<PAGE> 1
EXHIBIT 99(b)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants on
Consolidated Financial Statements......................... F-2
Consolidated Balance Sheets as of December 31,
1998 and 1999............................................. F-3
Consolidated Statements of Operations for the
years ended December 31, 1997, 1998 and 1999.............. F-4
Consolidated Statements of Changes in
Shareholders' Equity for the years ended December 31,
1997, 1998 and 1999....................................... F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1998 and 1999.............. F-6
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of King Pharmaceuticals, Inc.:
In our opinion, the consolidated balance sheets and the related
consolidated statements of operations, changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
King Pharmaceuticals, Inc. at December 31, 1998 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. 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 auditing standards generally
accepted in the United States 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 that our audits provide a reasonable basis for the opinion expressed
above.
As described in Note 21 to these financial statements, on February 25, 2000,
the Company merged with Medco Research, Inc. ("Medco") in a transaction
accounted for as a pooling of interest. The accompanying consolidated financial
statements give retroactive effect to the merger of the Company with Medco.
PricewaterhouseCoopers LLP
Greensboro, North Carolina
February 25, 2000, except for
the information in Note 21 for
which the date is March 17, 2000 and
the information in Note 17 for which
the date is June 21, 2000
F-2
<PAGE> 3
KING PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 5,901 $ 20,720
Investments, held to maturity............................... 21,434 17,001
Trade accounts receivable, net of allowance for doubtful
accounts of $1,402 and $1,864............................. 39,666 69,215
Royalty receivable.......................................... 8,349 6,691
Inventory................................................... 26,556 33,410
Deferred income taxes....................................... 6,256 14,643
Prepaid expenses and other current assets................... 2,460 9,443
-------- --------
Total current assets...................................... 110,622 171,123
-------- --------
Property and equipment, net................................. 94,447 97,759
Other assets................................................ 17,997 20,321
Investments, held to maturity............................... 25,074 33,583
Intangible assets, net...................................... 482,212 558,555
-------- --------
Total assets.............................................. $730,352 $881,341
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 13,233 $ 25,447
Accrued expenses............................................ 20,532 53,735
Income taxes payable........................................ 3,524 4,756
Current portion of long term debt........................... 13,310 14,502
-------- --------
Total current liabilities................................. 50,599 98,440
Long-term debt:
Revolving credit facility................................. 19,000 45,000
Term loans................................................ 414,750 354,194
Senior subordinated notes................................. 75,000 150,000
Other..................................................... 5,737 4,161
Deferred income taxes....................................... 5,621 12,638
Other liabilities........................................... 150 1,500
-------- --------
Total liabilities......................................... 570,857 665,933
Commitments and contingencies (notes 14 and 21)
Shareholders' equity........................................ 159,495 215,408
-------- --------
Total liabilities and shareholders' equity................ $730,352 $881,341
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
<PAGE> 4
KING PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Revenues:
Net sales............................................. $47,351 $158,180 $348,271
Royalty revenue....................................... 20,000 27,544 31,650
Development revenue................................... 558 5,283 --
------- -------- --------
Total revenues..................................... 67,909 191,007 379,921
------- -------- --------
Operating costs and expenses:
Costs of sales........................................ 13,034 64,052 113,204
Selling, general and administrative................... 19,950 36,193 80,213
Royalty expense....................................... 2,985 4,873 5,661
Depreciation and amortization......................... 3,071 9,963 27,734
Research and development expense...................... 7,792 10,749 16,316
------- -------- --------
Total operating costs and expenses................. 46,832 125,830 243,128
------- -------- --------
Operating income...................................... 21,077 65,177 136,793
------- -------- --------
Other income (expenses):
Interest income....................................... 2,110 2,875 3,314
Interest expense...................................... (2,787) (14,866) (55,371)
Other, net............................................ 682 4,004 (3,052)
------- -------- --------
Total other income (expense)....................... 5 (7,987) (55,109)
------- -------- --------
Income before income taxes and extraordinary item..... 21,082 57,190 81,684
Income tax expense...................................... 4,257 15,627 29,986
------- -------- --------
Income before extraordinary item........................ 16,825 41,563 51,698
Extraordinary item, net of income taxes of $2,787 and
$445 in 1998 and 1999................................. -- (4,411) (705)
------- -------- --------
Net income.............................................. $16,825 $ 37,152 $ 50,993
======= ======== ========
Income per common share:
Basic................................................. $ 0.24 $ 0.47 $ 0.61
------- -------- --------
Diluted............................................... $ 0.24 $ 0.47 $ 0.61
======= ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
<PAGE> 5
KING PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DUE
COMMON UNREALIZED FROM COST OF TOTAL
--------------------- RETAINED LOSS ON RELATED TREASURY SHAREHOLDERS'
SHARES AMOUNT EARNINGS SECURITIES PARTY STOCK EQUITY
---------- -------- -------- ---------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 as
previously reported.......... 15,643,452 $ 8,448 $ 7,938 $(16) $ (677) $ -- $ 15,693
Medco pooling of interests..... 10,885,560 52,216 (11,394) -- -- (4,323) 36,499
---------- -------- -------- ---- ------- -------- --------
Balance, December 31, 1996, as
adjusted..................... 26,529,012 60,664 (3,456) (16) (677) (4,323) 52,192
Issuance of common shares,
net of $743 of expenses.... 6,856,548 8,007 -- -- -- -- 8,007
Realized loss on
securities................. -- -- -- 16 -- -- 16
Advances to Benevolent
Fund....................... -- -- -- -- (994) -- (994)
2.8 to 1 common stock
split...................... 40,500,000 -- -- -- -- -- --
Stock options exercised...... 27,366 297 -- -- -- -- 297
Purchase of stock held in
treasury................... (256,631) -- -- (2,353) (2,353)
Net income................... -- -- 16,825 -- -- -- 16,825
---------- -------- -------- ---- ------- -------- --------
Balance, December 31, 1997..... 73,656,295 68,968 13,369 -- (1,671) (6,676) 73,990
Issuance of common shares,
net of expenses............ 9,235,643 50,117 -- -- -- -- 50,117
Payments from Benevolent
Fund....................... -- -- -- -- 1,075 -- 1,075
Stock options exercised...... 117,471 1,293 -- -- -- -- 1,293
Purchase of stock held in
treasury................... (223,386) -- -- -- -- (4,132) (4,132)
Net income................... -- -- 37,152 -- -- -- 37,152
---------- -------- -------- ---- ------- -------- --------
Balance, December 31, 1998..... 82,786,023 120,378 50,521 -- (596) (10,808) 159,495
Stock options exercised...... 496,958 5,764 -- -- -- -- 5,764
Stock warrants exercised..... 40,542 540 -- -- -- -- 540
Purchase of stock held in
treasury................... (187,406) -- -- -- -- (4,455) (4,455)
Retirement of treasury
stock...................... -- (15,263) -- -- -- 15,263 --
Tax benefit.................. -- 2,475 -- -- -- -- 2,475
Payments from Benevolent
Fund....................... -- -- -- -- 596 -- 596
Net income................... -- -- 50,993 -- -- -- 50,993
---------- -------- -------- ---- ------- -------- --------
Balance, December 31, 1999..... 83,136,117 $113,894 $101,514 $ -- $ -- $ -- $215,408
========== ======== ======== ==== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
<PAGE> 6
KING PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 16,825 $ 37,152 $ 50,993
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 3,071 9,963 27,734
Amortization of deferred financing costs................ -- 728 2,834
Loss on sale of marketable securities................... 32 -- --
Net amortization of investments premium (discount)...... (102) (334) 16
Extraordinary loss...................................... -- 7,198 1,150
Net loss on sale of property and equipment.............. 26 19 134
Deferred income taxes................................... (980) (2,626) (1,370)
Changes in operating assets and liabilities:
Accounts receivable................................... (6,256) (31,105) (29,642)
Royalty receivable.................................... (226) (2,345) 1,696
Inventories........................................... (4,753) (15,706) (6,854)
Prepaid expenses and other assets..................... (4,940) 2,912 (4,481)
Accounts payable...................................... 2,898 6,806 12,214
Accrued expenses and other............................ 7,861 7,215 34,553
Deferred revenue...................................... (548) -- --
Deferred royalty payment.............................. (1,266) (1,451) --
Income taxes.......................................... 2,514 1,662 1,232
-------- --------- ---------
Net cash provided by operating activities.......... 14,156 20,088 90,209
-------- --------- ---------
Cash flows from investing activities:
Purchase of investment securities......................... (20,162) (34,293) (25,592)
Proceeds from maturity and sale of investment
securities.............................................. 8,682 25,922 21,500
Purchases of property, plant and equipment................ (1,430) (81,432) (9,170)
Purchases of intangible assets............................ (54,161) (345,618) (98,199)
Merger related costs...................................... (373) -- (2,094)
Proceeds from sale of property and equipment.............. 2 44 20
-------- --------- ---------
Net cash used in investing activities.............. (67,442) (435,377) (113,535)
-------- --------- ---------
Cash flows from financing activities:
Proceeds from revolving credit facility................... 29,599 -- 92,000
Payments on revolving credit facility..................... (23,447) -- (66,000)
Proceeds from issuance of common shares and exercise of
stock options, net...................................... 8,304 51,410 8,779
Purchase of stock held in treasury........................ (2,353) (4,132) (4,455)
Book overdraft............................................ 1,423 -- --
Repayment on shareholder notes receivable................. 2,093 -- --
Proceeds from other long-term debt........................ 55,923 658,741 150,000
Payments on other long-term debt.......................... (23,798) (262,318) (136,021)
Payments on notes payable................................. -- (916) --
Due to affiliate.......................................... (994) 1,075 596
Initial public offering costs............................. (710) -- --
Debt issuance costs....................................... (458) (25,465) (6,754)
-------- --------- ---------
Net cash provided by financing activities.......... 45,582 418,395 38,145
-------- --------- ---------
Increase (decrease) in cash................................. (7,704) 3,106 14,819
Cash and cash equivalents, beginning of period.............. 10,499 2,795 5,901
-------- --------- ---------
Cash and cash equivalents, end of period.................... $ 2,795 $ 5,901 $ 20,720
======== ========= =========
Supplemental disclosure of cash paid for:
Interest.................................................. $ 2,335 $ 13,929 $ 50,411
======== ========= =========
Taxes..................................................... $ 2,974 $ 11,507 $ 30,576
======== ========= =========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-6
<PAGE> 7
KING PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
Supplemental schedule of non-cash investing and financing activities:
For the years ended December 31, 1997, 1998 and 1999, the Company
entered into capital leases totalling $85, $1,004 and $83, respectively.
The Company purchased intangible assets financed by the seller of
$75,000 in 1998.
In connection with its purchases of intangible assets the Company
assumed estimated liabilities of $3,062 and $2,913 for returns of products
shipped prior to acquisition date during 1997 and 1998, respectively.
The accompanying notes are an integral part of the
consolidated financial statements.
F-7
<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 researches, develops, manufactures,
markets and sells primarily branded prescription pharmaceutical products.
Through a national sales force and copromotion arrangements, 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., Parkedale
Pharmaceuticals, Inc., Medco Research, Inc. (acquired February 25, 2000) 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, rebates and chargebacks 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. The Company records royalty revenue when it is earned,
based on third party net sales of products under license.
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. Inventory of product
samples not distributed to third parties represent 11.3% of inventory as of
December 31, 1999.
Investments. The Company's investments primarily include marketable
securities, which are recorded at cost, net of amortization of premiums and
discounts. All premiums and/or discounts are amortized over the remaining term
of the related security using the straight-line method, which does not differ
significantly from the effective interest rate method. The Company's investments
are accounted for in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". This Statement addresses the
accounting and reporting for investments in equity securities that have readily
determinable fair values and for all investments on debt securities. These
investments are classified in three categories and are accounted for as follows:
(1) debt securities that the Company has the positive intent and the ability to
hold to maturity are classified as held-to-maturity and reported at cost; (2)
debt and equity securities that are bought and held principally for the purpose
of selling them in the near term are classified as trading securities and
reported at fair
F-8
<PAGE> 9
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value, with unrealized gains and losses included in earnings; (3) debt and
equity securities not classified as either held-to-maturity or trading
securities are classified as available-for-sale securities and reported at fair
value, with unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity. All of the Company's investments are
accounted for as held-to-maturity securities as of December 31, 1998 and 1999.
The classification of investments is determined on the date of acquisition. The
Company reviews its investment portfolio as deemed necessary and, where
appropriate, adjusts individual investments for other-than-temporary
impairments. In February 2000, the Company sold its held to maturity investments
as a result of the merger and recognized a loss on sale of $662.
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 and Derivatives. The Company does not use financial
instruments for trading purposes. Financial instruments, which are a type of
derivative instrument, are used to manage interest rate risks. The notional
amounts of the interest rate protection agreements entered into by the Company
are used to measure the interest to be paid or received and do not represent the
amount of exposure to loss.
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.
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. The estimated useful lives are principally 15 to 40 years for
buildings and improvements and 3 to 15 years for machinery and equipment.
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 years ended December 31, 1998 and 1999, the
Company capitalized interest of approximately $239 and $381, respectively. The
Company had no capitalized interest for the year ended December 31, 1997.
Intangible Assets. Intangible assets which include product rights and
goodwill are stated at cost, net of accumulated amortization. Amortization is
computed over the estimated useful lives, ranging from 10 to 30 years, using the
straight-line method. In addition, the Company capitalizes certain acquisition
costs incurred in connection with the application for and the procurement of
patents, trademarks and distribution rights. Costs are capitalized on a
case-by-case basis relating to those territories where the Company anticipates
receiving significant future benefits from the patent, and
F-9
<PAGE> 10
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are amortized over the life of the patent beginning at date of grant.
Amortization periods on capitalized patent costs trademarks and distribution
rights range from 3 to 20 years.
The Company periodically 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 ten years.
Amortization expense related to deferred financing costs was $0, $728 and $2,834
for 1997, 1998 and 1999, respectively, and has been included in interest
expense.
During 1998 and 1999, 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 in 1998, and $705, net of related tax benefits of $445, in
1999, associated with the write-off of certain 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 $7,792,
$10,749 and $16,316, for the years ended December 31, 1997, 1998 and 1999,
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, 1997, 1998 and 1999 were $1,583, $10,744 and $26,513, 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. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the effective date
of FASB Statement No. 133 -- an amendment of FASB Statement No. 133", that
revises SFAS No. 133, to become effective in the first quarter of fiscal 2001.
The Company is evaluating the provisions of SFAS No. 133, but does not
anticipate its adoption to have a material impact on financial position or
results of operations.
Comprehensive Income. In 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 or 1999.
F-10
<PAGE> 11
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. CONCENTRATIONS OF CREDIT RISK
A significant portion of the Company's sales is to customers in the
pharmaceutical industry. Approximately, 19% and 17% of accounts receivable at
December 31, 1998 and 1999, respectively were due from one customer. At December
31, 1998 and 1999, an additional 25% and 16%, 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>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Customer A.................................................. 11.8% n/a% 16.8%
Customer B.................................................. n/a 10.8 13.4
Customer C.................................................. n/a n/a 11.6
Customer D.................................................. 29.5 14.4 n/a
</TABLE>
n/a -- sales were less than 10% for the year.
The majority of the royalty receivable balance at December 31, 1998 and
1999 relates to Fujisawa USA, Inc.
The Company invests its excess cash primarily in U.S. Government and
high-quality corporate debt securities and commercial paper. The commercial
paper securities are highly liquid and the government securities typically
mature within one to three years (although there is an established secondary
market for sales at any given time). Based on the nature of the financial
instruments and/or historical realization of these financial instruments,
management believes they bear minimal risk.
4. INVESTMENTS
The aggregate fair values of investment securities at December 31, 1998 and
1999 along with unrealized gains and losses determined on an individual security
basis are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
COST GAINS LOSSES MARKET
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
1999 HELD TO MATURITY
U.S. Government Obligations................ $25,951 $ -- $ (278) $25,673
Corporate Obligations...................... 24,633 29 (235) 24,427
------- ---- ------ -------
Total securities held to maturity.......... $50,584 $ 29 $ (513) $50,100
======= ==== ====== =======
1998 HELD TO MATURITY
U.S. Government Obligations................ $26,046 $217 $ -- $26,263
Corporate Obligations...................... 20,462 -- (99) 20,363
------- ---- ------ -------
Total securities held to maturity.......... $46,508 $217 $ (99) $46,626
======= ==== ====== =======
</TABLE>
There were no realized gains or losses in 1999, 1998 or 1997.
F-11
<PAGE> 12
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following represents the contractual maturities of investments held as
of December 31, 1999.
<TABLE>
<S> <C>
Less than 1 year............................................ $17,001
1 to 5 years................................................ 33,583
-------
Total............................................. $50,584
=======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Land........................................................ $ 3,949 $ 4,115
Buildings and improvements.................................. 56,015 59,309
Machinery and equipment..................................... 33,430 39,100
Equipment under capital lease............................... 2,713 2,537
Construction in progress.................................... 6,106 6,189
-------- --------
102,213 111,250
Less accumulated depreciation............................... (7,766) (13,491)
-------- --------
$ 94,447 $ 97,759
======== ========
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1997, 1998 and 1999 was $1,087, $4,336 and $5,809, respectively.
6. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Finished goods.............................................. $13,772 $18,085
Work-in-process............................................. 5,386 6,120
Raw materials............................................... 7,398 9,205
------- -------
$26,556 $33,410
======= =======
</TABLE>
7. ACQUISITIONS/INTANGIBLE ASSETS
Goodwill and Product Rights:
On November 12, 1999, the Company purchased the rights, title and interest
to the Tigan product line from Roberts Pharmaceuticals, Inc. for a purchase
price of $6,493, including $93 related to the forgiveness of certain
indebtedness owed by the Company. The purchase price is being amortized over its
estimated useful life of 20 years. The acquisition was financed through
borrowings on the Company's revolving credit facility.
On July 30, 1999, the Company purchased the rights, title and interest in
and to the trademark Lorabid within the United States and Puerto Rico, from Eli
Lilly and Company for a purchase price of $90,500, plus acquisition costs of
$1,299 and sales performance milestones. The sales performance milestones could
bring the total price to $158,000 if the Company achieves annual product sales
of $140,000. The entire purchase price of $90,500 was allocated to intangible
assets and is being
F-12
<PAGE> 13
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amortized over its estimated useful life of 25 years for goodwill and 15 years
for amounts allocated to the patents. The acquisition was financed through
borrowings on the Company's revolving credit facility.
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.
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.
The following unaudited pro forma summary presents the financial
information as if the acquisitions had occurred on January 1, 1998 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, 1998, nor is it indicative of future results.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
---------------------------
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Total revenues.............................................. $406,294 $416,934
======== ========
Net income.................................................. $ 36,470 $ 60,653
======== ========
Basic and diluted income per common share................... $ 0.47 $ 0.77
======== ========
</TABLE>
In October 1989, the Company received FDA approval to market Adenocard in
the United States. The Company entered into agreements with Fujisawa USA, Inc.
("Fujisawa") for the manufacture and marketing of Adenocard in the United States
and Canada and receives royalties from Fujisawa based on a percentage of
Adenocard net sales. The Company has also entered into an agreement with Sanofi
Pharma (France) (Sanofi) for the manufacture and marketing of Adenocard in all
countries other than the United States and Canada. In September 1991, Sanofi
received marketing approval (under the trade name Adenocor) in the United
Kingdom and, in May 1992, received marketing approval (under the trade name
Krenosin) in Switzerland. The Company receives royalties from Sanofi based on a
percentage of Adenocor and Krenosin sales. One half of all royalties received
from Adenocard, Adenocor and Krenosin sales are payable by the Company to the
F-13
<PAGE> 14
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
University of Virginia Alumni Patents Foundation from which the Company acquired
rights to Adenocard.
In 1988, the Company entered into a Development and License Agreement (the
"Agreement") with Fujisawa that provides for Fujisawa to fund one-half of the
development costs (as incurred) of Adenoscan, and other products. Under the
agreement, Fujisawa will have manufacturing and marketing rights to these drugs
in the United States and Canada upon the Company's receipt of the required
regulatory approvals, and will pay the Company royalties based on sales of these
drugs. Royalties received by the Company from sales of these drugs outside of
the United States and Canada will be shared equally with Fujisawa. In May 1995,
the FDA granted marketing clearance for Adenoscan in the United States. In May
1996, the parties entered into an agreement to jointly develop adenosine-based
products having indications as cardioprotective agents. In March 1998, Fujisawa
on behalf of itself and the Company, licensed additional intellectual property
rights for intravenous adenosine in cardiac imaging and the right to use
intravenous adenosine as a cardioprotectant in combination with thrombolytic
therapy, balloon angioplasty and coronary bypass surgery and secured
intellectual property rights to extend the exclusivity of Adenoscan until 2015.
Pursuant to the Agreement and the May 1996 agreement, the Company paid its 50%
share of the one-time up-front fee due to the licensor, which the Company
capitalized and is amortizing over the life of the patents, and is obligated to
pay its 50% share of a 6% royalty on Adenoscan net sales to this third party.
In June 1998, Fujisawa assigned and transferred to the Company all of its
right, title and interest in the May 1996 cardioprotective product development
agreement, including all of Fujisawa's related scientific data and intellectual
properties in the United States and Canada. In the event that the Company
markets an adenosine-containing cardioprotective product, Fujisawa will receive
an 8% royalty on the Company's net sales. In the event that the Company licenses
a third party to sell such product, Fujisawa will receive 25% of licensing fees,
milestone payments, royalties, and other considerations received by the Company
from such third party after the Company has recouped $2,000 toward its
investment plus its substantiated future development costs. Also in June 1998,
the Company transferred the NDA for Adenocard and Adenoscan to Fujisawa and
provided assistance to Fujisawa in connection with the contract manufacturing
agreement for both products with a third party.
Intangible assets consist of the following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Altace, Silvadene, AVC...................................... $362,950 $362,950
Lorabid..................................................... -- 91,799
Sterile Products............................................ 54,509 54,509
Septra, Proloprim, Mantadil, Kemadrin....................... 15,425 15,425
Cortisporin................................................. 23,694 23,694
Other....................................................... 30,566 37,059
Patents, trademark and distribution rights.................. 2,514 2,514
-------- --------
489,658 587,950
Less accumulated amortization............................... (7,446) (29,395)
-------- --------
$482,212 $558,555
======== ========
</TABLE>
F-14
<PAGE> 15
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amortization expense for the years ended December 31, 1997, 1998, and 1999
was $1,984, $5,627, and $21,925, respectively.
8. 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, 1999 for
leases with initial or remaining terms in excess of one year are as follows:
<TABLE>
<S> <C>
2000........................................................ $4,676
2001........................................................ 3,554
2002........................................................ 2,342
2003........................................................ 1,387
2004........................................................ 397
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $349, $2,004, and $4.020, 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, 1997, 1998
and 1999 was approximately $44, $40 and $40, respectively. As of December 31,
1999 estimated future minimum rental payments to be received each year from 2000
to 2004 is $40.
Capital lease obligations for certain equipment as of December 31, 1999 are
as follows:
<TABLE>
<S> <C>
2000........................................................ $ 628
2001........................................................ 447
2002........................................................ 292
2003........................................................ 160
------
Total minimum lease payments................................ 1,527
Less imputed interest....................................... 86
------
Present value of minimum lease payments..................... 1,441
Less current maturities..................................... 562
------
$ 879
======
</TABLE>
9. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Product returns and chargebacks............................. $ 9,397 $16,822
Rebates..................................................... 266 12,507
Accrued interest............................................ 1,176 6,517
Other....................................................... 9,693 17,889
------- -------
$20,532 $53,735
======= =======
</TABLE>
F-15
<PAGE> 16
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Senior Credit Facility:
Revolving Credit Facility................................. $ 19,000 $ 45,000
Tranche A Term Loan....................................... 150,000 97,235
Tranche B Term Loan....................................... 275,000 269,921
Senior Subordinated Notes with interest at 10 3/4% payable
semiannually due March 2009............................... -- 150,000
Senior Subordinated Notes due to seller paid in March
1999...................................................... 75,000 --
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........................... 5,163 4,247
Note payable to shareholder, paid March 1999................ 1,750 --
Various capital leases with interest rates ranging from 8.3%
to 12.7% and maturing at various times through 2002....... 1,849 1,441
Other notes payable......................................... 35 13
-------- --------
527,797 567,857
Less current portion................................. 13,310 14,502
-------- --------
$514,487 $553,355
======== ========
</TABLE>
On March 3, 1999, the Company issued $150,000 of 10 3/4% 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 a
note due to seller ($75,000). The debt is guaranteed by the Company's wholly
owned subsidiaries.
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, as amended, provides for up
to $525,000 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 $100,000 (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, 1999, the Company had $55,000 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 until December 22, 2004.
The Tranche B Term Loan is subject to certain specified amortization payments
required to be made in quarterly installments 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.
F-16
<PAGE> 17
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 interest rates for borrowings under the Revolving Credit Facility, the
Tranche A Term Loan and the Tranche B Term Loan as of December 31, 1999 were
9.71%, 9.74% and 10.24%, respectively.
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 Company's debt agreements contain covenants which, among other things,
require the Company to comply with certain financial and other covenants. The
financial covenants require the maintenance of certain ratios including interest
coverage and leverage as defined in the agreements. As of December 31, 1999 the
Company has complied with the covenants.
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 7), and pay off a $40,000 term loan
and outstanding borrowings under a revolving credit facility as of February 27,
1998. The Credit Agreement was paid in full on December 22, 1998, with proceeds
from the Senior Credit Facility.
The Company has entered into several interest rate swap agreements
designated as a partial hedge of the Company's variable interest 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, 1999, the
Company had interest rate swaps with notional amounts aggregating $285,000.
Under these agreements, the Company pays a weighted average fixed rate of 5.78%
and receives a rate equivalent to the three-month and one-month LIBOR. The
notional amounts do not represent the amounts exchanged by the parties. The
agreements expire between 2004 and 2006.
On November 12, 1999, the Company entered into an interest rate swap
agreement related to its fixed rate senior subordinated notes. The notional
amount at December 31, 1999 was $150.0 million and the agreement expires in
2009. Under this agreement the Company exchanged its fixed rate 10.75% for a
floating rate based on LIBOR with the floating rate being fixed at 9.89% through
November 15, 2002. Thereafter the Company pays a floating rate based on the
three month LIBOR.
F-17
<PAGE> 18
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt (including capital lease
obligations -- Note 8) at December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000...................................................... $ 14,502
2001...................................................... 19,576
2002...................................................... 24,553
2003...................................................... 29,623
2004...................................................... 28,315
Thereafter................................................ 451,288
--------
$567,857
========
</TABLE>
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.
Cash and Cash Equivalents, Trade Receivables, Royalty Receivable and
Accounts Payable. The carrying amounts of these items are a reasonable estimate
of their fair values.
Investments. The fair value of investments was based primarily on quoted
market prices (see Note 4). If quoted market prices are not readily available,
fair values are based on quoted market prices of comparable instruments.
Long-Term Debt. The fair value of the Company's long-term debt, including
the current portion, at December 31, 1998 and 1999, is estimated to be
approximately $527,500 and $563,300, 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 and 1999, as determined by the issuing
financial institution and based on the estimated termination values, was an
unrealized loss of approximately $2,787 and an unrealized gain of $1,045,
respectively.
12. INCOME TAXES
The net income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------- -------
<S> <C> <C> <C>
Current.................................................... $5,237 $17,890 $31,356
Deferred................................................... (980) (2,263) (1,370)
------ ------- -------
Total expense.................................... $4,257 $15,627 $29,986
====== ======= =======
</TABLE>
F-18
<PAGE> 19
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the difference between the federal statutory tax rate
and the effective income tax rate as a percentage of income before income taxes
and extraordinary item is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- ----
<S> <C> <C> <C>
Federal statutory tax rate.................................. 34.0% 35.0% 35.0%
State income taxes, net of federal benefit.................. 3.0 3.3 3.0
Change in valuation allowance............................... (15.5) (10.3) --
Permanent differences....................................... 0.4 0.1 (0.6)
Other....................................................... (1.7) (0.8) (0.7)
----- ----- ----
Effective tax rate........................................ 20.2% 27.3% 36.7%
===== ===== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liability are as follows:
<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
Accrued expenses............................................ $ 5,307 $ 13,809
State net operating loss carryforward....................... 793 1,648
Tax credit carryforwards.................................... 1,264 1,436
Other....................................................... 949 834
------- --------
Total deferred tax assets......................... 8,313 17,727
------- --------
Property, plant and equipment............................... (3,792) (6,922)
Intangible assets........................................... (3,721) (8,635)
Miscellaneous............................................... (165) (165)
------- --------
Total deferred tax liabilities.................... (7,678) (15,722)
------- --------
Net deferred tax asset............................ $ 635 $ 2,005
======= ========
</TABLE>
The Company's state net operating loss carryforward of approximately
$50,000 expires in 2014. 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.
At December 31, 1998 and 1999, the Company had federal tax credit
carryforwards of approximately $974 and $1,436 which expire through 2019.
13. BENEFIT PLANS
The Company maintains two defined contribution employee benefit plans which
covers substantially all employees. The plans allows for employees' salary
deferrals, which are matched by the Company up to a specific amount under
provisions of the plans. Company contributions during the years ended December
31, 1997, 1998 and 1999, were $335, $1,093 and $1,531, respectively. The plans
also provides for discretionary profit-sharing contributions by the Company.
14. COMMITMENTS AND CONTINGENCIES
Agreements with Fujisawa:
In June 1998, the Company received a $4,000 payment from Fujisawa for the
transfer of the Adenoscan and Adenocard NDAs and for the assistance provided by
the Company to Fujisawa in
F-19
<PAGE> 20
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
connection with its contract manufacturing agreement with a third party relating
to Adenoscan and Adenocard. The Company has included this payment in other
income. Additionally, the Company incurred a one-time charge of $2,361
pertaining to the purchase of Fujisawa's commercialization rights and related
intellectual properties for the cardioprotection application of intravenous
adenosine, which is included in research and development expenses.
In October 1999, Fujisawa entered into a world-wide, exclusive license for
the use of adenosine under U.S. Patent No. 4,824,660 ("the '660 patent") over
the seven year remaining life of the '660 patent. Fujisawa sub-licensed the
Company under the '660 patent and the Company is obligated to pay Fujisawa
sub-license fees of $2,250, of which $500 was paid in 1999. This license fee is
included in 1999 research and development expenses.
Patents, Trademarks and Distribution Rights:
The Company is engaged in the development of new prescription drugs in
pursuit of obtaining governmental marketing approvals in the United States and
other countries. The Company acquires from third parties exclusive rights to
develop and market various drugs, including related patents and trademarks
(where applicable), and develops drugs and seeks patents and trademarks for its
products on a proprietary basis. Agreements under which the Company acquires
such rights from third parties generally require the Company to finance the
costs of clinical trials and the filing of New Drug Applications ("NDAs") with
the United States Food and Drug Administration ("FDA") and, in some instances,
comparable applications with appropriate regulatory agencies in other countries.
The Company is also typically required to pay royalties to such third parties
based on sales of the applicable approved drugs. The Company also may be
obligated to pay to third parties advance royalties or licensing fees, some of
which may be based on the attainment of specified milestones.
Under present agreements with third parties, the Company has obligations as
of December 31, 1999 to pay $1,900 in nonrefundable payments which are payable
through April 25, 2006. At December 31, 1999, approximately $400 of this
obligation is included in accounts payable and accrued expenses and the
remaining obligation of $1,500 is included in other long-term obligations in the
consolidated balance sheet. The Company may also be required to pay a maximum of
$5,500 in nonrefundable payments generally upon the completion of development
milestones and the FDA's approvals of NDAs for certain compounds.
Legal:
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
F-20
<PAGE> 21
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Other:
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
affect on the Company's consolidated financial position, results of operations,
or cash flow.
15. SEGMENT INFORMATION
The Company's business is classified into three reportable segments;
Branded Pharmaceuticals, Contract Manufacturing and Licensed Products. 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,
manufacturing process, method of distribution, and type of customer. Licensed
Products represents the licensed manufacturing and marketing rights to some of
the Company's products to corporate partners in exchange for licensing fees and
royalty payments on future product sales. 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> 22
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following represents selected information for the Company's operating
segments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Total revenues:
Branded pharmaceuticals............................... $37,912 $125,399 $304,004
Licensed Products..................................... 20,000 27,544 31,650
Contract manufacturing................................ 7,962 54,734 70,524
All Other............................................. 3,015 6,453 9,511
Eliminations.......................................... (980) (23,123) (35,768)
------- -------- --------
Consolidated total revenues........................ $67,909 $191,007 $379,921
======= ======== ========
Gross profit (loss):
Branded pharmaceuticals............................... $33,165 $ 94,452 $234,325
Licensed Products..................................... 17,015 22,671 25,990
Contract manufacturing................................ (187) (531) (4,858)
All Other............................................. 1,897 5,490 5,599
------- -------- --------
Consolidated gross profit.......................... $51,890 $122,082 $261,056
======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Total assets:
Branded pharmaceuticals................................... $522,218 $637,225
Licensed Products......................................... 64,285 77,162
Contract manufacturing.................................... 144,614 168,484
All Other................................................. 1,735 1,070
Eliminations.............................................. (2,500) (2,600)
-------- --------
Consolidated total assets.............................. $730,352 $881,341
======== ========
</TABLE>
Capital expenditures of $1,430, $81,432 and $9,170 for the years ended
December 31, 1997, 1998 and 1999, respectively, are substantially utilized for
contract manufacturing purposes.
16. RELATED PARTY TRANSACTIONS
THE UNITED COMPANY
In connection with its purchase of Cortisporin in 1997, the Company
received $8,750 from The United Company for 6,856,549 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 $994 and $247 for the years ended December
31, 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 remaining balance was paid
in full during 1999.
F-22
<PAGE> 23
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company donated inventory to the private foundation with a cost of
$1,780 in 1999.
For the year ended December 31, 1998 and 1999, the Company paid Bourne &
Co., Inc., an affiliate of a director and since January 1999 an officer of the
Company, $2,475 and $108 for consulting services and the purchase of furniture.
In connection with the Altace Acquisition and related financing, Bourne & Co.,
Inc., received $1,250 in January 1999. For the year ended December 31, 1997, the
Company paid Bourne & Co., Inc., approximately $651 for its advisory services in
the acquisition of the Cortisporin product line and $62 for consulting services.
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. The property was sold in February 2000.
Fees of $24, $108 and $144 as well as related travel expenses were paid in
1999, 1998 and 1997, respectively, to an individual director for consulting with
the Company on matters such as acquisitions, financial public relations and
pending litigation.
17. STOCKHOLDERS' EQUITY
COMMON SHARES
The Company is authorized to issue 150 million shares of no par value
common stock. As of December 31, 1998 and 1999 there were 82,786,023 and
83,136,117 shares outstanding, respectively.
STOCK SPLITS
On June 2, 2000, the Company's Board of Directors declared a three for two
stock split for shareholders of record as of June 12, 2000, to be distributed
June 21, 2000. The stock split has been reflected in all share data contained in
these financial statements.
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.
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.
STOCK OPTION PLANS
In 1989, the Company adopted the 1989 Stock Option and Stock Appreciation
Rights Plan (the "1989 Stock Option Plan"). 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 1989, 1997 and 1998 Stock Option Plans shall not exceed
9,993,319, (2,118,319, 7,200,000 and 675,000, respectively). No Stock
Appreciation Rights have been granted.
During 1998, the Company granted 501,187 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. On March 1, 1999, the Company granted 597,262
options of common stock to employees under the 1997 Stock Option Plan at an
exercise price of $10.722 per share and on November 24, 1999 the Company granted
863,625 options of common stock to employees at an exercise price of $30.0416
per share.
F-23
<PAGE> 24
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1999, the Company had 1,047,053 options outstanding of
which 366,263 are exercisable under the 1989 Stock Option Plan. As a result of
the merger all outstanding options vested immediately and are exercisable.
As of December 31, 1999, the Company had 1,818,441 options outstanding of
which 1,147,013 are vested and exercisable under the 1997 stock option plan.
Options under the 1997 Stock Option Plan vest at various times through 2001 and
expire 10 years from the date of grant.
During 1998, the Company granted 112,500 options of common stock to its
directors under the 1998 Stock Option Plan at an exercise price equal to the
initial public offering price. The options vested immediately upon grant. As of
December 31, 1999, the Company had 112,500 options vested, exercisable and
outstanding. Options under the 1998 Stock Option Plan expire 10 years from the
date of grant.
A summary of the status of the Company's Plans of December 31, 1999 and
changes during the years, ended December 31, 1998 and 1999 are presented in the
table below:
<TABLE>
<CAPTION>
1997 STOCK OPTION 1998 STOCK OPTION 1989 STOCK OPTION
PLAN PLAN PLAN
-------------------- ------------------ -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Shares under option:
Outstanding at January 1, 1997................ -- $ -- -- $ -- $792,578 $ 4.95
Granted..................................... -- -- -- -- 405,501 6.31
Exercised................................... -- -- -- -- (27,366) 4.95
Forfeited, expired or cancelled............. -- -- -- -- (173,451) 6.31
--------- ------ ------- ------ --------- ------
Outstanding at December 31, 1997.............. -- -- -- -- 997,262 5.41
Granted..................................... 501,188 6.23 112,500 6.22 345,555 9.01
Exercised................................... -- -- -- -- (117,471) 4.95
Forfeited, expired or cancelled............. (5,738) 6.22 -- -- (90,875) 6.31
--------- ------ ------- ------ --------- ------
Outstanding at December 31, 1998.............. 495,450 6.23 112,500 6.22 1,134,471 6.31
Granted..................................... 1,460,887 26.22 -- -- 343,239 11.71
Exercised................................... (72,748) 15.95 -- -- (424,209) 4.95
Forfeited, expired or cancelled............. (65,148) 10.22 -- -- (6,449) 8.56
--------- ------ ------- ------ --------- ------
Outstanding at December 31, 1999.............. 1,818,441 $18.48 112,500 $ 6.22 1,047,052 $ 9.01
========= ====== ======= ====== ========= ======
Weighted average fair value of options granted
in 1999..................................... N/A $13.15 N/A $ 6.22 N/A $11.59
========= ====== ======= ====== ========= ======
Options available for grant at December 31,
1999........................................ 5,308,811 N/A 562,500 N/A -- N/A
========= ====== ======= ====== ========= ======
</TABLE>
Options outstanding at December 31, 1999 have exercise prices between $5.92
and $30.04, with a weighted average exercise price of $15.55 and a remaining
contractual life of approximately 8.9 years.
F-24
<PAGE> 25
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, 1999:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Income before extraordinary item:
As reported............................................. $16,825 $41,563 $51,698
======= ======= =======
Pro Forma............................................... $15,662 $39,471 $39,294
======= ======= =======
Net income:
As reported............................................. $16,825 $37,152 $50,993
======= ======= =======
Pro Forma............................................... $15,662 $35,060 $38,589
======= ======= =======
Diluted income per share:
Income before extraordinary item:
As reported............................................. $ 0.24 $ 0.53 $ 0.62
======= ======= =======
Pro Forma............................................... $ 0.23 $ 0.50 $ 0.47
======= ======= =======
Net income:
As reported............................................. $ 0.24 $ 0.47 $ 0.61
======= ======= =======
Pro Forma............................................... $ 0.23 $ 0.45 $ 0.46
======= ======= =======
</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 and 1999: expected lives ranging from 3 to 5
years; expected volatility of approximately 72%; expected dividend yield of $0
and risk-free interest rates ranging from 5.19% to 6.02%.
18. INCOME PER SHARE
The basic and diluted income before extraordinary item per share was
determined as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Income before extraordinary item available to
common shareholders........................... $ 16,825 $ 41,563 $ 51,698
=========== =========== ===========
Basic income per share:
Weighted average common shares................ 69,796,155 78,460,372 82,794,675
----------- ----------- -----------
Basic income per common share................. $ 0.24 $ 0.53 $ 0.63
=========== =========== ===========
Diluted income per share weighted average common
shares........................................ 69,796,155 78,460,372 82,794,675
Effect of stock options....................... 76,270 397,934 868,600
----------- ----------- -----------
Weighted average common shares plus assumed
conversions................................ 69,872,425 78,858,306 83,663,275
----------- ----------- -----------
Diluted income per share...................... $ 0.24 $ 0.53 $ 0.62
=========== =========== ===========
</TABLE>
F-25
<PAGE> 26
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth summary quarterly financial information for
the years ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 BY QUARTER FIRST SECOND THIRD FOURTH
--------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues.................................... $31,356 $46,651 $54,515 $54,485
Gross profit...................................... 22,728 31,684 32,931 34,739
Operating income.................................. 12,452 15,872 18,698 18,155
Income before extraordinary item.................. 7,532 11,610 11,019 11,402
Net income........................................ 7,246 11,610 11,019 7,277
Basic and diluted income per common share(1):
Income before extraordinary item................ 0.10 0.15 0.13 0.15
Net income...................................... 0.10 0.15 0.13 0.09
</TABLE>
<TABLE>
<CAPTION>
1999 BY QUARTER FIRST SECOND THIRD FOURTH
--------------- ------- ------- -------- --------
<S> <C> <C> <C> <C>
Total revenues.................................. $67,569 $84,939 $114,119 $113,294
Gross profit.................................... 50,430 60,227 76,197 74,202
Operating income................................ 27,161 32,984 43,023 33,625
Income before extraordinary item................ 9,508 13,183 18,397 10,610
Net income...................................... 8,803 13,183 18,397 10,610
Basic income per common share(1):
Income before extraordinary item.............. 0.11 0.16 0.22 0.13
Net income.................................... 0.11 0.16 0.22 0.13
</TABLE>
---------------
(1) Quarterly amounts do not add to annual amounts due to the effect of rounding
on a quarterly basis.
20. GUARANTOR FINANCIAL STATEMENTS
The Company's wholly-owned subsidiaries Monarch Pharmaceuticals, Inc.,
Medco Research, Inc., Parkedale Pharmaceuticals, Inc. and King Pharmaceuticals
of Nevada, Inc. (the "Guarantor Subsidiaries") have guaranteed the Company's
performance under the $150,000 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-26
<PAGE> 27
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GUARANTOR SUBSIDIARIES
CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash...................................................... $ 4,742 $ 12,269
Investments, held to maturity............................. 21,434 17,001
Accounts Receivable....................................... 30,559 63,382
Royalty receivable........................................ 8,349 6,691
Inventory................................................. 20,089 27,433
Prepaid expenses and other current assets................. 848 6,382
Deferred income taxes..................................... 458 607
-------- --------
Total current assets.............................. 86,479 133,765
-------- --------
Property, plant, and equipment, net....................... 73,091 75,267
Intangible assets, net.................................... 119,487 120,316
Other assets.............................................. 1,228 2,506
Investments, held to maturity............................. 25,074 33,583
-------- --------
Total assets...................................... $305,359 $365,437
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 8,796 $ 22,275
Current portion of long-term debt......................... -- 27
Accrued expenses and other liabilities.................... 16,082 44,694
Income taxes payable...................................... -- 4,755
-------- --------
Total current liabilities......................... 24,878 71,751
-------- --------
Long-term debt............................................ -- 42
Other long-term liabilities............................... 150 1,500
Intercompany payable...................................... 175,613 57,290
-------- --------
Total liabilities................................. 200,641 130,583
-------- --------
Shareholders' equity...................................... 104,718 234,854
-------- --------
Total liabilities and shareholders' equity........ $305,359 $365,437
======== ========
</TABLE>
F-27
<PAGE> 28
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GUARANTOR SUBSIDIARIES COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
REVENUES:
Total net revenues................................ $57,912 $183,601 $364,825
------- -------- --------
OPERATING COSTS AND EXPENSES:
Cost of sales............................................. 4,804 60,053 104,187
Royalty expense........................................... 2,985 4,873 5,661
Selling, general, and administrative...................... 12,898 24,728 67,653
Depreciation and amortization............................. 2,045 7,973 14,824
Research and development expense.......................... 6,328 9,740 13,673
------- -------- --------
Total operating costs and expenses................ 29,060 107,367 205,998
------- -------- --------
OPERATING INCOME............................................ 28,852 76,234 158,827
OTHER (EXPENSES) INCOME..................................... 605 (10,590) 127
------- -------- --------
Income before income taxes................................ 29,457 65,644 158,954
------- -------- --------
Income tax expense........................................ 7,624 19,260 31,687
------- -------- --------
NET INCOME........................................ $21,833 $ 46,384 $127,267
======= ======== ========
</TABLE>
F-28
<PAGE> 29
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GUARANTOR SUBSIDIARIES COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
------------------------------
1997 1998 1999
------- --------- --------
<S> <C> <C> <C>
Net income.................................................. $21,833 $ 46,384 $127,267
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization and Depreciation............................. 2,045 7,973 14,824
Loss on disposition of assets............................. -- -- 143
Changes in operating assets and liabilities:
Accounts payable.......................................... 3,833 5,379 18,505
Inventory................................................. (4,999) (15,090) (7,344)
Prepaid expenses and other assets......................... (5,149) (1,425) (1,224)
Accrued expenses.......................................... 4,664 6,968 25,404
Income taxes.............................................. -- (1,686) 4,204
Accounts receivable....................................... (6,193) (25,241) (31,258)
------- --------- --------
Net cash provided by operating activities......... 16,034 23,262 150,521
------- --------- --------
Cash flow from investing activities:
Purchase of investment securities......................... (20,162) (34,293) (25,592)
Proceeds from maturity or sale of investments............. 8,479 25,922 21,500
Merger related costs...................................... (715)
Process from sale of property and equipment............... -- 14 2
Purchases of intangible assets............................ (65,286) (60,901) (6,400)
Purchases of property and equipment....................... (101) (75,658) (6,584)
------- --------- --------
Net cash used in investing activities............. (77,070) (144,916) (17,789)
------- --------- --------
Cash flows from financing activities:
Increase (decrease) in inter-company payable.............. 52,236 128,271 (123,218)
Increase (decrease) in long-term debt..................... 1,762 (1,762) 69
Proceeds from exercise of stock options and warrants...... 5,113 1,293 297
Purchase of stock held in treasury........................ (4,455) (4,132) (2,353)
------- --------- --------
Net cash provided by (used in) financing
activities...................................... 54,656 123,670 (125,205)
------- --------- --------
Change in cash and cash equivalents......................... (6,380) 2,016 7,527
Cash and cash equivalents at beginning of period............ 9,106 2,726 4,742
------- --------- --------
Cash and cash equivalents at end of period.................. $ 2,726 $ 4,742 $ 12,269
======= ========= ========
</TABLE>
21. SUBSEQUENT EVENTS
On February 25, 2000, the Company completed a merger with Medco Research,
Inc. ("Medco") by exchanging 7,221,125 (10,831,688 post-split) shares of it
common stock for all of the common stock of Medco. Each share of Medco was
exchanged for .6757 (1.0136 for 1 post-split) of one share of King common stock.
In addition, outstanding Medco stock options were converted at the same exchange
rate into options to purchase approximately 695,164 (1,042,746 post-split)
shares of King common stock.
The merger has been accounted for as a pooling of interests. In connection
with this transaction the Company expects to charge to expense between $16,000
and $24,000 of merger related costs in the first quarter of 2000.
F-29
<PAGE> 30
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 2000, the Company paid $2,823 to a director for services
performed in connection with the successful completion of the merger.
The following information presents certain unaudited financial statement
data of the separate companies as of December 31, 1998, 1999 and for the three
years in the period ended December 31, 1999, preceding the merger:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Net revenues:
King...................................................... $47,909 $163,463 $348,271
Medco..................................................... 20,000 27,544 31,650
------- -------- --------
$67,909 $191,007 $379,921
======= ======== ========
Net income:
King...................................................... $ 6,612 $ 20,910 $ 44,949
Medco..................................................... 10,213 16,242 6,044
------- -------- --------
$16,825 $ 37,152 $ 50,993
======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Total assets
King...................................................... $668,171 $805,689
Medco..................................................... 62,181 75,652
-------- --------
$730,352 $881,341
======== ========
</TABLE>
In March 2000, the United States Food and Drug Administration notified the
Company that the methods, facilities and control used by the Parkedale facility
in the manufacture, processing and packaging of Fluogen(R), the Company's
influenza virus vaccine, were not in compliance with current Good Manufacturing
Practices ("cGMP"). The FDA therefore informed Parkedale that it must suspend
production and distribution of Fluogen(R) until the Parkedale facility meets the
applicable cGMP standards for the manufacture and distribution of Fluogen(R).
The FDA has received the Company's initial response to its March 10 notification
and following discussions with the FDA, the Company has filed with the FDA its
written certification of conformance that the Company is now sufficiently in
compliance with cGMP manufacturing standards to resume the manufacture of
Fluogen(R) and the Company has now resumed the manufacture of Fluogen(R). The
distribution of Fluogen(R) remains suspended pursuant to the FDA's order. The
Company cannot resume the distribution of Fluogen(R) until the FDA conducts an
on-site inspection of the Parkedale facility and finds the facility in
substantial compliance with cGMPs. The Company is working to meet all of the
FDA's requirements to resume distribution of Fluogen(R), which can occur upon
the FDA's verification that Parkedale has satisfactorily completed all required
corrective measures and is in substantial compliance with cGMP standards.
Fluogen(R)'s gross sales totaled $32.0 million, while net sales equaled $28.7
million, for the year ended December 31, 1999. Gross profit for Fluogen(R)
equaled $6.9 million for the same period. While the Company is pursuing all
actions reasonably necessary to assure Fluogen(R)'s availability during the
upcoming flu season commencing in September 2000, the Company cannot be sure
that it will be able to satisfy the FDA's concerns respecting the cGMP standards
applicable to Fluogen(R). Consequently, the Company cannot be sure that it will
be able to market or distribute any amount of vaccine, if at all, in the future.
F-30
