<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION APRIL 27, 1999
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
KING PHARMACEUTICALS, INC.
(exact name of registrant as specified in its charter)
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<S> <C> <C>
TENNESSEE 2834 54-1684963
(State of incorporation) (Primary Standard Industrial (I.R.S. Employer
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 office)
-------------------------
JOHN M. GREGORY
CHAIRMAN OF THE BOARD
KING PHARMACEUTICALS, INC.
501 FIFTH STREET
BRISTOL, TENNESSEE 37620
(423) 989-8000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------------
COPIES TO:
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<S> <C>
LINDA M. CROUCH, ESQ. JOHN A. A. BELLAMY, ESQ.
BAKER, DONELSON, BEARMAN & CALDWELL KING PHARMACEUTICALS, INC.
207 MOCKINGBIRD LANE 501 FIFTH STREET
JOHNSON CITY, TENNESSEE 37604 BRISTOL, TENNESSEE 37620
(423) 975-7623 (423) 989-8010
</TABLE>
Approximate date of commencement of proposed sale of securities to
public: As soon as practicable after the effective date of this Registration
Statement.
-------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SECURITY OFFERING PRICE(1) REGISTRATION FEE(1)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10 3/4% Senior Subordinated Notes due 2009... $150,000,000 100% $150,000,000 $41,700
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- ---------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457(f) of the Securities Act of 1933, as amended.
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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
SUBJECT TO COMPLETION, DATED APRIL 27, 1999
Offer to Exchange
all outstanding 10 3/4% Senior Subordinated Notes due 2009
($150,000,000 aggregate principal amount outstanding)
for
10 3/4% Senior Subordinated Notes due 2009 of
KING PHARMACEUTICALS, INC.
-------------------------
TERMS OF THE EXCHANGE OFFER:
- Expires 5:00 p.m., New York City time, , 1999, unless
extended.
- Not subject to any condition other than that the exchange offer not
violate applicable law or any applicable interpretation of the staff of
the Securities and Exchange Commission.
- We will exchange all outstanding notes that are validly tendered and not
validly withdrawn by you.
- You may withdraw your tender of notes any time prior to the expiration
of the exchange offer.
- The exchange of notes should not be a taxable exchange for U.S. federal
income tax purposes.
- We will not receive any proceeds from the exchange offer.
- The terms of the exchange notes to be issued are substantially identical
to the outstanding notes, except for transfer restrictions and
registration rights relating to the outstanding notes.
- As of December 31, 1998, we had approximately $525.9 million of senior
debt outstanding
See "Risk Factors" beginning on page 10 for a discussion of matters that should
be considered when deciding whether to participate in the exchange offer.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE NOTES TO BE DISTRIBUTED IN THE EXCHANGE OFFER, NOR
HAVE ANY OF THESE ORGANIZATIONS DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1999
<PAGE> 3
TABLE OF CONTENTS
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PAGE
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Prospectus Summary............. 1
Risk Factors................... 10
Use of Proceeds................ 21
Capitalization................. 21
Unaudited Pro Forma
Consolidated Financial
Statements.................. 22
Selected Consolidated Financial
Data........................ 30
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.................. 32
Business....................... 44
</TABLE>
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PAGE
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<S> <C>
Management..................... 67
Certain Relationships and
Related Transactions........ 75
Principal Shareholders......... 76
Description of Certain
Indebtedness................ 78
Description of the Notes....... 80
Certain United States Federal
Income Tax Considerations... 120
Plan of Distribution........... 124
Legal Matters.................. 124
Experts........................ 125
Index to Financial
Statements.................. F-1
</TABLE>
---------------
Cortisporin(R), Viroptic(R), Neosporin(R), Polysporin(R), Vira-A(R),
Chloromycetin(R), Altace(R), Thalitone(R), Procanbid(R), Anusol-HC(R),
Proctocort(R), Pitocin(R), Menest(R), AVC(TM), Fluogen(R), Aplisol(R),
Septra(R), Coly-Mycin(R), Adrenalin(R), Quibron(R), Nucofed(R), Tussend(R),
Silvadene(R), Histoplasmin(TM), Monafed(R), Pediotic(R), Mantadil(R),
Kemadrin(R), Polymatrix(TM), Royal Vet(R) and Show Winner(TM) are registered,
pending or licensed trademarks of King. Anexsia(R) is a registered trademark of
Mallinckrodt Chemical, Inc.
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. Because this
is a summary, it does not contain all the information that may be important to
you. To understand the exchange offer fully, you should read the entire
prospectus, including the Risk Factors section beginning on page 10 and the
financial statements beginning on page F-1
THE EXCHANGE OFFER
Exchange Notes............... The forms and terms of the exchange notes are
identical in all material respects to the terms
of the old notes, except for certain transfer
restrictions, registration rights and liquidated
damages provisions relating to the old notes.
These are described elsewhere in this prospectus
under "Description of the Notes."
The Exchange Offer........... We are offering to exchange up to $150,000,000
of the exchange notes for up to $150,000,000 of
the old notes. Old notes may be exchanged only
in $1,000 increments.
Expiration Date; Withdrawal
of Tender.................. Unless we extend the exchange offer, it will
expire at 5:00 p.m., New York City time, on
, 1999. We will not extend this time
period to a date later than ,
1999. You may withdraw any old notes you tender
pursuant to the exchange offer at any time prior
to , 1999. We will return, as promptly
as practicable after the expiration or
termination of the exchange offer, any old notes
not accepted for exchange for any reason without
expense to you.
Certain Conditions to the
Exchange Offer............. The exchange offer is subject to the following
conditions, which we may waive. These conditions
permit us to refuse acceptance of the old notes
or to terminate the exchange offer if:
- a lawsuit is instituted or threatened in a
court or before a government agency which may
impair our ability to proceed with the
exchange offer;
- a law, statute, rule or regulation is proposed
or enacted or interpreted by the SEC which may
impair our ability to proceed with the
exchange offer; or
- any governmental approval is not received
which we think is necessary to consummate the
exchange offer.
Procedures for Tendering Old
Notes...................... If you wish to accept the exchange offer, you
must complete, sign and date the letter of
transmittal in
1
<PAGE> 5
accordance with the instructions, and deliver
the letter of transmittal, along with the old
notes and any other required documentation, to
the exchange agent. By executing the letter of
transmittal, you will represent to us that,
among other things:
- any exchange notes you receive will be
acquired in the ordinary course of your
business,
- you have no arrangement with any person to
participate in the distribution of the
exchange notes, and
- you are not an "affiliate," as defined in Rule
405 of the Securities Act of 1933, of King
Pharmaceuticals, Inc. or, if you are an
affiliate, you will comply with the
registration and prospectus delivery
requirements of the Securities Act to the
extent applicable.
- If you hold your old notes through the
Depository Trust Corporation and wish to
participate in the exchange offer, you may do
so through the Depository Trust Corporation's
Automated Tender Offer Program. By
participating in the exchange offer, you will
agree to be bound by the letter of transmittal
as though you had executed it.
Interest on the New Notes.... Interest on the exchange notes accrues from the
date of issuance at the rate of 10 3/4% per
annum.
Payment of Interest.......... Interest is payable semi-annually in arrears on
each February 15 and August 15, commencing on
August 15, 1999.
On August 15, 1999, holders of the exchange
notes will also receive an amount equal to the
accrued interest on the old notes. Interest on
the old notes accepted for exchange will stop
accruing upon the issuance of the exchange
notes.
Special Procedures for
Beneficial Owners.......... If you are a beneficial owner whose old notes
are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and wish to tender such old notes in the
exchange offer, please contact the registered
holder as soon as possible and instruct them to
tender on your behalf and comply with our
instructions set forth elsewhere in this
prospectus.
Guaranteed Delivery
Procedure.................. If you wish to tender your old notes, you may,
in certain instances, do so according to the
guaranteed delivery procedures set forth
elsewhere in this prospectus under "The Exchange
Offer -- Guaranteed Delivery Procedures."
2
<PAGE> 6
Registration Rights
Agreement.................. We sold the old notes to the initial purchasers
in a transaction exempt from the registration
requirements of the Securities Act of 1933 on
March 3, 1999. At that time, we entered into a
registration rights agreement with the initial
purchasers which grants you certain exchange and
registration rights. This exchange offer
satisfies those rights, which terminate upon
completion of the exchange offer. You will not
be entitled to exchange or registration rights
with respect to the exchange notes.
Certain Federal Tax
Considerations............. With respect to the exchange of the old notes
for the exchange notes:
- the exchange should not be a taxable exchange
for U.S. federal income tax purposes,
- you should not recognize gain or loss upon the
receipt of the exchange notes,
- you must include interest in gross income to
the same extent as the old notes, and
- you should be able to tack the holding period
of the exchange notes to the holding period of
the old notes.
Use of Proceeds.............. We will not receive any proceeds from exchange
of notes. We will pay all expenses related to
the exchange offer.
Exchange Agent............... We have appointed IBJ Whitehall Bank & Trust
Company as the exchange agent for the exchange
offer. The address and telephone number of the
Exchange Agent are IBJ Whitehall Bank & Trust
Company, P.O. Box 84, Bowling Green Station, New
York, New York 10274-0084, telephone (212)
858-2103.
3
<PAGE> 7
TERMS OF THE NOTES
The form and terms of the exchange notes are substantially the same as the
form and terms of the old notes, except that the exchange notes are registered
under the Securities Act. As a result, the exchange notes will not bear legends
restricting their transfer and will not contain the registration rights and
liquidated damages provisions contained in the old notes.
Issuer....................... King Pharmaceuticals, Inc.
Securities Offered........... $150.0 million aggregate principal amount of
10 3/4% Senior Subordinated Notes Due 2009.
Maturity..................... February 15, 2009.
Interest Rate................ 10 3/4% per year.
Interest Payment Dates....... February 15 and August 15 of each year,
commencing August 15, 1999.
Ranking...................... The notes will be unsecured senior subordinated
obligations and will rank junior to our existing
and future Senior Indebtedness. The notes will
rank equally with our future Senior Subordinated
Indebtedness and will rank senior to any other
subordinated indebtedness. The terms "Senior
Indebtedness" and "Senior Subordinated
Indebtedness" are defined in the "Description of
the Notes -- Definitions" section of this
prospectus.
As of December 31, 1998 we had outstanding
$525.9 million of Senior Indebtedness and no
Senior Subordinated Indebtedness.
Guaranties................... Our obligations under the notes will be
unconditionally guaranteed on a senior
subordinated basis by each Subsidiary Guarantor.
The term "Subsidiary Guarantor" is defined in
the "Description of the Notes -- Definitions"
section of this prospectus.
Optional Redemption.......... Except as described below under "Optional
Redemption after Public Equity Offerings," we
cannot redeem the notes until February 15, 2004.
Thereafter, we can redeem some or all of the
notes at the redemption prices listed in the
"Description of the Notes -- Optional
Redemption" section of this prospectus, plus
accrued interest.
4
<PAGE> 8
Optional Redemption after
Public Equity Offerings.... At any time (which may be more than once) before
February 15, 2002, we can choose to redeem up to
35% of the original principal amount of the
notes with money that we raise in certain equity
offerings, as long as:
- we pay to holders of the notes a redemption
price of 110 3/4% of the face amount of the
notes we redeem, plus accrued interest;
- we redeem the notes within 60 days of
completing such equity offering; and
- at least $97.5 million aggregate principal
amount of the notes remain outstanding
afterwards and are held by non-affiliates of
our company.
Change of Control Offer...... If a Change of Control of our company occurs, we
must give holders of the notes the opportunity
to sell to us their notes at a purchase price of
101% of their face amount, plus accrued
interest. The term "Change of Control" is
defined in the "Description of the Notes --
Change of Control" section of this prospectus.
Covenants.................... The indenture will contain covenants that limit
our ability and that of our subsidiaries to:
- incur or guarantee additional indebtedness;
- pay dividends or distributions on, or redeem
or repurchase, our capital stock;
- make investments;
- issue or sell capital stock of subsidiaries;
- engage in transactions with affiliates;
- transfer or sell assets;
- restrict dividend or other payments to us; and
- consolidate, merge or transfer all or
substantially all of our assets and the assets
of our subsidiaries.
These covenants are subject to important
exceptions and qualifications, which are
described in the "Description of the Notes"
section of this prospectus.
5
<PAGE> 9
RISK FACTORS
You should carefully consider all of the information in this prospectus. In
particular, you should evaluate the specific risk factors set forth under "Risk
Factors" for a discussion of certain risks involved with an investment in the
notes.
WHO ARE WE
King is a vertically integrated pharmaceutical company that manufactures,
markets and sells primarily branded prescription pharmaceutical products.
Through a national sales force of over 200 representatives, we market our
branded pharmaceutical products to general/family practitioners and internal
medicine physicians and hospitals across the country. Our business strategy is
to acquire established branded pharmaceutical products and to increase their
sales by focused marketing and promotion and through product life cycle
management. In pursuing acquisitions, we seek to capitalize on opportunities in
the pharmaceutical industry created by cost containment initiatives and
consolidation among large, global pharmaceutical companies. We also create value
by developing product line extensions for our branded pharmaceutical products
such as new formulations, dosages or new indications. These product line
extensions are profitable for us because they may have market exclusivity or
sales levels that do not attract significant competition. In addition to branded
pharmaceuticals, we also provide contract manufacturing for a number of the
world's leading pharmaceutical and biotechnology companies, including Amgen,
Inc., Warner-Lambert Company, Mallinckrodt Chemical Inc., Genetics Institute and
Hoffman-LaRoche, Inc.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements and
other information we file at the SEC's public reference rooms in Washington,
D.C., New York, New York, and Chicago, Illinois. You should call 1800-SEC-0330
if you would like more information about the SEC's public reference rooms. Our
filings are also available to the public from commercial document retrieval
services and at the web site maintained by the SEC. The SEC's web site is at
http://www.sec.gov.
We have filed a registration statement on Form S-4 to register with the SEC
the exchange notes to be issued in exchange for the old notes. This prospectus
is part of that registration statement. As allowed by the SEC's rules, this
prospectus does not contain all the information you can find in the registration
statement or the exhibits to the registration statement.
6
<PAGE> 10
FORWARD-LOOKING STATEMENTS
This prospectus includes and incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements relate to analyses and other information which are based
on forecasts of future results and estimates of amounts not yet determinable.
These statements also relate to our future prospects, developments and business
strategies.
These forward-looking statements are identified by their use of terms and
phrases, such as "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "plan," "predict," "project," "will" and similar terms and
phrases, including references to assumptions. These statements are contained in
sections entitled "Prospectus Summary," "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business" and
other sections of this prospectus.
Such forward-looking statements include, but are not limited to:
- anticipated developments and expansions of our business;
- increases in sales of recently acquired products, especially Altace as
described in "Business";
- development of product line extensions;
- the products which we expect to offer;
- the intent to market and distribute certain of our products
internationally;
- the intent to manufacture certain products in our own facilities which
are currently manufactured for us by third parties;
- the intent, belief or current expectations of King's directors or
officers with respect to its future operating performance;
- expectations regarding sales growth, gross margins, manufacturing
productivity, capital expenditures and effective tax rates;
- expectations or beliefs regarding regulatory matters or conditions; and
- expectations regarding King's financial condition and liquidity as well
as future cash flows and earnings.
These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. These factors include, but are not limited to, the following: changes
in general economic and business conditions; dependence on continued acquisition
of products; management of growth of business and integration of product
acquisitions; changes in current pricing levels; development of new competitive
products; changes in economic conditions and federal and state regulations;
competition for acquisition of products; manufacturing capacity constraints; and
the availability, terms and deployment of capital. For a more complete
discussion of these factors, see "Risk Factors."
We do not undertake to update our forward-looking statements or risk
factors to reflect future events or circumstances.
7
<PAGE> 11
SUMMARY FINANCIAL DATA
The following table presents summary financial and other data with respect
to King and has been derived from:
(A) the audited consolidated financial statements of King for each of
the three years in the period ended December 31, 1998, which appear
elsewhere in this prospectus;
(B) the unaudited consolidated pro forma financial statements included
elsewhere in this prospectus which give effect to certain acquisitions and
financings in 1998 and the sale and issuance of the old notes and exchange
notes as if such events occurred on January 1, 1998, except for the as
adjusted balance sheet data, which gives effect to the issuance and sale of
the old notes and the exchange notes as if such events had occurred on
December 31, 1998. The unaudited pro forma consolidated financial
statements do not purport to represent what King's results of operations or
financial condition would actually have been had the events assumed therein
in fact occurred on the dates indicated therein, nor do they purport to
project King's results of operations or financial condition for any future
period or date; and
(C) the unaudited pro forma consolidated information gives effect to
our recent business and product acquisitions and the pro forma adjustments
related thereto which include (1) products acquired from Warner-Lambert on
February 27, 1998; (2) the Menest product line on June 30, 1998; and (3)
the acquisition of Altace, Silvadene and AVC on December 22, 1998,
including the receipt of $519.0 million in proceeds from the senior credit
facility and the issuance of the senior subordinated seller notes, in each
case as if such transactions had occurred on January 1, 1998. For more
information about these transactions, see "Unaudited Pro Forma Consolidated
Financial Statements."
The information set forth below should be read together with the other
information contained under the captions "Capitalization," "Selected
Consolidated Financial Data," "Unaudited Pro Forma Consolidated Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," King's consolidated financial statements and related
notes and the special purpose statements of product contribution included
elsewhere in this prospectus.
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FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
HISTORICAL PRO FORMA
------------------------------ ----------
1996 1997 1998 1998(1)
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(DOLLARS IN THOUSANDS)
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STATEMENT OF OPERATIONS DATA:
Total revenues.............................. $20,457 $47,909 $163,463 $ 269,748
Cost of sales............................... 8,782 13,034 64,052 79,645
------- ------- -------- ---------
Gross profit................................ 11,675 34,875 99,411 190,103
Selling, general and administrative......... 12,106 19,123 34,718 57,718
Depreciation and amortization(2)............ 982 2,395 9,255 24,973
------- ------- -------- ---------
Operating income (loss)..................... (1,413) 13,357 56,438 107,412
Interest expense............................ 1,272 2,749 14,866 (53,883)
Other (income) expense, net(3).............. (2,338) 28 (145) (145)
Income tax expense (benefit)................ (107) 3,968 15,396 20,579
------- ------- -------- ---------
Income (loss) before extraordinary item..... (240) 6,612 25,321 33,095
Extraordinary item, net of income
taxes(4).................................. -- -- (4,411) --
------- ------- -------- ---------
Net income (loss)........................... $ (240) $ 6,612 $ 20,910 $ 33,095
======= ======= ======== =========
</TABLE>
8
<PAGE> 12
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
HISTORICAL PRO FORMA
------------------------------ ----------
1996 1997 1998 1998(1)
------- ------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Basic and diluted income (loss) per share:
Income before extraordinary item.......... $ (0.02) $ 0.25 $ 0.84 $ 1.10
======= ======= ======== =========
Net income (loss)......................... $ (0.02) $ 0.25 $ 0.69 $ 1.10
======= ======= ======== =========
OTHER DATA:
EBITDA(5)................................... $ 1,907 $15,724 $ 64,838 $ 132,530
Cash flow from operations................... (6,269) 5,016 5,831 5,831
Cash flow from investing.................... (2,126) (53,977) (425,975) (425,975)
Cash flow from financing.................... (781) 47,638 421,234 421,234
Capital expenditures(6)..................... 1,069 1,379 81,099 81,099
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
----------------------------
ACTUAL AS ADJUSTED(1)
----------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 1,159 $ 1,159
Working capital.......................................... 31,087 32,893
Total assets............................................. 668,171 672,671
Senior credit facility................................... 444,000 375,000
Senior subordinated seller notes......................... 75,000 --
Other debt............................................... 8,796 8,796
Old notes/exchange notes................................. -- 150,000
Shareholders' equity..................................... 101,436 100,536
</TABLE>
- -------------------------
(1) The pro forma information reflects the application of net proceeds of $144.0
million from the offering of old notes to repay the senior subordinated
seller notes and a portion of the senior credit facility. For more
information about these acquisitions, see "Unaudited Pro Forma Consolidated
Financial Statements."
(2) Amounts do not include amortization of debt issuance costs, which are
included in interest expense.
(3) Amount includes gain recognized from the sale of our 6.0% interest in an
affiliated, privately held pharmaceutical company in September 1996.
(4) Reflects the loss on early extinguishment of debt in 1998, net of income
taxes of $2.8 million.
(5) "EBITDA" is defined as net income (loss) from continuing operations before
interest, taxes, depreciation and amortization. We believe that EBITDA
provides useful information regarding our ability to service our
indebtedness, but should not be considered in isolation or as a substitute
for operating income or cash flow from operations (in each case as
determined in accordance with generally accepted accounting principles), as
an indicator of our operating performance or as a measure of our liquidity.
(6) Capital expenditures represent our purchases of property, plant and
equipment. Capital expenditures exclude business and product acquisitions.
For the year ended December 31, 1998, we completed approximately $493.0
million of business and product acquisitions.
9
<PAGE> 13
RISK FACTORS
Before you exchange your old notes, you should carefully consider these
risk factors, as well as the other information contained in this prospectus, in
evaluating whether to participate in the exchange offer. The risks described
below are not the only ones facing our company. Additional risks not presently
known to us or that we currently deem immaterial may also impair our business
operations.
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND
PREVENT US FROM FULFILLING OUR OBLIGATIONS TO YOU.
We have a high level of debt. As of December 31, 1998, our total debt was
approximately $527.8 million and our total debt, as a percentage of total
capitalization, was 84.0%. Our high level of debt could have a significant
adverse future effect on our business. For example:
- we will have limited ability to borrow additional amounts for working
capital, capital expenditures, acquisitions, debt service requirements,
execution of our growth strategy, research and development costs or other
purposes;
- a substantial portion of our cash flow will be used to pay principal and
interest on our debt, which will reduce the funds available for working
capital, capital expenditures, acquisitions and other purposes;
- our senior credit facility covenants require us to meet certain financial
objectives and impose other significant restrictions on business
operations. These covenants and the covenants contained in the indenture
governing the notes will limit our ability to borrow additional funds or
dispose of assets and limit our flexibility in planning for and reacting
to changes in our business;
- we may be more vulnerable to adverse changes in general economic,
industry and competitive conditions and adverse changes in government
regulation;
- our high debt level and the various covenants contained in the indenture
related to the notes and the documents governing our other existing
indebtedness may place us at a relative competitive disadvantage as
compared to certain of our competitors; and
- borrowings under our senior credit facility are at floating rates of
interest, which could result in higher interest expense in the event of
an increase in interest rates.
Our ability to pay principal of and interest on the notes, to service our
other debt and to refinance indebtedness when necessary depends on our financial
and operating performance, each of which is subject to prevailing economic
conditions and to financial, business and other factors beyond our control.
We cannot assure you that we will generate sufficient cash flow from
operations or that we will be able to obtain sufficient funding to satisfy all
of our obligations, including the notes. If we are unable to pay our debts, we
will be required to pursue one or more alternative strategies, such as selling
assets, refinancing or restructuring our indebtedness or selling additional
equity capital. However, we cannot assure you that any alternative strategies
will be feasible at the time or prove adequate. Also, certain alternative
strategies will require the consent of our senior secured lenders before we
engage in any such strategy.
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<PAGE> 14
RESTRICTIVE COVENANTS CONTAINED IN OUR EXISTING SENIOR CREDIT FACILITY MAY
TRIGGER A DEFAULT UNDER THE NOTES AND WE MAY NOT HAVE SUFFICIENT ASSETS TO REPAY
THE NOTES.
The operating and financial restrictions and covenants in the senior credit
facility, the indenture governing the notes and in any future financing
agreements may adversely affect our ability to finance future operations or
capital needs or to engage in other business activities. In addition, the senior
credit facility requires that we maintain compliance with certain financial
ratios. If we default under any financing agreements, our lenders could:
- elect to declare all amounts borrowed to be immediately due and payable,
together with accrued and unpaid interest; and/or
- terminate their commitments (if any) to make further extensions of
credit.
If we are unable to pay our obligations to our senior secured lenders, they
could proceed against any or all of the collateral securing our indebtedness to
them. The collateral under the senior credit facility consists of substantially
all of our assets. In addition, a breach of certain of these restrictions or
covenants, or an acceleration by our senior secured lenders of our obligations
to them, would cause a default under the notes. We may not have, or be able to
obtain, sufficient funds to make accelerated payments, including payments on the
notes, or to repay the notes in full after we pay our senior secured lenders.
UNDER SOME CIRCUMSTANCES, WE MIGHT NOT BE ABLE TO MAKE PAYMENTS ON THE NOTES.
The notes will be subordinate to the prior payment in full of all senior
indebtedness. As of December 31, 1998, we had approximately $525.9 million of
senior indebtedness outstanding. Because of the subordination provisions of the
notes, in the event of our bankruptcy, liquidation or dissolution, our assets
would be available to pay obligations under the notes only after all payments
had been made on our senior indebtedness, including primarily indebtedness under
the senior credit facility. We cannot assure you that sufficient assets will
remain after all such payments have been made to make any payments on the notes.
In addition, events of default under our senior indebtedness would prohibit us
from making any payments on the notes, including payments of interest when due.
We conduct a portion of our operations through subsidiaries. The holders of
the notes will have no direct claim against such subsidiaries other than the
subordinated claims created by the subsidiary guaranties which may themselves be
subject to legal challenge under relevant federal or state fraudulent conveyance
and similar statutes in a bankruptcy or reorganization case or a lawsuit by or
on behalf of creditors of a subsidiary guarantor. Under these statutes, if a
court were to find that obligations were incurred with the intent of hindering,
delaying or defrauding present or future creditors or that the subsidiary
guarantor received less than a reasonably equivalent value or fair consideration
for those obligations and, at the time of the incurrence of the obligations, the
obligor either
(1) was insolvent or rendered insolvent by reason thereof,
(2) was engaged or was about to engage in a business or transaction
for which its remaining unencumbered assets constituted unreasonably small
capital or
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<PAGE> 15
(3) intended to or believed that it would incur debt beyond its
ability to pay such debts as they matured or became due, such court could
void or subordinate the obligations in question.
The measure of insolvency for purposes of a fraudulent conveyance claim
will be dependent upon the law of the jurisdiction being applied. Generally,
however, a company will be considered insolvent at a particular time if the sum
of its debts at that time is greater than the then fair salable value of its
assets or if the fair salable value of its assets at that time is less than the
amount that would be required to pay its probable liability on its existing
debts as they become absolute and mature. We believe that each subsidiary
guarantor will be
(1) neither insolvent nor rendered insolvent by the incurrence of
indebtedness in connection with its Subsidiary Guaranty,
(2) in possession of sufficient capital to run its business
effectively and
(3) incurring debts within its ability to pay as the same mature or
become due.
However, we cannot assure you that a court would so determine. To the extent
that any of the subsidiary guaranties are not enforceable, the rights of holders
of the notes to participate in any distribution of assets of any subsidiary
guarantor upon liquidation, bankruptcy, reorganization or otherwise will, as is
the case with other unsecured creditors of King, be subject to prior claims of
creditors of that subsidiary guarantor.
IF THE ASSUMPTIONS WE MADE IN PREPARING PRO FORMA FINANCIAL INFORMATION ARE NOT
CORRECT, OUR RESULTS OF OPERATIONS MAY NOT BE AS EXPECTED.
The three product lines, including Altace, that we acquired from Hoechst
Marion Roussel, Inc., which we refer to as "HMR," were not managed as a separate
entity by HMR but were manufactured and marketed as part of a substantially
larger manufacturing and sales organization covering many pharmaceutical
products sold by HMR. As a result, HMR did not historically create financial
statements or systems designed to track the profitability of these product lines
on a stand-alone basis. The special purpose statements of product contribution
contained in this prospectus relating to these products, which are not complete
statements of operations, were prepared solely for purposes of the acquisition,
are not intended to be a complete presentation of the Altace product line and do
not represent the business of a discrete legal entity. Although these statements
are developed from the internal accounting records of HMR, they are based in
part on estimates and assumptions by HMR's management as to allocations of
various HMR costs incurred in connection with several other products. The
results set forth in the statements of product contribution, therefore, are not
necessarily indicative of the actual sales and costs that would have resulted if
the product lines we acquired had been manufactured in a different facility or
by a different party or had been operated as a separate entity.
The unaudited pro forma financial information included elsewhere in this
prospectus is based upon the historical financial information set forth in the
special purpose statements of product contribution referred to above. However,
we have made pro forma adjustments to certain cost allocations contained in
those statements to reflect our estimate as to the advertising, promotion,
selling and other expenses associated with those products based on our
experience in promoting and selling branded prescription pharmaceutical
products. While we believe that our assumptions are reasonable, we cannot assure
you that our actual expenses in integrating the product lines acquired in this
acquisition and marketing those products will be the same. Moreover, the
unaudited pro forma financial statements
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<PAGE> 16
do not purport to represent what our results of operations would actually have
been if the events described therein had in fact occurred on the date indicated
or to project our results of operations for any future period. For the reasons
described above, investors in the notes should not place undue reliance on the
special purpose statements of product contribution, or pro forma operating
results contained in this prospectus.
IF WE CANNOT ACQUIRE NEW BRANDED PRODUCTS, WE MAY NOT BE ABLE TO INCREASE SALES
OR NET INCOME.
We have increased our 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. Our strategy for growth is primarily dependent upon our 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 we are not engaged in proprietary research
activities leading to the introduction of new products, we must rely upon the
availability for purchase of product lines from other companies. Other
companies, including those with substantially greater financial, marketing and
sales resources, are competing with us for the right to acquire such products.
We may not 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 will have a material adverse effect on our future business,
financial condition and results of operations. Furthermore, even if we obtain
rights to a pharmaceutical product, we may not be able to generate sales
sufficient to create a profit or otherwise avoid a loss. In addition, our
marketing strategy, distribution channels and levels of competition with respect
to acquired products may be different than those of our current products and we
cannot assure you that we will be able to compete favorably in those product
categories.
IF SALES OF OUR MAJOR PRODUCTS DECREASE, OUR RESULTS OF OPERATIONS COULD BE
ADVERSELY EFFECTED.
Altace accounted for approximately 35.2% of pro forma net sales and Altace,
Fluogen, and the Cortisporin product line, collectively, accounted for
approximately 53.7% of pro forma net sales for the year ended December 31, 1998.
We believe that sales of these products will continue to constitute a
significant portion of our net sales for the foreseeable future. Accordingly,
any factor adversely affecting sales of any of these products could also have a
material adverse effect on our business, financial condition and results of
operations.
WE DO NOT HAVE PROPRIETARY PROTECTION FOR MOST OF OUR BRANDED PHARMACEUTICAL
PRODUCTS AND OUR SALES COULD SUFFER FROM COMPETITION BY GENERIC SUBSTITUTES.
Most of our branded pharmaceutical products are subject to competition from
generic equivalents. There is no proprietary protection for most of the branded
pharmaceutical products we sell. Generic substitutes for most of our branded
pharmaceutical products are sold by other pharmaceutical companies. In addition,
governmental and other pressure to reduce pharmaceutical costs may result in
physicians prescribing products for which there are generic substitutes.
Increased competition from the sale of generic pharmaceutical products may cause
a decrease in revenue from our branded products and could have a material
adverse effect on our business, financial condition and results of operations.
While we will seek to mitigate the effect of this substitution through, among
other things,
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<PAGE> 17
creation of strong brand name recognition and product line extensions for our
branded pharmaceutical products, we may not be successful in these efforts.
IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR ACQUISITIONS, WE MAY NOT BE ABLE TO
REPAY THE NOTES.
We anticipate that the integration of newly-acquired products, as well as
other assets, will require significant management attention and expansion of our
sales force. In order to effectively manage our acquisitions, we must maintain
adequate operational, financial and management information systems and motivate
and effectively manage an increasing number of employees. Our recent
acquisitions have significantly expanded our product offerings and operations.
Our future success will depend in part on our ability to retain or hire
qualified employees to operate our facilities efficiently in accordance with
applicable regulatory standards. If our management is unable to manage the
changes effectively and integrate our acquisitions successfully, these changes
and acquisitions could materially and adversely affect our business, financial
condition and results of operations.
IF WE HAVE PROBLEMS WITH ANY OF THE COMPANIES WHO MANUFACTURE PRODUCTS FOR US OR
OUR SUPPLIERS OF RAW MATERIALS, OUR PROFIT MARGIN AND OUR ABILITY TO DELIVER
PRODUCTS COULD BE ADVERSELY AFFECTED.
Sixteen of our product lines, including Altace and Cortisporin, are
currently manufactured by third parties. Until these products can be moved to
our manufacturing facilities, our dependence upon third parties for the
manufacture of our products may adversely affect our profit margins and our
ability to develop and deliver our products on a timely and competitive basis.
If for any reason we are unable to obtain or retain third-party manufacturers on
commercially acceptable terms, we may not be able to distribute our products as
planned. If we encounter delays or difficulties with contract manufacturers in
producing or packaging our products, the distribution, marketing and subsequent
sales of these products would be adversely affected, and we may have to seek
alternative sources of supply or abandon or sell a product line on
unsatisfactory terms. We might not be able to enter into alternative supply
arrangements at commercially acceptable rates, if at all. We also cannot assure
you that the manufacturers we utilize will be able to provide us with sufficient
quantities of our products or that the products supplied to us will meet our
specifications.
We require a supply of quality raw materials and components to manufacture
and package pharmaceutical products for us and for third parties with which we
have contracted. Generally, we have not had difficulty obtaining raw materials
and components from suppliers in the past. Currently, we rely on approximately
300 suppliers to deliver the necessary raw materials and components. The loss of
any one of these suppliers is not expected to have a material adverse effect on
our ability to acquire raw materials and components. We have no reason to
believe we will be unable to procure adequate supplies of raw materials and
components on a timely basis. However, if we are unable to obtain sufficient
quantities of any of the raw materials or components required to produce and
package our products, we may not be able to distribute our products as planned.
In this case, our business, financial condition and results of operations could
be materially and adversely affected.
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<PAGE> 18
OUR FAILURE TO BE REIMBURSED BY THIRD-PARTY PAYORS OR PRICING PRESSURES BY
MANAGED CARE ORGANIZATIONS COULD DECREASE OUR SALES.
Our commercial success in producing, marketing and selling 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. We cannot assure you that reimbursement will
be available to enable us to achieve market acceptance of our products or to
maintain price levels sufficient to realize an appropriate return on our
investment in product acquisition and development. If adequate reimbursement
levels are not provided, our business, financial condition and results of
operations could be materially and adversely effected. The market for our
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. We cannot assure you that our products will be
included on the formulary lists of managed care organizations or that downward
pricing pressures in the industry generally will not negatively impact our
operations. Further, a number of legislative and regulatory proposals aimed at
changing the health care system have been proposed. While we cannot predict
whether any such proposals will be adopted or the effect such proposals may have
on our 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 our financial condition or results of operations.
FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS COULD AFFECT OUR ABILITY TO
OPERATE OUR BUSINESS.
Virtually all aspects of our activities are regulated by federal and state
statutes and government agencies. The manufacturing, processing, formulation,
packaging, labeling, distribution and advertising of our products, and disposal
of waste products arising from such activities, are subject to regulation by one
or more federal agencies, including the Food and Drug Administration, which we
call the "FDA," the Drug Enforcement Agency, the Federal Trade Commission, the
Consumer Product Safety Commission, the U. S. Department of Agriculture, the
Occupational Safety and Health Administration and the U. S. Environmental
Protection Agency, as well as by foreign governments.
Noncompliance with applicable FDA policies or requirements could subject us
to possible enforcement actions, such as suspension of manufacturing, seizure of
products, product recalls, fines, criminal penalties, injunctions, failure to
approve pending drug product applications or withdrawal of product marketing
approvals. Similar civil or criminal penalties could be imposed by other
government agencies, such as the Drug Enforcement Agency, the Environmental
Protection Agency or various agencies of the states and localities in which our
products are manufactured and sold, and could have ramifications for contracts
with government agencies such as the Veteran's Administration. Such enforcement
actions could have a material adverse effect on our business, financial
condition and results of operations. We believe that our facilities are in
substantial compliance with all current provisions of federal and state laws and
that future compliance
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<PAGE> 19
with such provisions will not have a material adverse effect on our business,
financial condition or results of operations.
All manufacturers of human and animal pharmaceutical products are subject
to regulation by the FDA under the authority of the Federal Food, Drug, and
Cosmetic Act or the Public Health Service Act or both. New drugs, as defined in
the Federal Food, Drug and Cosmetic Act, and new human biological drugs, as
defined in the Public Health Service Act, must be the subject of an FDA-approved
new drug or biologic license application before they may be marketed in the
United States. Some prescription and other drugs are not the subject of an
approved marketing application but, rather, are marketed subject to the FDA's
regulatory discretion and/or enforcement policies. Any change in the FDA's
enforcement discretion and/or policies, such as any decision by the FDA to
require an approved marketing application for one of our products not currently
subject to the approved marketing application, could have a material adverse
effect on our business, financial condition and results of operations.
The FDA has the authority to withdraw existing marketing approvals and to
review the regulatory status of marketed products at any time. For example, the
FDA may require an approved marketing application for any drug product marketed
if new information reveals questions about the drug's safety or effectiveness.
All drugs must be manufactured in conformity with current good manufacturing
practices, which we call "cGMPs," and drug products subject to an approved
application must be manufactured, processed, packaged, held and labeled in
accordance with information contained in the approved application.
Pharmaceutical products also must be distributed, sampled and promoted in
accordance with FDA requirements, including the advertising of prescription
drugs.
Our Parkedale facility located in Rochester, Michigan was one of six
Warner-Lambert facilities subject to a consent decree issued by the U.S.
District Court of New Jersey in August 1993. We currently manufacture
pharmaceutical products at our Parkedale facility subject to the consent decree,
but material violations of the consent decree could subject us to significant
monetary penalties, in addition to possible FDA enforcement action. We are in
the process of preparing for, and if appropriate, plan to petition for relief
from the consent decree with respect to the Parkedale facility. There can be no
assurance that our petition, if and when sought, will be granted. The Parkedale
facility was inspected by the FDA in March and April 1998. During that
inspection, the FDA made cGMP observations in a written report provided to us.
This written report is known as an "FDA Form 483" or simply as a "483." We
provided the FDA with a written response to the 483 including an action plan to
address the observations. We have been informed by the FDA that a follow-up
inspection will occur in the second quarter of 1999 to determine if our
Parkedale facility is in compliance with cGMPs. We cannot assure you of the
outcome of this follow-up inspection. If the FDA finds the facility out of
compliance with cGMPs, it could take enforcement actions against us, including
the possibility of imposition of penalties under the consent decree, which could
have a material adverse effect on our business, financial condition and results
of operations, or could result in a delay of our efforts to seek relief from the
consent decree.
We manufacture some pharmaceutical products containing controlled
substances and, therefore, are also subject to statutes and regulations enforced
by the Drug Enforcement Agency and similar state agencies which impose security,
recordkeeping, reporting, and personnel requirements. Additionally, we
manufacture biological drug products for human use and animal care products for
companion animals and are subject to regulatory burdens as a result of these
aspects of our business. There are additional FDA and other regulatory
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policies and requirements for all our products covering such issues as
advertising, distributing, selling, sampling and reporting adverse events with
which we, like all pharmaceutical manufacturers, must continuously comply.
Noncompliance with any of these policies or requirements could result in
enforcement actions which could have a material adverse effect on our business,
financial condition and results of operations.
While we believe that all of our current pharmaceutical products are
lawfully marketed in the United States under current FDA enforcement discretion
and/or policies or have received the requisite agency approvals, such marketing
is subject to challenge by the FDA at any time. Through various mechanisms, the
FDA can ensure that drugs are no longer marketed. In addition, modifications,
enhancements, or changes in manufacturing sites 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. Our
manufacturing facilities and those of our third-party manufacturers 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.
We cannot determine what effect changes in regulations, enforcement
positions, statutes or legal interpretation, when and if promulgated, adopted or
enacted, may have on our business in the future. Changes could, among other
things, require changes to manufacturing methods or facilities, expanded or
different labeling, new approvals, 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 our business, financial
condition and results of operations.
FAILURE TO KEEP PACE WITH OUR COMPETITION AND TECHNOLOGY COULD HARM OUR
BUSINESS.
We compete with other pharmaceutical companies, including large, global
pharmaceutical companies with financial resources substantially greater than
ours, for products and product line acquisitions. We cannot assure you that
- we will be able to continue to acquire commercially attractive
pharmaceutical products,
- additional competitors will not enter the market or
- competition for products and product line acquisitions will not have a
material adverse effect on our business, financial condition and results
of operations.
We also compete 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 our current or future products. The
industry is characterized by rapid technological change which may render our
products obsolete, and competitors may develop their products more rapidly than
we. Competitors may also be able to complete the regulatory process sooner and,
therefore, may begin to market their products in advance of ours. We believe
that competition for sales of our products will be based primarily on product
efficacy, safety, reliability, availability and price.
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AN INCREASE IN PRODUCT LIABILITY CLAIMS, PRODUCT RECALLS OR PRODUCT RETURNS
COULD HARM OUR BUSINESS.
We face an inherent business risk of exposure to product liability claims
in the event that the use of our technologies or products is alleged to have
resulted in adverse effects. These risks will exist even with respect to those
products that receive regulatory approval for commercial sale. While we have
taken, and will continue to take, what we believe are appropriate precautions,
we may not be able to avoid significant product liability exposure. We currently
have product liability insurance in the amount of $50.0 million for aggregate
annual claims with a $50,000 deductible per incident and a $500,000 aggregate
annual deductible; however, we cannot assure you that the level or breadth of
any insurance coverage will be sufficient to cover fully all potential claims.
Also, adequate insurance coverage might not be available in the future at
acceptable costs, if at all.
Product recalls may be issued at our discretion or at the discretion of the
FDA, other government agencies or other companies having regulatory authority
for pharmaceutical product sales. In November 1998 the Parke-Davis division of
Warner-Lambert initiated a voluntary Class III recall for one lot of Procanbid
manufactured prior to our acquisition of Procanbid. A Class III recall is one in
which use of, or exposure to, the product is not likely to cause adverse
consequences. The recall was instituted because the lot at issue failed a
dissolution test as part of the routine stability program at the 18-month
interval. In February 1999 we notified the FDA that two additional lots of
Procanbid, also manufactured prior to our acquisition of the product line, had
failed the same dissolution test at the 24-month interval. If additional lots of
Procanbid are recalled, the reputation of the product and the value of the
trademark associated therewith could be adversely affected. We cannot assure you
that additional product recalls will not occur in the future. Any product recall
could materially adversely affect our business, financial condition and results
of operations.
Although product returns were approximately 1.7% of gross sales for the
year ended December 31, 1998, we cannot assure you that actual levels of returns
will not increase or significantly exceed the amounts we have anticipated.
THE LOSS OF OUR KEY PERSONNEL COULD HARM OUR BUSINESS.
We are highly dependent on the principal members of our management staff,
the loss of whose services might impede the achievement of our acquisition and
development objectives. Although we believe that we are adequately staffed in
key positions and that we will be successful in retaining skilled and
experienced management, operational and scientific personnel, we cannot assure
you that we 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 us, especially in light of our
recent growth. We do not maintain key-person life insurance on any of our
employees. In addition, we do not currently have employment agreements with any
of our key employees.
OUR FAILURE TO BE YEAR 2000 COMPLIANT COULD HARM OUR BUSINESS.
We are dependent on business systems (which include our information
technology systems and non-information technology devices with embedded
microprocessors) in operating our business. We also depend on the proper
functioning of business systems of third parties, such as our vendors and
customers. The failure of any of these systems to
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appropriately interpret the upcoming calendar year 2000 could have a material
adverse effect on our financial condition, results of operations, cash flow and
business prospects.
Except for our facility located in Bristol, Tennessee which we are
currently assessing, we have completed a Year 2000 readiness assessment of our
business critical information technology and non-information technology systems.
As a result of the assessment, we are in the process of developing and
implementing corrective action plans designed to address Year 2000 issues. These
plans include modification, upgrade and replacement of our critical
administrative, production and research and development computer systems to make
them Year 2000 ready. We have begun implementation of corrective action plans.
Because our operations depend on the uninterrupted flow of materials and
services from our contract manufacturers and other suppliers, our plans for Year
2000 readiness include receiving and analyzing information from our suppliers
with regard to their progress toward Year 2000 readiness. We intend to continue
to monitor the progress of our key suppliers toward Year 2000 readiness. We
consider the most reasonably likely worst case scenario is that one or more of
our suppliers encounters a Year 2000 problem and is unable to supply materials.
If this occurs and we could not promptly obtain the same materials from another
vendor, production could be interrupted, which could result in lost sales and
profits. In addition, while we are taking action to correct deficiencies in our
own systems, it is possible that one or more of our facilities or critical
business systems might not achieve Year 2000 readiness as anticipated. This
could also result in disruption of operations and lost sales and profits.
Our inability to remedy our own Year 2000 problems or the failure of third
parties to do so may cause business interruptions or shutdown, financial loss,
regulatory actions, reputational harm or legal liability. We cannot assure you
that our Year 2000 program or the programs of third parties who do business with
us will be effective, that our estimate about the timing and cost of completing
our program will be accurate or that all remediation will be complete by the
Year 2000.
OWNERSHIP OF OUR COMPANY IS CONCENTRATED IN A FEW INDIVIDUALS WHO CAN INFLUENCE
OUR MANAGEMENT AND POLICIES.
Our present officers and directors and their affiliates beneficially own
41.3% of the outstanding shares of our common stock as of March 1, 1999.
Accordingly, they have the ability to exercise significant influence over the
management and policies of King. Independent directors do not currently, and may
not in the future, constitute a majority of the Board of Directors. In the
absence of a majority of independent directors, King'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 King and its shareholders generally and its
executive officers or directors. We do not intend to implement any formal
procedures to address any such potential conflicts of interest. See "Certain
Relationships and Related Transactions" and "Principal Shareholders" for
information about the concentration of ownership and transactions with our
affiliates."
IF THE CONTROL OF OUR COMPANY CHANGES, WE MAY NOT BE ABLE TO REPAY THE NOTES.
If a change of control occurs, you have the right to require us to
repurchase any or all of the notes you own at a price equal to 101% of the
principal amount thereof, together with any interest we owe you. Upon a change
of control, we may be required immediately
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to repay the outstanding principal, any accrued interest on and any other
amounts owed by us under our senior credit facility and any other indebtedness
or preferred stock then outstanding. We cannot assure you that we would be able
to repay amounts outstanding under our senior credit facility or obtain
necessary consents under the facility to purchase the notes. Any requirement to
offer to purchase any outstanding notes may result in our having to refinance
our outstanding indebtedness, which we may not be able to do. In addition, even
if we were able to refinance such indebtedness, such financing may be on terms
unfavorable to us. If we fail to repurchase all of the notes tendered for
purchase upon the occurrence of a change of control, this failure will be an
event of default under the indenture governing the notes. In addition, the
change of control covenant does not cover all corporate reorganizations, mergers
or similar transactions and may not provide you with protection in a highly
leveraged transaction.
YOU MAY NOT BE ABLE TO SELL YOUR NOTES.
There is no established trading market for the notes although the notes are
eligible for trading in The Portal(SM) Market, a subsidiary of The Nasdaq Stock
Market, Inc. However, we do not intend to apply for listing of the notes on any
securities exchange.
The liquidity of any market for the notes will depend upon the number of
holders of the notes, our performance, the market for similar securities, the
interest of securities dealers in making a market in the notes and other
factors. A liquid trading market may not develop for the notes.
THE TRADING PRICE OF THE NOTES IS SUBJECT TO SIGNIFICANT FLUCTUATION.
The trading price of the notes could be subject to significant fluctuation
in response to, among other factors, variations in operating results,
developments in industries in which we do business, general economic conditions,
changes in securities analysts' recommendations regarding our securities and
changes in the market for noninvestment grade securities generally. Such
volatility may adversely affect the market price of the notes.
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USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes. The net proceeds from the sales of the old notes were approximately
$144.0 million after deducting expenses of the offering of the old notes. We
used the net proceeds of the old notes issued in March 1999 to repay in full the
$75.0 million in senior subordinated seller notes we issued to HMR for the
product lines, including Altace, we acquired December 22, 1998 and to repay
$69.0 million of our senior credit facility.
CAPITALIZATION
The following table sets forth our capitalization at December 31, 1998 on
an historical basis and as adjusted to give effect to the issuance of the old
notes and the exchange of old notes for exchange notes as if such events
occurred on December 31, 1998. This table should be read in conjunction with
"Selected Consolidated Financial Data," "Unaudited Pro Forma Consolidated
Financial Statements," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," our consolidated financial statements and
related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Senior Credit Facility:
Revolving credit facility............................. $ 19,000 $ --
Term loans(1)......................................... 425,000 375,000
Senior subordinated seller notes........................ 75,000 --
10 3/4% Senior Subordinated Notes/Exchange Notes........ -- 150,000
Other debt(1)........................................... 8,796 8,796
-------- --------
Total debt......................................... 527,796 533,796
Shareholders' equity(2)................................. 101,436 100,536
-------- --------
Total capitalization............................... $629,232 $634,332
======== ========
</TABLE>
- ---------------
(1) Includes current portion.
(2) As adjusted reflects write-offs of financing costs related to the senior
subordinated seller notes of $0.9 million, net of taxes of $0.6 million.
21
<PAGE> 25
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial information of
King is based on the historical financial statements of King included elsewhere
in this prospectus, adjusted to give pro forma effect to the following
transactions:
(1) the acquisition of Altace, Silvadene and AVC from HMR on December
22, 1998, which we call the "Altace Acquisition,"
(2) the receipt and use of proceeds from the senior credit facility
and the issuance of the senior subordinated seller notes,
(3) the sale and issuance of the old notes and exchange notes,
(4) the following product acquisitions:
- the acquisition of several products, a manufacturing facility and
manufacturing contracts from Warner-Lambert which we call the
"Sterile Products Acquisition" on February 27, 1998, and
- the Menest product line on June 30, 1998.
We refer to these two acquisitions in this prospectus as the "Product
Acquisitions."
We refer to all four of these events in this prospectus as the
"Transactions."
The unaudited pro forma consolidated balance sheet as of December 31, 1998
gives effect to the issuance of the old notes as if that transaction occurred on
December 31, 1998. The unaudited pro forma consolidated statements of operations
for the year ended December 31, 1998 give effect to the Transactions as if they
had occurred on January 1, 1998. The unaudited pro forma adjustments are based
upon available information and certain assumptions that we believe are
reasonable under the circumstances. The unaudited pro forma consolidated
financial statements do not purport to represent what King's results of
operations or financial condition would actually have been had the Transactions
in fact occurred on January 1, 1998, nor do they purport to project King's
results of operations or financial condition for any future period or date. The
information set forth below should be read together with the other information
contained under the captions "Capitalization," "Selected Consolidated Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations," King's consolidated financial statements and related notes and
the special purpose statements of product contribution included elsewhere in
this prospectus.
The Product Acquisitions and the Altace Acquisition have all been accounted
for as purchases. Under purchase accounting, the total purchase price and fair
value of the liabilities assumed are allocated to the tangible assets and
identifiable intangible assets of King based upon their respective fair values
as of the purchase date in accordance with Accounting Principles Board Opinion
No. 16.
22
<PAGE> 26
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 1,159 $ 1,159
Accounts receivable, net................... 39,666 39,666
Inventories................................ 26,556 26,556
Deferred income taxes...................... 6,675 6,675
Prepaid expenses and other assets.......... 1,554 1,554
-------- --------
Total current assets............... 75,610 75,610
Property, plant and equipment, net........... 93,981 93,981
Intangible assets............................ 480,583 480,583
Other assets................................. 17,997 4,500(1) 22,497
-------- -------- --------
Total assets....................... $668,171 $672,671
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt:
Term loans.............................. $ 10,250 (1,206)(2) $ 9,044
Other................................... 3,060 3,060
Accounts payable........................... 12,594 12,594
Accrued expenses........................... 15,095 15,095
Income taxes payable....................... 3,524 (600)(3) 2,924
-------- -------- --------
Total current liabilities.......... 44,523 44,523
-------- --------
Long-term debt:
Revolving credit facility.................. 19,000 (19,000)(4) --
Term loans................................. 414,750 (48,794)(5) 365,956
Other...................................... 5,736 5,736
Senior subordinated seller notes........... 75,000 (75,000)(5) --
10 3/4% Senior Subordinated Notes.......... -- 150,000(5) 150,000
Deferred income taxes........................ 7,726 7,726
--------
Total liabilities.................. 566,735 572,135
-------- --------
Shareholders' equity
Common shares.............................. 66,572 66,572
Retained earnings.......................... 35,460 (900)(6) 34,560
Due from related party..................... (596) (596)
-------- --------
Total shareholders' equity......... 101,436 100,536
-------- --------
Total liabilities and shareholders'
equity.......................... $668,171 $672,671
======== ========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Balance Sheet.
23
<PAGE> 27
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED BALANCE SHEET
(1) Other assets -- to reflect adjustments to record the following (in
thousands):
<TABLE>
<S> <C>
To record deferred financing costs related to issuance
of the old notes...................................... $ 6,000
To eliminate unamortized deferred financing costs
related to the senior subordinated seller notes....... (1,500)
-------
Total.............................................. $ 4,500
=======
</TABLE>
(2) Current portion of long-term debt -- to reflect adjustment to record
the following (in thousands):
<TABLE>
<S> <C>
Repayment of a portion of the term loans under the senior
credit facility with proceeds from issuance of the old
notes................................................... $(1,206)
=======
</TABLE>
(3) Income taxes payable--to reflect adjustment to record the following (in
thousands):
<TABLE>
<S> <C>
To record income tax benefit related to write-off of
deferred financing costs from the senior subordinated
seller notes at an assumed 40% tax rate(a)............... $(600)
=====
</TABLE>
- -------------------------
(a) 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>
(4) Revolving credit facility -- to reflect adjustment to record the
following (in thousands):
<TABLE>
<S> <C>
Repayment of the revolving credit facility............... $(19,000)
========
</TABLE>
(5) Long-term debt -- to reflect adjustments to record the following (in
thousands):
<TABLE>
<S> <C>
Proceeds from the issuance of the old notes.............. $150,000
========
Repayment of the senior subordinated seller notes with
proceeds from the issuance of the notes................ $(75,000)
========
Repayment of a portion of term loans with proceeds from
the issuance of the notes.............................. $(48,794)
========
</TABLE>
(6) Retained earnings -- to reflect adjustment to record the following (in
thousands):
<TABLE>
<S> <C>
To record the write-off of the unamortized deferred
financing costs from the senior subordinated seller
notes, net of tax........................................ $(900)
=====
</TABLE>
24
<PAGE> 28
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE PRO FORMA FOR ALTACE ALTACE
COMPANY THE PRODUCT ACQUISITION ACQUISITION
ACTUAL ACQUISITIONS(1) ACTUAL(2) OTHER(3) ADJUSTMENTS PRO FORMA
-------- --------------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total revenues....... $163,463 $175,197 $94,198 $353 $ -- $269,748
-------- -------- ------- ---- -------- --------
Cost of sales........ 64,052 68,643 6,917 141 1,698(4) 77,399
Royalty expense...... -- -- 2,246 -- -- 2,246
-------- -------- ------- ---- -------- --------
Gross profit......... 99,411 106,554 85,035 212 (1,698) 190,103
Selling, general and
administrative..... 34,718 35,774 44,619 -- (22,675)(5) 57,718
Depreciation and
amortization....... 9,255 10,473 -- -- 14,500(6) 24,973
-------- -------- ------- ---- -------- --------
Operating income
(loss)............. 55,438 60,307 40,416 212 6,477 107,412
Interest expense..... (14,866) (16,658) -- -- (37,225)(7)(8 (53,883)
Other income, net.... 145 145 -- -- -- 145
-------- -------- ------- ---- -------- --------
Income (loss) before
income taxes....... 40,717 43,794 40,416 212 (30,748) 53,674
Income tax (benefit)
expense............ 15,396 16,627 -- -- 3,952(9) 20,579
-------- -------- ------- ---- -------- --------
Net income (loss).... $25,321 $ 27,167 $40,416 $212 $(34,700) $ 33,095
======== ======== ======= ==== ======== ========
Basic and diluted net
income per share... $ 0.69 $ 1.10
======== ========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statement of Operations.
25
<PAGE> 29
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS
(1) The following unaudited pro forma consolidated financial information of King
is based on its historical financial statements included elsewhere in this
prospectus, adjusted to give pro forma effect to the Sterile Products
Acquisition and Menest acquisition and the receipt and use of proceeds from
a prior bank facility incurred in February 1998.
The unaudited pro forma consolidated statements of operations for the year
ended December 31, 1998, give effect to the above as if they had occurred on
January 1, 1998. The unaudited pro forma adjustments set forth below are
based upon available information and assumptions that management believes
are reasonable under the circumstances. The pro forma consolidated statement
of operations does not purport to project King's results of operations for
any future period. The information set forth below should be read together
with King's consolidated financial statements and related notes included
elsewhere in this prospectus.
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
THE COMPANY STERILE PRODUCTS MENEST FOR THE
ACTUAL ACTUAL(A)(B) ACTUAL(C) ADJUSTMENTS PRODUCT ACQUISITIONS
----------- ---------------- --------- ----------- --------------------
<S> <C> <C> <C> <C> <C>
Total revenues......................... $163,463 $10,844 $890 $ -- $175,197
-------- ------- ---- ------- --------
Cost of sales.......................... 64,052 5,314 108 (831)(d) 68,643
Royalty expense........................ -- -- -- -- --
-------- ------- ---- ------- --------
Gross profit........................... 99,411 5,530 782 831 106,554
Selling, general and administrative.... 34,718 1,001 -- 77(e) 35,774
Depreciation and amortization.......... 9,255 -- -- 1,196(f) 10,473
-------- ------- ---- ------- --------
Operating income (loss)................ 55,438 4,529 782 (442) 60,307
Interest expense....................... (14,866) -- -- (1,792)(g) (16,658)
Other income, net...................... 145 -- -- -- 145
-------- ------- ---- ------- --------
Income (loss) before income taxes...... 40,717 4,529 782 (2,234) 43,794
Income tax (benefit) expense........... 15,396 -- -- 1,231(h) 16,627
-------- ------- ---- ------- --------
Net income............................. $ 25,321 $ 4,529 $782 $(3,465) $ 27,167
======== ======= ==== ======= ========
Basic and diluted income per share:
Income before extraordinary item...... $ 0.84 $ -- $ -- $ -- $ 0.90
======== ======= ==== ======= ========
</TABLE>
- -------------------------
(a) Represents the historical results for the product lines included in the
Sterile Products Acquisition for the period prior to the acquisition on
February 27, 1998.
(b) Of the total products acquired in the Sterile Products Acquisition, one
product, Fluogen, 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 we reintroduced Fluogen in
August 1998.
(c) Represents the historical results for the Menest product line for the
period prior to its acquisition on June 30, 1998.
(d) Reflects the reclassification of depreciation expense of approximately $0.8
million from the Sterile Products Acquisition to be consistent with the
presentation of King's financial statements for the year ended December 31,
1998.
26
<PAGE> 30
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED)
(e) We calculated the total selling, general and administrative costs that
would have been required had the Sterile Products Acquisition been
consummated as of January 1, 1998 and compared this to the amount reflected
in the historical financial statements of King and this acquisition. There
were additional costs of $0.1 million for the year ended December 31, 1998.
(f) Includes amortization of intangible assets over 25 years for the Sterile
Products Acquisition and the acquisition of Menest, and depreciation of
fixed assets from the Sterile Products Acquisition over periods of 5 to 40
years.
(g) Represents increased interest expense based upon the pro forma debt
incurred under the prior bank facility at the rates indicated below as if
the prior bank facility had been incurred as of the beginning of 1998
presented as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
<S> <C>
Revolving credit facility ($7.0 million) at 8%.............. $ 93
Tranche A loan ($90.0 million) at 8%........................ 1,200
Tranche B loan ($85.0 million) at 8.25%..................... 1,168
Amortization of financing costs on above debt............... 150
Adjustment to net interest from assumed retirement of
existing debt............................................. (819)
------
$1,792
======
</TABLE>
(h) Adjustment to reflect a 40% effective tax rate applied to the incremental
pro forma net income before income taxes. A reconciliation of the statutory
tax rate to the assumed pro forma tax rate is provided as follows:
<TABLE>
<S> <C>
Federal statutory rate...................................... 35.0%
State taxes, net of federal benefit......................... 4.0
Other....................................................... 1.0
----
40.0%
====
</TABLE>
- -------------------------
(2) Represents the historical results of the product lines included in the
Altace Acquisition (other than the historical international results of
Silvadene and AVC) for the periods prior to this acquisition on December 22,
1998. See the special purpose statements of product contribution and related
notes included elsewhere in this prospectus.
(3) Represents the historical international results of Silvadene and AVC for the
periods prior to the acquisition on December 22, 1998. These results have
been determined by King solely based upon information provided to it by HMR.
(4) Reflects additional costs of approximately $1.7 million for the year ended
December 31, 1998, based upon the five-year agreement with HMR to supply the
Company with Altace at a fixed contract cost.
(5) We have determined that the selling and advertising and promotion expenses
reported in the special purpose statements of product contribution for the
Altace Acquisition
27
<PAGE> 31
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED)
would not be reflective of the costs we would have incurred utilizing its
existing infrastructure and marketing approach. As a result, the adjustment
for the year ended December 31, 1998, of $22.7 million consists of $14.3
million of selling costs savings, plus $8.4 million of general and
administrative cost savings. The savings in selling costs were determined as
follows (in thousands, except full-time equivalent representatives):
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31,
1998
-----------------
<S> <C>
Average selling cost per HMR representative................. $ 170.0
Average selling cost per King representative................ 75.0
-------
Savings per representative........................ $ 95.0
=======
Full-time equivalent representatives........................ 150
-------
Estimated total savings........................... $14,250
=======
</TABLE>
We estimated the total advertising and promotion costs, general,
administrative and distribution costs and the costs associated with the
implementation of the transitional services agreement that would have been
required had the Altace Acquisition been consummated as of January 1, 1998 and
compared this to the amounts reflected in the special purpose statements of
product contribution for the Altace Acquisition. The estimated savings is based
on utilizing our current infrastructure and more focused advertising and
promotion as compared to that of HMR, offset in part by an increase in sampling
costs. We have estimated the savings in general and administrative costs related
to the Altace Acquisition as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31,
1998
-----------------
<S> <C>
HMR reported:
Advertising and promotion as reported in the special purpose
statements of product contribution........................ $19,125
King estimated costs:
Advertising and promotion................................... $ 9,200
General, administrative and distribution.................... 500
Transitional services agreement............................. 1,000
-------
Subtotal.................................................. 10,700
-------
Estimated savings........................................... $ 8,425
=======
</TABLE>
(6) Represents amortization of intangible assets over 15 to 30 years for the
Altace Acquisition.
28
<PAGE> 32
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED)
(7) Adjustment to reflect the increase in interest expense as a result of the
receipt and use of proceeds from the senior credit facility and the senior
subordinated seller notes related to the Altace Acquisition (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1998
------------------
<S> <C>
Revolving credit facility ($19.0 million at 8.56%)(a)....... $ 1,626
Tranche A loan ($150.0 million at 8.56%)(a)................. 12,840
Tranche B loan ($275.0 million at 9.06%)(a)................. 24,915
Senior subordinated seller notes ($75.0 million at
10.0%)(a)................................................. 7,500
Amortization of finance costs on above debt................. 2,632
Adjustment to net interest from assumed retirement of
existing debt............................................. (15,295)
--------
$ 34,218
========
</TABLE>
- -------------------------
(a) The interest rates shown above for the revolving credit facility, the
Tranche A and B loans under the senior credit facility and the senior
subordinated seller notes were the rates in effect immediately following the
Altace Acquisition. A change in the interest rate of one-eighth of one
percent (0.125%) would change interest expense, net income and deficiency of
earnings available to cover fixed charges as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1998
------------------
<S> <C>
Revolving credit facility................................... $ 24
Tranche A loan.............................................. 188
Tranche B loan.............................................. 344
----
$556
====
</TABLE>
(8) Adjustment to reflect the increase in interest expense as a result of
issuance of the old notes (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1998
------------------
<S> <C>
Issuance of old notes ($150.0 million at 10 3/4%)(a)........ $16,125
Amortization of finance costs on above debt................. 450
Repayment of :
Revolving credit facility ($19.0 million)................. (1,626)
Tranche A loan ($17.6 million)............................ (1,511)
Tranche B loan ($32.4 million)............................ (2,931)
Senior subordinated seller notes ($75.0 million).......... (7,500)
-------
$ 3,007
=======
</TABLE>
- -------------------------
(a) A change in the interest rate of one-eighth of one percent (0.125%) would
change interest expense, net income before income taxes and deficiency of
earnings available to cover fixed charges by $188 for the year ended
December 31, 1998.
(9) Adjustment to reflect a 40% effective tax rate applied to the incremental
pro forma net 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>
29
<PAGE> 33
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the years ended
December 31, 1996, 1997 and 1998 and as of December 31, 1997 and 1998 are
derived from the consolidated financial statements of King, which have been
audited by PricewaterhouseCoopers LLP, independent accountants, and are included
elsewhere in this prospectus. The following historical selected consolidated
financial data as of December 31, 1994, 1995 and 1996 and for the years ended
December 31, 1994 and 1995 are derived from the consolidated financial
statements of King, which have been audited by PricewaterhouseCoopers LLP,
independent accountants, and are not included in this prospectus. The selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Unaudited Pro Forma Consolidated Financial Statements" and King's consolidated
financial statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------
1994 1995 1996(1) 1997 1998
------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $13,311 $25,441 $15,457 $ 47,351 $158,180
Development revenues(2)............... -- -- 5,000 558 5,283
------- ------- ------- -------- --------
Total revenues...................... 13,311 25,441 20,457 47,909 163,463
------- ------- ------- -------- --------
Cost of sales......................... 9,754 12,130 8,782 13,034 64,052
Selling, general and administrative... 1,987 8,605 12,106 19,123 34,718
Depreciation and amortization(3)...... 639 1,777 982 2,395 9,255
------- ------- ------- -------- --------
Total costs and expenses............ 12,380 22,512 21,870 34,522 108,025
Gain on sale of product line,
net(4).............................. -- 13,102 -- -- --
------- ------- ------- -------- --------
Operating income (loss)............... 931 16,031 (1,413) 13,357 55,438
Gain on sale of investment in
affiliate(5)........................ -- -- 1,760 -- --
Interest expense...................... (1,069) (2,006) (1,272) (2,749) (14,866)
Other income (expenses), net.......... 554 367 578 (28) 145
------- ------- ------- -------- --------
Income (loss) before income taxes and
extraordinary item.................. 416 14,392 (347) 10,580 40,717
Income tax (benefit) expense.......... (501) 5,058 (107) 3,968 15,396
------- ------- ------- -------- --------
Income (loss) before extraordinary
item................................ 917 9,334 (240) 6,612 25,321
Extraordinary item, net of income
taxes(6)............................ -- 528 -- -- (4,411)
------- ------- ------- -------- --------
Net income (loss)..................... $ 917 $ 9,862 $ (240) $ 6,612 $ 20,910
======= ======= ======= ======== ========
OTHER DATA:
EBITDA(7)............................. $ 2,124 $18,175 $ 1,907 $ 15,724 $ 64,834
Cash flow from operations............. 672 (2,585) (6,269) 5,016 5,831
Cash flow from investing.............. (890) 30,268 (2,126) (53,977) (425,975)
Cash flow from financing.............. 927 (18,143) (781) 47,638 421,234
Capital expenditures(8)............... 890 1,672 1,069 1,379 8,055
Ratio of earnings to fixed
charges(9).......................... 1.4x 8.0x -- 4.8x 3.6x
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents............. $ 1,028 $10,689 $ 1,392 $ 69 $ 1,159
Working capital....................... (2,408) 7,599 7,749 (424) 31,087
Total assets.......................... 38,477 33,942 39,279 104,863 668,171
Debt.................................. 28,093 15,176 18,011 57,289 527,796
Shareholders' equity.................. 1,935 11,011 15,697 29,334 101,436
</TABLE>
30
<PAGE> 34
- -------------------------
(1) Net sales 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.
(2) King developed four abbreviated new drug applications which were filed with
the FDA on Mallinckrodt's behalf for a maximum of $2.5 million each paid
upon FDA approval and validation of the process.
(3) Amounts do not include amortization of debt issuance costs, which are
included in interest expense.
(4) In December 1994 King acquired the Anexsia product line. King sold the
Anexsia product line to Mallinckrodt in December 1995 for $32.0 million and
recorded a $13.1 million net gain.
(5) In September 1996 King sold its entire 6.0% interest in an affiliated,
privately held pharmaceutical company.
(6) Reflects gain on 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 repayment of the prior bank
indebtedness in February 1998, net of income taxes of $272,000 and $2.8
million, respectively.
(7) "EBITDA" is defined as net income (loss) from continuing operations before
interest, taxes, depreciation and amortization. We believe that EBITDA
provide useful information regarding our ability to service our
indebtedness, but should not be considered in isolation or as a substitute
for operating income or cash flow from operations (in each case as
determined in accordance with generally accepted accounting principles) as
an indicator of our operating performance or as a measure of our liquidity.
(8) Capital expenditures represent King's purchases of property, plant and
equipment. Capital expenditures exclude business and product acquisitions.
For the year ended December 31, 1998, we completed approximately $495.9
million of business and product acquisitions, respectively.
(9) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. Earnings consist of income (loss) before income taxes,
extraordinary item, plus fixed charges, excluding capitalized interest.
Fixed charges consist of interest expense which includes amortization of
debt issuance costs, capitalized interest and the portion of rental expense
deemed representative of the interest factor. For the year ended December
31, 1996, earnings were insufficient to cover fixed charges by
approximately $347,000.
31
<PAGE> 35
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. Historical results and percentage relationships set forth in the
statement of operations, including trends which might appear, are not
necessarily indicative of future operations. See "Risk Factors" for trends and
uncertainties known to us that would cause reported financial information to
differ materially from future results.
OVERVIEW
We are a vertically integrated pharmaceutical company that manufactures,
markets and sells primarily branded prescription pharmaceutical products.
Through a national sales force of over 200 representatives, we market our
branded pharmaceutical products to general/family practitioners and internal
medicine physicians and hospitals across the country. Our business strategy is
to acquire established branded pharmaceutical products and to increase their
sales by focused marketing and promotion and through product life cycle
management. In pursuing acquisitions, we seek to capitalize on opportunities in
the pharmaceutical industry created by cost containment initiatives and
consolidation among large, global pharmaceutical companies. We also create value
by developing product line extensions for our branded pharmaceutical products
such as new formulations, dosages or new indications. These product line
extensions are attractive for us because they may have market exclusivity or
sales levels that do not attract significant competition. In addition to branded
pharmaceuticals, we also provide contract manufacturing for a number of the
world's leading pharmaceutical and biotechnology companies, including Amgen,
Inc., Warner-Lambert, Mallinckrodt Chemical, Genetics Institute and
Hoffman-LaRoche, Inc.
Our branded pharmaceutical products can be divided into four therapeutic
areas:
- cardiovascular (including Altace, Thalitone and Procanbid),
- anti-infectives (including Cortisporin, Neosporin, and Coly-Mycin M),
- vaccines and biologicals (including Fluogen, Aplisol and Histoplasmin)
and
- women's health (including Pitocin and Menest).
All of these products are marketed to general/family practitioners and
internal medicine physicians. Unlike many of our competitors, we have a broad
therapeutic focus that provides us with opportunities to purchase a wide variety
of products, as evidenced by our acquisition of 26 products over the last 18
months, including Altace. In addition, we have well known products in all of our
therapeutic categories that generate high prescription volumes. Our portfolio of
recognized prescription brand names includes, among others, Altace, Neosporin,
Cortisporin, Pitocin, Anusol-HC and Fluogen.
Since December 1994, we have acquired 34 branded pharmaceutical products,
developed three products internally, divested one product and introduced eight
product line extensions. We acquired from Glaxo Wellcome the Cortisporin product
line in March 1997, which we refer to as the "Cortisporin Acquisition", the
Viroptic product line in May 1997 and the Glaxo Acquisition in November 1997.
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<PAGE> 36
In February 1998, we acquired from Warner-Lambert 15 branded pharmaceutical
products, the Parkedale facility located in Rochester, Michigan and certain
manufacturing contracts for third parties for $127.9 million, including $2.9
million of assumed liabilities.
On June 30, 1998, we acquired the Menest product line from SmithKline
Beecham Corporation for $5.0 million.
In June 1998, we launched our new Cortisporin-TC Otic line. Cortisporin-TC
Otic is a product line extension for our Cortisporin Otic Suspension product.
In August 1998, we received approval by the FDA to reintroduce Fluogen
(influenza virus vaccine, Trivalent, Types A & B), which was acquired as part of
the Sterile Products Acquisition and had been off the market since 1996. Fluogen
is a seasonal product with most of its sales occurring in the third and fourth
quarters.
In December 1998, we acquired from HMR for $362.5 million the United States
rights to Altace, an ACE inhibitor, HMR's worldwide rights to Silvadene, a burn
cream, and HMR's worldwide rights to AVC, a vaginal anti-infective cream.
Our strategy is to continue to acquire branded pharmaceutical products and
to create value by leveraging our marketing, manufacturing and product
development capabilities. We expect that our strategy of acquiring branded
pharmaceutical products will increase our revenues as a result of sales of such
products and will increase gross margins. In general, margins are higher on our
branded pharmaceutical products than on our other products, making branded
products attractive to us. As soon as practicable after regulatory requirements
are satisfied and when advantageous, we expect that manufacturing these acquired
pharmaceutical products ourselves will increase our margins because the cost of
producing pharmaceutical products on our own is lower than the cost of having
these products manufactured by third parties. We may also be required to raise
funds through additional borrowings or the issuance of debt or equity securities
in order to finance additional branded product acquisitions and to expand or
remodel our manufacturing facilities.
We manufacture pharmaceutical products for a variety of pharmaceutical and
biotechnology companies under contracts expiring at various times within the
next five years. We intend to enter into additional manufacturing contracts in
cases where we identify contracts that offer significant volumes and attractive
margins. We have not accepted or renewed manufacturing contracts for third
parties where we perceived insignificant volumes or revenues. In accordance with
our focus on branded pharmaceutical products, we expect that, over time, our
contract manufacturing and generic pharmaceutical and companion animal health
product lines will become a smaller percentage of total revenues.
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<PAGE> 37
The following summarizes approximate net revenues by operating segment (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Branded pharmaceutical products..................... $ 2,939 $37,912 $125,399
Contract manufacturing.............................. 10,890 6,982 31,611
Other............................................... 6,628 3,015 6,453
------- ------- --------
Total..................................... $20,457 $47,909 $163,463
======= ======= ========
</TABLE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues
Net revenues increased $115.6 million, or 241.3%, to $163.5 million in 1998
from $47.9 million in 1997, due primarily to the acquisition of branded products
in 1998 and late 1997 and increased contract manufacturing related to the
Sterile Products Acquisition.
Branded pharmaceutical products revenues increased $87.5 million, or
230.8%, to $125.4 million in 1998 from $37.9 million in 1997. The Glaxo
Acquisition, Sterile Products Acquisition, Menest and the Altace Acquisition
collectively contributed $85.9 million in revenues from branded pharmaceuticals
in 1998, including $17.7 million in net revenues from Fluogen sales.
Revenues from contract manufacturing increased $24.6 million, or 351.4%, to
$31.6 million in 1998 from $7.0 million in 1997, due primarily to the increased
contract manufacturing related to the Sterile Products Acquisition.
Additionally, we recognized other revenues in 1998 of $5.0 million for the
development and related FDA approval of two ANDAs filed in connection with its
agreement with Mallinckrodt Chemical.
Gross Profit
Total gross profit increased $64.6 million, or 185%, to $99.4 million in
1998 from $34.9 million in 1997. The increase was primarily due to the increase
in gross profit associated with branded pharmaceutical products of $61.3
million. Additionally, gross profit associated with contract development
revenues, generic pharmaceutical sales and companion animal health product sales
increased by $3.6 million.
The gross profit of branded pharmaceutical products increased $61.3 million
to $94.5 million in 1998 from $33.2 million in 1997. This increase was primarily
due to increases in revenues from certain products acquired in the Sterile
Products Acquisition, the Cortisporin Acquisition, the Glaxo Acquisition, and
the Altace Acquisition.
The gross profit associated with contract development revenue, generic
pharmaceutical sales, and companion animal health sales increased by $3.6
million to $5.5 million in 1998 from $1.9 million in 1997. The increase was
primarily due to an increase in contract development revenue offset by a
decrease in gross profit contribution of generic pharmaceutical and companion
animal health products.
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<PAGE> 38
Selling, General and Administrative Expense
Selling, general and administrative expenses increased $15.6 million, or
81.7%, to $34.7 million in 1998 from $19.1 million in 1997. This increase was
primarily attributable to the hiring of additional sales representatives in 1998
and during the second half of 1997, as well as other additional personnel costs
and marketing, promotion and sampling costs associated with the newly acquired
branded product lines.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $6.9 million, or 287.5%, to
$9.3 million in 1998 from $2.4 million in 1997. This increase was primarily
attributable to the depreciation and amortization of the fixed assets and
intangible assets acquired with the branded product acquisitions in 1997 and the
Sterile Products and the Altace Acquisitions in 1998.
Operating Income
Operating income increased $42.0 million, or 313.4%, to $55.4 million in
1998 from $13.4 million in 1997. This increase was primarily due to incremental
revenues and costs associated with the acquisition of branded products. As a
percentage of net revenues, operating income increased to 33.9% in 1998 from
27.9% in 1997.
Interest Expense
Interest expense increased $12.2 million, or 451.9%, to $14.9 million in
1998 from $2.7 million in 1997, as a result of additional long-term debt used to
finance, in part, the acquisitions in 1998.
Income Tax Expense
The effective tax rate in 1998 of 37.8% was higher than the federal
statutory rate of 35% primarily due to state income taxes.
Extraordinary item
During 1998, we repaid some of our long-term debt prior to maturity. The
repayment resulted in extraordinary charges of $4.4 million, net of related tax
benefits of $2.8 million, associated with the write-off of some of the deferred
financing costs.
Net Income
Due to the factors set forth above, net income increased $14.3 million, or
216.7%, to $20.9 million in 1998 from $6.6 million 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 13 branded products since October 1996. Of these acquired branded products,
the Cortisporin product line
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<PAGE> 39
contributed $21.7 million from the date of acquisition (March 21, 1997) through
December 31, 1997, or 57.3% of total branded pharmaceutical sales of $37.9
million and 45.37% of total revenues, while our additional branded products
contributed an additional $16.6 million, or 43.8% and 34.7% of total revenues.
We filed two abbreviated new drug applications with the FDA in connection with
the disposal of the branded product, Anexsia, and a related generic product line
in December 1995. However, we did not recognize any income in 1997 related to
this contract, compared to $5.0 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.
Gross Profit
Total gross profit increased $23.2 million, or 199% to $34.9 million in
1997 from $11.7 million in 1996. The increase was primarily due to the gross
profit from branded pharmaceutical products such as the Cortisporin product line
which contributed $19.8 million of gross profit in 1997.
Gross profit of $(187,000) in 1997 associated with contract manufacturing
decreased $3.0 million from $2.8 million in 1996 primarily due to the expiration
of a manufacturing contract. Additionally, gross profit from contract
development, generic pharmaceutical products and companion animal health
products decreased $4.3 million or 69.0% to $1.9 million in 1997 from $6.2
million in 1996 primarily due to a decline in contract development revenues.
Selling, General and Administrative Expense
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
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 27.9% 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, we sold our entire 6.0% interest in an affiliated,
privately-held pharmaceutical company, which had been co-founded by King's chief
executive officer, for $2.0 million, resulting in a gain of $1.8 million.
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<PAGE> 40
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 37.5% 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.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Our liquidity requirements arise from debt service, working capital
requirements and funding acquisitions of branded products.
Our recent cash requirements arose primarily in connection with the
acquisition of branded pharmaceutical products. 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 we raised $23.0 million through a
combination of equity ($8.0 million), notes payable with banks and borrowing
under its then existing revolving line of credit to finance the acquisition of
the Cortisporin product line. Other product acquisitions in 1997, which totaled
$6.6 million, were financed primarily with notes payable from banks and
internally generated funds.
On February 27, 1998, we consummated the Sterile Products Acquisition for
$127.9 million, including assumed liabilities of $2.9 million, which was
financed with a prior bank facility. We also used a portion of our prior bank
facility to pay off approximately $50.0 million of long-term debt, which was
then outstanding, including the borrowings used for the Glaxo Acquisition.
On June 25, 1998 we completed our initial public offering of 4,000,000
shares of common stock, raising approximately $48.8 million of equity, net of
underwriting discounts and other offering expenses. On July 27, 1998 the
underwriters exercised the option to purchase additional shares to cover
over-allotments of shares. Pursuant to this option, the underwriters purchased
214,730 additional shares with 104,730 of the shares purchased from King and
110,000 shares purchased from selling shareholders. The sale of the over-
allotment provided us with approximately $1.1 million of net proceeds after
underwriting discounts, commissions and offering expenses. We used a portion of
the net proceeds to repay approximately $37.4 million of debt outstanding under
its prior bank facility in July 1998.
In December 1998 we completed the Altace Acquisition for $363.0 million,
including acquisition costs of approximately $450,000. A portion of the purchase
price, $287.5 million, was financed with proceeds from the senior credit
facility and the remainder of the
37
<PAGE> 41
purchase price, $75.0 million, with the seller notes. The balance of the
proceeds from the senior credit facility was used to refinance prior bank debt.
As of December 31, 1998, we had available up to $56.0 million under its
revolving line of credit pursuant to the senior credit facility, which allows
for total borrowing of up to $75.0 million at any time.
On March 3, 1999 we issued $150.0 million of 10 3/4% senior subordinated
notes due 2009. Net proceeds of approximately $144.0 million were used to repay
outstanding indebtedness under the senior credit facility and the senior
subordinated seller notes.
YEAR ENDED DECEMBER 31, 1998
Net cash provided by operating activities was $5.8 million for the year
ended December 31, 1998. Net cash provided by operating activities was primarily
the result of $20.9 million in net income resulting from sales from recently
purchased additional branded products, adjusted for non-cash charges for
depreciation and amortization of $9.3 million, and an extraordinary loss on
early retirement of existing indebtedness of $7.2 million. Net cash provided by
operating activities was negatively impacted by an increase in receivables and
inventory of $31.1 million and $15.7 million, respectively. However, cash flows
from operations was positively impacted due to changes in its accounts payable,
accrued expenses and income taxes by $6.7 million, $5.7 million, and $1.7
million, respectively.
Cash flows used in investing activities was $426.0 million due principally
to the Sterile Products and the Altace Acquisitions, the Menest acquisition, and
other purchases of property and equipment.
Net cash provided by financing activities was $421.2 million, which was a
result of the net proceeds from the initial public offering, and proceeds from
long-term debt to finance the Sterile Products and the Altace Acquisitions.
YEAR ENDED DECEMBER 31, 1997
Net cash provided by operating activities was $5.0 million for the year
ended December 31, 1997. Net operating cash in 1997 was primarily the result of
$6.6 million in net income resulting from sales from recently purchased
additional branded products, adjusted for non-cash charges of $2.4 million for
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
(A) aggregate borrowings of $14.0 million to finance the acquisition
of the Cortisporin product line in 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
38
<PAGE> 42
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,
(B) proceeds from issuance of common shares of $8.0 million in
connection with the acquisition of the Cortisporin product line and
(C) 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.
YEAR ENDED DECEMBER 31, 1996
Net cash used in operating activities was $6.3 million for the year ended
December 31, 1996. Net use of operating cash in 1996 was primarily a result of a
$1.4 million operating loss, excluding the $1.8 million gain on sale of
investment in affiliate, offset by $1.0 million of depreciation and
amortization, an increase in income taxes receivable of approximately $3.6
million resulting from federal and state tax payments made by us 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 $2.1 million and was primarily the result of cash paid of $3.0 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, we received $2.0 million from
the sale of our 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.
CERTAIN INDEBTEDNESS AND OTHER MATTERS
As of December 31, 1998, we had outstanding approximately $525.9 million of
long-term debt (including current portion), including borrowings under our
revolving line of credit agreement and term loans. Of these amounts,
approximately $444.0 million were at variable rates based on LIBOR and the
remainder at fixed rates. We entered into two interest rate swap agreements with
notional principal amounts aggregating $100.0 million with a commercial bank to
exchange its variable LIBOR for fixed LIBOR rate interest of approximately 5.5%.
We do not believe our exposure to changes in interest rates under our remaining
variable rate agreements will have a material effect on our financial condition
or results of operations. Certain financing arrangements require us to maintain
certain minimum net worth, debt to equity, cash flow and current ratio
requirements.
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<PAGE> 43
On December 22, 1998, we amended and restated our prior bank facility to
(A) finance the Altace Acquisition; (B) refinance our prior bank facility and
(C) provide for ongoing working capital and other financing requirements. The
senior credit facility provides for up to $500.0 million of aggregate borrowing
capacity, consisting of a secured $150.0 million tranche A term loan, a secured
$275.0 million tranche B term loan, and a secured revolving credit facility in
an aggregate amount of $75.0 million. The revolving credit facility includes a
$10.0 million sublimit available for the issuance of letters of credit and a
$5.0 million sublimit available for swingline loans.
The loans under the senior credit facility bear interest, at our option, at
either :
(1) the base rate (which is based on the prime rate most recently
announced by Credit Suisse First Boston or the federal funds rate plus
one-half of 1%) plus (A) in the case of the tranche A term loan and
borrowing under the revolving credit facility, an applicable spread ranging
from 1.25% to 2.25% (based on a leverage ratio) and (B) in the case of the
tranche B term loan, 2.75%; or
(2) the applicable London interbank rate plus (A) in the case of the
tranche A term loan and borrowings under the revolving credit facility, an
applicable spread ranging from 2.25% to 3.25% (based on a leverage ratio)
and (B) in the case of the tranche B term loan, 3.75%.
The tranche A term loan is subject to certain specified amortization
payments required to be made in quarterly installments commencing on March 31,
1999 until December 22, 2004. The tranche B term loan is subject to certain
specified amortization payments required to be made in quarterly installments
commencing on March 31, 1999 until December 22, 2006. The revolving credit
facility is available until December 22, 2004. In addition, the loans and the
aggregate available commitments under the senior credit facility will be reduced
upon the occurrence of certain specified events as outlined in the agreement.
Our obligations under the senior credit facility are unconditionally
guaranteed on a senior basis by each of our direct and indirect majority owned
U. S. subsidiary. In addition, the senior credit facility is collateralized by
substantially all of our real and personal property.
Our senior credit facility contains a number of covenants that, among other
things restricts our ability and the ability of our subsidiaries to dispose of
assets, incur additional indebtedness or guaranty obligations, repurchase or
redeem capital stock or repay subordinated indebtedness except in accordance
with the subordination provisions, pay dividends or make capital distributions,
enter into sale and leaseback transactions, make investments, make acquisitions,
engage in mergers or consolidations, make capital expenditures, engage in
certain transactions with affiliates, make loans, change our fiscal year, change
our business and otherwise restrict corporate activities.
We also financed a portion of the Altace Acquisition with $75.0 million
senior subordinated seller notes with interest payable monthly at 10%, due in
December 2007. We refinanced these notes in March 1999 with the $150.0 million
10 3/4% senior subordinated notes.
On February 27, 1998, we entered into a $195.0 million credit agreement,
the proceeds of which we used to finance the Sterile Product Acquisition and to
pay off $40.0
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<PAGE> 44
million of term loans and other outstanding borrowings. We refinanced this
facility with the senior credit facility entered into on December 22, 1998
described above.
We believe that existing credit facilities and cash expected to be
generated from operations are sufficient to finance our current operations and
working capital requirements. However, in the event we make significant future
acquisitions, we may be required to raise funds through additional borrowings or
the issuance of additional debt or equity securities. At present, we are
actively pursuing the acquisition of additional branded pharmaceutical products
that 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 $81.1
million for the year ended December 31, 1998 and $1.5 million for the year ended
December 31, 1997. The principal capital expenditures included property and
equipment purchases in connection with the Sterile Products Acquisition. As a
result of the Sterile Products Acquisition, we expect that we may need to incur
additional capital expenditures over the next few years in connection with the
maintenance and operation of the Parkedale facility. In addition, we expect to
increase our capital expenditures over the next few years as a part of our
acquisition and growth strategy.
YEAR 2000 READINESS
We have conducted an evaluation of our information technology and
non-information technology computer systems with respect to the "Year 2000"
issue. This issue arises because many electronic systems use two digits rather
than four to determine dates. This could cause information technology systems
such as software applications, hardware, network systems and embedded systems to
misread important dates beginning in the year 2000, which could cause system
failures and disruption of operations.
Except for the Bristol facility which is currently being assessed, we have
completed a Year 2000 readiness assessment of our business critical information
technology and non-information technology systems. As a result of the
assessment, we are in the process of developing and implementing corrective
action plans designed to address Year 2000 issues. These plans include
modification, upgrade and replacement of our critical administrative, production
and research and development computer systems to make them Year 2000 ready.
Implementation of corrective action plans has begun.
Because our operations depend on the uninterrupted flow of materials and
services from our contract manufacturers and other suppliers, our plans for Year
2000 readiness include receiving and analyzing information from our suppliers
with regard to their progress toward Year 2000 readiness. We intend to continue
to monitor the progress of our key suppliers toward Year 2000 readiness. We
consider the most reasonably likely worst case scenario is that one or more of
our suppliers encounters a Year 2000 problem and is unable to supply materials.
If this occurs and we could not obtain the same materials from another vendor,
production could be interrupted which could result in lost sales and profits. In
addition, while we are taking action to correct deficiencies in our own systems,
it is possible that one or more of our facilities or critical business systems
might not achieve Year 2000 readiness as anticipated. This could also result in
disruption of operations and lost sales and profits.
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<PAGE> 45
We estimate that we will spend between $1.0 million and $1.5 million to
become Year 2000 ready. The majority of this spending will constitute
replacement costs of non-compliant information technology systems and the
reprogramming of existing systems. It is possible that the actual cost of our
Year 2000 readiness effort could exceed these estimates. Funds for this project
have come from our cash flows and we have expensed costs as incurred except for
hardware, which we have capitalized. For the years ended December 31, 1997 and
1998, we have incurred approximately $88,000 and $38,500, respectively, to
become Year 2000 ready.
IMPACT OF INFLATION
We have experienced only moderate raw material and labor price increases in
recent years. While we have passed some price increases along to our customers,
we have primarily benefited from rapid sales growth negating most inflationary
pressures.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Some of our financial instruments are subject to market risks, including
interest rate risk. Our financial instruments are not currently subject to
foreign currency risk or commodity price risk. We have no financial instruments
held for trading purposes.
We are exposed to market risk related to changes in interest rates on
borrowings under our senior credit facility. The senior credit facility bears
interest based on LIBOR. However, we have entered into an aggregate notional
principal amount of $100.0 million in interest rate swap agreements to manage a
portion of our exposure to interest rate changes. The swaps involve the exchange
of fixed and variable interest rate payments based on contractual principal
amount and time period. Payments or receipts on the agreements are recorded as
adjustments to interest expense. At December 31, 1998, our swap agreements are
effective through 2001. Under these agreements, we pay a fixed weighted average
interest rate of 5.5% and receive a floating interest rate based on the
one-month LIBOR.
The fair value of the interest rate swap agreements represent the estimated
payments or receipts that would be made to terminate the agreements. At December
31, 1998, we would have paid approximately $2.8 million to terminate the
agreements. The fair value is based on dealer quotes. We have $444.0 million of
debt remaining that bears interest at a variable rate. Accordingly, an increase
in interest rates would adversely affect interest expense.
The following table sets forth our financial instruments that are sensitive
to interest rates as of December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
INTEREST
RATE AT MATURITIES ESTIMATED
YEAR- ----------------------------------------------------------------------- FAIR
END 1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
-------- ------- ------- ------- ------- ------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Debt:
Fixed rate........... 7.2% $ 2,700 $ 971 $ 1,029 $ 1,091 $ 1,156 $ 75,000 $ 81,947 $ 83,500
Variable rate........ 8.6% 10,250 17,750 25,250 32,750 40,250 317,750 444,000 444,000
5.5% -- -- -- -- -- -- -- (2,787)
</TABLE>
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<PAGE> 46
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, Reporting Comprehensive Income, became effective in 1998.
SFAS No. 130 establishes standards for reporting of comprehensive income and its
components in the financial statements. In 1996 and 1997, we had other
comprehensive income of $16,000, net of tax, related to an unrealized loss on
securities. We had no other comprehensive income in 1998.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, became effective in 1998. SFAS No. 131 requires public business
enterprises to adopt its provisions for periods beginning after December 15,
1997, and to report certain information about operating segments in complete
sets of financial statements of the enterprise and in condensed financial
statements of interim periods issued to shareholders. The adoption of SFAS 131
did not affect our results of operations or financial condition. However, we
reclassified prior year disclosures to conform with the provision of this
statement.
On June 15, 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
is effective for all fiscal quarters of all fiscal years beginning after June
15, 1999. SFAS No. 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. Management is evaluating the
provisions of SFAS No. 133, but management has not yet determined the impact, if
any of its adoption.
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BUSINESS
We are a vertically integrated pharmaceutical company that manufactures,
markets and sells primarily branded prescription pharmaceutical products.
Through a national sales force of over 200 representatives, we market our
branded pharmaceutical products to general/family practitioners, internal
medicine physicians and hospitals across the country. Our business strategy is
to acquire established branded pharmaceutical products and to increase their
sales by focused marketing and promotion and through product life cycle
management. In pursuing acquisitions, we seek to capitalize on opportunities in
the pharmaceutical industry created by cost containment initiatives and
consolidation among large, global pharmaceutical companies. We also create value
by developing product line extensions for our branded pharmaceutical products
such as new formulations, dosages or new indications. These product line
extensions are attractive for us because they may have market exclusivity or
sales levels that do not attract significant competition. In addition to branded
pharmaceuticals, we also provide contract manufacturing for a number of the
world's leading pharmaceutical and biotechnology companies, including Amgen,
Inc., Warner-Lambert, Mallinckrodt, Genetics Institute, Inc. and Hoffman-LaRoche
Inc. Based on our pro forma financial results for the year ended December 31,
1998, we would have had sales and EBITDA of $269.8 million and $132.5 million,
respectively. During this same period, branded pharmaceutical products accounted
for approximately 84.6% of our pro forma sales.
Cost containment initiatives and consolidation among large, global
pharmaceutical companies have created substantial opportunities for us to
acquire established branded pharmaceutical products. We generally seek branded
pharmaceutical products that
- have some patent protection or potential for market exclusivity;
- lend themselves to product life cycle management;
- can benefit from focused marketing efforts, including sampling,
advertising and direct mail; or
- complement our existing product lines.
Consistent with our strategy to acquire established branded pharmaceutical
products, we have acquired 34 branded pharmaceutical products since December
1994. Most recently, we acquired three branded pharmaceutical products from HMR
in the Altace Acquisition. These three products are Altace, an ACE inhibitor,
Silvadene, a burn cream and AVC, a vaginal anti-infective cream, with U.S. net
sales of $95.1 million, $3.2 million and $1.3 million, respectively, for the
year ended December 31, 1998. ACE inhibitors are one of the leading types of
products used in the treatment of hypertension or high blood pressure.
COMPETITIVE STRENGTHS
We believe that our competitive position is attributable to a number of key
strengths, including the following:
- DIVERSE PORTFOLIO OF BRAND NAME PRODUCTS. Our branded pharmaceutical
products can be divided into four therapeutic areas:
(1) cardiovascular,
44
<PAGE> 48
(2) anti-infectives,
(3) vaccines and biologicals and
(4) women's health.
All of these products are marketed to general/family practitioners and
internal medicine physicians. Unlike many of our competitors, we have a
broad therapeutic focus that provides us with opportunities to purchase a
wide variety of products, as evidenced by our acquisition of 26 products
over the last 18 months, including Altace. In addition, we have well known
products in all of our therapeutic categories. Our portfolio of recognized
prescription brand names includes, among others, Altace, Neosporin,
Cortisporin, Pitocin, Anusol-HC and Fluogen.
- DEMONSTRATED ABILITY TO SUSTAIN AND IMPROVE CASH FLOWS. Our established,
branded pharmaceutical product portfolio generated approximately 75%
gross margins for the year ended December 31, 1998 and requires limited
research and development and capital expenditures. We have increased
sales and improved cash flows of many of the products we have acquired.
For example, in March 1997, we acquired from Glaxo Wellcome, a full line
of prescription formulations of ophthalmic, otic and topical products
marketed under the brand name Cortisporin. In June 1998 we launched an
extension of this product line called Cortisporin-TC Otic. In addition,
we purchased the Proctocort cream formulation in January 1997 from Solvay
Pharmaceuticals, Inc., and introduced the Proctocort suppository product
line extension in August 1997. For the year ended December 31, 1998,
sales of Proctocort suppositories exceeded sales of the original cream
formulation. Overall, due to product line extensions and marketing
efforts, we have increased sales of the Cortisporin and Proctocort
product lines. The acquisition of Altace will also provide strong cash
flow, as we have entered into a five-year agreement with HMR to supply us
with Altace at a contract price which, at current selling prices, results
in approximately 90% gross margins.
- NATIONAL SALES AND MARKETING INFRASTRUCTURE. We have a national sales
and marketing infrastructure which includes over 200 sales
representatives dedicated to promoting and marketing our branded
pharmaceutical products to general/family practitioners and internal
medicine physicians. Our sales representatives are supported by 25
telemarketers and customer service representatives. In addition, we
expect to add approximately 50 sales representatives over the next six
months, which will enhance our national coverage. We have an excellent
relationship with our sales representatives as evidenced by an annual
turnover rate of less than 5%. This low turnover rate results in stable
relationships with general/family practitioners and internal medicine
physicians.
- MANUFACTURING EXPERTISE. We have flexible manufacturing capabilities
which give us the ability to acquire a variety of pharmaceutical
products, to integrate such products at attractive operating margins and
to develop new formulations and product line extensions. We currently
operate two facilities with a total of approximately one million square
feet of manufacturing, warehouse, laboratory and office space. The
Parkedale facility is one of the largest sterile manufacturing facilities
in the United States. The Parkedale facility and the Bristol facility
together can produce a broad range of formulations and dosage forms such
as sterile solutions, injectables, tablets, capsules, creams, lyophylized
(freeze-dried) products,
45
<PAGE> 49
liquids, suppositories, ointments, suspensions and powders. Our
manufacturing operations are integrated with our quality control, quality
assurance, regulatory compliance, purchasing, production planning,
distribution and inventory management operations. These integrated
services enable us to maintain high quality standards for our products as
well as provide reliable and timely service to our customers. Currently,
our capacity utilization is approximately 50% at the Bristol facility and
30% at the Parkdale Facility, providing us with substantial manufacturing
capacity for future growth.
- EXPERIENCED AND DEDICATED MANAGEMENT TEAM. Our company has an
experienced management team which is led by John M. Gregory, Chairman and
Chief Executive Officer; Joseph R. Gregory, Vice Chairman; and Jefferson
J. Gregory, President. These senior executives have an average of over 18
years of experience in the pharmaceutical industry. In addition, our
company's management team (12 persons) owns approximately 41.3% of our
common stock.
GROWTH STRATEGY
We believe that our ability to identify and integrate branded
pharmaceutical products and to leverage our marketing and manufacturing
infrastructure positions our company for continued growth. Specifically, we will
pursue the following growth strategies:
- SEEK ATTRACTIVELY PRICED PRODUCT ACQUISITION OPPORTUNITIES. We intend to
continue to take advantage of industry consolidation and cost cutting
trends and to selectively pursue acquisitions of branded pharmaceutical
products. We generally seek branded pharmaceutical products that
(1) have some patent protection or potential for market exclusivity
or product differentiation
(2) lend themselves to product life cycle management,
(3) can benefit from focused marketing efforts in addition to
product development or
(4) complement our existing product lines.
- ENHANCE SALES THROUGH FOCUSED MARKETING AND PROMOTION. We seek to
increase the sales of our branded pharmaceutical products through
one-on-one meetings with physicians known as "details" or "detailing" and
promotional efforts including sampling, advertising and direct mail. For
many of our branded pharmaceutical products, this increased focus on
product detailing and promotion is contrasted with the marketing efforts
made prior to our acquisition of the product. For example, we intend to
significantly increase the primary details and sampling of Altace to
general/family practitioners and internal medicine physicians as compared
with the corresponding efforts by HMR. In addition, we will continue to
leverage our sales force of over 200 representatives by marketing a
variety of products to general/ family practitioners and internal
medicine physicians and thereby increase sales of other branded products.
- INCREASE SALES THROUGH PRODUCT LIFE CYCLE MANAGEMENT. Our product life
cycle management includes pricing, product development, product position,
identification of new therapeutic indications, maximization of
pharmaceutical product exclusivity
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<PAGE> 50
and competitor evaluation. To date, we have focused our product
development efforts on product line extensions which allow us to leverage
our brand names, enhance product differentiation and minimize sales lost
to generic substitution. The implementation of this strategy has resulted
in the successful introduction of two product line extensions,
Cortisporin-TC Otic and Proctocort suppositories. We will continue to
pursue product line extensions of our existing and newly acquired
products.
- CAPITALIZE ON GLOBAL DISTRIBUTION RIGHTS. We have worldwide distribution
rights to several of our branded pharmaceutical products. We intend to
promote international sales of these products by entering into joint
marketing and licensing agreements with international pharmaceutical
companies and distributors. We believe one benefit will be low-cost
access to foreign markets by utilizing the marketing and regulatory
infrastructure of these companies.
COMPLETED ACQUISITIONS
Information regarding our material acquisitions is set forth below:
<TABLE>
<CAPTION>
SELLER PRODUCTS ACQUIRED(1) DATE OF ACQUISITION PURCHASE PRICE
- ------ -------------------- ------------------- --------------
<S> <C> <C> <C>
HMR.................. Altace, Silvadene, AVC December 1998 $362.5 million
SmithKline........... Menest June 1998 5.0 million
Warner-Lambert....... Fluogen, Anusol-HC,
Procanbid, Pitocin and
others February 1998 125.0 million(2)
Glaxo Wellcome....... Septra, Proloprim, Mantadil,
Kemadrin, Neosporin,
Polysporin(3) November 1997 23.0 million
Glaxo Wellcome....... Viroptic May 1997 6.0 million
Glaxo Wellcome....... Cortisporin product line March 1997 22.8 million
Solvay Pharmaceuti-
cals, Inc.......... Proctocort January 1997 1.5 million
Roberts Pharmaceu-
tical
Corporation........ Nucofed, Quibron October 1996 7.0 million
Boehringer Mannheim
Pharmaceuticals
Corporation........ Anexsia product line(4) December 1994 17.6 million
</TABLE>
- -------------------------
(1) For additional information about these acquisitions, see Note 6 to the notes
to consolidated financial statements.
(2) The purchase price includes the acquisition of the Parkedale facility and
certain manufacturing contracts for third parties.
(3) We acquired the exclusive licenses, free of royalty obligations, to market
and manufacture prescription formulations of Neosporin and Polysporin.
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<PAGE> 51
(4) We sold the Anexsia product line to Mallinckrodt Chemical in December 1995
for $32.0 million in cash and reported a $13.1 million net gain.
INDUSTRY BACKGROUND
GENERAL
Sales of pharmaceutical products in the United States were estimated to be
in excess of $85 billion in 1997. Growth in the pharmaceutical industry is being
driven primarily by:
(1) the aging population,
(2) technological breakthroughs which have increased the number of
ailments which can be treated with drugs,
(3) managed care's preference for drug therapy over surgery since drug
therapy is generally less costly, and
(4) direct-to-consumer television advertising which has increased
public awareness of available drug therapies.
During the past decade, the pharmaceutical industry has been faced with
cost containment initiatives from government and managed care organizations and
has begun to consolidate. Consolidation is being driven by a desire among
pharmaceutical companies to reduce costs through economies of scale and
synergies, to add previously lacking U. S. or European sales strength or to add
promising product pipelines or manufacturing capabilities in key therapeutic
categories.
Industry consolidation and cost containment pressures have increased the
level of sales necessary for an individual product to justify active marketing
and promotion from large pharmaceutical companies. For example, the additional
sales required for 1% sales growth for large global pharmaceutical companies
such as Merck, Johnson & Johnson and Novartis Pharmaceuticals, a subsidiary of
Novartis AG, are $236 million, $226 million and $214 million, respectively. This
has led large 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
emerging pharmaceutical companies, like us, to manufacture and market.
ANTIHYPERTENSION MARKET
With the Altace Acquisition, we will have established a greater presence in
the cardiovascular pharmaceutical market. Cardiovascular disease is currently
the leading cause of death in the United States. In 1997, pharmaceutical
products relating to cardiovascular disease generated sales of $11.8 billion.
The cardiovascular pharmaceutical market consists of products used in the
treatment of hypertension, cardiac arrhythmias, angina pectoris, congestive
heart failure and hyperlipidemia. The antihypertension market is currently the
largest portion of the U.S. cardiovascular pharmaceuticals market, with an
estimated market size in 1997 of approximately $5.5 billion. In 1997, the
antihypertension market
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<PAGE> 52
grew by 3.5%. Continued growth in the antihypertension market is expected to be
driven primarily by
(1) the aging population,
(2) improvements in pharmaceutical products,
(3) an increase in diagnosis,
(4) efforts to increase patient compliance and
(5) unhealthy behavioral patterns.
The antihypertension market is dominated by ACE inhibitors and calcium
channel blockers known as CCBs, with 33% and 39% market share of industry
wholesale sales in 1997, respectively. Other antihypertensives include
diuretics, beta blockers, adrenergic blockers, combination agents which contain
two therapeutics of different classes incorporated in one dosage form and
angiotensin II receptor antagonists known as AIIRAs. AIIRAs are a new class of
antihypertensives and currently there are four products on the market. We
believe that a primary perceived benefit of these products is that they
alleviate the dry cough sometimes associated with the use of an ACE inhibitor,
although clinical studies involving newer ACE inhibitors such as Altace have
this effect on only a small percentage of patients versus patients given
placebos. In addition, we believe that a significant body of clinical data
accumulated over many years documents the effectiveness and safety of ACE
inhibitors and will continue to drive physicians' decisions to prescribe ACE
inhibitors in the future, while it is expected to take a number of years for
AIIRAs to accumulate a similar body of data.
ACE INHIBITOR MARKET
The ACE inhibitor market has experienced significant growth over the past
five years and this growth has been driven primarily by the effectiveness of ACE
inhibitors in reducing patient blood pressure, the attractiveness of their
limited side effects and their wide acceptance among prescribing physicians. A
significant reason why ACE inhibitors are a leading product used to treat
hypertension is the substantial body of clinical data which exists to support
the efficacy and side effect profile of ACE inhibitors. As a result, many
prescribing physicians feel comfortable prescribing ACE inhibitors for the
treatment of hypertensive patients.
The patent for Altace does not expire until October 2008. We believe
patents for all other significant ACE inhibitors expire by 2003, including the
current market leader, Vasotec. Vasotec is manufactured and distributed by Merck
and had a 33% share of the U. S. ACE inhibitor market in 1997 based on retail
sales. As patents for these products expire, we believe that most large
pharmaceutical companies will begin to de-emphasize the marketing of products
resulting in reduced product sales. For example, Vasotec sales declined 3% in
1997 from 1996, despite ACE inhibitor market growth of 5% and patent protection
through 2000. Once a branded pharmaceutical product's patent expires, sales of
that product generally decrease as generic substitutes for the product become
available. However, sales of other patented products within the same therapeutic
category may not be negatively affected and can continue to grow. We believe
this is primarily because manufacturers of patented products typically continue
to promote their products, while manufacturers of genericized products
frequently discontinue sales efforts due to the
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<PAGE> 53
declining market size and the opportunity costs associated with a sales force
focused on a declining product versus newer patented products.
THE ALTACE ACQUISITION
GENERAL
On December 22, 1998, we acquired three branded pharmaceutical products
from HMR for a purchase price of $362.5 million. The acquired products were:
(1) the U.S. rights to the Altace product line, an ACE inhibitor, with
patent protection until October 2008 and U.S. net sales of $95.1 million
for the year ended December 31, 1998;
(2) HMR's worldwide rights to the Silvadene product line, a burn
cream, with U.S. net sales of $3.2 million for the year ended December 31,
1998; and
(3) HMR's worldwide rights to the AVC product line, a vaginal
anti-infective cream, with U.S. net sales of $1.3 million for the year
ended December 31, 1998.
Altace competes in the antihypertensive segment of the cardiovascular
pharmaceutical market, and we believe it is well positioned for growth due to
its long patent protection, powerful product attributes and sensitivity to
promotion. As part of the Altace Acquisition, we entered into a five-year
agreement with HMR to supply us with Altace at a contract cost which, at current
selling prices, results in approximately 90% gross margins. In addition, we have
entered into a transitional services agreement with HMR pursuant to which HMR
will provide the support of certain of its Altace sales representatives,
including their continued sampling, and access to HMR's clinical research staff
and expertise. We believe that this agreement will help facilitate the
integration of Altace.
ALTACE
One of the reasons we acquired Altace is because we believe Altace is
sensitive to promotion. We believe that the more prescribing physicians learn
about its attributes, the more Altace sales will increase. For example, in early
1997, we believe Altace was not heavily promoted. In late 1997, a new marketing
campaign for Altace was launched which included new product brochures and, we
believe most significantly, a dramatic increase in the number of details with
ACE inhibitor prescribing physicians. These focused marketing efforts proved
successful, as the number of new prescriptions for Altace increased 11.4% in the
third quarter of 1998 as compared to the third quarter of 1997. We believe that
the number of prescriptions for Altace will continue to grow as we continue to
explain and promote the benefits of Altace. Additionally, we believe that Altace
has limited downside risk as exhibited by the level of prescriptions written for
Altace through the first six months of 1997 despite the relatively limited
marketing efforts. In contrast to the prior efforts of HMR, we intend to market
Altace extensively and make it the primary emphasis of our detailing. Altace has
other attributes that made its acquisition attractive to us including:
(1) Altace is a powerful product with proven efficacy;
- Optimal formulation provides 24-hour efficacy with a once-daily dose -
one of the longest half-lives among ACE inhibitors;
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<PAGE> 54
- Combination of serum ACE and tissue ACE is believed to provide
increased efficacy;
- A 5-year study confirms a 36% reduction in relative mortality risk for
patients with congestive heart failure after post-myocardial
infarction;
- Established efficacy across a diverse patient population (i.e., men,
women, elderly, White, Black, Hispanic and obese); and
- Limited side effects - only 3% of patients discontinued treatment due
to adverse effects versus patients given placebos;
(2) Altace is the only ACE inhibitor that comes in a capsule, which
eliminates aftertaste and is often preferred by patients because it is
easier to swallow. Altace can also be mixed with water and certain foods,
including apple juice or apple sauce, making it even easier to take;
(3) Altace is patented until October 2008; and,
(4) Altace is marketed to general/family practitioners and internal
medicine physicians.
A study published in The Lancet, vol. 352 (October 1998) suggests that
there may be an application for Altace in certain patients with renal
complications. The study noted that certain patients treated with ramipril (the
active ingredient in Altace) for a period of 36 months or more did not require
dialysis. The FDA has not approved Altace for such an indication. We cannot and
will not promote or market the product for such use until we have filed and
secured FDA approval for this additional indication.
PRODUCTS AND PRODUCT DEVELOPMENT
BRANDED PRODUCTS
We market a variety of branded prescription products over four therapeutic
areas, including cardiovascular products (e.g., Altace), anti-infective products
(e.g., Cortisporin), vaccines and biologicals (e.g., Fluogen) and women's health
products (e.g., Pitocin). Our branded pharmaceutical products are generally in
high volume categories and are well known for their indications (e.g.,
Cortisporin and Altace). Additionally, many of our branded products have limited
or no generic competition, including patent protected products, vaccines and
biologicals that have no generic equivalent or products that are difficult to
formulate (e.g., creams, ophthalmic suspensions and otic suspensions). Branded
pharmaceutical products represented 84.6% of our total revenues for the year
ended December 31, 1998 on a pro forma basis after giving effect to the
Transactions as if they had occurred on January 1, 1998.
CARDIOVASCULAR PRODUCTS. Altace has become our primary product within this
therapeutic area. In February 1998 we acquired Procanbid as part of the Sterile
Products Acquisition. Procanbid is a branded pharmaceutical product used to
treat arrhythmia. Thalitone is a hypertension-diuretic tablet indicated for the
management of hypertension with patent protection through 2007. In connection
with the Procanbid acquisition, we also acquired exclusive rights to Polymatrix,
a sustained release drug delivery system patented through 2014, which we believe
may have applications for other of our products.
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<PAGE> 55
ANTI-INFECTIVE PRODUCTS. We market our anti-infective products primarily
to general/family practitioners and internal medicine physicians. These products
are prescribed to treat uncomplicated infections of the eyes, ears and skin. Our
products are generally in technologically mature product segments and as a
result have limited product risk. These mature, stable products are well suited
to our product life cycle management techniques. Cortisporin is our largest
product in the category and is an example of one of our product life cycle
management techniques. In March 1997 we acquired a full line of prescription
formulations of ophthalmic, otic and topical products marketed under the
Cortisporin brand name. The Cortisporin brand name is well recognized and has
been marketed for over 20 years. Physicians routinely write prescriptions for
Cortisporin opthalmic ointments and suspensions, otic solutions and topical
creams and ointments. Cortisporin otic products, however, are used to fill
prescriptions for only 3% of the total Cortisporin otic prescriptions written
due to a high degree of generic substitution. In June 1998 we introduced a
product line extension, Cortisporin-TC Otic suspension, used primarily in
treating swimmers ear infections. Cortisporin-TC Otic has an additional
antibiotic and a dispersion agent which we believe helps in the absorption
process. There is currently no Cortisporin-TC Otic suspension generic substitute
available and we believe that, because it is difficult to manufacture, it will
take several years before a generic substitute will become available. We plan to
market Cortisporin-TC Otic suspension to physicians through product sampling and
detailing. As long as there is no generic substitute, pharmacists filling
Cortisporin-TC Otic suspension prescriptions must dispense our product as
written. We believe this strategy will enable us to capture a greater portion of
the five to six million Cortisporin otic prescriptions that are written each
year.
VACCINES AND BIOLOGICALS. Fluogen, one of the products acquired in the
February 1998 Sterile Products Acquisition from Warner-Lambert, is a trivalent
influenza virus vaccine that has been marketed for over 25 years and has
historically been one of the major flu vaccines sold in the United States. The
only other three companies authorized to sell flu vaccine in the United States
are American Home Product's Wyeth division, Rhone Poulenc's Connaught division
and Medeva. The U.S. market for flu vaccine is estimated to be approximately 80
to 90 million doses. In 1997 Fluogen was voluntarily taken off the market by
Warner-Lambert for a product reformulation to address the apparent lack of
stability for one of the three virus strains in the product. On August 20, 1998,
we received FDA approval to reintroduce Fluogen. We reintroduced Fluogen in the
third quarter of 1998 and expect to increase 1999 Fluogen sales by increasing
our production from 9 million doses to 20 million doses, for which we have
already received FDA approval. We own worldwide rights to Fluogen and expect to
expand sales internationally. We believe that international sales of Fluogen
represent a significant opportunity due to limited supply and more attractive
pricing for flu vaccine internationally.
WOMEN'S HEALTH PRODUCTS. We have a number of leading brand-name products
in this category including Pitocin, the most recognized brand name in labor
induction, and Anusol-HC, which is the number one prescribed hemorrhoidal
product, according to industry sources. Both of these products have been on the
market for many years and we believe were underpromoted by their previous
owners.
In an effort to further strengthen our women's health franchise, we
acquired Menest from SmithKline in June 1998. We previously manufactured this
product for SmithKline. Menest competes in the growing $2 billion estrogen
replacement category. Menest is well positioned in this category because the
primary ingredient in the market leader's product is derived from the urine of
pregnant mares. In contrast, Menest's active ingredient is derived from Mexican
yams. Menest also lends itself to product line extensions.
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<PAGE> 56
Some of our products are described below:
<TABLE>
<CAPTION>
COMPANY ACQUIRED FROM
PRODUCT AND DATE OF ACQUISITION PRODUCT DESCRIPTION AND INDICATION
- ------- ----------------------- ----------------------------------
<S> <C> <C>
Cardiovascular Products
Altace(1).................. HMR (December 1998) A hard-shell capsule for oral
administration indicated for the
treatment of hypertension.
Thalitone(2)............... Horus Therapeutics, Inc. A hypertension-diuretic tablet
(December 1996) indicated for the management of
hypertension, either alone or in
combination with other
antihypertensive drugs, and for
edema associated with congestive
heart failure and various forms of
renal dysfunction.
Procanbid.................. Warner-Lambert A procainamide extended-release
(February 1998) tablet indicated for the treatment
of documented ventricular
arrhythmia, such as sustained
ventricular tachycardia, that, in
the judgment of a physician, are
life-threatening.
Anti-Infective Products
Cortisporin................ Glaxo Wellcome A full line of prescription
(March 1997) antibiotic and 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
(May 1997) the treatment of ocular Herpes
simplex virus,
idoxuridine-resistant Herpes and
vidarabine-resistant Herpes. In
November 1997, the FDA approved the
expanded use of Viroptic to include
pediatric patients, ages six and
above.
Neosporin(3)............... Glaxo Wellcome A prescription strength ophthalmic
(March 1997) ointment and 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(3).............. Glaxo Wellcome A prescription strength wide range
(November 1997) antibacterial sterile ointment
indicated for the topical treatment
of superficial ocular infections.
</TABLE>
53
<PAGE> 57
<TABLE>
<CAPTION>
COMPANY ACQUIRED FROM
PRODUCT AND DATE OF ACQUISITION PRODUCT DESCRIPTION AND INDICATION
- ------- ----------------------- ----------------------------------
<S> <C> <C>
Vira-A..................... Warner-Lambert An antiviral ointment indicated for
(February 1998) the topical treatment of ocular
infections caused by the Herpes
simplex virus types 1 and 2.
Chloromycetin.............. Warner-Lambert A broad spectrum antibiotic
(February 1998) ophthalmic ointment and 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.
Septra..................... Glaxo Wellcome An antibiotic indicated for the
(November 1997) treatment of infectious diseases,
including urinary tract infections,
pneumonia, enteritis and ear
infections in adults and children.
Coly-Mycin................. Warner-Lambert An antibiotic sterile parenteral
(February 1998) indicated for the 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.
Women's Health Products
Pitocin.................... Warner-Lambert A sterile hormone solution used to
(February 1998) initiate or improve uterine
contractions during labor and to
control bleeding or hemorrhage in
the mother after childbirth.
Menest..................... SmithKline A film-coated esterified estrogen
(June 1998) tablet for the treatment of
vasomotor symptoms of menopause,
atrophic vaginitis, kraurosis
vulvae, female hypogonadism, female
castration, primary ovarian
failure, breast cancer and
prostatic carcinoma.
AVC(4)..................... HMR Cream and suppositories for vaginal
(December 1998) administration as indicated for the
treatment of Candida albicans
infections.
</TABLE>
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<PAGE> 58
<TABLE>
<CAPTION>
COMPANY ACQUIRED FROM
PRODUCT AND DATE OF ACQUISITION PRODUCT DESCRIPTION AND INDICATION
- ------- ----------------------- ----------------------------------
<S> <C> <C>
Anusol-HC.................. Warner-Lambert A suppository and cream indicated
(February 1998) for the relief of inflammation
accompanying hemorrhoids (piles),
post-irradiation proctitis,
cryptitis and other inflammatory
conditions of the anorectum.
Proctocort................. Solvay Pharmaceuticals, Inc. A hemorrhoidal preparation cream
(January 1997) with hydrocortisone acetate which
the Company has also developed into
a suppository form.
Vaccines and Biologicals
Fluogen.................... Warner-Lambert A trivalent vaccine for
(February 1998) immunization against influenza
(flu); composition of the vaccine
is determined each year by the
Centers for Disease Control and
Center for Biologics Evaluation and
Research.
Aplisol.................... Warner-Lambert A sterile aqueous solution of
(February 1998) purified protein fraction for
intradermal administration as an
aid in the diagnosis of
tuberculosis.
Histoplasmin............... Warner-Lambert An aqueous solution used as an aid
(February 1998) in the diagnosis of histoplasmosis
(a respiratory infection due to a
fungus) and to differentiate
histoplasmosis from other myotic or
bacterial respiratory infections.
</TABLE>
55
<PAGE> 59
<TABLE>
<CAPTION>
COMPANY ACQUIRED FROM
PRODUCT AND DATE OF ACQUISITION PRODUCT DESCRIPTION AND INDICATION
- ------- ----------------------- ----------------------------------
<S> <C> <C>
Other Key Products
Adrenalin.................. Warner-Lambert A sterile solution made from the
(February 1998) active principle of the adrenal
medulla used to relieve respiratory
distress and hypersensitivity
reactions and restore cardiac
rhythm in cardiac arrest due to
various causes.
Quibron.................... Roberts Pharmaceutical A respiratory preparation
Corporation containing theophylline produced in
(October 1996) capsule, tablet and
sustained-release 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
Corporation containing codeine and
(October 1996) pseudoephedrine hydrochloride
produced 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(5)................. 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.
Silvadene(4)............... HMR A topical antimicrobial cream
(December 1998) indicated as an adjunct for the
prevention and treatment of wound
sepsis in patients with second-and
third-degree burns.
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.
</TABLE>
- -------------------------
(1) We acquired licenses for the exclusive rights in the United States under
various HMR patents to the active ingredient in Altace.
(2) We acquired the trademark for Thalitone from Boehringer Ingelheim
Pharmaceuticals, Inc.
(3) We have exclusive licenses, free of royalty obligations, to manufacture and
market prescription formulations of these products.
(4) We acquired HMR's worldwide rights to these products.
(5) We acquired the trademark for Tussend from Marion Merrill Dow.
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<PAGE> 60
CONTRACT MANUFACTURING
We utilize our excess manufacturing capacity to provide third-party
contract manufacturing. We currently provide contract manufacturing for many
pharmaceutical and biotechnology companies, including Amgen, Inc.,
Warner-Lambert, Mallinckrodt, Genetics Institute, Inc. and Hoffman-LaRoche Inc.
Many of the products that we contract manufacture are difficult to manufacture
and, therefore, do not attract significant competition. Contract manufacturing
as a percentage of sales has declined from 85% in 1994 to 19% of total revenues
for the year ended December 31, 1998 as we have acquired branded pharmaceuticals
products. Contract manufacturing, however, remains an important part of our
business because it:
- provides a stable, recurring source of cash flows;
- allows us to absorb overhead costs, and as such is an efficient
utilization of excess capacity; and
- provides experience in manufacturing a broad line of formulations
which is advantageous to us in pursuing and integrating acquired
products.
GENERICS AND OTHER
We are engaged in the development, manufacturing, packaging, marketing,
distribution and sale of generic pharmaceutical products sold as prescription
drugs. We currently have two generic products on the market, three other generic
products which have been approved by the FDA and two abbreviated new drug
applications on file. We intend to continue to add new development projects as
more pharmaceutical products lose their patent protection. Generic products and
companion animal health products represent 1% of our total revenues for the year
ended December 31, 1998. Through our companion animal health division, we are
engaged in developing and expanding a comprehensive over-the-counter line of
companion animal health products which are marketed under the Royal Vet and Show
Winner tradenames.
SALES AND MARKETING
Our principal marketing focus is on the sales of branded pharmaceutical
products. We have a national sales force of over 200 sales representatives. We
distribute our 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, our marketing and sales promotions principally target general/family
practitioners and internal medicine physicians through detailing and sampling to
encourage physicians to prescribe more of our 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. Our telemarketing and direct mailing efforts are performed
primarily by using a computer sampling system which we developed to distribute
samples to physicians. We identify and target physicians through data available
from IMS America, Ltd. and Scott-Levin, suppliers of prescriber prescription
data. We intend to seek new markets in which to promote our product lines and
will continue expansion of our field sales force as product growth or product
acquisitions warrant.
We also market and sell generic pharmaceutical products as well as
companion animal health products. We market and sell our generic pharmaceutical
products primarily to major hospitals and hospital buying groups.
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<PAGE> 61
Our companion animal health care products are sold to retailers such as pet
store chains, grocery stores and mass merchandisers. The promotion of our
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 our companion animal health care products under the Show
Winner label.
Similar to other pharmaceutical companies, our principal customers are
wholesale pharmaceutical distributors. The wholesale distributor network for
pharmaceutical products has in recent years been subject to increasing
consolidation which has increased our, and other industry participants',
customer concentration. In addition, the number of independent drug stores and
small chains has decreased as retail consolidation has occurred. For the year
ended December 31, 1998, approximately 41.1% of our sales were attributable to
four distributors: McKesson Corporation (11.4%), Cardinal/Whitmire (10.8%),
Bergen Brunswig Corporation (12.6%) and Amerisource (6.3%).
MANUFACTURING
Our two manufacturing facilities are the Bristol facility, located in
Bristol, Tennessee, and the Parkedale facility, located in Rochester, Michigan.
These facilities have in the aggregate approximately one million square feet of
manufacturing, packaging, laboratory, office and warehouse space. We manufacture
our products in accordance with cGMP requirements and are licensed by the DEA to
procure and produce controlled substances. We manufacture certain of our 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.
We can produce a broad range of dosage formulations, including sterile
solutions, lyophylized (freeze-dried) products, injectables, tablets and
capsules, liquids, creams and ointments, suppositories and powders. We believe
our manufacturing capabilities allow us to capture higher margins and pursue
product line extensions more efficiently. However, currently 16 of our product
lines, including Cortisporin and the six product lines acquired in the Glaxo
Acquisition, four of the product lines acquired in the Sterile Products
Acquisition and all three of the products acquired in the Altace Acquisition,
are manufactured in the same facilities in which they were previously
manufactured as we have not yet received regulatory approval for their
manufacture at our facilities. Currently, our capacity utilization is
approximately 50% at the Bristol facility and is approximately 30% at the
Parkedale facility, providing us with substantial manufacturing capacity for
future growth. We intend to transfer, when advantageous, production of newly
acquired branded pharmaceutical products and their product line extensions to
our manufacturing facilities as soon as practicable after regulatory
requirements and contract manufacturing requirements are satisfied.
In addition to manufacturing, we have fully integrated manufacturing
support systems including quality assurance, quality control, regulatory
compliance and inventory control. These support systems enable us to maintain
high standards of quality for our products and simultaneously deliver reliable
services and goods to our customers on a timely basis. Companies that do not
have such support systems in-house must out source these services.
We manufacture pharmaceutical products for, among others, Amgen, Inc.,
Warner-Lambert, Centocor, B.V., Fujisawa Pharmaceutical Company, Genentech,
Inc., Genetics
58
<PAGE> 62
Institute, Inc., Hoffman-LaRoche Inc., Mallinckrodt, Novartis, Roberts
Pharmaceutical Corporation, Santen Incorporated and SmithKline. Contract
manufacturing represented in the aggregate approximately 19.3% and 14.6% of our
total revenues for the years ended December 31, 1998 and 1997, respectively. In
1995, in conjunction with the Anexsia Transaction, we 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.
We require a supply of quality raw materials and components to manufacture
and package drug products for us and for third parties with which we have
contracted. Generally we have not had difficulty obtaining raw materials and
components from suppliers in the past. Currently, we rely on approximately 300
suppliers to deliver the necessary raw materials and components. The loss of any
one of these suppliers is not expected to have a material adverse effect on our
ability to acquire raw materials and components. We have no reason to believe we
will be unable to procure adequate supplies of raw materials and components on a
timely basis. However, if for any reason we are unable to obtain sufficient
quantities of any of the raw materials or components required to produce and
package our products, we may not be able to distribute our products as planned.
In such case, our business, financial condition and results of operations could
be materially and adversely affected.
RESEARCH AND DEVELOPMENT
At the present time, we are not engaged in substantial clinical research
activities. We are, however, involved in product development and continually
seek to develop extensions to our product lines and to improve the quality and
efficiency of our manufacturing processes. Our laboratories and product
development scientists have produced several product line extensions to some of
our existing branded pharmaceutical products for which we have secured several
abbreviated new drug application approvals from the FDA.
GOVERNMENT REGULATION
All aspects of our company and our products are subject to extensive and
rigorous regulation at both the federal and state levels. Most importantly,
nearly all of our products are subject to premarket approval requirements. Human
and animal drugs are subject to similar regulatory requirements. New drugs are
approved under, and are subject to, the Federal Food, Drug and Cosmetic Act and
the respective related regulations and biological drugs are subject to both the
Federal Food, Drug and Cosmetic Act and the Public Health Service Act and the
related regulations. Biological drugs are licensed under the Public Health
Service Act. Abbreviated new drug applications may be filed to secure marketing
approval for generic forms of certain approved human drugs, but generally not
for biological products.
At the federal level, we are principally regulated by the FDA as well as by
the Drug Enforcement Agency, the Consumer Product Safety Commission, the Federal
Trade Commission, the U.S. Department of Agriculture, Occupational Safety and
Health Administration and the Environmental Protection Agency. The Federal Food,
Drug and Cosmetic 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 our
59
<PAGE> 63
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.
We believe that we or our contract customers have the proper FDA approvals
or other marketing authority for the drugs that we currently produce. When we
acquire the right to market an existing approved pharmaceutical product, both we
and the former application holder are required to submit certain information to
the FDA. This information, if adequate, results in the transfer to us of
marketing rights, approved applications and the associated right and obligations
to the pharmaceutical products. We are also required to advise the FDA about any
changes in certain conditions in the approved application as set forth in the
FDA's regulations. Our strategy focuses on acquiring branded pharmaceutical
products and transferring, when advantageous, their manufacture to our
manufacturing facilities as soon as practicable after regulatory requirements
are satisfied. In order to transfer manufacturing of the acquired branded
products, we must demonstrate, by filing information with the FDA, that we can
manufacture the product in accordance with cGMPs and the specifications and
conditions of the approved marketing application. For changes requiring prior
approval, there can be no assurance that the FDA will grant such approval in a
timely manner, if at all.
The FDA regulatory regime applicable to our generic pharmaceutical products
depends, on whether the branded drug is the subject of an approved marketing
application or is marketed subject to the FDA's enforcement discretion and/or
policies. If the pharmaceutical product to be offered as a generic version of a
branded product is the subject of an approved marketing application, the generic
product must be the subject of an abbreviated new drug application and must be
approved by the FDA prior to marketing. Pharmaceutical products produced by any
manufacturer and marketed subject to the FDA's enforcement discretion and/or
policies are not subject to approval of generic drug applications.
The FDA also mandates that drugs be manufactured, packaged and labeled in
conformity with cGMPs. 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 cGMPs, and to impose or seek injunctions, voluntary recalls, and
civil monetary and criminal penalties. Such a restriction or prohibition on
sales or withdrawal of approval of products marketed by us could materially
adversely affect our business, financial condition and results of operation.
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<PAGE> 64
In November 1998 the Parke-Davis division of Warner-Lambert conducted a
voluntary Class III recall for one lot of Procanbid manufactured prior to our
acquisition of Procanbid. A Class III recall is one in which use of, or exposure
to, the product is not likely to cause adverse consequences. The recall was
instituted because the lot at issue failed a dissolution test as part of the
routine stability program at the 18-month interval. In February 1999 we notified
the FDA that two additional lots of Procanbid, also manufactured prior to our
acquisition of the product line, had failed the same dissolution test at the
24-month interval. The Parke Davis division of Warner-Lambert conducted the
Class III recall at its expense. If additional lots of Procanbid are recalled,
the reputation of the product and the value of the trademark associated
therewith could be adversely affected.
While we believe that all of our 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 or changes in
manufacturing locations 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. Our 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.
We also manufacture and sell pharmaceutical products which contain
"controlled substances" as defined in the Controlled Substances Act and related
federal and state laws, which establish certain security, licensing, record
keeping, reporting and personnel requirements administered by the Drug
Enforcement Agency, known as the "DEA," a division of the Department of Justice,
and state authorities. 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 manufacturers, distributors and
dispensers of controlled substances, the substances themselves and the equipment
and raw materials used in their manufacture and packaging in order to prevent
such articles from being diverted into illicit channels of commerce. We maintain
appropriate licenses and certificates with the States of Tennessee and Michigan
in order to engage in pharmaceutical development, manufacturing and distribution
of pharmaceutical products containing controlled substances. We are licensed by
the DEA to manufacture and distribute certain pharmaceutical products containing
controlled substances. We have not experienced license revocations, restrictions
or fines for non-compliance with the foregoing regulations but no assurance can
be given that revocations, restrictions or fines which could have a material
adverse effect upon our business, financial condition and results of operations,
will not be imposed upon us in the future.
The distribution of pharmaceutical products is subject to the Prescription
Drug Marketing Act, as part of the Federal Food, Drug and Cosmetic Act, which
regulates such activities at both the federal and state level. Under this Act
and its implementing regulations, states are permitted to require registration
of manufacturers and distributors who provide 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
product samples to licensed practitioners. This Act also imposes extensive
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<PAGE> 65
licensing, personnel record keeping, packaging, quantity, labeling product
handling and facility storage and security requirements intended to prevent the
sale of pharmaceutical product samples or other diversions.
Our Parkedale facility was one of six facilities owned by Warner-Lambert
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.). The Parkedale facility is currently
manufacturing pharmaceutical products subject to the consent decree which
prohibits the manufacture and delivery of specified drug products unless, among
other things, the products conform to cGMP regulations and are produced in
accordance with an approved abbreviated new drug application or new drug
application. We are in the process of preparing for, and if appropriate,
obtaining relief from the consent decree. There is no assurance that relief when
and if sought will be granted. We believe the Parkedale facility is in
compliance with the requirements of the consent decree.
As a result of an FDA inspection in March and April 1998, we received an
FDA Form 483 with respect to the Parkedale Facility. When an FDA inspector
completes an authorized inspection of a manufacturing facility, Section 704(b)
of the Federal Food, Drug and Cosmetic Act mandates that the inspector give to
the owner/operator of the facility a 483 listing the inspector's observations of
objectionable conditions and practices. The observations in a 483 are reported
to the manufacturer in order to assist the manufacturer in complying with this
Act and the regulations enforced by the FDA. Often a pharmaceutical manufacturer
receives a 483 after an inspection. While no law or regulation requires us to
respond to a 483, we have submitted our written response detailing the plan of
action with respect to each of the observations made on the 483 and our
commitment to correct the objectionable practice or condition. The risk to us of
a 483, if left unaddressed, could include adverse regulatory action, including,
among other things, the commencement of actions to seize or prohibit the sale of
unapproved or non-complying products. We believe the receipt of the 483 will not
have a material adverse effect on our business, financial condition or results
of operations. We have been informed by the FDA that a follow-up inspection will
occur in the second quarter of 1999. There can be no assurance that the outcome
of the inspection will be favorable.
We cannot determine what effect changes in regulations or statutes or legal
interpretation, when and if promulgated or enacted, may have on our business in
the future. Changes could, among other things, require changes to manufacturing
methods or facilities, expanded or different labeling, the recall, replacement
or discontinuance of certain products, additional record keeping or expanded
documentation of the properties of certain products and scientific
substantiation. Such changes, or new legislation, could have a material adverse
effect on our business, financial condition and results of operations.
ENVIRONMENTAL MATTERS
Our operations are subject to numerous and increasingly stringent 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 and the discharge of pollutants into
the air and water. Environmental permits and controls are required for certain
of our operations and these permits are subject to modification, renewal and
revocation by the issuing authorities. We believe that our facilities are in
substantial compliance with our permits and environmental laws and regulations
and do not
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believe that future environmental compliance will have a material adverse effect
on our business, financial condition or results of operations. Our environmental
capital expenditures and costs for environmental compliance may increase in the
future as a result in changes in environmental laws and regulations.
Under the Comprehensive Environmental Response, Compensation, and Liability
Act, known as CERCLA, the Environmental Protection Agency can impose liability
for the entire cost of cleanup of contaminated properties upon each or any of
current and former site owners and operators or parties who sent waste to the
site, 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 Environmental Protection Agency. We
have hazardous waste hauling agreements with licensed third parties to properly
dispose of hazardous wastes. We cannot assure you that we will not be found
liable under CERCLA for the costs of undertaking a clean up at a site to which
our wastes were transported.
COMPETITION
GENERAL
We compete 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., Roberts Pharmaceutical Corporation,
Watson Pharmaceuticals, Inc. and other companies which also acquire branded
pharmaceutical product lines from other pharmaceutical companies. Additionally,
since our products are generally established and commonly sold, they are subject
to competition from products with similar qualities. Our 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.
GENERIC SUBSTITUTES
Many of our branded pharmaceutical products have either a strong market
niche or competitive position. Some of our branded pharmaceutical products face
competition from generic substitutes. Of our branded pharmaceutical products
that have generic substitutes, we believe that only a small number face
significant competition because many of our branded pharmaceutical products have
sales levels that are too low to attract competition or are too difficult to
manufacture or prove bioequivalence (i.e., the two products produce identical
effects on the body).
Approximately 17 of our branded pharmaceutical product lines generated
between $29,000 and $3.0 million in net sales for the year ended December 31,
1998. We believe that these products do not face significant competition from
generic manufacturers because the market is too small to make competition from
generic manufacturers profitable. In addition, we believe that pharmacists
generally do not carry generic versions of branded
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<PAGE> 67
drugs that have low sales volume because of the cost of carrying the inventory
and the low sales volume.
For a manufacturer to launch a generic substitute, it must prove to the FDA
when filing an application to make a generic substitute that the branded
pharmaceutical and the generic substitute have bioequivalence. This is easiest
to prove when a drug is systemically absorbed into and measurable in the
bloodstream. For example, some of our products are topical preparations and
because topical preparations are less likely to be absorbed into the bloodstream
it is more difficult to prove bioequivalence for topical products. While it
typically takes two or three years to prove bioequivalence and receive FDA
approval for many generic substitutes, we believe that for topical products the
approval period is longer. By focusing our efforts in part on products with
bioequivalence or complex manufacturing requirements, we believe we are able to
protect market share and produce sustainable, high margins and cash flows.
INTELLECTUAL PROPERTY
PATENTS AND LICENSES
We consider the protection of discoveries in connection with our
development activities important to our business. We intend to seek patent
protection in the United States and selected foreign countries where deemed
appropriate. We own U.S. Patents for Novel Chlorthalidone Process and Product,
covering the raw materials used in the manufacture of Thalitone, and for
Procanbid. These patents expire in 2007 and 2014, respectively. We also have a
paid-up and non-exclusive license to certain other patent rights owned or
controlled by Bristol-Myers Squibb Company which are used in the manufacture of
Quibron(R). We have also applied for patents for an analysis test and a certain
manufacturing process for products other than Quibron(R). We also rely upon
trade secrets, unpatented proprietary know-how and continuing technological
innovation, where patent protection is not believed to be appropriate or
attainable, to develop our competitive position.
In connection with the Altace(R) product line, we acquired licenses for the
exclusive rights in the United States under various HMR patents to the active
ingredients in Altace(R) patented to 2008 and its metabolites patented to 2012.
Our rights include the exclusive utilization of the active ingredient in
Altace(R) in any combination as human therapeutic or human diagnostic products.
We have 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 we fail to meet specified quality control
standards, including cGMP with respect to the products, or commit 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.
TRADEMARKS
We sell our branded products under a variety of trademarks. While we
believe that we have valid proprietary interests in all currently used
trademarks, only certain of the trademarks are registered with the U.S.
government, including those for our principal
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<PAGE> 68
branded pharmaceutical products, Altace(R), Coly-Mycin(R), Fluogen(R),
Procanbid(R), Anusol-HC(R), Cortisporin(R), Neosporin(R), Polysporin(R),
Septra(R), Proctocort(R), Thalitone(R), Pediotic(R), Viroptic(R), Silvadene(R),
Menest(R) Adrenalin(R), Pitocin(R), Aplisol(R), Quibron(R), Nucofed(R),
Monafed(R), Tussend(R), Mantadil(R), Vira-A(R), Chloromycetin(R), and
Kemadrin(R). Additionally, trademark applications for Monarchpharm(TM) and Show
Winner(TM) are pending. We intend to market products under the following
trademarks: AVC(TM), Arthrose(TM), Vetrin(TM) and Monahist(TM). We also own or
have pending the Polymatrix(TM), Pro-Kemadrin(R), Histoplasmin(TM) and Royal
Vet(R) trademarks and own or have pending the Classics That Work(SM) service
mark and the registered service mark Secure-A-Sample(R).
EMPLOYEES
As of December 31, 1998, we employed 1,041 full-time and 19 part-time
persons. Certain employees of the Parkedale facility, representing approximately
31% of our employees, are covered by a collective bargaining agreement with the
Oil, Chemical & Atomic Workers, International Union which expires February 28,
2003. We believe our employee relations are good. We employ a full-time Chaplain
and offer as part of our employee benefits package access to additional
counseling services.
LITIGATION
Many distributors, marketers and manufacturers of anorexigenic drugs have
been subject to claims relating to the use of these drugs. As of December 31,
1998, we are a defendant in 52 lawsuits which claim damages for personal injury
arising from our production of the anorexigenic drug, phentermine, under
contract for SmithKline. Generally, the lawsuits allege that the defendants (1)
misled users of the products with respect to the dangers associated with them,
(2) failed to adequately test the products and (3) knew or should have known
about the negative effects of the drugs, and should have informed the public
about the risks of these negative effects. The actions generally have been
brought by individuals in their own right and have been filed in various state
and federal jurisdictions throughout the United States. They seek, among other
things, compensatory and punitive damages and/or court supervised medical
monitoring of persons who have ingested the product. We expect to be named in
additional lawsuits related to our production of the anorexigenic drug under
contract for SmithKline.
While we cannot predict the outcome of these suits, we believe that the
claims against us are without merit and intend to vigorously pursue all
available defenses available. We are being indemnified in all of these suits by
SmithKline for which we manufactured the anorexigenic product, provided that
neither the lawsuits nor the associated liabilities are based upon our
independent negligence or intentional acts, and intend to submit a claim for all
unreimbursed costs to our product liability insurance carrier. However, in the
event that SmithKline is unable to satisfy or fulfill its obligations under the
indemnity, we would have to defend the lawsuit and be responsible for damages,
if any, which are awarded against it or for amounts in excess of our product
liability coverage.
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PROPERTIES
We own the manufacturing facilities listed below. These facilities include
space for manufacturing, packaging, laboratories, offices and warehousing. We
believe these facilities are adequate for the conduct of our operations.
<TABLE>
<CAPTION>
LOCATION APPROXIMATE SQUARE FOOTAGE
- -------- --------------------------
<S> <C>
Bristol, Tennessee............................. 500,000
Rochester, Michigan............................ 500,000
</TABLE>
BACKLOG
As of December 31, 1998, we had no material backlog.
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<PAGE> 70
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY EMPLOYEES
The executive officers, directors and key employees of King are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ---- --- -------------
<S> <C> <C>
John M. Gregory................... 46 Chairman of the Board of Directors and Chief
Executive Officer
Jefferson J. Gregory.............. 43 President of King Pharmaceuticals, Inc. and of
Parkedale Pharmaceuticals, Inc. and Director
Joseph R. Gregory................. 44 Vice Chairman of the Board of Directors of
King, President of Monarch Pharmaceuticals,
Inc.
Brian G. Shrader.................. 30 Chief Financial Officer
James E. Gregory.................. 47 Executive Vice President, General Manager
(Bristol)
R. Henry Richards, M.D............ 54 Executive Vice President, Medical Affairs
John P. McCoy..................... 50 Executive Vice President, Quality
Terri D. White-Gregory............ 36 Executive Vice President, Financial Analyst
John A. A. Bellamy................ 36 Executive Vice President, Legal Affairs and
General Counsel
Ronald C. Siegfried............... 57 Executive Vice President, Development
Steven M. Samet................... 49 Executive Vice President, General Manager
(Parkedale)
Kyle P. Macione................... 35 Executive Vice President, Investor Relations
Michael R. Hilton................. 51 Vice President, Sales and Marketing
Thomas K. Rogers, III............. 45 Vice President, Regulatory Affairs
Edward J. Reilly.................. 46 Vice President, Brand Management
Moises Saporta.................... 61 Vice President, Manufacturing
Norman T. Miller.................. 64 Senior Director, Regulatory Affairs
(Compliance)
Ernest C. Bourne.................. 57 President, International Division, and
Director
Lois A. Clarke.................... 53 Director
Frank W. De Friece, Jr............ 78 Director
D. Greg Rooker.................... 51 Director
Ted G. Wood....................... 61 Director
</TABLE>
JOHN M. GREGORY has served as Chairman of the Board of Directors since
King's inception in 1993 and Chief Executive Officer since 1994. He previously
co-founded General Injectables and Vaccines, Inc. and served as its President
from 1984 through 1994. Prior to co-founding General Injectables and Vaccines,
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 of King Pharmaceuticals, Inc.,
since 1993, and as President of Parkedale Pharmaceuticals, Inc., a wholly owned
subsidiary of King, since February 1998 and as a Director since 1995. He was
formerly the Director of Regulatory Affairs and Product Information for General
Injectables and Vaccines from 1991 to 1993 and was a consultant to the
pharmaceutical industry from 1989 to 1991. He formerly served as a registered
pharmacist in retail pharmacies in the Washington D.C. and Baltimore, Maryland
metropolitan areas. He graduated from the University of Maryland School of Law
with a Juris Doctor in 1985, University of Maryland School of
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<PAGE> 71
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 of Monarch Pharmaceuticals, Inc.,
a wholly owned subsidiary of King, since 1994, has served as a Director since
1993 and as Vice Chairman of the Board of Directors of King since December 1997.
Prior to joining King, he was the Chief Operating Officer of General Injectables
and Vaccines from 1987 to 1994 and also served as the President of
Insource/Williams, Inc., a General Injectables and Vaccines 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 General Injectables and Vaccines from
1990 to 1993. He is a current member of the American Institute of Certified
Public Accountants and Virginia Society of CPA's. He graduated from the Virginia
Polytechnic Institute and State University with a B.S. in Accounting in 1990 and
a Masters of Accountancy in 1991.
JAMES E. GREGORY has served as Executive Vice President, 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 General Injectables and Vaccines 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.
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<PAGE> 72
TERRI D. WHITE-GREGORY, CPA, has served as Executive Vice President,
Financial Analyst since 1996. She served as a financial analyst for Westinghouse
Electric in 1995 and as a consultant and sole proprietor in public accounting
from 1993 to 1996. From 1988 to 1993, she was an audit manager and supervisor in
the Emerging Business Services Group of Coopers & Lybrand L.L.P., in Washington
D.C. and Roanoke, Virginia and was a senior associate on the audit staff of
Ernst & Young LLP in Columbia, South Carolina from 1985 to 1988. She graduated
from The Ohio State University with a B.S. in Business Administration in 1985.
JOHN A. A. BELLAMY has served as Executive Vice President of Legal Affairs
and General Counsel since February 1995. He was formerly a corporate attorney
with the law firm of Hunter, Smith & Davis in Kingsport, Tennessee from 1990 to
1995. He graduated from the University of Tennessee College of Law with a J.D.
with Honors in 1990, and graduated Summa Cum Laude with Honors in Independent
Study from King College in 1984 with a B. A. degree in Classics and English. He
is a member of the Licensing Executives Society.
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., 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) since its acquisition by King February 28, 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, Mr. Samet held various operations positions with
both Elkins-Sinn, Inc. and Sterling Drugs. Mr. Samet 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 King, he served RSR Laboratories as Manager of Scientific Development
from 1991 to 1993, and Manager of
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<PAGE> 73
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.
EDWARD J. REILLY has served as Vice President, Brand Management of Monarch
Pharmaceuticals, Inc., since January 1999. Previously, he was Product Manager
with Hoechst Marion Roussel, Inc., from 1990 to 1998. Since 1981 he served in
various sales and management and product management capacities with Merrell Dow
Pharmaceuticals and Marion Merrell Dow Pharmaceuticals. He graduated from the
State University of New York in 1976 with a B.S. in Biology.
MOISES SAPORTA has served as Vice President of Manufacturing since
September 1998. He was formerly Senior Director of Technology Development. He
previously served as Vice President, World Wide Manufacturing Operations for
Roberts Pharmaceutical Corporation from 1991 to 1997. From 1988 to 1991, he was
Assistant Director, Manufacturing and Engineering, with Whitehall International.
He served as plant manager and area manager for American Cyanamid Company from
1981 to 1988 in Argentina. From 1977 to 1981, he was manager of Pharmaceutical
Technology for E. R. Squibb & Sons International. He served in a series of
technical operations and planned management positions for USV Pharmaceutical
internationally and domestically from 1966 to 1977. From 1961 to 1966, he served
as manager of technical operations for F. Hoffman-LaRoche. He graduated from the
University of Chile in 1960 as a Pharmaceutical Chemist.
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 President of the International Division
since January 1999 and as a Director since October 1997. From 1968 until January
1999, he had been employed with Bourne & Co., Inc., an investment banking firm,
where he served as President.
LOIS A. CLARKE has served as a Director since April 1997. Presently she is
Executive Vice President and Chief Financial Officer of The United Company in
Bristol, Virginia, one of King'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 its financial matters. She is a graduate
of McClains College with a degree in Accounting.
FRANK W. DE FRIECE, JR. has served as a Director 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.
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<PAGE> 74
D. GREG ROOKER has served as a Director since October 1997. Mr. Rooker is
the owner and President of Family Community Newspapers of Southwest Virginia,
Inc., Wytheville, Virginia, which 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 served as a Director since April 1997. Presently, he is
President, United Operating Companies, affiliates of The United Company in
Bristol, Virginia, one of King'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 where he served as
President of Beecham Laboratories from 1988 to 1989 and Executive Vice President
of SmithKline 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
For the years ended December 31, 1997 and 1998, directors of King received
no fees for serving in such capacity. However, the 1998 Non-Employee Director
Plan was adopted by the Board of Directors in February 1998 and is subject to
approval of the shareholders at the next annual meeting. Currently options
exercisable for 50,000 shares of common stock have been granted, subject to this
approval, to non-employee directors.
CLASSIFICATION OF BOARD OF DIRECTORS
Pursuant to King'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 King's shareholders. A classified board of directors may have the effect of
deterring or delaying any attempt by any group to obtain control of King 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.
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
King's books, records and
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financial statements and to review King's systems of accounting (including its
systems of internal control); to discuss with such independent accountants the
results of such audit and review; to conduct periodic independent reviews of the
systems of accounting (including systems of internal control); and to make
reports periodically to the Board of Directors with respect to its findings.
COMPENSATION COMMITTEE. The compensation committee, which currently
consists of John M. Gregory, Frank W. DeFriece, Jr. and D. Greg Rooker, is
responsible for reviewing and approving compensation for the executive officers.
STOCK OPTION COMMITTEE. The stock option committee, which currently
consists of Lois A. Clarke, Frank W. DeFriece, Jr. and D. Greg Rooker, is
responsible for administering, and determining awards under, the 1997 Incentive
and Nonqualified Stock Option Plan for Employees.
DIRECTORS AND OFFICERS' INSURANCE
King maintains liability insurance for its directors and officers in the
aggregate amount of $20.0 million, subject to a $25,000 deductible loss per
occurrence payable by King.
EXECUTIVE COMPENSATION
The following table summarizes all compensation earned by King's chief
executive officer and by each of King's four other most highly compensated
executive officers whose total annual salary and bonus exceeded $100,000 for
services rendered in all capacities to King for the year ended December 31,
1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1)
- --------------------------- ---- --------- -------- ------------------
<S> <C> <C> <C> <C>
John M. Gregory..................... 1998 361,566 4,800
Chairman of the Board and Chief 1997 360,918 -- 4,800
Executive Officer
Jefferson J. Gregory................ 1998 282,881 4,800
President and Chief Operating 1997 265,854 -- 4,800
Officer, King Pharmaceuticals,
Inc. and Parkedale
Pharmaceuticals, Inc.
Joseph R. Gregory................... 1998 281,099 4,800
Vice Chairman of the Board and 1997 242,588 -- 4,800
President and Chief Operating
Officer, Monarch Pharmaceuticals,
Inc.
James E. Gregory.................... 1998 228,796 10,000 2,250
Executive Vice President, General 1997 201,569 4,000 4,800
Manager
R. Henry Richards, M.D.............. 1998 217,832 10,000 4,800
Executive Vice President, Medical 1997 218,189 4,000 4,800
Affairs
</TABLE>
- -------------------------
(1) All Other Compensation reflects King's matching contributions to the 401(k)
plan.
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STOCK OPTION PLANS
INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN. In October 1997, we adopted
the 1997 Incentive and Nonqualified Stock Option Plan for Employees pursuant to
which a committee of the board of directors may grant incentive stock options
(within the meaning of the Internal Revenue Code of 1986, as amended) and
nonqualified options to our employees for the purchase of common stock. The plan
is intended to provide incentives to, and rewards for employees who have
contributed and will continue to contribute to our success. 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.
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 King, 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 King, 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 King'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 which qualifies under Section
422 of the Code is granted will not recognize income at the time of grant or
exercise of the option. However, upon the exercise of an incentive stock option,
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 the shares more than one
year after the date of transfer of the shares and more than two years after the
date of grant of the incentive stock option, the employee will generally
recognize a long-term capital gain or loss equal to the difference, if any,
between the sale prices of the shares and the option price. King will not be
entitled to a federal income tax deduction in connection with the grant or
exercise of the incentive stock option. If the employee does not hold the shares
for the required period, when the employee sells the 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
the amounts as are prescribed by the Code and the regulations thereunder and
King will generally be entitled to a Federal income tax deduction in the amount
of the ordinary compensation income recognized by the employee.
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<PAGE> 77
An employee to whom a nonqualified stock option is granted will not
recognize income at the time of grant of option. When such employee exercises
the nonqualified stock option, 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 exercise over the
option price paid. The tax basis of these 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 the shares will commence on
the date on which the employee recognizes taxable income in respect of the
shares. Gain or loss upon a subsequent sale of any common stock received upon
the exercise of a nonqualified stock option 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, King will generally be limited to a Federal income tax deduction in
respect of a nonqualified stock option 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 King in which the participant recognizes the
ordinary income.
As of December 31, 1998, there were options outstanding for 220,200 shares
of common stock.
NON-EMPLOYEE DIRECTOR PLAN. The 1998 Non-Employee Director 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 plan is intended to
encourage stock ownership by directors of King and to provide those individuals
with an additional incentive to manage King 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 plan will provide
for the granting of options to non-employee directors, as defined, covering an
aggregate of 300,000 shares of common stock, subject to certain adjustments
reflecting changes in King's capitalization. The full board is authorized under
the director 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 King is eligible to participate; however, grants made must
be approved by the full board of directors with the affected member abstaining.
The director plan requires that the exercise price for each option granted under
the plan must equal 100% of the fair market value of King's common stock on the
date the option is granted. Nothing contained in the director plan or any
agreement to be executed pursuant to the director plan will obligate King, its
board or its shareholders to retain an optionee as a director.
As of December 31, 1998 there were options outstanding under the director
plan exercisable 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, 1998, 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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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
King Pharmaceuticals Benevolent Fund, Inc. 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 King. Messrs. John M., Joseph R. and Jefferson J. Gregory
are also directors of King. King advanced $700,000 in 1995 and $1,000,000 in
1997 to the Benevolent Fund which was used for general operating purposes. At
December 31, 1998, the Benevolent Fund was indebted to King in the amount of
approximately $596,000. The Benevolent Fund is independent of King, maintains
its own accounting records and its activities are not directly related to the
business of King.
The United Company, a Virginia corporation, and some of its shareholders,
officers, directors and employees are the beneficial owners of approximately
21.8% of the common stock of King. Currently, two members of King'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, King
executed a Promissory Note in the amount of $1,750,000 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. King 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.
For the year ended December 31, 1998, King had paid Bourne & Co., Inc., an
affiliate of Mr. Bourne (a director and since January 1999, the president of the
International Division) $2,475,000 for consulting services. Additionally, in
connection with the Altace Acquisition and the related financing, Bourne & Co.,
Inc., received $1,250,000 in January 1999. King also purchased office furniture,
accessories and supplies for its international division office in Charlotte,
North Carolina from Bourne & Co., Inc. for approximately $79,000. In addition
for the year ended December 31, 1997, King paid Bourne & Co., Inc.,
approximately $651,000, for its advisory services in the acquisition of the
Cortisporin product line and $62,000 for consulting service. Bourne & Co., Inc.,
provided consulting services to King in areas such as corporate development,
financing alternatives and strategies, and general business planning.
In September 1998, King purchased for approximately $350,000 the primary
residence of Jefferson J. Gregory, a director and officer of King, in connection
with his relocation to the Parkedale facility. King believes the purchase price
was at fair market value and currently holds the property for resale.
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<PAGE> 79
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of King's common stock as of March 1, 1999, for (i) each person who owns more
than 5% of the common stock, (ii) each director and executive officer, and (iii)
all executive officers and directors as a group.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP OF
COMMON STOCK
------------------------
PERCENTAGE
EXECUTIVE OFFICERS, DIRECTORS NUMBER OF OUTSTANDING
AND 5% SHAREHOLDERS SHARES SHARES(1)
- ----------------------------- ---------- -----------
<S> <C> <C>
John M. Gregory(2)...................................... 8,023,807 25.0%
Joseph R. Gregory(3).................................... 2,894,400 9.0
Jefferson J. Gregory(4)................................. 1,028,885 3.2
James E. Gregory(5)..................................... 147,923 *
R. Henry Richards, M.D.(6).............................. 222,594 *
Brian G. Shrader(7)..................................... 510,010 1.6
John McCoy(8)........................................... 27,701 *
Terri D. White-Gregory(4)............................... 1,875 *
John A. A. Bellamy(9)................................... 41,524 *
Steven M. Samet......................................... 21,000 *
Kyle P. Macione(10)..................................... 11,108 *
Ernest C. Bourne(11).................................... 138,478 *
Lois A. Clarke(12)(13).................................. 105,200 *
Frank W. DeFriece, Jr. (14)............................. 10,000 *
D. Greg Rooker(15)...................................... 70,980 *
Ted G. Wood(13)(16)..................................... 38,000 *
All executive officers and directors as a group (16
persons).............................................. 13,286,345 41.3
The United Company(17).................................. 5,172,594 16.1
</TABLE>
- -------------------------
* Less than 1%.
(1) Unless otherwise indicated, beneficial ownership consists of sole voting
and investing power based on 32,104,730 shares issued and outstanding as of
March 1, 1999. Options to purchase shares which are exercisable or become
exercisable within 60 days of March 1, 1999 are deemed to be outstanding
for the purpose of computing the percentage of outstanding shares owned by
each person to whom a portion of such options relate but are not deemed to
be outstanding for the purpose of computing the percentage owned by any
other person.
(2) Includes 6,116,228 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; 47,900 shares
registered in the name of The Lazarus Foundation, Inc., a private
foundation controlled by John M. Gregory; and 7,140 shares owned by The
Jason Foundation, a private foundation controlled by Mr. Gregory and by D.
Greg Rooker. Mr. Gregory's address is 501 Fifth Street, Bristol, Tennessee
37620.
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<PAGE> 80
(3) Includes 966,000 shares owned through Kingsway L.L.C., a limited liability
company, the primary members of which are Mr. Gregory, his spouse and his
son and 6,250 shares issuable upon the exercise of options. Mr. Gregory's
address is 501 Fifth Street, Bristol, Tennessee 37620.
(4) Includes 908,523 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 and 6,250 and 1,875 shares issuable upon the exercise of
options granted to Mr. Gregory and Ms. White-Gregory, respectively.
(5) Includes 142,702 shares jointly owned with Mr. Gregory's spouse, 3,346
shares owned by Mr. Gregory's children and 1,875 shares issuable upon the
exercise of options.
(6) Includes 203,132 shares jointly owned with Dr. Richards' spouse and 1,875
shares issuable upon the exercise of options.
(7) 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;
10,623 shares jointly owned with Mr. Shrader's mother; and 2,500 shares
issuable upon the exercise of options.
(8) Includes 25,826 shares jointly owned with Mr. McCoy's spouse and 1,875
shares issuable upon the exercise of options.
(9) Includes 1,875 shares issuable upon the exercise of options.
(10) Includes 375 shares issuable upon the exercise of options.
(11) Includes 10,000 shares issuable upon the exercise of options.
(12) Includes 16,800 shares held in the name of Ms. Clarke as custodian for
Donald Alan Clarke, a minor and 10,000 shares issuable upon the exercise of
options.
(13) Ms. Clarke and Mr. Wood are affiliates of The United Company.
(14) Includes 10,000 shares issuable upon the exercise of options.
(15) Includes 20,000 shares held in trust for the benefit of Mr. Rooker's
children; 2,850 shares owned by Mr. Rooker's spouse, 7,140 shares owned by
Family Community Newspapers of Southwest Virginia, 7,140 shares owned by
The Jason Foundation, a private foundation controlled by Mr. Rooker and by
John M. Gregory and 10,000 shares issuable upon the exercise of options.
(16) Includes 10,000 shares issuable upon the exercise of options.
(17) The United Company along with certain of its affiliates beneficially own in
the aggregate 7,001,658 shares representing approximately 21.8% of the
outstanding shares of King. The address of The United Company is 1005
Glenway Avenue, Bristol, Virginia 24201.
Messrs. John M. Gregory, Joseph R. Gregory, Jefferson J. Gregory, James E.
Gregory, Richards, Shrader, McCoy, Bellamy, Samet, Macione and Ms. White-Gregory
serve as executive officers of King. Messrs. John M. Gregory, Joseph R. Gregory
and Jefferson J. Gregory also serve as directors of King. See "Management."
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following description is only a summary of some of the provisions of
the senior credit facility and does not purport to be complete. You may request
copies of the Credit Agreement at our address set forth under "Where You Can
Find More Information About Us" section of this prospectus.
In this description, the word "King" refers only to King Pharmaceuticals,
Inc. and not to any of its subsidiaries.
In connection with the Altace Acquisition on December 22, 1998, King
amended and restated its Credit Agreement dated as of February 27, 1998 with
certain financial institutions as lenders, Credit Suisse First Boston, as the
Administrative Agent, Collateral Agent and Swingline Lender, First Union
National Bank, as Syndication Agent and Issuing Bank, and NationsBank, N.A., as
Syndication Agent, to:
(1) finance the Altace Acquisition;
(2) refinance King's then existing indebtedness; and
(3) provide for ongoing working capital and other financing
requirements of King and its subsidiaries.
The senior credit facility provides for up to $500 million of aggregate
borrowing capacity, consisting of:
- a secured $150 million tranche A term loan;
- a secured $275 million tranche B term loan; and
- a secured revolving credit facility in an aggregate amount of $75
million in borrowings available to King which has since been increased
to $100 million.
The revolving credit facility includes a $10 million sublimit available for the
issuance of letters of credit and a $5 million sublimit available for swingline
loans.
The tranche A term loan is subject to certain specified amortization
payments required to be made in quarterly installments commencing on March 31,
1999 until final payment is made on December 22, 2004. The tranche B term loan
is subject to certain specified amortization payments required to be made in
quarterly installments commencing on March 31, 1999 until final payment is made
on December 22, 2006. The revolving credit facility is available until December
22, 2004 unless terminated earlier under certain circumstances. In addition, the
loans and the aggregate available commitments under the senior credit facility
will be reduced in connection with certain asset and capital stock sales and
dispositions, equity issuances, receipt of certain insurance proceeds, certain
incurrences of indebtedness and a certain percentage of cash received by King
and its subsidiaries in excess of cash paid out during the same period by King
and its subsidiaries.
The loans under the senior credit facility bear interest, at King's option,
at either
(1) the base rate (which is based on the prime rate most recently
announced by Credit Suisse First Boston or the federal funds rate plus
one-half of 1%) plus (A) in the case of the tranche A term loan and
borrowings under the revolving credit facility, an applicable spread
ranging from 1.25% to 2.25% (based on a leverage ratio) and (B) in the case
of the tranche B term loan, 2.75%, or
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(2) the applicable London interbank rate plus (A) in the case of the
tranche A term loan and borrowings under the revolving credit facility, an
applicable spread ranging from 2.25% to 3.25% (based on a leverage ratio)
and (B) in the case of the tranche B term loan, 3.75%.
Following the occurrence and during the continuance of an event of default under
the Credit Agreement, the loans bear interest (A) in the case of overdue
principal, at the rate otherwise applicable to such loan plus 2.00% and (B) in
all other cases, at the base rate plus 2.00%. In addition, the lenders under the
senior credit facility are entitled to customary facility fees based on (A)
unused commitments under the revolving credit facility and (B) letters of credit
outstanding.
King's obligations under the senior credit facility are unconditionally
guaranteed on a senior basis by each direct and indirect majority owned U.S.
subsidiary of King and are also secured by (A) a pledge by King and the
subsidiaries of all of the outstanding capital stock of each U.S. subsidiary and
65% of the outstanding capital stock of any foreign subsidiary and (B) a
perfected first priority security interest in substantially all of the real and
personal property of King and the subsidiaries.
The Credit Agreement contains a number of covenants that, among other
things, restrict the ability of King and its subsidiaries to dispose of assets,
incur additional indebtedness or guaranty obligations, repurchase or redeem
capital stock or repay subordinated indebtedness (including the notes) except in
accordance with the subordination provisions, pay dividends or make capital
distributions, enter into agreements which restrict the payment of dividends or
capital distributions, create liens on assets, enter into sale and leaseback
transactions, make investments, make acquisitions, engage in mergers or
consolidations, make capital expenditures, engage in certain transactions with
affiliates, make loans, change its fiscal year, change its business and
otherwise restrict corporate activities.
In addition, the Credit Agreement requires compliance with certain
financial covenants, including requiring King and its subsidiaries to maintain a
maximum ratio of indebtedness to operating cash flow, a minimum ratio of
operating cash flow to fixed charges, a minimum ratio of operating cash flow to
interest expense and a minimum level of net worth.
The Credit Agreement contains customary events of default, including the
failure to pay principal when due or any interest or other amount that becomes
due within three days after the due date thereof, any representation or warranty
being made by King that is incorrect in any material respect on or as of the
date made, a default in the performance of any negative covenants or a default
in the performance of certain other covenants or agreements which remains
unremedied for a period of 30 days, default in certain other indebtedness,
certain insolvency events, certain material judgments which remain undischarged
for a period of 30 days, certain ERISA events, actual or asserted invalidity of
the guarantees of, and the security interests securing, the obligations under
the Credit Agreement and certain change of control events. In addition, a
default under the indenture will result in a default under the Credit Agreement.
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DESCRIPTION OF THE NOTES
You can find the definition of some of the terms used in this description
under the subheading "Definitions" beginning on page .
King will issue the notes under an indenture, dated March 3, 1999, between
King and Union Planters Bank, N.A., as trustee. The terms of the notes include
those stated in the indenture and those made part of the indenture by reference
to the Trust Indenture Act of 1939.
In this description, the word "King" refers only to King Pharmaceuticals,
Inc. and not to any of its subsidiaries.
The following description is a summary of the material provisions of the
indenture, the notes and the registration rights agreement. We urge you to read
the indenture, the notes and the registration rights agreement because they, and
not this description, define your rights as holders of these notes. You may
request copies of these agreements and notes at our address set forth under the
caption "Available Information."
The notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
shall be made for any registration of transfer or exchange of notes, but King
may require payment of a sum sufficient to cover any transfer tax or other
similar governmental charge payable in connection with a registration of
transfer or exchange of notes.
BRIEF DESCRIPTION OF THE NOTES
These notes:
- are unsecured senior subordinated obligations of King;
- are subordinated in right of payment to all existing and future Senior
Indebtedness of King; and
- are senior in right of payment to any future Subordinated Obligations
of King.
PRINCIPAL, MATURITY AND INTEREST
King will issue the notes with a maximum principal amount of $150 million,
in denominations of $1,000 and any integral multiple of $1,000. The notes mature
on February 15, 2009.
Interest on the notes will accrue at the rate of 10 3/4% per annum and will
be payable semiannually in arrears on February 15 and August 15, commencing on
August 15, 1999. We will pay interest on overdue principal at 1% per annum in
excess of this rate and will pay interest on overdue installments of interest at
the higher rate to the extent lawful. Each interest payment will be made to
Holders of record as of the immediately preceding payment date (August 1 or
February 1).
Interest on the notes will accrue from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
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OPTIONAL REDEMPTION
Except as set forth below we will not be entitled to redeem the notes at
our option prior to February 15, 2004.
On or after February 15, 2004, we will be entitled at our option to redeem
all or a portion of these notes upon not less than 30 nor more than 60 days'
prior notice. This redemption may be made at the following redemption prices
(expressed in percentages of principal amount on the redemption date), plus
accrued and unpaid interest to the redemption date, if redeemed during the
12-month period commencing on February 15 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- ------ ----------
<S> <C>
2004........................................................ 105.375%
2005........................................................ 103.583
2006........................................................ 101.792
2007 and thereafter......................................... 100.000
</TABLE>
The redemption prices described above are subject, however, to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date.
In addition, prior to February 15, 2002, we may at our option on one or
more occasions redeem up to 35% of the original aggregate principal amount of
the notes with the net cash proceeds of one or more Public Equity Offerings.
This redemption may be made at a redemption price (expressed as a percentage of
principal amount on the redemption date) of 110 3/4% plus accrued and unpaid
interest to the redemption date (subject to the right of Holders of record on
the relevant record date to receive interest due on the relevant interest
payment date); provided, however, that
(1) at least $97.5 million of the original aggregate principal amount
of the notes must remain outstanding immediately after the occurrence of
each such redemption (other than notes held, directly or indirectly, by
King or its Affiliates); and
(2) such redemption shall occur within 60 days after the date of the
related Public Equity Offering.
SELECTION AND NOTICE OF REDEMPTION
If we are redeeming less than all the notes at any time, the trustee will
select notes on a pro rata basis, by lot or by such other method as the trustee
in its sole discretion shall deem to be fair and appropriate.
We will redeem notes of $1,000 or less in whole and not in part. We will
cause notices of redemption to be mailed by first-class mail at least 30 but not
more than 60 days before the redemption date to each Holder of notes to be
redeemed at its registered address.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note shall state the portion of the principal amount thereof to
be redeemed. We will issue a new note in principal amount equal to the
unredeemed portion of the original note in the name of the holder thereof upon
cancelation of the original note. Notes called for
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redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on notes or portions of them called
for redemption.
MANDATORY REDEMPTION; OFFERS TO PURCHASE; OPEN MARKET PURCHASES
We are not required to make any mandatory redemption or sinking fund
payments with respect to the notes. However, under some circumstances, we may be
required to offer to purchase the notes as described under the captions
"-- Change of Control" and "-- Covenants -- Limitation on Sales of Assets and
Subsidiary Stock." We may at any time and from time to time purchase notes in
the open market or otherwise.
GUARANTIES
The Subsidiary Guarantors will jointly and severally guarantee, on a senior
subordinated basis, our obligations under the notes. The obligations of each
Subsidiary Guarantor under its Subsidiary Guaranty will be limited as necessary
to prevent that Subsidiary Guaranty from constituting a fraudulent conveyance
under applicable law.
Each Subsidiary Guarantor that makes a payment under its Subsidiary
Guaranty will be entitled to a contribution from each other Subsidiary Guarantor
in an amount equal to the other Subsidiary Guarantor's pro rata portion of the
payment. Each Subsidiary Guarantor's pro rata portion of the payment shall be
based on the respective net assets of all the Subsidiary Guarantors at the time
of such payment, determined in accordance with GAAP.
If a Subsidiary Guaranty were rendered voidable, it could be subordinated
by a court to all other indebtedness (including guarantees and other contingent
liabilities) of the applicable Subsidiary Guarantor, and, depending on the
amount of the indebtedness, a Subsidiary Guarantor's liability on its Subsidiary
Guaranty could be reduced to zero.
The Subsidiary Guaranty of a Subsidiary Guarantor will be released:
(1) upon the sale or other disposition (including by way of
consolidation or merger) of a Subsidiary Guarantor permitted by the
indenture; or
(2) the sale or disposition of all or substantially all the assets of
a Subsidiary Guarantor;
in each case other than to King or an Affiliate of King and as permitted by the
indenture.
RANKING
SENIOR INDEBTEDNESS VERSUS NOTES
The payment of the principal of, premium, if any, and interest on the notes
and the payment of any Subsidiary Guaranty will be subordinate in right of
payment to the prior payment in full in cash of all Senior Indebtedness of King
or the relevant Subsidiary Guarantor, as the case may be, including the
obligations of King and the Subsidiary Guarantor under the Credit Agreement.
As of December 31, 1998, after giving pro forma effect to the issuance of
the notes,
(1) the Senior Indebtedness of King would have been approximately
$381.9 million, including $376.8 million of secured indebtedness; and
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(2) the Senior Indebtedness of the Subsidiary Guarantors would have
been approximately $381.9 million. Virtually all of the Senior Indebtedness
of the Subsidiary Guarantors comprises their respective guaranties of
Senior Indebtedness of King under the Credit Agreement.
Although the indenture limits the amount of additional Indebtedness that
King and the Subsidiary Guarantors may incur, under certain circumstances the
amount of that Indebtedness could be substantial. In any case, that Indebtedness
may be Senior Indebtedness. See "-- Covenants -- Limitation on Indebtedness."
LIABILITIES OF SUBSIDIARIES VERSUS NOTES
A portion of our operations are conducted through our subsidiaries. Claims
of creditors of our subsidiaries, -- including trade creditors, secured
creditors and creditors holding indebtedness and guaranties issued by our
subsidiaries, and claims of preferred stockholders (if any) of our
subsidiaries -- generally will have priority with respect to the assets and
earnings of our subsidiaries over the claims of our creditors, including holders
of the notes. Accordingly, the notes and each Subsidiary Guaranty will be
effectively subordinated to creditors (including trade creditors) and preferred
stockholders (if any) of our subsidiaries (other than the Subsidiary
Guarantors).
Although the indenture limits the incurrence of Indebtedness and preferred
stock of certain of our subsidiaries, this limitation is subject to a number of
significant qualifications. Moreover, the indenture does not impose any
limitation on the incurrence by our subsidiaries of liabilities that are not
considered Indebtedness under the indenture. See "-- Covenants -- Limitation on
Indebtedness."
OTHER SENIOR SUBORDINATED INDEBTEDNESS VERSUS NOTES
Only Indebtedness of King or a Subsidiary Guarantor that is Senior
Indebtedness will rank senior to the notes and the relevant Subsidiary Guaranty,
in accordance with the provisions of the indenture. The notes and each
Subsidiary Guaranty will in all respects rank pari passu with all other Senior
Subordinated Indebtedness of King and the relevant Subsidiary Guarantor,
respectively.
We have agreed in the indenture that we will not Incur, directly or
indirectly, any Indebtedness that is contractually subordinate or junior in
right of payment to our Senior Indebtedness, unless that Indebtedness is Senior
Subordinated Indebtedness or is expressly subordinated in right of payment to
Senior Subordinated Indebtedness. The indenture does not treat unsecured
Indebtedness as subordinated or junior to Secured Indebtedness merely because it
is unsecured.
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PAYMENT OF NOTES
We are not permitted to pay principal of, or premium (if any) or interest
on, the notes or make any deposit pursuant to the provisions described under the
caption "-- Defeasance" below and may not repurchase, redeem or otherwise retire
any notes if
(1) any Designated Senior Indebtedness is not paid when due; or
(2) any other default on Designated Senior Indebtedness occurs and the
maturity of that Designated Senior Indebtedness is accelerated in
accordance with its terms;
unless, in either case, the default has been cured or waived and any
acceleration has been rescinded or the Designated Senior Indebtedness has been
paid in full. Regardless of the foregoing, we are permitted to pay the notes if
we and the trustee receive written notice approving the payment from the
Representative of the Designated Senior Indebtedness with respect to which
either of the events set forth in clause (1) or (2) above has occurred and is
continuing.
During any default (other than a default described in clause (1) or (2)
above) under any Designated Senior Indebtedness pursuant to which its maturity
may be accelerated without further notice (except notice as may be required to
effect the acceleration) or the expiration of any applicable grace periods, we
are not permitted to pay the notes for a period, called the "Payment Blockage
Period," commencing upon the receipt by the Trustee (with a copy to us) of
written notice, called the "Blockage Notice," of the default from the
Representative of the holders of the Designated Senior Indebtedness specifying
an election to effect a Payment Blockage Period and ending 179 days thereafter.
The Payment Blockage Period will end earlier if the Payment Blockage Period is
terminated:
(1) by written notice to the trustee and King from the Person or Persons
who gave the Blockage Notice;
(2) because the default giving rise to the Blockage Notice is no longer
continuing; or
(3) because the Designated Senior Indebtedness has been repaid in full.
Notwithstanding the provisions described above (but subject to the
provisions described in clauses (1) and (2) of the second preceding paragraph),
unless the holders of Designated Senior Indebtedness or the Representative of
these holders have accelerated the maturity of the Designated Senior
Indebtedness, we are permitted to resume paying the notes after the end of the
Payment Blockage Period.
The notes shall not be subject to more than one Payment Blockage Period in
any consecutive 365-day period. However, if any Blockage Notice within a 365-day
period is given by or on behalf of any holders of Designated Senior Indebtedness
(other than the agent under the Credit Agreement), the Administrative Agent (as
defined therein) under the Credit Agreement may give another Blockage Notice
within this period; but in no event may the total number of days during which
any Payment Blockage Period or Periods is in effect exceed 179 days in the
aggregate during any consecutive 365-day period.
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Upon any payment or distribution of the assets of King upon a total or
partial liquidation or dissolution or reorganization of or similar proceeding
relating to King or its property:
(1) the holders of Senior Indebtedness will be entitled to receive
payment in full in cash before the Noteholders are entitled to receive any
payment;
(2) until the Senior Indebtedness is paid in full in cash, any payment
or distribution to which Noteholders would be entitled but for the
subordination provisions of the Indenture will be made to holders of the
Senior Indebtedness as their interests may appear, except that Noteholders
may receive certain Capital Stock and subordinated debt obligations; and
(3) if a distribution is made to Noteholders that, due to the
subordination provisions, should not have been made to them, such
Noteholders are required to hold it in trust for the holders of Senior
Indebtedness and pay it over to them as their interests may appear.
If payment of the notes is accelerated because of an Event of Default, King
or the Trustee shall promptly notify the holders of Designated Senior
Indebtedness or the Representative of those holders of the acceleration. If any
Designated Senior Indebtedness is outstanding, neither King nor any Subsidiary
Guarantor may pay the notes until five Business Days after the Representatives
of all the issues of Designated Senior Indebtedness receive notice of the
acceleration and, thereafter, may pay the notes only if the indenture otherwise
permits payment at that time.
The obligations of a Subsidiary Guarantor under its Subsidiary Guaranty are
unsecured senior subordinated obligations. As such, the rights of Noteholders to
receive payment by a Subsidiary Guarantor pursuant to its Subsidiary Guaranty
will be subordinated in right of payment to the rights of holders of Senior
Indebtedness of the Subsidiary Guarantor. The terms of the subordination
provisions described above with respect to King's obligations under the notes
apply equally to a Subsidiary Guarantor and the obligations of that Subsidiary
Guarantor under its Subsidiary Guaranty.
By reason of the subordination provisions contained in the indenture, in
the event of a liquidation or insolvency proceeding, creditors of King or a
Subsidiary Guarantor who are holders of Senior Indebtedness of King or a
Subsidiary Guarantor, as the case may be, may recover more, ratably, than the
Noteholders, and creditors of King or a Subsidiary Guarantor who are not holders
of Senior Indebtedness may recover less, ratably, than holders of Senior
Indebtedness and may recover more, ratably, than the Holders of the notes.
The terms of the subordination provisions described above will not apply to
payments from money or the proceeds of U.S. Government Obligations held in trust
by the trustee for the payment of principal of and interest on the notes
pursuant to the provisions described under "-- Defeasance."
BOOK-ENTRY, DELIVERY AND FORM
We will issue the notes in the form of one or more global notes. The global
note will be deposited with, or on behalf of, the Depository and registered in
the name of the Depository or its nominee. Except as set forth below, the global
note may be transferred, in whole and not in part, only to the Depository or
another nominee of the Depository.
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You may hold your beneficial interests in the global note directly through the
Depository if you have an account with the Depository or indirectly through
organizations which have accounts with the Depository.
Upon the transfer of a note in definitive form, the note will, unless the
global note has previously been exchanged for notes in definitive form, be
exchanged for an interest in the global note representing the principal amount
of notes being transferred.
The Depository has advised King as follows: the Depository is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and "a clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depository was created to hold securities of institutions that have accounts
with the Depository known as "participants" and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depository's participants include securities brokers and dealers banks, trust
companies, clearing corporations and certain other organizations. Access to the
Depository's book-entry system is also available to "indirect participants" such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, whether directly or indirectly.
We expect that pursuant to procedures established by the Depository, upon
the deposit of the global note with the Depository, the Depository will credit,
on its book-entry registration and transfer system, the principal amount of
notes represented by the global note to the accounts of participants. Ownership
of beneficial interests in the global note will be limited to participants or
persons that may hold interests through participants. Ownership of beneficial
interests in the global note will be shown on, and the transfer of those
ownership interests will be effected only through, records maintained by the
Depository (with respect to participants' interest), the participants and the
indirect participants (with respect to the owners of beneficial interests in the
global note other than participants). The laws of some jurisdictions may require
that certain purchasers of securities take physical delivery of such securities
in definitive form. These limits and laws may impair the ability to transfer or
pledge beneficial interests in the global note.
So long as the Depository, or its nominee, is the registered holder and
owner of the global note, the Depository or its nominee, as the case may be,
will be considered the sole legal owner and holder of the related notes for all
purposes of the notes and the indenture. Except as set forth below, as an owner
of a beneficial interest in the global note, you will not be entitled to have
the notes represented by the global note registered in your name, will not
receive or be entitled to receive physical delivery of certificated notes and
will not be considered to be the owners or holders of any notes under the global
note. We understand that under existing industry practice, in the event an owner
of a beneficial interest in the global note desires to take any action that the
Depository, as the holder of the global note, is entitled to take, the
Depository would authorize the participants to take that action, and that the
participants would authorize beneficial owners owning through the participants
to take such action or would otherwise act upon the instructions of beneficial
owners owning through them.
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Payment of principal of and interest on notes represented by the global
note registered in the name of and held by the Depository or its nominee will be
made to the Depository or its nominee, as the case may be, as the registered
owner and holder of the global note.
We expect that the Depository or its nominee, upon receipt of any payment
of principal of, premium, if any, or interest on the global note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the global note as
shown on the records of the Depository or its nominee. We also expect that
payments by participants or indirect participants to owners of beneficial
interests in the global note held through the participants or indirect
participants will be governed by standing instructions and customary practices
and will be the responsibility of the participants or indirect participants. We
will not have any responsibility or liability for any aspect of the records
relating to, or payments made on account of, beneficial ownership interests in
the global note for any note or for maintaining, supervising or reviewing any
records relating to beneficial ownership interests or for any other aspect of
the relationship between the Depository and its participants or indirect
participants or the relationship between the participants or indirect
participants and the owners of beneficial interests in the global note owning
through the participants.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the global note among participants of the
Depository, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
trustee nor King will have any responsibility for the performance by the
Depository or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
CERTIFICATED NOTES
Subject to certain conditions, the notes represented by the global note are
exchangeable for certificated notes in definitive form of like tenor in
denominations of U.S. $1,000 and integral multiples thereof if:
(1) the Depository notifies King that it is unwilling or unable to
continue as Depository for the global note and we are unable to locate a
qualified successor within 90 days, or if at any time the Depository ceases
to be a clearing agency registered under the Exchange Act;
(2) we in our discretion at any time determine not to have all of the
notes represented by the global note; or
(3) an Event of Default has occurred and is continuing.
Any note that is exchangeable pursuant to the above is exchangeable for
certificated notes issuable in authorized denominations and registered in the
names as the Depository shall direct. Subject to the foregoing, the global note
is not exchangeable, except for a global note of the same aggregate denomination
to be registered in the name of the Depository or its nominee.
SAME-DAY PAYMENT
The indenture requires us to make payments in respect of notes (including
principal, premium and interest) by wire transfer of immediately available funds
to the accounts
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specified by the holders thereof or, if no such account is specified, by mailing
a check to each such holder's registered address.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder shall have the right to require us to repurchase the
Holder's notes at a purchase price in cash equal to 101% of the principal amount
thereof on the date of purchase plus accrued and unpaid interest, if any, to the
date of purchase (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date):
(1) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more Permitted Holders (or The United
Company, a Virginia corporation; provided, however, that any such capital
stock ownership by The United Company shall not result in The United
Company or any group of which The United Company is a member, directly or
indirectly, Controlling King), is or becomes the beneficial owner (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that for
purposes of this clause (1) such person shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 35% of the total voting power
of the Voting Stock of King; provided, however, that the Permitted Holders
beneficially own (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act), directly or indirectly, in the aggregate a lesser percentage of the
total voting power of the Voting Stock of King than such other person and
do not have the right or ability by voting power, contract or otherwise to
elect or designate for election a majority of the Board of Directors (for
the purposes of this clause (1), (x) the Permitted Holders shall be deemed
to beneficially own any Voting Stock of a corporation, called the
"specified corporation", held by any other corporation, called the "parent
corporation", so long as the Permitted Holders beneficially own (as defined
in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly,
in the aggregate a majority of the voting power of the Voting Stock of the
parent corporation and (y) such other person shall be deemed to
beneficially own any Voting Stock of a specified corporation held by a
parent corporation, if such other person is the beneficial owner (as
defined in this clause (1)), directly or indirectly, of more than 35% of
the voting power of the Voting Stock of such parent corporation and the
Permitted Holders beneficially own (as defined in Rules 13d-3 and 13d-5
under the Exchange Act), directly or indirectly, in the aggregate a lesser
percentage of the voting power of the Voting Stock of such parent
corporation and do not have the right or ability by voting power, contract
or otherwise to elect or designate for election a majority of the board of
directors of such parent corporation);
(2) individuals who on the Issue Date constituted the Board of
Directors (together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders of King was
approved by a vote of 66 2/3% of the directors of King then still in office
who were either directors on the Issue Date or whose election or nomination
for election was previously so approved) cease for any reason to constitute
a majority of the Board of Directors then in office;
(3) the adoption of a plan relating to the liquidation or dissolution
of King; or
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(4) the merger or consolidation of King with or into another Person or
the merger of another Person with or into King, or the sale of all or
substantially all the assets of King to another Person (other than a Person
that is controlled by the Permitted Holders), and, in the case of any
merger or consolidation, the securities of King that are outstanding
immediately prior to the transaction and which represent 100% of the
aggregate voting power of the Voting Stock of King are changed into or
exchanged for cash, securities or property, unless pursuant to the
transaction the securities are changed into or exchanged for, in addition
to any other consideration, securities of the surviving Person that
represent immediately after the transaction, at least a majority of the
aggregate voting power of the Voting Stock of the surviving Person.
Within 30 days following any Change of Control, we will mail a notice to
each Holder with a copy to the trustee (the "Change of Control Offer") stating:
(1) that a Change of Control has occurred and that the Holder has the
right to require King to purchase the Holder's notes at a purchase price in
cash equal to 101% of the principal amount thereof on the date of purchase,
plus accrued and unpaid interest, if any, to the date of purchase (subject
to the right of holders of record on the relevant record date to receive
interest on the relevant interest payment date);
(2) the circumstances and relevant facts regarding the Change of
Control (including information with respect to pro forma historical income,
cash flow and capitalization after giving effect to the Change of Control);
(3) the repurchase date (which shall be no earlier than 30 days nor
later than 60 days from the date the notice is mailed); and
(4) the instructions that a Holder must follow in order to have its
notes purchased.
We will not be required to make a Change of Control Offer following a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the indenture applicable to a Change of Control Offer made by King and
purchases all notes validly tendered and not withdrawn under the Change of
Control Offer.
We will comply, to the extent applicable, with the requirements of Section
14(e) of the Exchange Act and any other securities laws or regulations in
connection with the repurchase of notes as a result of a Change of Control. To
the extent that the provisions of any securities laws or regulations conflict
with the provisions of this covenant, we will comply with the applicable
securities laws and regulations and shall not be deemed to have breached our
obligations under this covenant.
The Change of Control purchase feature of the notes may in certain
circumstances make more difficult or discourage a sale or takeover of King and,
thus, the removal of incumbent management. The Change of Control purchase
feature was a result of negotiations between King and the initial purchasers of
the notes. We have no present intention to engage in a transaction involving a
Change of Control, although it is possible that we would decide to do so in the
future. Subject to the limitations discussed below, we could, in the future,
enter into certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise
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affect our capital structure or credit ratings. Restrictions on our ability to
Incur additional Indebtedness are contained in the covenants described under
"-- Covenants -- Limitation on Indebtedness." These restrictions can only be
waived with the consent of the holders of a majority in principal amount of the
notes then outstanding. Except for the limitations contained in the covenants,
however, the indenture will not contain any covenants or provisions that may
afford holders of the notes protection in the event of a highly leveraged
transaction.
The Credit Agreement prohibits us from purchasing any notes prior to
December 22, 2006, and also provides that the occurrence of some change of
control events with respect to King would constitute a default under the Credit
Agreement. In the event a Change of Control occurs at a time when we are
prohibited from purchasing notes, we may seek the consent of our lenders to the
purchase of notes or may attempt to refinance the borrowings that contain such
prohibition. If we do not obtain such a consent or repay borrowings, we will
remain prohibited from purchasing notes. In that case, our failure to purchase
tendered notes would constitute an Event of Default under the indenture which
would, in turn, constitute a default under the Credit Agreement. In that
circumstance, the subordination provisions in the indenture would likely
restrict payment to the Holders of notes.
Future indebtedness that we may incur may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require this indebtedness to be repurchased upon a Change of Control. Moreover,
the exercise by the holders of their right to require us to repurchase the notes
could cause a default under this indebtedness, even if the Change of Control
itself does not, due to the financial effect of the repurchase on King. Finally,
our ability to pay cash to the holders of notes following the occurrence of a
Change of Control may be limited by King's then existing financial resources.
There can be no assurance that sufficient funds will be available when necessary
for us to make any required repurchases.
The provisions under the indenture relative to our obligation to make an
offer to repurchase the notes as a result of a Change of Control may be waived
or modified with the written consent of the holders of a majority in principal
amount of the notes.
COVENANTS
The indenture contains covenants including, among others, the following:
LIMITATION ON INDEBTEDNESS
(a) King will not, and will not permit any Restricted Subsidiary to, Incur,
directly or indirectly, any Indebtedness; provided, however, that King and its
Restricted Subsidiaries may Incur Indebtedness if, on the date of that
Incurrence and after giving effect thereto, the Consolidated Coverage Ratio
exceeds 2.0 to 1 if the Indebtedness is Incurred prior to February 15, 2002, or
2.25 to 1 if the Indebtedness is Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), King and the Restricted
Subsidiaries may Incur any or all of the following Indebtedness:
(1) Indebtedness Incurred pursuant to the Credit Agreement; provided,
however, that, after giving effect to any Incurrence, the aggregate
principal amount of Indebtedness then outstanding does not exceed (i) the
sum of $425 million plus the
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greater of (x) $75 million and (y) the sum of (A) 50% of the book value of
the inventory of King and its Restricted Subsidiaries and (B) 85% of the
book value of the accounts receivable of King and its Restricted
Subsidiaries less (ii) the sum of all principal payments with respect to
Indebtedness pursuant to the covenant described under "-- Limitation on
Sales of Assets and Subsidiary Stock;"
(2) Indebtedness owed to and held by King or a Wholly Owned
Subsidiary; provided, however, that (i) any subsequent issuance or transfer
of any Capital Stock which results in any Wholly Owned Subsidiary ceasing
to be a Wholly Owned Subsidiary or any subsequent transfer of the
Indebtedness (other than to King or a Wholly Owned Subsidiary) shall be
deemed, in each case, to constitute the Incurrence of the Indebtedness by
the obligor thereon and (ii) if King is the obligor on the Indebtedness,
the Indebtedness is expressly subordinated to the prior payment in full in
cash of all obligations with respect to the notes;
(3) the notes;
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of this covenant);
(5) Indebtedness of a Restricted Subsidiary Incurred and outstanding
on or prior to the date on which the Restricted Subsidiary was acquired by
King (other than Indebtedness Incurred in connection with, or to provide
all or any portion of the funds or credit support utilized to consummate,
the transaction or series of related transactions pursuant to which the
Restricted Subsidiary became a Subsidiary or was acquired by King);
provided, however, that on the date of the acquisition and after giving
effect thereto, King would have been able to Incur at least $1.00 of
additional Indebtedness pursuant to paragraph (a) of this covenant;
(6) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (3), (4) or (5) or this
clause (6); provided, however, that to the extent the Refinancing
Indebtedness directly or indirectly Refinances Indebtedness of a Subsidiary
Incurred pursuant to clause (5), the Refinancing Indebtedness shall be
Incurred only by the Subsidiary;
(7) Hedging Obligations consisting of Interest Rate Agreements
directly related to Indebtedness permitted to be Incurred by King pursuant
to the Indenture;
(8) any Guarantee by a Subsidiary Guarantor of any Indebtedness
permitted to be Incurred by King or any Restricted Subsidiary pursuant to
this covenant; and
(9) Indebtedness of King in an aggregate principal amount which,
together with all other Indebtedness of King and the Restricted
Subsidiaries outstanding on the date the Incurrence (other than
Indebtedness permitted by clauses (1) through (8) above or paragraph (a))
does not exceed $25.0 million.
(c) Notwithstanding the foregoing, King shall not Incur any Indebtedness
pursuant to the foregoing paragraph (b) if the proceeds thereof are used,
directly or indirectly, to Refinance any Subordinated Obligations unless the
Indebtedness shall be subordinated to the notes to at least the same extent as
the Subordinated Obligations.
(d) For purposes of determining compliance with the foregoing covenant, (1)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, King, in its sole discretion, will
classify such item of
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Indebtedness and only be required to include the amount and type of such
Indebtedness in one of the above clauses and (2) an item of Indebtedness may be
divided and classified in more than one of the types of Indebtedness described
above.
(e) Notwithstanding paragraphs (a) and (b) above, neither King nor any
Restricted Subsidiary shall Incur (i) any Indebtedness if the Indebtedness is
subordinate or junior in ranking in any respect to any Senior Indebtedness of
such Person unless the Indebtedness is Senior Subordinated Indebtedness of the
Person or is expressly subordinated in right of payment to Senior Subordinated
Indebtedness of the Person or (ii) any Secured Indebtedness that is not Senior
Indebtedness of the Person unless effective provision is made contemporaneously
to secure the notes or the Subsidiary Guaranty of the Person, as the case may
be, equally and ratably with such Secured Indebtedness for so long as the
Secured Indebtedness is secured by a Lien.
LIMITATION ON RESTRICTED PAYMENTS
(a) King will not, and will not permit any Restricted Subsidiary, directly
or indirectly, to make a Restricted Payment if at the time King or a Restricted
Subsidiary makes a Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) King is not able to Incur an additional $1.00 of Indebtedness
pursuant to paragraph (a) of the covenant described under "-- Limitation on
Indebtedness;" or
(3) the aggregate amount of the Restricted Payment and all other
Restricted Payments since the Issue Date would exceed the sum of (without
duplication):
(A) 50% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from the beginning of the fiscal
quarter immediately following the fiscal quarter during which the notes
are originally issued to the end of the most recent fiscal quarter
ending at least 45 days prior to the date of the Restricted Payment (or,
in case the Consolidated Net Income shall be a deficit, minus 100% of
the deficit); plus
(B) the aggregate Net Cash Proceeds received by King from the
issuance or sale of its Capital Stock (other than Disqualified Stock)
subsequent to the Issue Date (other than an issuance or sale to a
Subsidiary of King and other than an issuance or sale to an employee
stock ownership plan or to a trust established by King or any of its
Subsidiaries for the benefit of their employees); plus
(C) the amount by which Indebtedness of King is reduced on King's
balance sheet upon the conversion or exchange (other than by a
Subsidiary of King) subsequent to the Issue Date of any Indebtedness of
King convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of King (less the amount of any cash, or the fair
value of any other property, distributed by King upon the conversion or
exchange); plus
(D) an amount equal to the sum of (i) the net reduction in
Investments in Unrestricted Subsidiaries resulting from dividends,
repayments of loans or advances or other transfers of assets, in each
case to King or any Restricted Subsidiary from Unrestricted
Subsidiaries, and (ii) the portion (proportionate to King's equity
interest in the Subsidiary) of the fair market value of the net assets
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of an Unrestricted Subsidiary at the time an Unrestricted Subsidiary is
designated a Restricted Subsidiary; provided, however, that the
foregoing sum shall not exceed, in the case of any Unrestricted
Subsidiary, the amount of Investments previously made (and treated as a
Restricted Payment) by King or any Restricted Subsidiary in the
Unrestricted Subsidiary; plus
(E) $5.0 million.
(b) The preceding provisions will not prohibit:
(1) any Restricted Payment (other than a Restricted Payment described
in clause (1) of the definition of "Restricted Payment") made out of the
Net Cash Proceeds of the substantially concurrent sale of, or made by
exchange for, Capital Stock of King (other than Disqualified Stock and
other than Capital Stock issued or sold to a Subsidiary of King or an
employee stock ownership plan or to a trust established by King or any of
its Subsidiaries for the benefit of their employees); provided, however,
that (A) the Restricted Payment shall be excluded in the calculation of the
amount of Restricted Payments and (B) the Net Cash Proceeds from the sale
shall be excluded from the calculation of amounts under clause (3)(B) of
paragraph (a) above;
(2) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made by
exchange for, or out of the proceeds of the substantially concurrent sale
of, Indebtedness of King which is permitted to be Incurred pursuant to
paragraph (b)(6) of the covenant described under "-- Limitation on
Indebtedness;" provided, however, that the purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value shall
be excluded in the calculation of the amount of Restricted Payments;
(3) dividends paid within 60 days after the date of declaration
thereof if at the date of declaration the dividend would have complied with
this covenant; provided, however, that at the time of payment of the
dividend, no other Default shall have occurred and be continuing (or result
therefrom); provided further, however, that the dividend shall be included
in the calculation of the amount of Restricted Payments; or
(4) the repurchase or other acquisition of shares of, or options to
purchase shares of, common stock of King or any of its Subsidiaries from
employees, former employees, directors or former directors of King or any
of its Subsidiaries (or permitted transferees of such employees, former
employees, directors or former directors), pursuant to the terms of the
agreements (including employment agreements) or plans (or amendments
thereto) approved by the Board of Directors under which the individuals
purchase or sell or are granted the option to purchase or sell, shares of
the common stock; provided, however, that the aggregate amount of the
repurchases and other acquisitions shall not exceed $1.0 million in any
calendar year; provided further, however, that the repurchases and other
acquisitions shall be excluded in the calculation of the amount of
Restricted Payments.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES
King will not, and will not permit any Restricted Subsidiary to, create or
otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to (a)
pay dividends or make any other distributions on its Capital Stock to King or
any other Restricted Subsidiary or pay any
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Indebtedness owed to King or any other Restricted Subsidiary, (b) make any loans
or advances to King or any other Restricted Subsidiary or (c) transfer any of
its property or assets to King or any other Restricted Subsidiary, except:
(1) any encumbrance or restriction pursuant to an agreement in effect
at or entered into on the Issue Date, including the Credit Agreement;
(2) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness Incurred
by the Restricted Subsidiary on or prior to the date on which the
Restricted Subsidiary was acquired by King (other than Indebtedness
Incurred as consideration in, or to provide all or any portion of the funds
or credit support utilized to consummate, the transaction or series of
related transactions pursuant to which the Restricted Subsidiary became a
Restricted Subsidiary or was acquired by King) and outstanding on that
date;
(3) any encumbrance or restriction pursuant to an agreement effecting
a Refinancing of Indebtedness Incurred pursuant to an agreement referred to
in clause (1) or (2) of this covenant or this clause (3) or contained in
any amendment to an agreement referred to in clause (1) or (2) of this
covenant or this clause (3); provided, however, that the encumbrances and
restrictions with respect to the Restricted Subsidiary contained in any
refinancing agreement or amendment are no less favorable to the Noteholders
than encumbrances and restrictions with respect to the Restricted
Subsidiary contained in such predecessor agreements;
(4) any encumbrance or restriction consisting of customary
nonassignment provisions in leases governing leasehold interests to the
extent the provisions restrict the transfer of the lease or the property
leased thereunder;
(5) in the case of clause (c) above, restrictions contained in
security agreements or mortgages securing Indebtedness of a Restricted
Subsidiary to the extent these restrictions restrict the transfer of the
property subject to security agreements or mortgages; and
(6) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all or
substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of the sale or disposition.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK
(a) King will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, consummate any Asset Disposition unless:
(1) King or the Restricted Subsidiary receives consideration at the
time of such Asset Disposition at least equal to the fair market value
(including as to the value of all noncash consideration), as determined in
good faith by the Board of Directors, of the shares and assets subject to
the Asset Disposition;
(2) at least 85% of the consideration thereof received by King or the
Restricted Subsidiary is in the form of cash or cash equivalents; and
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(3) an amount equal to 100% of the Net Available Cash from the Asset
Disposition is applied by King (or the Restricted Subsidiary, as the case
may be)
(A) first, to the extent King elects (or is required by the terms
of any Indebtedness), to prepay, repay, redeem or purchase Senior
Indebtedness or Indebtedness (other than any Disqualified Stock) of a
Wholly Owned Subsidiary (in each case other than Indebtedness owed to
King or an Affiliate of King) within one year from the later of the date
of the Asset Disposition or the receipt of the Net Available Cash;
(B) second, to the extent of the balance of the Net Available Cash
after application in accordance with clause (A), to the extent King
elects, to acquire Additional Assets within one year from the later of
the date of the Asset Disposition or the receipt of the Net Available
Cash;
(C) third, to the extent of the balance of Net Available Cash after
application in accordance with clauses (A) and (B), to make an offer to
the holders of the notes (and to holders of other Senior Subordinated
Indebtedness designated by the Company) to purchase notes (and other
Senior Subordinated Indebtedness) pursuant to and subject to the
conditions contained in the indenture; and
(D) fourth, to the extent of the balance of Net Available Cash
after application in accordance with clauses (A), (B) and (C) to (x) the
acquisition by King or any Wholly Owned Subsidiary of Additional Assets
or (y) the prepayment, repayment or purchase of Indebtedness (other than
any Disqualified Stock) of King (other than Indebtedness owed to an
Affiliate of King) or Indebtedness of any Subsidiary (other than
Indebtedness owed to King or an Affiliate of King), in each case within
one year from the later of the receipt of Net Available Cash and the
date the offer described in paragraph (b) below is consummated;
provided, however, that in connection with any prepayment, repayment or purchase
of Indebtedness pursuant to clause (A), (C) or (D) above, King or the Restricted
Subsidiary shall permanently retire the Indebtedness and shall cause the related
loan commitment (if any) to be permanently reduced in an amount equal to the
principal amount so prepaid, repaid or purchased.
Notwithstanding the foregoing provisions of this covenant, King and the
Restricted Subsidiaries shall not be required to apply any Net Available Cash in
accordance with this paragraph except to the extent that the aggregate Net
Available Cash from all Asset Dispositions which are not applied in accordance
with this paragraph exceeds $10.0 million. Pending application of Net Available
Cash pursuant to this covenant, such Net Available Cash shall be invested in
Permitted Investments.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents:
(1) the assumption of Indebtedness of King or any Restricted
Subsidiary and the release of King or such Restricted Subsidiary from all
liability on the Indebtedness in connection with the Asset Disposition; and
(2) securities received by King or any Restricted Subsidiary from the
transferee that are promptly converted by King or the Restricted Subsidiary
into cash.
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(b) In the event of an Asset Disposition that requires the purchase of the
notes (and other Senior Subordinated Indebtedness) pursuant to clause (a)(3)(C)
above, King will be required to purchase notes tendered pursuant to an offer by
King for the notes (and other Senior Subordinated Indebtedness) at a purchase
price of 100% of their principal amount, without premium, plus accrued but
unpaid interest (or, in respect of other Senior Subordinated Indebtedness, such
lesser price, if any, as may be provided for by the terms of such Senior
Subordinated Indebtedness) in accordance with the procedures (including
prorating in the event of oversubscription) set forth in the indenture. If the
aggregate purchase price of notes (and any other Senior Subordinated
Indebtedness) tendered pursuant to the offer is less than the Net Available Cash
allotted to the purchase thereof, King will be required to apply the remaining
Net Available Cash in accordance with clause (a)(3)(D) above. King shall not be
required to make an offer to purchase notes (and other Senior Subordinated
Indebtedness) pursuant to this covenant if the Net Available Cash available
therefor is less than $10.0 million (which lesser amount shall be carried
forward for purposes of determining whether an offer is required with respect to
the Net Available Cash from any subsequent Asset Disposition).
(c) King will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, King will comply with the applicable securities
laws and regulations and will not be deemed to have breached its obligations
under this clause.
LIMITATION ON AFFILIATE TRANSACTIONS
(a) King will not, and will not permit any Restricted Subsidiary to, enter
into or permit to exist any transaction (including the purchase, sale, lease or
exchange of any property, employee compensation arrangements or the rendering of
any service) with any Affiliate of King unless:
(1) the terms thereof are no less favorable to King or the Restricted
Subsidiary than those that could be obtained at the time of the transaction
in arm's-length dealings with a Person who is not an Affiliate;
(2) if the transaction with an Affiliate involves an amount in excess
of $1.0 million, (A) is set forth in writing and (B) has been approved by a
majority of the members of the Board of Directors having no personal stake
in the transaction; and
(3) if the transaction with an Affiliate involves an amount in excess
of $5.0 million, has been determined by a nationally recognized investment
banking firm to be fair, from a financial standpoint, to King and its
Restricted Subsidiaries.
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(1) any Investment (other than a Permitted Investment) or other
Restricted Payment, in each case permitted to be made pursuant to the
covenant described under the caption "-- Limitation on Restricted
Payments;"
(2) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the Board
of Directors;
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(3) the grant of stock options or similar rights to employees and
directors of King pursuant to plans approved by the Board of Directors;
(4) loans or advances to employees in the ordinary course of business
in accordance with the past practices of King or its Restricted
Subsidiaries, but in any event not to exceed $5.0 million in the aggregate
outstanding at any one time;
(5) the payment of reasonable fees to directors of King and its
Restricted Subsidiaries who are not employees of King or its Restricted
Subsidiaries;
(6) any transaction between King and a Wholly Owned Subsidiary or
between Wholly Owned Subsidiaries; and
(7) the issuance or sale of any Capital Stock (other than Disqualified
Stock) of King.
LIMITATION ON THE SALE OR ISSUANCE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
King shall not sell or otherwise dispose of any Capital Stock of a
Restricted Subsidiary, and shall not permit any Restricted Subsidiary, directly
or indirectly, to issue or sell or otherwise dispose of any of its Capital Stock
except:
(1) to King or a Wholly Owned Subsidiary;
(2) directors' qualifying shares;
(3) if, immediately after giving effect to the issuance, sale or other
disposition, neither King nor any of its Subsidiaries owns any Capital
Stock of the Restricted Subsidiary; or
(4) if, immediately after giving effect to the issuance, sale or other
disposition, the Restricted Subsidiary would no longer constitute a
Restricted Subsidiary and any Investment in the Person remaining after
giving effect to the issuance, sale or other disposition would have been
permitted to be made under the covenant described under "-- Limitation on
Restricted Payments" if made on the date of the issuance, sale or other
disposition.
CONSOLIDATION, MERGER AND SALE OF ASSETS
King will not consolidate with or merge with or into, or convey, transfer
or lease, in one transaction or a series of transactions, all or substantially
all its assets to, any Person, unless:
(1) the resulting, surviving or transferee Person, called the
"Successor Company", shall be a Person organized and existing under the
federal laws of the United States of America, any State thereof or the
District of Columbia and the Successor Company (if not King) shall
expressly assume, by a supplemental indenture, executed and delivered to
the trustee, in form satisfactory to the trustee, all the obligations of
King under the notes and the indenture;
(2) immediately after giving effect to the transaction (and treating
any Indebtedness which becomes an obligation of the Successor Company or
any Subsidiary as a result of the transaction as having been Incurred by
the Successor
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Company or the Subsidiary at the time of such transaction), no Default
shall have occurred and be continuing;
(3) immediately after giving effect to the transaction, the Successor
Company would be able to Incur an additional $1.00 of Indebtedness pursuant
to paragraph (a) of the covenant described under "-- Limitation on
Indebtedness;"
(4) immediately after giving effect to the transaction, the Successor
Company shall have Consolidated Net Worth in an amount that is not less
than the Consolidated Net Worth of King immediately prior to the
transaction;
(5) King shall have delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that the consolidation, merger or
transfer and the supplemental indenture (if any) complies with the
indenture; and
(6) King shall have delivered to the trustee an Opinion of Counsel to
the effect that the Holders will not recognize income, gain or loss for
federal income tax purposes as a result of such transaction and will be
subject to federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such transaction had not
occurred.
King will not permit any Subsidiary Guarantor to consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all of its assets to any Person unless:
(1) the resulting, surviving or transferee Person (if not the
Subsidiary) shall be a Person organized and existing under the laws of the
jurisdiction under which the Subsidiary was organized or under the laws of
the United States of America, or any State thereof or the District of
Columbia, and the Person shall expressly assume, by a Guaranty Agreement,
in a form satisfactory to the trustee, all the obligations of the
Subsidiary, if any, under its Subsidiary Guaranty;
(2) immediately after giving effect to the transaction or transactions
on a pro forma basis (and treating any Indebtedness which becomes an
obligation of the resulting, surviving or transferee Person as a result of
the transaction as having been issued by the Person at the time of such
transaction), no Default shall have occurred and be continuing; and
(3) King delivers to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that the consolidation, merger or transfer
and the Guaranty Agreement, if any, complies with the indenture;
provided, however, that the foregoing shall not be applicable if, in connection
with the consolidation, merger, conveyance, transfer or lease, the Subsidiary
Guarantor will be released from its obligations under its Subsidiary Guaranty as
described under "-- Guaranties."
The Successor Company will be the successor to King and shall succeed to,
and be substituted for, and may exercise every right and power of, King under
the indenture, but the predecessor company in the case of a conveyance, transfer
or lease shall not be released from the obligation to pay the principal of and
interest on the notes.
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FUTURE GUARANTORS
King will cause each domestic Restricted Subsidiary organized or acquired
after the Issue Date to execute and deliver to the trustee a Guaranty Agreement
pursuant to which the Restricted Subsidiary will Guarantee payment of the notes
on the same terms and conditions as those set forth in the indenture.
SEC REPORTS
Regardless of whether we are at any time subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, we will file with the
SEC and provide the Trustee and Noteholders at the times specified for the
filing of such information, documents and reports under these sections with the
annual reports and information, documents and other reports as are specified in
Sections 13 and 15(d) of the Exchange Act and applicable to a U.S. corporation
subject to these sections. In addition, so long as any of the notes are
outstanding, King will make available to any prospective purchaser of notes or
beneficial owner thereof (upon written request to King) in connection with any
sales thereof the information required by Rule 144A(d)(4) under the Securities
Act.
EVENTS OF DEFAULT
Each of the following is an Event of Default:
(1) a default in the payment of interest on the notes when due,
continued for 30 days;
(2) a default in the payment of principal of any note when due at its
Stated Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise;
(3) the failure by King to comply with its obligations under
"-- Covenants -- Consolidation, Merger and Sale of Assets" above;
(4) the failure by King to comply for 30 days after notice with any of
its obligations in the covenants described above under "-- Change of
Control" (other than a failure to purchase Notes) or under "-- Covenants,"
"-- Limitation on Indebtedness," "-- Limitation on Restricted Payments,"
"-- Limitation on Restrictions on Distributions from Restricted
Subsidiaries," "-- Limitation on Sales of Assets and Subsidiary Stock"
(other than a failure to purchase Notes), "-- Limitation on Affiliate
Transactions," "-- Limitation on the Sale or Issuance of Capital Stock of
Restricted Subsidiaries," "-- Future Guarantors" or "-- SEC Reports;"
(5) the failure by King or any Subsidiary Guarantor to comply for 60
days after notice with its other agreements contained in the indenture;
(6) Indebtedness of King, any Subsidiary Guarantor or any Significant
Subsidiary is not paid within any applicable grace period after final
maturity or is accelerated by the holders thereof because of a default and
the total amount of such Indebtedness unpaid or accelerated exceeds $10.0
million;
(7) certain events of bankruptcy, insolvency or reorganization of King
or a Significant Subsidiary;
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(8) any judgment or decree for the payment of money in excess of $10.0
million is entered against King or a Significant Subsidiary, remains
outstanding for a period of 60 consecutive days following judgment and is
not discharged, waived or stayed within 10 days after notice; or
(9) a Subsidiary Guaranty ceases to be in full force and effect (other
than in accordance with the terms of such Subsidiary Guaranty) or a
Subsidiary Guarantor denies or disaffirms its obligations under its
Subsidiary Guaranty.
However, a default under clauses (4), (5) and (8) will not constitute an Event
of Default until the trustee or the holders of 25% in principal amount of the
outstanding notes notify King of the default and King does not cure such default
within the time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the trustee or the holders
of at least 25% in principal amount of the outstanding notes may declare the
principal of and accrued but unpaid interest on all the notes to be due and
payable. Upon such a declaration, such principal and interest shall be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of King occurs and is continuing, the
principal of and interest on all the notes will ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the trustee or any holders of the notes. Under certain circumstances, the
holders of a majority in principal amount of the outstanding notes may rescind
any acceleration with respect to the notes and its consequences.
Subject to the provisions of the indenture relating to the duties of the
trustee, in case an Event of Default occurs and is continuing, the trustee will
be under no obligation to exercise any of the rights or powers under the
indenture at the request or direction of any of the holders of the notes unless
such holders have offered to the trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder of a note
may pursue any remedy with respect to the indenture or the notes unless:
(1) the holder has previously given the trustee notice that an Event
of Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding
notes have requested the trustee to pursue the remedy;
(3) the holders have offered the trustee reasonable security or
indemnity against any loss, liability or expense;
(4) the trustee has not complied with the request within 60 days after
its receipt and the offer of security or indemnity; and
(5) the holders of a majority in principal amount of the outstanding
notes have not given the trustee a direction inconsistent with the request
within the 60-day period.
Subject to certain restrictions, the holders of a majority in principal amount
of the outstanding notes are given the right to direct the time, method and
place of conducting any proceeding for any remedy available to the trustee or of
exercising any trust or power conferred on the trustee. The trustee, however,
may refuse to follow any direction that conflicts with law or the indenture or
that the trustee determines is unduly prejudicial to
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the rights of any other holder of a note or that would involve the trustee in
personal liability.
If a Default occurs and is continuing and is known to the trustee, the
trustee must mail to each holder of the notes notice of the Default within 90
days after it occurs. Except in the case of a Default in the payment of
principal of or interest on any note, the trustee may withhold notice if and so
long as a committee of its trust officers determines that withholding notice is
not opposed to the interest of the holders of the notes. In addition, we are
required to deliver to the trustee, within 120 days after the end of each fiscal
year, a certificate indicating whether the signers thereof know of any Default
that occurred during the previous year. We are required to deliver to the
trustee, within 30 days after the occurrence thereof, written notice of any
event which would constitute certain Defaults, their status and what action we
are taking or propose to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the indenture may be amended with the
consent of the holders of a majority in principal amount of the notes then
outstanding (including consents obtained in connection with a tender offer or
exchange for the notes) and any past default or compliance with any provisions
may also be waived with the consent of the holders of a majority in principal
amount of the notes then outstanding. However, without the consent of each
holder of an outstanding note affected thereby, no amendment may, among other
things:
(1) reduce the amount of notes whose holders must consent to an
amendment;
(2) reduce the rate of or extend the time for payment of interest on
any note;
(3) reduce the principal or extend the Stated Maturity of any note;
(4) reduce the amount payable upon the redemption of any note or
change the time at which any note may be redeemed as described under
"-- Optional Redemption" above;
(5) make any note payable in money other than that stated in the note;
(6) impair the right of any holder of the notes to receive payment of
principal of and interest on the holder's notes, on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to the holder's notes;
(7) make any change in the amendment provisions which require each
holder's consent or in the waiver provisions;
(8) make any change to the ranking or priority of any notes that would
adversely affect the Noteholders; or
(9) make any change in any Subsidiary Guaranty that would adversely
affect the Noteholders.
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Without the consent of any holder of the notes, King and trustee may amend
or supplement the indenture or the notes:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to provide for the assumption by a successor corporation of the
obligations of King under the indenture;
(3) to provide for uncertificated notes in addition to or in place of
certificated notes (provided that the uncertificated notes are issued in
registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated notes are described in Section 163(f)(2)(B) of
the Code);
(4) to add guarantees with respect to the notes or to secure the
notes;
(5) to add to the covenants of King for the benefit of the holders of
the notes or to surrender any right or power conferred upon King;
(6) to make any change that does not adversely affect the rights of
any holder of the notes; or
(7) to comply with any requirement of the SEC in connection with the
qualification of the indenture under the Trust Indenture Act.
However, no amendment may be made to the subordination provisions of the
indenture that adversely affects the rights of any holder of Senior Indebtedness
then outstanding unless the holders of such Senior Indebtedness (or their
Representative) consents to such change.
The consent of the holders of the notes is not necessary under the
indenture to approve the particular form of any proposed amendment. It is
sufficient if the consent approves the substance of the proposed amendment.
After an amendment under the indenture becomes effective, we are required
to mail to holders of the notes a notice briefly describing such amendment.
However, the failure to give notice to all holders of the notes, or any defect
therein, will not impair or affect the validity of the amendment.
TRANSFER
The notes will be issued in registered form and will be transferable only
upon the surrender of the notes being transferred for registration of transfer.
King may require payment of a sum sufficient to cover any tax, assessment or
other governmental charge payable in connection with certain transfers and
exchanges.
DEFEASANCE
King at any time may terminate all its obligations under the notes and the
indenture, except for certain obligations, including those respecting the
defeasance trust and obligations to register the transfer or exchange of the
notes, to replace mutilated, destroyed, lost or stolen notes and to maintain a
registrar and paying agent in respect of the notes. This is called "legal
defeasance."
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In addition, at any time we may terminate our obligations under the caption
"-- Change of Control" and under the covenants described under the caption
"-- Covenants" (other than the covenant described under the caption
"-- Consolidation, Merger and Sale of Assets"), the operation of the
cross-acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries, the judgment default provision or the guarantee
provision described under the caption "-- Events of Default" above and the
limitations contained in clauses (3) and (4) under the caption "-- Covenants --
Consolidation, Merger and Sale of Assets" above. This is called "covenant
defeasance."
We may exercise our legal defeasance option notwithstanding our prior
exercise of our covenant defeasance option. If we exercise our legal defeasance
option, payment of the notes may not be accelerated because of an Event of
Default with respect thereto. If we exercise our covenant defeasance option,
payment of the notes may not be accelerated because of an Event of Default
specified in clause (4), (6), (7) (with respect only to Significant
Subsidiaries), (8) or (9) under the caption "-- Events of Default" above or
because of the failure of the Company to comply with clause (3) or (4) under the
Caption "-- Covenants -- Consolidation, Merger and Sale of Assets" above. If we
exercise our legal defeasance option or our covenant defeasance option, each
Subsidiary Guarantor will be released from all of its obligations with respect
to its Subsidiary Guaranty.
In order to exercise either defeasance option, we must irrevocably deposit
in trust with the trustee money or U.S. Government Obligations for the payment
of principal and interest on the notes to redemption or maturity, as the case
may be. We must also comply with certain other conditions, including delivery to
the trustee of an Opinion of Counsel to the effect that holders of the notes
will not recognize income, gain or loss for federal income tax purposes as a
result of this deposit and defeasance and will be subject to federal income tax
on the same amounts and in the same manner and at the same times as would have
been the case if this deposit and defeasance had not occurred (and, in the case
of legal defeasance only, this Opinion of Counsel must be based on a ruling of
the Internal Revenue Service or other change in applicable federal income tax
law).
CONCERNING THE TRUSTEE
Union Planters Bank, N.A. is the trustee under the indenture and IBJ
Whitehall Bank & Trust Company is the registrar and paying agent with regard to
the notes.
The indenture contains certain limitations on the rights of the trustee,
should it become a creditor of King, to obtain payment of claims in certain
cases, or to realize on certain property received in respect of any such claim
as security or otherwise. The trustee will be permitted to engage in other
transactions; provided, however, if it acquires any conflicting interest it must
either eliminate the conflict within 90 days, apply to the SEC for permission to
continue or resign.
The Holders of a majority in principal amount of the outstanding notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the trustee, subject to certain
exceptions. If an Event of Default occurs (and is not cured), the trustee will
be required, in the exercise of its power, to use the degree of care of a
prudent man in the conduct of his own affairs. Subject to these provisions, the
trustee will be under no obligation to exercise any of its rights or powers
under the indenture at the request of any Holder of Notes, unless the Holder
shall have offered to the trustee security and indemnity satisfactory to it
against any loss, liability or expense and then only to the extent required by
the terms of the indenture.
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GOVERNING LAW
The indenture and the notes will be governed by, and construed in
accordance with, the laws of the State of New York without giving effect to
applicable principles of conflicts of law to the extent that the application of
the law of another jurisdiction would be required thereby.
DEFINITIONS
"Additional Assets" means:
(1) any property, plant or equipment used in a Related Business;
(2) any Product Line;
(3) the Capital Stock of a Person that becomes a Restricted Subsidiary
as a result of the acquisition of the Capital Stock by King or another
Restricted Subsidiary; or
(4) Capital Stock constituting a minority interest in any Person that
at the time is a Restricted Subsidiary;
provided, however, that any Restricted Subsidiary described in clauses (3) or
(4) above is primarily engaged in a Related Business.
"Affiliate" of any specified Person means:
(1) any other Person, directly or indirectly, controlling or
controlled by; or
(2) under direct or indirect common control with, the specified
Person.
For the purposes of this definition, "control" when used with respect to
any Person means the power to direct the management and policies of this Person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing. For purposes of the provisions described
under "-- Covenants -- Limitation on Restricted Payments,"
"-- Covenants -- Limitation on Affiliate Transactions" and "-- Covenants --
Limitation on Sales of Assets and Subsidiary Stock" only, "Affiliate" shall also
mean any beneficial owner of Capital Stock representing 5% or more of the total
voting power of the Voting Stock (on a fully diluted basis) of King or of rights
or warrants to purchase the Capital Stock (whether or not currently exercisable)
and any Person who would be an Affiliate of any beneficial owner pursuant to the
first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by King or any
Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares or shares
required by applicable law to be held by a Person other than King or a
Restricted Subsidiary); (ii) all or substantially all the assets of any division
or line of business of King or any Restricted Subsidiary; or (iii) any other
assets of King or any Restricted
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Subsidiary outside of the ordinary course of business of King or such Restricted
Subsidiary (other than, in the case of (i), (ii) and (iii) above:
(A) a disposition by a Restricted Subsidiary to King or by King or a
Restricted Subsidiary to a Wholly Owned Subsidiary;
(B) for purposes of the covenant described under
"-- Covenants -- Limitation on Sales of Assets and Subsidiary Stock" only,
a disposition that constitutes a Restricted Payment permitted by the
covenant described under "-- Covenants -- Limitation on Restricted
Payments" or a Permitted Investment;
(C) disposition of assets with a fair market value of less than
$250,000; and
(D) for purposes of the covenant described under
"-- Covenants -- Limitation on Sales of Assets and Subsidiary Stock" only,
a disposition by King or a Restricted Subsidiary of a Product Line in
consideration for the acquisition by King or a Restricted Subsidiary of
another Product Line; provided, however, that, if the Product Line so
disposed had revenues for the four consecutive fiscal quarters immediately
preceding such disposition in excess of $5.0 million, (x) the disposition
has been determined by a nationally recognized investment banking firm to
be fair, from a financial viewpoint, to King and its Restricted
Subsidiaries and (y) on the date of such disposition and after giving
effect thereto and to the related acquisition, King would have been able to
Incur at least $1.00 of additional Indebtedness pursuant to paragraph (a)
of the covenant described under the caption "-- Covenants -- Limitation on
Indebtedness").
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, at
the time of determination, the present value (discounted at the interest rate
borne by the notes, compounded annually) of the total obligations of the lessee
for rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has been
extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing:
(1) the sum of the products of numbers of years from the date of
determination to the dates of each successive scheduled principal payment
of the Indebtedness or redemption or similar payment with respect to the
Indebtedness multiplied by the amount of the payment by
(2) the sum of all the payments.
"Banks" has the meaning specified in the Credit Agreement.
"Bank Indebtedness" means all Obligations pursuant to the Credit Agreement.
"Board of Directors" means the Board of Directors of King or any committee
thereof duly authorized to act on behalf of the Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by this
obligation shall be the capitalized amount of the obligation determined in
accordance with GAAP; and the Stated Maturity
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thereof shall be the date of the last payment of rent or any other amount due
under the lease prior to the first date upon which the lease may be terminated
by the lessee without payment of a penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of the Person, including any Preferred
Stock, but excluding any debt securities convertible into the equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days prior to the date of
the determination to (ii) Consolidated Interest Expense for the four fiscal
quarters; provided, however, that:
(1) if King or any Restricted Subsidiary has Incurred any Indebtedness
since the beginning of the period that remains outstanding or if the
transaction giving rise to the need to calculate the Consolidated Coverage
Ratio is an Incurrence of Indebtedness, or both, EBITDA and Consolidated
Interest Expense for the period shall be calculated after giving effect on
a pro forma basis to the Indebtedness as if the Indebtedness had been
Incurred on the first day of the period and the discharge of any other
Indebtedness repaid, repurchased, defeased or otherwise discharged with the
proceeds of the new Indebtedness as if the discharge had occurred on the
first day of the period,
(2) if King or any Restricted Subsidiary has repaid, repurchased,
defeased or otherwise discharged any Indebtedness since the beginning of
the period or if any Indebtedness is to be repaid, repurchased, defeased or
otherwise discharged (in each case other than Indebtedness Incurred under
any revolving credit facility unless the Indebtedness has been permanently
repaid and has not been replaced) on the date of the transaction giving
rise to the need to calculate the Consolidated Coverage Ratio, EBITDA and
Consolidated Interest Expense for the period shall be calculated on a pro
forma basis as if such discharge had occurred on the first day of the
period and as if King or the Restricted Subsidiary has not earned the
interest income actually earned during the period in respect of cash or
Temporary Cash Investments used to repay, repurchase, defease or otherwise
discharge the Indebtedness,
(3) if since the beginning of the period King or any Restricted
Subsidiary has made any Asset Disposition, the EBITDA for the period shall
be reduced by an amount equal to the EBITDA (if positive) directly
attributable to the assets which are the subject of the Asset Disposition
for the period, or increased by an amount equal to the EBITDA (if
negative), directly attributable thereto for the period and Consolidated
Interest Expense for the period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Indebtedness of
the Company or any Restricted Subsidiary repaid, repurchased, defeased or
otherwise discharged with respect to King and its continuing Restricted
Subsidiaries in connection with the Asset Disposition for the period (or,
if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated
Interest Expense for the period directly attributable to the Indebtedness
of the Restricted Subsidiary to the extent the Company and its continuing
Restricted Subsidiaries are no longer liable for the Indebtedness after the
sale),
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(4) if since the beginning of the period King or any Restricted
Subsidiary (by merger or otherwise) has made an Investment in any
Restricted Subsidiary (or any person which becomes a Restricted Subsidiary)
or an acquisition of assets, including any acquisition of assets occurring
in connection with a transaction requiring a calculation to be made
hereunder, which constitutes all or substantially all of an operating unit
of a business, EBITDA and Consolidated Interest Expense for the period
shall be calculated after giving pro forma effect thereto (including the
Incurrence of any Indebtedness) as if the Investment or acquisition
occurred on the first day of the period and
(5) if since the beginning of the period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into King or any
Restricted Subsidiary since the beginning of the period) has made any Asset
Disposition, any Investment or acquisition of assets that would have
required an adjustment pursuant to clause (3) or (4) above if made by King
or a Restricted Subsidiary during the period, EBITDA and Consolidated
Interest Expense for the period shall be calculated after giving pro forma
effect thereto as if the Asset Disposition, Investment or acquisition
occurred on the first day of the period.
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of related income or earnings and the amount
of Consolidated Interest Expense associated with any Indebtedness Incurred in
connection with the acquisition, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting Officer of King. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest of the Indebtedness shall be calculated as if the rate in
effect on the date of determination had been the applicable rate for the entire
period (taking into account any Interest Rate Agreement applicable to the
Indebtedness if the Interest Rate Agreement has a remaining term in excess of 12
months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of King and its consolidated Restricted Subsidiaries, plus, to the
extent not included in the total interest expense, and to the extent incurred by
King or its Restricted Subsidiaries, without duplication:
(1) interest expense attributable to capital leases and the interest
expense attributable to leases constituting part of a Sale/Leaseback
Transaction;
(2) amortization of debt discount and debt issuance cost;
(3) capitalized interest;
(4) noncash interest expenses;
(5) commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing;
(6) net costs associated with Hedging Obligations (including
amortization of fees);
(7) Preferred Stock dividends in respect of all Preferred Stock held
by Persons other than King or a Wholly Owned Subsidiary (other than
dividends payable solely in Capital Stock (other than Disqualified Stock)
of the issuer of the Preferred Stock);
(8) interest incurred in connection with Investments in discontinued
operations;
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(9) interest accruing on any Indebtedness of any other Person to the
extent the Indebtedness is Guaranteed by (or secured by the assets of) King
or any Restricted Subsidiary; and
(10) the cash contributions to any employee stock ownership plan or
similar trust to the extent these contributions are used by such plan or
trust to pay interest or fees to any Person (other than King) in connection
with Indebtedness Incurred by the plan or trust.
"Consolidated Net Income" means, for any period, the net income of King and
its consolidated Subsidiaries; provided, however, that there shall not be
included in the Consolidated Net Income:
(1) any net income of any Person (other than King) if the Person is
not a Restricted Subsidiary, except that:
(A) subject to the exclusion contained in clause (4) below, King's
equity in the net income of any Person for the period shall be included
in the Consolidated Net Income up to the aggregate amount of cash
actually distributed by the Person during the period to King or a
Restricted Subsidiary as a dividend or other distribution (subject, in
the case of a dividend or other distribution paid to a Restricted
Subsidiary, to the limitations contained in clause (3) below); and
(B) King's equity in a net loss of any Person for the period shall
be included in determining the Consolidated Net Income;
(2) any net income (or loss) of any Person acquired by King or a
Subsidiary in a pooling of interests transaction for any period prior to
the date of the acquisition;
(3) any net income of any Restricted Subsidiary if the Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by the Restricted
Subsidiary, directly or indirectly, to King, except that:
(A) subject to the exclusion contained in clause (4) below, King's
equity in the net income of any Restricted Subsidiary for the period
shall be included in the Consolidated Net Income up to the aggregate
amount of cash actually distributed by the Restricted Subsidiary during
the period to King or another Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution paid to another Restricted Subsidiary, to the limitation
contained in this clause); and
(B) King's equity in a net loss of any the Restricted Subsidiary
for the period shall be included in determining the Consolidated Net
Income;
(4) any gain (but not loss) realized upon the sale or other
disposition of any assets of King, its consolidated Subsidiaries or any
other Person (including pursuant to any sale-and-leaseback arrangement)
which is not sold or otherwise disposed of in the ordinary course of
business and any gain (but not loss) realized upon the sale or other
disposition of any Capital Stock of any Person;
(5) extraordinary gains or losses; and
(6) the cumulative effect of a change in accounting principles.
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Notwithstanding the foregoing, for the purposes of the covenant described
under "-- Covenants -- Limitation on Restricted Payments" only, there shall be
excluded from Consolidated Net Income any dividends, repayments of loans or
advances or other transfers of assets from Unrestricted Subsidiaries to King or
a Restricted Subsidiary to the extent the dividends, repayments or transfers
increase the amount of Restricted Payments permitted under the covenant pursuant
to clause (a)(3)(D).
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of King and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of King ending at least 45 days prior to the taking of any action
for the purpose of which the determination is being made, as the sum of:
(1) the par or stated value of all outstanding Capital Stock of King
plus
(2) paid-in capital or capital surplus relating to the Capital Stock
plus
(3) any retained earnings or earned surplus
less (A) any accumulated deficit and (B) any amounts attributable to
Disqualified Stock.
"Credit Agreement" means (i) the Credit Agreement dated as of December 22,
1998, by and among the Company, the lenders referred to in the Credit Agreement,
Credit Suisse First Boston, as Administrative Agent, First Union National Bank,
as Syndication Agent, and NationsBank, N.A., as Syndication Agent, together with
the related documents (including the term loans and revolving loans under the
Credit Agreement, any guarantees and security documents), as amended, extended,
renewed, restated, supplemented or otherwise modified (in whole or in part, and
without limitation as to amount, terms, conditions, covenants and other
provisions) from time to time, and (ii) any other agreement or debt instrument
(and related documents) governing Indebtedness incurred to Refinance or replace,
in whole or in part, the borrowings or commitments under the Credit Agreement as
in effect on the Issue Date, whether by the same or any other lender or group of
lenders.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement designed to protect
the Person against fluctuations in currency values.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means:
(1) the Bank Indebtedness; and
(2) any other Senior Indebtedness of King which, at the date of
determination, has an aggregate principal amount outstanding of, or under
which, at the date of determination, the holders thereof are committed to
lend up to, at least $25.0 million and is specifically designated by King
in the instrument evidencing or governing the Senior Indebtedness as
"Designated Senior Indebtedness" for purposes of the indenture.
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"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable at the option of the holder) or upon the
happening of any event:
(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise;
(2) is convertible or exchangeable at the option of the holder for
Indebtedness or Disqualified Stock; or
(3) is mandatorily redeemable or must be purchased, upon the
occurrence of certain events or otherwise, in whole or in part;
in each case on or prior to the first anniversary of the Stated Maturity of the
notes; provided, however, that any Capital Stock that would not constitute
Disqualified Stock but for provisions thereof giving holders thereof the right
to require such Person to purchase or redeem the Capital Stock upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
first anniversary of the Stated Maturity of the notes shall not constitute
Disqualified Stock if:
(1) the "asset sale" or "change of control" provisions applicable to
the Capital Stock are not more favorable to the holders of the Capital
Stock than the terms applicable to the note and described under
"-- Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and
"-- Change of Control;" and
(2) any such requirement only becomes operative after compliance with
the terms applicable to the notes, including the purchase of any notes
tendered pursuant thereto.
"EBITDA" for any period means the sum of Consolidated Net Income, plus the
following to the extent deducted in calculating the Consolidated Net Income:
(1) all income tax expense of King and its consolidated Restricted
Subsidiaries;
(2) Consolidated Interest Expense;
(3) depreciation and amortization expense of King and its consolidated
Restricted Subsidiaries (excluding amortization expense attributable to a
prepaid cash item that was paid in a prior period); and
(4) all other noncash charges of King and its consolidated Restricted
Subsidiaries (excluding any the noncash charge to the extent that it
represents an accrual of or reserve for cash expenditures in any future
period);
in each case for the period. Notwithstanding the foregoing, the provision for
taxes based on the income or profits of, and the depreciation and amortization
and noncash charges of, a Restricted Subsidiary shall be added to Consolidated
Net Income to compute EBITDA only to the extent (and in the same proportion)
that the net income of the Restricted Subsidiary was included in calculating
Consolidated Net Income and only if a corresponding amount would be permitted at
the date of determination to be dividended to King by the Restricted Subsidiary
without prior approval (that has not been obtained), pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to the Restricted
Subsidiary or its stockholders.
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"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in:
(1) the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants;
(2) statements and pronouncements of the Financial Accounting
Standards Board;
(3) other statements by other entities as approved by a significant
segment of the accounting profession; and
(4) the rules and regulations of the SEC governing the inclusion of
financial statements (including pro forma financial statements) in periodic
reports required to be filed pursuant to Section 13 of the Exchange Act,
including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of the Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) the Indebtedness or other obligation of the Person (whether
arising by virtue of partnership arrangements, or by agreements to
keep-well, to purchase assets, goods, securities or services, to
take-or-pay or to maintain financial statement conditions or otherwise); or
(2) entered into for the purpose of assuring in any other manner the
obligee of the Indebtedness of the payment thereof or to protect the
obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning. The term "Guarantor" shall mean any
Person Guaranteeing any obligation.
"Guaranty Agreement" means a supplemental indenture, in a form satisfactory
to the trustee, pursuant to which a Subsidiary Guarantor Guarantees King's
obligations with respect to the notes on the terms provided for in the
indenture.
"Hedging Obligations" of any Person means the obligations of the Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time the Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by the
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning.
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The accretion of principal of a noninterest bearing or other discount security
shall not be deemed the Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(1) the principal in respect of (A) indebtedness of the Person for
money borrowed and (B) indebtedness evidenced by notes, debentures, bonds
or other similar instruments for the payment of which the Person is
responsible or liable, including, in each case, any premium on the
indebtedness to the extent the premium has become due and payable;
(2) all Capital Lease Obligations of the Person and all Attributable
Debt in respect of Sale/Leaseback Transactions entered into by the Person;
(3) all obligations of the Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of the Person
and all obligations of the Person under any title retention agreement (but
excluding trade accounts payable arising in the ordinary course of
business);
(4) all obligations of the Person for the reimbursement of any obligor
on any letter of credit, banker's acceptance or similar credit transaction
(other than obligations with respect to letters of credit securing
obligations (other than obligations described in clauses (1) through (3)
above) entered into in the ordinary course of business of the Person to the
extent the letters of credit are not drawn upon or, if and to the extent
drawn upon, the drawing is reimbursed no later than the tenth Business Day
following payment on the letter of credit);
(5) the amount of all obligations of the Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or,
with respect to any Subsidiary of the Person, the liquidation preference
with respect to, any Preferred Stock (but excluding, in each case, any
accrued dividends);
(6) all obligations of the type referred to in clauses (1) through (5)
of other Persons and all dividends of other Persons for the payment of
which, in either case, the Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee;
(7) all obligations of the type referred to in clauses (1) through (6)
of other Persons secured by any Lien on any property or asset of the Person
(whether or not such obligation is assumed by the Person), the amount of
the obligation being deemed to be the lesser of the value of the property
or assets or the amount of the obligation so secured; and
(8) to the extent not otherwise included in this definition, Hedging
Obligations of the Person.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at the date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at that date.
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"Interest Rate Agreement" means in respect of a Person any interest rate
swap agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect the Person against fluctuations in interest
rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extensions of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by the Person. For purposes of the definition of
"Unrestricted Subsidiary," the definition of "Restricted Payment" and the
covenant described under "-- Covenants -- Limitation on Restricted Payments:"
(1) "Investment" shall include the portion (proportionate to King's
equity interest in the Subsidiary) of the fair market value of the net
assets of any Subsidiary of King at the time that the Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of the Subsidiary as a Restricted Subsidiary, King shall be
deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary equal to an amount (if positive) equal to (x) King's
"Investment" in the Subsidiary at the time of such redesignation less (y)
the portion (proportionate to King's equity interest in the Subsidiary) of
the fair market value of the net assets of the Subsidiary at the time of
the redesignation; and
(2) any property transferred to or from an Unrestricted Subsidiary
shall be valued at its fair market value at the time of the transfer, in
each case as determined in good faith by the Board of Directors.
"Issue Date" means the date on which the notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise and proceeds
from the sale or other disposition of any securities received as consideration,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
noncash form), in each case net of:
(1) all legal, title and recording tax expenses, commissions and other
fees and expenses incurred, and all Federal, state, provincial, foreign and
local taxes required to be accrued as a liability under GAAP, as a
consequence of the Asset Disposition;
(2) all payments made on any Indebtedness which is secured by any
assets subject to the Asset Disposition, in accordance with the terms of
any Lien upon or other security agreement of any kind with respect to the
assets, or which must by its terms, or in order to obtain a necessary
consent to the Asset Disposition, or by applicable law, be repaid out of
the proceeds from the Asset Disposition;
(3) all distributions and other payments required to be made to
minority interest holders in Restricted Subsidiaries as a result of the
Asset Disposition; and
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(4) the deduction of appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with
the property or other assets disposed in the Asset Disposition and retained
by King or any Restricted Subsidiary after the Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of the issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with the issuance or sale and net of taxes paid or payable as a
result of the issuance or sale.
"Obligations" means with respect to any Indebtedness all obligations for
principal, premium, interest, penalties, fees, indemnifications, reimbursements,
and other amounts payable pursuant to the documentation governing the
Indebtedness.
"Permitted Holders" means, collectively, John M. Gregory, Joan P. Gregory,
Jefferson J. Gregory, Terri D. White-Gregory, Joseph R. Gregory, Hershel P.
Blessing, Mary Ann Blessing, James E. Gregory, Dr. R. Henry Richards, Jeanie
Richards, Fred Jarvis and Mary Gregory-Jarvis, their respective estates,
spouses, ancestors and lineal descendants, the legal representatives of any of
the foregoing and the trustees of any bona fide trusts of which the foregoing
are the sole beneficiaries or the grantors, or any Person of which the foregoing
"beneficially owns" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act)
voting securities representing at least 66 2/3% of the total voting power of all
classes of ordinary voting stock of the person (exclusive of any matters as to
which class voting rights exist), including S.J. L.L.C. and Kingsway L.L.C. to
the extent such entities adhere to the aforementioned minimum beneficial
ownership requirements.
"Permitted Investment" means an Investment by King or any Restricted
Subsidiary in:
(1) King, a Restricted Subsidiary or a Person that will, upon the
making of the Investment, become a Restricted Subsidiary; provided,
however, that the primary business of the Restricted Subsidiary is a
Related Business;
(2) another Person if as a result of the Investment the other Person
is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, King or a Restricted Subsidiary; provided,
however, that the Person's primary business is a Related Business;
(3) Temporary Cash Investments;
(4) receivables owing to King or any Restricted Subsidiary if created
or acquired in the ordinary course of business and payable or dischargeable
in accordance with customary trade terms; provided, however, that the trade
terms may include such concessionary trade terms as King or any Restricted
Subsidiary deems reasonable under the circumstances;
(5) payroll, travel and similar advances to cover matters that are
expected at the time of the advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of
business;
(6) loans or advances to employees made in the ordinary course of
business consistent with past practices of King or the Restricted
Subsidiary;
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(7) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to King or any
Restricted Subsidiary or in satisfaction of judgments; and
(8) any Person to the extent the Investment represents the noncash
portion of the consideration received for an Asset Disposition as permitted
pursuant to the covenant described under "-- Covenants -- Limitation on
Sales of Assets and Subsidiary Stock."
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or its political subdivision or any other
entity.
"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred in
the payment of dividends or distributions, or in the distribution of assets upon
any voluntary or involuntary liquidation or dissolution of the Person, over
shares of Capital Stock of any other class of the Person.
"principal" of a note means the principal of the note plus the premium, if
any, payable on the note which is due or overdue or is to become due at the
relevant time.
"Product Line" means any pharmaceutical product or product line.
"Public Equity Offering" means an underwritten primary public offering of
common stock of King pursuant to an effective registration statement under the
Securities Act.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of King or any Restricted Subsidiary existing on the Issue Date or
Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that:
(1) the Refinancing Indebtedness has a Stated Maturity no earlier than
the Stated Maturity of the Indebtedness being Refinanced;
(2) the Refinancing Indebtedness has an Average Life at the time the
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being Refinanced; and
(3) the Refinancing Indebtedness has an aggregate principal amount (or
if Incurred with original issue discount, an aggregate issue price) that is
equal to or less than the aggregate principal amount (or if Incurred with
original issue discount, the aggregate accreted value) then outstanding or
committed (plus fees and expenses, including any premium and defeasance
costs) under the Indebtedness being Refinanced;
provided further, however, that Refinancing Indebtedness shall not include
(A) Indebtedness of a Subsidiary that Refinances Indebtedness of King or
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(B) Indebtedness of King or a Restricted Subsidiary that Refinances Indebtedness
of an Unrestricted Subsidiary.
"Related Business" means any business related, ancillary or complementary
to the businesses of King and the Restricted Subsidiaries on the Issue Date.
"Representative" means any trustee, agent or representative (if any) for an
issue of Senior Indebtedness of King.
"Restricted Payment" with respect to any Person means:
(1) the declaration or payment of any dividends or any other
distributions of any sort in respect of its Capital Stock (including any
payment in connection with any merger or consolidation involving the
Person) or similar payment to the direct or indirect holders of its Capital
Stock (other than dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock) and dividends or distributions
payable solely to King or a Restricted Subsidiary, and other than pro rata
dividends or other distributions made by a Subsidiary that is not a Wholly
Owned Subsidiary to minority stockholders (or owners of an equivalent
interest in the case of a Subsidiary that is an entity other than a
corporation));
(2) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of King held by any Person or of any Capital
Stock of a Restricted Subsidiary held by any Affiliate of King (other than
a Restricted Subsidiary), including the exercise of any option to exchange
any Capital Stock (other than into Capital Stock of King that is not
Disqualified Stock);
(3) the purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value, prior to scheduled maturity, scheduled
repayment or scheduled sinking fund payment of any Subordinated Obligations
(other than the purchase, repurchase or other acquisition of Subordinated
Obligations purchased in anticipation of satisfying a sinking fund
obligation, principal installment or final maturity, in each case due
within one year of the date of acquisition); or
(4) the making of any Investment in any Person (other than a Permitted
Investment).
"Restricted Subsidiary" means any Subsidiary of King that is not an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby King or a Restricted Subsidiary transfers
the property to a Person and King or a Restricted Subsidiary leases it from the
Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of King secured by a Lien.
"Securities Act" means the Securities Act of 1933.
"Senior Indebtedness" means with respect to any Person on any date of
determination:
(1) Indebtedness of the Person, whether outstanding on the Issue Date
or thereafter Incurred; and
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(2) accrued and unpaid interest (including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization
relating to King to the extent post-filing interest is allowed in such
proceeding) in respect of (A) indebtedness of the Person for money borrowed
and (B) indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which the Person is responsible or liable
unless, in the case of (i) and (ii), in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is
provided that the obligations are subordinate in right of payment to the
notes;
provided, however, that Senior Indebtedness shall not include:
(1) any obligation of King to any Subsidiary;
(2) any liability for federal, state, local or other taxes owed or
owing by the Person;
(3) any accounts payable or other liability to trade creditors arising
in the ordinary course of business (including guarantees of these accounts
payable or other liabilities to trade creditors or instruments evidencing
these liabilities);
(4) any Indebtedness of the Person (and any accrued and unpaid
interest in respect thereof) which is subordinate or junior in any respect
to any other Indebtedness or other obligation of the Person, except for
approximately $10.0 million of Indebtedness defined as "Existing
Indebtedness" under the Senior Credit Facility which consists of: (i) notes
payable to The United Company, GIV and RSR Laboratories, (ii) certain
capital leases with First American National Bank and (iii) certain other
Indebtedness; or
(5) that portion of any Indebtedness which at the time of Incurrence
is Incurred in violation of the Indenture.
"Senior Subordinated Indebtedness" means the notes and the Subsidiary
Guaranties and any other Indebtedness of King or the Subsidiary Guarantors that
specifically provides that the Indebtedness is to rank pari passu with the notes
or the Subsidiary Guaranties, as applicable, in right of payment and is not
subordinated by its terms in right of payment to any Indebtedness or other
obligation of King or the Subsidiary Guarantors, as applicable, which is not
Senior Indebtedness.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of King within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified
in the security as the fixed date on which the final payment of principal of the
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of the
security at the option of the holder thereof upon the happening of any
contingency unless the contingency has occurred).
"Subordinated Obligation" means any Indebtedness of King (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the notes pursuant to a written agreement to that
effect.
"Subsidiary" means, with respect to any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of
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shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by:
(1) the Person;
(2) the Person and one or more Subsidiaries of the Person; or
(3) one or more Subsidiaries of the Person.
"Subsidiary Guarantor" means each Restricted Subsidiary that provides a
Subsidiary Guaranty.
"Subsidiary Guaranty" means a Guarantee by a Subsidiary Guarantor of the
Company's obligations with respect to the notes.
"Temporary Cash Investments" means any of the following:
(1) any investment in direct obligations of the United States of
America or any agency thereof or obligations guaranteed by the United
States of America or any agency thereof;
(2) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws
of the United States of America, any state thereof or any foreign country
recognized by the United States, and which bank or trust company has
capital, surplus and undivided profits aggregating in excess of $50 million
(or the foreign currency equivalent thereof) and has outstanding debt which
is rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule
436 under the Securities Act) or any money-market fund sponsored by a
registered broker dealer or mutual fund distributor;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with a bank meeting the qualifications described in clause (2) above;
(4) investments in commercial paper, maturing not more than 90 days
after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United
States of America with a rating at the time as of which any investment
therein is made of "P-1" (or higher) according to Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings
Group; and
(5) investments in securities with maturities of six months or less
from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by Standard & Poor's Ratings Group or "A" by Moody's Investors Service,
Inc.
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"Unrestricted Subsidiary" means:
(1) any Subsidiary of King that at the time of determination shall be
designated an Unrestricted Subsidiary by the Board of Directors in the
manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary of King (including any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless
such Subsidiary or any of its Subsidiaries owns any Capital Stock or
Indebtedness of, or holds any Lien on any property of, King or any other
Subsidiary of King that is not a Subsidiary of the Subsidiary to be so
designated; provided, however, that either (A) the Subsidiary to be so
designated has total assets of $1,000 or less or (B) if the Subsidiary has
assets greater than $1,000, the designation would be permitted under the
covenant described under "-- Covenants -- Limitation on Restricted Payments."
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, however, that immediately after giving effect
to the designation (x) King could Incur $1.00 of additional Indebtedness under
paragraph (a) of the covenant described under "-- Covenants -- Limitation on
Indebtedness" and (y) no Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced to the trustee by
promptly filing with the trustee a copy of the resolution of the Board of
Directors giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality of it) for the payment of which
the full faith and credit of the United States of America is pledged and which
are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of the Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees of the Person.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by King or one
or more Wholly Owned Subsidiaries.
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the U.S. federal income tax
considerations relevant to the exchange of old notes for exchange notes and to
the acquisition, ownership and disposition of the exchange notes. This
discussion is based upon the Internal Revenue Code of 1986, as amended, Treasury
Regulations, Internal Revenue Service rulings and judicial decisions now in
effect, all of which are subject to change (possible with retroactive effect) or
different interpretations. This discussion does not purport to deal with all
aspects of U.S. federal income taxation that may be relevant to a holder of the
Notes and it is not intended to be wholly applicable to all categories of
holders, some of which, such as dealers in securities, banks, insurance
companies and tax-exempt organizations, may be subject to special rules. In
addition, this discussion is limited to persons that will hold the notes
represented thereby as a "capital asset" within the meaning of section 1221 of
the Code.
U.S. HOLDERS
As used herein, a U.S. Holder means a holder of the exchange note who or
which is
(1) an individual who is a citizen or resident of the United States
for U.S. federal income tax purposes,
(2) a corporation or other entity taxable as a corporation created or
organized under the laws of the United States or any political subdivision
thereof (including the States and the District of Columbia),
(3) an estate whose income is includible in gross income for U.S.
federal income tax purposes regardless of its source,
(4) a trust, if a United States court is able to exercise primary
jurisdiction over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of
the trust or
(5) a person whose worldwide income or gain is otherwise subject to
U.S. federal income taxation on a net income basis.
INTEREST INCOME
Interest on the notes will be includable in the income of a U.S. Holder
under such holder's regular method of accounting for U.S. federal income tax
purposes. The notes will not be treated as having been issued with original
issue discount.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
A U.S. Holder of exchange notes generally will recognize gain or loss upon
the sale, exchange, repurchase, redemption, retirement or other disposition of
those notes measured by the difference (if any) between
(1) the amount of cash and the fair market value of any property
received (except to the extent that such cash or other property is
attributable to the payment of accrued interest not previously included in
income, which amount will be taxable as ordinary income) and
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<PAGE> 124
(2) the Holder's adjusted tax basis in those notes. Any such gain or
loss recognized on the sale, exchange, repurchase, redemption, retirement
or other disposition of an exchange note will be capital gain or loss, and
will be long-term capital gain or loss if the exchange note had been held
for more than one year at the time of the sale, exchange, repurchase,
redemption, retirement or other disposition. If the exchange notes had been
held by a noncorporate Holder for more than 12 months, such capital gain
generally will be subject to tax at a maximum 20% rate. The ability to use
capital losses to offset ordinary income in determining taxable income is
generally limited. A Holder's initial tax basis in an exchange note will be
the cash price it paid therefor.
BACKUP WITHHOLDING
A U.S. Holder of exchange notes may be subject to "backup withholding" at a
rate of 31% with respect to certain "reportable payments," including interest
payments and, under certain circumstances, principal payments on the exchange
notes. These backup withholding rules apply if the Holder, among other things,
(1) fails to furnish a social security number or other taxpayer
identification number certified under penalties of perjury within a
reasonable time after the request therefor,
(2) furnishes an incorrect taxpayer identification number,
(3) fails properly to report interest or
(4) under certain circumstances, fails to provide a certified
statement, signed under penalties of perjury, that the taxpayer
identification number furnished is the correct number and that such holder
is not subject to backup withholding. A U.S. Holder who does not provide
the Issuer with its correct taxpayer identification number also may be
subject to penalties imposed by the IRS. Any amount withheld from a payment
to a Holder under the backup withholding rules is creditable against the
holder's U.S. federal income tax liability, provided that the required
information is furnished to the IRS. Backup withholding will not apply,
however, with respect to payments made to certain Holders, including
corporations, tax-exempt organizations and certain foreign persons called
"exempt recipients", provided their exemptions from backup withholding are
properly established.
The amount of any "reportable payments" including interest made to the
Holders of exchange notes (other than to holders which are exempt recipients)
and the amount of tax withheld, if any, with respect to such payments will be
reported to such Holders and to the IRS for each calendar year.
FOREIGN HOLDERS
As used herein, the term "Foreign Person" means a nonresident alien
individual or foreign corporation, but only if the income or gain on the
exchange note is not "effectively connected with the conduct of a trade or
business within the U.S." If the income or gain on the exchange note is
"effectively connected with the conduct of a trade or business within the U.S.,"
then the nonresident alien individual or foreign corporation will be subject to
tax on such income or gain in essentially the manner as a U.S. citizen or
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<PAGE> 125
resident or a domestic corporation, as discussed above, and in the case of a
foreign corporation, may also be subject to the branch profits tax.
Under the portfolio interest exception to the general rules for the
withholding of tax on interest paid to a Foreign Person, a Foreign Person will
not be subject to U.S. federal income tax (or to withholding) on interest
payments on an exchange note, provided that
(1) the Foreign Person does not actually or constructively own 10% or
more of the total combined voting power of all classes of stock of King
entitled to vote and is not a controlled foreign corporation with respect
to the U.S. that is related to King through stock ownership and
(2) King, its paying agent or the person who would otherwise be
required to withhold tax received either
(A) a statement, called an "Owner's Statement", signed under
penalties of perjury by the beneficial owner of the note in which the
owner certifies that the owner is not a U.S. person, or in the case of
an individual, that he is neither a citizen nor a resident of the United
States, and which provides the owner's name and address, or
(B) a statement signed under penalties of perjury by the Financial
Institution holding the exchange note on behalf of the beneficial owner,
together with a copy of the Owner's Statement. The term "Financial
Institution" means a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary
course of its trade or business and that holds an exchange note on
behalf of the owner of the exchange note. A Foreign Person who does not
qualify for the "portfolio interest" exception, would, under current
law, generally be subject to U.S. federal withholding tax at a flat rate
of 30% (or lower applicable treaty rate) on interest payments unless the
beneficial owner of the note provides King or its paying agent, as the
case may be, with a properly executed (1) IRS Form 1001 (or successor
form) claiming an exemption from withholding under the benefit of a tax
treaty or (2) IRS Form 4224 (or successor form) stating that interest
paid on the note is not subject to withholding tax because it is
effectively connected with the beneficial owner's conduct of a trade or
business in the United States. Treasury regulations generally effective
for payments made after December 31, 1999 provide alternative methods
for satisfying the certification requirements described above.
In general, gain recognized by a Foreign Person upon the redemption, sale
or exchange of a exchange note will not be subject to U.S. federal income tax.
However, a Foreign Person may be subject to U.S. federal income tax at a flat
rate of 30% (unless exempt by an applicable treaty) on any such gain if the
Foreign Person is an individual present in the U.S. for 183 days or more during
the taxable year in which the exchange note is redeemed, sold or exchanged, and
certain other requirements are met.
No information reporting or backup withholding tax (which is a withholding
tax imposed at the rate of 31% on certain payments to persons who fail to
furnish the information required under United States information reporting
requirements) will be required with respect to payments made by King or any
paying agent to Foreign Persons if a statement described in the above discussion
of the portfolio interest exception has been received and the payor does not
have actual knowledge that the beneficial owner is a United States person.
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<PAGE> 126
In addition, backup withholding and information reporting generally will
not apply if payments of the principal or interest on an exchange note are paid
or collected by a foreign office of a custodian, nominee or other foreign agent
on behalf of the beneficial owner of such exchange note, or if a foreign office
of a broker (as defined in applicable Treasury regulations) pays the proceeds of
the sale of an exchange note to the owner thereof. If, however, such nominee,
custodian, agent or broker is, for U.S. federal income tax purposes, a United
States person, a controlled foreign corporation or a foreign person that derives
50% or more of its gross income for certain periods from the conduct of a trade
or business in the United States, or, for taxable years beginning after December
31, 1999, a foreign partnership, in which one or more United States persons, in
the aggregate, own more than 50% of the income or capital interests in the
partnership or which is engaged in a trade or business in the United States,
such payments will not be subject to backup withholding but will be subject to
information reporting, unless (1) the custodian, nominee, agent or broker has
documentary evidence in its records that the beneficial owner is not a United
States person and certain other conditions are met or (2) the beneficial owner
otherwise establishes an exemption.
Payments of principal or interest, on an exchange note paid to the
beneficial owner of an exchange note by a United States office of a custodian,
nominee or agent, or the payment by the United States office of a broker of the
proceeds of a sale of an exchange note will be subject to both backup
withholding and information reporting unless the beneficial owner provides the
statement referred to in (a)(iii) above and the payor does not have actual
knowledge that the beneficial owner is a United States person or otherwise
establishes an exemption.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
EXCHANGE OFFER
The exchange of the exchange notes for the old notes pursuant to the
exchange offer will not be treated as an "exchange" for U.S. federal income tax
purposes because the exchange notes will not be considered to differ materially
in kind or extent from the old notes. Rather, the exchange notes received by a
Holder will be treated as a continuation of the old notes in the hands of such
holder. As a result, there will be no U.S. federal income tax consequences to
Holders exchanging the old notes for the exchange notes pursuant to the exchange
offer and any such Holder will have the same adjusted tax basis and holding
period in the exchange notes as it had in the old notes immediately before the
exchange. The Holder must continue to include stated interest in income as if
the exchange had not occurred. Similarly, there would be no U.S. federal income
tax consequences to a Holder of old notes that does not participate in the
exchange offer.
123
<PAGE> 127
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of exchange notes received in
exchange for old notes where such old notes were acquired as a result of
market-making activities or other trading activities. King has agreed that, for
a period of 180 days after the expiration date, it will make this prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale, In addition, until , 199 , all dealers effecting
transactions in the exchange notes may be required to deliver a prospectus.
King will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such exchange notes. Any broker-dealer
that resells exchange notes that were received by it for its own account
pursuant to the exchange offer and any broker or dealer that participates in a
distribution of such exchange note may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of exchange
notes and any commission or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The letter of
transmittal states that, by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the expiration date King will promptly send
additional copies of this prospectus and any amendment or supplement to this
prospectus to any broker-dealer that requests the documents in the letter of
transmittal. King has agreed to pay all expenses incident to the exchange offer
(including the expenses of one counsel for the holders of the old notes) other
than commissions or concessions of any brokers or dealers and will indemnify the
holders of the notes (including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
Each broker-dealer that receives exchange notes for its own account in
exchange for the old notes, where the old notes were acquired by the
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of the exchange notes.
LEGAL MATTERS
The legal matters relating to the exchange offer will be passed upon for
King by Baker, Donelson, Bearman & Caldwell, Johnson City, Tennessee.
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<PAGE> 128
EXPERTS
The consolidated financial statements of King Pharmaceuticals, Inc. as of
December 31, 1997 and 1998 and for each of the three years in the period ended
December 31, 1998, included elsewhere in this prospectus have been audited by
PricewaterhouseCoopers LLP, independent accountants, as stated in their report
appearing herein and are included in reliance upon such reports given upon the
authority of that firm as experts in accounting and auditing.
The special purpose statements of product contribution for the Altace
product line, the Silvadene product line and the AVC product line for the period
January 1, 1998 through December 22, 1998 and for the years ended December 31,
1997 and 1996 included elsewhere in this prospectus have been audited by KPMG
LLP, independent accountants, as set forth in their reports thereon appearing
elsewhere in this prospectus.
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<PAGE> 129
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
KING PHARMACEUTICALS, INC.
Report of Independent Accountants......................... F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and
1998.................................................. F-3
Consolidated Statements of Operations for the years
ended December 31, 1996, 1997 and 1998................ F-4
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1996, 1997 and
1998.................................................. F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1997 and 1998................ F-6
Notes to Consolidated Financial Statements............. F-8
ALTACE PRODUCT LINE OF HOECHST MARION ROUSSEL, INC. AND
HOECHST MARION ROUSSEL DEUTSCHLAND GMBH
Independent Auditors' Report.............................. F-28
Special Purpose Statement of Product Contribution for the
period January 1, 1998 through December 22, 1998 and
for the years ended December 31, 1997 and 1996......... F-29
Notes to Special Purpose Statement of Product
Contribution........................................... F-30
SILVADENE PRODUCT LINE OF HOECHST MARION ROUSSEL, INC.
Independent Auditors' Report.............................. F-33
Special Purpose Statement of Product Contribution for the
period January 1, 1998 through December 22, 1998 and
for the years ended December 31, 1997 and 1996......... F-34
Notes to Special Purpose Statement of Product
Contribution........................................... F-35
AVC PRODUCT LINE OF HOECHST MARION ROUSSEL, INC.
Independent Auditors' Report.............................. F-37
Special Purpose Statement of Product Contribution for the
period January 1, 1998 through December 22, 1998 and
for the years ended December 31, 1997 and 1996......... F-38
Notes to Special Purpose Statement of Product
Contribution........................................... F-39
</TABLE>
F-1
<PAGE> 130
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
King Pharmaceuticals, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows present fairly, in all material respects, the financial position
of King Pharmaceuticals, Inc. and its subsidiaries at December 31, 1997 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Greensboro, North Carolina
February 15, 1999, except
Note 20 for which the
date is March 3, 1999
F-2
<PAGE> 131
KING PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 69 $ 1,159
Accounts receivable, net of allowance for doubtful accounts
$638 and $1,402, respectively............................ 8,561 39,666
Inventories................................................ 10,850 26,556
Deferred income taxes...................................... 2,013 6,675
Prepaid expenses and other assets.......................... 1,319 1,554
-------- --------
Total current assets..................................... 22,812 75,610
Property, plant and equipment, net......................... 17,170 93,981
Intangible assets, net..................................... 62,783 480,583
Other assets............................................... 2,098 17,997
-------- --------
Total assets............................................. $104,863 $668,171
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable.............................................. $ 916 $ --
Current portion of long-term debt.......................... 8,084 13,310
Accounts payable........................................... 5,871 12,594
Accrued expenses........................................... 6,503 15,095
Income taxes payable....................................... 1,862 3,524
-------- --------
Total current liabilities................................ 23,236 44,523
LONG-TERM DEBT:
Revolving Credit Facility.................................. 6,152 19,000
Term loans................................................. 40,000 414,750
Senior Subordinated Seller Notes........................... -- 75,000
Other...................................................... 2,137 5,736
Deferred income taxes...................................... 4,004 7,726
-------- --------
Total liabilities........................................ 75,529 566,735
-------- --------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common shares no par value, 150,000,000 shares authorized,
28,000,000 and 32,104,730 shares issued and outstanding,
respectively............................................. 16,455 66,572
Retained earnings.......................................... 14,550 35,460
Due from related party..................................... (1,671) (596)
-------- --------
Total shareholders' equity............................... 29,334 101,436
-------- --------
Total liabilities and shareholders' equity............... $104,863 $668,171
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 132
KING PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
REVENUES:
Net sales........................................... $15,457 $47,351 $158,180
Development revenues................................ 5,000 558 5,283
------- ------- --------
Total revenues................................. 20,457 47,909 163,463
------- ------- --------
OPERATING COSTS AND EXPENSES:
Cost of sales....................................... 8,782 13,034 64,052
Selling, general and administrative................. 12,106 19,123 34,718
Depreciation and amortization....................... 982 2,395 9,255
------- ------- --------
Total operating costs and expenses, net........ 21,870 34,552 108,025
------- ------- --------
Operating income (loss)............................. (1,413) 13,357 55,438
------- ------- --------
OTHER (EXPENSES) INCOME:
Interest expense.................................... (1,272) (2,749) (14,866)
Gain on sale of investment in affiliate............. 1,760 -- --
Other income, net................................... 578 (28) 145
------- ------- --------
Total other (expenses) income.................. 1,066 (2,777) (14,721)
------- ------- --------
Income (loss) before income taxes and extraordinary
item.............................................. (347) 10,580 40,717
Income tax expense (benefit)...................... (107) 3,968 15,396
------- ------- --------
Income (loss) before extraordinary item............. (240) 6,612 25,321
Extraordinary loss on early extinguishment of
long-term debt, net of income taxes of
$2,787......................................... -- -- (4,411)
------- ------- --------
Net income (loss)................................... $ (240) $ 6,612 $ 20,910
======= ======= ========
Basic and diluted income (loss) per common share:
Income (loss) before extraordinary item........... $ (0.02) $ 0.25 $ 0.84
Extraordinary item................................ -- -- (0.15)
------- ------- --------
Net income (loss).............................. $ (0.02) $ 0.25 $ 0.69
======= ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 133
KING PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DUE
UNREALIZED FROM TOTAL
COMMON RETAINED LOSS ON RELATED SHAREHOLDERS'
SHARES AMOUNT EARNINGS SECURITIES PARTY EQUITY
---------- ------- -------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
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 17)......... 18,000,000 -- -- -- -- --
Net income................ -- -- 6,612 -- -- 6,612
---------- ------- ------- ---- ------- --------
BALANCE, DECEMBER 31,
1997...................... 28,000,000 16,455 14,550 -- (1,671) 29,334
Issuance of common shares,
net of expenses......... 4,104,730 50,117 -- -- -- 50,117
Payments from Benevolent
Fund.................... -- -- -- -- 1,075 1,075
Net income................ -- -- 20,910 -- -- 20,910
---------- ------- ------- ---- ------- --------
BALANCE, DECEMBER 31,
1998...................... 32,104,730 $66,572 $35,460 $ -- $ (596) $101,436
========== ======= ======= ==== ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 134
KING PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ (240) $ 6,612 $ 20,910
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 982 2,395 9,255
Amortization of deferred financing costs.................. -- -- 728
Loss on sale of marketable securities..................... 1 32 --
Extraordinary loss........................................ -- -- 7,198
Loss on sale of property and equipment.................... (54) -- 22
Gain on sale of investment in affiliate................... (1,760) -- --
Deferred income taxes..................................... 410 (980) (940)
Changes in operating assets and liabilities:
Accounts receivable....................................... 467 (6,256) (31,105)
Inventories............................................... (1,895) (4,753) (15,706)
Prepaid expenses and other assets......................... (335) (332) 1,405
Accounts payable.......................................... (83) 3,604 6,723
Accrued expenses.......................................... (138) 2,180 5,679
Income taxes.............................................. (3,624) 2,514 1,662
------- -------- ---------
Net cash provided by (used in) operating activities..... (6,269) 5,016 5,831
------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (1,069) (1,379) (81,099)
Purchases of intangible assets............................ (2,974) (52,428) (344,906)
Acquisition related costs................................. -- (373) --
Purchases of marketable securities........................ (307) -- --
Proceeds from sale of marketable securities............... 72 203 --
Proceeds from sale of investment in affiliated company.... 2,052 -- --
Proceeds from sale of property and equipment.............. 100 -- 30
------- -------- ---------
Net cash used in investing activities................... (2,126) (53,977) (425,975)
------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit.................... -- 29,599 --
Payments on revolving line of credit...................... (3,403) (23,447) --
Proceeds from issuance of common shares, net of expenses
paid.................................................... 2,844 8,007 50,117
Book overdraft............................................ -- 1,423 --
Repayment on shareholder notes receivable................. -- 2,093 --
Proceeds from long-term debt.............................. 2,549 55,923 658,741
Payments on long-term debt and capital lease
obligations............................................. (2,772) (23,798) (262,318)
Payments on notes payable................................. -- -- (916)
Due to affiliate.......................................... 1 (994) 1,075
Initial public offering costs............................. -- (710) --
Debt issuance costs....................................... -- (458) (25,465)
------- -------- ---------
Net cash provided by (used in) financing activities..... (781) 47,638 421,234
------- -------- ---------
Increase (decrease) in cash................................. (9,176) (1,323) 1,090
Cash and cash equivalents, beginning of period.............. 10,568 1,392 69
------- -------- ---------
Cash and cash equivalents, end of period.................... $ 1,392 $ 69 $ 1,159
======= ======== =========
Supplemental disclosure of cash paid for:
Interest................................................ $ 1,170 $ 2,335 $ 13,929
======= ======== =========
Taxes................................................... $ 3,078 $ 2,445 $ 10,662
======= ======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 135
KING PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Supplemental schedule of non-cash investing and financing activities:
The Company purchased intangible assets financed by the seller of $5,500
and $75,000 in 1996 and 1998, respectively.
For the years ended December 31, 1996, 1997 and 1998 the Company entered
into capital leases totaling $1,082, $85 and $1,004, respectively.
In connection with its purchases of intangible assets the Company assumed
estimated liabilities of $301, $3,062 and $2,913 for returns of products shipped
prior to acquisition date during 1996, 1997 and 1998, respectively.
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 had prepaid insurance of $359 that was
financed with a note payable.
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.
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE> 136
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, markets and sells primarily
branded prescription pharmaceutical products. Through a national sales force,
King markets its branded pharmaceutical products to general/family
practitioners, internal medicine physicians and hospitals across the country.
The Company also provides contract manufacturing for a number of the world's
leading pharmaceutical and biotechnology companies.
These consolidated financial statements include the accounts of King and
its wholly owned subsidiaries, Monarch Pharmaceuticals, Inc. (formerly a
division of King), Parkedale Pharmaceuticals, Inc. and King Pharmaceuticals of
Nevada, Inc. All intercompany transactions and balances have been eliminated in
consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES. The preparation of the consolidated financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions. Assets, liabilities, revenues and expenses,
and disclosure of contingent assets and liabilities are affected by such
estimates and assumptions. Actual results could differ from those estimates.
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 Food and
Drug Administration.
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.
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 basis 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.
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.
F-8
<PAGE> 137
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at
cost. Maintenance and repairs are expensed as incurred. Depreciation is computed
over the estimated useful lives of the related assets using the straight-line
method for financial statement purposes and accelerated methods for income tax
purposes. Retirements, sales and disposals of assets are recorded by removing
the cost and accumulated depreciation with any resulting gain or loss reflected
in income.
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.
CAPITALIZED INTEREST. For the year ended December 31, 1998, the Company
capitalized interest of approximately $239. The Company had no capitalized
interest for the years ended December 31, 1996 and 1997.
INTANGIBLE ASSETS. Intangible assets are stated at cost, net of
accumulated amortization. Amortization is computed over the estimated useful
lives of 10 to 30 years using the straight-line method.
The Company continually reevaluates the propriety of the carrying amount of
intangibles as well as the related amortization period to determine whether the
current events and circumstances warrant adjustments to the carrying values
and/or revised estimates of useful lives. This evaluation is performed using the
estimated projected future undiscounted cash flows associated with the asset
compared to the asset's carrying amount to determine if a writedown is required.
To the extent such projection indicates that undiscounted cash flow is not
expected to be adequate to recover the carrying amounts, the assets are written
down to discounted cash flows.
OTHER ASSETS. Other assets consist primarily of deferred financing costs
which are being amortized over periods ranging from six to eight years.
Amortization expense related to deferred financing costs was $0, $0 and $728 for
the years ended December 31, 1996, 1997 and 1998, respectively, and has been
included in interest expense.
During 1998, the Company repaid certain debt prior to maturity. The
repayment resulted in extraordinary charges of $4,411, net of related tax
benefits of $2,787, associated with the write-off of deferred financing costs.
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 $1,298, $890
and $401, for the years ended December 31, 1996, 1997 and 1998, respectively.
F-9
<PAGE> 138
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING AND PROMOTION. The Company expenses advertising and promotion
costs as incurred and these costs are included as selling, general and
administrative expenses. Advertising and promotion costs for the years ended
December 31, 1996, 1997 and 1998 were $1,283, $1,583 and $10,744, respectively.
STATEMENT OF ACCOUNTING STANDARDS NOT YET ADOPTED. In June 1998, the Board
adopted Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company currently is evaluating the
potential effect of SFAS 133 on its financial statements.
COMPREHENSIVE INCOME. In 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income". In 1996 and 1997, the Company had other
comprehensive income of $16, net of tax, related to an unrealized loss on
securities. The Company had no other comprehensive income in 1998.
RECLASSIFICATIONS. Certain amounts from the prior consolidated financial
statements have been reclassified to conform to the presentation adopted in
1998.
3. CONCENTRATIONS OF CREDIT RISK
A significant portion of the Company's sales are to customers in the
pharmaceuticals industry. Approximately 20% and 17% of accounts receivable at
December 31, 1997 and 1998, respectively were due from one customer. At December
31, 1997 and 1998, an additional 22% and 25%, respectively, were due from two
other customers. The Company monitors the extension of credit to customers and
has not experienced significant credit losses.
The following table represents a summary of sales to significant customers
as a percentage of the Company's total revenues:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
McKesson Corporation...................................... n/a 16.7% 11.4%
Cardinal Whitmire......................................... n/a 14.0% 10.8%
Bergen Brunswig Corporation............................... n/a 13.4% 12.6%
Amerisource............................................... n/a 10.6% n/a
SmithKline Beecham Corporation............................ 18.1% n/a n/a
Mallinckrodt.............................................. 36.7% n/a n/a
Novartis Animal Health US, Inc............................ 14.9% n/a n/a
n/a -- sales were less than 10% for the year
</TABLE>
F-10
<PAGE> 139
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Land........................................................ $ 319 $ 3,949
Buildings and improvements.................................. 13,563 55,990
Machinery and equipment..................................... 4,046 32,522
Equipment under capital lease............................... 1,720 2,713
Construction in progress.................................... 585 6,106
------- --------
20,233 101,280
Less accumulated depreciation............................... (3,063) (7,299)
------- --------
$17,170 $ 93,981
======= ========
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1996,
1997 and 1998 was $853, $985 and $4,236, respectively.
5. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Finished goods.............................................. $ 7,568 $13,772
Work-in process............................................. 494 5,386
Raw materials............................................... 2,788 7,398
------- -------
$10,850 $26,556
======= =======
</TABLE>
6. ACQUISITIONS/INTANGIBLE ASSETS
On December 22, 1998, the Company acquired three branded pharmaceutical
products from Hoechst Marion Roussel, Inc. ("HMR" or "Seller") for a purchase
price of $362,500, plus acquisition costs of approximately $450. The acquired
products were: (a) the U.S. rights to the Altace product line with patents
expiring through 2008, (b) worldwide rights to the Silvadene product line, and
(c) worldwide rights to the AVC product line (collectively the "Altace
Acquisition"). The purchase price was principally allocated to intangible assets
and financed under the Company's Senior Credit Facility and a $75,000 note from
the Seller (Note 9). Intangible assets are being amortized over 15 to 30 years.
On June 30, 1998, the Company acquired the rights, title and interest to
the Menest(R) product line for approximately $5,000. The entire purchase was
allocated to intangible assets and is being amortized over its estimated useful
life of 25 years. The acquisition was financed with proceeds resulting from the
completion of the Company's June 25, 1998 initial public offering (Note 17).
F-11
<PAGE> 140
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On February 28, 1998, the Company acquired the rights, titles and interest
to certain product lines, production facilities (the "Parkedale Facility"), and
assumed contracts for manufacturing for third parties from Warner-Lambert
Company (the "Sterile Products Acquisition"). The purchase price, including
assumed liabilities of $2,913, of $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 Credit Agreement (Note 9).
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 of 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 of products shipped prior to the
acquisition. The entire purchase price was allocated to intangible assets and is
being amortized over its estimated useful life of 25 years. The purchase price
was financed from internally generated cash funds and borrowings under its
revolving line of credit agreement.
On March 21, 1997, the Company acquired the rights, title and interest in
the United States to the Cortisporin(R) product line for $22,845, plus the
assumption of an estimated $849 of returns of products shipped prior to the
acquisition. The entire purchase price was allocated to intangible assets and is
being amortized over its estimated useful life of 25 years. The purchase price
was financed principally through the raising of equity (Note 17), 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.
F-12
<PAGE> 141
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma summary presents the financial
information as if the acquisitions 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 acquisitions been made on
January 1, 1997, nor is it indicative of future results.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Total revenues.............................. $213,441 $269,803
======== ========
Income before extraordinary item............ $ 11,273 $ 34,877
======== ========
Net income.................................. $ 11,273 $ 30,466
======== ========
Diluted income per common share:
Income before extraordinary item.......... $ 0.43 $ 1.16
======== ========
Net income............................. $ 0.43 $ 1.01
======== ========
</TABLE>
Intangible assets at December 31 resulted from the following product
acquisitions:
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Altace, Silvadene, AVC...................................... $ -- $362,950
Sterile Products............................................ -- 54,509
Menest...................................................... -- 5,000
Septra, Proloprim, Mantadil, Kemadrin....................... 15,425 15,425
Cortisporin................................................. 23,694 23,694
Neosporin................................................... 5,876 5,876
Viroptic.................................................... 5,229 5,229
Nucofed/Quibron............................................. 7,301 7,301
Polysporin.................................................. 3,783 3,783
Other....................................................... 3,017 3,377
------- --------
64,325 487,144
Less accumulated amortization............................... (1,542) (6,561)
------- --------
$62,783 $480,583
======= ========
</TABLE>
Amortization expense for the years ended December 31, 1996, 1997, and 1998
was $129, $1,410, and $5,019, respectively.
F-13
<PAGE> 142
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LEASE OBLIGATIONS
The Company leases certain office and manufacturing equipment and
automobiles under noncancelable operating leases with terms from one to five
years. Estimated future minimum lease payments, as of December 31, 1998 for
leases with initial or remaining terms in excess of one year are as follows:
<TABLE>
<S> <C>
1999........................................................ $1,419
2000........................................................ 1,311
2001........................................................ 795
2002........................................................ 741
2003........................................................ 262
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 was
approximately $196, $138, and $1,230, respectively.
Additionally, the Company leases office space in its building to tenants
under agreements ranging from one to twenty years. Such leases are accounted for
as operating leases. Rental income for the years ended December 31, 1996, 1997
and 1998 was approximately $86, $44, and $40, respectively. As of December 31,
1998 estimated future minimum rental payments to be received each year from 1999
to 2003 is $40.
Capital lease obligations for certain equipment as of December 31, 1998 are
as follows:
<TABLE>
<S> <C>
1999........................................................ $ 620
2000........................................................ 631
2001........................................................ 485
2002........................................................ 275
2003........................................................ 160
------
Total minimum lease payments................................ 2,171
Less imputed interest....................................... (322)
------
Present value of minimum lease payments..................... 1,849
Less current maturities..................................... 374
------
$1,475
======
</TABLE>
F-14
<PAGE> 143
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. ACCRUED EXPENSES
Accrued expenses at December 31, consist of the following:
<TABLE>
<CAPTION>
1997 1998
------ -------
<S> <C> <C>
Payroll and outside personnel services...................... $ 555 $ 675
Returns and chargebacks..................................... 4,207 9,397
Accrued interest............................................ 478 1,176
Franchise taxes............................................. 146 142
Other....................................................... 803 3,257
Incurred but not reported medical claims.................... 314 448
------ -------
$6,503 $15,095
====== =======
</TABLE>
9. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Senior Credit Facility:
Revolving Credit Facility................................. $ -- $ 19,000
Tranche A Term Loan....................................... -- 150,000
Tranche B Term Loan....................................... -- 275,000
Senior Subordinated Seller Notes with interest at 10%
payable monthly due December 2007......................... -- 75,000
Senior Secured Revolving Credit Facility, paid in February
1998...................................................... 6,152 --
Senior Secured Term Loan, paid in February 1998............. 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........................... 6,027 5,163
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 1,750
Various capital leases with interest rates ranging from 8.3%
to 12.7% and maturing at various times through 2002....... 1,206 1,849
Other notes payable......................................... 1,238 34
------- --------
56,373 527,796
Less current portion................................... 8,084 13,310
------- --------
$48,289 $514,486
======= ========
</TABLE>
On December 22, 1998, the Company amended and restated its Credit Agreement
(as defined below) dated as of February 27, 1998 (the "Senior Credit Facility")
to: (a) finance the Altace Acquisition; (b) refinance the Company's then
existing indebtedness; and (c) provide for ongoing working capital and other
financing requirements. The Senior Credit Facility provides for up to $500,000
of aggregate borrowing capacity,
F-15
<PAGE> 144
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consisting of: a $150,000 tranche A term loan (the "Tranche A Term Loan"); a
$275,000 tranche B term loan (the "Tranche B Term Loan"); and a revolving credit
facility in an aggregate amount of $75,000 (the "Revolving Credit Facility").
The Revolving Credit Facility includes a $10,000 sublimit available for the
issuance of letters of credit and a $5,000 sublimit available for swingline
loans.
As of December 31, 1998, the Company had $56,000 of available borrowings
under its Revolving Credit Facility.
The Tranche A Term Loan is subject to certain specified amortization
payments required to be made in quarterly installments commencing on March 31,
1999 until December 22, 2004. The Tranche B Term Loan is subject to certain
specified amortization payments required to be made in quarterly installments
commencing on March 31, 1999 until December 22, 2006. The Revolving Credit
Facility is available until December 22, 2004. In addition, the loans and the
aggregate available commitments under the Senior Credit Facility will be reduced
upon the occurrence of certain specified events as outlined in the agreement.
The loans under the Senior Credit Facility accrue interest, at the
Company's option, at either (a) the base rate (which is based on the prime rate
or the federal funds rate plus one-half of 1%) plus (i) in the case of the
Tranche A Term Loan and borrowings under the Revolving Credit Facility, an
applicable spread ranging from 1.25% to 2.25% (based on a leverage ratio) and
(ii) in the case of the Tranche B Term Loan, 2.75% or (b) the applicable LIBOR
rate plus (i) in the case of the Tranche A Term Loan and borrowings under the
Revolving Credit Facility, an applicable spread ranging from 2.25% to 3.25%
(based on a leverage ratio) and (ii) in the case of the Tranche B Term Loan,
3.75%. In addition, the lenders under the Senior Credit Facility are entitled to
customary facility fees based on (a) unused commitments under the Revolving
Credit Facility and (b) letters of credit outstanding.
The Company's obligations under the Senior Credit Facility are
unconditionally guaranteed on a senior basis by each direct and indirect
majority owned U.S. subsidiary of the Company (collectively, the
"Subsidiaries"). In addition, the Senior Credit Facility is collateralized by
substantially all of the real and personal property of the Company.
The Senior Credit Facility contains a number of covenants that, among other
things, restrict the ability of the Company and its subsidiaries to dispose of
assets, incur additional indebtedness or guaranty obligations, repurchase or
redeem capital stock or repay subordinated indebtedness (including the Notes),
except in accordance with the subordination provisions, pay dividends or make
capital distributions, enter into sale and leaseback transactions, make
investments, make acquisitions, engage in mergers or consolidations, make
capital expenditures, engage in certain transactions with affiliates, make
loans, change its fiscal year, change its business and otherwise restrict
corporate activities.
On February 27, 1998, the Company entered into a $195,000 credit agreement
("Credit Agreement"). The Company used the proceeds from the Credit Agreement to
finance the Warner Lambert Acquisition (Note 6), and pay off the $40,000 Term
Loan and outstanding borrowings under the Revolver as of February 27, 1998. The
Credit
F-16
<PAGE> 145
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Agreement was paid in full on December 22, 1998 with proceeds from the Senior
Credit Facility.
On November 26, 1997, the Company entered into a $12,000 Senior Secured
Revolving Credit Facility (the "Revolver") and a $40,000 Senior Secured Term
Loan ("Term Loan"), collectively referred to as the "Financing". As of December
31, 1997, $40,000 was outstanding under the term loan and $6,152 was outstanding
under the Revolver. The Financing was repaid in February 1998 with proceeds from
the Credit Agreement.
The Company has entered into two interest rate swap agreements designated
as a partial hedge of the Company's variable rate debt. The purpose of these
swaps is to fix interest rates on variable rate debt and reduce certain
exposures to interest rate fluctuations. At December 31, 1998, the Company had
interest rate swaps with a notional amount of $100,000. Under these agreements
the Company pays a weighted average fixed rate of 5.5% and receives a rate
equivalent to the three-month and one-month LIBOR. The notional amounts do not
represent in amounts exchanged by the parties. The agreements expire in the year
2001.
The aggregate maturities of long-term debt (excluding capital lease
obligations -- Note 7) at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 12,936
2000........................................................ 18,735
2001........................................................ 26,279
2002........................................................ 33,841
2003........................................................ 41,406
Thereafter.................................................. 392,750
--------
$525,947
========
</TABLE>
10. NOTES PAYABLE
During 1997, the Company entered into a financing agreement to make certain
payments for machinery and equipment. As of December 31, 1997, the Company had a
demand note payable plus interest at prime plus .33% with $557 outstanding. The
Note payable was paid in 1998.
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 was $359. The note payable has an interest rate of 7.8% and
was paid in 1998.
11. FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair values of financial
instruments are made in accordance with the requirements of SFAS 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.
F-17
<PAGE> 146
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 AND NOTES PAYABLE The carrying amounts of the Company's
long-term debt and notes payable approximate fair value. The fair value of the
Company's long-term debt, including the current portion, at December 31, 1997
and 1998, is estimated to be approximately $56,000 and $572,500, respectively,
using discounted cash flow analyses and based on the Company's incremental
borrowing rates for similar types of borrowing arrangements.
INTEREST RATE SWAPS The estimated fair market value of the interest rate
swap agreements at December 31, 1998, as determined by the issuing financial
institution and based on the estimated termination values, was an unrealized
loss of approximately $2,787.
12. INCOME TAXES
The net income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----- ------ -------
<S> <C> <C> <C>
Current................................................ $(635) $4,948 $16,336
Deferred............................................. 528 (980) (940)
----- ------ -------
Total (benefit) expense...................... $(107) $3,968 $15,396
===== ====== =======
</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>
1996 1997 1998
------ ---- -----
<S> <C> <C> <C>
Federal statutory tax rate............................. (34.0)% 34.0% 35.0%
State income taxes, net of federal benefit........... -- 3.0 3.3
Permanent differences................................ 2.3 0.4 0.1
Other................................................ 0.9 0.1 (0.6)
------ ---- -----
Effective tax rate................................ (30.8)% 37.5% 37.8%
====== ==== =====
</TABLE>
F-18
<PAGE> 147
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liability are as follows:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Allowance for doubtful accounts............................ $ 238 $ 389
Uniform cost capitalization................................ 117 228
Accrued expenses........................................... 528 101
State net operating loss carryforward...................... 413 793
Accrued liabilities........................................ 1,239 5,164
------- -------
Total deferred tax assets................................ 2,535 6,675
------- -------
Property, plant and equipment.............................. (3,135) (3,840)
Intangible assets.......................................... (1,226) (3,721)
Miscellaneous.............................................. (165) (165)
------- -------
Total deferred tax liabilities........................... (4,526) (7,726)
------- -------
Net deferred tax liability............................... $(1,991) $(1,051)
======= =======
</TABLE>
The Company's state net operating loss carryforward of approximately
$24,000 expires in 2013. 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. Company contributions during the years ended December
31, 1996, 1997 and 1998, were $278, $307 and $1,066, respectively. The plan also
provides for discretionary profit-sharing contributions by the Company.
14. COMMITMENTS AND CONTINGENCIES
In May 1998, the Company was named as a co-defendant in a wrongful death
and survival action in the District Court of Gregg County, Texas. The action
demands an unspecified amount. This action relates to the manufacture of the
anorexigenic product for SmithKline.
Many distributors, marketers and manufacturers of anorexigenic drugs have
been subject to claims relating to the use of these drugs. The Company is a
defendant in various lawsuits which claim damages for personal injury arising
from the Company's production of the anorexigenic drug, phentermine, under
contract for SmithKline. Generally, the lawsuits allege that the defendants (1)
misled users of the products with respect to the dangers associated with them,
(2) failed to adequately test the products and (3) knew or should have known
about the negative effects of the drugs, and should have informed the public
about the risks of such negative effects. The actions generally have been
brought by individuals in their own right and have been filed in various state
and federal jurisdictions
F-19
<PAGE> 148
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
throughout the United States. They seek, among other things, compensatory and
punitive damages and/or court supervised medical monitoring of persons who have
ingested the product. The Company expects to be named in additional lawsuits
related to the company's production of the anorexigenic drug under contract for
SmithKline.
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 for which it manufactured the anorexigenic product,
provided that neither the lawsuits 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 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.
The Parkedale Facility was one of six facilities owned by Warner-Lambert
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.) (the "Consent Decree"). The
Parkedale Facility is currently manufacturing pharmaceutical products subject to
the Consent Decree which prohibits the manufacture and delivery of specified
drug products unless, among other things, the products conform to current good
manufacturing practices and are produced in accordance with an approved
abbreviated new drug application or new drug application. The Company is in the
process of petitioning for, and if appropriate, obtaining relief from the
Consent Decree.
The Company is involved in various routine legal proceedings incident to
the ordinary course of its business. Management believes that the outcome of all
pending legal proceedings in the aggregate will not have a material adverse
effect on the Company's consolidated financial position, results of operation or
cash flow.
15. SEGMENT INFORMATION
Effective December 31, 1998 the Company adopted SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information". SFAS No. 131
establishes standards for the way public business enterprises report information
about operating segments. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS No. 131 did not affect the Company's results of operations
or financial position. However, prior year disclosures have been reclassified to
conform with the provisions of this statement.
The Company's business is classified into two reportable segments; Branded
Pharmaceuticals and Contract Manufacturing. Branded Pharmaceuticals include a
variety of branded prescription products over four therapeutic areas, including
cardiovascular, anti-infective, vaccines and biologicals and women's health
products. These branded prescription products have been aggregated because of
the similarity in regulatory environment,
F-20
<PAGE> 149
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
manufacturing process, method of distribution, and type of customer. Contract
Manufacturing represents contract manufacturing services provided for
pharmaceutical and biotechnology companies. The classification all other
primarily includes generic pharmaceutical, companion animal health products and
development services.
The Company primarily evaluates its segments based on gross profit.
Reportable segments were separately identified based on revenues, gross profit
and total assets.
The following represents selected information for the Company's operating
segments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
TOTAL REVENUES:
Branded pharmaceuticals............................. $ 2,939 $37,912 $125,399
Contract manufacturing.............................. 10,890 7,962 54,734
All Other........................................... 7,128 3,015 6,453
Eliminations........................................ (500) (980) (23,123)
------- ------- --------
Consolidated total revenues....................... $20,457 $47,909 $163,463
======= ======= ========
GROSS PROFIT (LOSS):
Branded pharmaceuticals............................. $ 2,659 $33,165 $ 94,452
Contract manufacturing.............................. 2,809 (187) (531)
All Other........................................... 6,207 1,897 5,490
------- ------- --------
Consolidated gross profit......................... $11,675 $34,875 $ 99,411
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
TOTAL ASSETS:
Branded pharmaceuticals.................................... $ 73,640 $522,218
Contract manufacturing..................................... 30,334 144,614
All Other.................................................. 918 1,735
Eliminations............................................... (29) (396)
-------- --------
Consolidated total assets................................ $104,863 $668,171
======== ========
</TABLE>
Capital expenditures of $1,069, $1,379 and $8,099 for the years ended
December 31, 1996, 1997 and 1998, respectively, are substantially utilized for
contract manufacturing purposes.
16. 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
F-21
<PAGE> 150
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$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.
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.
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 $245, $994 and $247 for the years ended
December 31, 1996, 1997 and 1998, respectively. At December 31, 1997 and 1998,
the Company had receivables from this foundation of approximately $1,671 and
$596, 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.
For the year ended December 31, 1998, the Company had paid Bourne & Co.,
Inc., an affiliate of a director and since January 1999, an officer of the
Company, $2,475 for consulting services. In connection with the Altace
Acquisition and related financing, Bourne & Co., Inc., received $1,250 in
January 1999, which was recorded in accrued expenses as of December 31, 1998.
For the years ended December 31, 1996 and 1997, the Company had paid Bourne &
Co., Inc., approximately $92 and $651 respectively, for its advisory services in
the acquisition of the Cortisporin product line and $62 for consulting services
for the year ended December 31, 1997.
In September 1998, the Company purchased for approximately $350 the primary
residence of an officer of the Company in connection with his relocation to the
Parkedale Facility. The Company believes the purchase price was at fair market
value and currently holds the property for sale.
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.
The Company paid a certain shareholder $160 for consulting fees during the
year ended December 31, 1996.
17. 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 market value at the time of the transaction of $3 per share. The
weighted average shares and all per share amounts included in the accompanying
consolidated financial statements
F-22
<PAGE> 151
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 and
1998 Stock Option Plans shall not exceed 3,500,000, (3,200,000 and 300,000,
respectively).
During 1998, the Company granted 222,750 options of common stock to
employees under the 1997 Stock Option Plan at an exercise price equal to fair
market value at date of grant. As of December 31, 1998, the Company had 220,200
options outstanding of which 54,375 are vested and exercisable. Options under
the 1997 Stock Option Plan vest at various times over 24 months and expire 10
years from the date of grant.
During 1998, the Company granted 50,000 options of common stock to its
directors under the 1998 Stock Option Plan at an exercise price equal to the
initial public offering price of $14.00 per share. The options vested
immediately upon grant. As of December 31, 1998, the Company had 50,000 options
vested and outstanding. Options under the 1998 Stock Option Plan expire 10 years
from the date of grant.
F-23
<PAGE> 152
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has adopted the disclosure only provision of SFAS No. 123,
"Accounting for Stock Based Compensation." Accordingly, since options were
granted at fair value, no compensation cost has been recognized for stock
options granted to date. Had compensation cost for these plans been determined
for options granted, consistent with SFAS No. 123, the Company's net income and
diluted income per share would have decreased to the following pro forma amounts
for the year ended December 31, 1998:
<TABLE>
<CAPTION>
1998
-------
<S> <C>
INCOME BEFORE EXTRAORDINARY ITEM:
As reported............................................... $25,321
=======
Pro Forma................................................. $24,520
=======
NET INCOME:
As reported............................................... $20,910
=======
Pro Forma................................................. $20,109
=======
DILUTED INCOME PER SHARE:
Income before extraordinary item:
As reported............................................... $ 0.84
=======
Pro Forma................................................. $ 0.81
=======
NET INCOME:
As reported............................................... $ 0.69
=======
Pro Forma................................................. $ 0.67
=======
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998: expected lives of ranging from 3 years to 4
years; expected volatility of approximately 72%; expected dividend yield of $0
and risk-free interest rates ranging from 4.91% to 5.46%.
F-24
<PAGE> 153
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's Plans of December 31, 1998 and
changes during the year ended December 31, 1998 is presented in the table below:
<TABLE>
<CAPTION>
1997 STOCK 1998 STOCK
OPTION PLAN OPTION PLAN
--------------------- ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- --------- ------- --------
<S> <C> <C> <C> <C>
SHARES UNDER OPTION:
Outstanding at January 1, 1998........... -- $ -- -- $ --
Granted................................ 222,750 14.02 50,000 14.00
Exercised.............................. -- -- -- --
Forfeited.............................. (2,550) 14.00 -- --
--------- ------ ------- ------
Outstanding at December 31, 1998......... 220,200 $14.02 50,000 $14.00
========= ====== ======= ======
Weighted average fair value of options
granted................................ N/A $ 8.10 N/A $ 7.14
========= ====== ======= ======
Options available for grant at December
31, 1998............................... 2,979,800 N/A 250,000 N/A
========= ====== ======= ======
</TABLE>
Options outstanding at December 31, 1998 have exercise prices between
$14.00 and $15.25, with a weighted average exercise price of $14.02 and a
remaining contractual life of approximately 9.5 years.
OTHER 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. The Company is authorized to issue up to
15 million shares.
An amendment to the Company's Articles of Incorporation to increase the number
of authorized common shares from 10 million shares of no par value to 150
million shares of no par value.
A dividend of one preferred share purchase right (a "Right") for each common
share outstanding. Such rights entitle the registered holder under certain
circumstances to purchase from the Company one-thousandth of a share of a newly
created series of the Company's preferred shares, at a price of $60 per
one-thousandth shares of Preferred Stock, subject to adjustment.
The Company closed the sale of 4,104,730 shares of common stock at $14.00
per share on June 30, 1998. The net proceeds to the Company from the sale of
stock in the initial public offering after deducting underwriting discounts and
commissions and offering expenses were approximately $50,117.
F-25
<PAGE> 154
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth a reconciliation of the gross IPO proceeds
to the net IPO proceeds.
<TABLE>
<S> <C>
Gross IPO proceeds.......................................... $57,466
Underwriters discounts and commissions...................... 4,118
IPO expenses paid in 1998................................... 2,521
IPO expenses paid in 1997................................... 710
-------
Net equity provided from IPO................................ $50,117
=======
</TABLE>
18. INCOME (LOSS) PER SHARE
The basic and diluted income (loss) before extraordinary item per share was
determined as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Income (loss) before extraordinary item
available to common shareholders........ $ (240) $ 6,612 $ 25,321
=========== =========== ===========
BASIC INCOME (LOSS) PER SHARE:
Weighted average common shares.......... 15,440,465 26,270,103 30,127,527
----------- ----------- -----------
Basic (loss) income per common share.... $ (0.02) $ 0.26 $ 0.84
=========== =========== ===========
DILUTED INCOME (LOSS) PER SHARE:
Weighted average common shares.......... 15,440,465 26,270,103 30,127,527
Effect of stock options................. -- -- 29,891
----------- ----------- -----------
Weighted average common shares plus
assumed conversions.................. 15,440,465 26,270,103 30,157,418
----------- ----------- -----------
Diluted income (loss) per share......... $ (0.02) $ 0.26 $ 0.84
=========== =========== ===========
</TABLE>
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth summary quarterly financial information for
the years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 BY QUARTER FIRST SECOND THIRD FOURTH
- --------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues...................... $ 8,786 $12,066 $12,735 $14,322
Gross profit........................ 6,723 8,913 8,978 10,261
Operating income.................... 1,906 3,911 3,297 4,243
Net income.......................... 921 1,984 1,650 2,057
Basic and diluted income per common
share(1).......................... 0.04 0.07 0.06 0.07
</TABLE>
F-26
<PAGE> 155
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 BY QUARTER FIRST SECOND THIRD FOURTH
- --------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues...................... $24,977 $40,264 $48,089 $50,133
Gross profit........................ 17,613 26,216 27,568 28,014
Operating income.................... 9,690 14,812 15,349 15,587
Income before extraordinary item.... 4,361 6,388 7,310 7,262
Net income.......................... 4,075 6,388 7,310 3,137
Basic and diluted income per common
share:
Income before extraordinary
item(1)........................ 0.16 0.23 0.23 0.23
Net income........................ 0.15 0.23 0.23 0.08
</TABLE>
- -------------------------
(1) Quarterly amounts do not add to annual amounts due to the effect of rounding
on a quarterly basis.
20. SUBSEQUENT EVENTS
On March 3, 1999, the Company issued $150,000 of 10 3/4% of Senior
Subordinated Notes due 2009. Net proceeds of approximately $144,000 were used to
repay outstanding indebtedness under the Senior Credit Facility ($69,000) and
the Seller Note ($75,000). The debt is guaranteed by the Company's wholly-owned
subsidiaries Monarch Pharmaceuticals, Inc., Parkedale Pharmaceuticals, Inc. and
King Pharmaceuticals of Nevada, Inc. In addition, the Company increased its
borrowing capacity under its Revolving Credit Facility to $100,000.
21. GUARANTOR FINANCIAL STATEMENTS
The Company's wholly-owned subsidiaries Monarch Pharmaceuticals, Inc.,
Parkedale Pharmaceuticals, Inc. and King Pharmaceuticals of Nevada, Inc. (the
"Guarantor Subsidiaries") have guaranteed the Company's performance under the
$150,000 of 10 3/4% Senior Subordinated Notes due 2009 on a joint and several
basis. There are no restrictions under the Company's financing arrangements on
the ability of the Guarantor Subsidiaries to distribute funds to the Company in
the form of cash dividends, loans or advances. The following combined financial
data provides information regarding the financial position, results of
operations and cash flows of the Guarantor Subsidiaries (condensed
consolidated/combined financial data). Separate financial statements and other
disclosures concerning the Guarantor Subsidiaries are not presented because
management has determined that such information would not be material to the
holders of the Notes.
F-27
<PAGE> 156
GUARANTOR SUBSIDIARIES
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Assets
Current assets:
Cash................................... $ (132,582) $ (1,411,477)
Accounts receivable.................... 6,419,007 30,474,645
Intercompany receivable................
Inventory.............................. 4,999,611 20,089,372
Prepaid expenses....................... 62,222 26,521
----------- ------------
Total current assets........... 11,348,258 49,179,061
----------- ------------
Property, plant and equipment............ 49,531 72,965,262
Other assets............................. 82,357 --
Intangibles.............................. 62,185,550 117,517,943
----------- ------------
Total assets................... $73,665,696 $239,662,266
=========== ============
Liabilities and shareholder's equity:
Accounts payable....................... $ 3,634,124 $ 8,157,191
Current portion of long-term debt...... 2,059 --
Other liabilities and accrued
expenses............................ 4,542,969 10,644,962
Income taxes payable...................
----------- ------------
Total current liabilities...... 8,179,152 18,802,153
----------- ------------
Long-term debt........................... 1,759,452
Intercompany payable..................... 47,210,426 174,201,405
----------- ------------
Total liabilities.............. 57,149,030 193,003,558
----------- ------------
Shareholder's equity..................... 16,516,666 46,658,708
----------- ------------
Total liabilities and
shareholder's equity........ $73,665,696 $239,662,266
=========== ============
</TABLE>
F-28
<PAGE> 157
GUARANTOR SUBSIDIARIES
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Net sales.............................. $ -- $37,912,835 $166,012,301
Development revenues................... 5,000,000 -- 5,000,000
----------- ----------- ------------
Total revenues......................... 5,000,000 37,912,835 171,012,301
Cost of sales.......................... 500,000 4,748,092 72,786,486
Selling, general and administrative.... 54,449 10,606,004 22,243,800
Depreciation........................... -- 1,069 2,748,837
Amortization........................... -- 1,368,001 4,516,294
Royalty expense........................ -- 56,459 2,222,225
----------- ----------- ------------
Operating income....................... 4,445,551 21,133,210 66,494,659
----------- ----------- ------------
Interest expense....................... -- 2,601,094 18,360,616
Gain on sale of investment in
affiliate........................... (1,759,916) -- --
Other income........................... (239,589) (425,883) (1,041,749)
Other expense.......................... -- 1,518 4,434
----------- ----------- ------------
Income before income taxes............. 6,445,056 18,956,481 49,171,358
----------- ----------- ------------
Income tax expense..................... 2,247,820 7,336,158 19,029,316
----------- ----------- ------------
Net income............................. $ 4,197,236 $11,620,323 $ 30,142,042
=========== =========== ============
</TABLE>
F-29
<PAGE> 158
GUARANTOR SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
----------- ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................... $ 4,197,236 $ 11,620,323 $ 30,142,042
Adjustments to reconcile net income
provided by (used in) operating
activities
Amortization......................... 239 1,368,001 4,516,294
Depreciation......................... 96 1,069 2,748,837
Gain on sale of investment in
affiliate......................... (1,759,916) -- --
Increase in accrued expenses......... -- 4,542,969 6,101,993
Decrease in income taxes payable..... (3,806,595) --
Increase in accounts receivable...... -- (6,419,007) (24,055,638)
Increase in inventory................ -- (4,999,611) (15,089,761)
Increase in prepaid assets........... -- (62,222) 35,701
Increase in accounts payable......... -- 3,634,124 4,523,067
Increase in other assets............. -- (80,874) 82,357
----------- ------------ -------------
Net cash provided by (used in)
operating activities.............. (1,368,940) 9,604,772 9,004,892
----------- ------------ -------------
Cash flows from investing activities:
Decrease (increase) in intercompany
receivable........................ (1,108,564) 4,815,287 --
Proceeds from sale of stock.......... 2,052,000 -- --
Purchases of intangibles............. -- (63,552,599) (59,848,686)
Purchases of property, plant and
equipment......................... -- (50,021) (75,664,568)
----------- ------------ -------------
Cash flows from investing............ 943,436 (58,787,333) (135,513,254)
----------- ------------ -------------
Cash flows from financing activities:
Increase in intercompany payable..... -- 47,210,426 126,990,979
Increase in long-term debt........... -- 1,761,512 (1,761,512)
----------- ------------ -------------
Net cash provided by financing
activities........................ -- 48,971,938 125,229,467
----------- ------------ -------------
Increase (decrease) in cash and cash
equivalents....................... (425,504) (210,623) (1,278,895)
Cash at beginning of period.......... 503,545 78,041 (132,582)
----------- ------------ -------------
Cash at end of period................ 78,041 (132,582) (1,411,477)
----------- ------------ -------------
Cash at end of period................ $ 78,041 $ (132,582) $ (1,411,477)
=========== ============ =============
</TABLE>
F-30
<PAGE> 159
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Hoechst Marion Roussel, Inc.:
We have audited the accompanying statement of product contribution for the
Altace Product Line of Hoechst Marion Roussel, Inc. and Hoechst Marion Roussel
Deutschland GmbH for the period January 1, 1998 through December 22, 1998 and
for years ended December 31, 1997 and 1996. The statement of product
contribution is the responsibility of Hoechst Marion Roussel, Inc. and Hoechst
Marion Roussel Deutschland GmbH 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 audits provide 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 direct revenues and direct
expenses of the Altace Product Line and is not intended to be a complete
presentation of the Altace Product Line. Furthermore, the amounts in the
accompanying statement are not necessarily indicative of the costs and expenses
that would have resulted if the Altace Product Line 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 Altace Product
Line for the period January 1, 1998 through December 22, 1998 and for years
ended December 31, 1997 and 1996, in conformity with generally accepted
accounting principles.
KPMG LLP
Kansas City, MO
March 11, 1999
F-31
<PAGE> 160
ALTACE PRODUCT LINE
OF HOECHST MARION ROUSSEL, INC. AND
HOECHST MARION ROUSSEL DEUTSCHLAND GMBH
SPECIAL PURPOSE STATEMENT OF PRODUCT CONTRIBUTION
FOR THE PERIOD JANUARY 1, 1998 THROUGH DECEMBER 22, 1998
AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------- -------
<S> <C> <C> <C>
Net sales........................................ $89,859 $83,671 $88,154
------- ------- -------
Cost of sales.................................... 5,663 5,238 9,441
Royalty expense.................................. 2,246 2,092 2,204
Advertising and promotion expense................ 19,125 12,549 11,650
Selling expense.................................. 25,494 17,600 14,234
------- ------- -------
Total costs and expenses............... 52,528 37,479 37,529
------- ------- -------
Net product contribution............... $37,331 $46,192 $50,625
======= ======= =======
</TABLE>
See accompanying notes to the special purpose statement of product contribution.
F-32
<PAGE> 161
ALTACE PRODUCT LINE
OF HOECHST MARION ROUSSEL, INC. AND
HOECHST MARION ROUSSEL DEUTSCHLAND GMBH
NOTES TO SPECIAL PURPOSE STATEMENT OF PRODUCT CONTRIBUTION
FOR THE PERIOD JANUARY 1, 1998 THROUGH DECEMBER 22, 1998
AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. OWNERSHIP/BASIS OF PRESENTATION
The Altace Product Line (the "Product") includes all rights, title, and
interest within the United States. Hoechst Marion Roussel, Inc. and Hoechst
Marion Roussel Deutschland GmbH (the "Company") are negotiating the sale of the
U. S. rights of this product to King Pharmaceuticals, Inc. to sell, market, and
distribute the Product in the United States. The Company will continue to supply
finished goods and samples under a separate supply agreement for a minimum of
five years.
Historically, financial statements were not prepared for the Product. These
statements have been developed from the historical accounting records of the
Company and represent the direct revenues and direct expenses, only, of the
Product. All of the estimates in the financial statements, as described in note
2, are based on the assumptions that Company management believes are reasonable.
However, these estimates are not necessarily indicative of the net sales and
costs that would have resulted if the Product 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 certain sales deductions. Sales deductions are presented
on an accrual basis and include deductions specifically attributable to the
Product and deductions allocated to the Product by management. The types of
deductions included in the calculation of net sales are as follows:
- SALES REBATES. Managed care and Medicaid rebates are charged to the
Product monthly, using actual cash rebate payments and monthly accruals.
Bid chargebacks are allocated to the Product monthly, based on actual
sales.
- CASH DISCOUNTS. Cash discounts are allocated to the Product monthly, as
a percentage of actual Product gross sales to total gross sales of the
Company.
F-33
<PAGE> 162
ALTACE PRODUCT LINE
OF HOECHST MARION ROUSSEL, INC. AND
HOECHST MARION ROUSSEL DEUTSCHLAND GMBH
NOTES TO SPECIAL PURPOSE STATEMENT OF PRODUCT CONTRIBUTION
FOR THE PERIOD JANUARY 1, 1998 THROUGH DECEMBER 22, 1998
AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
- SALES RETURNS. Sales returns are directly attributable to identifiable
products based on actual sales returns.
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross sales......................................... $104,150 $97,439 $99,908
Less:
Sales rebates..................................... 10,776 10,732 8,856
Cash discounts.................................... 2,083 1,949 1,998
Sales returns..................................... 1,432 1,087 900
-------- ------- -------
Net sales...................................... $ 89,859 $83,671 $88,154
======== ======= =======
</TABLE>
COST OF SALES
Elements of cost of sales include raw materials, direct labor, plant
overhead, and manufacturing variances. Certain of these costs are specifically
identifiable to specific brands, and the remaining costs are allocated based on
the Product's percentage of total production for the production facility.
Inventories are valued at the lower of cost or market. The cost of
inventories has been determined using the last-in, first-out (LIFO) method of
valuation.
Depreciation of plant facilities is computed using the straight-line method
based on estimated useful lives of the assets. Generally, the lives of buildings
range from thirty to forty years, and five to ten years for machinery and
equipment.
Production of the Product was transferred from the Company's manufacturing
facility in Bridgewater, New Jersey to the Company's manufacturing facility in
Kansas City, Missouri during the last half of 1996. This transfer resulted in
larger than expected manufacturing variances and an increase in cost of sales
for the Product in 1996.
ROYALTY EXPENSE
The Company pays quarterly royalties based upon net sales of the Product.
This royalty is paid quarterly based upon 2.5% of net sales.
ADVERTISING AND PROMOTION EXPENSE
Advertising and promotion costs include professional advertising costs,
promotional tools, and samples.
F-34
<PAGE> 163
ALTACE PRODUCT LINE
OF HOECHST MARION ROUSSEL, INC. AND
HOECHST MARION ROUSSEL DEUTSCHLAND GMBH
NOTES TO SPECIAL PURPOSE STATEMENT OF PRODUCT CONTRIBUTION
FOR THE PERIOD JANUARY 1, 1998 THROUGH DECEMBER 22, 1998
AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
SELLING EXPENSE
Selling costs consist primarily of sales force employment costs (salaries
and bonuses). These costs are allocated based on actual sales force
documentation of sales calls, itemized by product.
USE OF ESTIMATES
The preparation of the financial statement of Altace Product Contribution
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect certain reported amounts of gross
profit for the period January 1, 1998 through December 22, 1998 and for the
years ended December 31, 1997 and 1996. Actual results could differ from those
estimates.
3. SIGNIFICANT CUSTOMERS
The Product had U. S. sales to four customers representing approximately
73%, 77%, and 73% of sales for the period January 1, 1998 through December 22,
1998 and for the years ended December 31, 1997 and 1996, respectively.
F-35
<PAGE> 164
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Hoechst Marion Roussel, Inc.:
We have audited the accompanying statement of product contribution for the
Silvadene Product Line of Hoechst Marion Roussel, Inc. for the period January 1,
1998 through December 22, 1998 and for the years ended December 31, 1997 and
1996. The statement of product contribution is the responsibility of Hoechst
Marion Roussel, Inc. 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 audits provide 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 direct revenues and direct
expenses of the Silvadene Product Line and is not intended to be a complete
presentation of the Silvadene Product Line. Furthermore, the amounts in the
accompanying statement are not necessarily indicative of the costs and expenses
that would have resulted if the Silvadene Product Line 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 Silvadene
Product Line for the period January 1, 1998 through December 22, 1998 and for
the years ended December 31, 1997 and 1996, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Kansas City, MO
March 11, 1999
F-36
<PAGE> 165
SILVADENE PRODUCT LINE
OF HOECHST MARION ROUSSEL, INC.
SPECIAL PURPOSE STATEMENT OF PRODUCT CONTRIBUTION
FOR THE PERIOD JANUARY 1, 1998 THROUGH DECEMBER 22, 1998
AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------ ------
<S> <C> <C> <C>
Net sales.......................................... $3,107 $3,320 $3,646
------ ------ ------
Cost of sales...................................... 954 1,281 1,190
------ ------ ------
Net product contribution......................... $2,153 $2,039 $2,456
====== ====== ======
</TABLE>
See accompanying notes to the special purpose statement of product contribution.
F-37
<PAGE> 166
SILVADENE PRODUCT LINE
OF HOECHST MARION ROUSSEL, INC.
NOTES TO SPECIAL PURPOSE STATEMENT OF PRODUCT CONTRIBUTION
FOR THE PERIOD JANUARY 1, 1998 THROUGH DECEMBER 22, 1998
AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. OWNERSHIP/BASIS OF PRESENTATION
The Silvadene Product Line (the "Product") includes all rights, title, and
interest within the United States. Hoechst Marion Roussel, Inc. (the "Company"
or "HMRI") is negotiating the sale of its worldwide rights of this product to
King Pharmaceuticals, Inc. to sell, market, and distribute the Product. The
Company will continue to supply finished goods and samples under a separate
supply agreement for two years.
Historically, financial statements were not prepared for the Product. These
statements have been developed from the historical accounting records of the
Company and represent the direct revenues and direct expenses, only, of the
Product. All of the estimates in the financial statements, as described in note
2, are based on the assumptions that Company management believes are reasonable.
However, these estimates are not necessarily indicative of the net sales and
costs that would have resulted if the Product 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 certain sales deductions. Sales deductions are presented
on an accrual basis and include deductions specifically attributable to the
Product and deductions allocated to the Product by management. The types of
deductions included in the calculation of net sales are as follows:
- SALES REBATES. Managed care and Medicaid rebates are allocated to the
Product monthly, using actual cash rebate payments. Bid chargebacks are
allocated to the Product monthly, based on actual sales.
- CASH DISCOUNTS. Cash discounts are allocated to the Product monthly, as
a percentage of actual Product gross sales to total gross sales of the
Company.
- SALES RETURNS. Sales returns are directly attributable to identifiable
products based on actual sales returns.
F-38
<PAGE> 167
SILVADENE PRODUCT LINE
OF HOECHST MARION ROUSSEL, INC.
NOTES TO SPECIAL PURPOSE STATEMENT OF PRODUCT CONTRIBUTION
FOR THE PERIOD JANUARY 1, 1998 THROUGH DECEMBER 22, 1998
AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross sales..................................... $3,787 $4,199 $4,479
Less:
Sales rebates................................. 501 725 591
Cash discounts................................ 76 84 89
Sales returns................................. 103 70 153
------ ------ ------
Net sales.................................. $3,107 $3,320 $3,646
====== ====== ======
</TABLE>
COST OF SALES
Elements of 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 the Product's percentage
of total production for the Company.
Inventories are valued at the lower of cost or market. The cost of
inventories has been determined using the last-in, first-out (LIFO) method of
valuation.
Depreciation of plant facilities is computed using the straight line method
based on estimated useful lives of the assets. Generally, the lives for
buildings are thirty to forty years, and five to ten years for machinery and
equipment.
USE OF ESTIMATES
The preparation of the financial statements of Silvadene Product
Contribution in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect certain
reported amounts of gross profit for the period January 1, 1998 through December
22, 1998 and for the years ended December 31, 1997 and 1996. Actual results
could differ from those estimates.
3. SIGNIFICANT CUSTOMERS
The Product had sales to four customers representing approximately 71%,
73%, and 62% of sales for the period January 1, 1998 through December 22, 1998
and for the years ended December 1997 and 1996, respectively.
F-39
<PAGE> 168
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Hoechst Marion Roussel, Inc.:
We have audited the accompanying statement of product contribution for the
AVC Product Line of Hoechst Marion Roussel, Inc. for the period January 1, 1998
through December 22, 1998 and for the years ended December 31, 1997 and 1996.
The statement of product contribution is the responsibility of Hoechst Marion
Roussel, Inc. 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 audits provide 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 direct revenues and direct
expenses of the AVC Product Line and is not intended to be a complete
presentation of the AVC Product Line. Furthermore, the amounts in the
accompanying statement are not necessarily indicative of the costs and expenses
that would have resulted if the AVC Product Line 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 AVC Product
Line for the period January 1, 1998 through December 22, 1998 and for the years
ended December 31, 1997 and 1996, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Kansas City, MO
March 11, 1999
F-40
<PAGE> 169
AVC PRODUCT LINE
FOR HOECHST MARION ROUSSEL, INC.
SPECIAL PURPOSE STATEMENT OF PRODUCT CONTRIBUTION
FOR THE PERIOD JANUARY 1, 1998 THROUGH DECEMBER 22, 1998
AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------ ------
<S> <C> <C> <C>
Net sales.......................................... $1,232 $1,460 $2,284
------ ------ ------
Cost of sales...................................... 300 288 446
------ ------ ------
Net product contribution......................... $ 932 $1,172 $1,838
====== ====== ======
</TABLE>
See accompanying notes to the special purpose statement of product contribution.
F-41
<PAGE> 170
AVC PRODUCT LINE OF
HOECHST MARION ROUSSEL, INC.
NOTES TO SPECIAL PURPOSE STATEMENT OF PRODUCT CONTRIBUTION
FOR THE PERIOD JANUARY 1, 1998 THROUGH DECEMBER 22, 1998
AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. OWNERSHIP/BASIS OF PRESENTATION
The AVC Product Line (the "Product") includes all rights, title, and
interest within the United States. Hoechst Marion Roussel, Inc. (the "Company"
or "HMRI") is negotiating the sale of its worldwide rights of this product to
King Pharmaceuticals, Inc. to sell, market, and distribute the Product. The
Company will continue to supply finished goods and samples under a separate
supply agreement for two years.
Historically, financial statements were not prepared for the Product. These
statements have been developed from the historical accounting records of the
Company and represent the direct revenues and direct expenses, only, of the
Product. All of the estimates in the financial statements, as described in note
2, are based on the assumptions that Company management believes are reasonable.
However, these estimates are not necessarily indicative of the net sales and
costs that would have resulted if the Product 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 CERTAIN SALES DEDUCTIONS. Sales deductions are presented
on an accrual basis and include deductions specifically attributable to the
Product and deductions allocated to the Product by management. The types of
deductions included in the calculation of net sales are as follows:
- SALES REBATES. Medicaid rebates are allocated to the Product monthly,
using actual cash rebate payments. Bid chargebacks are allocated to the
Product monthly, based on actual sales.
- CASH DISCOUNTS. Cash discounts are allocated to the Product monthly, as
a percentage of actual Product gross sales to total gross sales of the
Company.
F-42
<PAGE> 171
AVC PRODUCT LINE OF
HOECHST MARION ROUSSEL, INC.
NOTES TO SPECIAL PURPOSE STATEMENT OF PRODUCT CONTRIBUTION
FOR THE PERIOD JANUARY 1, 1998 THROUGH DECEMBER 22, 1998
AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
- SALES RETURNS. Sales returns are directly attributable to identifiable
products based on actual sales returns.
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross sales................................ $1,792 $1,992 $2,881
Less:
Sales rebates............................ 133 178 270
Cash discounts........................... 36 40 58
Sales returns............................ 391 314 269
------ ------ ------
Net sales............................. $1,232 $1,460 $2,284
====== ====== ======
</TABLE>
COST OF SALES
Elements of 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 the Product's percentage
of total production for the Company.
Inventories are valued at the lower of cost or market. The cost of
inventories has been determined using the last-in, first-out (LIFO) method of
valuation.
Depreciation of plant facilities is computed using the straight line method
based on estimated useful lives of the assets. Generally, the lives of buildings
range from thirty to forty years, and five to ten years for machinery and
equipment.
USE OF ESTIMATES
The preparation of the financial statements of AVC Product Contribution in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect certain reported amounts of gross
profit for the period January 1, 1998 through December 22, 1998 and for the
years ended December 31, 1997 and 1996. Actual results could differ from those
estimates.
3. SIGNIFICANT CUSTOMERS
The Product had sales to four customers representing approximately 70% of
sales for the period January 1, 1998 through December 22, 1998. The Product had
sales to five customers representing approximately 85% of sales for the year
ended December 1997 and sales to four customers representing approximately 70%
of sales for the year ended December 31, 1996.
F-43
<PAGE> 172
(KING PHARMACEUTICALS LOGO)
<PAGE> 173
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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, director, 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. King has adopted the
provisions of the Tennessee statute pursuant to Paragraph 9 of its Second
Amended and Restated Charter. King also has 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 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<C> <S> <C>
*3.1 -- Second Amended and Restated Charter of King Pharmaceuticals,
Inc.
*3.2 -- 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.
**4.3 -- Registration Rights Agreement, dated as of March 3, 1999,
between the Company and the Initial Purchasers
**4.4 -- King Pharmaceuticals, Inc., Issuer, 10 3/4% Senior
Subordinated Notes due 2009, Indenture dated as of March 3,
1999, Union Planters Bank, N.A., Trustee.
**5.1 -- Opinion of Baker, Donelson, Bearman & Caldwell.
*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 -- Promissory Note between King Pharmaceuticals, Inc., and The
United Company, dated March 17, 1997, in the amount of
$1,750,000
*10.4 -- Toll Manufacturing Agreement for APAP/Hydrocodone Bitartrate
Tablets by and between Mallinckrodt Chemical, Inc. and King
Pharmaceuticals, Inc.
*10.5 -- Agreement between King Pharmaceuticals, Inc. and Ernest C.
Bourne dated July 30, 1997.
****10.6 -- Credit Agreement, dated as of February 27, 1998, as amended
and restated as of December 22, 1998 among King
Pharmaceuticals, Inc., and the Lenders therein, Credit
Suisse First Boston, as Administrative Agent, as Collateral
Agent and as Swingline Lender, First Union National Bank, as
Issuing Bank, and First Union National Bank and NationsBank,
N.A., as Syndication Agents.
*10.7 -- Agreement for Purchase and Sale of Assets Relating to
Cortisporin by and between Glaxo Wellcome Inc. and Monarch
Pharmaceuticals, Inc. dated March 21, 1997.
</TABLE>
II-1
<PAGE> 174
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<C> <S> <C>
*10.8 -- 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.
*10.9 -- 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.
*10.10 -- Manufacture and Supply Agreement with Novartis (Ciba-Geigy
Corporation) dated July 17, 1995.
*10.11 -- Manufacture and Supply Agreement with Roberts Laboratories,
Inc. dated October 5, 1995.
*10.12 -- Supply Agreement with SmithKline Beecham Corporation dated
July 16, 1996.
*10.13 -- Trademark, Patent, Copyright and Know-How License Agreement
between Warner-Lambert Company and Glaxo Wellcome Inc. dated
as of June 30, 1996
*10.14 -- 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.
*10.15 -- 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.
*10.16 -- Product Manufacturing Agreement between Santen Incorporated
and Warner-Lambert Company, dated June 26, 1997, for the
manufacture of Ofloxacin Otic Solution 0.3%.
*10.17 -- License Agreement by and among Warner-Lambert Company, Parke
Davis & Company, and Parkedale Pharmaceuticals, Inc., dated
February 27, 1998, for the use of the Anusol Trademark, the
Anusol Mold, and Other Trademarks.
*10.18 -- 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.
*10.19 -- 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.
***10.20 -- General Products Agreement dated as of December 17, 1998, by
and among Hoechst Marion Roussel, Inc., Hoechst Marion
Roussel, Deutschland GmbH, and King Pharmaceuticals, Inc.
*10.21 -- 1998 King Pharmaceuticals, Inc. Non-Employee Director Stock
Option Plan.
*10.22 -- 1997 Incentive and Nonqualified Stock Option Plan for
Employees of King Pharmaceuticals, Inc.
**12.1 -- Statements re computation of ratios.
**21.1 -- Subsidiaries of the Registrant
**23.1 -- Consent of Baker, Donelson, Bearman & Caldwell (included in
Exhibit 5)
**23.2 -- Consent of PricewaterhouseCoopers LLP
**23.3 -- Consent of KPMG LLP
**24.1 -- Power of Attorney (included on signature page hereto)
**25.1 -- Statement of Eligibility of Trustee under the Trust
Indenture Act of 1939 on Form T-1
</TABLE>
II-2
<PAGE> 175
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<C> <S> <C>
**99.1 -- Form of Letter of Transmittal
**99.2 -- Form of Notice of Guaranteed Delivery
</TABLE>
- -------------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (registration No. 333-38753) filed October 24, 1997.
** Filed herewith.
*** Incorporated by reference to the Company's Current Report on Form 8-K filed
January 6, 1999.
**** Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
(b) Financial Statement Schedules -- Not applicable
(c) Not Applicable
ITEM 22. UNDERTAKINGS
The undersigned hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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:
(1) to file, during any period in which offers or sales of the
securities are being made, a post-effective amendment to this Registration
Statement:
(i) to include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect any facts or events arising after the effective
date (or most recent post-effective amendment) which, individually, or
in the aggregate, represent a fundamental change in the information set
forth in the Registration Statement;
II-3
<PAGE> 176
(iii) to include any material information with respect to the plan
of distribution not previously disclosed or any material change to such
information set forth in the Registration Statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply
if the registration statement is on Form S-3, Form S-8, and the
information required [or] to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
Registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment 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.
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(c) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement 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.
(d) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(e) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (d) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment 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.
(f) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Proxy
Statement-Prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request.
(g) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-4
<PAGE> 177
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement on Form S-4 to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Bristol,
State of Tennessee on April 26, 1999.
KING PHARMACEUTICALS, INC.
By: /s/ JOHN M. GREGORY
---------------------------------------
John M. Gregory
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints John M. Gregory, Jefferson J. Gregory and
Joseph R. Gregory and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities (including his capacity as a
director and/or officer of King Pharmaceuticals, Inc. (The "Company")), to sign
any or all amendments (including post-effective amendments) to this Registration
Statement on Form S-4 of the Company relating to the exchange offer by the
Company to exchange its 10 3/4% Senior Subordinated Notes Due 2009 for new
notes, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their or
his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
In accordance with the requirements of the Securities Act, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ JOHN M. GREGORY Chairman of the Board (principal April 26, 1999
- --------------------------------------------------- executive officer)
John M. Gregory
/s/ BRIAN G. SHRADER Chief Financial Officer April 26, 1999
- --------------------------------------------------- (principal financial and
Brian G. Shrader accounting officer)
/s/ JEFFERSON J. GREGORY Director April 26, 1999
- ---------------------------------------------------
Jefferson J. Gregory
/s/ JOSEPH R. GREGORY Director April 26, 1999
- ---------------------------------------------------
Joseph R. Gregory
Director April , 1999
- ---------------------------------------------------
Ernest C. Bourne
/s/ LOIS A. CLARKE Director April 26, 1999
- ---------------------------------------------------
Lois A. Clarke
</TABLE>
II-5
<PAGE> 178
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ FRANK W. DE FRIECE, JR. Director April 26, 1999
- ---------------------------------------------------
Frank W. De Friece, Jr.
/s/ D. GREG ROOKER Director April 26, 1999
- ---------------------------------------------------
D. Greg Rooker
/s/ TED G. WOOD Director April 26, 1999
- ---------------------------------------------------
Ted G. Wood
</TABLE>
II-6
<PAGE> 1
EXHIBIT 4.3
EXECUTION COPY
$150,000,000
KING PHARMACEUTICALS, INC.
10 3/4% SENIOR SUBORDINATED NOTES DUE 2009
REGISTRATION RIGHTS AGREEMENT
February 26, 1999
Credit Suisse First Boston Corporation
First Union Capital Markets Corp.
Nationsbanc Montgomery Securities LLC
c/o Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, New York 10010-3629
Dear Sirs:
King Pharmaceuticals, Inc., a Tennessee corporation (the "Company"),
proposes to issue and sell to Credit Suisse First Boston Corporation, First
Union Capital Markets Corp. and Nationsbanc Montgomery Securities LLC
(collectively, the "Initial Purchasers"), upon the terms set forth in a purchase
agreement of even date herewith (the "Purchase Agreement"), $150,000,000
aggregate principal amount of its 10 3/4% Senior Subordinated Notes Due 2009
(the "Initial Securities") to be unconditionally guaranteed (each, a "Subsidiary
Guaranty") on an unsecured, senior subordinated basis by each of the Company's
subsidiaries listed on Schedule A thereto (the "Subsidiary Guarantors"). The
Initial Securities will be issued pursuant to an Indenture dated as of March 3,
1999 (the "Indenture"), among the Company, the Subsidiary Guarantors and Union
Planters Bank, N.A., as trustee (the "Trustee"). As an inducement to the
Initial Purchasers to enter into the Purchase Agreement, the Company agrees with
the Initial Purchasers, for the benefit of the holders of the Initial Securities
(including, without limitation, the Initial Purchasers), the Exchange Securities
(as defined below) and the Private Exchange Securities (as defined below)
(collectively the "Holders"), as follows:
1. Registered Exchange Offer. The Company shall, at its own cost,
prepare and, not later than 60 days after (or if the 60th day is not a business
day, the first business day thereafter) the date of original issue of the
Initial Securities (the "Issue Date"), file with the Securities and Exchange
Commission (the "Commission") a registration statement (the "Exchange Offer
Registration Statement") on an appropriate form under the Securities Act of
1933, as amended (the "Securities Act"), with respect to a proposed offer (the
"Registered Exchange Offer") to the Holders of Transfer Restricted Securities
(as defined in Section 6(d) hereof), who are not prohibited by any law or policy
of the Commission from participating in the Registered Exchange Offer, to issue
and deliver to such Holders, in exchange for the Initial Securities, a like
aggregate principal amount of debt securities (the "Exchange Securities") of the
Company issued under the Indenture and identical in all material respects to the
Initial Securities (except for the transfer restrictions relating to the Initial
Securities and the provisions relating to the matters described in Section 6
hereof) that would be registered under the Securities Act. The Company shall use
its best efforts to cause such Exchange Offer Registration Statement
<PAGE> 2
to become effective under the Securities Act within 150 days (or if the 150th
day is not a business day, the first business day thereafter) after the Issue
Date of the Initial Securities and shall keep the Exchange Offer Registration
Statement effective for not less than 30 days (or longer, if required by
applicable law) after the date notice of the Registered Exchange Offer is mailed
to the Holders (such period being called the "Exchange Offer Registration
Period").
If the Company effects the Registered Exchange Offer, the Company will
be entitled to close the Registered Exchange Offer 30 days after the
commencement thereof provided that the Company has accepted all the Initial
Securities theretofore validly tendered in accordance with the terms of the
Registered Exchange Offer.
Following the declaration of the effectiveness of the Exchange Offer
Registration Statement, the Company shall commence the Registered Exchange Offer
as soon as practicable thereafter, it being the objective of such Registered
Exchange Offer to enable each Holder of Transfer Restricted Securities (as
defined in Section 6(d) hereof) electing to exchange the Initial Securities for
Exchange Securities (assuming that such Holder is not an affiliate of the
Company within the meaning of the Securities Act, acquires the Exchange
Securities in the ordinary course of such Holder's business and has no
arrangement or understanding with any person to participate in the distribution
of the Exchange Securities and is not prohibited by any law or policy of the
Commission from participating in the Registered Exchange Offer) to trade such
Exchange Securities from and after their receipt without any limitations or
restrictions under the Securities Act and without material restrictions under
the securities laws of the several states of the United States.
The Company acknowledges that, pursuant to current interpretations by
the Commission's staff of Section 5 of the Securities Act, in the absence of an
applicable exemption therefrom, (i) each Holder which is a broker-dealer
electing to exchange Initial Securities, acquired for its own account as a
result of market making activities or other trading activities, for Exchange
Securities (an "Exchanging Dealer"), is required to deliver a prospectus
containing the information set forth in (a) Annex A hereto on the cover, (b)
Annex B hereto in the "Exchange Offer Procedures" section and the "Purpose of
the Exchange Offer" section, and (c) Annex C hereto in the "Plan of
Distribution" section of such prospectus in connection with a sale of any such
Exchange Securities received by such Exchanging Dealer pursuant to the
Registered Exchange Offer and (ii) an Initial Purchaser that elects to sell
Securities (as defined below) acquired in exchange for Initial Securities
constituting any portion of an unsold allotment, is required to deliver a
prospectus containing the information required by Items 507 or 508 of Regulation
S-K under the Securities Act, as applicable, in connection with such sale.
The Company shall use its best efforts to keep the Exchange Offer
Registration Statement effective and to amend and supplement the prospectus
contained therein, in order to permit such prospectus to be lawfully delivered
by all persons subject to the prospectus delivery requirements of the Securities
Act for such period of time as such persons must comply with such requirements
in order to resell the Exchange Securities; provided, however, that (i) in the
case where such prospectus and any amendment or supplement thereto must be
delivered by an Exchanging Dealer or an Initial Purchaser, such period shall be
the lesser of 180 days and the date on which all Exchanging Dealers and the
Initial Purchasers have sold all Exchange Securities held by them (unless such
period is extended pursuant to Section 3(j) below) and (ii) the Company shall
make such prospectus and any amendment or supplement thereto available to any
broker-dealer for use in connection with any resale of any Exchange Securities
for a period of not less than 180 days after the consummation of the Registered
Exchange Offer.
2
<PAGE> 3
If, upon consummation of the Registered Exchange Offer, any Initial
Purchaser holds Initial Securities acquired by it as part of its initial
distribution, the Company, simultaneously with the delivery of the Exchange
Securities pursuant to the Registered Exchange Offer, shall issue and deliver to
such Initial Purchaser upon the written request of such Initial Purchaser, in
exchange (the "Private Exchange") for the Initial Securities held by such
Initial Purchaser, a like principal amount of debt securities of the Company
issued under the Indenture and identical in all material respects (including the
existence of restrictions on transfer under the Securities Act and the
securities laws of the several states of the United States, but excluding
provisions relating to the matters described in Section 6 hereof) to the Initial
Securities (the "Private Exchange Securities"). The Initial Securities, the
Exchange Securities and the Private Exchange Securities are herein collectively
called the "Securities."
In connection with the Registered Exchange Offer, the Company shall:
(a) mail to each Holder a copy of the prospectus forming part
of the Exchange Offer Registration Statement, together with an
appropriate letter of transmittal and related documents;
(b) keep the Registered Exchange Offer open for not less than
30 days (or longer, if required by applicable law) after the date
notice thereof is mailed to the Holders;
(c) utilize the services of a depositary for the Registered
Exchange Offer with an address in the Borough of Manhattan, The City of
New York, which may be the Trustee or an affiliate of the Trustee;
(d) permit Holders to withdraw tendered Securities at any time
prior to the close of business, New York time, on the last business day
on which the Registered Exchange Offer shall remain open; and
(e) otherwise comply with all applicable laws.
As soon as practicable after the close of the Registered Exchange Offer
or the Private Exchange, as the case may be, the Company shall:
(x) accept for exchange all the Securities validly tendered
and not withdrawn pursuant to the Registered Exchange Offer and the
Private Exchange;
(y) deliver to the Trustee for cancelation all the Initial
Securities so accepted for exchange; and
(z) cause the Trustee to authenticate and deliver promptly to
each Holder of the Initial Securities, Exchange Securities or Private
Exchange Securities, as the case may be, equal in principal amount to
the Initial Securities of such Holder so accepted for exchange.
The Indenture will provide that the Exchange Securities will not be
subject to the transfer restrictions set forth in the Indenture and that all the
Securities will vote and consent together on all matters as one class and that
none of the Securities will have the right to vote or consent as a class
separate from one another on any matter.
3
<PAGE> 4
Interest on each Exchange Security and Private Exchange Security issued
pursuant to the Registered Exchange Offer and in the Private Exchange will
accrue from the last interest payment date on which interest was paid on the
Initial Securities surrendered in exchange therefor or, if no interest has been
paid on the Initial Securities, from the Issue Date.
Each Holder participating in the Registered Exchange Offer shall be
required to represent to the Company that at the time of the consummation of the
Registered Exchange Offer (i) any Exchange Securities received by such Holder
will be acquired in the ordinary course of business, (ii) such Holder will have
no arrangement or understanding with any person to participate in the
distribution of the Securities or the Exchange Securities within the meaning of
the Securities Act, (iii) such Holder is not an "affiliate," as defined in Rule
405 of the Securities Act, of the Company or if it is an affiliate, such Holder
will comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable, (iv) if such Holder is not a
broker-dealer, that it is not engaged in, and does not intend to engage in, the
distribution of the Exchange Securities and (v) if such Holder is a
broker-dealer, that it will receive Exchange Securities for its own account in
exchange for Initial Securities that were acquired as a result of market-making
activities or other trading activities and that it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Securities.
Notwithstanding any other provisions hereof, the Company will ensure
that (i) any Exchange Offer Registration Statement and any amendment thereto and
any prospectus forming part thereof and any supplement thereto complies in all
material respects with the Securities Act and the rules and regulations
thereunder, (ii) any Exchange Offer Registration Statement and any amendment
thereto does not, when it becomes effective, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (iii) any prospectus
forming part of any Exchange Offer Registration Statement, and any supplement to
such prospectus, does not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
2. Shelf Registration. If, (i) because of any change in law or in
applicable interpretations thereof by the staff of the Commission, the Company
is not permitted to effect a Registered Exchange Offer, as contemplated by
Section 1 hereof, (ii) the Registered Exchange Offer is not consummated within
150 days of the Issue Date, (iii) an Initial Purchaser shall notify us within 10
business days following consummation of the Registered Exchange Offer that the
Initial Securities (or the Private Exchange Securities) held by it are not
eligible to be exchanged for Exchange Securities in the Registered Exchange
Offer or (iv) any Holder (other than an Exchanging Dealer) is not eligible to
participate in the Registered Exchange Offer or, in the case of any Holder
(other than an Exchanging Dealer) that participates in the Registered Exchange
Offer, such Holder does not receive freely tradeable Exchange Securities on the
date of the exchange, the Company shall take the following actions:
(a) The Company shall, at its cost, as promptly as practicable
(but in no event more than 30 days after so required or requested
pursuant to this Section 2) file with the Commission and thereafter
shall use its best efforts to cause to be declared effective a
registration statement (the "Shelf Registration Statement" and,
together with the Exchange Offer Registration Statement, a
"Registration Statement") on an appropriate form under the Securities
Act relating to the offer
4
<PAGE> 5
and sale of the Transfer Restricted Securities (as defined in Section
6(d) hereof) by the Holders thereof from time to time in accordance
with the methods of distribution set forth in the Shelf Registration
Statement and Rule 415 under the Securities Act (hereinafter, the
"Shelf Registration"); provided, however, that no Holder (other than an
Initial Purchaser) shall be entitled to have the Securities held by it
covered by such Shelf Registration Statement unless such Holder agrees
in writing to be bound by all the provisions of this Agreement
applicable to such Holder.
(b) The Company shall use its best efforts to keep the Shelf
Registration Statement continuously effective in order to permit the
prospectus included therein to be lawfully delivered by the Holders of
the relevant Securities, for a period of two years (or for such longer
period if extended pursuant to Section 3(j) below) from the date of its
effectiveness or such shorter period that will terminate when all the
Securities covered by the Shelf Registration Statement (i) have been
sold pursuant thereto or (ii) are no longer restricted securities (as
defined in Rule 144 under the Securities Act, or any successor rule
thereof). The Company shall be deemed not to have used its best efforts
to keep the Shelf Registration Statement effective during the requisite
period if it voluntarily takes any action that would result in Holders
of Securities covered thereby not being able to offer and sell such
Securities during that period, unless such action is required by
applicable law.
(c) Notwithstanding any other provisions of this Agreement to
the contrary, the Company shall cause the Shelf Registration Statement
and the related prospectus and any amendment or supplement thereto, as
of the effective date of the Shelf Registration Statement, amendment or
supplement, (i) to comply in all material respects with the applicable
requirements of the Securities Act and the rules and regulations of the
Commission and (ii) not to contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
3. Registration Procedures. In connection with any Shelf Registration
contemplated by Section 2 hereof and, to the extent applicable, any Registered
Exchange Offer contemplated by Section 1 hereof, the following provisions shall
apply:
(a) The Company shall (i) furnish to each Initial Purchaser,
prior to the filing thereof with the Commission, a copy of the
Registration Statement and each amendment thereof and each supplement,
if any, to the prospectus included therein and, in the event that an
Initial Purchaser (with respect to any portion of an unsold allotment
from the original offering) is participating in the Registered Exchange
Offer or the Shelf Registration Statement, the Company shall use its
best efforts to reflect in each such document, when so filed with the
Commission, such comments as such Initial Purchaser reasonably may
propose; (ii) include the information set forth in Annex A hereto on
the cover, in Annex B hereto in the "Exchange Offer Procedures" section
and the "Purpose of the Exchange Offer" section and in Annex C hereto
in the "Plan of Distribution" section of the prospectus forming a part
of the Exchange Offer Registration Statement and include the
information set forth in Annex D hereto in the Letter of Transmittal
delivered pursuant to the Registered Exchange Offer; (iii) if requested
by an Initial Purchaser, include the information required by Items 507
or 508 of Regulation S-K under the Securities Act, as applicable, in
the prospectus forming a part of the Exchange Offer Registration
Statement; (iv) include within the prospectus
5
<PAGE> 6
contained in the Exchange Offer Registration Statement a section
entitled "Plan of Distribution," reasonably acceptable to the Initial
Purchasers, which shall contain a summary statement of the positions
taken or policies made by the staff of the Commission with respect to
the potential "underwriter" status of any broker-dealer that is the
beneficial owner (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) of Exchange
Securities received by such broker-dealer in the Registered Exchange
Offer (a "Participating Broker-Dealer"), whether such positions or
policies have been publicly disseminated by the staff of the
Commission or such positions or policies, in the reasonable judgment
of the Initial Purchasers based upon advice of counsel (which may be
in-house counsel), represent the prevailing views of the staff of the
Commission; and (v) in the case of a Shelf Registration Statement,
include the names of the Holders who propose to sell Securities
pursuant to the Shelf Registration Statement as selling
securityholders.
(b) The Company shall give written notice to the Initial
Purchasers, the Holders of the Securities and any Participating
Broker-Dealer from whom the Company has received prior written notice
that it will be a Participating Broker-Dealer in the Registered
Exchange Offer (which notice pursuant to clauses (ii) through (v) below
shall be accompanied by an instruction to suspend the use of the
prospectus until the requisite changes have been made):
(i) when the Registration Statement or any amendment
thereto has been filed with the Commission and when the
Registration Statement or any post-effective amendment thereto
has become effective;
(ii) of any request by the Commission for amendments
or supplements to the Registration Statement or the prospectus
included therein or for additional information;
(iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that
purpose;
(iv) of the receipt by the Company or its legal
counsel of any notification with respect to the suspension of
the qualification of the Securities for sale in any
jurisdiction or the initiation or threatening of any
proceeding for such purpose; and
(v) of the happening of any event that requires the
Company to make changes in the Registration Statement or the
prospectus in order that the Registration Statement or the
prospectus do not contain an untrue statement of a material
fact nor omit to state a material fact required to be stated
therein or necessary to make the statements therein (in the
case of the prospectus, in light of the circumstances under
which they were made) not misleading.
(c) The Company shall make every reasonable effort to obtain
the withdrawal at the earliest possible time, of any order suspending
the effectiveness of the Registration Statement.
(d) The Company shall furnish to each Holder of Securities
included within the coverage of the Shelf Registration, without charge,
at least one copy of the Shelf Registration Statement and any
post-effective amendment thereto,
6
<PAGE> 7
including financial statements and schedules, and, if the Holder so
requests in writing, all exhibits thereto (including those, if any,
incorporated by reference).
(e) The Company shall deliver to each Exchanging Dealer and
each Initial Purchaser, and to any other Holder who so requests,
without charge, at least one copy of the Exchange Offer Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules, and, if any Initial Purchaser or any such
Holder requests, all exhibits thereto (including those incorporated by
reference).
(f) The Company shall, during the Shelf Registration Period,
deliver to each Holder of Securities included within the coverage of
the Shelf Registration, without charge, as many copies of the
prospectus (including each preliminary prospectus) included in the
Shelf Registration Statement and any amendment or supplement thereto as
such person may reasonably request. The Company consents, subject to
the provisions of this Agreement, to the use of the prospectus or any
amendment or supplement thereto by each of the selling Holders of the
Securities in connection with the offering and sale of the Securities
covered by the prospectus, or any amendment or supplement thereto,
included in the Shelf Registration Statement.
(g) The Company shall deliver to each Initial Purchaser, any
Exchanging Dealer, any Participating Broker-Dealer and such other
persons required to deliver a prospectus following the Registered
Exchange Offer, without charge, as many copies of the final prospectus
included in the Exchange Offer Registration Statement and any amendment
or supplement thereto as such persons may reasonably request. The
Company consents, subject to the provisions of this Agreement, to the
use of the prospectus or any amendment or supplement thereto by any
Initial Purchaser, if necessary, any Participating Broker-Dealer and
such other persons required to deliver a prospectus following the
Registered Exchange Offer in connection with the offering and sale of
the Exchange Securities covered by the prospectus, or any amendment or
supplement thereto, included in such Exchange Offer Registration
Statement.
(h) Prior to any public offering of the Securities pursuant to
any Registration Statement the Company shall register or qualify or
cooperate with the Holders of the Securities included therein and their
respective counsel in connection with the registration or qualification
of the Securities for offer and sale under the securities or "blue sky"
laws of such states of the United States as any Holder of the
Securities reasonably requests in writing and do any and all other acts
or things necessary or advisable to enable the offer and sale in such
jurisdictions of the Securities covered by such Registration Statement;
provided, however, that the Company shall not be required to (i)
qualify generally to do business in any jurisdiction where it is not
then so qualified or (ii) take any action which would subject it to
general service of process or to taxation in any jurisdiction where it
is not then so subject.
(i) The Company shall cooperate with the Holders of the
Securities to facilitate the timely preparation and delivery of
certificates representing the Securities to be sold pursuant to any
Registration Statement free of any restrictive legends and in such
denominations and registered in such names as the Holders may request a
reasonable period of time prior to sales of the Securities pursuant to
such Registration Statement.
7
<PAGE> 8
(j) Upon the occurrence of any event contemplated by
paragraphs (ii) through (v) of Section 3(b) above during the period for
which the Company is required to maintain an effective Registration
Statement, the Company shall promptly prepare and file a post-effective
amendment to the Registration Statement or a supplement to the related
prospectus and any other required document so that, as thereafter
delivered to Holders of the Securities or purchasers of Securities, the
prospectus will not contain an untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. If the Company notifies the
Initial Purchasers, the Holders of the Securities and any known
Participating Broker-Dealer in accordance with paragraphs (ii) through
(v) of Section 3(b) above to suspend the use of the prospectus until
the requisite changes to the prospectus have been made, then the
Initial Purchasers, the Holders of the Securities and any such
Participating Broker-Dealers shall suspend use of such prospectus, and
the period of effectiveness of the Shelf Registration Statement
provided for in Section 2(b) above and the Exchange Offer Registration
Statement provided for in Section 1 above shall each be extended by the
number of days from and including the date of the giving of such notice
to and including the date when the Initial Purchasers, the Holders of
the Securities and any known Participating Broker-Dealer shall have
received such amended or supplemented prospectus pursuant to this
Section 3(j).
(k) Not later than the effective date of the applicable
Registration Statement, the Company will provide a CUSIP number for the
Initial Securities, the Exchange Securities or the Private Exchange
Securities, as the case may be, and provide the applicable trustee with
printed certificates for the Initial Securities, the Exchange
Securities or the Private Exchange Securities, as the case may be, in a
form eligible for deposit with The Depository Trust Company.
(l) The Company will comply with all rules and regulations of
the Commission to the extent and so long as they are applicable to the
Registered Exchange Offer or the Shelf Registration and will make
generally available to its security holders (or otherwise provide in
accordance with Section 11(a) of the Securities Act) an earnings
statement satisfying the provisions of Section 11(a) of the Securities
Act, no later than 45 days after the end of a 12-month period (or 90
days, if such period is a fiscal year) beginning with the first month
of the Company's first fiscal quarter commencing after the effective
date of the Registration Statement, which statement shall cover such
12-month period.
(m) The Company shall cause the Indenture to be qualified
under the Trust Indenture Act of 1939, as amended, in a timely manner
and containing such changes, if any, as shall be necessary for such
qualification. In the event that such qualification would require the
appointment of a new trustee under the Indenture, the Company shall
appoint a new trustee thereunder pursuant to the applicable provisions
of the Indenture.
(n) The Company may require each Holder of Securities to be
sold pursuant to the Shelf Registration Statement to furnish to the
Company such information regarding the Holder and the distribution of
the Securities as the Company may from time to time reasonably require
for inclusion in the Shelf Registration Statement, and the Company may
exclude from such registration the Securities of any Holder that
unreasonably fails to furnish such information within a reasonable time
after receiving such request.
8
<PAGE> 9
(o) The Company shall enter into such customary agreements
(including, if requested, an underwriting agreement in customary form)
and take all such other action, if any, as any Holder of the Securities
shall reasonably request in order to facilitate the disposition of the
Securities pursuant to any Shelf Registration.
(p) In the case of any Shelf Registration, the Company shall
(i) make reasonably available for inspection by the Holders of the
Securities, any underwriter participating in any disposition pursuant
to the Shelf Registration Statement and any attorney, accountant or
other agent retained by the Holders of the Securities or any such
underwriter all relevant financial and other records, pertinent
corporate documents and properties of the Company and (ii) cause the
Company's officers, directors, employees, accountants and auditors to
supply all relevant information reasonably requested by the Holders of
the Securities or any such underwriter, attorney, accountant or agent
in connection with the Shelf Registration Statement, in each case, as
shall be reasonably necessary to enable such persons, to conduct a
reasonable investigation within the meaning of Section 11 of the
Securities Act; provided, however, that the foregoing inspection and
information gathering shall be coordinated on behalf of the Initial
Purchasers by you and on behalf of the other parties, by one counsel
designated by and on behalf of such other parties as described in
Section 4 hereof.
(q) In the case of any Shelf Registration, the Company, if
requested by any Holder of Securities covered thereby, shall cause (i)
its counsel to deliver an opinion and updates thereof relating to the
Securities in customary form addressed to such Holders and the Managing
Underwriters (as defined in Section 8 hereof), if any, thereof and
dated, in the case of the initial opinion, the effective date of such
Shelf Registration Statement (it being agreed that the matters to be
covered by such opinion shall include, without limitation, the due
incorporation and good standing of the Company and its subsidiaries;
the qualification of the Company and its subsidiaries to transact
business as foreign corporations; the due authorization, execution and
delivery of the relevant agreements of the type referred to in Section
3(o) hereof; the due authorization, execution, authentication and
issuance, and the validity and enforceability, of the applicable
Securities; the absence of material legal or governmental proceedings
involving the Company and its subsidiaries; the absence of governmental
approvals required to be obtained in connection with the Shelf
Registration Statement, the offering and sale of the applicable
Securities or any agreement of the type referred to in Section 3(o)
hereof; the compliance as to form of such Shelf Registration Statement
and any documents incorporated by reference therein and of the
Indenture with the requirements of the Securities Act and the Trust
Indenture Act, respectively; and, as of the date of the opinion and as
of the effective date of the Shelf Registration Statement or most
recent post-effective amendment thereto, as the case may be, the
absence from such Shelf Registration Statement and the prospectus
included therein, as then amended or supplemented, and from any
documents incorporated by reference therein of an untrue statement of a
material fact or the omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading (in the case of any such documents, in the light of the
circumstances existing at the time that such documents were filed with
the Commission under the Exchange Act); (ii) its officers to execute
and deliver all customary documents and certificates and updates
thereof requested by any underwriters of the applicable Securities; and
(iii) its independent public accountants and the independent public
accountants with respect to any other entity for which financial
information is provided in the
9
<PAGE> 10
Shelf Registration Statement to provide to the selling Holders of the
applicable Securities and any underwriter therefor a comfort letter in
customary form and covering matters of the type customarily covered in
comfort letters in connection with primary underwritten offerings,
subject to receipt of appropriate documentation as contemplated, and
only if permitted, by Statement of Auditing Standards No. 72.
(r) In the case of the Registered Exchange Offer, if requested
by any Initial Purchaser or any known Participating Broker-Dealer, the
Company shall cause (i) its counsel to deliver to such Initial
Purchaser or such Participating Broker-Dealer a signed opinion in the
form set forth in Section 6(d) of the Purchase Agreement with such
changes as are customary in connection with the preparation of a
Registration Statement and (ii) its independent public accountants and
the independent public accountants with respect to any other entity for
which financial information is provided in the Registration Statement
to deliver to such Initial Purchaser or such Participating
Broker-Dealer a comfort letter, in customary form, meeting the
requirements as to the substance thereof as set forth in Section 6(a)
of the Purchase Agreement, with appropriate date changes.
(s) If a Registered Exchange Offer or a Private Exchange is to
be consummated, upon delivery of the Initial Securities by Holders to
the Company (or to such other person as directed by the Company) in
exchange for the Exchange Securities or the Private Exchange
Securities, as the case may be, the Company shall mark, or caused to be
marked, on the Initial Securities so exchanged that such Initial
Securities are being canceled in exchange for the Exchange Securities
or the Private Exchange Securities, as the case may be; in no event
shall the Initial Securities be marked as paid or otherwise satisfied.
(t) The Company will use its best efforts to (a) if the
Initial Securities have been rated prior to the initial sale of such
Initial Securities, confirm such ratings will apply to the Securities
covered by a Registration Statement or (b) if the Initial Securities
were not previously rated, cause the Securities covered by a
Registration Statement to be rated with the appropriate rating
agencies, if so requested by Holders of a majority in aggregate
principal amount of Securities covered by such Registration Statement,
or by the Managing Underwriters (as defined in Section 8 hereof), if
any.
(u) In the event that any broker-dealer registered under the
Exchange Act shall underwrite any Securities or participate as a member
of an underwriting syndicate or selling group or "assist in the
distribution" (within the meaning of the Conduct Rules (the "Rules") of
the National Association of Securities Dealers, Inc. ("NASD")) thereof,
whether as a Holder of such Securities or as an underwriter, a
placement or a sales agent or a broker or dealer in respect thereof, or
otherwise, the Company will assist such broker-dealer in complying with
the requirements of such Rules, including, without limitation, by (i)
if such Rules, including Rule 2720, shall so require, engaging a
"qualified independent underwriter" (as defined in Rule 2720) to
participate in the preparation of the Registration Statement relating
to such Securities, to exercise usual standards of due diligence with
respect thereto and, if any portion of the offering contemplated by
such Registration Statement is an underwritten offering or is made
through a placement or sales agent, to recommend the yield of such
Securities, (ii) indemnifying any such qualified independent
underwriter to the extent of the indemnification of underwriters
provided in Section 5 hereof and (iii) providing
10
<PAGE> 11
such information to such broker-dealer as may be required in order for
such broker-dealer to comply with the requirements of the Rules.
(v) The Company shall use its best efforts to take all other
steps necessary to effect the registration of the Securities covered by
a Registration Statement contemplated hereby.
4. Registration Expenses. The Company shall bear all fees and expenses
incurred in connection with the performance of its obligations under Sections 1
through 3 hereof (including the reasonable fees and expenses, if any, of
Cravath, Swaine & Moore, counsel for the Initial Purchasers, incurred in
connection with the Registered Exchange Offer), whether or not the Registered
Exchange Offer or a Shelf Registration is filed or becomes effective, and, in
the event of a Shelf Registration, shall bear or reimburse the Holders of the
Securities covered thereby for the reasonable fees and disbursements of one firm
of counsel designated by the Holders of a majority in principal amount of the
Securities covered thereby to act as counsel for the Holders of the Securities
in connection therewith.
5. Indemnification. (a) The Company agrees to indemnify and hold
harmless each Holder of the Securities, any Participating Broker-Dealer and each
person, if any, who controls such Holder or such Participating Broker-Dealer
within the meaning of the Securities Act or the Exchange Act (each such Holder,
any such Participating Broker-Dealer and such controlling persons are referred
to collectively as the "Indemnified Parties") from and against any losses,
claims, damages or liabilities, joint or several, or any actions in respect
thereof (including, but not limited to, any losses, claims, damages, liabilities
or actions relating to purchases and sales of the Securities) to which each
Indemnified Party may become subject under the Securities Act, the Exchange Act
or otherwise, insofar as such losses, claims, damages, liabilities or actions
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in a Registration Statement or prospectus or in any
amendment or supplement thereto or in any preliminary prospectus relating to a
Shelf Registration, or arise out of, or are based upon, the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and shall reimburse, as
incurred, the Indemnified Parties for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action in respect thereof; provided, however, that
(i) the Company shall not be liable in any such case to the extent that such
loss, claim, damage or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in a
Registration Statement or prospectus or in any amendment or supplement thereto
or in any preliminary prospectus relating to a Shelf Registration in reliance
upon and in conformity with written information pertaining to such Holder and
furnished to the Company by or on behalf of such Holder specifically for
inclusion therein and (ii) with respect to any untrue statement or omission or
alleged untrue statement or omission made in any preliminary prospectus relating
to a Shelf Registration Statement, the indemnity agreement contained in this
subsection (a) shall not inure to the benefit of any Holder or Participating
Broker-Dealer from whom the person asserting any such losses, claims, damages or
liabilities purchased the Securities concerned, to the extent that a prospectus
relating to such Securities was required to be delivered by such Holder or
Participating Broker-Dealer under the Securities Act in connection with such
purchase and any such loss, claim, damage or liability of such Holder or
Participating Broker-Dealer results from the fact that there was not sent or
given to such person, at or prior to the written confirmation of the sale of
such Securities to such person, a copy of the final prospectus if the Company
had previously furnished copies thereof to such Holder or Participating
Broker-Dealer; provided further, however,
11
<PAGE> 12
that this indemnity agreement will be in addition to any liability which the
Company may otherwise have to such Indemnified Party. The Company shall also
indemnify underwriters, their officers and directors and each person who
controls such underwriters within the meaning of the Securities Act or the
Exchange Act to the same extent as provided above with respect to the
indemnification of the Holders of the Securities if requested by such Holders.
(b) Each Holder of the Securities, severally and not jointly, will
indemnify and hold harmless the Company and each person, if any, who controls
the Company within the meaning of the Securities Act or the Exchange Act from
and against any losses, claims, damages or liabilities or any actions in respect
thereof, to which the Company or any such controlling person may become subject
under the Securities Act, the Exchange Act or otherwise, insofar as such losses,
claims, damages, liabilities or actions arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in a
Registration Statement or prospectus or in any amendment or supplement thereto
or in any preliminary prospectus relating to a Shelf Registration, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact necessary to make the statements therein not misleading, but in
each case only to the extent that the untrue statement or omission or alleged
untrue statement or omission was made in reliance upon and in conformity with
written information pertaining to such Holder and furnished to the Company by or
on behalf of such Holder specifically for inclusion therein; and, subject to the
limitation set forth immediately preceding this clause, shall reimburse, as
incurred, the Company for any legal or other expenses reasonably incurred by the
Company or any such controlling person in connection with investigating or
defending any loss, claim, damage, liability or action in respect thereof. This
indemnity agreement will be in addition to any liability which such Holder may
otherwise have to the Company or any of its controlling persons.
(c) Promptly after receipt by an indemnified party under this Section 5
of notice of the commencement of any action or proceeding (including a
governmental investigation), such indemnified party will, if a claim in respect
thereof is to be made against the indemnifying party under this Section 5,
notify the indemnifying party of the commencement thereof; but the omission so
to notify the indemnifying party will not, in any event, relieve the
indemnifying party from any obligations to any indemnified party other than the
indemnification obligation provided in paragraph (a) or (b) above. In case any
such action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party (who
shall not, except with the consent of the indemnified party, be counsel to the
indemnifying party), and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof the
indemnifying party will not be liable to such indemnified party under this
Section 5 for any legal or other expenses, other than reasonable costs of
investigation, subsequently incurred by such indemnified party in connection
with the defense thereof. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened action in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party unless such settlement includes an unconditional release of such
indemnified party from all liability on any claims that are the subject matter
of such action.
(d) If the indemnification provided for in this Section 5 is
unavailable or insufficient to hold harmless an indemnified party under
subsections (a) or (b) above, then each indemnifying party shall contribute to
the amount paid or payable by such
12
<PAGE> 13
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to in subsection (a) or (b) above (i) in
such proportion as is appropriate to reflect the relative benefits received by
the indemnifying party or parties on the one hand and the indemnified party on
the other from the exchange of the Securities, pursuant to the Registered
Exchange Offer, or (ii) if the allocation provided by the foregoing clause (i)
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but also
the relative fault of the indemnifying party or parties on the one hand and the
indemnified party on the other in connection with the statements or omissions
that resulted in such losses, claims, damages or liabilities (or actions in
respect thereof) as well as any other relevant equitable considerations. The
relative fault of the parties shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or such Holder or such other indemnified
party, as the case may be, on the other, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The amount paid by an indemnified party as a result of
the losses, claims, damages or liabilities referred to in the first sentence of
this subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any action or claim which is the subject of this subsection (d).
Notwithstanding any other provision of this Section 5(d), the Holders of the
Securities shall not be required to contribute any amount in excess of the
amount by which the net proceeds received by such Holders from the sale of the
Securities pursuant to a Registration Statement exceeds the amount of damages
which such Holders have otherwise been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this paragraph (d),
each person, if any, who controls such indemnified party within the meaning of
the Securities Act or the Exchange Act shall have the same rights to
contribution as such indemnified party and each person, if any, who controls the
Company within the meaning of the Securities Act or the Exchange Act shall have
the same rights to contribution as the Company.
(e) The agreements contained in this Section 5 shall survive the sale
of the Securities pursuant to a Registration Statement and shall remain in full
force and effect, regardless of any termination or cancelation of this Agreement
or any investigation made by or on behalf of any indemnified party.
6. Additional Interest Under Certain Circumstances. (a) Additional
interest (the "Additional Interest") with respect to the Initial Securities and
the Private Exchange Securities shall be assessed as follows if any of the
following events occur (each such event in clauses (i) through (iii) below a
"Registration Default"):
(i) If by May 2, 1999, neither the Exchange Offer Registration
Statement nor a Shelf Registration Statement has been filed with the
Commission;
(ii) If by August 30, 1999, neither the Registered Exchange
Offer is consummated nor, if required in lieu thereof, the Shelf
Registration Statement is declared effective by the Commission; or
(iii) If after either the Exchange Offer Registration
Statement or the Shelf Registration Statement is declared effective (A)
such Registration Statement thereafter ceases to be effective or (B)
such Registration Statement or the related
13
<PAGE> 14
prospectus ceases to be usable in connection with resales of Transfer
Restricted Securities during the periods specified herein because
either (1) any event occurs as a result of which the related prospectus
forming part of such Registration Statement would include any untrue
statement of a material fact or omit to state any material fact
necessary to make the statements therein in the light of the
circumstances under which they were made not misleading or (2) it shall
be necessary to amend such Registration Statement or supplement the
related prospectus, to comply with the Securities Act or the Exchange
Act or the respective rules thereunder.
Additional Interest shall accrue on the Initial Securities and the Private
Exchange Notes over and above the interest set forth in the title of the
Securities from and including the date on which any such Registration Default
shall occur to but excluding the date on which all such Registration Defaults
have been cured, at a rate of 0.50% per annum (the "Additional Interest Rate")
for the first 90-day period immediately following the occurrence of such
Registration Default. The Additional Interest Rate shall increase by an
additional 0.50% per annum with respect to each subsequent 90-day period until
all Registration Defaults have been cured, up to a maximum Additional Interest
Rate of 2.00% per annum.
(b) A Registration Default referred to in Section 6(a)(iii) hereof
shall be deemed not to have occurred and be continuing in relation to a Shelf
Registration Statement or the related prospectus if (i) such Registration
Default has occurred solely as a result of (x) the filing of a post-effective
amendment to such Shelf Registration Statement to incorporate annual audited
financial information with respect to the Company where such post-effective
amendment is not yet effective and needs to be declared effective to permit
Holders to use the related prospectus or (y) other material events, with respect
to the Company that would need to be described in such Shelf Registration
Statement or the related prospectus and (ii) in the case of clause (y), the
Company is proceeding promptly and in good faith to amend or supplement such
Shelf Registration Statement and related prospectus to describe such events;
provided, however, that in any case if such Registration Default occurs for a
continuous period in excess of 30 days, Additional Interest shall be payable in
accordance with the above paragraph from the day such Registration Default
occurs until such Registration Default is cured.
(c) Any amounts of Additional Interest due pursuant to clause (i), (ii)
or (iii) of Section 6(a) above will be payable in cash on the regular interest
payment dates with respect to the Securities. The amount of Additional Interest
will be determined by multiplying the applicable Additional Interest rate by the
principal amount of the Initial Securities or Private Exchange Notes, as the
case may be, multiplied by a fraction, the numerator of which is the number of
days such Additional Interest rate was applicable during such period (determined
on the basis of a 360-day year comprised of twelve 30-day months) and the
denominator of which is 360.
(d) "Transfer Restricted Securities" means each Security until (i) the
date on which such Security has been exchanged by a person other than a
broker-dealer for a freely transferable Exchange Security in the Registered
Exchange Offer, (ii) following the exchange by a broker-dealer in the Registered
Exchange Offer of an Initial Security for an Exchange Note, the date on which
such Exchange Note is sold to a purchaser who receives from such broker-dealer
on or prior to the date of such sale a copy of the prospectus contained in the
Exchange Offer Registration Statement, (iii) the date on which such Security has
been effectively registered under the Securities Act and disposed of in
accordance with the Shelf Registration Statement or (iv) the date on which such
14
<PAGE> 15
Security is distributed to the public pursuant to Rule 144 under the Securities
Act or is saleable pursuant to Rule 144(k) under the Securities Act.
7. Rules 144 and 144A. The Company shall use its best efforts to file
the reports required to be filed by it under the Securities Act and the Exchange
Act in a timely manner and, if at any time the Company is not required to file
such reports, it will, upon the request of any Holder of Securities, make
publicly available other information so long as necessary to permit sales of
their securities pursuant to Rules 144 and 144A. The Company covenants that it
will take such further action as any Holder of Securities may reasonably
request, all to the extent required from time to time to enable such Holder to
sell Securities without registration under the Securities Act within the
limitation of the exemptions provided by Rules 144 and 144A (including the
requirements of Rule 144A(d)(4)). The Company will provide a copy of this
Agreement to prospective purchasers of Initial Securities identified to the
Company by the Initial Purchasers upon request. Upon the request of any Holder
of Initial Securities, the Company shall deliver to such Holder a written
statement as to whether it has complied with such requirements. Notwithstanding
the foregoing, nothing in this Section 7 shall be deemed to require the Company
to register any of its securities pursuant to the Exchange Act.
8. Underwritten Registrations. If any of the Transfer Restricted
Securities covered by any Shelf Registration are to be sold in an underwritten
offering, the investment banker or investment bankers and manager or managers
that will administer the offering (the "Managing Underwriters") will be selected
by the Holders of a majority in aggregate principal amount of such Transfer
Restricted Securities to be included in such offering.
No person may participate in any underwritten registration hereunder
unless such person (i) agrees to sell such person's Transfer Restricted
Securities on the basis reasonably provided in any underwriting arrangements
approved by the persons entitled hereunder to approve such arrangements and (ii)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the terms
of such underwriting arrangements.
9. Miscellaneous.
(a) Amendments and Waivers. The provisions of this Agreement may not be
amended, modified or supplemented, and waivers or consents to departures from
the provisions hereof may not be given, except by the Company and the written
consent of the Holders of a majority in principal amount of the Securities
affected by such amendment, modification, supplement, waiver or consents.
(b) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand delivery, first-class mail,
facsimile transmission or air courier which guarantees overnight delivery:
(1) if to a Holder of the Securities, at the most current
address given by such Holder to the Company.
15
<PAGE> 16
(2) if to the Initial Purchasers:
Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, NY 10010-3629
Fax No.: (212) 325-8278
Attention: Transactions Advisory Group
with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Fax No.: (212) 474-3700
Attention: Kris F. Heinzelman
(3) if to the Company, at its address as follows:
King Pharmaceuticals, Inc.
501 Fifth Street
Bristol, Tennessee 37620
Fax No.: (473) 274-8677
Attention: Kyle Macione
with a copy to:
Baker, Donelson, Bearman & Caldwell
Suntrust Bank Building
207 Mockingbird Lane
Post Office Box 3038-37602
Johnson City, Tennessee 37604
Fax No.: (423) 928-5694
Attention: Linda Crouch
All such notices and communications shall be deemed to have been duly
given: (i) at the time delivered by hand, if personally delivered; (ii) three
business days after being deposited in the mail, postage prepaid, if mailed;
(iii) when receipt is acknowledged by recipient's facsimile machine operator, if
sent by facsimile transmission; and (iv) on the day delivered, if sent by
overnight air courier guaranteeing next day delivery.
(c) No Inconsistent Agreements. The Company has not, as of the date
hereof, entered into, nor shall it, on or after the date hereof, enter into, any
agreement with respect to its securities that is inconsistent with the rights
granted to the Holders herein or otherwise conflicts with the provisions hereof.
(d) Successors and Assigns. This Agreement shall be binding upon the
Company and its successors and assigns.
16
<PAGE> 17
(e) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(f) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(g) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
(h) Severability. If any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid, illegal
or unenforceable, the validity, legality and enforceability of any such
provision in every other respect and of the remaining provisions contained
herein shall not be affected or impaired thereby.
(i) Securities Held by the Company. Whenever the consent or approval of
Holders of a specified percentage of principal amount of Securities is required
hereunder, Securities held by the Company or its affiliates (other than
subsequent Holders of Securities if such subsequent Holders are deemed to be
affiliates solely by reason of their holdings of such Securities) shall not be
counted in determining whether such consent or approval was given by the Holders
of such required percentage.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
among the several Initial Purchasers and the Company in accordance with its
terms.
Very truly yours,
KING PHARMACEUTICALS, INC.
by
-----------------------------------
Name:
Title:
The foregoing Registration Rights
Agreement is hereby confirmed and
accepted as of the date first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
FIRST UNION CAPITAL MARKETS CORP.
NATIONSBANC MONTGOMERY SECURITIES LLC
by: CREDIT SUISSE FIRST BOSTON CORPORATION,
as Representative of the Initial Purchasers
by
----------------------------------
Name:
Title:
17
<PAGE> 18
ANNEX A
Each broker-dealer that receives Exchange Securities for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Securities. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Securities received in exchange for Initial Securities
where such Initial Securities were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after the Expiration Date (as defined herein), it
will make this Prospectus available to any broker-dealer for use in connection
with any such resale. See "Plan of Distribution."
18
<PAGE> 19
ANNEX B
Each broker-dealer that receives Exchange Securities for its own account
in exchange for Initial Securities, where such Initial Securities were acquired
by such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Securities. See "Plan of Distribution."
19
<PAGE> 20
ANNEX C
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Securities for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Securities. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Securities received in
exchange for Initial Securities where such Initial Securities were acquired as a
result of market-making activities or other trading activities. The Company has
agreed that, for a period of 180 days after the Expiration Date, it will make
this prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale. In addition, until , 199 , all
dealers effecting transactions in the Exchange Securities may be required to
deliver a prospectus.(1)
The Company will not receive any proceeds from any sale of Exchange
Securities by broker-dealers. Exchange Securities received by broker-dealers for
their own account pursuant to the Exchange Offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Securities or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchasers of any such Exchange
Securities. Any broker-dealer that resells Exchange Securities that were
received by it for its own account pursuant to the Exchange Offer and any broker
or dealer that participates in a distribution of such Exchange Securities may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of Exchange Securities and any commission or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
Holders of the Securities) other than commissions or concessions of any brokers
or dealers and will indemnify the Holders of the Securities (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
- --------------
(1) In addition, the legend required by Item 502(e) of Regulation S-K will
appear on the back cover page of the Exchange Offer prospectus.
20
<PAGE> 21
ANNEX D
CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name:
-------------------------------------
Address:
----------------------------------
----------------------------------
If the undersigned is not a broker-dealer, the undersigned represents that it is
not engaged in, and does not intend to engage in, a distribution of Exchange
Securities. If the undersigned is a broker-dealer that will receive Exchange
Securities for its own account in exchange for Initial Securities that were
acquired as a result of market-making activities or other trading activities, it
acknowledges that it will deliver a prospectus in connection with any resale of
such Exchange Securities; however, by so acknowledging and by delivering a
prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
21
<PAGE> 1
EXECUTION COPY
================================================================================
KING PHARMACEUTICALS, INC.
Issuer
10 3/4% Senior Subordinated Notes Due 2009
--------------------
INDENTURE
Dated as of March 3, 1999
---------------------
UNION PLANTERS BANK, N.A.
Trustee
================================================================================
<PAGE> 2
CROSS-REFERENCE TABLE
<TABLE>
<CAPTION>
TIA Indenture
Section Section
- ------- ---------
<S> <C> <C>
310(a)(1) .............................. 7.10
(a)(2) .............................. 7.10
(a)(3) .............................. N.A.
(a)(4) .............................. N.A.
(b) .............................. 7.08; 7.10
(c) .............................. N.A.
311(a) .............................. 7.11
(b) .............................. 7.11
(c) .............................. N.A.
312(a) .............................. 2.05
(b) .............................. 13.03
(c) .............................. 13.03
313(a) .............................. 7.06
(b)(1) .............................. N.A.
(b)(2) .............................. 7.06
(c) .............................. 13.02
(d) .............................. 7.06
314(a) .............................. 4.02;
4.12; 13.02
(b) .............................. N.A.
(c)(1) .............................. 13.04
(c)(2) .............................. 13.04
(c)(3) .............................. N.A.
(d) .............................. N.A.
(e) .............................. 13.05
(f) .............................. 4.12
315(a) .............................. 7.01
(b) .............................. 7.05; 13.02
(c) .............................. 7.01
(d) .............................. 7.01
(e) .............................. 6.11
316(a)(last sentence).............................. 13.06
(a)(1)(A) .............................. 6.05
(a)(1)(B) .............................. 6.04
(a)(2) .............................. N.A.
(b) .............................. 6.07
317(a)(1) .............................. 6.08
(a)(2) .............................. 6.09
(b) .............................. 2.04
318(a) .............................. 13.01
N.A. means Not Applicable.
</TABLE>
- ------------------
Note: This Cross-Reference Table shall not, for any
purpose, be deemed to be part of the Indenture.
<PAGE> 3
TABLE OF CONTENTS
ARTICLE 1
Definitions and Incorporation by Reference
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 1.01. Definitions ................................................. 1
SECTION 1.02. Other Definitions ........................................... 27
SECTION 1.03. Incorporation by Reference of Trust Indenture Act ........... 27
SECTION 1.04. Rules of Construction ....................................... 28
ARTICLE 2
The Securities
SECTION 2.01. Form and Dating ............................................. 29
SECTION 2.02. Execution and Authentication ................................ 29
SECTION 2.03. Registrar and Paying Agent .................................. 30
SECTION 2.04. Paying Agent To Hold Money in Trust ......................... 30
SECTION 2.05. Securityholder Lists ........................................ 31
SECTION 2.06. Transfer and Exchange ....................................... 31
SECTION 2.07. Replacement Securities ...................................... 32
SECTION 2.08. Outstanding Securities ...................................... 32
SECTION 2.09. Temporary Securities ........................................ 33
SECTION 2.10. Cancellation ................................................ 33
SECTION 2.11. Defaulted Interest .......................................... 33
SECTION 2.12. CUSIP Numbers ............................................... 34
ARTICLE 3
Redemption
SECTION 3.01. Notices to Trustee .......................................... 34
SECTION 3.02. Selection of Securities To Be Redeemed ...................... 34
SECTION 3.03. Notice of Redemption ........................................ 35
SECTION 3.04. Effect of Notice of Redemption .............................. 35
SECTION 3.05. Deposit of Redemption Price ................................. 36
SECTION 3.06. Securities Redeemed in Part ................................. 36
</TABLE>
<PAGE> 4
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ARTICLE 4
Covenants
<TABLE>
<S> <C> <C>
SECTION 4.01. Payment of Securities ....................................... 36
SECTION 4.02. SEC Reports ................................................. 36
SECTION 4.03. Limitation on Indebtedness .................................. 37
SECTION 4.04. Limitation on Restricted Payments ........................... 39
SECTION 4.05. Limitation on Restrictions on Distributions from Restricted
Subsidiaries .............................................. 42
SECTION 4.06. Limitation on Sales of Assets and Subsidiary Stock .......... 43
SECTION 4.07. Limitation on Transactions with Affiliates .................. 48
SECTION 4.08. Limitation on the Sale or Issuance of Capital Stock of
Restricted Subsidiaries ................................... 49
SECTION 4.09. Change of Control ........................................... 49
SECTION 4.10. Future Guarantors ........................................... 51
SECTION 4.11. Compliance Certificates ..................................... 51
SECTION 4.12. Further Instruments and Acts ................................ 51
ARTICLE 5
Successor Company
SECTION 5.01. When Company May Merge or Transfer Assets ................... 52
ARTICLE 6
Defaults and Remedies
SECTION 6.01. Events of Default ........................................... 54
SECTION 6.02. Acceleration ................................................ 56
SECTION 6.03. Other Remedies .............................................. 57
SECTION 6.04. Waiver of Past Defaults ..................................... 57
SECTION 6.05. Control by Majority ......................................... 57
SECTION 6.06. Limitation on Suits ......................................... 58
SECTION 6.07. Rights of Holders To Receive Payment ........................ 58
SECTION 6.08. Collection Suit by Trustee .................................. 58
SECTION 6.09. Trustee May File Proofs of Claim ............................ 58
SECTION 6.10. Priorities .................................................. 59
SECTION 6.11. Undertaking for Costs ....................................... 59
</TABLE>
<PAGE> 5
3
<TABLE>
<S> <C> <C>
SECTION 6.12. Waiver of Stay or Extension Laws ............................ 60
ARTICLE 7
Trustee
SECTION 7.01. Duties of Trustee ........................................... 60
SECTION 7.02. Rights of Trustee ........................................... 61
SECTION 7.03. Individual Rights of Trustee ................................ 62
SECTION 7.04. Trustee's Disclaimer ........................................ 62
SECTION 7.05. Notice of Defaults .......................................... 62
SECTION 7.06. Reports by Trustee to Holders ............................... 63
SECTION 7.07. Compensation and Indemnity .................................. 63
SECTION 7.08. Replacement of Trustee ...................................... 64
SECTION 7.09. Successor Trustee by Merger ................................. 65
SECTION 7.10. Eligibility; Disqualification ............................... 65
SECTION 7.11. Preferential Collection of Claims Against Company ........... 65
ARTICLE 8
Discharge of Indenture; Defeasance
SECTION 8.01. Discharge of Liability on Securities; Defeasance ............ 66
SECTION 8.02. Conditions to Defeasance .................................... 67
SECTION 8.03. Application of Trust Money .................................. 68
SECTION 8.04. Repayment to Company ........................................ 68
SECTION 8.05. Indemnity for Government Obligations ........................ 69
SECTION 8.06. Reinstatement ............................................... 69
ARTICLE 9
Amendments
SECTION 9.01. Without Consent of Holders .................................. 69
SECTION 9.02. With Consent of Holders ..................................... 70
SECTION 9.03. Compliance with Trust Indenture Act ......................... 71
SECTION 9.04. Revocation and Effect of Consents and Waivers ............... 72
SECTION 9.05. Notation on or Exchange of Securities ....................... 72
SECTION 9.06. Trustee To Sign Amendments .................................. 72
SECTION 9.07. Payment for Consent ......................................... 73
</TABLE>
<PAGE> 6
4
ARTICLE 10
Subordination
<TABLE>
<S> <C> <C>
SECTION 10.01. Agreement To Subordinate .................................... 73
SECTION 10.02. Liquidation, Dissolution, Bankruptcy ........................ 73
SECTION 10.03. Default on Senior Indebtedness .............................. 74
SECTION 10.04. Acceleration of Payment of Securities ....................... 75
SECTION 10.05. When Distribution Must Be Paid Over ......................... 75
SECTION 10.06. Subrogation ................................................. 75
SECTION 10.07. Relative Rights ............................................. 76
SECTION 10.08. Subordination May Not Be Impaired by Company ................ 76
SECTION 10.09. Rights of Trustee and Paying Agent .......................... 76
SECTION 10.10. Distribution or Notice to Representative .................... 77
SECTION 10.11. Article 10 Not To Prevent Events of Default or Limit Right To
Accelerate ................................................ 77
SECTION 10.12. Trust Moneys Not Subordinated ............................... 77
SECTION 10.13. Trustee Entitled To Rely .................................... 77
SECTION 10.14. Trustee To Effectuate Subordination ......................... 78
SECTION 10.15. Trustee Not Fiduciary for Holders of Senior Indebtedness .... 78
SECTION 10.16. Reliance by Holders of Senior Indebtedness on Subordination
Provisions ................................................ 78
ARTICLE 11
Subsidiary Guaranties
SECTION 11.01. Guaranties .................................................. 79
SECTION 11.02. Limitation on Liability ..................................... 81
SECTION 11.03. Successors and Assigns ...................................... 81
SECTION 11.04. No Waiver ................................................... 82
SECTION 11.05. Modification ................................................ 82
SECTION 11.06. Release of Subsidiary Guarantor ............................. 82
</TABLE>
<PAGE> 7
5
ARTICLE 12
Subordination of Subsidiary Guaranties
<TABLE>
<S> <C> <C>
SECTION 12.01. Agreement To Subordinate .................................... 83
SECTION 12.02. Liquidation, Dissolution, Bankruptcy ........................ 83
SECTION 12.03. Default on Senior Indebtedness of Subsidiary Guarantor ...... 84
SECTION 12.04. Demand for Payment .......................................... 84
SECTION 12.05. When Distribution Must Be Paid Over ......................... 84
SECTION 12.06. Subrogation ................................................. 85
SECTION 12.07. Relative Rights ............................................. 85
SECTION 12.08. Subordination May Not Be Impaired by Company ................ 85
SECTION 12.09. Rights of Trustee and Paying Agent .......................... 85
SECTION 12.10. Distribution or Notice to Representative .................... 86
SECTION 12.11. Article 12 Not to Prevent Defaults Under a Subsidiary
Guaranty or Limit Right to Demand Payment ................. 86
SECTION 12.12. Trustee Entitled To Rely .................................... 86
SECTION 12.13. Trustee to Effectuate Subordination ......................... 87
SECTION 12.14. Trustee Not Fiduciary for Holders of Senior Indebtedness of
Subsidiary Guarantor ...................................... 87
SECTION 12.15. Reliance by Holders of Senior Indebtedness on Subordination
Provisions ................................................ 87
ARTICLE 13
Miscellaneous
SECTION 13.01. Trust Indenture Act Controls ................................ 88
SECTION 13.02. Notices ..................................................... 88
SECTION 13.03. Communication by Holders with Other Holders ................. 89
SECTION 13.04. Certificate and Opinion as to Conditions Precedent .......... 89
SECTION 13.05. Statements Required in Certificate or Opinion ............... 89
SECTION 13.06. When Securities Disregarded ................................. 90
SECTION 13.07. Rules by Trustee, Paying Agent and Registrar ................ 90
SECTION 13.08. Legal Holidays .............................................. 90
SECTION 13.09. Governing Law ............................................... 90
SECTION 13.10. No Recourse Against Others .................................. 90
</TABLE>
<PAGE> 8
6
<TABLE>
<S> <C> <C>
SECTION 13.11. Successors .................................................. 90
SECTION 13.12. Multiple Originals .......................................... 91
SECTION 13.13. Table of Contents; Headings ................................. 91
</TABLE>
Rule 144A/Regulation S Appendix - Provisions Relating to Initial Securities,
Private Exchange Securities and Exchange Securities
Exhibit 1 to Rule 144A/Regulation S Appendix - Form of Initial Security
Exhibit A - Form of Exchange Security or Private Exchange Security
<PAGE> 9
INDENTURE dated as of March 3, 1999, between
KING PHARMACEUTICALS, INC., a Tennessee corporation
(the "Company"), KING PHARMACEUTICALS OF NEVADA,
INC., a Nevada corporation and wholly owned
subsidiary of the Company, MONARCH PHARMACEUTICALS,
INC., a Tennessee corporation and a wholly owned
subsidiary of the Company, PARKEDALE PHARMACEUTICALS,
INC., a Michigan corporation and a wholly owned
subsidiary of the Company, and UNION PLANTERS BANK,
N.A., a national banking association (the "Trustee").
Each party agrees as follows for the benefit of the other
parties and for the equal and ratable benefit of the Holders of the Company's
10 3/4% Senior Subordinated Notes Due 2009 (the "Initial Securities") and, if
and when issued pursuant to a registered exchange for Initial Securities, the
Company's 10 3/4% Senior Subordinated Notes Due 2009 (the "Exchange Securities")
and if and when issued pursuant to a private exchange for Initial Securities,
the Company's 10 3/4% Senior Subordinated Notes Due 2009 (the "Private Exchange
Securities", together with the Exchange Securities and the Initial Securities,
the "Securities"):
ARTICLE 1
Definitions and Incorporation by Reference
SECTION 1.01. Definitions.
"Additional Assets" means:
(i) any property, plant or equipment used in
a Related Business;
(ii) any Product Line;
(iii) the Capital Stock of a Person that becomes a
Restricted Subsidiary as a result of the acquisition of such Capital
Stock by the Company or another Restricted Subsidiary; or
(iv) Capital Stock constituting a minority
interest in any Person that at such time is a Restricted Subsidiary;
<PAGE> 10
2
provided, however, that any such Restricted Subsidiary described in clauses
(iii) or (iv) above is primarily engaged in a Related Business.
"Affiliate" of any specified Person means (i) any other
Person, directly or indirectly, controlling or controlled by or (ii) under
direct or indirect common control with such specified Person. For the purposes
of this definition, "control" when used with respect to any Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing. For purposes of Sections 4.04, 4.06 and 4.07 only,
"Affiliate" shall also mean any beneficial owner of Capital Stock representing
5% or more of the total voting power of the Voting Stock (on a fully diluted
basis) of the Company or of rights or warrants to purchase such Capital Stock
(whether or not currently exercisable) and any Person who would be an Affiliate
of any such beneficial owner pursuant to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) by
the Company or any Restricted Subsidiary, including any disposition by means of
a merger, consolidation or similar transaction (each referred to for the
purposes of this definition as a "disposition"), of (i) any shares of Capital
Stock of a Restricted Subsidiary (other than directors' qualifying shares or
shares required by applicable law to be held by a Person other than the Company
or a Restricted Subsidiary), (ii) all or substantially all the assets of any
division or line of business of the Company or any Restricted Subsidiary or
(iii) any other assets of the Company or any Restricted Subsidiary outside of
the ordinary course of business of the Company or such Restricted Subsidiary
(other than, in the case of (i), (ii) and (iii) above:
(w) a disposition by a Restricted Subsidiary to the Company or
by the Company or a Restricted Subsidiary to a Wholly Owned Subsidiary;
(x) for purposes of Section 4.06 only, a disposition that
constitutes a Restricted Payment permitted by Section 4.04 or a
Permitted Investment;
(y) disposition of assets with a fair market value of less
than $250,000; and
<PAGE> 11
3
(z) for purposes of Section 4.06 only, a disposition by the
Company or a Restricted Subsidiary of a Product Line in consideration
for the acquisition by the Company or a Restricted Subsidiary of
another Product Line);
provided, however, that, if the Product Line so disposed had revenues for the
four consecutive fiscal quarters immediately preceding such disposition in
excess of $5,000,000, (A) such disposition has been determined by a nationally
recognized investment banking firm to be fair, from a financial viewpoint, to
the Company and its Restricted Subsidiaries and (B) on the date of such
disposition and after giving effect thereto and to the related acquisition, the
Company would have been able to Incur at least $1.00 of additional Indebtedness
pursuant to Section 4.03(a).
"Attributable Debt" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Securities, compounded annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with
respect to any Indebtedness, the quotient obtained by dividing (i) the sum of
the products of the numbers of years from the date of determination to the dates
of each successive scheduled principal payment of such Indebtedness multiplied
by the amount of such payment by (ii) the sum of all such payments.
"Banks" has the meaning specified in the Credit Agreement.
"Bank Indebtedness" means all Obligations pursuant to the
Credit Agreement.
"Board of Directors" means the Board of Directors of the
Company or any committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is
required to be classified and accounted for as a
<PAGE> 12
4
capital lease for financial reporting purposes in accordance with GAAP, and the
amount of Indebtedness represented by such obligation shall be the capitalized
amount of such obligation determined in accordance with GAAP; and the Stated
Maturity thereof shall be the date of the last payment of rent or any other
amount due under such lease prior to the first date upon which such lease may be
terminated by the lessee without payment of a penalty.
"Capital Stock" of any Person means any and all shares,
interests, rights to purchase, warrants, options, participation or other
equivalents of or interests in (however designated) equity of such Person,
including any Preferred Stock, but excluding any debt securities convertible
into such equity.
"Change of Control" means the occurrence of any of the
following events:
(i) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act), other than one or more Permitted Holders
(or The United Company, a Virginia corporation; provided, however, that
any such capital stock ownership by The United Company shall not result
in The United Company or any group of which The United Company is a
member, directly or indirectly, controlling the Company), is or becomes
the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that for purposes of this clause (i) such person
shall be deemed to have "beneficial ownership" of all shares that any
such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly,
of more than 35% of the total voting power of the Voting Stock of the
Company; provided, however, that the Permitted Holders beneficially own
(as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly
or indirectly, in the aggregate a lesser percentage of the total voting
power of the Voting Stock of the Company than such other person and do
not have the right or ability by voting power, contract or otherwise to
elect or designate for election a majority of the Board of Directors
(for the purposes of this clause (i), (x) the Permitted Holders shall
be deemed to beneficially own any Voting Stock of a corporation (the
"specified corporation") held by any other corporation (the "parent
corporation") so long as the Permitted Holders beneficially own (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, in the aggregate a majority of the
<PAGE> 13
5
voting power of the Voting Stock of the parent corporation and (y) such
other person shall be deemed to beneficially own any Voting Stock of a
specified corporation held by a parent corporation, if such other
person is the beneficial owner (as defined in this clause (i)),
directly or indirectly, of more than 35% of the voting power of the
Voting Stock of such parent corporation and the Permitted Holders
beneficially own (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, in the aggregate a lesser
percentage of the voting power of the Voting Stock of such parent
corporation and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of
the board of directors of such parent corporation);
(ii) individuals who on the Issue Date constituted the Board
of Directors (together with any new directors whose election by such
Board of Directors or whose nomination for election by the shareholders
of the Company was approved by a vote of 66-2/3% of the directors of
the Company then still in office who were either directors on the Issue
Date or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors then in office;
(iii) the adoption of a plan relating to the liquidation or
dissolution of the Company; or
(iv) the merger or consolidation of the Company with or into
another Person or the merger of another Person with or into the
Company, or the sale of all or substantially all the assets of the
Company to another Person (other than a Person that is controlled by
the Permitted Holders), and, in the case of any such merger or
consolidation, the securities of the Company that are outstanding
immediately prior to such transaction and which represent 100% of the
aggregate voting power of the Voting Stock of the Company are changed
into or exchanged for cash, securities or property, unless pursuant to
such transaction such securities are changed into or exchanged for, in
addition to any other consideration, securities of the surviving Person
that represent immediately after such transaction, at least a majority
of the aggregate voting power of the Voting Stock of the surviving
Person or transferee.
"Code" means the Internal Revenue Code of 1986, as amended.
<PAGE> 14
6
"Company" means the party named as such in this Indenture
until a successor replaces it and, thereafter, means the successor and, for
purposes of any provision contained herein and required by the TIA, each other
obligor on the indenture securities.
"Consolidated Coverage Ratio" as of any date of determination
means the ratio of (i) the aggregate amount of EBITDA for the period of the most
recent four consecutive fiscal quarters ending at least 45 days prior to the
date of such determination to (ii) Consolidated Interest Expense for such four
fiscal quarters; provided, however, that:
(1) if the Company or any Restricted Subsidiary has Incurred
any Indebtedness since the beginning of such period that remains
outstanding or if the transaction giving rise to the need to calculate
the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or
both, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving effect on a pro forma basis to such
Indebtedness as if such Indebtedness had been Incurred on the first day
of such period and the discharge of any other Indebtedness repaid,
repurchased, defeased or otherwise discharged with the proceeds of such
new Indebtedness as if such discharge had occurred on the first day of
such period;
(2) if the Company or any Restricted Subsidiary has repaid,
repurchased, defeased or otherwise discharged any Indebtedness since
the beginning of such period or if any Indebtedness is to be repaid,
repurchased, defeased or otherwise discharged (in each case other than
Indebtedness Incurred under any revolving credit facility unless such
Indebtedness has been permanently repaid and has not been replaced) on
the date of the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio, EBITDA and Consolidated Interest Expense
for such period shall be calculated on a pro forma basis as if such
discharge had occurred on the first day of such period and as if the
Company or such Restricted Subsidiary has not earned the interest
income actually earned during such period in respect of cash or
Temporary Cash Investments used to repay, repurchase, defease or
otherwise discharge such Indebtedness;
(3) if since the beginning of such period the Company or any
Restricted Subsidiary shall have made any Asset Disposition, the EBITDA
for such period shall
<PAGE> 15
7
be reduced by an amount equal to the EBITDA (if positive) directly
attributable to the assets which are the subject of such Asset
Disposition for such period, or increased by an amount equal to the
EBITDA (if negative), directly attributable thereto for such period and
Consolidated Interest Expense for such period shall be reduced by an
amount equal to the Consolidated Interest Expense directly attributable
to any Indebtedness of the Company or any Restricted Subsidiary repaid,
repurchased, defeased or otherwise discharged with respect to the
Company and its continuing Restricted Subsidiaries in connection with
such Asset Disposition for such period (or, if the Capital Stock of any
Restricted Subsidiary is sold, the Consolidated Interest Expense for
such period directly attributable to the Indebtedness of such
Restricted Subsidiary to the extent the Company and its continuing
Restricted Subsidiaries are no longer liable for such Indebtedness
after such sale);
(4) if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an
Investment in any Restricted Subsidiary (or any person which becomes a
Restricted Subsidiary) or an acquisition of assets, including any
acquisition of assets occurring in connection with a transaction
requiring a calculation to be made hereunder, which constitutes all or
substantially all of an operating unit of a business, EBITDA and
Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the Incurrence of any
Indebtedness) as if such Investment or acquisition occurred on the
first day of such period; and
(5) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into
the Company or any Restricted Subsidiary since the beginning of such
period) shall have made any Asset Disposition, any Investment or
acquisition of assets that would have required an adjustment pursuant
to clause (3) or (4) above if made by the Company or a Restricted
Subsidiary during such period, EBITDA and Consolidated Interest Expense
for such period shall be calculated after giving pro forma effect
thereto as if such Asset Disposition, Investment or acquisition
occurred on the first day of such period.
<PAGE> 16
8
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting Officer of the Company.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest of such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Agreement applicable to
such Indebtedness if such Interest Rate Agreement has a remaining term in excess
of 12 months).
"Consolidated Interest Expense" means, for any period, the
total interest expense of the Company and its consolidated Restricted
Subsidiaries, plus, to the extent not included in such total interest expense,
and to the extent incurred by the Company or its Restricted Subsidiaries,
without duplication:
(i) interest expense attributable to capital leases and the
interest expense attributable to leases constituting part of a
Sale/Leaseback Transaction;
(ii) amortization of debt discount and debt issuance cost;
(iii) capitalized interest;
(iv) non-cash interest expenses;
(v) commissions, discounts and other fees and charges owed
with respect to letters of credit and bankers' acceptance financing;
(vi) net costs associated with Hedging Obligations (including
amortization of fees);
(vii) Preferred Stock dividends in respect of all Preferred
Stock held by Persons other than the Company or a Wholly Owned
Subsidiary (other than dividends payable solely in Capital Stock (other
than Disqualified Stock) of the issuer of such Preferred Stock);
(viii) interest incurred in connection with Investments in
discontinued operations;
<PAGE> 17
9
(ix) interest accruing on any Indebtedness of any other Person
to the extent such Indebtedness is Guaranteed by (or secured by the
assets of) the Company or any Restricted Subsidiary; and
(x) the cash contributions to any employee stock ownership
plan or similar trust to the extent such contributions are used by such
plan or trust to pay interest or fees to any Person (other than the
Company) in connection with Indebtedness Incurred by such plan or
trust.
"Consolidated Net Income" means, for any period, the net
income of the Company and its consolidated Subsidiaries; provided, however,
that there shall not be included in such Consolidated Net Income:
(i) any net income of any Person (other than the Company) if
such Person is not a Restricted Subsidiary, except that (A) subject to
the exclusion contained in clause (iv) below, the Company's equity in
the net income of any such Person for such period shall be included in
such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Person during such period to the Company
or a Restricted Subsidiary as a dividend or other distribution
(subject, in the case of a dividend or other distribution paid to a
Restricted Subsidiary, to the limitations contained in clause (iii)
below) and (B) the Company's equity in a net loss of any such Person
for such period shall be included in determining such Consolidated Net
Income;
(ii) any net income (or loss) of any Person acquired by the
Company or a Subsidiary in a pooling of interests transaction for any
period prior to the date of such acquisition;
(iii) any net income of any Restricted Subsidiary if such
Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions
by such Restricted Subsidiary, directly or indirectly, to the Company,
except that (A) subject to the exclusion contained in clause (iv)
below, the Company's equity in the net income of any such Restricted
Subsidiary for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Restricted Subsidiary during such period to the Company or another
Restricted Subsidiary
<PAGE> 18
10
as a dividend or other distribution (subject, in the case of a dividend
or other distribution paid to another Restricted Subsidiary, to the
limitation contained in this clause) and (B) the Company's equity in a
net loss of any such Restricted Subsidiary for such period shall be
included in determining such Consolidated Net Income;
(iv) any gain (but not loss) realized upon the sale or other
disposition of any assets of the Company, its consolidated Subsidiaries
or any other Person (including pursuant to any Sale/Leaseback
Transaction) which is not sold or otherwise disposed of in the ordinary
course of business and any gain (but not loss) realized upon the sale
or other disposition of any Capital Stock of any Person;
(v) extraordinary gains or losses; and
(vi) the cumulative effect of a change in accounting
principles.
Notwithstanding the foregoing, for the purpose of Section 4.04 only, there shall
be excluded from Consolidated Net Income any dividends, repayments of loans or
advances or other transfers of assets from Unrestricted Subsidiaries to the
Company or a Restricted Subsidiary to the extent such dividends, repayments or
transfers increase the amount of Restricted Payments permitted under such
Section pursuant to clause (a)(3)(D) thereof.
"Consolidated Net Worth" means the total of the amounts shown
on the balance sheet of the Company and its consolidated Subsidiaries,
determined on a consolidated basis in accordance with GAAP, as of the end of the
most recent fiscal quarter of the Company ending at least 45 days prior to the
taking of any action for the purpose of which the determination is being made,
as the sum of:
(i) the par or stated value of all outstanding Capital Stock
of the Company; plus
(ii) paid-in capital or capital surplus relating to such
Capital Stock; plus
(iii) any retained earnings or earned surplus, less (A) any
accumulated deficit and (B) any amounts attributable to Disqualified
Stock.
<PAGE> 19
11
"Credit Agreement" means:
(i) the Credit Agreement dated as of February 27, 1998, as
amended and restated as of December 22, 1998, by and among the Company,
the lenders referred to therein, Credit Suisse First Boston, as
Administrative Agent, First Union National Bank, as Syndication Agent,
and NationsBank, N.A., as Syndication Agent, together with the related
documents thereto (including the term loans and revolving loans
thereunder, any guarantees and security documents), as amended,
extended, renewed, restated, supplemented or otherwise modified (in
whole or in part, and without limitation as to amount, terms,
conditions, covenants and other provisions) from time to time; and
(ii) any other agreement or debt instrument (and related
documents) governing Indebtedness incurred to Refinance or replace, in
whole or in part, the borrowings or commitments under such Credit
Agreement as in effect on the Issue Date, whether by the same or any
other lender or group of lenders.
"Currency Agreement" means in respect of a Person any foreign
exchange contract, currency swap agreement or other similar agreement designed
to protect such Person against fluctuations in currency values.
"Default" means any event which is, or after notice or passage
of time or both would be, an Event of Default.
"Designated Senior Indebtedness" means:
(i) the Bank Indebtedness; and
(ii) any other Senior Indebtedness of the Company which, at
the date of determination, has an aggregate principal amount
outstanding of, or under which, at the date of determination, the
holders thereof are committed to lend up to, at least $25,000,000 and
is specifically designated by the Company in the instrument evidencing
or governing such Senior Indebtedness as "Designated Senior
Indebtedness" for purposes of this Indenture.
<PAGE> 20
12
"Disqualified Stock" means, with respect to any Person, any
Capital Stock which by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable at the option of the holder) or
upon the happening of any event:
(i) matures or is mandatorily redeemable pursuant to a sinking
fund obligation or otherwise;
(ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock; or
(iii) is mandatorily redeemable or must be purchased, upon the
occurrence of certain events or otherwise, in whole or in part;
in each case on or prior to the first anniversary of the Stated Maturity of the
Securities; provided, however, that any Capital Stock that would not constitute
Disqualified Stock but for provisions thereof giving holders thereof the right
to require such Person to repurchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
first anniversary of the Stated Maturity of the Securities shall not constitute
Disqualified Stock if:
(x) the "asset sale" or "change of control" provisions
applicable to such Capital Stock are not more favorable to the holders
of such Capital Stock than the provisions of Sections 4.06 and 4.09;
and
(y) any such requirement only becomes operative after
compliance with such terms applicable to the Securities, including the
purchase of any Securities tendered pursuant thereto.
"EBITDA" for any period means the sum of Consolidated Net
Income, plus the following to the extent deducted in calculating such
Consolidated Net Income:
(a) all income tax expense of the Company and its consolidated
Restricted Subsidiaries;
(b) Consolidated Interest Expense;
(c) depreciation and amortization expense of the Company and
its consolidated Restricted Subsidiaries, (excluding amortization
expense attributable to a prepaid cash item that was paid in a prior
period); and
<PAGE> 21
13
(d) all other non-cash charges of the Company and its
consolidated Restricted Subsidiaries (excluding any such non-cash
charge to the extent that it represents an accrual of or reserve for
cash expenditures in any future period);
in each case for such period. Notwithstanding the foregoing, the provision for
taxes based on the income or profits of, and the depreciation and amortization
and non-cash charges of, a Restricted Subsidiary shall be added to Consolidated
Net Income to compute EBITDA only to the extent (and in the same proportion)
that the net income of such Restricted Subsidiary was included in calculating
Consolidated Net Income and only if a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Restricted
Subsidiary without prior approval (that has not been obtained), pursuant to the
terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to such
Restricted Subsidiary or its stockholders.
"Exchange Act" means the Securities Exchange Act of 1934,
as amended.
"GAAP" means generally accepted accounting principles in the
United States of America as in effect as of the Issue Date, including those set
forth in:
(i) the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public
Accountants;
(ii) statements and pronouncements of the Financial Accounting
Standards Board;
(iii) such other statements by such other entity as approved
by a significant segment of the accounting profession; and
(iv) the rules and regulations of the SEC governing the
inclusion of financial statements (including pro forma financial
statements) in periodic reports required to be filed pursuant to
Section 13 of the Exchange Act, including opinions and pronouncements
in staff accounting bulletins and similar written statements from the
accounting staff of the SEC.
<PAGE> 22
14
All ratios and computations based on GAAP contained in this
Indenture shall be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness of any other
Person and any obligation, direct or indirect, contingent or otherwise, of such
Person:
(i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Indebtedness or other obligation of such
Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or
services, to take-or-pay or to maintain financial statement conditions
or otherwise); or
(ii) entered into for the purpose of assuring in any other
manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in
part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning. The term "Guarantor" shall mean any
Person Guaranteeing any obligation.
"Guaranty Agreement" means a supplemental indenture, in a form
satisfactory to the Trustee, pursuant to which a Subsidiary Guarantor Guarantees
the Company's obligations with respect to the Securities on the terms provided
for in this Indenture.
"Hedging Obligations" of any Person means the obligations of
such Person pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Securityholder" means the Person in whose name a
Security is registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise
become liable for; provided, however, that any Indebtedness or Capital Stock of
a Person existing at the time such Person becomes a Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred
by such Subsidiary at the time it becomes a Subsidiary. The term "Incurrence"
when used as a noun shall have a correlative meaning. The accretion of principal
of a
<PAGE> 23
15
non-interest bearing or other discount security shall not be deemed the
Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date
of determination (without duplication):
(i) the principal in respect of (A) indebtedness of such
Person for money borrowed and (B) indebtedness evidenced by notes,
debentures, bonds or other similar instruments for the payment of which
such Person is responsible or liable, including, in each case, any
premium on such indebtedness to the extent such premium has become due
and payable;
(ii) all Capital Lease Obligations of such Person and all
Attributable Debt in respect of Sale/Leaseback Transactions entered
into by such Person;
(iii) all obligations of such Person issued or assumed as the
deferred purchase price of property, all conditional sale obligations
of such Person and all obligations of such Person under any title
retention agreement (but excluding trade accounts payable arising in
the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of
any obligor on any letter of credit, banker's acceptance or similar
credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in
clauses (i) through (iii) above) entered into in the ordinary course of
business of such Person to the extent such letters of credit are not
drawn upon or, if and to the extent drawn upon, such drawing is
reimbursed no later than the tenth Business Day following payment on
the letter of credit);
(v) the amount of all obligations of such Person with respect
to the redemption, repayment or other repurchase of any Disqualified
Stock or, with respect to any Subsidiary of such Person, the
liquidation preference with respect to, any Preferred Stock (but
excluding, in each case, any accrued dividends);
(vi) all obligations of the type referred to in clauses (i)
through (v) of other Persons and all dividends of other Persons for the
payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including
by means of any Guarantee;
<PAGE> 24
16
(vii) all obligations of the type referred to in clauses (i)
through (vi) of other Persons secured by any Lien on any property or
asset of such Person (whether or not such obligation is assumed by such
Person), the amount of such obligation being deemed to be the lesser of
the value of such property or assets or the amount of the obligation so
secured; and
(viii) to the extent not otherwise included in this
definition, Hedging Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
"Indenture" means this Indenture as amended or supplemented
from time to time.
"Interest Rate Agreement" means in respect of a Person any
interest rate swap agreement, interest rate cap agreement or other financial
agreement or arrangement designed to protect such Person against fluctuations in
interest rates.
"Investment" in any Person means any direct or indirect
advance, loan (other than advances to customers in the ordinary course of
business that are recorded as accounts receivable on the balance sheet of the
lender) or other extensions of credit (including by way of Guarantee or similar
arrangement) or capital contribution to (by means of any transfer of cash or
other property to others or any payment for property or services for the account
or use of others), or any purchase or acquisition of Capital Stock, Indebtedness
or other similar instruments issued by such Person. For purposes of the
definition of "Unrestricted Subsidiary", the definition of "Restricted Payment"
and Section 4.04:
(i) "Investment" shall include the portion (proportionate to
the Company's equity interest in such Subsidiary) of the fair market
value of the net assets of any Subsidiary of the Company at the time
that such Subsidiary is designated an Unrestricted Subsidiary;
provided, however, that upon a redesignation of such Subsidiary as a
Restricted Subsidiary, the Company shall be deemed to continue to have
a permanent "Investment" in an Unrestricted Subsidiary equal to an
amount (if positive) equal to (x) the Company's
<PAGE> 25
17
"Investment" in such Subsidiary at the time of such redesignation less
(y) the portion (proportionate to the Company's equity interest in such
Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and
(ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of
Directors.
"Issue Date" means the date on which the Securities are
originally issued.
"Lien" means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any conditional sale or other
title retention agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash
payments received therefrom (including any cash payments received by way of
deferred payment of principal pursuant to a note or installment receivable or
otherwise and proceeds from the sale or other disposition of any securities
received as consideration, but only as and when received, but excluding any
other consideration received in the form of assumption by the acquiring Person
of Indebtedness or other obligations relating to such properties or assets or
received in any other noncash form), in each case net of:
(i) all legal, title and recording tax expenses, commissions
and other fees and expenses incurred, and all Federal, state,
provincial, foreign and local taxes required to be accrued as a
liability under GAAP, as a consequence of such Asset Disposition;
(ii) all payments made on any Indebtedness which is secured
by any assets subject to such Asset Disposition, in accordance with the
terms of any Lien upon or other security agreement of any kind with
respect to such assets, or which must by its terms, or in order to
obtain a necessary consent to such Asset Disposition, or by applicable
law, be repaid out of the proceeds from such Asset Disposition;
(iii) all distributions and other payments required to be made
to minority interest holders in Restricted Subsidiaries as a result of
such Asset Disposition; and
<PAGE> 26
18
(iv) the deduction of appropriate amounts provided by the
seller as a reserve, in accordance with GAAP, against any liabilities
associated with the property or other assets disposed in such Asset
Disposition and retained by the Company or any Restricted Subsidiary
after such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of
Capital Stock, means the cash proceeds of such issuance or sale net of
attorneys' fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Officer" means the Chairman of the Board, the President, any
Executive Vice President, the Treasurer or the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two
Officers.
"Opinion of Counsel" means a written opinion from legal
counsel who is acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Permitted Holders" means, collectively, John M. Gregory,
Joan P. Gregory, Jefferson J. Gregory, Terri D. White-Gregory, Joseph R.
Gregory, Hershel P. Blessing, Mary Ann Blessing, James E. Gregory, Dr. R. Henry
Richards, Jeanie Richards, Fred Jarvis and Mary Gregory-Jarvis, their respective
estates, spouses, ancestors and lineal descendants, the legal representatives of
any of the foregoing and the trustees of any bona fide trusts of which the
foregoing are the sole beneficiaries or the grantors, or any Person of which the
foregoing "beneficially owns" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act) voting securities representing at least 66 2/3% of the total
voting power of all classes of ordinary voting stock of such person (exclusive
of any matters as to which class voting rights exist), including S.J. L.L.C. and
Kingsway L.L.C. to the extent such entities adhere to the aforementioned minimum
beneficial ownership requirements.
"Permitted Investment" means an Investment by the Company or
any Restricted Subsidiary in:
(i) the Company, a Restricted Subsidiary or a Person that
will, upon the making of such Investment,
<PAGE> 27
19
become a Restricted Subsidiary; provided, however, that the primary
business of such Restricted Subsidiary is a Related Business;
(ii) another Person if as a result of such Investment such
other Person is merged or consolidated with or into, or transfers or
conveys all or substantially all its assets to, the Company or a
Restricted Subsidiary; provided, however, that such Person's primary
business is a Related Business;
(iii) Temporary Cash Investments;
(iv) receivables owing to the Company or any Restricted
Subsidiary if created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms;
provided, however, that such trade terms may include such concessionary
trade terms as the Company or any such Restricted Subsidiary deems
reasonable under the circumstances;
(v) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary
course of business;
(vi) loans or advances to employees made in the ordinary
course of business consistent with past practices of the Company or
such Restricted Subsidiary; (vii) stock, obligations or securities
received in settlement of debts created in the ordinary course of
business and owing to the Company or any Restricted Subsidiary or in
satisfaction of judgments; and
(viii) any Person to the extent such Investment represents the
non-cash portion of the consideration received for an Asset Disposition
as permitted pursuant to Section 4.06.
"Person" means any individual, corporation, partnership,
limited liability company, joint venture, association, joint-stock company,
trust, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any
Person, means Capital Stock of any class or classes (however designated) which
is preferred as to the payment of
<PAGE> 28
20
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over shares
of Capital Stock of any other class of such Person.
"principal" of a Security means the principal of the Security
plus the premium, if any, payable on the Security which is due or overdue or is
to become due at the relevant time.
"Product Line" means any pharmaceutical product or
product line.
"Public Equity Offering" means an underwritten primary public
offering of common stock of the Company pursuant to an effective registration
statement under the Securities Act.
"Refinance" means, in respect of any Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue other Indebtedness in exchange or replacement for, such indebtedness.
"Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances
any Indebtedness of the Company or any Restricted Subsidiary existing on the
Issue Date or Incurred in compliance with this Indenture, including Indebtedness
that Refinances Refinancing Indebtedness; provided, however, that:
(i) such Refinancing Indebtedness has a Stated Maturity no
earlier than the Stated Maturity of the Indebtedness being Refinanced;
(ii) such Refinancing Indebtedness has an Average Life at the
time such Refinancing Indebtedness is Incurred that is equal to or
greater than the Average Life of the Indebtedness being Refinanced; and
(iii) such Refinancing Indebtedness has an aggregate principal
amount (or if Incurred with original issue discount, an aggregate issue
price) that is equal to or less than the aggregate principal amount (or
if Incurred with original issue discount, the aggregate accreted value)
then outstanding or committed (plus fees and expenses, including any
premium and defeasance costs) under the Indebtedness being Refinanced;
<PAGE> 29
21
provided further, however, that Refinancing Indebtedness shall not include (x)
Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or (y)
Indebtedness of the Company or a Restricted Subsidiary that Refinances
Indebtedness of an Unrestricted Subsidiary.
"Related Business" means any business related, ancillary or
complementary to the businesses of the Company and the Restricted Subsidiaries
on the Issue Date.
"Representative" means any trustee, agent or representative
(if any) for an issue of Senior Indebtedness of the Company.
"Restricted Payment" with respect to any Person means:
(i) the declaration or payment of any dividends or any other
distributions of any sort in respect of its Capital Stock (including
any payment in connection with any merger or consolidation involving
such Person) or similar payment to the direct or indirect holders of
its Capital Stock (other than dividends or distributions payable solely
in its Capital Stock (other than Disqualified Stock) and dividends or
distributions payable solely to the Company or a Restricted Subsidiary,
and other than pro rata dividends or other distributions made by a
Subsidiary that is not a Wholly Owned Subsidiary to minority
stockholders (or owners of an equivalent interest in the case of a
Subsidiary that is an entity other than a corporation));
(ii) the purchase, redemption or other acquisition or
retirement for value of any Capital Stock of the Company held by any
Person or of any Capital Stock of a Restricted Subsidiary held by any
Affiliate of the Company (other than a Restricted Subsidiary),
including the exercise of any option to exchange any Capital Stock
(other than into Capital Stock of the Company that is not Disqualified
Stock);
(iii) the purchase, repurchase, redemption, defeasance or
other acquisition or retirement for value, prior to scheduled maturity,
scheduled repayment or scheduled sinking fund payment of any
Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of
satisfying a sinking fund obligation, principal installment or final
maturity, in
<PAGE> 30
22
each case due within one year of the date of acquisition); or
(iv) the making of any Investment in any Person (other than
a Permitted Investment).
"Restricted Subsidiary" means any Subsidiary of the Company
that is not an Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to
property now owned or hereafter acquired whereby the Company or a Restricted
Subsidiary transfers such property to a Person and the Company or a Restricted
Subsidiary leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company
secured by a Lien.
"Securities" means the Securities issued under this Indenture.
"Securities Act" means the Securities Act of 1933.
"Senior Indebtedness" means with respect to any Person on any
date of determination:
(i) Indebtedness of such Person, whether outstanding on the
Issue Date or thereafter Incurred; and
(ii) accrued and unpaid interest (including interest accruing
on or after the filing of any petition in bankruptcy or for
reorganization relating to the Company to the extent post-filing
interest is allowed in such proceeding) in respect of (A) Indebtedness
of such Person for money borrowed and (B) Indebtedness evidenced by
notes, debentures, bonds or other similar instruments for the payment
of which such Person is responsible or liable unless, in the case of
(i) and (ii), in the instrument creating or evidencing the same or
pursuant to which the same is outstanding, it is provided that such
obligations are subordinate in right of payment to the Securities;
<PAGE> 31
23
provided, however, that Senior Indebtedness shall not include:
(1) any obligation of the Company to any Subsidiary;
(2) any liability for Federal, state, local or other taxes
owed or owing by such Person;
(3) any accounts payable or other liability to trade creditors
arising in the ordinary course of business (including guarantees
thereof or instruments evidencing such liabilities);
(4) any Indebtedness of such Person (and any accrued and
unpaid interest in respect thereof) which is subordinate or junior in
any respect to any other Indebtedness or other obligation of such
Person, except for approximately $10,000,000 of Indebtedness which
consists of: (A) notes payable to The United Company, General
Injectables and Vaccines, Inc. and RSR Laboratories, Inc., (B) certain
capital leases with First American National Bank and (C) certain other
Indebtedness set forth in the Credit Agreement; or
(5) that portion of any Indebtedness which at the time of
Incurrence is Incurred in violation of this Indenture.
"Senior Subordinated Indebtedness" means the Securities and
the Subsidiary Guaranties and any other Indebtedness of the Company or the
Subsidiary Guarantors that specifically provides that such Indebtedness is to
rank pari passu with the Securities or the Subsidiary Guarantors, as applicable,
in right of payment and is not subordinated by its terms in right of payment to
any Indebtedness or other obligation of the Company or the Subsidiary
Guarantors, as applicable, which is not Senior Indebtedness.
"Significant Subsidiary" means any Restricted Subsidiary that
would be a "Significant Subsidiary" of the Company within the meaning of Rule
1-02 under Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the
date specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option
<PAGE> 32
24
of the holder thereof upon the happening of any contingency beyond the control
of the issuer unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the
Company (whether outstanding on the Issue Date or thereafter Incurred) which is
subordinate or junior in right of payment to the Securities pursuant to a
written agreement to that effect.
"Subsidiary" means, in respect of any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by (i) such Person,
(ii) such Person and one or more Subsidiaries of such Person or (iii) one or
more Subsidiaries of such Person.
"Subsidiary Guarantor" means each Restricted Subsidiary that
provides a Subsidiary Guaranty.
"Subsidiary Guaranty" means a Guarantee by a Subsidiary
Guarantor of the Company's obligations with respect to the Securities.
"Temporary Cash Investments" means any of the following:
(i) any investment in direct obligations of the United States
of America or any agency thereof or obligations guaranteed by the
United States of America or any agency thereof;
(ii) investments in time deposit accounts, certificates of
deposit and money market deposits maturing within 180 days of the date
of acquisition thereof issued by a bank or trust company which is
organized under the laws of the United States of America, any state
thereof or any foreign country recognized by the United States of
America, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50,000,000 (or the foreign
currency equivalent thereof) and has outstanding debt that is rated "A"
(or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in
Rule 436 under the Securities Act) or any money-
<PAGE> 33
25
market fund sponsored by a registered broker dealer or mutual fund
distributor;
(iii) repurchase obligations with a term of not more than 30
days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in
clause (ii) above;
(iv) investments in commercial paper, maturing not more than
90 days after the date of acquisition, issued by a corporation (other
than an Affiliate of the Company) organized and in existence under the
laws of the United States of America or any foreign country recognized
by the United States of America with a rating at the time as of which
any investment therein is made of "P-1" (or higher) according to
Moody's Investors Service, Inc. or "A-1" (or higher) according to
Standard and Poor's Ratings Group; and
(v) investments in securities with maturities of six months or
less from the date of acquisition issued or fully guaranteed by any
state, commonwealth or territory of the United States of America, or by
any political subdivision or taxing authority thereof, and rated at
least "A" by Standard & Poor's Ratings Group or "A" by Moody's
Investors Service, Inc.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. ss.ss.
77aaa-77bbbb) as in effect on the date of this Indenture.
"Trustee" means the party named as such in this Indenture
until a successor replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President
or any other officer or assistant officer of the Trustee assigned by the Trustee
to administer its corporate trust matters.
"Uniform Commercial Code" means the New York Uniform
Commercial Code as in effect from time to time.
"Unrestricted Subsidiary" means (i) any Subsidiary of the
Company that at the time of determination shall be designated an Unrestricted
Subsidiary by the Board of Directors in the manner provided below and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate
any Subsidiary of the Company
<PAGE> 34
26
(including any newly acquired or newly formed Subsidiary of the Company) to be
an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries
owns any Capital Stock or Indebtedness of, or owns or holds any Lien on any
property of, the Company or any other Subsidiary of the Company that is not a
Subsidiary of the Subsidiary to be so designated; provided, however, that either
(A) the Subsidiary to be so designated has total assets of $1,000 or less or (B)
if such Subsidiary has assets greater than $1,000, such designation would be
permitted under Section 4.04. The Board of Directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that
immediately after giving effect to such designation (x) the Company could Incur
$1.00 of additional Indebtedness under Section 4.03(a) and (y) no Default shall
have occurred and be continuing. Any such designation by the Board of Directors
shall be evidenced to the Trustee by promptly filing with the Trustee a copy of
the resolution of the Board of Directors giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentality thereof) for
the payment of which the full faith and credit of the United States of America
is pledged and which are not callable or redeemable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock
or other interests (including partnership interests) of such Person then
outstanding and normally entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all
the Capital Stock of which (other than directors' qualifying shares) is owned by
the Company or one or more Wholly Owned Subsidiaries.
<PAGE> 35
27
SECTION 1.02. Other Definitions.
<TABLE>
<CAPTION>
Defined in
Term Section
---- ----------
<S> <C>
"Affiliate Transaction" ............................ 4.07
"Applicable Guarantor" ............................. 11.01
"Bankruptcy Law" ................................... 6.01
"Blockage Notice" .................................. 10.03
"covenant defeasance option" ....................... 8.01(b)
"Custodian" ........................................ 6.01
"Event of Default" ................................. 6.01
"legal defeasance option" .......................... 8.01(b)
"Legal Holiday" .................................... 13.08
"Obligations"....................................... 11.01
"Offer" ............................................ 4.06(b)
"Offer Amount" ..................................... 4.01(c)(2)
"Offer Period"...................................... 4.01(c)(2)
"pay the Securities" ............................... 10.03
"Paying Agent" ..................................... 2.03
"Payment Blockage Period" .......................... 10.03
"Purchase Date" .................................... 4.06(c)(1)
"Registrar"......................................... 2.03
"Successor Company" ................................ 5.01
</TABLE>
SECTION 1.03. Incorporation by Reference of Trust Indenture
Act. This Indenture is subject to the mandatory provisions of the TIA which are
incorporated by reference in and made a part of this Indenture. The following
TIA terms have the following meanings:
"Commission" means the SEC;
"indenture securities" means the Securities and the Subsidiary
Guaranties;
"indenture security holder" means a Securityholder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the
Trustee; and
"obligor" on the indenture securities means the Company, each
Subsidiary Guarantor and any other obligor on the indenture securities.
All other TIA terms used in this Indenture that are defined by
the TIA, defined by TIA reference to another
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28
statute or defined by SEC rule have the meanings assigned to them by such
definitions.
SECTION 1.04. Rules of Construction. Unless the context
otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) "including" means including without limitation;
(5) words in the singular include the plural and words in the
plural include the singular;
(6) unsecured Indebtedness shall not be deemed to be
subordinate or junior to Secured Indebtedness merely by virtue of its
nature as unsecured Indebtedness;
(7) the principal amount of any noninterest bearing or other
discount security at any date shall be the principal amount thereof
that would be shown on a balance sheet of the issuer dated such date
prepared in accordance with GAAP;
(8) the principal amount of any Preferred Stock shall be (i)
the maximum liquidation value of such Preferred Stock or (ii) the
maximum mandatory redemption or mandatory repurchase price with
respect to such Preferred Stock, whichever is greater; and
(9) all references to the date the Securities were originally
issued shall refer to the date the Initial Securities were originally
issued.
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ARTICLE 2
The Securities
SECTION 2.01. Form and Dating. Provisions relating to the
Initial Securities, the Private Exchange Securities and the Exchange Securities
are set forth in the Rule 144A/Regulation S Appendix attached hereto (the
"Appendix") which is hereby incorporated in and expressly made part of this
Indenture. The Initial Securities and the Trustee's certificate of
authentication shall be substantially in the form of Exhibit 1 to the Appendix
which is hereby incorporated in and expressly made a part of this Indenture. The
Exchange Securities, the Private Exchange Securities and the Trustee's
certificate of authentication shall be substantially in the form of Exhibit A,
which is hereby incorporated in and expressly made a part of this Indenture. The
Securities may have notations, legends or endorsements required by law, stock
exchange rule, agreements to which the Company is subject, if any, or usage
(provided that any such notation, legend or endorsement is in a form acceptable
to the Company). Each Security shall be dated the date of its authentication.
The terms of the Securities set forth in the Appendix and Exhibit A are part of
the terms of this Indenture.
SECTION 2.02. Execution and Authentication. Two Officers shall
sign the Securities for the Company by manual or facsimile signature. The
Company's seal shall be impressed, affixed, imprinted or reproduced on the
Securities and may be in facsimile form.
If an Officer whose signature is on a Security no longer holds
that office at the time the Trustee authenticates the Security, the Security
shall be valid nevertheless.
A Security shall not be valid until an authorized signatory of
the Trustee manually signs the certificate of authentication on the Security.
The signature shall be conclusive evidence that the Security has been
authenticated under this Indenture.
The Trustee shall authenticate and deliver Securities for
original issue in an aggregate principal amount of $150,000,000, upon a written
order of the Company signed by two Officers or by an Officer and either an
Assistant Treasurer or an Assistant Secretary of the Company. Such order shall
specify the amount of the
<PAGE> 38
30
Securities to be authenticated and the date on which the original issue of
Securities is to be authenticated. The aggregate principal amount of Securities
outstanding at any time may not exceed that amount except as provided in Section
2.07.
The Trustee may appoint an authenticating agent reasonably
acceptable to the Company to authenticate the Securities. Unless limited by the
terms of such appointment, an authenticating agent may authenticate Securities
whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as any Registrar, Paying Agent or agent
for service of notices and demands.
SECTION 2.03. Registrar and Paying Agent. The Company shall
maintain an office or agency where Securities may be presented for registration
of transfer or for exchange (the "Registrar") and an office or agency where
Securities may be presented for payment (the "Paying Agent"). The Registrar
shall keep a register of the Securities and of their transfer and exchange. The
Company may have one or more co-registrars and one or more additional paying
agents. The term "Paying Agent" includes any additional paying agent.
The Company shall enter into an appropriate agency agreement
with any Registrar, Paying Agent or co-registrar not a party to this Indenture,
which shall incorporate the terms of the TIA. The agreement shall implement the
provisions of this Indenture that relate to such agent. The Company shall
notify the Trustee of the name and address of any such agent. If the Company
fails to maintain a Registrar or Paying Agent, the Trustee shall act as such
and shall be entitled to appropriate compensation therefor pursuant to Section
7.07. The Company or any of its domestically incorporated Wholly Owned
Subsidiaries may act as Paying Agent, Registrar, co-registrar or transfer agent.
The Company initially appoints IBJ Whitehall Bank & Trust
Company as Registrar and Paying Agent in connection with the Securities.
SECTION 2.04. Paying Agent To Hold Money in Trust. Prior to
each due date of the principal and interest on any Security, the Company shall
deposit with the Paying Agent a sum sufficient to pay such principal and
interest when so becoming due. The Company shall require each Paying Agent
(other than the Trustee) to agree in writing that the
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Paying Agent shall hold in trust for the benefit of Securityholders or the
Trustee all money held by the Paying Agent for the payment of principal of or
interest on the Securities and shall notify the Trustee of any default by the
Company in making any such payment. If the Company or a Subsidiary acts as
Paying Agent, it shall segregate the money held by it as Paying Agent and hold
it as a separate trust fund. The Company at any time may require a Paying Agent
to pay all money held by it to the Trustee and to account for any funds
disbursed by the Paying Agent. Upon complying with this Section, the Paying
Agent shall have no further liability for the money delivered to the Trustee.
SECTION 2.05. Securityholder Lists. The Trustee shall preserve
in as current a form as is reasonably practicable the most recent list
available to it of the names and addresses of Securityholders. If the Trustee is
not the Registrar, the Company shall furnish to the Trustee, in writing at least
five Business Days before each interest payment date and at such other times as
the Trustee may request in writing, a list in such form and as of such date as
the Trustee may reasonably require of the names and addresses of
Securityholders.
SECTION 2.06. Transfer and Exchange. The Securities shall be
issued in registered form and shall be transferable only upon the surrender of a
Security for registration of transfer. When a Security is presented to the
Registrar or a co-registrar with a request to register a transfer, the Registrar
shall register the transfer as requested if the requirements of Section 8-401(1)
of the Uniform Commercial Code are met. When Securities are presented to the
Registrar or a co-registrar with a request to exchange them for an equal
principal amount of Securities of other denominations, the Registrar shall make
the exchange as requested if the same requirements are met. To permit
registration of transfers and exchanges, the Company shall execute and the
Trustee shall authenticate Securities at the Registrar's or co-registrar's
request. The Company may require payment of a sum sufficient to pay all taxes,
assessments or other governmental charges in connection with any transfer or
exchange pursuant to this Section. The Company shall not be required to make and
the Registrar need not register transfers or exchanges of Securities selected
for redemption (except, in the case of Securities to be redeemed in part, the
portion thereof not to be redeemed) or any Securities for a period of 15 days
before a selection of Securities to be redeemed or 15 days before an interest
payment date.
<PAGE> 40
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Prior to the due presentation for registration of transfer of
any Security, the Company, the Trustee, the Paying Agent, the Registrar or any
co-registrar may deem and treat the person in whose name a Security is
registered as the absolute owner of such Security for the purpose of receiving
payment of principal of and interest on such Security and for all other purposes
whatsoever, whether or not such Security is overdue, and none of the Company,
the Trustee, the Paying Agent, the Registrar or any co-registrar shall be
affected by notice to the contrary.
All Securities issued upon any transfer or exchange pursuant
to the terms of this Indenture will evidence the same debt and will be entitled
to the same benefits under this Indenture as the Securities surrendered upon
such transfer or exchange.
SECTION 2.07. Replacement Securities. If a mutilated Security
is surrendered to the Registrar or if the Holder of a Security claims that the
Security has been lost, destroyed or wrongfully taken, the Company shall issue
and the Trustee shall authenticate a replacement Security if the requirements of
Section 8-405 of the Uniform Commercial Code are met and the Holder satisfies
any other reasonable requirements of the Trustee. If required by the Trustee or
the Company, such Holder shall furnish an indemnity bond sufficient in the
judgment of the Company and the Trustee to protect the Company, the Trustee, the
Paying Agent, the Registrar and any co-registrar from any loss which any of them
may suffer if a Security is replaced. The Company and the Trustee may charge the
Holder for their expenses in replacing a Security.
Every replacement Security is an additional obligation of the
Company.
SECTION 2.08. Outstanding Securities. Securities outstanding
at any time are all Securities authenticated by the Trustee except for those
canceled by it, those delivered to it for cancellation and those described in
this Section as not outstanding. A Security does not cease to be outstanding
because the Company or an Affiliate of the Company holds the Security.
If a Security is replaced pursuant to Section 2.07, it ceases
to be outstanding unless the Trustee and the Company receive proof satisfactory
to them that the replaced Security is held by a bona fide purchaser.
<PAGE> 41
33
If the Paying Agent segregates and holds in trust, in
accordance with this Indenture, on a redemption date or maturity date money
sufficient to pay all principal and interest payable on that date with respect
to the Securities (or portions thereof) to be redeemed or maturing, as the case
may be, and the Paying Agent is not prohibited from paying such money to the
Securityholders on that date pursuant to the terms of this Indenture, then on
and after that date such Securities (or portions thereof) cease to be
outstanding and interest on them ceases to accrue.
SECTION 2.09. Temporary Securities. Until definitive
Securities are ready for delivery, the Company may prepare and the Trustee shall
authenticate temporary Securities. Temporary Securities shall be substantially
in the form of definitive Securities but may have variations that the Company
considers appropriate for temporary Securities. Without unreasonable delay, the
Company shall prepare and the Trustee shall authenticate definitive Securities
and deliver them in exchange for temporary Securities.
SECTION 2.10. Cancellation. The Company at any time may
deliver Securities to the Trustee for cancellation. The Registrar and the Paying
Agent shall forward to the Trustee any Securities surrendered to them for
registration of transfer, exchange or payment. The Trustee and no one else shall
cancel and destroy (subject to the record retention requirements of the
Exchange Act) all Securities surrendered for registration of transfer, exchange,
payment or cancellation and deliver a certificate of such destruction to the
Company unless the Company directs the Trustee to deliver canceled Securities to
the Company. The Company may not issue new Securities to replace Securities it
has redeemed, paid or delivered to the Trustee for cancellation.
SECTION 2.11. Defaulted Interest. If the Company defaults in a
payment of interest on the Securities, the Company shall pay defaulted interest
(plus interest on such defaulted interest to the extent lawful) in any lawful
manner. The Company may pay the defaulted interest to the persons who are
Securityholders on a subsequent special record date. The Company shall fix or
cause to be fixed any such special record date and payment date to the
reasonable satisfaction of the Trustee and shall promptly mail to each
Securityholder a notice that states the special record date, the payment date
and the amount of defaulted interest to be paid.
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SECTION 2.12. CUSIP Numbers. The Company in issuing the
Securities may use "CUSIP" numbers (if then generally in use) and, if so, the
Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to
Holders; provided, however, that any such notice may state that no
representation is made as to the correctness of such numbers either as printed
on the Securities or as contained in any notice of a redemption and that
reliance may be placed only on the other identification numbers printed on the
Securities, and any such redemption shall not be affected by any defect in or
omission of such numbers.
ARTICLE 3
Redemption
SECTION 3.01. Notices to Trustee. If the Company elects to
redeem Securities pursuant to paragraph 5 of the Securities, it shall notify the
Trustee in writing of the redemption date, the principal amount of Securities to
be redeemed and the paragraph of the Securities pursuant to which the redemption
will occur.
The Company shall give each notice to the Trustee provided for
in this Section at least 60 days before the redemption date unless the Trustee
consents to a shorter period. Such notice shall be accompanied by an Officers'
Certificate and an Opinion of Counsel from the Company to the effect that such
redemption will comply with the conditions herein.
SECTION 3.02. Selection of Securities To Be Redeemed. If fewer
than all the Securities are to be redeemed, the Trustee shall select the
Securities to be redeemed pro rata or by lot or by a method that complies with
applicable legal and securities exchange requirements, if any, and that the
Trustee in its sole discretion shall deem to be fair and appropriate and in
accordance with methods generally used at the time of selection by fiduciaries
in similar circumstances. The Trustee shall make the selection from outstanding
Securities not previously called for redemption. The Trustee may select for
redemption portions of the principal of Securities that have denominations
larger than $1,000. Securities and portions of them the Trustee selects shall be
in amounts of $1,000 or a whole multiple of $1,000. Provisions of this Indenture
that apply to Securities called for redemption also apply to portions of
Securities called for redemption.
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35
The Trustee shall notify the Company promptly of the Securities or portions of
Securities to be redeemed.
SECTION 3.03. Notice of Redemption. At least 30 days but not
more than 60 days before a date for redemption of Securities, the Company shall
mail a notice of redemption by first-class mail to each Holder of Securities to
be redeemed at such Holder's registered address.
The notice shall identify the Securities to be redeemed and
shall state:
(1) the redemption date;
(2) the redemption price;
(3) the name and address of the Paying Agent;
(4) that Securities called for redemption must be surrendered
to the Paying Agent to collect the redemption price;
(5) if fewer than all the outstanding Securities are to be
redeemed, the identification and principal amounts of the particular
Securities to be redeemed;
(6) that, unless the Company defaults in making such
redemption payment or the Paying Agent is prohibited from making such
payment pursuant to the terms of this Indenture, interest on Securities
(or portion thereof) called for redemption ceases to accrue on and
after the redemption date; and
(7) that no representation is made as to the correctness or
accuracy of the CUSIP number, if any, listed in such notice or printed
on the Securities.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense. In such event,
the Company shall provide the Trustee with the information required by this
Section.
SECTION 3.04. Effect of Notice of Redemption. Once notice of
redemption is mailed, Securities called for redemption become due and payable on
the redemption date and at the redemption price stated in the notice. Upon
surrender to the Paying Agent, such Securities shall be paid at the redemption
price stated in the notice, plus accrued interest to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive
<PAGE> 44
36
interest due on the related interest payment date). Failure to give notice or
any defect in the notice to any Holder shall not affect the validity of the
notice to any other Holder.
SECTION 3.05. Deposit of Redemption Price. Prior to the
redemption date, the Company shall deposit with the Paying Agent (or, if the
Company or a Subsidiary is the Paying Agent, shall segregate and hold in trust)
money sufficient to pay the redemption price of and accrued interest on all
Securities to be redeemed on that date other than Securities or portions of
Securities called for redemption which have been delivered by the Company to the
Trustee for cancellation.
SECTION 3.06. Securities Redeemed in Part. Upon surrender of a
Security that is redeemed in part, the Company shall execute and the Trustee
shall authenticate for the Holder (at the Company's expense) a new Security
equal in principal amount to the unredeemed portion of the Security surrendered.
ARTICLE 4
Covenants
SECTION 4.01. Payment of Securities. The Company shall
promptly pay the principal of and interest on the Securities on the dates and in
the manner provided in the Securities and in this Indenture. Principal and
interest shall be considered paid on the date due if on such date the Trustee or
the Paying Agent holds in accordance with this Indenture money sufficient to pay
all principal and interest then due and the Trustee or the Paying Agent, as the
case may be, is not prohibited from paying such money to the Securityholders on
that date pursuant to the terms of this Indenture.
The Company shall pay interest on overdue principal at the
rate specified therefor in the Securities, and it shall pay interest on overdue
installments of interest at the same rate to the extent lawful.
SECTION 4.02. SEC Reports. Notwithstanding that the Company
may not be subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, the Company shall file with the SEC and provide the Trustee and
Securityholders at the times specified for the filing of
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37
such information, documents and reports under such Sections with such annual
reports and such information, documents and other reports as are specified in
Sections 13 and 15(d) of the Exchange Act and applicable to a U.S. corporation
subject to such Sections. In addition, so long as any of the Securities are
outstanding, the Company shall make available to any prospective purchaser of
Securities or beneficial owner thereof (upon written request to the company) in
connection with any sales thereof the information required by Rule 144A(d)(4)
under the Securities Act. The Company also shall comply with the other
provisions of TIA ss. 314(a).
SECTION 4.03. Limitation on Indebtedness. (a) The Company
shall not, and shall not permit any Restricted Subsidiary to, Incur, directly or
indirectly, any Indebtedness; provided, however, that the Company may Incur
Indebtedness if, on the date of such Incurrence and after giving effect thereto,
the Consolidated Coverage Ratio exceeds 2.00 to 1 if such Indebtedness is
Incurred prior to February 15, 2002 or 2.25 to 1 if such Indebtedness is
Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company
and the Restricted Subsidiaries may Incur any or all of the following
Indebtedness:
(1) Indebtedness Incurred pursuant to the Credit Agreement;
provided, however, that, after giving effect to any such Incurrence,
the aggregate principal amount of such Indebtedness then outstanding
does not exceed (i) the sum of $425,000,000 plus the greater (x) of
$75,000,000 and (y) the sum of (A) 50% of the book value of the
inventory of the Company and its Restricted Subsidiaries and (B) 85% of
the book value of the accounts receivables of the Company and its
Restricted Subsidiaries, less the sum of all principal payments with
respect to such Indebtedness made pursuant to Section 4.06;
(2) Indebtedness owed to and held by the Company or a Wholly
Owned Subsidiary; provided, however, that (i) any subsequent issuance
or transfer of any Capital Stock which results in any such Wholly Owned
Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or a Wholly
Owned Subsidiary) shall be deemed, in each case, to constitute the
Incurrence of such Indebtedness by the obligor thereon and (ii) if the
Company is the obligor on such Indebtedness, such
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Indebtedness is expressly subordinated to the prior payment in full in
cash of all obligations with respect to the Securities;
(3) the Securities;
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of this Section
4.03(b));
(5) Indebtedness of a Restricted Subsidiary Incurred and
outstanding on or prior to the date on which such Subsidiary was
acquired by the Company (other than Indebtedness Incurred in connection
with, or to provide all or any portion of the funds or credit support
utilized to consummate, the transaction or series of related
transactions pursuant to which such Subsidiary became a Subsidiary or
was acquired by the Company); provided, however, that on the date of
such acquisition and after giving effect thereto, the Company would
have been able to Incur at least $1.00 of additional Indebtedness
pursuant to Section 4.03(a);
(6) Refinancing Indebtedness in respect of Indebtedness
Incurred pursuant to Section 4.03(a) or pursuant to clause (3), (4) or
(5) of this Section 4.03(b) or this clause (6); provided, however, that
to the extent such Refinancing Indebtedness directly or indirectly
Refinances Indebtedness of a Subsidiary Incurred pursuant to clause
(5), such Refinancing Indebtedness shall be Incurred only by such
Subsidiary;
(7) Hedging Obligations consisting of Interest Rate Agreements
directly related to Indebtedness permitted to be Incurred by the
Company pursuant to this Indenture;
(8) any Guarantee by a Subsidiary Guarantor of any
Indebtedness permitted to be Incurred by the Company or any Restricted
Subsidiary pursuant to this Section 4.03(b); and
(9) Indebtedness of the Company in an aggregate principal
amount which, together with all other Indebtedness of the Company and
the Restricted Subsidiaries outstanding on the date of such Incurrence
(other than Indebtedness permitted by clauses (1) through (8) of this
Section 4.03(b) or Section 4.03(a)) does not exceed $25,000,000.
<PAGE> 47
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(c) Notwithstanding the foregoing, the Company shall not Incur
any Indebtedness pursuant to Section 4.03(b) if the proceeds thereof are used,
directly or indirectly, to Refinance any Subordinated Obligations unless such
Indebtedness shall be subordinated to the Securities to at least the same extent
as such Subordinated Obligations.
(d) For purposes of determining compliance with this Section
4.03, (i) in the event that an item of Indebtedness meets the criteria of more
than one of the types of Indebtedness described above, the Company, in its sole
discretion, will classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of the above clauses and
(ii) an item of Indebtedness may be divided and classified in more than one of
the types of Indebtedness described herein.
(e) Notwithstanding Section 4.03(a) or 4.03(b), neither the
Company nor any Restricted Subsidiary shall Incur (i) any Indebtedness if such
Indebtedness is subordinate or junior in ranking in any respect to any Senior
Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness of
such Person or is expressly subordinated in right of payment to Senior
Subordinated Indebtedness of such Person or (ii) any Secured Indebtedness that
is not Senior Indebtedness of such Person unless contemporaneously therewith
effective provision is made to secure the Securities or the Subsidiary Guaranty
of such Person, as the case may be, equally and ratably with such Secured
Indebtedness for so long as such Secured Indebtedness is secured by a Lien.
SECTION 4.04. Limitation on Restricted Payments. (a) The
Company shall not, and shall not permit any Restricted Subsidiary, directly or
indirectly, to make a Restricted Payment if at the time the Company or such
Restricted Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would
result therefrom);
(2) the Company is not able to Incur an additional $1.00 of
Indebtedness under Section 4.03(a); or
(3) the aggregate amount of such Restricted Payment and all
other Restricted Payments since the Issue Date would exceed the sum of:
(A) 50% of the Consolidated Net Income accrued during
the period (treated as one account-
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40
ing period) from the beginning of the fiscal quarter
immediately following the fiscal quarter during which the
Securities are originally issued to the end of the most recent
fiscal quarter ending at least 45 days prior to the date of
such Restricted Payment (or, in case such Consolidated Net
Income shall be a deficit, minus 100% of such deficit); plus
(B) the aggregate Net Cash Proceeds received by the
Company from the issuance or sale of its Capital Stock (other
than Disqualified Stock) subsequent to the Issue Date (other
than an issuance or sale to a Subsidiary of the Company and
other than an issuance or sale to an employee stock ownership
plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees); plus
(C) the amount by which Indebtedness of the Company
is reduced on the Company's balance sheet upon the conversion
or exchange (other than by a Subsidiary of the Company)
subsequent to the Issue Date of any Indebtedness of the
Company convertible or exchangeable for Capital Stock (other
than Disqualified Stock) of the Company (less the amount of
any cash, or the fair value of any other property, distributed
by the Company upon such conversion or exchange); plus
(D) an amount equal to the sum of (i) the net
reduction in Investments in Unrestricted Subsidiaries
resulting from dividends, repayments of loans or advances or
other transfers of assets, in each case to the Company or any
Restricted Subsidiary from Unrestricted Subsidiaries, and (ii)
the portion (proportionate to the Company's equity interest in
such Subsidiary) of the fair market value of the net assets of
an Unrestricted Subsidiary at the time such Unrestricted
Subsidiary is designated a Restricted Subsidiary; provided,
however, that the foregoing sum shall not exceed, in the case
of any Unrestricted Subsidiary, the amount of Investments
previously made (and treated as a Restricted Payment) by the
Company or any Restricted Subsidiary in such Unrestricted
Subsidiary; plus
(E) $5,000,000.
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(b) The provisions of Section 4.05(a) shall not prohibit:
(i) any Restricted Payment (other than a Restricted Payment
described in clause (i) of the definition of "Restricted Payment" set
forth in Section 1.01) made out of the Net Cash Proceeds of the
substantially concurrent sale of, or made by exchange for, Capital
Stock of the Company (other than Disqualified Stock and other than
Capital Stock issued or sold to a Subsidiary of the Company or an
employee stock ownership plan or to a trust established by the Company
or any of its Subsidiaries for the benefit of their employees);
provided, however, that (A) such Restricted Payment shall be excluded
in the calculation of the amount of Restricted Payments and (B) the Net
Cash Proceeds from such sale shall be excluded from the calculation of
amounts under clause (3)(B) of Section 4.04(a);
(ii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made by
exchange for, or out of the proceeds of the substantially concurrent
sale of, Indebtedness of the Company which is permitted to be Incurred
pursuant to Section 4.03(b)(6); provided, however, that such purchase,
repurchase, redemption, defeasance or other acquisition or retirement
for value shall be excluded in the calculation of the amount of
Restricted Payments;
(iii) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would
have complied with Section 4.05(a); provided, however, that at the time
of payment of such dividend, no other Default shall have occurred and
be continuing (or result therefrom); provided further, however, that
such dividend shall be included in the calculation of the amount of
Restricted Payments; or
(iv) the repurchase or other acquisition of shares of, or
options to purchase shares of, common stock of the Company or any of
its Subsidiaries from employees, former employees, directors or former
directors of the Company or any of its Subsidiaries (or permitted
transferees of such employees, former employees, directors or former
directors), pursuant to the terms of the agreements (including
employment agreements) or plans (or amendments thereto) approved by the
Board of Directors under which such individuals purchase or sell
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or are granted the option to purchase or sell, shares of such common
stock; provided, however, that the aggregate amount of such repurchases
and other acquisitions shall not exceed $1,000,000 in any calendar
year; provided further, however, that such repurchases and other
acquisitions shall be excluded in the calculation of the amount of
Restricted Payments.
SECTION 4.05. Limitation on Restrictions on Distributions from
Restricted Subsidiaries. The Company shall not, and shall not permit any
Restricted Subsidiary to, create or otherwise cause or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to (a) pay dividends or make any other distributions on
its Capital Stock to the Company or a Restricted Subsidiary or pay any
Indebtedness owed to the Company or any other Restricted Subsidiary, (b) make
any loans or advances to the Company or any other Restricted Subsidiary or (c)
transfer any of its property or assets to the Company or any other Restricted
Subsidiary, except:
(i) any encumbrance or restriction pursuant to an agreement in
effect at or entered into on the Issue Date, including the Credit
Agreement;
(ii) any encumbrance or restriction with respect to a
Restricted Subsidiary pursuant to an agreement relating to any
Indebtedness Incurred by such Restricted Subsidiary on or prior to the
date on which such Restricted Subsidiary was acquired by the Company
(other than Indebtedness Incurred as consideration in, or to provide
all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant
to which such Restricted Subsidiary became a Restricted Subsidiary or
was acquired by the Company) and outstanding on such date;
(iii) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (i) or (ii) of this Section 4.05 or
this clause (iii) or contained in any amendment to an agreement
referred to in clause (i) or (ii) of this Section 4.05 or this clause
(iii); provided, however, that the encumbrances and restrictions with
respect to such Restricted Subsidiary contained in any such refinancing
agreement or amendment are no less favorable to the Securityholders
than encumbrances and
<PAGE> 51
43
restrictions with respect to such Restricted Subsidiary contained in
such predecessor agreements;
(iv) any such encumbrance or restriction consisting of
customary nonassignment provisions in leases governing leasehold
interests to the extent such provisions restrict the transfer of the
lease or the property leased thereunder;
(v) in the case of clause (c) above, restrictions contained in
security agreements or mortgages securing Indebtedness of a Restricted
Subsidiary to the extent such restrictions restrict the transfer of the
property subject to such security agreements or mortgages; and
(vi) any restriction with respect to a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or assets of
such Restricted Subsidiary pending the closing of such sale or
disposition.
SECTION 4.06. Limitation on Sales of Assets and Subsidiary
Stock. (a) The Company shall not, and shall not permit any Restricted Subsidiary
to, directly or indirectly, consummate any Asset Disposition unless:
(i) the Company or such Restricted Subsidiary receives
consideration at the time of such Asset Disposition at least equal to
the fair market value (including as to the value of all non-cash
consideration), as determined in good faith by the Board of Directors,
of the shares and assets subject to such Asset Disposition;
(ii) at least 85% of the consideration thereof received by the
Company or such Restricted Subsidiary is in the form of cash or cash
equivalents; and
(iii) an amount equal to 100% of the Net Available Cash from
such Asset Disposition is applied by the Company (or such Restricted
Subsidiary, as the case may be):
(A) first, to the extent the Company elects (or is
required by the terms of any Indebtedness), to prepay, repay,
redeem or purchase Senior Indebtedness or Indebtedness (other
than any Disqualified Stock) of a Wholly Owned Subsidiary (in
each case other than Indebtedness owed to the
<PAGE> 52
44
Company or an Affiliate of the Company) within one year from
the later of the date of such Asset Disposition or the receipt
of such Net Available Cash;
(B) second, to the extent of the balance of such Net
Available Cash after application in accordance with clause
(A), to the extent the Company elects, to acquire Additional
Assets within one year from the later of the date of such
Asset Disposition or the receipt of such Net Available Cash;
(C) third, to the extent of the balance of such Net
Available Cash after application in accordance with clauses
(A) and (B), to make an Offer to the holders of the Securities
(and to holders of other Senior Subordinated Indebtedness
designated by the Company) to purchase Securities (and such
other Senior Subordinated Indebtedness) pursuant to and
subject to the conditions of Section 4.06(b); and
(D) fourth, to the extent of the balance of such Net
Available Cash after application in accordance with clauses
(A), (B) and (C), to (x) the acquisition by the Company or any
Wholly Owned Subsidiary of Additional Assets or (y) the
prepayment, repayment or purchase of Indebtedness (other than
any Disqualified Stock) of the Company (other than
Indebtedness owed to an Affiliate of the Company) or
Indebtedness of any Subsidiary (other than Indebtedness owed
to the Company or an Affiliate of the Company), in each case
within one year from the later of the receipt of such Net
Available Cash and the date the offer described in Section
4.06(b) is consummated;
provided, however, that in connection with any prepayment, repayment
or purchase of Indebtedness pursuant to clause (A), (C) or (D) above,
the Company or such Restricted Subsidiary shall permanently retire such
Indebtedness and shall cause the related loan commitment (if any) to be
permanently reduced in an amount equal to the principal amount so
prepaid, repaid or purchased.
Notwithstanding the foregoing provisions of this Section 4.06,
the Company and the Restricted Subsidiaries shall not be required to apply any
Net Available Cash in
<PAGE> 53
45
accordance with this Section 4.06(a) except to the extent that the aggregate Net
Available Cash from all Asset Dispositions which are not applied in accordance
with this Section 4.06(a) exceeds $10,000,000. Pending application of Net
Available Cash pursuant to this Section 4.06(a), such Net Available Cash shall
be invested in Permitted Investments.
For the purposes of this Section 4.06, the following are
deemed to be cash or cash equivalents: (x) the assumption of Indebtedness of the
Company or any Restricted Subsidiary and the release of the Company or such
Restricted Subsidiary from all liability on such Indebtedness in connection with
such Asset Disposition and (y) securities received by the Company or any
Restricted Subsidiary from the transferee that are promptly converted by the
Company or such Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the
purchase of Securities (and other Senior Subordinated Indebtedness) pursuant to
Section 4.06(a)(iii)(C), the Company shall be required to purchase Securities
tendered pursuant to an offer by the Company for the Securities (and other
Senior Subordinated Indebtedness) (the "Offer") at a purchase price of 100% of
their principal amount (without premium) plus accrued but unpaid interest (or,
in respect of such other Senior Subordinated Indebtedness, such lesser price, if
any, as may be provided for by the terms of such Senior Subordinated
Indebtedness) in accordance with the procedures (including prorationing in the
event of oversubscription) set forth in Section 4.06(c). If the aggregate
purchase price of Securities (and any other Senior Subordinated Indebtedness)
tendered pursuant to the Offer is less than the Net Available Cash allotted to
the purchase thereof, the Company shall be required to apply the remaining Net
Available Cash in accordance with Section 4.06(a)(ii)(D). The Company shall not
be required to make an Offer to purchase Securities (and other Senior
Subordinated Indebtedness) pursuant to this Section 4.06 if the Net Available
Cash available therefor is less than $10,000,000 (which lesser amount shall be
carried forward for purposes of determining whether such an Offer is required
with respect to the Net Available Cash from any subsequent Asset Disposition).
(c) (1) Promptly, and in any event within 10 days after the
Company becomes obligated to make an Offer, the Company shall be obligated to
deliver to the Trustee and send, by first-class mail to each Holder, a written
notice stating that the Holder may elect to have his Securities
<PAGE> 54
46
purchased by the Company either in whole or in part (subject to prorating as
hereinafter described in the event the Offer is oversubscribed) in integral
multiples of $1,000 of principal amount, at the applicable purchase price. The
notice shall specify a purchase date not less than 30 days nor more than 60 days
after the date of such notice (the "Purchase Date") and shall contain such
information concerning the business of the Company which the Company in good
faith believes will enable such Holders to make an informed decision (which at a
minimum will include (i) the most recently filed Annual Report on Form 10-K
(including audited consolidated financial statements) of the Company, the most
recent subsequently filed Quarterly Report on Form 10-Q and any Current Report
on Form 8-K of the Company filed subsequent to such Quarterly Report, other than
Current Reports describing Asset Dispositions otherwise described in the
offering materials (or corresponding successor reports), (ii) a description of
material developments in the Company's business subsequent to the date of the
latest of such Reports and (iii) if material, appropriate pro forma financial
information) and all instructions and materials necessary to tender Securities
pursuant to the Offer, together with the information contained in clause (3).
(2) Not later than the date upon which written notice of an
Offer is delivered to the Trustee as provided below, the Company shall deliver
to the Trustee an Officers' Certificate as to (i) the amount of the Offer (the
"Offer Amount"), (ii) the allocation of the Net Available Cash from the Asset
Dispositions pursuant to which such Offer is being made and (iii) the compliance
of such allocation with the provisions of Section 4.06(a). On such date, the
Company shall also irrevocably deposit with the Trustee or with a paying agent
(or, if the Company is acting as its own paying agent, segregate and hold in
trust) in Temporary Cash Investments, maturing on the last day prior to the
Purchase Date or on the Purchase Date if funds are immediately available by open
of business, an amount equal to the Offer Amount to be held for payment in
accordance with the provisions of this Section. Upon the expiration of the
period for which the Offer remains open (the "Offer Period"), the Company shall
deliver to the Trustee for cancellation the Securities or portions thereof which
have been properly tendered to and are to be accepted by the Company. The
Trustee shall, on the Purchase Date, mail or deliver payment to each tendering
Holder in the amount of the purchase price. In the event that the aggregate
purchase price of the Securities delivered by the Company to the Trustee is less
than the Offer Amount applicable to the Securities, the Trustee shall deliver
the excess to the Company immediately
<PAGE> 55
47
after the expiration of the Offer Period for application in accordance with this
Section.
(3) Holders electing to have a Security purchased shall be
required to surrender the Security, with an appropriate form duly completed, to
the Company at the address specified in the notice at least three Business Days
prior to the Purchase Date. Holders shall be entitled to withdraw their election
if the Trustee or the Company receives not later than one Business Day prior to
the Purchase Date, a telex, facsimile transmission or letter setting forth the
name of the Holder, the principal amount of the Security which was delivered for
purchase by the Holder and a statement that such Holder is withdrawing his
election to have such Security purchased. If at the expiration of the Offer
Period the aggregate principal amount of Securities (and any other Senior
Subordinated Indebtedness included in the Offer) surrendered by holders thereof
exceeds the Offer Amount, the Company shall select the Securities and the other
Senior Subordinated Indebtedness to be purchased on a pro rata basis (with such
adjustments as may be deemed appropriate by the Company so that only Securities
and the other Senior Subordinated Indebtedness) in denominations of $1,000, or
integral multiples thereof, shall be purchased). Holders whose Securities are
purchased only in part shall be issued new Securities equal in principal amount
to the unpurchased portion of the Securities surrendered.
(4) At the time the Company delivers Securities to the Trustee
which are to be accepted for purchase, the Company shall also deliver an
Officers' Certificate stating that such Securities are to be accepted by the
Company pursuant to and in accordance with the terms of this Section. A Security
shall be deemed to have been accepted for purchase at the time the Trustee,
directly or through an agent, mails or delivers payment therefor to the
surrendering Holder.
(d) The Company shall comply, to the extent applicable, with
the requirements of Section 14(e) of the Exchange Act and any other securities
laws or regulations in connection with the repurchase of Securities pursuant to
this Section. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this Section, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this Section by virtue thereof.
<PAGE> 56
48
SECTION 4.07. Limitation on Affiliate Transactions. (a) The
Company shall not, and shall not permit any Restricted Subsidiary to, enter into
or permit to exist any transaction (including the purchase, sale, lease or
exchange of any property, employee compensation arrangements or the rendering of
any service) with any Affiliate of the Company (an "Affiliate Transaction")
unless:
(i) the terms thereof are no less favorable to the Company or
such Restricted Subsidiary than those that could be obtained at the
time of such transaction in arm's-length dealings with a Person who is
not such an Affiliate;
(ii) if such Affiliate Transaction involves an amount in
excess of $1,000,000, (1) is set forth in writing and (2) has been
approved by a majority of the members of the Board of Directors having
no personal stake in such Affiliate Transaction; and
(iii) if such Affiliate Transaction involves an amount in
excess of $5,000,000, has been determined by a nationally recognized
investment banking firm to be fair, from a financial standpoint, to the
Company and its Restricted Subsidiaries.
(b) The provisions of Section 4.07(a) shall not prohibit:
(i) any Investment (other than a Permitted Investment) or
other Restricted Payment, in each case permitted to be made pursuant to
Section 4.04;
(ii) any issuance of securities, or other payments, awards or
grants in cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans
approved by the Board of Directors;
(iii) the grant of stock options or similar rights to
employees and directors of the Company pursuant to plans approved by
the Board of Directors;
(iv) loans or advances to employees in the ordinary course of
business in accordance with the past practices of the Company or its
Restricted Subsidiaries, but in any event not to exceed $5,000,000 in
the aggregate outstanding at any one time;
<PAGE> 57
49
(v) the payment of reasonable fees to directors of the Company
and its Restricted Subsidiaries who are not employees of the Company or
its Restricted Subsidiaries;
(vi) any Affiliate Transaction between the Company and a
Wholly Owned Subsidiary or between Wholly Owned Subsidiaries; and
(vii) the issuance or sale of any Capital Stock (other than
Disqualified Stock) of the Company.
SECTION 4.08. Limitation on the Sale or Issuance of Capital
Stock of Restricted Subsidiaries. The Company shall not sell or otherwise
dispose of any Capital Stock of a Restricted Subsidiary, and shall not permit
any Restricted Subsidiary, directly or indirectly, to issue or sell or otherwise
dispose of any of its Capital Stock except:
(i) to the Company or a Wholly Owned Subsidiary;
(ii) directors' qualifying shares;
(iii) if, immediately after giving effect to such issuance,
sale or other disposition, neither the Company nor any of its
Subsidiaries own any Capital Stock of such Restricted Subsidiary; or
(iv) if, immediately after giving effect to such issuance,
sale or other disposition, such Restricted Subsidiary would no longer
constitute a Restricted Subsidiary and any Investment in such Person
remaining after giving effect thereto would have been permitted to be
made under Section 4.04 if made on the date of such issuance, sale or
other disposition.
SECTION 4.09. Change of Control. (a) Upon the occurrence of a
Change of Control, each Holder shall have the right to require that the Company
repurchase such Holder's Securities at a purchase price in cash equal to 101% of
the principal amount thereof plus accrued and unpaid interest, if any, to the
date of purchase (subject to the right of holders of record on the relevant
record date to receive interest on the relevant interest payment date), in
accordance with the terms contemplated in Section 4.09(b).
<PAGE> 58
50
(b) Within 30 days following any Change of Control, the
Company shall mail a notice to each Holder with a copy to the Trustee (the
"Change of Control Offer") stating:
(1) that a Change of Control has occurred and that such Holder
has the right to require the Company to purchase such Holder's
Securities at a purchase price in cash equal to 101% of the principal
amount thereof on the date of purchase, plus accrued and unpaid
interest, if any, to the date of purchase (subject to the right of
Holders of record on the relevant record date to receive interest on
the relevant interest payment date);
(2) the circumstances and relevant facts regarding such Change
of Control (including information with respect to pro forma historical
income, cash flow and capitalization, each after giving effect to such
Change of Control);
(3) the repurchase date (which shall be no earlier than 30
days nor later than 60 days from the date such notice is mailed); and
(4) the instructions determined by the Company, consistent
with this Section, that a Holder must follow in order to have its
Securities purchased.
(c) Holders electing to have a Security purchased will be
required to surrender the Security, with an appropriate form duly completed, to
the Company at the address specified in the notice at least three Business Days
prior to the purchase date. Holders will be entitled to withdraw their election
if the Trustee or the Company receives not later than one Business Day prior to
the purchase date, a telegram, telex, facsimile transmission or letter setting
forth the name of the Holder, the principal amount of the Security which was
delivered for purchase by the Holder and a statement that such Holder is
withdrawing his election to have such Security purchased.
(d) On the purchase date, all Securities purchased by the
Company under this Section shall be delivered by the Trustee for cancellation,
and the Company shall pay the purchase price plus accrued and unpaid interest,
if any, to the Holders entitled thereto.
(e) Notwithstanding the foregoing provisions of this Section,
the Company will not be required to make a
<PAGE> 59
51
Change of Control Offer following a Change of Control if a third party makes the
Change of Control Offer in the manner, at the times and otherwise this in
compliance with the requirements set forth in this Section 4.09 applicable to a
Change of Control Offer made by the Company and purchases all Securities validly
tendered and not withdrawn under such Change of Control Offer.
(f) The Company shall comply, to the extent applicable, with
the requirements of Section 14(e) of the Exchange Act and any other securities
laws or regulations in connection with the repurchase of Securities pursuant to
this Section. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this Section, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this Section by virtue thereof.
SECTION 4.10. Future Guarantors. The Company shall cause each
domestic Restricted Subsidiary organized or acquired after the Issue Date to
execute and deliver to the Trustee a Guaranty Agreement pursuant to which such
Restricted Subsidiary shall Guarantee payment of the Securities on the same
terms and conditions as those set forth in this Indenture.
SECTION 4.11. Compliance Certificate. The Company shall
deliver to the Trustee within 120 days after the end of each fiscal year of the
Company an Officers' Certificate stating that in the course of the performance
by the signers of their duties as Officers of the Company they would normally
have knowledge of any Default and whether or not the signers know of any Default
that occurred during such period. If they do, the certificate shall describe the
Default, its status and what action the Company is taking or proposes to take
with respect thereto. The Company also shall comply with TIA ss. 314(a)(4).
SECTION 4.12. Further Instruments and Acts. Upon request of
the Trustee, the Company will execute and deliver such further instruments and
do such further acts as may be reasonably necessary or proper to carry out more
effectively the purpose of this Indenture.
<PAGE> 60
52
ARTICLE 5
Successor Company
SECTION 5.01. When Company May Merge or Transfer Assets. (a)
The Company shall not consolidate with or merge with or into, or convey,
transfer or lease, in one transaction or a series of transactions, all or
substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the
"Successor Company") shall be a Person organized and existing under the
laws of the United States of America, any State thereof or the District
of Columbia and the Successor Company (if not the Company) shall
expressly assume, by an indenture supplemental hereto, executed and
delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company under the Securities and this Indenture;
(ii) immediately after giving effect to such transaction (and
treating any Indebtedness which becomes an obligation of the Successor
Company or any Subsidiary as a result of such transaction as having
been Incurred by the Successor Company or such Subsidiary at the time
of such transaction), no Default shall have occurred and be continuing;
(iii) immediately after giving effect to such transaction, the
Successor Company would be able to Incur an additional $1.00 of
Indebtedness pursuant to Section 4.03(a);
(iv) immediately after giving effect to such transaction, the
Successor Company shall have Consolidated Net Worth in an amount that
is not less than the Consolidated Net Worth of the Company immediately
prior to such transaction;
(v) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if
any) comply with this Indenture; and
(vi) the Company shall have delivered to the Trustee an
Opinion of Counsel to the effect that the Holders will not recognize
income, gain or loss for Federal income tax purposes as a result of
such
<PAGE> 61
53
transaction and will be subject to Federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if such transaction had not occurred.
The Successor Company shall be the successor to the Company
and shall succeed to, and be substituted for, and may exercise every right and
power of, the Company under this Indenture, but the predecessor Company in the
case of a conveyance, transfer or lease shall not be released from the
obligation to pay the principal of and interest on the Securities.
(b) The Company shall not permit any Subsidiary Guarantor to
consolidate with or merge with or into, or convey, transfer or lease, in one
transaction or series of transactions, all or substantially all of its assets to
any Person unless:
(i) the resulting, surviving or transferee Person (if not such
Subsidiary) shall be a Person organized and existing under the laws of
the jurisdiction under which such Subsidiary was organized or under the
laws of the United States of America, or any State thereof or the
District of Columbia, and such Person shall expressly assume, by a
Guaranty Agreement, in a form satisfactory to the Trustee, all the
obligations of such Subsidiary, if any, under its Subsidiary Guaranty;
(ii) immediately after giving effect to such transaction or
transactions on a pro forma basis (and treating any Indebtedness which
becomes an obligation of the resulting, surviving or transferee Person
as a result of such transaction as having been issued by such Person at
the time of such transaction), no Default shall have occurred and be
continuing; and
(iii) the Company delivers to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such Guaranty Agreement, if any,
complies with this Indenture;
provided, however, that this clause (b) shall not be applicable if, in
connection with such consolidation, merger, conveyance, transfer or lease, the
Subsidiary Guarantor shall be released from its obligations under its Subsidiary
Guaranty pursuant to this Indenture.
<PAGE> 62
54
ARTICLE 6
Defaults and Remedies
SECTION 6.01. Events of Default. An "Event of Default"
occurs if:
(1) the Company defaults in any payment of interest on any
Security when the same becomes due and payable, whether or not such
payment shall be prohibited by Article 10, and such default continues
for a period of 30 days;
(2) the Company defaults in the payment of the principal of
any Security when the same becomes due and payable at its Stated
Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise, whether or not such payment shall be
prohibited by Article 10;
(3) the Company fails to comply with Section 5.01;
(4) the Company fails to comply with Section 4.02, 4.03, 4.04,
4.05, 4.06, 4.07, 4.08, 4.09 or 4.10 (other than a failure to purchase
Securities when required under Section 4.06 or 4.09) and such failure
continues for 30 days after the notice specified below;
(5) the Company fails to comply with any of its agreements in
the Securities or this Indenture (other than those referred to in
clause (1), (2), (3) or (4) above) and such failure continues for 60
days after the notice specified below;
(6) Indebtedness of the Company, any Subsidiary Guarantor or
any Significant Subsidiary is not paid within any applicable grace
period after final maturity or is accelerated by the holders thereof
because of a default and the total amount of such Indebtedness unpaid
or accelerated exceeds $10,000,000 or its foreign currency equivalent;
<PAGE> 63
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(7) the Company or any Significant Subsidiary pursuant to or
within the meaning of any Bankruptcy Law:
(A) commences a voluntary case;
(B) consents to the entry of an order for relief
against it in an involuntary case;
(C) consents to the appointment of a Custodian of it
or for any substantial part of its property; or
(D) makes a general assignment for the benefit of its
creditors;
or takes any comparable action under any foreign laws relating to
insolvency;
(8) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(A) is for relief against the Company or any
Significant Subsidiary in an involuntary case;
(B) appoints a Custodian of the Company or any
Significant Subsidiary or for any substantial part of its
property; or
(C) orders the winding up or liquidation of the
Company or any Significant Subsidiary;
or any similar relief is granted under any foreign laws and the order
or decree remains unstayed and in effect for 60 days;
(9) any judgment or decree for the payment of money in excess
of $10,000,000 or its foreign currency equivalent at the time is
entered against the Company or any Significant Subsidiary, remains
outstanding for a period of 60 days following the entry of such
judgment or decree and is not discharged, waived or the execution
thereof stayed within 10 days after the notice specified below; or
(10) a Subsidiary Guaranty ceases to be in full force and
effect (other than in accordance with the terms of such Subsidiary
Guaranty) or a Subsidiary Guarantor denies or disaffirms its
obligations under its Subsidiary Guaranty.
<PAGE> 64
56
The foregoing will constitute Events of Default whatever the
reason for any such Event of Default and whether it is voluntary or involuntary
or is effected by operation of law or pursuant to any judgment, decree or order
of any court or any order, rule or regulation of any administrative or
governmental body.
The term "Bankruptcy Law" means Title 11, United States Code,
or any similar Federal or state law for the relief of debtors. The term
"Custodian" means any receiver, trustee, assignee, liquidator, custodian or
similar official under any Bankruptcy Law.
A Default under clauses (4), (5) or (9) is not an Event of
Default until the Trustee or the holders of at least 25% in principal amount of
the outstanding Securities notify the Company of the Default and the Company
does not cure such Default within the time specified after receipt of such
notice. Such notice must specify the Default, demand that it be remedied and
state that such notice is a "Notice of Default".
The Company shall deliver to the Trustee, within 30 days after
the occurrence thereof, written notice in the form of an Officers' Certificate
of any Event of Default under clause (6) or (10) and any event which with the
giving of notice or the lapse of time would become an Event of Default under
clause (4), (5) or (9), its status and what action the Company is taking or
proposes to take with respect thereto.
SECTION 6.02. Acceleration. If an Event of Default (other than
an Event of Default specified in Section 6.01(7) or (8) with respect to the
Company) occurs and is continuing, the Trustee by notice to the Company, or the
Holders of at least 25% in principal amount of the Securities by notice to the
Company and the Trustee, may declare the principal of and accrued but unpaid
interest on all the Securities to be due and payable. Upon such a declaration,
such principal and interest shall be due and payable immediately. If an Event of
Default specified in Section 6.01(7) or (8) with respect to the Company occurs
and is continuing, the principal of and interest on all the Securities shall
ipso facto become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any Securityholders. The Holders of a
majority in principal amount of the Securities by notice to the Trustee may
rescind an acceleration and its consequences if the rescission would not
conflict with any judgment or decree and if all existing Events of Default have
been cured
<PAGE> 65
57
or waived except nonpayment of principal or interest that has become due solely
because of acceleration. No such rescission shall affect any subsequent Default
or impair any right consequent thereto.
SECTION 6.03. Other Remedies. If an Event of Default occurs
and is continuing, the Trustee may pursue any available remedy to collect the
payment of principal of or interest on the Securities or to enforce the
performance of any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not
possess any of the Securities or does not produce any of them in the proceeding.
A delay or omission by the Trustee or any Securityholder in exercising any right
or remedy accruing upon an Event of Default shall not impair the right or remedy
or constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative.
SECTION 6.04. Waiver of Past Defaults. The Holders of a
majority in principal amount of the Securities by notice to the Trustee may
waive an existing Default and its consequences except (i) a Default in the
payment of the principal of or interest on a Security (ii) a Default arising
from the failure to redeem or purchase any Security when required pursuant to
this Indenture or (iii) a Default in respect of a provision that under Section
9.02 cannot be amended without the consent of each Securityholder affected. When
a Default is waived, it is deemed cured, but no such waiver shall extend to any
subsequent or other Default or impair any consequent right.
SECTION 6.05. Control by Majority. The Holders of a majority
in principal amount of the Securities may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. However, the Trustee may
refuse to follow any direction that conflicts with law or this Indenture or,
subject to Section 7.01, that the Trustee determines is unduly prejudicial to
the rights of other Securityholders or would involve the Trustee in personal
liability; provided, however, that the Trustee may take any other action deemed
proper by the Trustee that is not inconsistent with such direction. Prior to
taking any action hereunder, the Trustee shall be entitled to indemnification
satisfactory to it in its sole discretion against all losses and expenses caused
by taking or not taking such action.
<PAGE> 66
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SECTION 6.06. Limitation on Suits. Except to enforce the right
to receive payment of principal, premium (if any) or interest when due, no
Securityholder may pursue any remedy with respect to this Indenture or the
Securities unless:
(1) the Holder gives to the Trustee written notice stating
that an Event of Default is continuing;
(2) the Holders of at least 25% in principal amount of the
Securities make a written request to the Trustee to pursue the remedy;
(3) such Holder or Holders offer to the Trustee reasonable
security or indemnity against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60
days after receipt of the request and the offer of security or
indemnity; and
(5) the Holders of a majority in principal amount of the
Securities do not give the Trustee a direction inconsistent with the
request during such 60-day period.
A Securityholder may not use this Indenture to prejudice the
rights of another Securityholder or to obtain a preference or priority over
another Securityholder.
SECTION 6.07. Rights of Holders to Receive Payment.
Notwithstanding any other provision of this Indenture, the right of any Holder
to receive payment of principal of and interest on the Securities held by such
Holder, on or after the respective due dates expressed in the Securities, or to
bring suit for the enforcement of any such payment on or after such respective
dates, shall not be impaired or affected without the consent of such Holder.
SECTION 6.08. Collection Suit by Trustee. If an Event of
Default specified in Section 6.01(1) or (2) occurs and is continuing, the
Trustee may recover judgment in its own name and as trustee of an express trust
against the Company for the whole amount then due and owing (together with
interest on any unpaid interest to the extent lawful) and the amounts provided
for in Section 7.07.
SECTION 6.09. Trustee May File Proofs of Claim. The Trustee
may file such proofs of claim and other papers or documents as may be necessary
or advisable in order to
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59
have the claims of the Trustee and the Securityholders allowed in any judicial
proceedings relative to the Company, its creditors or its property and, unless
prohibited by law or applicable regulations, may vote on behalf of the Holders
in any election of a trustee in bankruptcy or other Person performing similar
functions, and any Custodian in any such judicial proceeding is hereby
authorized by each Holder to make payments to the Trustee and, in the event that
the Trustee shall consent to the making of such payments directly to the
Holders, to pay to the Trustee any amount due it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and its counsel, and any other amounts due the Trustee under Section 7.07.
SECTION 6.10. Priorities. If the Trustee collects any money
or property pursuant to this Article 6, it shall pay out the money or property
in the following order:
FIRST: to the Trustee for amounts due under Section 7.07;
SECOND: to holders of Senior Indebtedness of the Company to
the extent required by Article 10;
THIRD: to Securityholders for amounts due and unpaid on the
Securities for principal and interest, ratably, without preference or
priority of any kind, according to the amounts due and payable on the
Securities for principal and interest, respectively; and
FOURTH: to the Company.
The Trustee may fix a record date and payment date for any
payment to Securityholders pursuant to this Section. At least 15 days before
such record date, the Company shall mail to each Securityholder and the Trustee
a notice that states the record date, the payment date and amount to be paid.
SECTION 6.11. Undertaking for Costs. In any suit for the
enforcement of any right or remedy under this Indenture or in any suit against
the Trustee for any action taken or omitted by it as Trustee, a court in its
discretion may require the filing by any party litigant in the suit of an
undertaking to pay the costs of the suit, and the court in its discretion may
assess reasonable costs, including reasonable attorneys' fees, against any
party litigant in the suit, having due regard to the merits and good faith of
the claims or defenses made by the party litigant. This Section
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60
does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section
6.07 or a suit by Holders of more than 10% in principal amount of the
Securities.
SECTION 6.12. Waiver of Stay or Extension Laws. The Company
(to the extent it may lawfully do so) shall not at any time insist upon, or
plead, or in any manner whatsoever claim or take the benefit or advantage of,
any stay or extension law wherever enacted, now or at any time hereafter in
force, which may affect the covenants or the performance of this Indenture; and
the Company (to the extent that it may lawfully do so) hereby expressly waives
all benefit or advantage of any such law, and shall not hinder, delay or impede
the execution of any power herein granted to the Trustee, but shall suffer and
permit the execution of every such power as though no such law had been enacted.
ARTICLE 7
Trustee
SECTION 7.01. Duties of Trustee. (a) If an Event of Default
has occurred and is continuing, the Trustee shall exercise the rights and powers
vested in it by this Indenture and use the same degree of care and skill in
their exercise as a prudent Person would exercise or use under the circumstances
in the conduct of such Person's own affairs.
(b) Except during the continuance of an Event of Default:
(1) the Trustee undertakes to perform such duties and only
such duties as are specifically set forth in this Indenture and no
implied covenants or obligations shall be read into this Indenture
against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements
of this Indenture. However, the Trustee shall examine the certificates
and opinions to determine whether or not they conform to the
requirements of this Indenture.
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(c) The Trustee may not be relieved from liability for its
own negligent action, its own negligent failure to act or its own wilful
misconduct, except that:
(1) this paragraph does not limit the effect of paragraph (b)
of this Section;
(2) the Trustee shall not be liable for any error of judgment
made in good faith by a Trust Officer unless it is proved that the
Trustee was negligent in ascertaining the pertinent facts; and
(3) the Trustee shall not be liable with respect to any action
it takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05.
(d) Every provision of this Indenture that in any way relates
to the Trustee is subject to paragraphs (a), (b) and (c) of this Section.
(e) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company.
(f) Money held in trust by the Trustee need not be segregated
from other funds except to the extent required by law.
(g) No provision of this Indenture shall require the Trustee
to expend or risk its own funds or otherwise incur financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers, if it shall have reasonable grounds to believe that repayment
of such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
(h) Every provision of this Indenture relating to the conduct
or affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Section and to the provisions of the TIA.
SECTION 7.02. Rights of Trustee. (a) The Trustee may rely on
any document believed by it to be genuine and to have been signed or presented
by the proper person. The Trustee need not investigate any fact or matter
stated in the document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opin-
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ion of Counsel. The Trustee shall not be liable for any action it takes or omits
to take in good faith in reliance on the Officers' Certificate or Opinion of
Counsel.
(c) The Trustee may act through agents and shall not be
responsible for the misconduct or negligence of any agent appointed with due
care.
(d) The Trustee shall not be liable for any action it takes or
omits to take in good faith which it believes to be authorized or within its
rights or powers; provided, however, that the Trustee's conduct does not
constitute wilful misconduct or negligence.
(e) The Trustee may consult with counsel, and the advice or
opinion of counsel with respect to legal matters relating to this Indenture and
the Securities shall be full and complete authorization and protection from
liability in respect to any action taken, omitted or suffered by it hereunder
in good faith and in accordance with the advice or opinion of such counsel.
SECTION 7.03. Individual Rights of Trustee. The Trustee in
its individual or any other capacity may become the owner or pledgee of
Securities and may otherwise deal with the Company or its Affiliates with the
same rights it would have if it were not Trustee. Any Paying Agent, Registrar,
co-registrar or co-paying agent may do the same with like rights. However, the
Trustee must comply with Sections 7.10 and 7.11.
SECTION 7.04. Trustee's Disclaimer. The Trustee shall not be
responsible for and makes no representation as to the validity or adequacy of
this Indenture or the Securities, it shall not be accountable for the Company's
use of the proceeds from the Securities and it shall not be responsible for any
statement of the Company in the Indenture or in any document issued in
connection with the sale of the Securities or in the Securities other than the
Trustee's certificate of authentication.
SECTION 7.05. Notice of Defaults. If a Default occurs and is
continuing and if it is known to the Trustee, the Trustee shall mail to each
Securityholder notice of the Default within 90 days after it occurs. Except in
the case of a Default in payment of principal of or interest on any Security,
the Trustee may withhold the notice if and so long as a committee of its Trust
Officers in good faith determines that withholding the notice is not opposed to
the interests of Securityholders.
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SECTION 7.06. Reports by Trustee to Holders. As promptly as
practicable after each January 1 beginning with the January 1 following the date
of this Indenture, and in any event prior to February 1 in each year, the
Trustee shall mail to each Securityholder a brief report dated as of February 1
that complies with TIA ss. 313(a). The Trustee also shall comply with TIA ss.
313(b).
A copy of each report at the time of its mailing to
Securityholders shall be filed with the SEC and each stock exchange (if any) on
which the Securities are listed. The Company agrees to notify promptly the
Trustee whenever the Securities become listed on any stock exchange and of any
delisting thereof.
SECTION 7.07. Compensation and Indemnity. The Company shall
pay to the Trustee from time to time reasonable compensation for its services.
The Trustee's compensation shall not be limited by any law on compensation of a
trustee of an express trust. The Company shall reimburse the Trustee upon
request for all reasonable out-of-pocket expenses incurred or made by it,
including costs of collection, in addition to the compensation for its services.
Such expenses shall include the reasonable compensation and expenses,
disbursements and advances of the Trustee's agents, counsel, accountants and
experts. The Company shall indemnify the Trustee against any and all loss,
liability or expense (including attorneys' fees) incurred by it in connection
with the administration of this trust and the performance of its duties
hereunder and shall file any undertaking required by a court of law as described
in Section 6.11. The Trustee shall notify the Company promptly of any claim for
which it may seek indemnity. Failure by the Trustee to so notify the Company
shall not relieve the Company of its obligations hereunder. The Company shall
defend the claim and the Trustee may have separate counsel and the Company shall
pay the fees and expenses of such counsel. The Company need not reimburse any
expense or indemnify against any loss, liability or expense determined by a
court of competent jurisdiction to have been incurred by the Trustee through the
Trustee's own wilful misconduct, negligence or bad faith.
To secure the Company's payment obligations in this Section,
the Trustee shall have a lien prior to the Securities on all money or property
held or collected by the Trustee other than money or property held in trust to
pay principal of and interest on particular Securities.
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64
The Company's payment obligations pursuant to this Section
shall survive the discharge of this Indenture. When the Trustee incurs expenses
after the occurrence of a Default specified in Section 6.01(7) or (8) with
respect to the Company, the expenses are intended to constitute expenses of
administration under the Bankruptcy Law.
SECTION 7.08. Replacement of Trustee. The Trustee may resign
at any time by so notifying the Company. The Holders of a majority in principal
amount of the Securities may remove the Trustee by so notifying the Trustee and
may appoint a successor Trustee. The Company shall remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes charge of the
Trustee or its property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns, is removed by the Company or by the
Holders of a majority in principal amount of the Securities and such Holders do
not reasonably promptly appoint a successor Trustee, or if a vacancy exists in
the office of Trustee for any reason (the Trustee in such event being referred
to herein as the retiring Trustee), the Company shall promptly appoint a
successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Securityholders. The retiring Trustee shall promptly transfer all
property held by it as Trustee to the successor Trustee, subject to the lien
provided for in Section 7.07.
If a successor Trustee does not take office within 60 days
after the retiring Trustee resigns or is removed, the retiring Trustee or the
Holders of 10% in principal amount of the Securities may petition any court of
competent jurisdiction for the appointment of a successor Trustee.
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If the Trustee fails to comply with Section 7.10, any
Securityholder may petition any court of competent jurisdiction for the removal
of the Trustee and the appointment of a successor Trustee.
Notwithstanding the replacement of the Trustee pursuant to
this Section, the Company's obligations under Section 7.07 shall continue for
the benefit of the retiring Trustee.
SECTION 7.09. Successor Trustee by Merger. If the Trustee
consolidates with, merges or converts into, or transfers all or substantially
all its corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee.
In case at the time such successor or successors by merger,
conversion or consolidation to the Trustee shall succeed to the trusts created
by this Indenture any of the Securities shall have been authenticated but not
delivered, any such successor to the Trustee may adopt the certificate of
authentication of any predecessor trustee, and deliver such Securities so
authenticated; and in case at that time any of the Securities shall not have
been authenticated, any successor to the Trustee may authenticate such
Securities either in the name of any predecessor hereunder or in the name of the
successor to the Trustee; and in all such cases such certificates shall have the
full force which it is anywhere in the Securities or in this Indenture provided
that the certificate of the Trustee shall have.
SECTION 7.10. Eligibility; Disqualification. The Trustee
shall at all times satisfy the requirements of TIA ss. 310(a). The Trustee shall
have a combined capital and surplus of at least $50,000,000 as set forth in its
most recent published annual report of condition. The Trustee shall comply with
TIA ss. 310(b); provided, however, that there shall be excluded from the
operation of TIA ss. 310(b)(1) any indenture or indentures under which other
securities or certificates of interest or participation in other securities of
the Company are outstanding if the requirements for such exclusion set forth in
TIA ss. 310(b)(1) are met.
SECTION 7.11. Preferential Collection of Claims Against
Company. The Trustee shall comply with TIA ss. 311(a), excluding any creditor
relationship listed in TIA ss. 311(b). A Trustee who has resigned or been
removed shall be subject to TIA ss. 311(a) to the extent indicated.
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ARTICLE 8
Discharge of Indenture; Defeasance
SECTION 8.01. Discharge of Liability on Securities;
Defeasance. (a) When (i) the Company delivers to the Trustee all outstanding
Securities (other than Securities replaced pursuant to Section 2.07) for
cancellation or (ii) all outstanding Securities have become due and payable,
whether at maturity or as a result of the mailing of a notice of redemption
pursuant to Article 3 hereof and the Company irrevocably deposits with the
Trustee funds sufficient to pay at maturity or upon redemption all outstanding
Securities, including interest thereon to maturity or such redemption date
(other than Securities replaced pursuant to Section 2.07), and if in either case
the Company pays all other sums payable hereunder by the Company, then this
Indenture shall, subject to Sections 8.01(c), cease to be of further effect. The
Trustee shall acknowledge satisfaction and discharge of this Indenture on demand
of the Company accompanied by an Officers' Certificate and an Opinion of Counsel
and at the cost and expense of the Company.
(b) Subject to Sections 8.01(c) and 8.02, the Company at any
time may terminate (i) all its obligations under the Securities and this
Indenture ("legal defeasance option") or (ii) its obligations under Sections
4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.09 and 4.10 and the operation of
Sections 6.01(4), 6.01(6), 6.01(7), 6.01(8), 6.01(9) and 6.01(10) (but, in the
case of Sections 6.01(7) and (8), with respect only to Significant Subsidiaries)
and the limitations contained in Sections 5.01(a)(iii) and (iv) ("covenant
defeasance option"). The Company may exercise its legal defeasance option
notwithstanding its prior exercise of its covenant defeasance option.
If the Company exercises its legal defeasance option, payment
of the Securities may not be accelerated because of an Event of Default with
respect thereto. If the Company exercises its covenant defeasance option,
payment of the Securities may not be accelerated because of an Event of Default
specified in Sections 6.01(4), 6.01(6), 6.01(7), 6.01(8), 6.01(9)and 6.01(10)
(but, in the case of Sections 6.01(7) and (8), with respect only to Significant
Subsidiaries) or because of the failure of the Company to comply with Section
5.01(a)(iii) or (iv). If the Company exercises its legal defeasance option or
its covenant defeasance option, each Subsidiary Guarantor, if any, shall
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be released from all its obligations with respect to its Subsidiary Guaranty.
Upon satisfaction of the conditions set forth herein and upon
request of the Company, the Trustee shall acknowledge in writing the discharge
of those obligations that the Company terminates.
(c) Notwithstanding clauses (a) and (b) above, the Company's
obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 2.08, 7.07 and 7.08 and in
this Article 8 shall survive until the Securities have been paid in full.
Thereafter, the Company's obligations in Sections 7.07, 8.04 and 8.05 shall
survive.
SECTION 8.02. Conditions to Defeasance. The Company may
exercise its legal defeasance option or its covenant defeasance option only if:
(1) the Company irrevocably deposits in trust with the Trustee
money or U.S. Government Obligations for the payment of principal of
and interest on the Securities to maturity or redemption, as the case
may be;
(2) the Company delivers to the Trustee a certificate from a
nationally recognized firm of independent accountants expressing their
opinion that the payments of principal and interest when due and
without reinvestment on the deposited U.S. Government Obligations plus
any deposited money without investment will provide cash at such times
and in such amounts as will be sufficient to pay principal and interest
when due on all the Securities to maturity or redemption, as the case
may be;
(3) 123 days pass after the deposit is made and during the
123-day period no Default specified in Sections 6.01(7) or (8) with
respect to the Company occurs which is continuing at the end of the
period;
(4) the deposit does not constitute a default under any other
agreement binding on the Company and is not prohibited by Article 10;
(5) the Company delivers to the Trustee an Opinion of Counsel
to the effect that the trust resulting from the deposit does not
constitute, or is qualified as, a regulated investment company under
the Investment Company Act of 1940;
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(6) in the case of the legal defeasance option, the Company
shall have delivered to the Trustee an Opinion of Counsel stating that
(i) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling, or (ii) since the date of this
Indenture there has been a change in the applicable Federal income tax
law, in either case to the effect that, and based thereon such Opinion
of Counsel shall confirm that, the Securityholders will not recognize
income, gain or loss for Federal income tax purposes as a result of
such defeasance and will be subject to Federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if such defeasance had not occurred;
(7) in the case of the covenant defeasance option, the Company
shall have delivered to the Trustee an Opinion of Counsel to the effect
that the Securityholders will not recognize income, gain or loss for
Federal income tax purposes as a result of such covenant defeasance
and will be subject to Federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such
covenant defeasance had not occurred; and
(8) the Company delivers to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent to the defeasance and discharge of the Securities as
contemplated by this Article 8 have been complied with.
Before or after a deposit, the Company may make arrangements
satisfactory to the Trustee for the redemption of Securities at a future date in
accordance with Article 3.
SECTION 8.03. Application of Trust Money. The Trustee shall
hold in trust money or U.S. Government Obligations deposited with it pursuant
to this Article 8. It shall apply the deposited money and the money from U.S.
Government Obligations through the Paying Agent and in accordance with this
Indenture to the payment of principal of and interest on the Securities. Money
and securities so held in trust are not subject to Article 10.
SECTION 8.04. Repayment to Company. The Trustee and the Paying
Agent shall promptly turn over to the Company upon request any excess money or
securities held by them at any time.
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Subject to any applicable abandoned property law, the Trustee
and the Paying Agent shall pay to the Company upon request any money held by
them for the payment of principal or interest that remains unclaimed for two
years, and, thereafter, Securityholders entitled to the money must look to the
Company for payment as general creditors.
SECTION 8.05. Indemnity for Government Obligations. The
Company shall pay and shall indemnify the Trustee against any tax, fee or other
charge imposed on or assessed against deposited U.S. Government Obligations or
the principal and interest received on such U.S. Government Obligations.
SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is
unable to apply any money or U.S. Government Obligations in accordance with this
Article 8 by reason of any legal proceeding or by reason of any order or
judgment of any court or governmental authority enjoining, restraining or
otherwise prohibiting such application, the Company's obligations under this
Indenture and the Securities shall be revived and reinstated as though no
deposit had occurred pursuant to this Article 8 until such time as the Trustee
or Paying Agent is permitted to apply all such money or U.S. Government
Obligations in accordance with this Article 8; provided, however, that, if the
Company has made any payment of interest on or principal of any Securities
because of the reinstatement of its obligations, the Company shall be subrogated
to the rights of the Holders of such Securities to receive such payment from the
money or U.S. Government Obligations held by the Trustee or Paying Agent.
ARTICLE 9
Amendments
SECTION 9.01. Without Consent of Holders. The Company, the
Subsidiary Guaranties and the Trustee may amend this Indenture or the Securities
without notice to or consent of any Securityholder:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to comply with Article 5;
(3) to provide for uncertificated Securities in addition to or
in place of certificated Securities; provided, however, that the
uncertificated Securities
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are issued in registered form for purposes of Section 163(f) of the
Code or in a manner such that the uncertificated Securities are
described in Section 163(f)(2)(B) of the Code;
(4) to add guarantees with respect to the Securities or to
secure the Securities;
(5) to add to the covenants of the Company for the benefit of
the Holders or to surrender any right or power herein conferred upon
the Company;
(6) to comply with any requirements of the SEC in connection
with qualifying, or maintaining the qualification of, this Indenture
under the TIA; or
(7) to make any change that does not adversely affect the
rights of any Securityholder.
An amendment under this Section may not make any change that
adversely affects the rights under Article 10 or 12 of any holder of Senior
Indebtedness then outstanding unless the holders of such Senior Indebtedness (or
any group or representative thereof authorized to give a consent) consent to
such change.
After an amendment under this Section becomes effective, the
Company shall mail to Securityholders a notice briefly describing such
amendment. The failure to give such notice to all Securityholders, or any defect
therein, shall not impair or affect the validity of an amendment under this
Section.
SECTION 9.02. With Consent of Holders. The Company, the
Subsidiary Guaranties and the Trustee may amend this Indenture or the Securities
without notice to any Securityholder but with the written consent of the Holders
of at least a majority in principal amount of the Securities then outstanding
(including consents obtained in connection with a tender offer or exchange for
the Securities). However, without the consent of each Securityholder affected
thereby, an amendment may not:
(1) reduce the amount of Securities whose Holders must consent
to an amendment;
(2) reduce the rate of or extend the time for payment of
interest on any Security;
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(3) reduce the principal of or extend the Stated Maturity of
any Security;
(4) reduce the premium payable upon the redemption of any
Security or change the time at which any Security may be redeemed in
accordance with Article 3;
(5) make any Security payable in money other than that stated
in the Security;
(6) impair the right of any Holder to receive payment of
principal of and interest on such Holder's Securities, on or after the
due dates therefor or to institute suit for the enforcement of any
payment on or with respect to such Holder's Securities;
(7) make any change in Section 6.04 or 6.07 or the second
sentence of this Section;
(8) make any change in the ranking or priority of any
Securities that would adversely affect the Holders; or
(9) make any change in any Subsidiary Guaranty that would
adversely affect the Securityholders.
It shall not be necessary for the consent of the Holders under
this Section to approve the particular form of any proposed amendment, but it
shall be sufficient if such consent approves the substance thereof.
An amendment under this Section may not make any change that
adversely affects the rights under Article 10 or 12 of any holder of Senior
Indebtedness then outstanding unless the holders of such Senior Indebtedness (or
any group or representative thereof authorized to give a consent) consent to
such change.
After an amendment under this Section becomes effective, the
Company shall mail to Securityholders a notice briefly describing such
amendment. The failure to give such notice to all Securityholders, or any defect
therein, shall not impair or affect the validity of an amendment under this
Section.
SECTION 9.03. Compliance with Trust Indenture Act. Every
amendment to this Indenture or the Securities shall comply with the TIA as then
in effect.
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SECTION 9.04. Revocation and Effect of Consents and Waivers. A
consent to an amendment or a waiver by a Holder of a Security shall bind the
Holder and every subsequent Holder of that Security or portion of the Security
that evidences the same debt as the consenting Holder's Security, even if
notation of the consent or waiver is not made on the Security. However, any such
Holder or subsequent Holder may revoke the consent or waiver as to such
Holder's Security or portion of the Security if the Trustee receives the notice
of revocation before the date the amendment or waiver becomes effective. After
an amendment or waiver becomes effective, it shall bind every Securityholder.
An amendment or waiver becomes effective upon the execution of such amendment or
waiver by the Trustee.
The Company may, but shall not be obligated to, fix a record
date for the purpose of determining the Securityholders entitled to give their
consent or take any other action described above or required or permitted to be
taken pursuant to this Indenture. If a record date is fixed, then
notwithstanding the immediately preceding paragraph, those Persons who were
Securityholders at such record date (or their duly designated proxies), and only
those Persons, shall be entitled to give such consent or to revoke any consent
previously given or to take any such action, whether or not such Persons
continue to be Holders after such record date. No such consent shall be valid or
effective for more than 120 days after such record date.
SECTION 9.05. Notation on or Exchange of Securities. If an
amendment changes the terms of a Security, the Trustee may require the Holder of
the Security to deliver it to the Trustee. The Trustee may place an appropriate
notation on the Security regarding the changed terms and return it to the
Holder. Alternatively, if the Company or the Trustee so determines, the Company
in exchange for the Security shall issue and the Trustee shall authenticate a
new Security that reflects the changed terms. Failure to make the appropriate
notation or to issue a new Security shall not affect the validity of such
amendment.
SECTION 9.06. Trustee To Sign Amendments. The Trustee shall
sign any amendment authorized pursuant to this Article 9 if the amendment does
not adversely affect the rights, duties, liabilities or immunities of the
Trustee. If it does, the Trustee may but need not sign it. In signing such
amendment the Trustee shall be entitled to receive indemnity reasonably
satisfactory to it and to receive, and (subject to Section 7.01) shall be fully
protected in relying upon, an Officers' Certificate and an Opinion of
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Counsel stating that such amendment is authorized or permitted by this
Indenture.
SECTION 9.07. Payment for Consent. Neither the Company nor any
Affiliate of the Company shall, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or otherwise, to any Holder
for or as an inducement to any consent, waiver or amendment of any of the terms
or provisions of this Indenture or the Securities unless such consideration is
offered to be paid to all Holders that so consent, waive or agree to amend in
the time frame set forth in solicitation documents relating to such consent,
waiver or agreement.
ARTICLE 10
Subordination
SECTION 10.01. Agreement To Subordinate. The Company agrees,
and each Securityholder by accepting a Security agrees, that the Indebtedness
evidenced by the Securities is subordinated in right of payment, to the extent
and in the manner provided in this Article 10, to the prior payment of all
Senior Indebtedness of the Company and that the subordination is for the benefit
of and enforceable by the holders of such Senior Indebtedness. The Securities
shall in all respects rank pari passu with all other Senior Subordinated
Indebtedness of the Company and only Indebtedness of the Company which is Senior
Indebtedness shall rank senior to the Securities in accordance with the
provisions set forth herein. All provisions of this Article 10 shall be subject
to Section 10.12.
SECTION 10.02. Liquidation, Dissolution, Bankruptcy. Upon any
payment or distribution of the assets of the Company upon a total or partial
liquidation or a total or partial dissolution of the Company or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or its property:
(1) holders of Senior Indebtedness of the Company shall be
entitled to receive payment in full of such Senior Indebtedness in cash
or cash equivalents before Securityholders shall be entitled to receive
any payment of principal of or interest on the Securities; and
(2) until such Senior Indebtedness is paid in full in cash,
any payment or distribution to which
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Securityholders would be entitled but for this Article 10 shall be made
to holders of such Senior Indebtedness as their interests may appear,
except that Securityholders may receive shares of stock and any debt
securities that are subordinated to such Senior Indebtedness to at
least the same extent as the Securities.
SECTION 10.03. Default on Senior Indebtedness. The Company may
not pay the principal of, premium (if any) or interest on the Securities or make
any deposit pursuant to Section 8.01 and may not repurchase, redeem or otherwise
retire any Securities (collectively, "pay the Securities") if (i) any Designated
Senior Indebtedness is not paid when due or (ii) any other default on Designated
Senior Indebtedness occurs and the maturity of such Designated Senior
Indebtedness is accelerated in accordance with its terms unless, in either case,
(x) the default has been cured or waived and any such acceleration has been
rescinded or (y) such Designated Senior Indebtedness has been paid in full;
provided, however, that the Company may pay the Securities without regard to the
foregoing if the Company and the Trustee receive written notice approving such
payment from the Representative of such Designated Senior Indebtedness. During
the continuance of any default (other than a default described in clause (i) or
(ii) of the preceding sentence) with respect to any Designated Senior
Indebtedness pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be required to
effect such acceleration) or the expiration of any applicable grace periods, the
Company may not pay the Securities for a period (a "Payment Blockage Period")
commencing upon the receipt by the Company and the Trustee (with a copy
delivered to the Company) of written notice (a "Blockage Notice") of such
default from the Representative of such Designated Senior Indebtedness
specifying an election to effect a Payment Blockage Period and ending 179 days
thereafter (or earlier if such Payment Blockage Period is terminated (i) by
written notice to the Trustee and the Company from the Person or Persons who
gave such Blockage Notice, (ii) because the default giving rise to such Blockage
Notice is no longer continuing or (iii) because such Designated Senior
Indebtedness has been repaid in full. Notwithstanding the provisions described
in the immediately preceding sentence (but subject to the provisions contained
in the first sentence of this Section), unless the holders of such Designated
Senior Indebtedness or the Representative of such holders shall have accelerated
the maturity of such Designated Senior Indebtedness, the Company may resume
payments on the Securities after
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termination of such Payment Blockage Period. Not more than one Blockage Notice
may be given in any consecutive 365-day period, irrespective of the number of
defaults with respect to Designated Senior Indebtedness during such period;
provided, however, that if any Blockage Notice within such 365-day period is
given by or on behalf of any holders of Designated Senior Indebtedness (other
than the Bank Indebtedness), the Representative of the Bank Indebtedness may
give another Blockage Notice within such period; provided further, however, that
in no event may the total number of days during which any Payment Blockage
Period or Periods is in effect exceed 179 days in the aggregate during any
365-consecutive-day period.
SECTION 10.04. Acceleration of Payment of Securities. If
payment of the Securities is accelerated because of an Event of Default, the
Company or the Trustee shall promptly notify the holders of the Designated
Senior Indebtedness (or their Representatives) of the acceleration. If any
Designated Senior Indebtedness is outstanding at the time of such acceleration,
the Company may not pay the Securityholders until five Business Days after the
Representatives of all the issues of Designated Senior Indebtedness receive
notice of such acceleration and, thereafter, may pay the Securityholders only if
the Indenture otherwise permits payment at that time.
SECTION 10.05. When Distribution Must Be Paid Over. If a
distribution is made to Securityholders that because of this Article 10 should
not have been made to them, the Securityholders who receive the distribution
shall hold it in trust for holders of Senior Indebtedness of the Company and pay
it over to them as their interests may appear.
SECTION 10.06. Subrogation. After all Senior Indebtedness of
the Company is paid in full and until the Securities are paid in full,
Securityholders shall be subrogated to the rights of holders of such Senior
Indebtedness to receive distributions applicable to such Senior Indebtedness. A
distribution made under this Article 10 to holders of such Senior Indebtedness
which otherwise would have been made to Securityholders is not, as between the
Company and Securityholders, a payment by the Company on such Senior
Indebtedness.
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SECTION 10.07. Relative Rights. This Article 10 defines the
relative rights of Securityholders and holders of Senior Indebtedness of the
Company. Nothing in this Indenture shall:
(1) impair, as between the Company and Securityholders, the
obligation of the Company, which is absolute and unconditional, to pay
principal of and interest on the Securities in accordance with their
terms; or
(2) prevent the Trustee or any Securityholder from exercising
its available remedies upon a Default, subject to the rights of
holders of Senior Indebtedness of the Company to receive distributions
otherwise payable to Securityholders.
SECTION 10.08. Subordination May Not Be Impaired by Company.
No right of any holder of Senior Indebtedness of the Company to enforce the
subordination of the Indebtedness evidenced by the Securities shall be impaired
by any act or failure to act by the Company or by its failure to comply with
this Indenture.
SECTION 10.09. Rights of Trustee and Paying Agent.
Notwithstanding Section 10.03, the Trustee or Paying Agent may continue to make
payments on the Securities and shall not be charged with knowledge of the
existence of facts that would prohibit the making of any such payments unless,
not less than two Business Days prior to the date of such payment, a Trust
Officer of the Trustee receives notice satisfactory to it that payments may not
be made under this Article 10. The Company, the Registrar or co-registrar, the
Paying Agent, a Representative or a holder of Senior Indebtedness may give the
notice; provided, however, that, if an issue of Senior Indebtedness of the
Company has a Representative, only the Representative may give the notice.
The Trustee in its individual or any other capacity may hold
Senior Indebtedness of the Company with the same rights it would have if it were
not Trustee. The Registrar and co-registrar and the Paying Agent may do the same
with like rights. The Trustee shall be entitled to all the rights set forth in
this Article 10 with respect to any Senior Indebtedness of the Company which may
at any time be held by it, to the same extent as any other holder of such Senior
Indebtedness; and nothing in Article 7 shall deprive the Trustee of any of its
rights as such holder. Nothing in this Article 10 shall apply to claims of, or
payments to, the Trustee under or pursuant to Section 7.07.
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SECTION 10.10. Distribution or Notice to Representative.
Whenever a distribution is to be made or a notice given to holders of Senior
Indebtedness of the Company, the distribution may be made and the notice given
to their Representative (if any).
SECTION 10.11. Article 10 Not To Prevent Events of Default or
Limit Right To Accelerate. The failure to make a payment pursuant to the
Securities by reason of any provision in this Article 10 shall not be construed
as preventing the occurrence of a Default. Nothing in this Article 10 shall
have any effect on the right of the Securityholders or the Trustee to
accelerate the maturity of the Securities.
SECTION 10.12. Trust Moneys Not Subordinated. Notwithstanding
anything contained herein to the contrary, payments from money or the proceeds
of U.S. Government Obligations held in trust under Article 8 by the Trustee for
the payment of principal of and interest on the Securities shall not be
subordinated to the prior payment of any Senior Indebtedness or subject to the
restrictions set forth in this Article 10, and none of the Securityholders shall
be obligated to pay over any such amount to the Company or any holder of Senior
Indebtedness of the Company or any other creditor of the Company.
SECTION 10.13. Trustee Entitled To Rely. Upon any payment or
distribution pursuant to this Article 10, the Trustee and the Securityholders
shall be entitled to rely (i) upon any order or decree of a court of competent
jurisdiction in which any proceedings of the nature referred to in Section
10.02 are pending, (ii) upon a certificate of the liquidating trustee or agent
or other Person making such payment or distribution to the Trustee or to the
Securityholders or (iii) upon the Representatives for the holders of Senior
Indebtedness of the Company for the purpose of ascertaining the Persons entitled
to participate in such payment or distribution, the holders of such Senior
Indebtedness and other Indebtedness of the Company, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all other
facts pertinent thereto or to this Article 10. In the event that the Trustee
determines, in good faith, that evidence is required with respect to the right
of any Person as a holder of Senior Indebtedness of the Company to participate
in any payment or distribution pursuant to this Article 10, the Trustee may
request such Person to furnish evidence to the reasonable satisfaction of the
Trustee as to the amount of such Senior Indebtedness held by such Person, the
extent to
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which such Person is entitled to participate in such payment or distribution and
other facts pertinent to the rights of such Person under this Article 10, and,
if such evidence is not furnished, the Trustee may defer any payment to such
Person pending judicial determination as to the right of such Person to receive
such payment. The provisions of Sections 7.01 and 7.02 shall be applicable to
all actions or omissions of actions by the Trustee pursuant to this Article 10.
SECTION 10.14. Trustee To Effectuate Subordination. Each
Securityholder by accepting a Security authorizes and directs the Trustee on
his behalf to take such action as may be necessary or appropriate to acknowledge
or effectuate the subordination between the Securityholders and the holders of
Senior Indebtedness of the Company as provided in this Article 10 and appoints
the Trustee as attorney-in-fact for any and all such purposes.
SECTION 10.15. Trustee Not Fiduciary for Holders of Senior
Indebtedness. The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Indebtedness and shall not be liable to any such holders if it
shall mistakenly pay over or distribute to Securityholders or the Company or any
other Person, money or assets to which any holders of Senior Indebtedness of the
Company shall be entitled by virtue of this Article 10 or otherwise.
SECTION 10.16. Reliance by Holders of Senior Indebtedness on
Subordination Provisions. Each Securityholder by accepting a Security
acknowledges and agrees that the foregoing subordination provisions are, and are
intended to be, an inducement and a consideration to each holder of any Senior
Indebtedness of the Company, whether such Senior Indebtedness was created or
acquired before or after the issuance of the Securities, to acquire and continue
to hold, or to continue to hold, such Senior Indebtedness and such holder of
such Senior Indebtedness shall be deemed conclusively to have relied on such
subordination provisions in acquiring and continuing to hold, or in continuing
to hold, such Senior Indebtedness.
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ARTICLE 11
Subsidiary Guaranties
SECTION 11.01. Guaranties. Each Subsidiary Guarantor hereby
unconditionally and irrevocably guarantees, jointly and severally, to each
Holder and to the Trustee and its successors and assigns (a) the full and
punctual payment of principal of and interest on the Securities when due,
whether at maturity, by acceleration, by redemption or otherwise, and all other
monetary obligations of the Company under this Indenture and the Securities and
(b) the full and punctual performance within applicable grace periods of all
other obligations of the Company under this Indenture and the Securities (all
the foregoing being hereinafter collectively called the "Obligations"). Each
Subsidiary Guarantor further agrees that the Obligations may be extended or
renewed, in whole or in part, without notice or further assent from such
Subsidiary Guarantor and that such Subsidiary Guarantor will remain bound under
this Article 11 notwithstanding any extension or renewal of any Obligation.
Each Subsidiary Guarantor waives presentation to, demand of,
payment from and protest to the Company of any of the Obligations and also
waives notice of protest for nonpayment. Each Subsidiary Guarantor waives notice
of any default under the Securities or the Obligations. The obligations of each
Subsidiary Guarantor hereunder shall not be affected by (a) the failure of any
Holder or the Trustee to assert any claim or demand or to enforce any right or
remedy against the Company or any other Person under this Indenture, the
Securities or any other agreement or otherwise; (b) any extension or renewal of
any thereof; (c) any rescission, waiver, amendment or modification of any of the
terms or provisions of this Indenture, the Securities or any other agreement;
(d) the release of any security held by any Holder or the Trustee for the
Obligations or any of them; (e) the failure of any Holder or the Trustee to
exercise any right or remedy against any other guarantor of the Obligations; or
(f) any change in the ownership of such Subsidiary Guarantor.
Each Subsidiary Guarantor further agrees that its Subsidiary
Guaranty herein constitutes a guarantee of payment, performance and compliance
when due (and not a guarantee of collection) and waives any right to require
that any resort be had by any Holder or the Trustee to any security held for
payment of the Obligations.
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Each Subsidiary Guaranty is, to the extent and in the manner
set forth in Article 12, subordinated and subject in right of payment to the
prior payment in full of the principal of and premium, if any, and interest on
all Senior Indebtedness of the Subsidiary Guarantor giving such Subsidiary
Guaranty and each Subsidiary Guaranty is made subject to such provisions of this
Indenture.
Except as expressly set forth in Sections 8.01(b), 11.02 and
11.06, the obligations of each Subsidiary Guarantor hereunder shall not be
subject to any reduction, limitation, impairment or termination for any reason,
including any claim of waiver, release, surrender, alteration or compromise, and
shall not be subject to any defense of setoff, counterclaim, recoupment or
termination whatsoever or by reason of the invalidity, illegality or
unenforceability of the Obligations or otherwise. Without limiting the
generality of the foregoing, the obligations of each Subsidiary Guarantor herein
shall not be discharged or impaired or otherwise affected by the failure of any
Holder or the Trustee to assert any claim or demand or to enforce any remedy
under this Indenture, the Securities or any other agreement, by any waiver or
modification of any thereof, by any default, failure or delay, willful or
otherwise, in the performance of the obligations, or by any other act or thing
or omission or delay to do any other act or thing which may or might in any
manner or to any extent vary the risk of such Subsidiary Guarantor or would
otherwise operate as a discharge of such Subsidiary Guarantor as a matter of law
or equity.
Each Subsidiary Guarantor further agrees that its Guarantee
herein shall continue to be effective or be reinstated, as the case may be, if
at any time payment, or any part thereof, of principal of or interest on any
Obligation is rescinded or must otherwise be restored by any Holder or the
Trustee upon the bankruptcy or reorganization of the Company or otherwise.
In furtherance of the foregoing and not in limitation of any
other right which any Holder or the Trustee has at law or in equity against any
Subsidiary Guarantor by virtue hereof, upon the failure of the Company to pay
the principal of or interest on any Obligation when and as the same shall become
due, whether at maturity, by acceleration, by redemption or otherwise, or to
perform or comply with any other Obligation, each Subsidiary Guarantor hereby
promises to and will, upon receipt of written demand by the Trustee, forthwith
pay, or cause to be paid, in cash, to the Holders or the Trustee an amount equal
to the sum of
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(i) the unpaid amount of such Obligations, (ii) accrued and unpaid interest on
such Obligations (but only to the extent not prohibited by law) and (iii) all
other monetary Obligations of the Company to the Holders and the Trustee.
Each Subsidiary Guarantor agrees that it shall not be entitled
to any right of subrogation in respect of any Obligations guaranteed hereby
until payment in full of all Obligations and all obligations to which the
Obligations are subordinated as provided in Article 12. Each Subsidiary
Guarantor further agrees that, as between it, on the one hand, and the Holders
and the Trustee, on the other hand, (x) the maturity of the Obligations
Guaranteed hereby may be accelerated as provided in Article 6 for the purposes
of such Subsidiary Guarantor's Subsidiary Guaranty herein, notwithstanding any
stay, injunction or other prohibition preventing such acceleration in respect of
the Obligations guaranteed hereby, and (y) in the event of any declaration of
acceleration of such obligations as provided in Article 6, such Obligations
(whether or not due and payable) shall forthwith become due and payable by such
Subsidiary Guarantor for the purposes of this Section.
Each Subsidiary Guarantor also agrees to pay any and all costs
and expenses (including reasonable attorneys' fees) incurred by the Trustee or
any Holder in enforcing any rights under this Section.
Each Subsidiary Guarantor (the "Applicable Guarantor") also
agrees that, to the extent any other Subsidiary Guarantor makes any payment
pursuant to its Subsidiary Guaranty, such Applicable Guarantor will be obligated
to contribute to such other Subsidiary Guarantor an amount equal to the
Applicable Guarantor's pro rata portion of such payment based on the respective
net assets of all the Subsidiary Guarantors at the time of such payment
determined in accordance with GAAP.
SECTION 11.02. Limitation on Liability. Any term or provision
of this Indenture to the contrary notwithstanding, the maximum, aggregate amount
of the Obligations guaranteed hereunder by any Subsidiary Guarantor shall not
exceed the maximum amount that can be hereby guaranteed without rendering this
Indenture, as it relates to such Subsidiary Guarantor, voidable under applicable
law relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally.
SECTION 11.03. Successors and Assigns. This Article 11 shall
be binding upon each Subsidiary Guarantor
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and its successors and assigns and shall enure to the benefit of the successors
and assigns of the Trustee and the Holders and, in the event of any transfer or
assignment of rights by any Holder or the Trustee, the rights and privileges
conferred upon that party in this Indenture and in the Securities shall
automatically extend to and be vested in such transferee or assignee, all
subject to the terms and conditions of this Indenture.
SECTION 11.04. No Waiver. Neither a failure nor a delay on the
part of either the Trustee or the Holders in exercising any right, power or
privilege under this Article 11 shall operate as a waiver thereof, nor shall a
single or partial exercise thereof preclude any other or further exercise of any
right, power or privilege. The rights, remedies and benefits of the Trustee and
the Holders herein expressly specified are cumulative and not exclusive of any
other rights, remedies or benefits which either may have under this Article 11
at law, in equity, by statute or otherwise.
SECTION 11.05. Modification. No modification, amendment or
waiver of any provision of this Article 11, nor the consent to any departure by
any Subsidiary Guarantor therefrom, shall in any event be effective unless the
same shall be in writing and signed by the Trustee, and then such waiver or
consent shall be effective only in the specific instance and for the purpose for
which given. No notice to or demand on any Subsidiary Guarantor in any case
shall entitle such Subsidiary Guarantor to any other or further notice or demand
in the same, similar or other circumstances.
SECTION 11.06. Release of Subsidiary Guarantor. Upon the sale
or other disposition (including by way of consolidation or merger) of a
Subsidiary Guarantor or the sale or disposition of all or substantially all the
assets of such Subsidiary Guarantor (in each case other than to the Company or
an Affiliate of the Company), such Subsidiary Guarantor shall be deemed released
from all obligations under this Article 11 without any further action required
on the part of the Trustee or any Holder. At the request of the Company, the
Trustee shall execute and deliver an appropriate instrument evidencing such
release.
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ARTICLE 12
Subordination of Subsidiary Guaranties
SECTION 12.01. Agreement To Subordinate. Each Subsidiary
Guarantor agrees, and each Securityholder by accepting a Security agrees, that
the obligations of such Subsidiary Guarantor under its Subsidiary Guaranty are
subordinated in right of payment, to the extent and in the manner provided in
this Article 12, to the prior payment of all Senior Indebtedness of such
Subsidiary Guarantor and that the subordination is for the benefit of and
enforceable by the holders of such Senior Indebtedness. The obligations of a
Subsidiary Guarantor under its Subsidiary Guaranty shall in all respects rank
pari passu with all other Senior Subordinated Indebtedness of such Subsidiary
Guarantor and only Senior Indebtedness of such Subsidiary Guarantor (including
such Subsidiary Guarantor's Guarantee of Senior Indebtedness of the Company)
shall rank senior to such obligations of such Subsidiary Guarantor in accordance
with the provisions set forth herein.
SECTION 12.02. Liquidation, Dissolution, Bankruptcy. Upon any
payment or distribution of the assets of any Subsidiary Guarantor to creditors
upon a total or partial liquidation or a total or partial dissolution of such
Subsidiary Guarantor or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to such Subsidiary Guarantor or its
property:
(1) holders of Senior Indebtedness of such Subsidiary
Guarantor shall be entitled to receive payment in full of such Senior
Indebtedness in cash or cash equivalents before Securityholders shall
be entitled to receive any payment pursuant to the Subsidiary Guaranty
of such Subsidiary Guarantor; and
(2) until the Senior Indebtedness of any Subsidiary Guarantor
is paid in full in cash or cash equivalents, any payment or
distribution to which Securityholders would be entitled but for this
Article 12 shall be made to holders of such Senior Indebtedness as
their interests may appear, except that Securityholders may receive
shares of stock and any debt securities of such Subsidiary Guarantor
that are subordinated to Senior Indebtedness, and to any debt
securities received by holders of Senior Indebtedness, of such
Subsidiary Guarantor to at least the same extent as the obligations of
such Subsidiary Guarantor
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under its Subsidiary Guaranty are subordinated to Senior Indebtedness
of such Subsidiary Guarantor.
SECTION 12.03. Default on Senior Indebtedness of Subsidiary
Guarantor. No Subsidiary Guarantor may make any payment pursuant to its
Subsidiary Guaranty or repurchase, redeem or otherwise retire or defease any
Securities or other Obligations (collectively, "pay its Subsidiary Guaranty") if
(i) any Designated Senior Indebtedness of the Company is not paid when due or
(ii) any other default on Designated Senior Indebtedness of the Company occurs
and the maturity of such Designated Senior Indebtedness is accelerated in
accordance with its terms unless, in either case, (x) the default has been cured
or waived and any such acceleration has been rescinded or (y) such Designated
Senior Indebtedness has been paid in full; provided, however, that any
Subsidiary Guarantor may pay its Subsidiary Guaranty without regard to the
foregoing if such Subsidiary Guarantor and the Trustee receive written notice
approving such payment from the Representatives of the Designated Senior
Indebtedness. No Subsidiary Guarantor may pay its Subsidiary Guaranty during the
continuance of any Payment Blockage Period after receipt by the Company and the
Trustee of a Payment Notice under Section 10.03. Notwithstanding the provisions
described in the immediately preceding sentence (but subject to the provisions
contained in the first sentence of this Section), unless the holders of
Designated Senior Indebtedness giving such Payment Notice or the Representative
of such holders shall have accelerated the maturity of such Designated Senior
Indebtedness, any Subsidiary Guarantor may resume payments pursuant to its
Subsidiary Guaranty after termination of such Payment Blockage Period.
SECTION 12.04. Demand for Payment. If a demand for payment is
made on a Subsidiary Guarantor pursuant to Article 11, the Trustee shall
promptly notify the holders of the Designated Senior Indebtedness (or their
Representatives) of such demand. If any Designated Senior Indebtedness is
outstanding at the time of such acceleration, the Subsidiary Guarantor may not
pay the Securityholders until five Business Days after the Representatives of
all the issues of Designated Senior Indebtedness receive notice of such
acceleration and, thereafter, may pay the Securityholders only if the Indenture
otherwise permits payment at that time.
SECTION 12.05. When Distribution Must Be Paid Over. If a
distribution is made to Securityholders that because of this Article 12 should
not have been made to
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them, the Securityholders who receive the distribution shall hold it in trust
for holders of the relevant Senior Indebtedness and pay it over to them or their
Representatives as their interests may appear.
SECTION 12.06. Subrogation. After all Senior Indebtedness of a
Subsidiary Guarantor is paid in full and until the Securities are paid in full,
Securityholders shall be subrogated to the rights of holders of such Senior
Indebtedness to receive distributions applicable to Senior Indebtedness. A
distribution made under this Article 12 to holders of such Senior Indebtedness
which otherwise would have been made to Securityholders is not, as between the
relevant Subsidiary Guarantor and Securityholders, a payment by such Subsidiary
Guarantor on such Senior Indebtedness.
SECTION 12.07. Relative Rights. This Article 12 defines the
relative rights of Securityholders and holders of Senior Indebtedness of a
Subsidiary Guarantor. Nothing in this Indenture shall:
(1) impair, as between a Subsidiary Guarantor and
Securityholders, the obligation of such Subsidiary Guarantor, which is
absolute and unconditional, to pay the Obligations to the extent set
forth in Article 11 or the relevant Subsidiary Guaranty; or
(2) prevent the Trustee or any Securityholder from exercising
its available remedies upon a default by such Subsidiary Guarantor
under the Obligations, subject to the rights of holders of Senior
Indebtedness of such Subsidiary Guarantor to receive distributions
otherwise payable to Securityholders.
SECTION 12.08. Subordination May Not Be Impaired by Company.
No right of any holder of Senior Indebtedness of any Subsidiary Guarantor to
enforce the subordination of the Subsidiary Guaranty of such Subsidiary
Guarantor shall be impaired by any act or failure to act by such Subsidiary
Guarantor or by its failure to comply with this Indenture.
SECTION 12.09. Rights of Trustee and Paying Agent.
Notwithstanding Section 12.03, the Trustee or Paying Agent may continue to make
payments in respect of any Subsidiary Guaranty and shall not be charged with
knowledge of the existence of facts that would prohibit the making of any such
payments unless, not less than two Business Days prior to the date of such
payment, a Trust Officer of the Trustee receives written notice satisfactory to
it that payments may not be made under this Article 12. The
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Company, the relevant Subsidiary Guarantor, the Registrar or co-registrar, the
Paying Agent, a Representative or a holder of Senior Indebtedness of any
Subsidiary Guarantor may give the notice; provided, however, that, if an issue
of Senior Indebtedness of any Subsidiary Guarantor has a Representative, only
the Representative may give the notice.
The Trustee in its individual or any other capacity may hold
Senior Indebtedness with the same rights it would have if it were not the
Trustee. The Registrar and co-registrar and the Paying Agent may do the same
with like rights. The Trustee shall be entitled to all the rights set forth in
this Article 12 with respect to any Senior Indebtedness of any Subsidiary
Guarantor which may at any time be held by it, to the same extent as any other
holder of Senior Indebtedness; and nothing in Article 7 shall deprive the
Trustee of any of its rights as such holder. Nothing in this Article 12 shall
apply to claims of, or payments to, the Trustee under or pursuant to Section
7.07.
SECTION 12.10. Distribution or Notice to Representative.
Whenever a distribution is to be made or a notice given to holders of Senior
Indebtedness of any Subsidiary Guarantor, the distribution may be made and the
notice given to their Representative (if any).
SECTION 12.11. Article 12 Not to Prevent Defaults Under a
Subsidiary Guaranty or Limit Right To Demand Payment. The failure to make a
payment pursuant to a Subsidiary Guaranty by reason of any provision in this
Article 12 shall not be construed as preventing the occurrence of a default
under such Subsidiary Guaranty. Nothing in this Article 12 shall have any effect
on the right of the Securityholders or the Trustee to make a demand for payment
on any Subsidiary Guarantor pursuant to Article 11 or the relevant Subsidiary
Guaranty.
SECTION 12.12. Trustee Entitled To Rely. Upon any payment or
distribution pursuant to this Article 12, the Trustee and the Securityholders
shall be entitled to rely (i) upon any order or decree of a court of competent
jurisdiction in which any proceedings of the nature referred to in Section
12.02 are pending, (ii) upon a certificate of the liquidating trustee or agent
or other Person making such payment or distribution to the Trustee or to the
Securityholders or (iii) upon the Representatives for the holders of Senior
Indebtedness of any Subsidiary Guarantor for the purpose of ascertaining the
Persons entitled to participate in such payment or distribution, the holders of
such Senior Indebtedness and other indebtedness of such Subsidiary
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Guarantor, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to this Article 12.
In the event that the Trustee determines, in good faith, that evidence is
required with respect to the right of any Person as a holder of Senior
Indebtedness of any Subsidiary Guarantor to participate in any payment or
distribution pursuant to this Article 12, the Trustee may request such Person to
furnish evidence to the reasonable satisfaction of the Trustee as to the amount
of Senior Indebtedness of such Subsidiary Guarantor held by such Person, the
extent to which such Person is entitled to participate in such payment or
distribution and other facts pertinent to the rights of such Person under this
Article 12, and, if such evidence is not furnished, the Trustee may defer any
payment to such Person pending judicial determination as to the right of such
Person to receive such payment. The provisions of Sections 7.01 and 7.02 shall
be applicable to all actions or omissions of actions by the Trustee pursuant to
this Article 12.
SECTION 12.13. Trustee To Effectuate Subordination. Each
Securityholder by accepting a Security authorizes and directs the Trustee on
his behalf to take such action as may be necessary or appropriate to acknowledge
or effectuate the subordination between the Securityholders and the holders of
Senior Indebtedness of any Subsidiary Guarantor as provided in this Article 12
and appoints the Trustee as attorney-in-fact for any and all such purposes.
SECTION 12.14. Trustee Not Fiduciary for Holders of Senior
Indebtedness of Subsidiary Guarantor. The Trustee shall not be deemed to owe any
fiduciary duty to the holders of Senior Indebtedness of any Subsidiary Guarantor
and shall not be liable to any such holders if it shall mistakenly pay over or
distribute to Securityholders or the Company or any other Person, money or
assets to which any holders of such Senior Indebtedness shall be entitled by
virtue of this Article 12 or otherwise.
SECTION 12.15. Reliance by Holders of Senior Indebtedness on
Subordination Provisions. Each Securityholder by accepting a Security
acknowledges and agrees that the foregoing subordination provisions are, and are
intended to be, an inducement and a consideration to each holder of any Senior
Indebtedness of any Subsidiary Guarantor, whether such Senior Indebtedness was
created or acquired before or after the issuance of the Securities, to acquire
and continue to hold, or to continue to hold, such Senior Indebtedness and such
holder of Senior Indebtedness
<PAGE> 96
88
shall be deemed conclusively to have relied on such subordination provisions in
acquiring and continuing to hold, or in continuing to hold, such Senior
Indebtedness.
ARTICLE 13
Miscellaneous
SECTION 13.01. Trust Indenture Act Controls. If any provision
of this Indenture limits, qualifies or conflicts with another provision which
is required to be included in this Indenture by the TIA, the required provision
shall control.
SECTION 13.02. Notices. Any notice or communication shall be
in writing and delivered in person or mailed by first-class mail addressed as
follows:
if to the Company or any Subsidiary Guarantor:
501 Fifth Street
Bristol, TN 37620
Attention of John M. Gregory
if to the Trustee:
6200 Poplar Avenue
Third Floor
Memphis, TN 38119
Attention of Corporate Trust Department
The Company or the Trustee by notice to the other may
designate additional or different addresses for subsequent notices or
communications.
Any notice or communication mailed to a Securityholder shall
be mailed to the Securityholder at the Securityholder's address as it appears
on the registration books of the Registrar and shall be sufficiently given if so
mailed within the time prescribed.
Failure to mail a notice or communication to a Securityholder
or any defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communication is mailed in the manner provided
<PAGE> 97
89
above, it is duly given, whether or not the addressee receives it.
SECTION 13.03. Communication by Holders with Other Holders.
Securityholders may communicate pursuant to TIA ss. 312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities. The Company, the Trustee, the Registrar and anyone else shall have
the protection of TIA ss. 312(c).
SECTION 13.04. Certificate and Opinion as to Conditions
Precedent. Upon any request or application by the Company to the Trustee to take
or refrain from taking any action under this Indenture, the Company shall
furnish to the Trustee:
(1) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this
Indenture relating to the proposed action have been complied with; and
(2) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of such
counsel, all such conditions precedent have been complied with.
SECTION 13.05. Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a covenant or
condition provided for in this Indenture shall include:
(1) a statement that the individual making such
certificate or opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such individual, he
has made such examination or investigation as is necessary to enable
him to express an informed opinion as to whether or not such covenant
or condition has been complied with; and
(4) a statement as to whether or not, in the opinion of such
individual, such covenant or condition has been complied with.
<PAGE> 98
90
SECTION 13.06. When Securities Disregarded. In determining
whether the Holders of the required principal amount of Securities have
concurred in any direction, waiver or consent, Securities owned by the Company
or by any Person directly or indirectly controlling or controlled by or under
direct or indirect common control with the Company shall be disregarded and
deemed not to be outstanding, except that, for the purpose of determining
whether the Trustee shall be protected in relying on any such direction, waiver
or consent, only Securities which the Trustee knows are so owned shall be so
disregarded. Also, subject to the fore going, only Securities outstanding at the
time shall be considered in any such determination.
SECTION 13.07. Rules by Trustee, Paying Agent and Registrar.
The Trustee may make reasonable rules for action by or a meeting of
Securityholders. The Registrar and the Paying Agent may make reasonable rules
for their functions.
SECTION 13.08. Legal Holidays. A "Legal Holiday" is a
Saturday, a Sunday or a day on which banking institutions are not required to
be open in the State of New York. If a payment date is a Legal Holiday, payment
shall be made on the next succeeding day that is not a Legal Holiday, and no
interest shall accrue for the intervening period. If a regular record date is a
Legal Holiday, the record date shall not be affected.
SECTION 13.09. Governing Law. This Indenture and the
Securities shall be governed by, and construed in accordance with, the laws of
the State of New York but without giving effect to applicable principles of
conflicts of law to the extent that the application of the laws of another
jurisdiction would be required thereby.
SECTION 13.10. No Recourse Against Others. A director,
officer, employee or stockholder, as such, of the Company shall not have any
liability for any obligations of the Company under the Securities or this
Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Security, each Securityholder
shall waive and release all such liability. The waiver and release shall be
part of the consideration for the issue of the Securities.
SECTION 13.11. Successors. All agreements of the Company in
this Indenture and the Securities shall bind its successors. All agreements of
the Trustee in this Indenture shall bind its successors.
<PAGE> 99
91
SECTION 13.12. Multiple Originals. The parties may sign any
number of copies of this Indenture. Each signed copy shall be an original, but
all of them together represent the same agreement. One signed copy is enough to
prove this Indenture.
<PAGE> 100
92
SECTION 13.13. Table of Contents; Headings. The table of
contents, cross-reference sheet and headings of the Articles and Sections of
this Indenture have been inserted for convenience of reference only, are not
intended to be considered a part hereof and shall not modify or restrict any of
the terms or provisions hereof.
IN WITNESS WHEREOF, the parties have caused this Indenture to
be duly executed as of the date first written above.
KING PHARMACEUTICALS, INC.,
by /s/ John M. Gregory
-------------------------------
John M. Gregory
Chairman of the Board and
Chief Executive Officer
KING PHARMACEUTICALS OF
NEVADA, INC.,
by /s/ Brian G. Shrader
-------------------------------
Brian G. Shrader
President
MONARCH PHARMACEUTICALS, INC.,
by /s/ Joseph R. Gregory
------------------------------
Joseph R. Gregory
President
PARKEDALE PHARMACEUTICALS,
INC.,
by /s/ Jefferson J. Gregory
------------------------------
Jefferson J. Gregory
President and Chief Executive
Officer
<PAGE> 101
93
UNION PLANTERS BANK, N.A.,
by /s/ Regina Sharpe
-----------------------------
Regina Sharpe
Assistant Vice President
and Corporate Trust Officer
<PAGE> 1
EXHIBIT 5.1
Baker, Donelson, Bearman & Caldwell
A Professional Corporation
207 Mockingbird Lane
Johnson City, Tennessee 37604
April 26, 1999
King Pharmaceuticals, Inc.
501 Fifth Street
Bristol, Tennessee 37620
Re: King Pharmaceuticals, Inc.
Registration Statement on Form S-4
Ladies and Gentlemen:
We have acted as counsel to King Pharmaceuticals, Inc., a Tennessee
corporation (the "Company"), in connection with the proposed registration by the
Company of up to $150,000,000 of the Company's 10 3/4% Senior Subordinated Notes
Due 2009 (the "Exchange Notes") pursuant to a Registration Statement on Form S-4
filed with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act") (such Registration Statement, as
amended or supplemented, is hereinafter referred to as the "Registration
Statement"). The Exchange Notes will be offered in exchange for the Company's
issued and outstanding 10 3/4% Senior Subordinated Notes Due 2009, all as
described in the Registration Statement.
In that connection, we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, corporate records
and other instruments as we have deemed necessary for the purposes of this
opinion, including (i) the Second Amended and Restated Charter and Amended and
Restated Bylaws of the Company, (ii) minutes and records of the corporate
proceedings of the Company with respect to the Exchange Notes, (iii) the
Registration Statement and exhibits thereto, (iv) the form of Indenture (the
"Indenture") entered into between the Company and Union Planters Bank, N.A., as
trustee, (v) the Registration Rights Agreement entered into between the Company
and the Initial Purchasers (as defined therein) and (vi) such other documents
and instruments as we have deemed necessary for the expression of the opinions
contained herein.
For purposes of this opinion, we have assumed the authenticity of all
documents submitted to us as originals, the conformity to the originals of all
documents submitted to us as copies and the authenticity of the originals of all
documents submitted to us as copies. We have also assumed the genuineness of the
signatures of persons signing all documents in connection with which this
opinion is rendered, the authority of such persons signing on behalf of the
parties thereto and the due authorization, execution and delivery of all
documents by the parties thereto other than the Company. As to any facts
material to the opinions expressed herein which we have not independently
established or verified, we have relied upon statements and representations of
officers and other representatives of the Company and others.
<PAGE> 2
Our opinion expressed below is subject to the qualifications that we
express no opinion as to the applicability of, compliance with, or effect of (i)
any bankruptcy, insolvency, reorganization, fraudulent transfer, fraudulent
conveyance, moratorium or other similar law affecting the enforcement of
creditors' rights generally, (ii) general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law), (iii)
public policy considerations which may limit the rights of parties to obtain
certain remedies and (iv) any laws except the laws of the State of Tennessee and
the federal laws of the United States of America.
Based upon and subject to the foregoing qualifications, assumptions and
limitations and the further limitations set forth below, we are of the opinion
that when (i) the Registration Statement becomes effective under the Act, (ii)
the appropriate officers of the Company have taken all necessary action to fix
and approve the terms of the Exchange Notes, (iii) the Indenture has been duly
qualified under the Trust Indenture Act of 1939, as amended, and (iv) the
Exchange Notes have been duly executed and authenticated in accordance with the
provisions of the Indenture and duly delivered to the holders thereof in
accordance with the terms of the Exchange Offer, the Exchange Notes will be
validly issued and binding obligations of the Company.
We hereby consent to the filing of this opinion with the Commission as
Exhibit 5.1 to the Registration Statement. We also consent to the reference to
our firm under the heading "Legal Matters" in the Registration Statement. In
giving this consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission.
This opinion is limited to the specific issues addressed herein, and no
opinion may be inferred or implied beyond that expressly stated herein. We
assume no obligation to revise or supplement this opinion should the present
laws of the State of Tennessee or the federal law of the United States be
changed by legislative action, judicial decision or otherwise.
We do not find it necessary for the purposes of this opinion, and
accordingly we do not purport to cover herein, the application of the securities
or "Blue Sky" laws of the various states to the issuance of the Exchange Notes.
This opinion is furnished to you in connection with the filing of the
Registration Statement and is not to be used, circulated, quoted or otherwise
relied upon for any other purpose.
Very truly yours,
/s/ Baker, Donelson, Bearman & Caldwell
<PAGE> 1
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
-----------------------------------------------
1994 1995 1996 1997 1998
------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before
income taxes and
extraordinary item ..... $ 416 $14,392 $ (347) $10,580 $40,717
Add:
Fixed charges .......... 1,069 2,043 1,337 2,795 15,515
Capitalized interest ... -- -- -- -- (239)
------ ------- ------ ------- -------
1,529 16,435 990 13,375 55,993
Fixed Charges:
Interest expense(a) ...... 1,069 2,006 1,272 2,749 14,866
Capitalized interest ..... -- -- -- -- 239
Portion of rents
representative of
interest factor ........ 44 37 65 46 410
------ ------- ------ ------- -------
1,113 2,043 1,337 2,795 15,515
Ratio of earnings to fixed
charges ................ 1.4x 8.0x -- 4.8x 3.6x
</TABLE>
- -----------
(a) Includes amortization of debt issuance costs and excludes capitalized
interest.
<PAGE> 1
Exhibit 21.1
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
Name of Subsidiary Jurisdiction
- ------------------- ------------
<S> <C>
Monarch Pharmaceuticals, Inc. Tennessee
Parkedale Pharmaceuticals, Inc. Michigan
King Pharmaceuticals, of Nevada, Inc. Nevada
</TABLE>
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of King
Pharmaceuticals, Inc. of our report dated February 15, 1999 (except Note 20 for
which the date is March 3, 1999) relating to the financial statements, which
appear in such Registration Statement. We also consent to the references to us
under the headings "Experts" and "Selected Financial Data" in such Registration
Statement.
PricewaterhouseCoopers LLP
Greensboro, NC
April 26, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the Form S-4 Registration Statement for
King Pharmaceuticals, Inc.'s 10 3/4% Senior Subordinated Notes due 2009.
KPMG LLP
Kansas City, Missouri
April 22, 1999
<PAGE> 1
-----------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(B)(2) _____
UNION PLANTERS BANK, N.A.
(Exact name of trustee as specified in its charter)
62-0859006
(I.R.S. employer identification No.)
6200 POPLAR AVENUE, THIRD FLOOR, MEMPHIS, TENNESSEE 38119
(Address of principal executive offices) (Zip code)
REGINA SHARPE
ASSISTANT VICE PRESIDENT &
CORPORATE TRUST OFFICER
UNION PLANTERS BANK, N.A.
6200 POPLAR AVENUE, THIRD FLOOR
MEMPHIS, TENNESSEE 38119
(901) 580-5510
(Name, Address and Telephone Number of Agent for Service)
KING PHARMACEUTICALS, INC.
(Exact name of obligor as specified in its charter)
TENNESSEE 54-1684963
(State or jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
501 FIFTH STREET
BRISTOL, TENNESSEE 37620
(Address of principal executive office) Zip code)
10 3/4% SENIOR SUBORDINATED NOTES DUE 2009
1
<PAGE> 2
ITEM 1. GENERAL INFORMATION
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Comptroller of the Currency, Washington, D.C.
Federal Deposit Insurance Corporation,
Washington, D.C.
Federal Reserve Bank, St. Louis, Missouri
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
The obligor is not an affiliate of the trustee.
ITEM 3. VOTING SECURITIES OF THE TRUSTEE.
Furnish the following information as to each class of voting securities
of the trustee:
All outstanding voting securities of the trustee are owned by
Union Planters Holding Corporation, incorporated under the
laws of Tennessee and headquartered at 7130 Goodlett Farms
Parkway, Memphis, Tennessee ("Parent"). The following is
information as to all outstanding voting securities of Parent
as of the date hereof.
Col. A Col. B
Title of Class Amount Outstanding
-------------- ------------------
Common Stock 1,000
ITEM 4. TRUSTEESHIPS UNDER OTHER INDENTURES.
If the trustee is a trustee under another indenture under which any
other securities, or certificates of interest or participation in any other
securities, of the obligor are outstanding, furnish the following information:
(a) Title of the securities outstanding under each such other
indenture.
Not Applicable.
(b) A brief statement of the facts relied upon as a basis for the
claim that no conflicting interest within the meaning of
Section 310 (b) (1) of the Act arises as a result of the
trusteeship under any such other
2
<PAGE> 3
indenture, including a statement as to how the indenture
securities will rank as compared with the securities issued
under such other indenture.
Not Applicable.
ITEM 5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH THE OBLIGOR OR
UNDERWRITERS.
If the trustee or any of the directors or executive officers of the
trustee is a director, officer, partner, employee, appointee, or representative
of the obligor or of any underwriter for the obligor, identify each such person
having any such connection and state the nature of each such connection.
None.
ITEM 6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS OFFICIALS.
Furnish the following information as to the voting securities of the
trustee owned beneficially by the obligor and each director, partner, and
executive officer of the obligor:
<TABLE>
<CAPTION>
Col. A Col. B. Col. C Col. D
Name of owner Title of class Amount owned Percent of voting
beneficially securities represented
by amount given in
Col. C
------------------- ----------------- -------------------- ---------------------------
<S> <C> <C> <C>
Not Applicable
</TABLE>
ITEM 7. VOTING SECURITIES OF THE TRUSTEE OWNED BY UNDERWRITERS OR THEIR
OFFICIALS.
Furnish the following information as to the voting securities of the
trustee owned beneficially by each underwriter for the obligor and each
director, partner and executive officer of each such underwriter:
<TABLE>
<CAPTION>
Col. A Col. B. Col. C Col. D
Name of owner Title of class Amount owned Percent of voting
beneficially securities represented
by amount given in
Col. C
------------------- ----------------- -------------------- ---------------------------
<S> <C> <C> <C>
Not Applicable
</TABLE>
ITEM 8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE.
3
<PAGE> 4
Furnish the following information as to securities of the obligor owned
beneficially or held as collateral security for obligations in default by the
trustee:
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D
Title of Class Whether the securities Amount owned beneficially Percent of class
are voting or nonvoting or held as collateral represented by
securities security for obligations amount given
in default in Col. C
------------------ ------------------------ --------------------------- --------------------
<S> <C> <C> <C>
Not Applicable
</TABLE>
ITEM 9. SECURITIES OF UNDERWRITERS OWNED OR HELD BY THE TRUSTEE.
If the trustee owns beneficially or holds as collateral security for
obligations in default any securities of an underwriter for the obligor, furnish
the following information as to each class of securities of such underwriter any
of which are so owned or held by the trustee:
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D
Title of issuer Amount Outstanding Amount owned Percent of class
and title of classes beneficially or represented by
held as collateral amount given in
security for Col. C
obligations in
default by trustee
---------------------- ------------------- ------------------- ----------------------
<S> <C> <C> <C>
Not Applicable
</TABLE>
ITEM 10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF
CERTAIN AFFILIATES OR SECURITY HOLDERS OF THE OBLIGOR.
If the trustee owns beneficially or holds as collateral security for
obligations in default voting securities of a person who, to the knowledge of
the trustee (1) owns 10 percent or more of the voting securities of the obligor
or (2) is an affiliate, other than a subsidiary, of the obligor, furnish the
following information as to the voting securities of such person:
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D
Title of issuer Amount Outstanding Amount owned Percent of class
and title of classes beneficially or represented by
held as collateral amount given in
security for Col. C
obligations in
default by trustee
---------------------- ------------------ ------------------- ----------------------
<S> <C> <C> <C>
Not Applicable
</TABLE>
4
<PAGE> 5
ITEM 11. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF ANY SECURITIES OF A PERSON
OWNING 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR.
If the trustee owns beneficially or holds as collateral security for
obligations in default any securities of a person who, to the knowledge of the
trustee, owns 50 percent or more of the voting securities of the obligor,
furnish the following information as to each class of securities of such person
any of which are so owned or held by the trustee:
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D
Title of issuer Amount Outstanding Amount owned Percent of class
and title of classes beneficially or represented by
held as collateral amount given in
security for Col. C
obligations in
default by trustee
---------------------- ------------------- ---------------------- -----------------------
<S> <C> <C> <C>
Not Applicable
</TABLE>
ITEM 12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE.
Except as noted in the instructions, if the obligor is indebted to the
trustee, furnish the following information:
<TABLE>
<CAPTION>
Col. A Col. B Col. C
Nature of Amount Date
Indebtedness Outstanding Due
----------------- ------------------ -------------
<S> <C> <C>
Not Applicable
</TABLE>
ITEM 13. DEFAULTS BY THE OBLIGOR.
(a) State whether there is or has been a default with respect to the
securities under this indenture. Explain the nature of any such default.
Not Applicable.
(b) If the trustee is a trustee under another indenture under which any
other securities, or certificates of interest or participation in any other
securities, of the obligor are outstanding, or is trustee for more than one
outstanding series of securities under the indenture, state whether there has
been a default under any such indenture or series, identify the indenture or
series affected, and explain the nature of any such default.
Not Applicable
5
<PAGE> 6
ITEM 14. AFFILIATIONS WITH THE UNDERWRITERS.
If any underwriter is an affiliate of the trustee, describe each such
affiliation.
Not Applicable
ITEM 15. FOREIGN TRUSTEE
Identify the order or rule pursuant to which the foreign trustee is
authorized to at as sole trustee under indentures qualified or to be qualified
under the Act.
Not Applicable
ITEM 16. LIST OF EXHIBITS
List below all exhibits filed as part of this statement of eligibility.
1. A copy of the articles of association of the trustee
now in effect. *
2. A copy of the Certificate of Authority of the Trustee
to Commence Business. *
3. A copy of the Authorization of the Trustee to
exercise Corporate Trust Powers.*
4. A copy of the existing By-Laws of the Trustee. *
5. A copy of each Indenture referred to in Item 4, if
the Obligor is in default.
Not Applicable.
6. The consent of the United States institutional
trustee required by Section 321(b) of the Act.
7. A copy of the latest report of condition of the
trustee published pursuant to law or the requirements
of its supervising or examining authority.
*Exhibits 1, 2, 3 and 4 are herein incorporated by reference
to exhibits bearing identical numbers in Item 16 of the Form
T-1 filed as Exhibit 25.1 to the Registration Statement on
Form S-1 of Buckeye Technologies, Inc. filed with the
Securities and Exchange Commission on October 6, 1995 (Number
33-97836).
NOTE
In answering any item in this Statement of Eligibility which relates to
matters peculiarly within the knowledge of the obligor and its directors or
officers, or any underwriter for the obligor, the undersigned Union Planters
Bank, N.A. has relied upon information furnished to it by the obligor or such
underwriter and the undersigned disclaims responsibility for the accuracy or
completeness of such information.
6
<PAGE> 7
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
trustee, Union Planters Bank, N.A. a national banking association organized and
existing under the laws of the United States of America, has duly caused this
statement of eligibility to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of Memphis, and State of Tennessee,
on the __ day of ____, 1999.
UNION PLANTERS BANK, N. A.
(Trustee)
---------------------------------------
By: Regina Sharpe
Assistant Vice President and Corporate
Trust Officer
7
<PAGE> 8
Exhibit 5
Not Applicable
8
<PAGE> 9
Exhibit 6
CONSENT OF TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture
Act of 1939 in connection with the sale by King Pharmaceuticals, Inc. of its 10
3/4% Senior Subordinated Notes Due 2009, we hereby consent that reports of
examinations by Federal, State, Territorial, or District authorities may be
furnished by such authorities to the Securities and Exchange Commission upon
request therefor.
UNION PLANTERS BANK, N. A.
(Trustee)
---------------------------------------
By: Regina Sharpe
Assistant Vice President and Corporate
Trust Officer
Dated: __________, 1999
9
<PAGE> 10
Exhibit 7
The following is the latest report of condition of the Trustee at the
close of business on December 31, 1998, published in response to call made by
the Comptroller of the Currency of the United States of America, under Title 12,
United States Code, Section 161, U.S. Revised Statutes.
Reserve District No. 8
Charter No. 13349
10
<PAGE> 11
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL
AND STATE-CHARTERED SAVINGS BANKS FOR DECEMBER 31, 1998
All schedules are to be reported in thousands of dollars. Unless
otherwise indicated, report the amount outstanding as of the last business day
of the quarter.
SCHEDULE RC - BALANCE SHEET
Dollar Amounts in Thousands
<TABLE>
<S> <C> <C> <C>
ASSETS
1. Cash and balances-due from depository institutions (from Schedule RC-A): RCF
a. Noninterest-bearing balances and currency and coin (1)...........................0081 1,107,823 1.a
b. Interest-bearing balances (2)....................................................0071 34,577 1.b
2. Securities:
a. Held-to-maturity securities (from Schedule RC-B, column A).......................1754 0 2.a
b. Available-for-sale securities (from Schedule RC-B, column D).....................1773 7,410,152 2.b
3. Federal funds sold and securities purchased under agreements to resell..............1350 74,623 3
4. Loans and lease financing receivables: RCF
a. Loans and leases, net of unearned income (from Schedule RC-C)........ 2122 17,045,383 4.a
b. LESS: Allowance for loan and lease losses............................ 3123 269,812 4.b
c. LESS: Allocated transfer risk reserve................................ 3128 0 4.c
d. Loans and leases, net of unearned income, RCF
allowance, and reserve (item 4.a minus 4.b and 4.c)..............................2125 16,775,571 4.d
5. Trading assets (from Schedule RC-D).................................................3545 275,992 5.
6. Premises and fixed assets (including capitalized leases)........................... 2145 478,574 6.
7. Other real estate owned (from Schedule RC-M)....................................... 2150 21,721 7.
8. Investments in unconsolidated subsidiaries and associated companies
(from Schedule RC-M)................................................................... 2130 945 8.
</TABLE>
11
<PAGE> 12
<TABLE>
<S> <C> <C> <C>
9. Customers' liability to this bank on acceptances outstanding........................2155 39,858 9.
10. Intangible assets (from Schedule RC-M)..............................................2143 418,410 10.
11. Other assets (from Schedule RC-F)...................................................2160 768,950 11.
12. Total assets (sum of items 1 through 11)............................................2170 27,406,926 12.
</TABLE>
(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held for trading.
12
<PAGE> 13
SCHEDULE RC - CONTINUED
Dollar Amounts in Thousands
<TABLE>
<S> <C> <C> <C>
LIABILITIES
13. Deposits: RCON
a. In domestic offices (sum of totals of columns A and C from Schedule RC-E).. CON 2200 21,316,039 13.a.
(1) Noninterest-bearing (1).............................................. 6631 3,359,687 13.a.1
(2) Interest-bearing..................................................... 6636 17,956,352 13.a.2
RCF
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs............ RCF 2200 1,471 13.b
(1) Noninterest-bearing.................................................. 6631 0 13.b.1
(2) Interest-bearing..................................................... 6636 1,471 13.b.2
RCF
14. Federal funds purchased and securities sold under agreements to repurchase.......... 2800 1,861,987 14
RCON
15. a. Demand notes issued to the U.S. Treasury......................................... 2840 0 15.a
RCF
b. Trading liabilities (from Schedule RC-D)......................................... 3548 0 15.b
16. Other borrowed money (includes mortgage indebtedness and obligations under
capitalized leases):
a. With a remaining maturity of one year or less..................................... 2332 310,254 16.a
b. With a remaining maturity of more than one year through three years............... A547 356,981 16.b
c. With a remaining maturity of more than three years................................ A548 364,828 16.c
17. Not applicable
18. Bank's liability on acceptances executed and outstanding............................ 2920 39,858 18
19. Subordinated notes and debentures (2)............................................... 3200 301,716 19
20. Other liabilities (from Schedule RC-G).............................................. 2930 624,660 20
21. Total liabilities (sum of items 13 through 20)...................................... 2948 24,977,794 21
22. Not applicable
EQUITY CAPITAL
23. Perpetual preferred stock and related surplus....................................... 3838 0 23
24. Common stock........................................................................ 3230 18,047 24
</TABLE>
13
<PAGE> 14
<TABLE>
<S> <C> <C>
25. Surplus (exclude all surplus related to preferred stock)............................ 3839 1,444,151 25
26. a. Undivided profits and capital reserves.................................................... 3632 918,831 26.a
b. Net unrealized holding gains (losses) on available-for-sale securities.................... 8434 48,103 26.b
27. Cumulative foreign currency translation adjustments......................................... 3284 0 27
28. Total equity capital (sum of items 23 through 27)............................................ 210 2,429,132 28
29. Total liabilities and equity capital (sum of items 21 and 28).................................3300 27,406,926 29
MEMORANDUM
TO BE REPORTED ONLY WITH THE MARCH REPORT OF CONDITION.
1. Indicate in the box at the right the number of the statement below that
best describes the most comprehensive level of auditing work performed RCF
for the bank by independent external auditors as of any date during 1998.................... 6724 N/A M.1
1 = Independent audit of the bank conducted in accordance 4 = Directors' examination of the bank performed
with generally accepted auditing standards by a certified by other external auditors (may be required by
state chartering public accounting firm which submits a authority)
report on the bank
2 = Independent audit of the bank's parent holding company 5 = Review of the bank's financial statements by
conducted in accordance with generally accepted auditing external auditors
standards by a certified public accounting firm which 6 = Compilation of the bank's financial statements
by submits a report on the consolidated holding company
(but external auditors not on the bank separately) 7 = Other audit procedures (excluding tax
preparation work)
3 = Directors' examination of the bank conducted in accordance 8 = No external audit work
with generally accepted auditing standards by a certified
public accounting firm (may be required by state chartering
authority)
</TABLE>
(1) Includes total demand deposits and noninterest-bearing time and savings
deposits.
(2) Includes limited-life preferred stock and related surplus.
14
<PAGE> 1
Exhibit 99.1
FORM OF LETTER OF TRANSMITTAL
KING PHARMACEUTICALS, INC.
OFFER TO EXCHANGE
10 3/4% SENIOR SUBORDINATED NOTES DUE 2009
FOR ANY AND ALL OF THE OUTSTANDING
10 3/4% SENIOR SUBORDINATED NOTES DUE 2009
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON _________________, 1999, UNLESS THE OFFER IS EXTENDED
UNION PLANTERS BANK, N.A.
(THE "EXCHANGE AGENT")
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
By Mail (registered or certified By Facsimile Transmission (for By Hand or Overnight Courier:
mail recommended): Eligible Institutions only):
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Union Planters Bank, N.A. (901)580-5411 Union Planters Bank, N.A.
6200 Poplar Avenue 6200 Poplar Avenue
Memphis, Tennessee 38119 Third Floor
Memphis, Tennessee 38119
- ---------------------------------------------------------------------------------------------------------
Confirm Receipt of Notice of Guaranteed Delivery by Telephone:
(901)580-5510
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Delivery of this instrument to an address other than as set forth above
or transmission of instructions via a facsimile number other than as set forth
above will not constitute a valid delivery. The instructions accompanying this
Letter of Transmittal should be read carefully before this Letter of Transmittal
is completed.
By execution hereof, the undersigned hereby acknowledges receipt of the
Prospectus dated ______, 1999 (the "Prospectus") of King Pharmaceuticals, Inc.
(the "Company") and this Letter of Transmittal, which together constitute the
Company's offer (the "Exchange Offer") to exchange $1,000 in principal amount of
its 10 3/4% Senior Subordinated Notes due 2009 (the "Exchange Notes"), which
have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement of which the Prospectus
is a part, for each $1,000 in principal amount of its outstanding 10 3/4% Senior
Subordinated Notes due 2009 (the "Notes"). The term "Expiration Date" shall mean
5:00 p.m., New York City time, on ____________, 1999, unless the Exchange Offer
is extended, in which case the term "Expiration Date" means the latest date and
time to which the Exchange Offer is extended. Capitalized terms used but not
defined herein have the meaning given to them in the Prospectus.
YOUR BANK OR BROKER CAN ASSIST YOU IN COMPLETING THIS FORM. THE
INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED.
QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS
AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
List on the next page the Notes to which this Letter of Transmittal
relates. If the space indicated is inadequate, the Certificate or Registration
Numbers and the Principal Amounts should be listed on a separately signed
schedule affixed hereto.
<PAGE> 2
DESCRIPTION OF SENIOR SUBORDINATED NOTES TENDERED HEREBY
<TABLE>
<CAPTION>
=======================================================================================================
NAME AND ADDRESS OF REGISTERED OWNER PRINCIPAL AMOUNT TENDERED**
(PLEASE FILL IN, IF BLANK) (ATTACH LIST IF NECESSARY)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
CERTIFICATE OR AGGREGATE PRINCIPAL
REGISTRATION AMOUNT REPRESENTED BY
NUMBERS* NOTES
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Total
========================================================================================================
</TABLE>
* Need not be completed by Book-Entry Holders.
** Unless otherwise indicated, the Holder will be deemed to have tendered the
full aggregate principal amount represented by such Notes. All tenders must be
in integral multiples of $1,000.
This Letter of Transmittal is to be used (i) if certificates
representing Notes are to be forwarded herewith, (ii) if tender of Notes is to
be made by book-entry transfer to an account maintained by the Exchange Agent at
The Depository Trust Company (the "Depository" or "DTC"), pursuant to the
procedures set forth in the Prospectus under "The Exchange Offer -- Procedures
for Tendering" or (iii) if tender of the Notes is to be made according to the
guaranteed delivery procedures described in the Prospectus under "The Exchange
Offer -- Guaranteed Delivery Procedures." See Instruction 2. DELIVERY OF
DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO THE
EXCHANGE AGENT.
Unless the context requires otherwise, the term "Holder" with respect
to the Exchange Offer means any person (i) in whose name Notes are registered on
the books of the Company or any other person who has obtained a properly
completed bond power from the registered holder or (ii) whose Notes are held of
record by DTC who desires to deliver such Notes by book-entry transfer at DTC.
The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer. Holders who wish to tender their Notes must complete this
letter in its entirety.
[ ] CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE
TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE DEPOSITORY AND COMPLETE
THE FOLLOWING:
Name of Tendering Institution:
---------------------------------------------
Account Number:
-----------------------------------------------------------
Transaction Code Number:
---------------------------------------------------
Holders whose Notes are not immediately available or who cannot
deliver their Notes and all other documents required hereby to the Exchange
Agent on or prior to the Expiration Date may tender their Notes according to the
<PAGE> 3
guaranteed delivery procedures set forth in the Prospectus under the caption
"The Exchange Offer -- Guaranteed Delivery Procedures." See Instruction 2.
[ ] CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s):
----------------------------------------------
Name of Eligible Institution that Guaranteed Delivery:
---------------------
If delivery by book-entry transfer:
Account Number:
---------------------------------------------------------
Transfer Code Number:
---------------------------------------------------
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE TEN ADDITIONAL
COPIES OF THE PROSPECTUS AND TEN COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:
-------------------------------------------------------------------
Address:
----------------------------------------------------------------
If the undersigned is not a broker-dealer, the undersigned represents
that it is not engaged in, and does not intend to engage in, a
distribution of Exchange Notes. If the undersigned is a broker-dealer
that will receive Exchange Notes for its own account in exchange for
Notes that were acquired as a result of market-making activities or other
trading activities, it acknowledges that it will deliver a prospectus in
connection with any resale of such Exchange Notes; however, by so
acknowledging and by delivering a prospectus, the undersigned will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
<PAGE> 1
Exhibit 99.2
FORM OF NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF
10 3/4% SENIOR SUBORDINATED NOTES DUE 2009
(INCLUDING THOSE IN BOOK-ENTRY FORM)
OF
KING PHARMACEUTICALS, INC.
This form or one substantially equivalent hereto must be used to accept
the Exchange Offer of King Pharmaceuticals, Inc. (the "Company") made pursuant
to the Prospectus, dated _____________________, 1999 (the "Prospectus"), if
certificates for the outstanding 10 3/4% Senior Subordinated Notes Due 2009 of
the Company (the "Notes") are not immediately available or if the procedure for
book-entry transfer cannot be completed on a timely basis or time will not
permit all required documents to reach the Exchange Agent prior to 5:00 p.m.,
New York time, on the Expiration Date. Such form may be delivered or transmitted
by telegram, telex, facsimile transmission, mail or hand delivery to Union
Planters Bank, N.A. (the "Exchange Agent") as set forth below. In addition, in
order to utilize the guaranteed delivery procedure to tender Notes pursuant to
the Exchange Offer, a completed, signed and dated Letter of Transmittal (or
facsimile thereof) must also be received by the Exchange Agent prior to 5:00
p.m., New York City time, on the Expiration Date. Capitalized terms not defined
herein are defined in the Prospectus.
UNION PLANTERS BANK, N.A., EXCHANGE AGENT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
By Mail (registered or certified By Facsimile Transmission (for By Hand or Overnight Courier:
mail recommended): Eligible Institutions only):
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Union Planters Bank, N.A. (901)580-5411 Union Planters Bank, N.A.
6200 Poplar Avenue 6200 Poplar Avenue
Memphis, Tennessee 38119 Third Floor
Memphis, Tennessee 38119
- -------------------------------------------------------------------------------------------------------------
Confirm Receipt of Notice of Guaranteed Delivery by Telephone:
(901)580-5510
- -------------------------------------------------------------------------------------------------------------
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
<PAGE> 2
LADIES AND GENTLEMEN:
Upon the terms and conditions set forth in the Prospectus and the
accompanying Letter of Transmittal, the undersigned hereby tenders to the
Company the principal amount of Notes set forth below, pursuant to the
guaranteed delivery procedure described in "The Exchange Offer -- Guaranteed
Delivery Procedures" section of the Prospectus.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PLEASE SIGN AND COMPLETE
- ----------------------------------------------------------------------------------------------------
<S> <C>
Signature of Registered Holder(s) or Authorized
Signatory:
---------------------------------
- -------------------------------------------
- -------------------------------------------
- ----------------------------------------------------------------------------------------------------
Name(s) of Registered Holder(s): Area Code and Telephone No.:
- ------------------------------------------- --------------------------------------------------
- -------------------------------------------
- ----------------------------------------------------------------------------------------------------
Principal amount of Notes Tendered: If Notes will be delivered by book-entry transfer,
check trust company below:
- -------------------------------------------
------ The Depository Trust Company
------ Midwest Securities Trust Company
------ Philadelphia Depository Trust Company
- ----------------------------------------------------------------------------------------------------
Certficate No.(s) of Notes (if available): Depository Account No.:
--------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Must be signed by the Holder(s) of Notes as their name(s) appear(s) on
certificates for Notes or on a security position listing, or by person(s)
authorized to become registered holder(s) by endorsement and documents
transmitted with this Notice of Guaranteed Delivery. If signature is by a
trustee, executor, administrator, guardian, attorney-in-fact, officer or other
person acting in a fiduciary or representative capacity, such person must set
forth his or her full title below. If Notes will be delivered by book-entry
transfer to The Depository Trust Company, provide account number.
Please print name(s) and address(es)
Name(s):
------------------------------------------------------------------------
Capacity:
-----------------------------------------------------------------------
Address(es):
--------------------------------------------------------------------
Account Number:
-----------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 3
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a financial institution (including most banks, savings
and loan associations and brokerage houses) that is a participant in the
Securities Transfer Agents Medallion Program, the New York Stock Exchange
Medallion Signature Program or the Stock Exchanges Medallion Program, hereby
guarantees that the undersigned will deliver to the Exchange Agent the
certificates representing the Notes being tendered hereby or confirmation of
book-entry transfer of such Notes into the Exchange Agent's account at The
Depository Trust Company, in proper form for transfer, together with any other
documents required by the Letter of Transmittal within three New York Stock
Exchange trading days after the Expiration Date.
Name of Firm: Authorized Signature:
---------------------------
Address:
-------------------------------- -----------------------------------
Area Code and Telephone No.:( ) Name:
--------- -----------------------------
(PLEASE TYPE OR PRINT)
Title:
----------------------------
Dated:
----------------------------
NOTE: DO NOT SEND CERTIFICATES OF NOTES WITH THIS FORM. CERTIFICATES OF NOTES
SHOULD BE SENT ONLY WITH A COPY OF THE PREVIOUSLY EXECUTED LETTER OF
TRANSMITTAL.
