KING PHARMACEUTICALS INC, 424B3, 1999-05-10

KING PHARMACEUTICALS INC
424B3, 1999-05-10
PHARMACEUTICAL PREPARATIONS

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<PAGE> 1
Filed Pursuant to 424(b)(3)
Registration No. 333-77141

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, June 7, 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validly withdrawn by you.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 MAY 7, 1999
<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............. 1
Risk Factors................... 10
Use of Proceeds................ 21
The Exchange Offer............. 21
Capitalization................. 30
Unaudited Pro Forma
Consolidated Financial
Statements.................. 31
Selected Consolidated Financial
Data........................ 39
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.................. 41
Business....................... 53
</TABLE>

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management..................... 76
Certain Relationships and
Related Transactions........ 84
Principal Shareholders......... 85
Description of Certain
Indebtedness................ 87
Description of the Notes....... 89
United States Federal Income
Tax Considerations.......... 129
Plan of Distribution........... 133
Legal Matters.................. 133
Experts........................ 134
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> 3

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 May
7, 1999. We will not extend this time period to
a date later than June 14, 1999. You may
withdraw any old notes you tender pursuant to
the exchange offer at any time prior to May 7,
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> 4

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> 5

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> 6

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> 7

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> 8

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> 9

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> 10

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.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
HISTORICAL PRO FORMA
------------------------------ ----------
1996 1997 1998 1998(1)
------- ------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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> 11

<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> 12

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.
10
<PAGE> 13

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

11
<PAGE> 14

(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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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> 16

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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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> 18

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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<PAGE> 19

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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<PAGE> 20

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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<PAGE> 21

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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<PAGE> 22

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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<PAGE> 23

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.

THE EXCHANGE OFFER

PURPOSE AND EFFECT OF THE EXCHANGE OFFER

At the time we issued the old notes, we agreed to:

(1) file a registration statement to register the exchange of the old
notes for the exchange notes on or prior to 60 days after March 3, 1999;

(2) use our reasonable best efforts to cause the registration
statement to become effective within 150 days after March 3, 1999; and

(3) consummate the exchange offer within 30 days after the effective
date.

In the event that changes in law or applicable interpretations of the staff
of the SEC do not permit us to effect the exchange offer, or if a holder of old
notes notifies us that it is not eligible to participate in, or would not
receive freely tradeable exchange notes in exchange for tendered old notes
pursuant to, the exchange offer, we will use our reasonable best efforts to
cause to become effective under the Securities Act a shelf registration
statement with respect to the resale of the old notes and keep the shelf
registration statement effective until the earlier of the date the old notes can
be sold under Rule 144 of the Securities Act or two years after March 3, 1999.

If we do not comply with the requirements of the exchange offer described
above, we will pay additional interest on the old notes of 0.50% per year per
$1,000 in principal amount of the old notes during the first 90 days that we are
not in compliance. The additional interest will increase by an additional 0.50%
per year per $1,000 in principal amount of old notes with respect to each
subsequent 90 day period, up to a maximum of 2.0% per year per $1,000 in
principal amount of the old notes. Once we are in compliance with the
requirements described above, additional interest will no longer accrue.

If you desire to exchange your old notes for exchange notes, you will be
required to represent that:

- any exchange notes received will be acquired in your ordinary course of
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 King.

TERMS OF THE EXCHANGE OFFER

Upon the terms and subject to the conditions set forth in this prospectus
and the letter of transmittal, we will accept for exchange any and all old notes
properly tendered

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<PAGE> 24

and not withdrawn prior to 5:00 p.m., New York City time, on June 7, 1999. We
will issue $1,000 principal amount of exchange notes in exchange for each $1,000
principal amount of outstanding old notes accepted in the exchange offer. Old
notes may be tendered only in $1,000 increments.

The form and terms of the exchange notes will be the same as the form and
terms of the old notes except that the exchange notes will be registered under
the Securities Act and will not bear legends restricting their transfer. The
exchange notes will evidence the same debt as the old notes. The exchange notes
will be issued under and entitled to the benefits of the indenture, which also
authorized the issuance of the old notes, such that both series will be treated
as a single class of debt securities under the indenture.

The exchange offer is not conditioned upon any minimum aggregate principal
amount of old notes being tendered for exchange.

As of the date of this prospectus, $150.0 million of the old notes are
outstanding. This prospectus, together with the letter of transmittal, is being
sent to all registered holders of old notes as of May 6, 1999.

We intend to conduct the exchange offer in accordance with the provisions
of the registration rights agreement and the applicable requirements of the
Securities Act and the rules and regulations of the SEC. Old notes that are not
tendered for exchange in the exchange offer will remain outstanding and continue
to accrue interest and will be entitled to the rights and benefits under the
indenture and the registration rights agreement.

We will be deemed to have accepted for exchange properly tendered old notes
when, as and if we give oral or written notice of acceptance to the exchange
agent. The exchange agent will act as agent for the tendering holders for
purposes of receiving the exchange notes from us. We expressly reserve the right
to amend or terminate the exchange offer, and not to accept for exchange any old
notes, if any of the events described below under "-- Conditions to the Exchange
Offer" occur.

Holders who tender old notes in the exchange offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of old notes
pursuant to the exchange offer. We will pay all charges and expenses, other than
taxes described below under "-- Fees and Expenses."

EXPIRATION DATE; EXTENSIONS; AMENDMENTS

The expiration date is 5:00 p.m., New York City time on June 7, 1999,
unless we, in our sole discretion, extend the exchange offer, in which case the
expiration date will mean the latest date and time to which the exchange offer
is extended.

In order to extend the exchange offer, we will notify the exchange agent of
any extension by oral or written notice and will issue a press release notifying
the registered holders of old notes of such extension, each prior to 9:00 a.m.,
New York City time, on the next business day after the expiration date.

We reserve the right, in our sole discretion:

- to delay accepting any old notes for exchange, to extend the exchange
offer or terminate the exchange offer if any of the conditions set forth
below under

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<PAGE> 25

"-- Conditions to the Exchange Offer" have not been satisfied, by giving
oral or written notice of such delay, extension or termination to the
exchange agent; or

- to amend the terms of the exchange offer in any manner.

Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice describing the
event to the registered holders of old notes. If the exchange offer is amended
in a manner we determine constitutes a material change, we will promptly
disclose such amendment in a manner reasonably calculated to inform the holders
of the old notes of such amendment.

Without limiting the manner in which we may choose to make a public
announcement of any delay in acceptance, extension, termination or amendment of
the exchange offer, we have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.

INTEREST ON THE EXCHANGE NOTES

The exchange notes will bear interest at a rate of 10 3/4% per annum,
payable semi-annually on February 15 and August 15 of each year, commencing on
August 15, 1999. Holders of exchange notes will receive the same interest
payment on August 15, 1999 that they would have received if they had not
accepted the exchange offer.

CERTAIN CONDITIONS TO THE EXCHANGE OFFER

We will not be required to accept for exchange, or exchange any exchange
notes for, any old notes, and may terminate the exchange offer before the
acceptance of any old notes for exchange, if:

- any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the exchange offer
which, in our reasonable judgment, might materially impair our ability to
proceed with the exchange offer;

- any law, statute, rule or regulation is proposed, adopted or enacted, or
any existing law, statute, rule or regulation is interpreted by the staff
of the SEC, which, in our reasonable judgment, might materially impair
our ability to proceed with the exchange offer; or

- any governmental approval has not been obtained, which approval we, in
our reasonable discretion, deem necessary for the consummation of the
exchange offer.

If we determine in our sole discretion that any of these events have
occurred, we may

- refuse to accept any old notes and return all old notes to the tendering
holders;

- extend the exchange offer and retain all old notes tendered prior to the
expiration of the exchange offer, subject, however, to the rights of
holders to withdraw such old notes; or

- waive such unsatisfied conditions with respect to the exchange offer and
accept all properly tendered old notes which have not been withdrawn.

23
<PAGE> 26

If our waiver of a condition constitutes a material change to the exchange
offer, we will promptly disclose the waiver to the registered holders of the old
notes and we may extend the exchange offer.

PROCEDURES FOR TENDERING OLD NOTES

Subject to the terms and conditions hereof and the letter of transmittal,
only a holder of old notes may tender such old notes in the exchange offer. To
tender in the exchange offer, a holder must complete, sign and date the letter
of transmittal, or facsimile thereof, have its signature guaranteed if required
by the letter of transmittal, and mail or otherwise deliver such letter of
transmittal or such facsimile so that it is received by the exchange agent prior
to 5:00 p.m., New York City time, on the expiration date or, in the alternative,
comply with the Depository Trust Corporation's Automated Tender Offer Program
procedures described below. In addition, either:

- old notes must be received by the exchange agent along with the letter of
transmittal;

- a timely confirmation of book-entry transfer of such old notes, if such
procedure is available, into the exchange agent's account at the
Depository Trust Corporation pursuant to the procedure for book-entry
transfer described below or properly transmitted agent's message, as
defined below, must be received by the exchange agent prior to the
expiration date; or

- the holder must comply with the guaranteed delivery procedures described
below.

To be tendered effectively, the letter of transmittal and other required
documents must be received by the exchange agent at the address set forth below
under "-- Exchange Agent" prior to 5:00 p.m., New York City time, on the
expiration date.

The tender by a holder which is not withdrawn prior to the expiration date
will constitute an agreement between such holder and King in accordance with the
terms and subject to the conditions set forth herein and in the letter of
transmittal.

The method of delivery of old notes, the letter of transmittal and all
other required documents to the exchange agent is at the election and risk of
the holder. Instead of delivery by mail, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure delivery to the exchange agent before the expiration date. No
letter of transmittal or old notes should be sent to King. Holders may request
their respective brokers, dealers, commercial banks, trust companies or other
nominees to effect the above transactions for such holders.

Any beneficial owner whose old notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder of old notes to tender on the beneficial owner's behalf. If
the beneficial owner wishes to tender on the owner's own behalf, the owner must,
prior to completing and executing the letter of transmittal and delivering the
owner's old notes, either make appropriate arrangements to register ownership of
the old notes in the owner's name or obtain a properly completed bond power from
the registered holder of old notes. The transfer of registered ownership may
take considerable time and may not be able to be completed prior to the
expiration date.

24
<PAGE> 27

Signatures on a letter of transmittal and a notice of withdrawal described
below must be guaranteed by an eligible institution, as defined below, unless
the old notes are tendered:

- by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal; or

- for the account of an eligible institution.

In the event that signatures on a letter of transmittal or a notice of
withdrawal are required to be guaranteed, the guarantor must be an eligible
institution, which means a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the United
States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15
under the Securities Exchange Act which is a member of one of the recognized
signature guarantee programs identified in the letter of transmittal.

If the letter of transmittal is signed by a person other than the
registered holder of any old notes listed therein, those old notes must be
endorsed or accompanied by a properly completed bond power, signed by the
registered holder as that registered holder's name appears on the old notes with
the signature thereon guaranteed by an eligible institution.

If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, those
persons should so indicate when signing, and unless we waive the requirement,
provide evidence satisfactory to us of their authority to so act must be
submitted with the letter of transmittal.

The exchange agent and the Depository Trust Corporation have confirmed that
any financial institution that is a participant in the Depository Trust
Corporation's system may utilize the Depository Trust Corporation's Automated
Tender Offer Program to tender old notes. Accordingly, participants in the
Depository Trust Corporation's Automated Tender Offer Program may, in lieu of
physically completing and signing the letter of transmittal and delivering it to
the exchange agent, electronically transmit their acceptance of the exchange
offer by causing the Depository Trust Corporation to transfer the old notes to
the exchange agent in accordance with the Depository Trust Corporation's
Automated Tender Offer Program procedures for transfer. The Depository Trust
Corporation will then send an agent's message to the exchange agent. The term
"agent's message" means a message transmitted by the Depository Trust
Corporation received by the exchange agent and forming part of the book-entry
confirmation, which states:

- that the Depository Trust Corporation has received an express
acknowledgment from a participant in the Depository Trust Corporation's
Automated Tender Offer Program that is tendering old notes which are the
subject of such book entry confirmation;

- that the participant has received and agrees to be bound by the terms of
the letter of transmittal, or, in the case of an agent's message relating
to guaranteed delivery, that the participant has received and agrees to
be bound by the applicable notice of guaranteed delivery, and that the
agreement may be enforced against the participant.

25
<PAGE> 28

All questions as to the validity, form, eligibility, including time of
receipt, acceptance of tendered old notes and withdrawal of tendered old notes
will be determined by King in our sole discretion, which determination will be
final and binding.

We reserve the absolute right to reject any and all old notes not properly
tendered or any old notes our acceptance of which would, in the opinion of our
counsel, be unlawful. We also reserve the right to waive any defects,
irregularities or conditions of tender as to particular old notes. Our
interpretation of the terms and conditions of the exchange offer, including the
instructions in the letter of transmittal, will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of old notes must be cured within such time as we determine. Although we intend
to notify holders of defects or irregularities with respect to tenders of old
notes, neither King, the exchange agent nor any other person shall incur any
liability for failure to give such notification. Tenders of old notes will not
be deemed to have been made until the defects or irregularities have been cured
or waived. Any old notes received by the exchange agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the exchange agent to the tendering holder, unless
otherwise provided in the letter of transmittal, as soon as practicable
following the expiration date.

In all cases, issuance of exchange notes for old notes that are accepted
for exchange pursuant to the exchange offer will be made only after timely
receipt by the exchange agent of old notes or a timely book-entry confirmation
of the old notes into the exchange agent's account at the book-entry transfer
facility, a properly completed and duly executed letter of transmittal and all
other required documents. If any tendered old notes are not accepted for
exchange for any reason set forth in the terms and conditions of the exchange
offer or if old notes are submitted for a greater principal amount than the
holder desires to exchange, the unaccepted or non-exchanged old notes will be
returned without expense to the tendering holder thereof, or, in the case of old
notes tendered by book-entry transfer into the exchange agent's account at the
Depository Trust Company pursuant to the book-entry transfer procedures
described below, such non-exchanged notes will be credited to an account
maintained with the Depository Trust Company, as promptly as practicable after
the expiration or termination of the exchange offer.

BOOK ENTRY TRANSFER

The exchange agent will make a request to establish an account with respect
to the old notes at the Depository Trust Company for purposes of the exchange
offer within two business days after the date of this prospectus. Any financial
institution that is a participant in the Depository Trust Company's system may
make book-entry delivery of old notes by causing the Depository Trust Company to
transfer such old notes into the exchange agent's account at the Depository
Trust Company in accordance with the Depository Trust Company's procedures for
transfer. Although delivery of old notes may be effected through book-entry
transfer at the Depository Trust Company, the letter of transmittal or facsimile
thereof, with any required signature guarantees and any other required
documents, must, in any case, be transmitted to and received by the exchange
agent at the address set forth below under "-- Exchange Agent" on or prior to
5:00 p.m. New York City time on the expiration date or, if the guaranteed
delivery procedures described below are to be complied with, within the time
period provided under such procedures. Delivery of documents to the Depository
Trust Company does not constitute delivery to the exchange agent.

26
<PAGE> 29

GUARANTEED DELIVERY PROCEDURES

Holders who wish to tender their old notes and (A) whose old notes are not
immediately available, or (B) who cannot deliver their old notes, the letter of
transmittal or any other required documents to the exchange agent prior to the
expiration date, may effect a tender if:

- the tender is made through an eligible institution;

- prior to the expiration date, the exchange agent receives from such
eligible institution a properly completed and duly executed notice of
guaranteed delivery by facsimile transmission, mail or hand delivery,
setting forth the name and address of the holder, the registered
number(s) of such old notes and the principal amount of old notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within three New York Stock Exchange trading days after the
expiration date, the letter of transmittal, or facsimile thereof,
together with the old notes or a book-entry confirmation, as the case may
be, and any other documents required by the letter of transmittal will be
deposited by the eligible institution with the exchange agent; and

- such properly completed and executed letter of transmittal, or facsimile
thereof, or properly transmitted agent's message as well as all tendered
old notes in proper form for transfer or a book-entry confirmation, as
the case may be, and all other documents required by the letter of
transmittal, are received by the exchange agent within three New York
Stock Exchange trading days after the expiration date.

Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to holders who wish to tender their old notes according to the guaranteed
delivery procedures set forth above.

WITHDRAWAL OF TENDERS

Except as otherwise provided herein, tenders of old notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the business day
immediately preceding the expiration date.

For a withdrawal to be effective:

- written notice of withdrawal must be received by the exchange agent at
one of the addresses set forth below under "-- Exchange Agent" or

- holders must comply with the appropriate procedures of the Depository
Trust Company's automated tender offer program system.

Any such notice of withdrawal must specify the name of the person having
tendered the old notes to be withdrawn, identify the old notes to be withdrawn,
including the principal amount of such old notes, and, where certificates for
old notes have been transmitted, specify the name in which such old notes were
registered, if different from that of the withdrawing holder. If certificates
for old notes have been delivered or otherwise identified to the exchange agent,
then, prior to the release of such certificates, the withdrawing holder must
also submit the serial numbers of the particular certificates to be withdrawn
and a signed notice of withdrawal with signatures guaranteed by an eligible
institution unless the holder is an eligible institution. If old notes have been
tendered pursuant to the procedure for book-entry transfer described above, any
notice of withdrawal

27
<PAGE> 30

must specify the name and number of the account at the Depository Trust Company
to be credited with the withdrawn old notes and otherwise comply with the
procedures of such facility. All questions as to the validity, form and
eligibility, including time of receipt, of such notices will be determined by
King, whose determination shall be final and binding on all parties. Any old
notes so withdrawn will be deemed not to have been validly tendered for exchange
for purposes of the exchange offer. Any old notes which have been tendered for
exchange but which are not exchanged for any reason will be returned to the
holder thereof without cost to such holder, or, in the case of old notes
tendered by book-entry transfer into the exchange agent's account at the
Depository Trust Company pursuant to the book-entry transfer procedures
described above, such old notes will be credited to an account maintained with
the Depository Trust Company for the old notes, as soon as practicable after
withdrawal, rejection of tender or termination of the exchange offer. Properly
withdrawn old notes may be retendered by following one of the procedures
described under "-- Procedures for Tendering" above at any time on or prior to
the expiration date.

EXCHANGE AGENT

IBJ Whitehall Bank & Trust Company has been appointed as exchange agent for
the exchange offer. Questions and requests for assistance and requests for
additional copies of this prospectus or the letter of transmittal should be
directed to the exchange agent addressed as follows:

<TABLE>
<S> <C>
By Mail or Hand Delivery: One State Street
New York, New York 10004
Facsimile Transmission: (212) 858-2611
Confirm by Telephone: (212) 858-2103
</TABLE>

FEES AND EXPENSES

The expenses of soliciting tenders will be borne by King. The principal
solicitation is being made by mail. However, additional solicitation may be made
by telegraph, telephone or in person by officers and regular employees of King
and its affiliates.

We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offer. However, we will pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection therewith.

The cash expenses to be incurred in connection with the exchange offer will
be paid by King and are estimated in the aggregate to be approximately $300,000.
Such expenses include registration fees, fees and expenses of the exchange agent
and trustee, accounting and legal fees and printing costs, and related fees and
expenses.

TRANSFER TAXES

We will pay all transfer taxes, if any, applicable to the exchange of the
old notes for exchange notes pursuant to the exchange offer. If, however,
certificates representing old notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of notes tendered, or if
tendered notes are registered in the name of any person other than the

28
<PAGE> 31

person signing the letter of transmittal, or if a transfer tax is imposed for
any reason other than the exchange of notes pursuant to the exchange offer, then
the amount of any such transfer taxes, whether imposed on the registered holder
or any other persons, will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the letter of transmittal, the amount of such transfer taxes will be billed
directly to such tendering holder.

CONSEQUENCES OF FAILURE TO EXCHANGE

Holders of old notes who do not exchange their old notes for exchange notes
pursuant to the exchange offer will continue to be subject to the restrictions
on transfer of the old notes, as set forth:

- in the legend thereon as a consequence of the issuance of the old notes
pursuant to the exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state
securities laws; and

- otherwise set forth in the offering circular dated February 26, 1999,
distributed in connection with the offering of the old notes.

In general, the old notes may not be offered or sold unless registered
under the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. We do not currently anticipate that we will register the old notes under
the Securities Act.

29
<PAGE> 32

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.

30
<PAGE> 33

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.

31
<PAGE> 34

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.

32
<PAGE> 35

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>

33
<PAGE> 36

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.

34
<PAGE> 37

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.

35
<PAGE> 38
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:

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

(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

36
<PAGE> 39
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.

37
<PAGE> 40
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>

38
<PAGE> 41

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>

39
<PAGE> 42

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

(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.

40
<PAGE> 43

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.

41
<PAGE> 44

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.

42
<PAGE> 45

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.

43
<PAGE> 46

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

44
<PAGE> 47

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.

45
<PAGE> 48

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

46
<PAGE> 49

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

47
<PAGE> 50

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

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.

48
<PAGE> 51

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> 52

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> 53

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> 54

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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<PAGE> 55

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,

53
<PAGE> 56

(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,

54
<PAGE> 57

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> 58

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> 59

(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> 60

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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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> 62

- 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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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> 64

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>

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<PAGE> 65

<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> 66

<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>

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<PAGE> 67

<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> 68

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> 69

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

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<PAGE> 70

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

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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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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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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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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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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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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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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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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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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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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 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

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<PAGE> 83

(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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<PAGE> 84

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> 85

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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<PAGE> 86

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> 87

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> 88

(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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<PAGE> 89

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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<PAGE> 90

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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<PAGE> 91

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 113.

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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<PAGE> 92

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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<PAGE> 93

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;

(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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(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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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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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.

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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 August 5, 1999, 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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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> 137

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> 138

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> 139

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> 140

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> 141

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> 142

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> 143

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> 144

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> 145
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> 146
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> 147
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> 148
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> 149
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> 150
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:

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> 151
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> 152
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> 153
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> 154
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> 155
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> 156
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> 157
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> 158
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> 159
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> 160
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> 161
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> 162
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> 163
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> 164

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> 165

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> 166

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> 167

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> 168

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> 169

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> 170
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> 171
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> 172

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.

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> 173

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> 174

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.

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

- 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> 175
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> 176

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.

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> 177

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> 178

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.

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> 179
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

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> 180

(KING PHARMACEUTICALS LOGO)