
purchasing as principal and not as agent, and (iii) such purchaser has reviewed
the text above under "-- Resale Restrictions."

RIGHTS OF ACTION (ONTARIO PURCHASERS)

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.

ENFORCEMENT OF LEGAL RIGHTS

All of the Company's directors and officers as well as the experts named
herein and the Selling Shareholders may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the Company or such persons. All or a substantial
portion of the assets of the Company and such persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the Company or such persons in Canada or to enforce a judgment obtained in
Canadian courts against the Company or such persons outside of Canada.

NOTICE TO BRITISH COLUMBIA RESIDENTS

A purchaser of Common Stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Common Stock acquired by such purchaser pursuant to the Offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect of Common Stock acquired on the same date
and under the same prospectus exemption.

TAXATION AND ELIGIBILITY FOR INVESTMENT

Canadian purchasers of Common Stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the Common Stock for investment by the purchaser under relevant Canadian
legislation.

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UNDERWRITING

Under the terms and subject to the conditions contained in an Underwriting
Agreement, dated the date of this Prospectus (the "Underwriting Agreement")
among the Company, the Selling Shareholders and the underwriters named below
(the "Underwriters"), for whom CSFBC and Hambrecht & Quist LLC are acting as the
representatives (the "Representatives"), the Underwriters have severally, but
not jointly, agreed to purchase from the Company and the Selling Shareholders,
the following respective numbers of shares of Common Stock:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Hambrecht & Quist LLC.......................................
---------
Total............................................. 6,580,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the shares of Common Stock
offered hereby (other than those shares covered by the over-allotment option
described below) if any are purchased. The Underwriting Agreement provides,
that, in the event of a default by an Underwriter, in certain circumstances the
purchase commitments of non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.

The Company has granted to the Underwriters an option exercisable by CSFBC,
expiring at the close of business on the 30th day after the date of this
Prospectus, to purchase up to 987,000 additional shares of Common Stock at the
initial public offering price, less the underwriting discounts and commissions,
all as set forth on the cover page of this Prospectus. Such option may be
exercised only to cover over-allotments in the sale of the shares of Common
Stock. To the extent that the option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares of Common Stock as it was obligated to
purchase pursuant to the Underwriting Agreement.

The Company and the Selling Shareholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock to the public initially at the public offering price set forth on the
cover page of this Prospectus and, through the Underwriters, to certain dealers
at such price less a concession of $ per share and the Underwriters and
such dealers may allow a discount of $ per share on sales to certain
other dealers. After the Offering, the public offering price and concession and
discount to dealers may be changed by the Representatives.

The Representatives have informed the Company and the Selling Shareholders
that they do not expect discretionary sales by the Underwriters to exceed 5% of
the shares being offered hereby.

The Company intends to use more than 10% of the net proceeds from the sale
of shares to repay indebtedness owed by it to Credit Suisse First Boston.
Accordingly, the Offering is being made in compliance with the requirements of
Rule 2710(c)(8) of the National Association of Securities Dealers, Inc. Conduct
Rules. This rule provides generally that if more than 10% of the net proceeds
from the sale of stock, not including underwriting compensation, is paid to the
underwriters or their affiliates, the initial public offering price of the stock
may not be higher than that recommended by a "qualified independent underwriter"
meeting certain standards. Accordingly, Hambrecht & Quist LLC is assuming the
responsibilities of acting as the qualified independent underwriter in pricing
the Offering and conducting due diligence. The initial public offering price of
the shares set forth on the cover page of this Prospectus is no higher than the
price recommended by Hambrecht & Quist LLC.

The Company and certain of its directors, officers and shareholders have
agreed that they will not offer, sell, contract to sell, announce their
intention to sell, pledge or otherwise dispose of, directly or indirectly, or,
in the case of the Company file with the Securities and Exchange Commission (the
"Commission") a registration statement under the Securities Act relating to any
additional shares of the Common Stock or securities convertible into or
exchangeable or exercisable for any shares of the Common Stock, without the

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prior written consent of CSFBC during the Lock-Up, except for issuance by the
Company pursuant to the exercise of stock options granted under the Stock Option
Plans where the person receiving the Common Stock agrees not to sell or
otherwise dispose of such shares until 180 days after the date of this
Prospectus.

The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or contribute to payments which the Underwriters may be required
to make in respect thereof.

The Common Stock has been approved, subject to official notice of issuance,
for quotation on the Nasdaq National Market under the symbol "KING."

Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price will be negotiated between the Company
and the Representatives. Among the material factors to be considered in
determining the initial public offering price of the Common Stock, in addition
to the prevailing market conditions, will be 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. There can be no assurance that the initial
public offering price of the Common Stock will correspond to the price at which
the Common Stock will trade in the public market subsequent to the Offering or
that an active public market for the Common Stock will develop or continue after
the Offering. See "Risk Factors -- No Prior Public Market; Possible Volatility
of Stock Price."

The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions, and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934 (the "Exchange Act"). Over-allotment involves syndicate sales in excess
of the offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the shares of Common Stock in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the Representatives to reclaim a selling
concession from a syndicate member when the shares of Common Stock originally
sold by such syndicate member are purchased in a syndicate covering transaction
to cover syndicate short positions. Such stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the Common Stock
to be higher than it would otherwise be in the absence of such transactions.
These transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.

As required by the Credit Facility, the Company will use approximately
$48.5 million of the net proceeds of the Offering to repay a portion of the
outstanding debt under the Credit Facility. The Credit Facility includes a
six-year $20.0 million revolving line of credit, a six-year $90.0 million
amortizing Tranche A term loan facility and an eight-year $85.0 million Tranche
B term loan facility 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. At March 31, 1998 interest
rates for the various components of the Credit Facility ranged from
approximately 8.4% to 8.9%. Under the terms of the Credit Facility, any proposed
repayment is required to be offered first to the holders of the Tranche B term
loan, then to the holders of the Tranche A term loan. Assuming that the holders
of the Tranche B term loan decline to accept any repayment, the Company expects
that approximately $8.8 million of the $48.5 million of the net proceeds of the
Offering will be used to repay Credit Suisse First Boston's portion of the
outstanding debt under the Credit Facility. A portion of the proceeds of the
Credit Facility were used to consummate the Sterile Products Acquisition,
purchase the Parkedale Facility and acquire certain contract manufacturing for
third parties. Proceeds of the Credit Facility were also used to pay off
outstanding amounts of approximately $48.2 million under a prior credit
facility.

The Company has agreed to pay Bourne & Co., Inc., an affiliate of Ernest C.
Bourne, a director, 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 the Offering will be offset by the amount
of the monthly retainer paid prior to the consummation of the Offering. Assuming
the 4,000,000 shares offered hereby are priced at $18.00 per share,

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Bourne & Company would receive a fee of approximately $654,000 offset by the
monthly retainer fee described above.

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,
1996 and 1997 and for each of the three years in the period ended December 31,
1997, the statement of Product Contribution of the Cortisporin Product Line for
each of the two years in the period ended December 31, 1996 and the combined
statement of Product Contribution 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 Brand
Contribution for each of the three years in the period ended December 31, 1997
and the statement of fixed assets as of December 31, 1996 and 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 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.

69
<PAGE> 71

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, 1996 and
1997 and March 31, 1998 (unaudited)................... F-3
Consolidated Statements of Operations for the years
ended December 31, 1995, 1996 and 1997 and for the
three months ended March 31, 1997 (unaudited) and 1998
(unaudited)........................................... F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1996 and 1997 and for the
three months ended March 31, 1997 (unaudited) and 1998
(unaudited)........................................... F-5
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1995, 1996 and
1997 and the three months ended March 31, 1998
(unaudited)........................................... F-7
Notes to Consolidated Financial Statements................ F-8
Cortisporin Product Line
Report of Independent Accountants......................... F-23
Statement of Product Contribution......................... F-24
Notes to Financial Statement.............................. F-25
Glaxo Wellcome Product Line
Report of Independent Accountants......................... F-27
Combined Statement of Product Contribution................ F-28
Notes to the Combined Financial Statement................. F-29
Warner-Lambert Company's Sterile Products Operations
Report of Independent Accountants on Special Purpose
Financial Statements................................... F-31
Statement of Fixed Assets................................. F-32
Statement of Brand Contribution........................... F-33
Notes to Financial Statements............................. F-34
Pro Forma Consolidated Financial Statements................. F-37
Pro Forma Consolidated Statement of Operations for the
year ended December 31, 1997........................... F-38
Pro Forma Consolidated Statement of Operations for the
three months ended March 31, 1998...................... F-39
Notes to Pro Forma Consolidated Financial Statements........ F-40
</TABLE>

F-1
<PAGE> 72

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, 1996 and 1997, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 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, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.

/s/ COOPERS & LYBRAND L.L.P.

Greensboro, North Carolina
April 2, 1998

F-2
<PAGE> 73

KING PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1996 1997 1998
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,392 $ 69 $ 4
Accounts receivable, net of allowance for doubtful
accounts of $93, $638 and $620, respectively........... 2,305 8,561 21,569
Inventories............................................... 6,097 10,850 26.040
Marketable securities..................................... 209 -- --
Deferred income taxes..................................... 499 2,013 2,013
Income taxes receivable................................... 652 -- --
Shareholder notes receivable.............................. 2,093 -- --
Prepaid expenses and other assets......................... 638 1,319 1,618
------- -------- --------
Total current assets.............................. 13,885 22,812 51,244
------- -------- --------
Property, plant and equipment, net.......................... 16,691 17,170 90,157
Intangible assets, net...................................... 8,703 62,783 116,819
Other assets................................................ -- 2,098 9,540
------- -------- --------
Total assets...................................... $39,279 $104,863 $267,760
======= ======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes Payable............................................. $ -- $ 916 $ 1,137
Current portion of long-term debt......................... 4,031 8,084 7,719
Accounts payable.......................................... 844 5,871 20,735
Accrued expenses.......................................... 1,261 6,503 10,451
Income taxes payable...................................... -- 1,862 4,337
------- -------- --------
Total current liabilities......................... 6,136 23,236 44,379
------- -------- --------
Long-term debt.............................................. 13,980 48,289 187,206
Deferred income taxes....................................... 3,470 4,004 2,763
------- -------- --------
Total liabilities................................. 23,586 75,529 234,348
------- -------- --------
Commitments and contingencies
Shareholders' equity:
Common shares no par value, 150,000,000 shares authorized,
19,467,406, 28,000,000 and 28,000,000 shares issued and
outstanding, respectively.............................. 8,448 16,455 16,455
Retained earnings......................................... 7,938 14,550 18,625
Due from related party.................................... (677) (1,671) (1,668)
Unrealized loss on marketable securities, net of tax...... (16) -- --
------- -------- --------
Total shareholders' equity........................ 15,693 29,334 33,412
------- -------- --------
Total liabilities and shareholders' equity........ $39,279 $104,863 $267,760
======= ======== ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-3
<PAGE> 74

KING PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FOR THE THREE
FOR THE YEARS ENDED MONTHS
DECEMBER 31, ENDED MARCH 31,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Net sales...................................... $25,441 $15,457 $47,351 $ 8,786 $22,319
Development revenues........................... -- 5,000 558 -- 2,658
------- ------- ------- ------- -------
Total revenues......................... 25,441 20,457 47,909 8,786 24,977
------- ------- ------- ------- -------
OPERATING COSTS AND EXPENSES:
Cost of sales.................................. 12,130 8,782 13,034 2,063 7,364
Selling, general and administrative............ 8,605 12,106 19,123 4,394 6,832
Depreciation and amortization.................. 1,777 982 2,395 423 1,091
------- ------- ------- ------- -------
Total operating costs and expenses,
net.................................. 22,512 21,870 34,552 6,880 15,287
------- ------- ------- ------- -------
GAIN ON SALE OF PRODUCT LINE, NET................ 13,102 -- -- -- --
------- ------- ------- ------- -------
OPERATING INCOME (LOSS).......................... 16,031 (1,413) 13,357 1,906 9,690
------- ------- ------- ------- -------
OTHER (EXPENSES) INCOME:
Gain on sale of investment in affiliate........ -- 1,760 -- -- --
Interest expense............................... (2,006) (1,272) (2,749) (450) (2,703)
Other income, net.............................. 367 578 4 67 24
Loss on sale of stock.......................... -- -- (32) (32) --
------- ------- ------- ------- -------
Total other (expenses) income.......... (1,639) 1,066 (2,777) (415) (2,679)
------- ------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM............................. 14,392 (347) 10,580 1,491 7,011
Income tax expense (benefit)................... 5,058 (107) 3,968 570 2,650
------- ------- ------- ------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.......... 9,334 (240) 6,612 921 4,361
Extraordinary item net of income taxes of $272
and $175, respectively...................... 528 -- -- -- (286)
------- ------- ------- ------- -------
NET INCOME (LOSS)................................ $ 9,862 $ (240) $ 6,612 $ 921 $ 4,075
======= ======= ======= ======= =======
Basic income (loss) per common share:
Income (loss) before extraordinary item..... $ 0.71 $ (0.02) $ 0.25 $ 0.04 $ 0.15
Extraordinary item.......................... 0.04 -- -- -- --
------- ------- ------- ------- -------
Net income (loss)........................... $ 0.75 $ (0.02) $ 0.25 $ 0.04 $ 0.15
======= ======= ======= ======= =======
Diluted income (loss) per common share:
Income (loss) before extraordinary item..... $ 0.66 $ (0.02) $ 0.25 $ 0.04 $ 0.15
Extraordinary item.......................... 0.04 -- -- -- --
------- ------- ------- ------- -------
Net income (loss)........................... $ 0.70 $ (0.02) $ 0.25 $ 0.04 $ 0.15
======= ======= ======= ======= =======
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-4
<PAGE> 75

KING PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
FOR THE THREE
FOR THE YEARS ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
--------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 9,862 $ (240) $ 6,612 $ 921 $ 4,075
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization........................... 1,777 982 2,395 423 1,091
Loss on sale of marketable securities................... -- 1 32 32 --
Extraordinary item...................................... (800) -- -- -- 461
Gain on sale of product line............................ (15,608) -- -- -- --
Gain on sale of property and equipment.................. -- (54) -- -- --
Gain on sale of investment in affiliate................. -- (1,760) -- -- --
Income from equity in earnings of affiliated company.... (166) -- -- -- --
Deferred income taxes................................... 2,193 410 (980) (9) (1,241)
Changes in operating assets and liabilities:
Accounts receivable..................................... (876) 467 (6,256) (3,202) (13,008)
Inventories............................................. (1,326) (1,895) (4,753) (534) (15,190)
Prepaid expenses and other current assets............... 12 (335) (332) 111 74
Accounts payable........................................ (288) (83) 3,604 899 14,864
Accrued expenses........................................ (220) (138) 2,180 1,595 1,035
Income taxes............................................ 2,855 (3,624) 2,514 579 2,475
--------- --------- --------- -------- ---------
Net cash provided by (used in) operating activities..... (2,585) (6,269) 5,016 815 (5,364)
--------- --------- --------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment....................... (1,672) (1,069) (1,379) (220) (73,642)
Purchase of intangible assets............................. (60) (2,974) (52,428) (25,243) (51,559)
Acquisition related costs................................. -- -- (373) -- --
Purchases of marketable securities........................ -- (307) -- -- --
Proceeds from sales of marketable securities.............. -- 72 203 203 --
Proceeds from sale of product line........................ 32,000 -- -- -- --
Proceeds from sale of investment in affiliated company.... -- 2,052 -- -- --
Proceeds from sale of property and equipment.............. -- 100 -- -- --
--------- --------- --------- -------- ---------
Net cash provided by (used in) investing
activities........................................ 30,268 (2,126) (53,977) (25,260) (125,201)
--------- --------- --------- -------- ---------
Cash flows from financing activities:
Proceeds from revolving line of credit.................... 200,847 -- 29,599 5,193 17,139
Payments on revolving line of credit...................... (198,405) (3,403) (23,447) (2,081) (13,291)
Proceeds from issuance of common shares, net of expenses
of $743................................................. -- 2,844 8,007 8,007 --
Payments to retire 8% cumulative common shares............ (100) -- -- -- --
Book overdraft............................................ -- -- 1,423 -- --
Repayment on shareholder notes receivable................. -- -- 2,093 600 --
Proceeds from short-term debt............................. -- -- -- 185 --
Payment on short-term debt................................ -- -- -- (52) (118)
Proceeds from long-term debt.............................. 329 2,549 55,923 15,750 175,000
Payments on long-term debt and capital lease
obligations............................................. (20,127) (2,772) (23,798) (467) (40,296)
Dividends on preferred shares............................. (8) -- -- -- --
Due from affiliate........................................ (679) 1 (994) -- 3
Initial public offering costs............................. -- -- (710) -- (602)
Debt Issuance costs....................................... -- -- (458) -- (7,335)
--------- --------- --------- -------- ---------
Net cash (used in) provided by financing
activities........................................ (18,143) (781) 47,638 27,135 130,500
--------- --------- --------- -------- ---------
Increase (decrease) in cash................................. 9,540 (9,176) (1,323) 2,690 (65)
Cash and cash equivalents, beginning of period.............. 1,028 10,568 1,392 1,392 69
--------- --------- --------- -------- ---------
Cash and cash equivalents, end of period.................... $ 10,568 $ 1,392 $ 69 $ 4,082 $ 4
========= ========= ========= ======== =========
Supplemental disclosure of cash paid for:
Interest............................................ $ 2,505 $ 1,170 $ 2,335
========= ========= =========
Taxes............................................... $ 283 $ 3,078 $ 2,445
========= ========= =========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-5
<PAGE> 76
KING PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)

Supplemental schedule of non-cash investing and financing activities:

During 1997, the Company entered into a financing arrangement to have
certain payments made for machinery and equipment. Deposits of $557 were
outstanding on behalf of the Company at December 31, 1997.

At December 31, 1997, the Company has prepaid insurance of $359 that
was financed with a note payable.

The Company purchased intangible assets financed by the seller of
$5,500 during 1996.

For the years ended December 31, 1996 and 1997, the Company entered
into capital leases totaling $1,082 and $85, respectively.

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.

In connection with its purchases of intangible assets the Company
assumed estimated liabilities of $301 and $3,062 for returns of products
shipped prior to acquisition during 1996 and 1997, respectively.

The Company converted its 40,000 shares of Series B Preferred Stock
into 400,000 common shares during 1995.

The accompanying notes are an integral part of the consolidated financial
statements.

F-6
<PAGE> 77

KING PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DUE TOTAL
COMMON PREFERRED UNREALIZED FROM SHARE-
-------------------- ---------------- RETAINED LOSS ON RELATED HOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS SECURITIES PARTY EQUITY
---------- ------- ------- ------ -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994............. 4,000,000 $ 126 50,000 $ 900 $ 909 $ -- $ -- $ 1,935
Conversion of Series B preferred
shares to common shares............ 400,000 800 (40,000) (800) -- -- -- --
Repurchase of 8% cumulative preferred
shares............................. -- -- (10,000) (100) -- -- -- (100)
Dividends on preferred shares........ -- -- -- -- (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 shares............ 1,386,230 4,159 -- -- -- -- -- 4,159
Issuance of common shares 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 loss............................. -- -- -- -- (240) -- -- (240)
---------- ------- ------- ----- ------- ---- ------- -------
Balance, December 31, 1996............. 6,952,645 8,448 -- -- 7,938 (16) (677) 15,693
Issuance of common shares, net of
$743 of expenses................... 3,047,355 8,007 -- -- -- -- -- 8,007
Realized loss on securities.......... -- -- -- -- -- 16 -- 16
Advances to Benevolent Fund.......... -- -- -- -- -- -- (994) (994)
2.8 to 1 common stock split (Note
16)................................ 18,000,000 -- -- -- -- -- -- --
Net income........................... -- -- -- -- 6,612 -- -- 6,612
---------- ------- ------- ----- ------- ---- ------- -------
Balance, December 31, 1997............. 28,000,000 16,455 -- -- 14,550 -- (1,671) 29,334
Payments from Benevolent Fund
(unaudited)........................ -- -- -- -- -- -- 3 3
Net income (unaudited)............... -- -- -- -- 4,075 -- -- 4,075
---------- ------- ------- ----- ------- ---- ------- -------
Balance, March 31, 1998 (unaudited).... 28,000,000 $16,455 -- $ -- $18,625 $ -- $(1,668) $33,412
========== ======= ======= ===== ======= ==== ======= =======
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-7
<PAGE> 78

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)

1. THE COMPANY

King Pharmaceuticals, Inc. ("King" or the "Company") is a vertically
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.

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 are 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.

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. As of December 31,
1997 the Company has $1,423 of book overdrafts classified as accounts payable.

Marketable Securities -- Marketable securities at December 31, 1996
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 of $32 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. A valuation allowance is recorded when, in
the opinion of management, it is more likely than not that some or all of the
deferred tax assets will not be realized (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

F-8
<PAGE> 79
KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

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.

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 fair value.

Other Assets -- Other assets at December 31, 1997 consists of deferred
costs of $710 associated with the Company's proposed initial public offering, a
deposit of $557 for equipment that will be leased back to the Company under an
operating lease, debt issuance costs of $458 and acquisition costs incurred
related to the Warner Lambert Acquisition of $373 (Note 6).

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 to be earned over 4 years. Additionally,
the Company agreed to develop and file four ANDA's with the Food and Drug
Administration ("FDA") on the purchaser's behalf, for $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 $682, $1,298
and $890, for the years ended December 31, 1995, 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,
1995, 1996 and 1997 were $931, $1,283 and $1,583, respectively.

Statement of Accounting Standards Not Yet Adopted -- 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

F-9
<PAGE> 80
KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

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:

A significant portion of the Company's sales are to customers in the
pharmaceuticals industry. Approximately 34% and 20% of accounts receivable at
December 31, 1996 and 1997, respectively were due from one customer. At December
31, 1996 and 1997, an additional 39% and 22%, 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 of significant customers
as a percentage of the Company's total revenues:

<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
McKesson Corporation........................................ n/a n/a 16.7%
Cardinal/Whitmire........................................... n/a n/a 14.0
Bergen Brunswig Corporation................................. n/a n/a 13.6
Amerisource................................................. n/a n/a 10.6
SmithKline Beecham Corporation.............................. 27.0% 18.1% n/a
Mallinckrodt................................................ n/a 36.7 n/a
Novartis Animal Health US, Inc.............................. 11.8 14.9 n/a
DuPont...................................................... 18.1 n/a n/a
</TABLE>

n/a -- sales were less than 10% for the year.

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Land........................................................ $ 306 $ 319
Buildings and improvements.................................. 13,407 13,563
Machinery and equipment..................................... 3,380 4,193
Equipment under capital lease............................... 1,488 1,573
Construction in progress.................................... 189 585
------- -------
18,770 20,233
Less accumulated depreciation............................... (2,079) (3,063)
------- -------
$16,691 $17,170
======= =======
</TABLE>

Depreciation and amortization expense for the years ended December 31,
1995, 1996 and 1997 was $701, $853, and $985, respectively.

F-10
<PAGE> 81
KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

5. INVENTORY:

Inventory consists of the following:

<TABLE>
<CAPTION>
1996 1997
------ -------
<S> <C> <C>
Finished goods.............................................. $3,176 $ 7,568
Work-in-process............................................. 525 494
Raw materials............................................... 2,396 2,788
------ -------
$6,097 $10,850
====== =======
</TABLE>

6. ACQUISITIONS/INTANGIBLE ASSETS

On November 14, 1997, the Company acquired the rights, titles and interests
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
plus the assumption of an estimated liability of $2,084 for returns of products
shipped prior to the acquisition. The entire purchase price was allocated to
intangible assets and will be amortized over its estimated useful life of 25
years. The purchase price was financed under the Company's Senior Secured
Revolving Credit Facility and Senior Secured Term Loan.

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 of returns for 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 of returns for 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 in
the United States 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
in the United States to the Thalitone(R) product line for $1,000, including
inventory valued at $268 and $832 was allocated to 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.

On February 27, 1998, the Company acquired the rights, titles and interest
to certain product lines, production facilities, and assumed contracts or
manufacturing for third parties from Warner-Lambert Company (the "Sterile
Products Acquisition"). The purchase price, including assumed liabilities of
$2,913, of

F-11
<PAGE> 82
KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

$127,913 was allocated to real estate and equipment based on fair values
($44,130 and $28,914, respectively) with the residual ($54,869) being allocated
to intangibles and is being amortized over 5 to 40 years and 25 years,
respectively. The purchase price was financed under the Company's new Credit
Agreement (Note 9).

The following unaudited pro forma summary presents the financial
information as if the acquisitions, including the Sterile Products Acquisition,
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 FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Net revenues......................................... $141,527 $123,062
======== ========
Net income........................................... $ 18,351 $ 6,214
======== ========
Net income per common and common stock equivalent.... $ 1.19 $ 0.24
======== ========
</TABLE>

Intangible assets at December 31 consist of the following:

<TABLE>
<CAPTION>
1996 1997
------ -------
<S> <C> <C>
Septra, Proloprim, Mantadil, Kemadrin....................... $ -- $15,425
Cortisporin................................................. -- 23,694
Neosporin................................................... -- 5,876
Viroptic.................................................... -- 5,229
Nucofed/Quibron............................................. 7,301 7,301
Polysporin.................................................. -- 3,783
Other....................................................... 1,534 3,017
------ -------
8,835 64,325
Less accumulated amortization............................... (132) (1,542)
------ -------
$8,703 $62,783
====== =======
</TABLE>

Amortization expense for the years ended December 31, 1995, 1996, and 1997
was $1,076, $129, and $1,410, 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 December 31, 1997 for leases with initial
or remaining terms in excess of one year are as follows:

Rent expense for the years ended December 31, 1995, 1996 and 1997 was
approximately $111, $196, and $138, respectively.

F-12
<PAGE> 83
KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

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, 1995, 1996
and 1997 was approximately $87, $86 and $44, respectively. As of December 31,
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.................................................. $184
</TABLE>

Capital lease obligations for certain equipment as of December 31, 1997 are
as follows:

<TABLE>
<S> <C>
1998........................................................ $ 404
1999........................................................ 375
2000........................................................ 387
2001........................................................ 241
2002........................................................ 31
------
Total minimum lease payments................................ 1,438
Less imputed interest....................................... 232
------
Present value of minimum lease payments..................... 1,206
Less current maturities..................................... 302
------
$ 904
======
</TABLE>

8. ACCRUED EXPENSES

Accrued expenses at December 31, consist of the following:

<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Payroll and outside personnel services...................... $ 346 $ 555
Returns and chargebacks..................................... 351 4,207
Accrued interest............................................ 110 478
Franchise taxes............................................. 24 146
Incurred but not reported medical claims.................... 108 314
Other....................................................... 322 803
------ ------
$1,261 $6,503
====== ======
</TABLE>

9. LONG-TERM DEBT

Long-term debt consisted of the following:

<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Senior Secured Revolving Credit Facility, paid in February
1998 (see below).......................................... $ -- $ 6,152
Senior Secured Term Loan, paid in February 1998 (see
below).................................................... -- 40,000
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 (see below)............... 6,842 6,027
Note payable to pharmaceutical company, due in five annual
installments of principal and interest (at a rate of 8%)
of $1,378, paid in November 1997.......................... 5,500 --
</TABLE>

F-13
<PAGE> 84
KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Note payable, due in semiannual installments of $588,
through December 1998, plus monthly interest at 8%........ 2,350 1,175
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%, paid in November 1997.............................. 2,014 --
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
Various capital leases with interest rates ranging from 8.3%
to 12.7% and maturing at various times through 2002....... 1,237 1,206
Other notes payable......................................... 68 63
------- -------
18,011 56,373
Less current portion.............................. 4,031 8,084
------- -------
$13,980 $48,289
======= =======
</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 loan with customary
covenants and with a floating interest rate based on LIBOR, plus an applicable
margin. The borrowings under the Revolver are limited to predetermined levels of
trade accounts receivable and inventories. At December 31, 1997, $40,000 was
outstanding under the term loan and $6,152 under the line of credit. 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 repay approximately $19.0 million of long-term
debt which had been outstanding. The Financing was repaid in February 1998.

On February 27, 1998, the Company entered into a $195.0 million credit
agreement ("Credit Agreement"). The Company used the proceeds from the Credit
Agreement to finance the Sterile Products Acquisition (Note 6), and repay the
$40.0 million Term Loan and outstanding borrowings under the Revolver as of
February 27, 1998. The Credit Agreement includes Tranche A Term Loans of $90.0
million with a maturity of December 31, 2003 with a floating interest rate of
either LIBOR plus 2.75% or an alternative rate based on either prime or the fed
funds rate plus 0.5%, plus an applicable margin of 1.75%, Tranche B Term Loans
of $85.0 million with a maturity of December 31, 2005 with a floating interest
rate of either LIBOR plus 3.25% or an alternative rate based on either prime or
the fed funds rate plus 0.5%, plus an applicable margin of 2.25%; and Revolving
Loans of $20.0 million with a maturity of February 27, 2004 with a floating
interest rate based on either LIBOR plus 2.75% or an alternative rate based on
either prime or the fed funds rate plus 0.5%, plus an applicable margin of
1.75%, selected at the discretion of the Company. In connection with this Credit
Agreement debt issuance costs of $7.2 million were incurred and are being
amortized over the term of the respective loans.

As a result of the early retirement of borrowings under the Senior Secured
Term loan and Senior Secured Revolver, debt issuance costs associated with this
debt of $461($287 net of tax) has been included as an extraordinary item in the
Consolidated Statement of Operations for the three months ended March 31, 1998.

The Credit Agreement requires the Company to maintain certain maximum
leverage and interest expense coverage ratios and minimum cash flow and net
worth ratios beginning in the first quarter of 1998. The Credit Agreement is
collateralized by all existing and acquired tangible and intangible assets of
the Company.

F-14
<PAGE> 85
KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

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 item
in the Consolidated Statements of Operations.

The aggregate maturities of long-term debt (including capital lease
obligations at December 31, 1997 are as follows:

<TABLE>
<S> <C>
1998.................................... $ 8,084
1999.................................... 8,401
2000.................................... 6,693
2001.................................... 6,749
2002.................................... 24,386
Thereafter.............................. 2,060
-------
$56,373
=======
</TABLE>

10. LINE OF CREDIT AND NOTES PAYABLE

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. On November 26, 1997 this line of credit was paid off
and the line cancelled. At December 31, 1996 there were no borrowings
outstanding under this line of credit. Interest was payable monthly at a rate of
LIBOR plus 1.75%. Borrowings under the agreement were limited to 85% of eligible
accounts receivable and 60% of eligible inventory as defined in the agreement.
Collateral consisted of accounts receivable, inventory, and certain intangible
assets.

The weighted average interest rate for this line of credit was 8.51% for
the year ended December 31, 1997.

During 1997, the Company entered into an agreement to fund deposits for
machinery and equipment being developed for the Company. As of December 31,
1997, the Company had a demand note payable plus interest at prime plus 0.33%
with $557 outstanding.

During December 1997, the Company entered into an agreement to finance
certain insurance costs with a note payable. The balance of the note payable at
December 31, 1997 is $359. The note payable has an interest rate of 7.8% and is
due September 1998.

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 NOTE PAYABLE -- The carrying amounts of
the Company's line of credit and note payable approximates fair value. The fair
value of the Company's long-term debt including the current portion at December
31, 1996 and 1997 is estimated to be $17.6 million and

F-15
<PAGE> 86
KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

$56.0 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>
1995 1996 1997
------ ----- ------
<S> <C> <C> <C>
Current..................................................... $2,865 $(635) $4,948
Deferred.................................................... 2,193 528 (980)
------ ----- ------
Total (benefit) expense........................... $5,058 $(107) $3,968
====== ===== ======
</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>
1995 1996 1997
---- ----- ----
<S> <C> <C> <C>
Federal statutory tax rate.................................. 35.0% (34.0)% 34.0%
State income taxes, net of federal benefit.................. 3.3 -- 3.0
Permanent differences....................................... (1.3) 2.3 .4
Other....................................................... (1.9) .9 .3
---- ----- ----
Effective tax rate.......................................... 35.1% (30.8)% 37.7%
==== ===== ====
</TABLE>

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liability at December 31 are as follows:

<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Allowance for doubtful accounts............................. $ 35 $ 238
Uniform cost capitalization................................. -- 117
Accrued expenses............................................ 225 528
State net operating loss carryforward....................... 261 413
Refunds and chargebacks..................................... -- 1,239
------- -------
Total deferred tax assets......................... 521 2,535
------- -------
Property, plant and equipment............................... (2,997) (3,135)
Intangible assets........................................... -- (1,226)
Miscellaneous............................................... (495) (165)
------- -------
Total deferred tax liabilities.................... (3,492) (4,526)
------- -------
Net deferred tax liability........................ $(2,971) $(1,991)
======= =======
</TABLE>

The Company's state net operating loss carryforward of approximately $12.5
million expires at various times through 2012. 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, 1995, 1996 and 1997 were $197, $278 and $307, respectively.

F-16
<PAGE> 87
KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

From January 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 AND CONTINGENCIES

As of December 31, 1997 the Company has entered into a firm commitment to
provide financing for capital expenditures under an operating lease of
approximately $3,500 for machinery and equipment.

Many distributors and marketers of anorexigenic drugs have been subject to
claims relating to the use of these drugs, many of which purport to be class
actions. The Company is a co-defendant only in the suits described below, but
expects it will be named in additional lawsuits related to the Company's
production of an anorexigenic drug under contract for SmithKline Beecham.

Except as described below, the Company has not been a party to litigation
or other legal proceedings. The Company has been named in six lawsuits in
connection with the Company's manufacture of phentermine, an anorexigenic, under
contract for SmithKline Beecham and its use in combination with other drugs. In
October 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. 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. In February 1998, the Company was named as a defendant
in an action in Jefferson Circuit Court, Louisville, Kentucky and a suit in
Circuit Court of Montgomery County, Alabama, both of which demand damages in an
unspecified amount. In March 1998, the Company was named as a co-defendant in
three additional actions. A suit in the Supreme Court of New York, County of
Suffolk, demands compensatory damages of $30.0 million and punitive damages of
$20.0 million. A suit in the Montana Eleventh Judicial District Court, Flathead
County, demands an unspecified amount of general and special compensatory
damages. A suit in the Superior Court of the State of California, County of Los
Angeles, demands damages in an unspecified amount.

F-17
<PAGE> 88
KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

intentional acts of the Company, and intends to submit a claim for all
unreimbursed costs to its product liability insurance carrier. However, in the
event that SmithKline Beecham is unable to satisfy or fulfill its obligations
under the indemnity, the Company would have to defend the lawsuit and be
responsible for damages, if any, which are awarded against it or for amounts in
excess of the Company's product liability coverage. In the opinion of
management, because the Company has requested indemnification, has product
liability insurance and believes the claims against it are without merit, the
Company does not believe these claims will materially affect the Company's
operations, cash flows or financial position.

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.

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 $417, $245 and $994 for the years ended
December 31, 1995, 1996 and 1997, respectively. At December 31, 1996 and 1997,
the Company had receivables from this foundation of approximately $677 and
$1,671, respectively, for expenses paid 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. During the years ended December 31, 1996 and 1997, the Company paid
$92 and $651, respectively to this director's Company for assistance in raising
capital for the Cortisporin product line acquisition. The Company paid $62 to
this director's Company for consulting services during the years ended December
31, 1997. In addition, in connection with the Credit Agreement entered into on
February 27, 1998 (Note 9), approximately $1,950 was paid to this director's
Company for assisting in obtaining the financing.

In 1996, the Company issued 699,711 common shares which were financed by
notes of approximately $2,100 receivable 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.

In October 1996, the Company issued 1,386,230 common shares to shareholders
and members of management of which 699,711 common shares were financed by notes
receivable of approximately $2,100. At December 31, 1996, the Company had notes
receivable outstanding of $2,093. As of August 5, 1997 these notes were paid in
full.

F-18
<PAGE> 89
KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

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 of director fees to the members of its
Board of Directors. No payments were made in 1996 and 1997.

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. STOCKHOLDERS' EQUITY

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.

Stock Split: On November 15, 1997 the shareholders approved 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.

Stock Option Plans: The 1997 Incentive and Nonqualified Stock Option Plan
for Employees (the "1997 Stock Option Plan") was adopted in December 1997. In
February 1998, the Company adopted the 1998 Non-employee Director Stock Option
Plan (the "1998 Stock Option Plan"). The aggregate number of shares which may be
issued under the 1997 Stock Option Plan and the 1998 Stock Option Plan shall not
exceed 3,200,000 and 300,000, respectively. Under both plans, the option
exercise price and the period of exercisability will be determined by the Stock
Option Committee of the Board of Directors on an individual grant basis. Stock
options granted expire 10 years from the grant date.

The Company granted 215,150 options and 5,000 options under the 1997 Stock
Option Plan in February and April 1998, respectively. The exercise price per
share of the options shall be the offering price per share of the Company's
common stock upon the effectiveness of its Registration Statement on Form S-1
and the options will be exercisable as to the following percentages of the
options on the following anniversaries of the grant date; 25% after six months,
50% after twelve months and 100% after twenty-four months.

In addition, the Company granted 50,000 options under the 1998 Stock Option
Plan, subject to approval by the shareholders at the next annual meeting. The
exercise price per share of the option shall be the initial public offering
price per share of the Company's common stock under the effectiveness of its
Registration Statement on Form S-1 and the options will be 100% exercisable
subject to approval of the shareholders.

The Company plans to account for stock option grants 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.

Other 1997 Equity Transactions: On November 14, 1997 the Company's
shareholders approved:

- A new class of preferred shares, with preference terms and rights to be
determined by the Board of Directors.

- 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.

F-19
<PAGE> 90
KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

- 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 share of Preferred Stock, subject to
adjustment.

- The Company has filed a Registration Statement with the Securities and
Exchange Commission for an initial public offering (the "Offering") of
4,000,000 common shares. The Company's offering is expected to close in
June 1998.

17. INCOME (LOSS) PER SHARE

In 1997, the Company adopted SFAS No. 128, "Earnings Per Share". The basic
and diluted income (loss) per share was determined as follows:

<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Basic income (loss) per share
Income (loss) before extraordinary item....... $ 9,334 $ (240) $ 6,612
Less: Preferred share dividends............... (8) -- --
----------- ----------- -----------
Income (loss) available to common
shareholders............................... $ 9,326 $ (240) $ 6,612
Weighted average common shares................ 13,201,118 15,440,465 26,270,103
----------- ----------- -----------
Basic income (loss) per share before
extraordinary item......................... $ 0.71 $ (0.02) $ 0.25
=========== =========== ===========
Shares:
Weighted average common shares................ 13,201,118 15,440,465 26,270,103
Effect of preferred conversion................ 966,000 -- --
----------- ----------- -----------
Weighted average common shares plus assumed
conversions................................ 14,167,118 15,440,465 26,270,103
----------- ----------- -----------
Diluted income (loss) per share before
extraordinary item......................... $ 0.66 $ (0.02) $ 0.25
=========== =========== ===========
</TABLE>

18. EVENTS SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITOR'S REPORT
(UNAUDITED)

The interim consolidated financial data with respect to March 31, 1997 and
1998 have been prepared without audit; however, in the opinion of management,
all adjustments (which are normal and recurring) necessary to prevent fairly the
consolidated financial position at March 31, 1998 and the results of operations
and cash flow for the three months ended March 31, 1998 and 1997, have been
made. The results of operations for the three months ended March 31, 1998 are
not necessarily indicative of the results of operations for a full year. Interim
financial data conforms to the requirements of Article X of Regulation S-X and,
therefore, does not include all the disclosure normally required under generally
accepted accounting principles.

F-20
<PAGE> 91
KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

Property, plant and equipment consists of the following at March 31, 1998:

<TABLE>
<S> <C>
Land........................................................ $ 3,949
Buildings and improvements.................................. 54,064
Machinery and equipment..................................... 29,933
Equipment under capital lease............................... 1,573
Construction in progress.................................... 4,356
-------
93,875
Less accumulated depreciation............................... (3,718)
-------
$90,157
=======
</TABLE>

Inventory consists of the following at March 31, 1998:

<TABLE>
<S> <C>
Finished goods.............................................. $16,130
Work-in-process............................................. 9,375
Raw materials............................................... 4,461
-------
$29,966
=======
</TABLE>

Intangible assets consists of the following at March 31, 1998:

<TABLE>
<S> <C>
Septra, Proloprim, Mantadil, Kemadrin....................... $ 15,425
Cortisporin................................................. 23,694
Sterile Products............................................ 54,869
Neosporin................................................... 5,876
Viroptic.................................................... 5,229
Nucofed/Quibron............................................. 7,301
Polysporin.................................................. 3,783
Other....................................................... 3,017
--------
119,194
Less accumulated amortization............................... (2,375)
--------
$116,819
========
</TABLE>

Accrued expenses at March 31, 1998 consist of the following:

<TABLE>
<S> <C>
Payroll related and outside personnel....................... $ 2,103
Returns, chargebacks and other claims....................... 5,333
Accrued interest............................................ 1,442
Franchise taxes............................................. 186
Incurred but not reported medical claims.................... 314
Other....................................................... 1,073
-------
$10,451
=======
</TABLE>

F-21
<PAGE> 92
KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

The following unaudited pro forma summary presents the financial
information as if the acquisitions, including the Sterile Products Acquisition,
had occurred on January 1, 1997. These pro forma results have been prepared for
comparative purposes and do not purport to be indicative of what would have
occurred had the acquisition been made on January 1, 1997, nor is it indicative
of future results.

<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1998
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Net revenues.............................................. $31,217 $35,821
======= =======
Net income................................................ $ 806 $ 6,247
======= =======
Net income per common and common stock equivalent......... $ 0.04 $ 0.20
======= =======
</TABLE>

Long-term debt consisted of the following at March 31, 1998:

<TABLE>
<S> <C>
Tranche A Term Loans........................................ $ 90,000
Tranche B Term Loans........................................ 84,788
Line of credit.............................................. 10,000
Notes payable to former owners.............................. 6,027
Notes payable............................................... 1,175
Note payable to shareholders................................ 1,750
Various capital leases...................................... 1,134
Other notes payable......................................... 51
--------
194,925
Less current portion........................................ 7,719
--------
$187,206
========
</TABLE>

The Company has entered into an interest rate swap through March 2001 with
a notional principal amount of $50 million whereby the Company pays a fixed rate
of 5.52% and receives a variable rate amount equivalent to a three-month LIBOR.
The Company entered into the swap agreement to hedge against interest rate risk
associated with the variable rate Tranche A and Tranche B term loans.

In April 1998, the private foundation (Note 15) repaid approximately $571
of its receivables to the Company.

F-22
<PAGE> 93

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of
Glaxo Wellcome, Inc. and King Pharmaceuticals, Inc.:

We have audited the accompanying Statement of Product Contribution for the
Cortisporin Product Line of Glaxo Wellcome Inc. ("Glaxo Wellcome") for the years
ended December 31, 1995 and 1996. The Statement of Product Contribution 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 Product Contribution is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Statement of Product Contribution.
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 Product Contribution. We believe that our audit provides a
reasonable basis for our opinion.

The operations covered by the Statement of Product Contribution 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 Product Contribution for 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-23
<PAGE> 94

CORTISPORIN PRODUCT LINE

STATEMENT OF PRODUCT CONTRIBUTION
(NOTE 1)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE PERIOD JANUARY 1, 1997 THROUGH MARCH 20, 1997
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, JANUARY 1, 1997
------------------ THROUGH
1995 1996 MARCH 20, 1997
------- ------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Net sales................................................. $14,083 $11,562 $3,342
------- ------- ------
Cost of sales............................................. 2,376 1,445 430
Selling, general and administrative....................... 930 631 188
Distribution.............................................. 80 48 10
------- ------- ------
Total costs and expenses........................ 3,386 2,124 628
------- ------- ------
Product contribution...................................... $10,697 $ 9,438 $2,714
======= ======= ======
</TABLE>

The accompanying notes are an integral part of
the Statement of Product Contribution

F-24
<PAGE> 95

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 SALES

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.

DISTRIBUTION

Distribution costs principally include freight and warehousing charges and
are allocated based on a percentage of gross sales. Such percentage is
determined by dividing total Glaxo Wellcome distribution costs by total Glaxo
Wellcome gross sales.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative costs include expenses for
administrative services, such as finance, human resources, legal, information
systems and other corporate affairs. Such costs are allocated based on a
percentage of gross sales. Such percentage is determined by dividing total Glaxo
Wellcome general and administrative costs by total Glaxo Wellcome gross sales.
Although Glaxo Wellcome incurred direct selling, marketing and advertising
costs, no such costs were allocated to the Cortisporin Product Line because
Glaxo Wellcome did not support the Cortisporin Product Line during the periods
presented.

F-25
<PAGE> 96
CORTISPORIN PRODUCT LINE

NOTES TO THE FINANCIAL STATEMENT -- (CONTINUED)

3. SIGNIFICANT CUSTOMER

The Cortisporin Product Line had net sales to two customers representing
approximately 13% and 10% of net sales for the period January 1, 1997 to March
20, 1997. 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 Product Contribution 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 and for the period January
1, 1997 through March 20, 1997. Actual results could differ from those
estimates.

F-26
<PAGE> 97

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 Product Contribution
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 Product
Contribution 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 Product
Contribution is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the Combined
Statement of Product Contribution. 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 Product
Contribution. We believe that our audit provides a reasonable basis for our
opinion.

The operations covered by the Combined Statement of Product Contribution
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 Product Contribution 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-27
<PAGE> 98

NEOSPORIN, POLYSPORIN, SEPTRA, PROLOPRIM, MANTADIL,
AND KEMADRIN PRODUCT LINES

COMBINED STATEMENT OF PRODUCT CONTRIBUTION
(NOTE 1)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE PERIOD JANUARY 1, 1997 THROUGH NOVEMBER 13, 1997
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED PERIOD
DECEMBER 31, JANUARY 1, 1997
----------------- THROUGH
1995 1996 NOVEMBER 13, 1997
------- ------- -----------------
(UNAUDITED)
<S> <C> <C> <C>
Net sales.................................................. $18,562 $12,440 $11,171
------- ------- -------
Cost of sales.............................................. 3,665 2,030 4,058
Selling, general and administrative........................ 1,334 848 494
Distribution............................................... 115 64 45
------- ------- -------
Total costs and expenses......................... 5,114 2,942 4,597
------- ------- -------
Product contribution....................................... $13,448 $ 9,498 $ 6,574
======= ======= =======
</TABLE>

The accompanying notes are an integral part of the Combined Statement of Product
Contribution

F-28
<PAGE> 99

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 Sales -- 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.

Distribution -- Distribution costs principally include freight and
warehousing charges and are allocated based on a percentage of gross sales. Such
percentage is determined by dividing total Glaxo Wellcome distribution costs by
total Glaxo Wellcome gross sales.

Selling, General and Administrative -- Selling, general and administrative
costs include expenses for administrative services, such as finance, human
resources, legal, information systems and other corporate affairs. Such costs
are allocated based on a percentage of gross sales. Such percentage is
determined by dividing total Glaxo Wellcome general and administrative costs by
total Glaxo Wellcome gross sales. Although Glaxo Wellcome incurred direct
selling, marketing and advertising costs, no such costs were allocated to the
Product Lines because Glaxo Wellcome did not support these products during the
periods presented.

3. SIGNIFICANT CUSTOMER

Net sales to four customers represented approximately 17%, 13%, 12% and 11%
for the nine months ended September 30, 1997. 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.

F-29
<PAGE> 100
NEOSPORIN, POLYSPORIN, SEPTRA, PROLOPRIM, MANTADIL,
AND KEMADRIN PRODUCTS LINES

NOTES TO THE COMBINED FINANCIAL STATEMENT -- (CONTINUED)

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 years ended December 31, 1995 and 1996 and for the period January
1, 1997 through November 13, 1997. Actual results could differ from those
estimates.

F-30
<PAGE> 101

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 December 31, 1997 and 1996 and the Statement of Brand
Contribution of Sterile Products Operations for each of the three years in the
period ended December 31, 1997. 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 Brand Contribution 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 Brand Contribution. 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 Brand Contribution. We believe that our audit
provides a reasonable basis for our opinion.

The accompanying Statement of Fixed Assets and Statement of Brand
Contribution reflect certain assets and brand contribution 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 Products Operations.

In our opinion, the Statements referred to above present fairly, in all
material respects, the fixed assets at December 31, 1997 and 1996 and brand
contribution for each of the three years in the period ended December 31, 1997
of Sterile Products Operations, in conformity with generally accepted accounting
principles.

As explained in Note 1 to the financial statements, on February 27, 1998,
Warner-Lambert Company signed the Product Asset Purchase Agreement and the Asset
Purchase Agreement to sell Sterile Products Operations to King Pharmaceutical,
Inc.

/s/ Price Waterhouse LLP

Morristown, New Jersey
March 27, 1998

F-31
<PAGE> 102

WARNER-LAMBERT COMPANY'S STERILE PRODUCTS OPERATIONS

STATEMENT OF FIXED ASSETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ -------------
<S> <C> <C>
Buildings (including land of $8)............................ $38,158 $42,303
Machinery, furniture and fixtures........................... 43,274 53,361
Construction in progress.................................... 15,606 2,731
------- -------
97,038 98,395
Less accumulated depreciation............................... (46,118) (48,639)
------- -------
Property, plant and equipment, net.......................... $50,920 $49,756
======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-32
<PAGE> 103

WARNER-LAMBERT COMPANY'S STERILE PRODUCTS OPERATIONS

STATEMENT OF BRAND CONTRIBUTION
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Gross sales................................................. $120,554 $120,351 $ 85,929
Sales deductions............................................ 30,765 29,658 27,612
-------- -------- --------
Net sales................................................... 89,789 90,693 58,317
Cost of goods sold.......................................... 55,861 54,564 46,793
-------- -------- --------
Gross profit................................................ 33,928 36,129 11,524
Voluntary severance......................................... -- -- 2,152
Selling, general and administrative......................... 5,362 5,664 3,624
Distribution................................................ 3,170 3,147 1,761
-------- -------- --------
Brand contribution.......................................... $ 25,396 $ 27,318 $ 3,987
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-33
<PAGE> 104

WARNER-LAMBERT COMPANY'S STERILE PRODUCTS OPERATIONS

NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS)

NOTE 1 -- DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Warner-Lambert Company's Sterile Products Operations ("Sterile Products")
manufactures, sells and distributes certain sterile and oral 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, a manufacturing facility in Rochester, Michigan and
contracts for manufacturing for third parties. The 15 branded product lines in
Sterile Products, as defined in the Product Asset Purchase Agreement discussed
below, are Ketalar, Aplisol, Chloromycetin, Coly-Mycin-S Otic, Coly-Mycin-M
Parenteral, Adrenalin, Vira-A, Pitocin, Pitressin, Histoplasmin, Fluogen,
Anusol-HC, Procan SR, Procanbid and Humatin.

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 February 27, 1998, W-L signed a Product Asset Purchase Agreement and the
Asset Purchase Agreement, which together, 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,
---------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Sales returns and allowances.............................. $14,141 $12,602 $ 9,869
Customer rebates.......................................... 14,775 15,345 16,437
Cash discounts............................................ 1,849 1,711 1,306
------- ------- -------
Total sales deductions.................................... $30,765 $29,658 $27,612
======= ======= =======
</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.

Selling, General and Administrative Costs

Selling, general and administrative costs include expenses for
administrative services, such as credit and collections, risk management, human
resources, information systems and accounting services and are allocated based
on a percentage of net sales. Such percentage is determined by dividing total
W-L general and

F-34
<PAGE> 105
WARNER-LAMBERT COMPANY'S STERILE PRODUCTS OPERATIONS

NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS) -- (CONTINUED)

administrative costs by total W-L net sales. Although W-L incurs direct selling,
advertising and promotion costs, none of these costs are allocated to Sterile
Products because W-L did not support these products during the years ended
December 31, 1997, 1996 or 1995.

Distribution Costs

Distribution costs principally include freight charges and are allocated
based on a percentage of net sales. Such percentage is determined by dividing
total W-L distribution costs by total W-L net sales.

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 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 $4,034, $3,714 and $3,500 for the years ended
December 31, 1997, 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 year ended December 31, 1997 Procanbid, Anusol-HC and Coly-Mycin-M
Parenteral accounted for approximately 17%, 17% and 11% of gross sales,
respectively. For the year ended December 31, 1996, Anusol-HC and Fluogen
accounted for 16% and 19% of gross sales, respectively. For the year ended
December 31, 1995, Anusol-HC, Fluogen and Procan SR accounted for 17%, 19% and
12% of gross sales, respectively.

In 1997, due to issues regarding shelf life potency, management decided not
to sell Fluogen, which as noted above, had significant gross sales in 1996 and
1995. As a result of this decision, cost of goods sold in 1997 included $7,115
of unabsorbed overhead and $4,044 of obsolete inventory.

F-35
<PAGE> 106
WARNER-LAMBERT COMPANY'S STERILE PRODUCTS OPERATIONS

NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS) -- (CONTINUED)

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 four customers each
representing approximately 19%, 17%, 16% and 13% of gross sales for the year
ended December 31, 1997. Sterile Products had significant gross sales in 1996
and 1995 to two of these four customers. Sales to these two customers
represented approximately 12% and 11% of gross sales in 1996 and approximately
11% of gross sales each 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 $2,152.

F-36
<PAGE> 107

PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The following Pro Forma Financial Statements of Operations for the year
ended December 31, 1997 and for the three months ended March 31, 1998 have been
prepared to give effect to the recent acquisitions of the Company which include,
(i) the Proctocort product line on January 22, 1997, (ii) the Viroptic product
line on May 15, 1997, (iii) the Cortisporin Product Line on March 21, 1997 and
(iv) the Glaxo Acquisition on November 14, 1997 and (v) the Sterile Products
Acquisition on February 28, 1998 (collectively, "the Acquisitions"), in all
cases, as if these acquisitions had occurred on January 1, 1997.

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 Acquisitions. The 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 Consolidated 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 Consolidated 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
Acquisitions been completed on the dates indicated or which may be expected to
occur in the future.

F-37
<PAGE> 108

KING PHARMACEUTICALS, INC.

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
CORTISPORIN GLAXO
ACQUISITION ACQUISITION OTHER RECENT
FROM FROM ACQUISITIONS STERILE
THE COMPANY JANUARY 1, JANUARY 1, FROM PRODUCTS
FOR THE 1997 1997 JANUARY 1, ACQUISITION FOR
YEAR ENDED THROUGH THROUGH 1997 THE YEAR ENDED
DECEMBER 31, MARCH 20, NOVEMBER 13, THROUGH THE DATE DECEMBER 31, PRO FORMA
1997 1997 1997 OF ACQUISITION 1997 ADJUSTMENTS
------------ ------------ ------------ ----------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues, net..... $ 47,909 $3,342 $11,171 $2,323 $58,317 $ --
---------- ------ ------- ------ ------- --------
Cost of sales........... 13,034 430 4,058 232 46,793(1) (4,034)(6)
Selling, general and
administrative........ 19,123 198 539 150 7,537 (402)(2)
Depreciation and
amortization.......... 2,395 -- -- -- -- 7,409(3)
---------- ------ ------- ------ ------- --------
Total costs and
expenses.............. 34,552 628 4,597 382 54,330 2,973
---------- ------ ------- ------ ------- --------
Operating income........ 13,357 2,714 6,574 1,941 3,987 (2,973)
Interest expense........ (2,749) -- -- -- -- (12,906)(4)
Other income, net....... (28) -- -- -- -- --
---------- ------ ------- ------ ------- --------
Income before income
taxes................. 10,580 2,714 6,574 1,941 3,987 (15,879)
Income tax expense...... 3,968 -- -- -- -- (265)(5)
---------- ------ ------- ------ ------- --------
Net income.............. $ 6,612 $2,714 $ 6,574 $1,941 $ 3,987 $(15,614)
========== ====== ======= ====== ======= ========
Basic and diluted net
income per common
share................. $ 0.25
==========
Weighted average number
of common shares...... 26,270,103
==========

AS ADJUSTED
FOR
PRO FORMA THE OFFERING(7)
---------- ---------------
<S> <C> <C>
INCOME STATEMENT DATA:
Total revenues, net..... $ 123,062 $ 123,062
---------- ----------
Cost of sales........... 60,513 60,513
Selling, general and
administrative........ 27,145 27,145
Depreciation and
amortization.......... 9,804 9,804
---------- ----------
Total costs and
expenses.............. 97,462 97,462
---------- ----------
Operating income........ 25,600 25,600
Interest expense........ (15,655) (11,484)
Other income, net....... (28) (28)
---------- ----------
Income before income
taxes................. 9,917 14,088
Income tax expense...... 3,703 5,371
---------- ----------
Net income.............. $ 6,214 $ 8,717
========== ==========
Basic and diluted net
income per common
share................. $ 0.24 $ 0.29
========== ==========
Weighted average number
of common shares...... 26,270,103 30,270,103
========== ==========
</TABLE>

See Notes to Pro Forma Consolidated Financial Statements

F-38
<PAGE> 109

KING PHARMACEUTICALS, INC.

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
STERILE
PRODUCTS
THE COMPANY ACQUISITION
FOR THE THREE FROM JANUARY 1,
MONTHS ENDED 1998 THROUGH PRO FORMA AS ADJUSTED FOR
MARCH 31, 1998 FEBRUARY 27, 1998 ADJUSTMENTS PRO FORMA THE OFFERING(7)
-------------- ----------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues, net........... $ 24,977 $10,844 $ -- $ 35,821 $ 35,821
---------- ------- ------- ---------- ----------
Cost of sales................. 7,364 5,314(1) (831)(6) 11,847 11,847
Selling, general and
administrative.............. 6,832 1,001 73(2) 7,906 7,906
Depreciation and
amortization................ 1,091 -- 1,046(3) 2,137 2,137
---------- ------- ------- ---------- ----------
Total costs and
expenses.......... 15,287 6,315 288 21,890 21,890
Operating income.............. 9,690 4,529 (288) 13,931 13,931
OTHER (EXPENSES) INCOME:
Interest expense.............. (2,703) -- (1,792)(4) (4,495) (3,800)
Other income, net............. 24 -- -- 24 24
---------- ------- ------- ---------- ----------
Income before income taxes and
extraordinary item.......... 7,011 4,529 (2,080) 9,460 10,155
Income tax expense............ 2,650 -- 980(5) 3,630 3,908
---------- ------- ------- ---------- ----------
Income before extraordinary
item........................ 4,361 4,529 (3,060) 5,830 6,247
Extraordinary item............ (286) -- -- (286) --(8)
---------- ------- ------- ---------- ----------
Net income.......... $ 4,075 $ 4,529 $(3,060) $ 5,544 $ 6,247
========== ======= ======= ========== ==========
Basic and diluted
net income per
common share...... $ 0.15 $ 0.20 $ 0.20
========== ========== ==========
Weighted average number of
common shares............... 28,000,000 28,000,000 32,000,000
========== ========== ==========
</TABLE>

See Notes to Pro Forma Consolidated Financial Statements.

F-39
<PAGE> 110

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

(1) The products that the Company acquired 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 45% of the total sales of the Warner-Lambert Products in
1997, and one product, Fluogen, had gross sales of $23.0 million and $22.3
million in 1995 and 1996, respectively, but was not sold in 1997 or during the
three months ended March 31, 1998. Fluogen was subject to a voluntary recall due
to shelf life potency concerns in 1996. Subsequent testing has established
Fluogen's shelf life potency and the Company intends to market Fluogen in 1998.
As a result of Fluogen being discontinued, cost of goods sold in 1997 included
approximately $7.1 million of unabsorbed overhead and approximately $4.3 million
of obsolete inventory. If these costs were excluded from cost of sales in 1997,
pro forma earnings per share would have been $0.49. In addition, because the
potency issue related to this product has been resolved the Company intends to
market the product in 1998; however, these pro formas do not reflect any
revenues from the expected sales in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Business -- Strategy" and "Business -- Products and Product Development."

(2) The Company believes its existing infrastructure at March 31, 1998 is
adequate to support the Company's operations including all the Acquisitions
consummated as of that date. Therefore, based on actual selling, general and
administrative expenses being incurred, the Company calculated the total
selling, general and administrative costs that would have been required had the
acquisitions been consummated as of January 1, 1997 and compared this to the
amount reflected in the historical financial statements of the Company and the
Acquisitions. The differences between the amount required and the actual amount
in the historical financial statements of $1.8 million, offset by the
elimination of a voluntary severance charge of $2.2 million from the Sterile
Products Acquisition for the year ended December 31, 1997 and $0.1 million for
the three months ended March 31, 1998 were reflected as a pro forma adjustment.
This pro forma adjustment represents the incremental cost due principally to the
establishment of a sales force, distribution systems, and information systems to
support the Acquisitions offset in part by the elimination of the duplicate
general and administrative costs that result when the individual historical
financial statements are combined.

(3) Includes amortization of intangible assets over 10 to 25 years for the
Other Acquisitions, 25 years for the Glaxo and Sterile Products Acquisitions,
and depreciation of fixed assets from the Sterile Products Acquisition over
periods of 5 to 40 years.

(4) Assumes the additional interest costs on approximately $175.6 million
of additional indebtedness, incurred in connection with the Cortisporin
Acquisition ($14.0 million), the Glaxo Wellcome Acquisition ($23.0 million), the
Sterile Products Acquisition ($125.0 million) and approximately $13.6 million of
additional indebtedness incurred related to the Other 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) 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>

(6) Reflects the reclassification of depreciation expense from the Sterile
Products Acquisition to be consistent with the presentation of the Company's
financial statements.

(7) Reflects the sale of 4,000,000 shares of common stock at the assumed
initial 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).

(8) Reflects the elimination of an extraordinary loss of $286,000 for the
three months ended March 31, 1998 in 1996.

F-40
<PAGE> 111

- ------------------------------------------------------

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER, OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. 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 OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.

------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Cautionary Statement Regarding
Forward-Looking Statements.......... 19
Use of Proceeds....................... 20
Dividend Policy....................... 20
Capitalization........................ 21
Dilution.............................. 21
Selected Consolidated Financial
Data................................ 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 34
Management............................ 48
Certain Transactions.................. 55
Principal and Selling Shareholders.... 56
Description of Capital Stock.......... 58
Shares Eligible for Future Sale....... 62
Certain United States Federal Tax
Considerations for Non-U.S. Holders
of Common Stock..................... 63
Notice to Canadian Residents.......... 66
Underwriting.......................... 67
Legal Matters......................... 69
Experts............................... 69
Additional Information................ 69
Index to Financial Statements......... F-1
</TABLE>

------------------

UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

======================================================

KING
PHARMACEUTICALS,
INC.

[LOGO]

6,580,000 Shares
Common Stock
(no par value)

PROSPECTUS
CREDIT SUISSE FIRST BOSTON

HAMBRECHT & QUIST

- ------------------------------------------------------
<PAGE> 112

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 58,501
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...................................... 375,000
Accounting Fees and Expenses................................ 325,000
Legal Fees and Expenses..................................... 250,000
Advisor Fees................................................ 654,000
Miscellaneous............................................... 618,059
----------
Total............................................. $2,325,000
==========
</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> 113

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.
</TABLE>

II-2
<PAGE> 114

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<C> <C> <S>
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.
10.16 -- Agreement for Purchase and Sale of Assets Relating to
Cortisporin by and between Glaxo Wellcome Inc. and Monarch
Pharmaceuticals, Inc. dated March 21, 1997.
10.17 -- Agreement for Purchase and Sale of Assets Relating to
Neosporin and Polysporin by and between Glaxo Wellcome Inc.
and Monarch Pharmaceuticals, Inc. dated November 14, 1997.
10.18 -- Agreement for Purchase and Sale of Assets Relating to
Septra, Proloprim, Mantadil and Kemadrin by and between
Glaxo Wellcome Inc. and Monarch Pharmaceuticals, Inc. dated
November 14, 1997.
10.19 -- Manufacture and Supply Agreement with Novartis (Ciba-Geigy
Corporation) dated July 17, 1995.
10.20 -- Manufacture and Supply Agreement with Roberts Laboratories,
Inc. dated October 5, 1995.
10.21 -- Supply Agreement with SmithKline Beecham Corporation dated
July 16, 1996.
10.22 -- Letter of Intent with Warner-Lambert Company dated October
31, 1997.
10.23 -- Trademark, Patent, Copyright and Know-How License Agreement
between Warner-Lambert Company and Glaxo Wellcome Inc. dated
as of June 30, 1996.
10.24 -- [Intentionally Omitted].
10.25 -- Asset Purchase Agreement by and among Parkedale
Pharmaceuticals, Inc., Warner-Lambert Company, and Parke,
Davis & Company, dated February 27, 1998, for the
acquisition of assets related to the Parkedale Facility,
Rochester, Michigan.
10.26 -- Product Asset Purchase Agreement between Parkedale
Pharmaceuticals, Inc. and Warner-Lambert Company, dated
February 27, 1998, for the acquisition of Anusol-HC(R) and
other products.
10.27 -- 1998 King Pharmaceuticals, Inc. Non-Employee Director Stock
Option Plan.
10.28 -- Credit Agreement by and among King Pharmaceuticals, Inc.,
Credit Suisse First Boston, and Wachovia Bank, N.A., dated
February 27, 1998, in the amount of $175,000,000, plus
associated Revolving Loans of $20,000,000, maximum.
10.29 -- [Intentionally Omitted].
10.30 -- Product Manufacturing Agreement between Santen Incorporated
and Warner-Lambert Company, dated June 26, 1997, for the
manufacture of Ofloxacin Otic Solution 0.3%.
10.31 -- License Agreement by and among Warner-Lambert Company, Parke
Davis & Company, and Parkedale Pharmaceuticals, Inc., dated
February 27, 1998, for use of the Anusol Trademark, the
Anusol Mold, and Other Trademarks.
10.32 -- Distribution and Supply Agreement between Warner-Lambert
Company and Fujisawa Pharmaceutical Company, dated December
4, 1989, for the distribution and supply of Elase, Elase
Ointment, and Elase-Chloromycetin Ointment.
10.33 -- Processing Services Agreement between Amgen, Inc. and
Parke-Davis Division of Warner-Lambert Company, dated
December 16, 1997, for the processing of Leptin, Epogen(R),
Neupogen(R), Stemgen(R), and other products.
</TABLE>

II-3
<PAGE> 115

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<C> <C> <S>
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>

- ---------------

* 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-4
<PAGE> 116

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 7 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 May 20, 1998.

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. 7 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ JOHN M. GREGORY Chairman of the Board and Chief May 20, 1998
- ----------------------------------------------------- Executive Officer
John M. Gregory

/s/ BRIAN G. SHRADER Chief Financial Officer May 20, 1998
- -----------------------------------------------------
Brian G. Shrader

* Director May 20, 1998
- -----------------------------------------------------
Joseph R. Gregory

* Director May 20, 1998
- -----------------------------------------------------
Jefferson J. Gregory

* Director May 20, 1998
- -----------------------------------------------------
Ernest C. Bourne

* Director May 20, 1998
- -----------------------------------------------------
Lois A. Clarke

* Director May 20, 1998
- -----------------------------------------------------
D. Greg Rooker

* Director May 20, 1998
- -----------------------------------------------------
Ted G. Wood

* Director May 20, 1998
- -----------------------------------------------------
Frank W. DeFriece, Jr.

* /s/ JOHN M. GREGORY
---------------------------------------------------
John M. Gregory
As Attorney-in-Fact
</TABLE>

II-5

<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. 7 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 April 2, 1998.

- - Our audits of the statement of Product Contribution for the Cortisporin
Product Line dated October 20, 1997.

- - Our audits of the Combined Statement of Product Contribution 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
May 21, 1998

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 March 27, 1998, relating
to the statement of brand contribution for each of the three years in the period
ended December 31, 1997 and the statement of fixed assets as of December 31,
1996 and 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
May 22, 1998