<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
CURRENT REPORT FOR ISSUERS SUBJECT TO THE
1934 REPORTING REQUIREMENTS
FORM 8-K
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 11, 1999
-----------------
KING PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Tennessee 0-24425 54-1684963
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
501 Fifth Street, Bristol, Tennessee 37620
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (423) 989-8000
------------------------
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
<PAGE> 2
INFORMATION TO BE INCLUDED IN THE REPORT
ITEM 5. OTHER EVENTS.
The distribution of a three for two stock split became effective
November 11, 1999 for shareholders of record as of October 28, 1999, for the
common stock of King Pharmaceuticals, Inc., a Tennessee corporation. King is
restating its consolidated financial statements for the years ended December
31, 1996, 1997 and 1998, which appeared in its Form 10-K for the fiscal year
ended December 31, 1998, to reflect the stock split. The restated consolidated
financial statements included in this filing consist of the following:
(a) Report of Independent Accountants.
(b) Consolidated Balance Sheets as of December 31, 1997 and 1998.
(c) Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998.
(d) Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1996, 1997 and 1998.
(e) Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.
(f) Notes to Consolidated Financial Statements.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits.
99 Restated consolidated balance sheets and the related
consolidated statements of operations, changes in
shareholders' equity and cash flows 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:
(i) Report of Independent Accountants.
(ii) Consolidated Balance Sheets as of December 31, 1997 and
1998.
(iii) Consolidated Statements of Operations for the years
ended December 31, 1996, 1997 and 1998.
(iv) Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1996, 1997 and
1998.
(v) Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1997 and 1998.
(vi) Notes to Consolidated Financial Statements.
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KING PHARMACEUTICALS, INC.
Date: December 10, 1999
By: /s/ Brian G. Shrader
-------------------------------------
Brian G. Shrader
Chief Financial Officer
<PAGE> 1
EXHIBIT 99
C O N T E N T S
<TABLE>
<CAPTION>
Page
----
<S> <C>
King Pharmaceuticals, Inc.
Report of Independent Accountants F-1
Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-2
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998 F-3
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1996, 1997 and 1998 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 F-5
Notes to Consolidated Financial Statements F-7
</TABLE>
<PAGE> 2
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
and Note 21 for which the
date is November 11, 1999
F-1
<PAGE> 3
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, 42,000,000 and 48,157,095 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-2
<PAGE> 4
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 $ (0.01) $ 0.17 $ 0.56
Extraordinary item -- -- (0.10)
-------- -------- ---------
Net income (loss) $ (0.01) $ 0.17 $ 0.46
======== ======== =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
<PAGE> 5
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 Total
Unrealized from Share-
Common Retained loss on Related holders'
Shares Amount Earnings securities Party Equity
---------- ------- -------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 6,600,000 $ 926 $ 10,763 $ -- $ (678) $ 11,011
Issuance of common shares 2,079,345 4,159 -- -- -- 4,159
Issuance of common shares under
employee stock purchase plan 389,298 778 -- -- -- 778
15% Stock Dividend 1,360,325 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 10,428,968 8,448 7,938 (16) (677) 15,693
Issuance of common shares,
net of $743 of expenses 4,571,032 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) 27,000,000 -- -- -- -- --
Net income -- -- 6,612 -- -- 6,612
---------- ------- -------- ---- ------- ---------
Balance, December 31, 1997 42,000,000 16,455 14,550 -- (1,671) 29,334
Issuance of common shares,
net of expenses 6,157,095 50,117 -- -- -- 50,117
Payments from Benevolent Fund -- -- -- -- 1,075 1,075
Net income -- -- 20,910 -- -- 20,910
---------- ------- -------- ---- ------- ---------
Balance, December 31, 1998 48,157,095 $66,572 $ 35,460 $ -- $ (596) $ 101,436
========== ======= ======== ==== ======= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
<PAGE> 6
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>
F-5
<PAGE> 7
KING PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
for the years ended December 31, 1996, 1997 and 1998, Continued
(in thousands, except share data)
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 1,049,567 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-6
<PAGE> 8
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-7
<PAGE> 9
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
2. Summary of Significant Accounting Policies, 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.
F-8
<PAGE> 10
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
2. Summary of Significant Accounting Policies, continued:
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.
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.
F-9
<PAGE> 11
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
3. Concentrations of Credit Risk, continued:
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>
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>
F-10
<PAGE> 12
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
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).
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.
F-11
<PAGE> 13
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
6. Acquisitions/Intangible Assets, continued:
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.
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 $ 0.28 $ 0.77
========= ========
Net income $ 0.28 $ 0.67
========= ========
</TABLE>
F-12
<PAGE> 14
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
6. Acquisitions/Intangible Assets, continued:
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.
7. Lease Obligations:
The Company leases certain office and manufacturing equipment and
automobiles under noncancelable operating leases with terms from one to
five years. Estimated future minimum lease payments, as of December 31,
1998 for leases with initial or remaining terms in excess of one year
are as follows:
<TABLE>
<S> <C>
1999 $1,419
2000 1,311
2001 795
2002 741
2003 262
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 was
approximately $196, $138, and $1,230, respectively.
F-13
<PAGE> 15
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
7. Lease Obligations, continued:
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>
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>
F-14
<PAGE> 16
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
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,
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.
F-15
<PAGE> 17
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
9. Long-term Debt, continued:
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 bear 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 Agreement was paid in full
on December 22, 1998 with proceeds from the Senior Credit Facility.
F-16
<PAGE> 18
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
9. Long-term Debt, continued:
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
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> 19
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
11. Financial Instruments, 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> 20
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
12. Income Taxes, 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
$24.0 million 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.
F-19
<PAGE> 21
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
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 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.
F-20
<PAGE> 22
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
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 similiarity in
regulatory environment, 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.
F-21
<PAGE> 23
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
15. Segment Information, continued:
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
======== ========= =========
<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 $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 4,571,032 common shares.
F-22
<PAGE> 24
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
16. Related Party Transactions, continued:
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 2,079,345 common shares to
shareholders and members of management of which 1,049,567 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 1,360,325 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 $2.00 per share. The weighted average shares and all per
share amounts included in the accompanying consolidated financial
statements and notes are based on the increased number of shares giving
retroactive effect to the stock dividend.
F-23
<PAGE> 25
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
17. Stockholders' Equity, continued:
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
5,250,000, (4,800,000 and 450,000, respectively).
During 1998, the Company granted 334,125 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 330,300 options outstanding of which 81,562 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 75,000 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 $9.33 per share. The options vested
immediately upon grant. As of December 31, 1998, the Company had 75,000
options vested and outstanding. Options under the 1998 Stock Option Plan
expire 10 years from the date of grant.
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 $ 0.56
==========
Pro Forma $ 0.54
==========
Net income:
As reported $ 0.46
==========
Pro Forma $ 0.45
==========
</TABLE>
F-24
<PAGE> 26
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
17. Stockholders' Equity. Continued:
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%.
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 Option Plan 1998 Stock 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 334,125 9.35 75,000 9.33
Exercised -- -- -- --
Forfeited (3,825) 9.33 -- --
---------- ------ ------- ------
Outstanding at December 31, 1998 330,300 $ 9.35 75,000 $ 9.33
========== ====== ======= ======
Weighted average fair value
of options granted N/A $ 5.40 N/A $ 4.76
========== ====== ======= ======
Options available for grant
at December 31, 1998 4,469,700 N/A 375,000 N/A
========== ====== ======= ======
</TABLE>
Options outstanding at December 31, 1998 have exercise prices between
$9.33 and $10.17, with a weighted average exercise price of $9.35 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.
F-25
<PAGE> 27
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
17. Stockholders' Equity, continued:
The Company closed the sale of 4,104,730 (6,157,095 post three for 2
split) shares of common stock at $14.00 ($9.33 post three for 2 split)
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.
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 23,160,698 39,405,155 45,191,291
---------- ---------- -----------
Basic (loss) income per common share $ (0.01) $ 0.17 $ 0.56
========== ========== ===========
Diluted income (loss) per share
Weighted average common shares 23,160,698 39,405,155 45,191,291
Effect of stock options -- -- 44,836
---------- ---------- -----------
Weighted average common shares
plus assumed conversions 23,160,698 39,405,155 45,236,127
---------- ---------- -----------
Diluted income (loss) per share $ (0.01) $ 0.17 $ 0.56
========== ========== ===========
</TABLE>
F-26
<PAGE> 28
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
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) 0.03 0.05 0.04 0.05
<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 0.10 0.15 0.15 0.15
Net income 0.10 0.15 0.15 0.05
</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 10.75% 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. Stock Split
On October 4, 1999 the Company's board of directors declared a three for
two stock split for shareholders of record as of October 28, 1999, to be
distributed November 11, 1999. The stock split has been reflected in all
share data contained in these financial statements.
F-27
