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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-24425
KING PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 54-1684963
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
501 FIFTH STREET
BRISTOL, TENNESSEE 37620
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (423) 989-8000
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
THE AGGREGATE MARKET VALUE OF THE SHARES OF COMMON STOCK HELD BY
NONAFFILIATES OF THE REGISTRANT AS OF MARCH 8, 2000 IS APPROXIMATELY
$1,545,000,000. (For purposes of this calculation only, all executive officers
and directors are classified as affiliates.)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. OUTSTANDING AT MARCH 8, 2000,
COMMON STOCK, NO PAR VALUE, 55,546,468.
Documents Incorporated by Reference: NONE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
King Pharmaceuticals, Inc. was incorporated in the State of Tennessee
in 1993. Our principal executive offices are located at 501 Fifth Street,
Bristol, Tennessee 37620. Our telephone number is (423) 989-8000 and our
facsimile number is (423) 274-8677. Our wholly-owned subsidiaries are Monarch
Pharmaceuticals, Inc.; Parkedale Pharmaceuticals, Inc.; Medco Research, Inc.
(acquired February 25, 2000); and King Pharmaceuticals of Nevada, Inc.
We are a vertically integrated pharmaceutical company that develops,
manufactures, markets and sells branded prescription pharmaceutical products.
Through a national sales force of approximately 300 representatives and
copromotion arrangements, we market our branded pharmaceutical products to
general/family practitioners and internal medicine physicians and hospitals
across the country. Our primary business strategy is to acquire established
branded pharmaceutical products and to increase their sales by focused marketing
and promotion and through product life cycle management. In pursuing
acquisitions, we seek to capitalize on opportunities in the pharmaceutical
industry created by cost containment initiatives and consolidation among large,
global pharmaceutical companies. We also create value by developing product line
extensions for our branded pharmaceutical products such as new formulations,
dosages or new indications. These product line extensions are attractive for us
because they may have market exclusivity or sales levels that do not attract
significant competition. In addition to branded pharmaceuticals, we also provide
contract manufacturing for a number of the world's leading pharmaceutical and
biotechnology companies, including Amgen, Inc., Warner-Lambert Company,
Centocor, Inc., Mallinckrodt Chemical Inc., Genetics Institute, Inc. and
Hoffman-LaRoche, Inc.
Cost containment initiatives and consolidation among large, global
pharmaceutical companies have created substantial opportunities for us to
acquire established branded pharmaceutical products. We generally seek branded
pharmaceutical products that:
- have some patent protection or potential for market
exclusivity;
- lend themselves to product life cycle management;
- can benefit from focused marketing efforts including
sampling, advertising and direct mail; or
- complement our existing product lines.
Consistent with our strategy to acquire established branded
pharmaceutical products, we have acquired 36 branded pharmaceutical products
since December 1994.
RECENT DEVELOPMENTS
In March 2000, the United States Food and Drug Administration, which
we refer to in this report as the "FDA," concluded that the methods, facilities
and controls used by Parkedale in the manufacture, processing and packaging of
Fluogen(R) were not in compliance with current Good Manufacturing Practices,
which we refer to in this report as "cGMP," requirements. The FDA therefore
informed Parkedale that it must suspend production and distribution of
Fluogen(R) until the Parkedale facility meets the applicable cGMP standards. The
production and distribution of Fluogen(R) is currently suspended pursuant to the
FDA's order. We are working to meet all of the FDA's requirements for the
production and distribution of Fluogen(R) to resume, which can occur upon the
FDA's verification that Parkedale has substantially complied with all required
corrective measures. 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. We generally recognize
revenue from Fluogen(R) during the third and fourth quarters of each calendar
year. We are presently evaluating strategies pertaining to Fluogen(R).
Presently, we intend to pursue all actions reasonably necessary to assure
Fluogen(R)'s availability during the upcoming flu season commencing in September
2000.
On February 25, 2000 we acquired Medco in an all stock transaction
accounted for as a pooling of interests valued at approximately $366 million.
Medco is now one of our wholly-owned subsidiaries. Medco is engaged in the
development and global commercialization of cardiovascular medicines and
adenosine-receptor technologies. Medco's products and the related intellectual
property rights are typically obtained under license from academic or corporate
sources who have received United States patents. Medco then sponsors and directs
any additional preclinical studies and clinical testing needed for product
registration and marketing approval. These late-stage product development
activities are outsourced to independent clinical research organizations to
maximize efficiency and minimize internal overhead. Historically Medco has
licensed the manufacturing and marketing rights to its products to corporate
partners in exchange for licensing fees and royalty payments on future product
sales. A portion of formulation development, as well as microbiology, chemistry,
manufacturing and controls information, are typically provided by Medco's
licensed corporate partner, and Medco then submits to the FDA, a New Drug
Application, which we refer to in this report as an "NDA," to obtain the FDA's
clearance to market the drug. Medco has successfully developed two
adenosine-based products, Adenocard(R) and Adenoscan(R). The NDAs for
Adenocard(R) and Adenoscan(R) are held by Fujisawa Healthcare, Inc. and Medco
receives a royalty based on the sales of the products.
On January 21, 2000, we filed a registration statement with the SEC
which allows us to offer up to $350.0 million from offerings of common stock,
preferred stock, debt securities and debt warrants at the time and in the
amounts we deem appropriate. To date, none of these securities have been issued.
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COMPLETED ACQUISITIONS
Information regarding certain of our acquisitions is set forth below:
<TABLE>
<CAPTION>
DATE OF
SELLER PRODUCTS ACQUIRED(1) ACQUISITION PURCHASE PRICE
- ------ -------------------- ----------- --------------
<S> <C> <C> <C>
Eli Lilly Company....................... Lorabid(R) August 1999 90.5 million(2)
Hoechst Marion Roussel, Inc. ........... Altace(R), Silvadene(R),AVC(TM) December 1998 362.5 million
Warner-Lambert Company ................. Fluogen(R), Anusol-HC(R),
Procanbid(R), February 1998 125.0 million(3)
Pitocin(R) and others
Glaxo Wellcome, Inc .................... Septra(R), Proloprim(R),
Mantadil(R), November 1997 23.0 million
Kemadrin(R), Neosporin(R),
Polysporin(R)(4)
Glaxo Wellcome.......................... Cortisporin(R)product line March 1997 22.8 million
</TABLE>
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(1) For additional information, see Note 6 to the notes to consolidated
financial statements.
(2) Plus sales performance milestones that, if met, would bring the total
value of the transaction to $158 million.
(3) The purchase price includes the acquisition of the Parkedale facility
and certain manufacturing contracts for third parties.
(4) We acquired the exclusive licenses, free of royalty obligations, to
market and manufacture prescription formulations of Neosporin(R) and
Polysporin(R).
INDUSTRY
Growth in the pharmaceutical industry is being driven primarily by: (i)
the aging population; (ii) technological breakthroughs which have increased the
number of ailments which can be treated with or prevented by drugs; (iii)
managed care's preference for drug therapy over surgery since drug therapy is
generally less costly; and (iv) direct-to-consumer television advertising which
has increased public awareness of available drug therapies.
During the past decade, the pharmaceutical industry has been faced with
cost containment initiatives from government and managed care organizations and
has begun to consolidate. Consolidation is being driven by a desire among
pharmaceutical companies to reduce costs through economies of scale and
synergies, to add previously lacking U. S. or European sales strength or to add
promising product pipelines or manufacturing capabilities in key therapeutic
categories.
Industry consolidation and cost containment pressures have increased
the level of sales necessary for an individual product to justify active
marketing and promotion from large pharmaceutical companies. This has led large
pharmaceutical companies to focus their marketing efforts on drugs with high
volume sales, newer or novel drugs which have the potential for high volume
sales and products which fit within core therapeutic or marketing priorities. As
a result, major pharmaceutical companies increasingly have sought to divest
small or non-strategic product lines which can be profitable for emerging
pharmaceutical companies, like us, to manufacture and market.
PRODUCTS AND PRODUCT DEVELOPMENT
We market a variety of branded prescription products primarily over
four therapeutic areas, including cardiovascular products (e.g., Altace(R)),
anti-infective products (e.g., Lorabid(R)), vaccines and biologicals (e.g.,
Fluogen(R)) and women's health products (e.g., Pitocin(R)). Our branded
pharmaceutical products are generally in high volume categories and are well
known for their indications (e.g., Altace(R) and Lorabid(R)). Additionally, many
of our
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branded products have limited or no generic competition, including patent
protected products, vaccines and biologicals that have no generic equivalent or
products that are difficult to formulate (e.g., creams, ophthalmic suspensions).
Branded pharmaceutical products represented 87% and 77% of our net revenues for
the years ended December 31, 1999 and 1998.
Cardiovascular products. Altace(R), an Angiotensin Converting Enzyme
("ACE") inhibitor, is our primary product within this category. In August 1999,
the results of the Heart Outcomes Prevention Evaluation Study were released. The
study determined that Altace(R) significantly reduces the rates of death,
myocardial infarction, and stroke in a broad range of high-risk heart patients.
We submitted a Supplemental New Drug Application to the FDA on January 18, 2000
to request approval for new and unique indications for Altace(R). The
indications sought are for the significant reduction of mortality, myocardial
infarction, stroke, revascularization procedures and heart failure in patients
at risk for such cardiovascular events. We are evaluating alternative marketing
strategies for Altace(R). In February 1998, we acquired Procanbid(R) from
Warner-Lambert. Procanbid(R) is a branded pharmaceutical product used to treat
arrhythmia. Thalitone(R)is a hypertension diuretic tablet indicated for the
management of hypertension with patent protection through 2007.
Anti-infective products. Our anti-infective products are marketed
primarily to general/family practitioners and internal medicine physicians and
are prescribed to treat uncomplicated infections of the respiratory tract,
urinary tract, eyes, ears and skin. Our products are generally in
technologically mature product segments and as a result have limited product
risk. Lorabid(R) is our largest product in the category while Cortisporin(R) has
become our second largest product in this category. Lorabid(R) is indicated for
the treatment of patients with mild to moderate infections caused by susceptible
strains of bacteria in the upper and lower respiratory tract, the skin and the
urinary tract.
Vaccines and biologicals. Fluogen(R), one of the products acquired in
February 1998 from Warner-Lambert, is a trivalent influenza virus vaccine. In
March 2000, we received written notice from the FDA that we must suspend the
production of Fluogen(R) until certain production issues have been
satisfactorily addressed. More information about the FDA's communication appears
in the section below called "Government Regulation."
Women's health. We have a number of leading brand-name products in this
category including Pitocin(R), the most recognized brand name in labor
induction, and Anusol-HC(R), which is the number one prescribed hemorrhoidal
product, according to industry sources. Both of these products have been on the
market for many years and we believe were underpromoted by their previous
owners.
In an effort to further strengthen our women's health franchise, we
acquired Menest(R) from SmithKline in June 1998. We previously manufactured this
product for SmithKline. Menest(R) competes in the growing $2 billion estrogen
replacement category. Menest(R) is well positioned in this category because the
primary ingredient in the market leader's product is derived from the urine of
pregnant mares. In contrast, Menest(R)'s active ingredient is derived from
Mexican yams.
Certain of our products are described below:
<TABLE>
<CAPTION>
COMPANY ACQUIRED FROM
PRODUCT AND DATE OF ACQUISITION PRODUCT DESCRIPTION AND INDICATION
Cardiovascular Products
<S> <C> <C>
Altace(R)(1)................ Hoechst Marion A hard-shell capsule for oral administration
Roussel, Inc. indicated for the treatment of hypertension.
(December 1998)
Thalitone(R)(2)............. Horus Therapeutics, Inc. A hypertension-diuretic tablet indicated for
(December 1996) the management of hypertension, either alone
or in combination with other
antihypertensive drugs, and for edema
associated with congestive heart failure and
various forms of renal dysfunction.
Procanbid(R)................ Warner-Lambert A procainamide extended-release tablet
(February 1998) indicated for the treatment of documented
ventricular arrhythmia, such as sustained
ventricular tachycardia, that, in the
judgment of a physician, are
life-threatening.
Adrenalin(R)................ Warner-Lambert A sterile solution made from the active
(February 1998) principle of the adrenal medulla used to
relieve respiratory distress and
hypersensitivity reactions and restore
cardiac rhythm in cardiac arrest due to
various causes.
</TABLE>
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<TABLE>
<S> <C> <C>
Anti-Infective Products
Lorabid(R)................. Eli Lilly Company A capsule and suspension product
(August 1999) indicated for the treatment of patients with
mild to moderate infections caused by
susceptible strains of bacteria in the upper
and lower respiratory tract, the skin and
the urinary tract.
Cortisporin(R)............. Glaxo Wellcome A full line of prescription antibiotic and
(March 1997) anti-inflammatory formulations of ophthalmic
ointments and suspensions, otic solutions
and suspensions, and topical creams and
ointments indicated for the treatment of
corticosteroid-responsive dermatoses with
secondary infections.
Viroptic(R)................. Glaxo Wellcome A sterile solution indicated for the
(May 1997) treatment of ocular Herpes simplex virus,
idoxuridine-resistant Herpes and
vidarabine-resistant Herpes. In November
1997, the FDA approved the expanded use of
Viroptic to include pediatric patients, ages
six and above.
Neosporin(R)(3)............. Glaxo Wellcome A prescription strength ophthalmic ointment
(March 1997) and solution indicated for the topical
treatment of ocular infections. It is also
formulated as a prescription strength
genito-urinary concentrated sterile irrigant
indicated for short-term use as a continuous
irrigant or rinse to help prevent infections
associated with the use of indwelling
catheters.
Polysporin(R)(3)............ Glaxo Wellcome A prescription strength wide range
(November 1997) antibacterial sterile ointment indicated for
the topical treatment of superficial ocular
infections.
Vira-A(R)................... Warner-Lambert An antiviral ointment indicated for the
(February 1998) topical treatment of ocular infections
caused by the Herpes simplex virus types 1
and 2.
Chloromycetin(R)............ Warner-Lambert A broad spectrum antibiotic ophthalmic
(February 1998) ointment and solution indicated for the
treatment of serious bacterial infections
that are not responsive to other antibiotics
or when other antibiotics are
contraindicated. This product is also
available in an otic solution and sterile
injectable form for intravenous
administration in the treatment of acute
infections caused by salmonella and
meningeal infections.
Septra(R)................... Glaxo Wellcome An antibiotic indicated for the treatment of
(November 1997) infectious diseases, including urinary tract
infections, pneumonia, enteritis and ear
infections in adults and children.
Coly-Mycin(R)............... Warner-Lambert An antibiotic sterile parenteral indicated
(February 1998) for the treatment of acute or chronic
infections due to sensitive strains of
certain gram-negative bacteria and a sterile
aqueous suspension for the treatment of
superficial bacterial infections of the
external auditory canal.
Silvadene(R)(4)............. HMR A topical antimicrobial cream indicated as
(December 1998) an adjunct for the prevention and treatment
of wound sepsis in patients with second-and
third-degree burns.
Women's Health Products
Pitocin(R).................. Warner-Lambert A sterile hormone solution used to initiate
(February 1998) or improve uterine contractions during labor
and to control bleeding or hemorrhage in the
mother after childbirth.
Menest(R)................... SmithKline A film-coated esterified estrogen tablet for
(June 1998) the treatment of vasomotor symptoms of
menopause, atrophic vaginitis, kraurosis
vulvae, female hypogonadism, female
castration, primary ovarian failure, breast
cancer and prostatic carcinoma.
AVC(TM)(4)................... HMR Cream and suppositories for vaginal
(December 1998) administration as indicated for the
treatment of Candida albicans infections.
Anusol-HC(R)................ Warner-Lambert A suppository and cream indicated for the
(February 1998) relief of inflammation accompanying
hemorrhoids (piles), post-irradiation
proctitis, cryptitis and other inflammatory
conditions of the anorectum.
Vaccines and Biologicals
Fluogen(R)(5)............... Warner-Lambert A trivalent vaccine for immunization against
(February 1998) influenza (flu); composition of the vaccine
is determined each year by the Centers for
Disease Control and Center for Biologics
Evaluation and Research.
Aplisol(R)................. Warner-Lambert A sterile aqueous solution of purified
(February 1998) protein fraction for intradermal
administration as an aid in the diagnosis of
tuberculosis.
</TABLE>
(1) We acquired licenses for the exclusive rights in the United States
under various HMR patents to the active ingredient in Altace(R).
(2) We acquired the trademark and patents for this product from Boehringer
Ingelheim Pharmaceuticals, Inc.
(3) We have exclusive licenses, free of royalty obligations, to manufacture
and market prescription formulations of these products.
(4) We acquired HMR's worldwide rights to these products.
(5) We have currently suspended production of Fluogen(R) pursuant to the
request of the FDA. For more information see "Government Regulations"
below.
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CONTRACT MANUFACTURING
We utilize our excess manufacturing capacity to provide third party
contract manufacturing. We currently provide contract manufacturing for many
pharmaceutical and biotechnology companies, including Amgen, Inc., Warner-
Lambert, Centocor, Inc, Mallinckrodt, Genetics Institute, Inc. and
Hoffman-LaRoche, Inc. Many of the products that we contract manufacture are
difficult to manufacture and, therefore, do not attract significant competition.
Contract manufacturing as a percentage of sales has declined from 85% in 1994 to
10% of net revenues for the year ended December 31, 1999 as we have acquired
branded pharmaceuticals products. Contract manufacturing, however, remains an
important part of our business because it:
- provides a stable, recurring source of cash flows;
- allows us to absorb overhead costs, and as such is an
efficient utilization of excess capacity; and
- provides experience in manufacturing a broad line of
formulations which is advantageous to us in pursuing
and integrating acquired products.
SALES AND MARKETING
We have a national sales force of approximately 300 sales
representatives. We distribute our branded pharmaceutical products primarily
through wholesale drug distributors. These products are ordinarily dispensed to
the public through pharmacies on the prescription of a physician. For branded
pharmaceutical products, our marketing and sales promotions principally target
general/family practitioners and internal medicine physicians through detailing
and sampling to encourage physicians to prescribe more of our products. The
sales force is supported and supplemented by copromotion arrangements,
telemarketing and direct mail, as well as through advertising in trade
publications and representations at regional and national medical conventions.
Our telemarketing and direct mailing efforts are performed primarily by using a
computer sampling system which we developed to distribute samples to physicians.
We identify and target physicians through data available from IMS America, Ltd.
and Scott-Levin, suppliers of prescriber prescription data. We intend to seek
new markets in which to promote our product lines and will continue expansion of
our field sales force as product growth or product acquisitions warrant.
Similar to other pharmaceutical companies, our principal customers are
wholesale pharmaceutical distributors. The wholesale distributor network for
pharmaceutical products has in recent years been subject to increasing
consolidation which has increased our, and other industry participants',
customer concentration. In addition, the number of independent drug stores and
small chains has decreased as retail consolidation has occurred. For the year
ended December 31, 1999, approximately 45.5% of our sales were attributable to
three distributors: McKesson Corporation (18.3%), Bergen Brunswig (14.6%) and
Cardinal/Whitmire (12.6%).
MANUFACTURING
Our two manufacturing facilities are the Bristol facility, located in
Bristol, Tennessee, and the Parkedale facility, located in Rochester, Michigan.
These facilities have in the aggregate approximately one million square feet of
manufacturing, packaging, laboratory, office and warehouse space. We are
licensed by the Drug Enforcement Agency, which we refer to as the "DEA," to
procure and produce controlled substances. We manufacture certain of our
own branded pharmaceutical products as well as products owned by other
pharmaceutical companies under manufacture and supply contracts which expire
over periods ranging from one to four years.
We can produce a broad range of dosage formulations, including sterile
solutions, lyophylized (freeze-dried) products, injectables, tablets and
capsules, liquids, creams and ointments, suppositories and powders. We believe
our manufacturing capabilities allow us to capture higher margins and pursue
product line extensions more efficiently. However, currently 16 of our product
lines, including Cortisporin(R), the six product lines acquired from Glaxo
Wellcome, four of the product lines acquired from Warner-Lambert and all three
of the products, including Altace(R) acquired from HMR and Lorabid(R) acquired
from Eli Lilly and Company, are manufactured in the same facilities or by the
same manufacturer as they were previously manufactured. As of December 31, 1999,
capacity utilization was approximately 60% at the
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Bristol facility and approximately 40% at the Parkedale facility, providing us
with substantial manufacturing capacity for future growth. We intend to
transfer, when advantageous, production of newly acquired branded pharmaceutical
products and their product line extensions to our manufacturing facilities as
soon as practicable after regulatory requirements and contract manufacturing
requirements are satisfied. For example, we anticipate moving the manufacturing
of Altace(R) to the Bristol facility prior to December 31, 2001. Aventis Pharma
AG, successor by merger to HMR, will continue to supply raw materials for the
process and we anticipate that Aventis will continue to be a secondary
manufacturer for this product.
In addition to manufacturing, we have fully integrated manufacturing
support systems including quality assurance, quality control, regulatory
compliance and inventory control. These support systems enable us to maintain
high standards of quality for our products and simultaneously deliver reliable
services and goods to our customers on a timely basis. Companies that do not
have such support systems in-house must out source these services.
We manufacture pharmaceutical products for, among others, Amgen, Inc.,
Warner-Lambert Company, Centocor, Inc., B.V., Fujisawa Healthcare, Inc.,
Genentech, Inc., Genetics Institute, Inc., Hoffman-LaRoche, Inc., Mallinckrodt,
Novartis and Santen Incorporated. Contract manufacturing represented in the
aggregate approximately 10.0% and 19.3% of our net sales for the years ended
December 31, 1999 and 1998.
We require a supply of quality raw materials and components to
manufacture and package drug products for us and for third parties with which we
have contracted. Generally we have not had difficulty obtaining raw materials
and components from suppliers in the past. Currently, we rely on approximately
350 suppliers to deliver the necessary raw materials and components. The loss of
any one of these suppliers is not expected to have a material adverse effect on
our ability to acquire raw materials and components. We have no reason to
believe we will be unable to procure adequate supplies of raw materials and
components on a timely basis. However, if for any reason we are unable to obtain
sufficient quantities of any of the raw materials or components required to
produce and package our products, we may not be able to distribute our products
as planned. In such case, our business, financial condition and results of
operations could be materially and adversely affected.
RESEARCH AND DEVELOPMENT
We are also involved in product development and continually seek to
develop extensions to our product lines and to improve the quality and
efficiency of our manufacturing processes. Our laboratories and product
development scientists have produced several product line extensions to existing
branded pharmaceutical products. For more information about Medco's research and
development activities, see the section above entitled "Recent Developments."
GOVERNMENT REGULATION
Our business and our products are subject to extensive and rigorous
regulation at both the federal and state levels. Most importantly, nearly all of
our products are subject to premarket approval requirements. New drugs are
approved under, and are subject to, the Federal Food, Drug and Cosmetic Act,
which we refer to in this report as the "FDC Act," and the respective related
regulations. Biological drugs are subject to both the FDC Act and the Public
Health Service Act, which we refer to in this report as the "PHS Act," and the
related regulations. Biological drugs are licensed under the PHS Act.
At the federal level, we are principally regulated by the FDA as well
as by the DEA, the Consumer Product Safety Commission, the Federal Trade
Commission, the U.S. Department of Agriculture, Occupation Safety and Health
Administration and the U.S. Environmental Protection Agency which we refer to in
this report as the "EPA." The FDC Act, the regulations promulgated thereunder,
and other federal and state statutes and regulations, govern, among other
things, the development, testing, manufacture, safety, effectiveness, labeling,
storage, record keeping, approval, advertising and promotion of our products and
those manufactured by and for third parties. Product development and approval
within this regulatory framework requires a number of years and involves the
expenditure of substantial resources.
When we acquire the right to market an existing approved pharmaceutical
product, both we and the former application holder are required to submit
certain information to the FDA. This information, if adequate, results in the
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transfer to us of marketing rights to the pharmaceutical products. We are also
required to advise the FDA about any changes in certain conditions in the
approved application as set forth in the FDA's regulations. Our strategy focuses
on acquiring branded pharmaceutical products and transferring, when
advantageous, their manufacture to our manufacturing facilities as soon as
practicable after regulatory requirements are satisfied. In order to transfer
manufacturing of the acquired branded products, we must demonstrate, by filing
information with the FDA, that we can manufacture the product in accordance with
cGMPs and the specifications and conditions of the approved marketing
application. For changes requiring prior approval, there can be no assurance
that the FDA will grant such approval in a timely manner, if at all.
The FDA also mandates that drugs be manufactured, packaged and labeled
in conformity with cGMPs. In complying with cGMP regulations, manufacturers must
continue to expend time, money and effort in production, record keeping and
quality control to ensure that the product meets applicable specifications and
other requirements to ensure product safety and efficacy. The FDA periodically
inspects drug manufacturing facilities to ensure compliance with applicable cGMP
requirements. Failure to comply with the statutory and regulatory requirements
subjects the manufacturer to possible legal or regulatory action, such as
suspension of manufacturing, seizure of product or voluntary recall of a
product. Adverse experiences with the use of products must be reported to the
FDA and could result in the imposition of market restrictions through labeling
changes or in product removal. Product approvals may be withdrawn if compliance
with regulatory requirements is not maintained or if problems concerning safety
or efficacy of the product occur following approval.
The federal government has extensive enforcement powers over the
activities of pharmaceutical manufacturers, including authority to withdraw
product approvals, commence actions to seize and prohibit the sale of unapproved
or non-complying products, to halt manufacturing operations that are not in
compliance with cGMPs, and to impose or seek injunctions, voluntary recalls, and
civil monetary and criminal penalties. Such a restriction or prohibition on
sales or withdrawal of approval of products marketed by us could materially
adversely affect our business, financial condition and results of operations.
In November 1998 the Parke-Davis division of Warner-Lambert initiated a
voluntary Class III recall for one lot of Procanbid(R) manufactured prior to our
acquisition of Procanbid(R). In April 1999, Warner-Lambert initiated a voluntary
Class III recall for two additional lots of Procanbid(R) manufactured prior to
our acquisition of the product. A Class III recall is one in which use of, or
exposure to, the product is not likely to cause adverse consequences. These
recalls were instituted because the lots at issue failed a dissolution test as
part of the routine stability program at the 18- month interval. In December
1999, Warner-Lambert initiated a voluntary Class III recall for one lot of
Procanbid(R) manufactured prior to our acquisition of the product because it had
failed the same dissolution test at the 24-month interval.
Marketing authority for our products is subject to revocation by the
applicable government agencies. In addition, modifications or enhancements of
approved products or changes in manufacturing locations are in many
circumstances subject to additional FDA approvals which may or may not be
received and which may be subject to a lengthy application process. Our
manufacturing facilities are continually subject to inspection by such
governmental agencies and manufacturing operations could be interrupted or
halted in any such facilities if such inspections prove unsatisfactory.
We also manufacture and sell pharmaceutical products which are
"controlled substances" as defined in the Controlled Substances Act and related
federal and state laws, which establish certain security, licensing, record
keeping, reporting and personnel requirements administered by the DEA, a
division of the Department of Justice, and state authorities. The DEA has a dual
mission--law enforcement and regulation. The former deals with the illicit
aspects of the control of abusable substances and the equipment and raw
materials used in making them. The DEA shares enforcement authority with the
Federal Bureau of Investigation, another division of the Department of Justice.
The DEA's regulatory responsibilities are concerned with the control of licensed
manufacturers, distributors and dispensers of controlled substances, the
substances themselves and the equipment and raw materials used in their
manufacture and packaging in order to prevent such articles from being diverted
into illicit channels of commerce. We maintain appropriate licenses and
certificates with the applicable state authorities in order to engage in
pharmaceutical development, manufacturing and distribution of pharmaceutical
products containing controlled substances. We are licensed by the DEA to
manufacture and distribute certain pharmaceutical products containing
- 8 -
<PAGE> 9
controlled substances. We have not experienced license revocations,
restrictions or fines for non-compliance with the foregoing regulations but no
assurance can be given that revocations, restrictions or fines which could have
a material adverse effect upon our business, financial condition and results of
operations will not be imposed upon us in the future.
The distribution of pharmaceutical products is subject to the
Prescription Drug Marketing Act ("PDMA"), as part of the FDC Act, which
regulates such activities at both the federal and state level. Under the PDMA
and its implementing regulations, states are permitted to require registration
of manufacturers and distributors who provide pharmaceuticals even if such
manufacturers or distributors have no place of business within the state. States
are also permitted to adopt regulations limiting the distribution of product
samples to licensed practitioners. The PDMA also imposes extensive licensing,
personnel record keeping, packaging, quantity, labeling, product handling and
facility storage and security requirements intended to prevent the sale of
pharmaceutical product samples or other diversions.
Our Parkedale facility, located in Rochester, Michigan, manufactures
both drug and biological pharmaceutical products. Parkedale was one of six
Warner-Lambert facilities subject to a consent decree issued by the U.S.
District Court of New Jersey in August 1993. We plan to petition for relief from
the consent decree with respect to the Parkedale facility when appropriate.
The Parkedale facility was inspected by the FDA's Team Biologics in
March and April 1998. During that inspection, the FDA made cGMP observations in
a written report provided to King. This written report is known as an "FDA Form
483" or simply as a "483." We provided the FDA with a written response to the
483 including an action plan to address the observations.
As a continuation of the inspections in March and April 1998, the FDA
inspected the Parkedale facility in May 1999 to verify actions taken in response
to the 1998 inspection and to address compliance with the FDA's cGMP
requirements. At the end of that inspection, the FDA issued another 483 listing
their observations. We submitted a written response to that 483 and met with FDA
representatives to present our plans for addressing the observations. In August
1999, the FDA asked us to clarify and supplement our responses to the 483 which
resulted from the May 1999 inspection. The FDA also stated it would require
additional product testing for the product Histoplasmin. We decided that since
revenues attributable to Histoplasmin were minimal we would discontinue the
manufacture and distribution of the product, and we subsequently informed the
FDA of our decision. Most, but not all, of our actions in response to the May
1999 inspection and the August 1999 FDA letter have been completed, and we have
continued to inform the FDA in writing of our progress in implementing those
actions.
In October 1999, as part of its program for inspection of all
manufacturers of influenza virus vaccine, the FDA's Team Biologics inspected our
production of Fluogen(R) at the Parkedale facility and issued a 483 listing
certain cGMP observations. In November 1999, we submitted a written response
containing our plan to address the observations.
In March 2000, the FDA concluded that the methods, facilities and
controls used by Parkedale in the manufacture, processing and packaging of
Fluogen(R) were not in compliance with cGMP requirements. The FDA therefore
informed Parkedale, pursuant to the consent decree, that it must suspend
production and distribution of Fluogen(R) until the Parkedale facility meets the
applicable cGMP standards. The production and distribution of Fluogen(R) is
currently suspended pursuant to the FDA's order. We are working to meet all of
the FDA's requirements for the production and distribution of Fluogen(R) to
resume, which can occur upon the FDA's verification that Parkedale has
substantially complied with all required corrective measures. 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. We generally recognize revenue from Fluogen(R) during the third
and fourth quarters of each calendar year. We are presently evaluating
strategies pertaining to Fluogen(R). Presently, we intend to pursue all actions
reasonably necessary to assure Fluogen(R)'s availability during the upcoming flu
season commencing September 2000.
In March 2000, the FDA also wrote to provide comments and requests for
further information and clarification of previous information submitted by
Parkedale to the FDA in relation to certain process validation issues of
Aplisol(R) (tuberculin purified protein derivative diluted). The FDA's
correspondence does not require Parkedale to discontinue or delay, in any
manner, the production and distribution of Aplisol(R), and the FDA continues to
approve the release and distribution of Aplisol(R) by Parkedale.
We cannot determine what effect changes in regulations or statutes or
legal interpretation, when and if promulgated or enacted, may have on our
business in the future. Changes could, among other things, require changes
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<PAGE> 10
to manufacturing methods, expanded or different labeling, the recall,
replacement or discontinuance of certain products, additional record keeping or
expanded documentation of the properties of certain products and scientific
substantiation. Such changes, or new legislation, could have a material adverse
effect on our business, financial condition and results of operations.
ENVIRONMENTAL MATTERS
Our operations are subject to numerous and increasingly stringent
federal, state and local environmental laws and regulations concerning, among
other things, the generation, handling, storage, transportation, treatment and
disposal of toxic and hazardous substances and the discharge of pollutants into
the air and water. Environmental permits and controls are required for certain
of our operations and these permits are subject to modification, renewal and
revocation by the issuing authorities. We believe that our facilities are in
substantial compliance with our permits and environmental laws and regulations
and do not believe that future environmental compliance will have a material
adverse effect on our business, financial condition or results of operations.
Our environmental capital expenditures and costs for environmental compliance
may increase in the future as a result in changes in environmental laws and
regulations.
Under the Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA"), the EPA can impose liability for the entire cost of
cleanup of contaminated properties upon each or any of current and former site
owners and operators or parties who sent waste to the site, regardless of fault
or the legality of the original disposal activity. Many states, including
Tennessee and Michigan, have statutes and regulatory authorities similar to
CERCLA and to the EPA. We have hazardous waste hauling agreements with licensed
third parties to properly dispose of hazardous wastes. We cannot assure you that
we will not be found liable under CERCLA for the costs of undertaking a clean up
at a site to which our wastes were transported.
COMPETITION
General
We compete with other pharmaceutical companies for product and product
line acquisitions. These competitors include Jones Pharma Incorporated, ICN
Pharmaceuticals, Inc., Dura Pharmaceuticals, Inc., Medicis Pharmaceutical
Corporation, Forest Laboratories, Inc., Shire Pharmaceuticals Group plc, Watson
Pharmaceuticals, Inc. and other companies which also acquire branded
pharmaceutical products and product lines from other pharmaceutical companies.
Additionally, since the Company's products are generally established and
commonly sold, they are subject to competition from products with similar
qualities. The Company's branded pharmaceutical products may be subject to
competition from alternate therapies during the period of patent protection and
thereafter from generic equivalents. The manufacturers of generic products
typically do not bear the related research and development costs and
consequently are able to offer such products at considerably lower prices than
the branded equivalents. There are, however, a number of factors which enable
products to remain profitable once patent protection has ceased. These include
the establishment of a strong brand image with the prescriber or the consumer,
supported by the development of a broader range of alternative formulations than
the manufacturers of generic products typically supply.
Generic Substitutes
Many of our branded pharmaceutical products have either a strong market
niche or competitive position. Some of our branded pharmaceutical products face
competition from generic substitutes. Of our branded pharmaceutical products
that have generic substitutes, we believe that only a small number face
significant competition because many of our branded pharmaceutical products have
sales levels that are too low to attract competition or are too difficult to
manufacture or prove bioequivalence (i.e., the two products produce identical
effects on the body).
For a manufacturer to launch a generic substitute, it must prove to the
FDA when filing an application to make a generic substitute that the branded
pharmaceutical and the generic substitute have bioequivalence. This is easiest
to prove when a drug is systemically absorbed into and measurable in the
bloodstream. However, some of our products are topical preparations and
because topical preparations are less likely to be absorbed into the bloodstream
it is more difficult to prove bioequivalence for topical products. While it
typically takes two or three years to prove
- 10 -
<PAGE> 11
bioequivalence and receive FDA approval for many generic substitutes, we believe
that for topical products the approval period is longer. By focusing our efforts
in part on products with bioequivalence or complex manufacturing requirements,
we are able to protect market share and produce sustainable, high margins and
cash flows.
INTELLECTUAL PROPERTY
Patents, Licenses and Proprietary Rights
We consider the protection of discoveries in connection with our
development activities important to our business. The patent positions of
pharmaceutical firms, including King, are uncertain and involve legal and
factual questions which can be difficult to resolve. We intend to seek patent
protection in the United States and selected foreign countries where and when
deemed appropriate.
The patent application and issuance process may take several years and
involves considerable expense, and there is no assurance that any patent sought
by us or our licensors will issue. The coverage claimed in a patent application
can be significantly reduced before a patent is issued. Consequently, neither
the applicant nor the licensee knows whether any claim contained in a patent
application will be allowed and result in the issuance of a patent or, if any
patent is issued, whether it will provide meaningful proprietary protection or
will be circumvented or invalidated. Since patent applications in the United
States are maintained in secrecy, until foreign counterparts, if any, are
published, and because publication of discoveries in the scientific or patent
literature often lags behind actual discoveries, we cannot be certain that we or
any licensor was the first inventor of the subject matter covered by the patent
application or that it or the licensor was the first to file a patent
application therefor or that it will obtain the freedom to practice the claimed
inventions. Moreover, priority in filing a patent application for an invention
can be overcome by another party who first practiced the invention. Accordingly,
we might be required to engage in extended proceedings in U.S. and/or foreign
patent offices or courts, including interference proceedings declared by the
U.S. Patent and Trademark Office, which we call the Patent Office, to determine
priority and/or patent validity. Any proceeding could be costly and consuming of
management's time. There can be no assurance either that our owned or licensed
patents would be held valid or that our products would not be found to infringe
the patents of others. In the event of a determination that we are infringing a
third party's patent, we would likely be required to pay royalties, which could
be substantial, to a third party. In order to avoid the cost and risk of a
Patent Office proceeding, or otherwise to obtain the intellectual property
rights, we may seek to obtain from third parties patent licenses we believe are
necessary or appropriate. However, it is possible that the third party could
refuse a license to us in order to keep our product off the market.
There can be no assurance that any patent rights held by us will
provide any actual competitive advantage to us. Competitors may be able to
develop similar and competitive products outside the scope of our patents. For
example, should third parties patent or otherwise develop and receive
governmental clearance to commercialize an adenosine product for a use not
covered by our patents, physicians could use those third party products in place
of our products even though the third party products were not approved by the
FDA for the same indications as our products. Any off-label use of third party
products could have a material adverse effect on sales of our products and the
amount of royalty revenues we receive.
In connection with the Altace(R) product line, we acquired the
exclusive rights in the United States under various HMR patents to the active
ingredients in Altace(R) patented to 2008. Our rights include the exclusive
utilization of the active ingredients in Altace(R) in any combination as human
therapeutic or human diagnostic products. We also own U.S. Patents for Novel
Chlorthalidone Process and Product, covering the raw materials used in the
manufacture of Thalitone(R), and for Procanbid(R). These patents expire in 2007
and 2014, respectively.
In connection with the acquisition of Lorabid(R), we acquired, among
other things, all of Lilly's rights in approximately 30 patents and received a
broad royalty-free non-exclusive license in the U.S. and Puerto Rico to 12 other
patents and associated technology. We also received an exclusive sublicense to 4
other patents for which we must pay a royalty to Lilly if certain sales
threshholds are met. Lorabid(R) has patent protection through 2005.
We have exclusive licenses expiring June 2036 for the prescription
formulations of Neosporin(R) and Polysporin(R) and a license expiring February
2038 for the prescription formulation of Anusol-HC(R). Such licenses are subject
to early termination in the event we fail to meet specified quality control
standards, including cGMP regulations with respect to the products, or commit a
material breach of other terms and conditions of the licenses which would have a
significant adverse effect on the uses of the licensed products retained by the
licensor, which would include among other things, marketing products under these
trade names outside the prescription field.
In February 2000, we acquired the licenses to several patents related
to Medco's adenosine-based products through our merger with Medco.
Medco is party to an agreement with Fujisawa Healthcare, Inc., which we
call "Fujisawa" in this report for the manufacture and marketing of Adenocard in
the United States and Canada in exchange for royalties. Medco is also party to
an agreement with Sanofi Pharma, France, which we call "Sanofi" in this report,
for the manufacture and marketing of Adenocard in countries other than the
United States and Canada in exchange for royalties. Sanofi has received
marketing approval under the trade name Adenocor in the United Kingdom and under
the trade name Krenosin in Switzerland. Medco pays one half of all royalties
received from Adenocard, Adenocor and Krenosin sales to the University of
Virginia Alumni Patents Foundation from which Medco acquired rights to
Adenocard.
Medco is party to an agreement with Fujisawa that provides for Fujisawa to fund
one-half of the development costs of Adenoscan, and other products; grants to
Fujisawa manufacturing and marketing rights to such products in the United
States and Canada and entitles Medco to royalties. Royalties received by Medco
from sales outside of the United States and Canada are shared equally with
Fujisawa. Fujisawa, on behalf of itself and Medco, 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. Medco is obligated to pay 50% share of a 6% royalty on Adenoscan net
sales to this third party.
Medco has licensed exclusive rights to Sanofi to manufacture and market
adenoscan worldwide except in the United States, Canada, Japan, Korea and
Taiwan. Sanofi has received marketing approval for Adenoscan in the United
Kingdom and has registered Adenoscan in a number of different countries.
Fujisawa is party to a worldwide, exclusive, paid-up license for the use of
adenosine under a certain U.S. Patent over its seven year remaining life.
Fujisawa sub-licensed this particular patent to Medco and Medco agreed to pay
Fujisawa sub-license fees equal to 50%, or an aggregate of $2,250,000.
Medco regained the rights from Fujisawa to develop adenosine-based products
having cardioprotective indications in the United States and Canada. Upon
marketing by Medco of such a product, Fujisawa will receive an 8% royalty on
Medco's net sales. If Medco licenses a third party to sell such product,
Fujisawa will receive 25% of all fees and royalties from such third party after
recouping $2 million plus development costs.
Medco is party to a Development and Commercialization Agreement with Discovery
Therapeutics, Inc. ("DTI") dedicated to the discovery, development and
commercialization of compounds that stimulate the A2a subfamily of adenosine
receptors ("A2a-agonists"). Under the terms of that agreement, DTI granted to
Medco an exclusive license under certain U.S. and foreign patents and pending
applications relating to DTI's current intellectual property related to
A2a-agonists. Medco has exclusive rights under certain U.S. and foreign patents
and pending applications to market and sell developed compounds, either directly
or through sublicense. In exchange for these rights, Medco agreed to pay DTI
certain licensing fees, development milestones and royalties on future sales of
A2a-agonists.
We also rely upon trade secrets, unpatented proprietary know-how and
continuing technological innovation, where patent protection is not believed to
be appropriate or attainable, to develop our competitive position. There can be
no assurance that others will not independently develop substantially equivalent
proprietary technology and techniques or otherwise gain access to our trade
secrets or disclose the technology or that we can adequately protect our trade
secrets.
Trademarks
We sell our branded products under a variety of trademarks. While we
believe that we have valid proprietary interests in all currently used
trademarks or foreign governmental entities, only certain of the trademarks are
registered with the U.S. government, including those for our principal branded
pharmaceutical products registered in the U.S. Altace(R), Lorabid(R),
Coly-Mycin(R), Fluogen(R), Procanbid(R), Anusol-HC(R), Cortisporin(R),
Neosporin(R), Polysporin(R), Septra(R), Proctocort(R), Thalitone(R),
Pediotic(R), Viroptic(R), Silvadene(R), Menest(R), Adrenalin(R), Pitocin(R),
Aplisol(R), Quibron(R), Nucofed(R), Humatin(R), Tussend(R), Mantadil(R),
Vira-A(R), Chloromycetin(R) and Kemadrin(R). We own the U.S. registered
trademarks for Adenoscan(R) and Adenocard(R). Additionally, a trademark
application for Monarchpharm(TM) is pending. We intend to market products under
the trademark AVC(TM). We also own the registered service marks
Secure-A-Sample(R) and Classics That Work(R).
BACKLOG
As of December 31, 1999, we had no material backlog.
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<PAGE> 12
EMPLOYEES
As of December 31, 1999, we employed 1,281 full-time and 24 part-time
persons. Certain employees of the Parkedale Facility, representing approximately
28% of our employees, are covered by a collective bargaining agreement with the
Oil, Chemical & Atomic Workers, International Union which expires February 28,
2003. We believe our employee relations are good. We employ two full-time
Chaplains and offer as part of our employee benefits package access to
additional counseling services.
ITEM 2. PROPERTIES
We own the manufacturing facilities listed below. These facilities
include space for manufacturing, packaging, laboratories, offices and
warehousing. We believe these facilities are adequate for the conduct of our
operations.
<TABLE>
<CAPTION>
Approximate
Location Square Footage
-------- --------------
<S> <C>
Bristol, Tennessee.................. 500,000
Rochester, Michigan ................ 500,000
</TABLE>
- 12 -
<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, we are subject to various regulatory
proceedings, lawsuits, claims and other matters. Such matters are subject to
many uncertainties and outcomes are not predictable with assurance.
State of Wisconsin Investment Board
On November 30, 1999, we entered into an agreement of merger with Medco
pursuant to which we acquired Medco in an all stock, tax-free pooling of
interests transaction, which was subject to approval by the Medco shareholders.
On January 5, 2000, Medco issued to its stockholders a proxy statement with
respect to the proposed transaction and noticed a meeting to approve the
transaction for February 10, 2000.
On January 11, 2000, the State of Wisconsin Investment Board, whom we
call SWIB, a Medco shareholder which held approximately 11.6% of the outstanding
stock of Medco filed suit on behalf of a proposed class of Medco shareholders in
the Court of Chancery for the State of Delaware, New Castle County, against
Medco and members of Medco's board of directors to enjoin the shareholder vote
on the merger and the consummation of the merger. State of Wisconsin Investment
Board v. Bartlett, et al., C.A. No. 17727. SWIB alleged, among other things,
that the proxy materials failed to disclose all material information and
included misleading statements regarding the transaction, its negotiation, and
its approval by the Medco board of directors; that the Medco directors were not
adequately informed and did not adequately inform themselves of all reasonably
available information before recommending the transaction to Medco shareholders;
and that the Medco directors were disloyal and committed waste in allegedly
enabling one of the Medco directors to negotiate the transaction purportedly for
his own benefit and in agreeing to terms that precluded what the complaint
alleged were more beneficial alternative transactions. SWIB also moved for a
preliminary injunction to enjoin the shareholder vote and the merger based on
the claims asserted in its complaint. Medco and the other defendants denied all
allegations and continue to deny them.
After Medco distributed a supplemental proxy statement on January 31,
2000 and the court postponed the February 10, 2000 vote on the merger agreement
for 15 days to allow shareholders sufficient time to consider the supplemental
disclosures, the court rejected SWIB's claims in a February 24 Memorandum
Opinion and denied preliminary injunctive relief because SWIB had not shown a
reasonable likelihood of success following trial on the merits. The court made a
number of preliminary findings, including that the Medco board of directors
properly delegated to one of its directors the responsibility to negotiate the
merger; that the payment of the negotiating fee was a proper exercise of
business judgment and did not constitute waste; that the other merger provisions
were also valid; that the Medco directors were adequately informed of all
material information reasonably available to them prior to approving the merger
agreement; that the Medco directors acted independently and in good faith to
benefit the economic interests of the Medco shareholders; that the alleged
omissions in the proxy statements were not material; and that the Medco board of
directors fully met its duty of complete disclosure with respect to the
transaction.
SWIB has filed an Application for a Scheduling Order stating its
intention to dismiss the case, before a class has been certified, without
prejudice. In the meantime, the action is still pending. While SWIB has
indicated that it does not intend to prosecute the merits of the case further,
another shareholder could intervene and continue the action. Even though SWIB
lost its motion for preliminary injunction, and is going to dismiss the case,
SWIB has claimed that its attorneys are entitled to an award of attorneys' fees
and costs. SWIB has petitioned the court for approximately $7.26 million in
attorneys' fees and approximately $270,000 in costs.
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<PAGE> 14
We believe that SWIB's case, including SWIB's claim for attorneys'
fees, is meritless, and we are vigorously contesting it. We believe SWIB's
actions did not confer a benefit on the Medco shareholders. We also believe it
is unlikely that another shareholder will intervene to continue the action, but
if that results then we will vigorously contest it. Although there can be no
assurance as to the outcome of these matters, an unfavorable resolution could
have a material adverse effect on our results of operations and our financial
condition in the future.
Other
Many distributors, marketers and manufacturers of anorexigenic drugs
have been subject to claims relating to the use of these drugs. We are a
defendant in 93 lawsuits which claim damages for personal injury arising from
our production of the anorexigenic drug phentermine under contract for
SmithKline Beecham Corporation. 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. We
expect to be named in additional lawsuits related to our production of the
anorexigenic drug under contract for SmithKline Beecham.
While we cannot predict the outcome of these suits, we believe that the
claims against us are without merit and intend to vigorously pursue all defenses
available to us. We are being indemnified in all of these suits by SKB for which
we manufacture the anorexigenic product, provided that neither the lawsuits nor
the associated liabilities are based upon our independent negligence or
intentional acts, and intend to submit a claim for all unreimbursed costs to our
product liability insurance carrier. However, in the event that SKB is unable to
satisfy or fulfill its obligations under the indemnity, we would have to defend
the lawsuit and be responsible for damages, if any, which are awarded against us
or for amounts in excess of our product liability coverage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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<PAGE> 15
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of King is traded on the Nasdaq Stock Market under the
symbol "KING." There were approximately 2,300 shareholders on December 31, 1999,
based on the number of record holders of the Common Stock and an estimate of the
number of individual participants represented by security position listings.
The Company's Common Stock began trading on June 25, 1998 and the price
range of Common Stock is described below:
<TABLE>
<CAPTION>
1998
--------------------------
High Low
---- ---
<S> <C> <C>
Second quarter (June 25 through June 30)......................... 9.50 9.17
Third quarter (ended September 30)............................... 14.25 8.50
Fourth quarter (ended December 31)............................... 19.17 7.08
</TABLE>
<TABLE>
<CAPTION>
1999
--------------------------
High Low
---- ---
<S> <C> <C>
High Low
First quarter (ended March 31)................................... 19.92 12.92
Second quarter (ended June 30).................................. 21.75 13.83
Third quarter (ended September 30)............................... 27.83 16.33
Fourth quarter (ended December 31)............................... 68.00 20.13
</TABLE>
The Company has no plans to pay dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The table should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and related notes included elsewhere in this
report. The information below does not include information related to the Medco
merger which occurred on February 25, 2000.
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales(1) ........................................... $ 25,441 $ 15,457 $ 47,351 $ 158,180 $ 348,271
Development revenues(2) ................................ -- 5,000 558 5,283 --
-------- -------- --------- --------- ---------
Total revenues ...................................... 25,441 20,457 47,909 163,463 348,271
-------- -------- --------- --------- ---------
Gross profit ........................................... 13,311 11,675 34,875 99,411 235,067
Operating income (loss) ................................ 16,031 (1,413) 13,357 55,438 128,171
Gain on sale of investment in affiliate(3) ............. -- 1,760 -- -- --
Interest expense ....................................... (2,006) (1,272) (2,749) (14,866) (55,371)
Other income (expenses), net ........................... 367 578 10 145 246
-------- -------- --------- --------- ---------
Income (loss) before income taxes and extraordinary item 14,392 (347) 10,580 40,717 73,046
Income tax (benefit) expense ........................... 5,058 (107) 3,968 15,396 27,392
-------- -------- --------- --------- ---------
Income (loss) before extraordinary item ................ 9,334 (240) 6,612 25,321 45,654
Extraordinary item, net of income taxes(4) ............. 528 -- -- (4,411) (705)
-------- -------- --------- --------- ---------
Net income (loss) ...................................... $ 9,862 $ (240) $ 6,612 $ 20,910 $ 44,949
======== ======== ========= ========= =========
Basic and diluted income (loss) per share:
Income (loss) before extraordinary item ............. $ 0.36 $ (0.02) $ 0.17 $ 0.56 $ 0.94
======== ======== ========= ========= =========
Net income (loss) per share ......................... $ 0.36 $ (0.02) $ 0.17 $ 0.46 $ 0.93
======== ======== ========= ========= =========
OTHER DATA:
EBITDA(5) .............................................. $ 18,175 $ 1,907 $ 15,724 $ 64,838 $ 155,331
Capital expenditures(6) ................................ 1,672 1,069 1,379 8,099 8,826
Cash flow provided by (used in) operating activities ... (2,585) (6,269) 5,016 5,831 80,661
Cash flow provided by (used in) investing activities ... 30,268 (2,126) (53,977) (425,975) (108,384)
Cash flow provided by (used in) financing activities ... (18,143) (781) 47,638 421,234 35,015
BALANCE SHEET DATA AS OF THE YEAR ENDED:
Working capital ........................................ $ 7,599 $ 7,749 $ (424) $ 31,087 $ 42,692
Total assets ........................................... 33,942 39,279 104,863 668,171 807,458
Total debt ............................................. 4,487 18,011 56,373 527,796 567,857
Shareholders' equity ................................... 11,011 15,697 29,334 101,436 148,436
</TABLE>
- 15 -
<PAGE> 16
(1) Total revenues decreased $4.9 million, or 19.3%, to $20.5 million in
1996 from $25.4 million in 1995 due primarily to the disposition of the
Anexsia(R) product line, which had generated net revenues of $9.6
million in 1995.
(2) The Company developed four Abbreviated New Drug Applications which were
filed with the FDA on Mallinckrodt's behalf for a maximum of $2.5
million each paid upon FDA approval and validation of the process.
(3) In September 1996, the Company sold its entire 6.0% interest in an
affiliated, privately held pharmaceutical company.
(4) Reflects gain on early extinguishment of debt in connection with the
disposition of the Anexsia(R) product line in 1995 and loss on early
extinguishment of debt in connection with the repayment of certain debt
instruments during 1998 and 1999, net of income taxes of $2.8 million
and $445,000, respectively.
(5) "EBITDA" is defined as net income (loss) from continuing operations
before interest, taxes, depreciation and amortization. We believe that
EBITDA provides useful information regarding our ability to service our
indebtedness, but should not be considered in isolation or as a
substitute for operating income or cash flow from operations (in each
case as determined in accordance with generally accepted accounting
principles) as an indicator of our operating performance or as a
measure of our liquidity.
(6) Capital expenditures represent the Company's purchases of property,
plant and equipment. Capital expenditures exclude business and product
acquisitions. For the years ended December 31, 1998 and 1999, we
completed approximately $493.0 million and $98.2 million of business
and product acquisitions.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Annual Report on Form 10-K. Historical results and percentage relationships set
forth in the statement of operations, including trends that might appear, are
not necessarily indicative of future operations.
OVERVIEW
We are a vertically integrated pharmaceutical company that
manufactures, markets and sells primarily branded prescription pharmaceutical
products. Through a national sales force of approximately 300 representatives
and copromotion arrangements, we market our branded pharmaceutical products to
general/family practitioners, internal medicine physicians and hospitals across
the country. Our business strategy is to acquire established branded
pharmaceutical products and to increase their sales by focused marketing and
promotion and through product life cycle management. In pursuing acquisitions,
we seek to capitalize on opportunities in the pharmaceutical industry created by
cost containment initiatives and consolidation among large, global
pharmaceutical companies. We also create value by developing product line
extensions for our branded pharmaceutical products such as new formulations,
dosages or new indications. These product line extensions are attractive to us
because they may have market exclusivity or sales levels that do not attract
significant competition. In addition to branded pharmaceuticals, we also provide
contract manufacturing for a number of the world's leading pharmaceutical and
biotechnology companies, including Amgen, Inc., Warner-Lambert Company,
Centocor, Inc., Mallinckrodt Chemical, Inc., Genetics Institute, Inc. and
Hoffman-La Roche Inc.
Our branded pharmaceutical products can be divided primarily into four
therapeutic areas: (i) cardiovascular (including Altace(R), Thalitone(R) and
Procanbid(R)), (ii) anti-infectives (including Lorabid(R), Cortisporin(R),
Neosporin(R) and Coly-Mycin M(R)), (iii) vaccines and biologicals (including
Fluogen(R) and Aplisol(R)) and (iv) women's health (including Menest(R) and
Pitocin(R)). All of these products are marketed to general/family practitioners
and internal medicine physicians. Unlike many of our competitors, we have a
broad therapeutic focus that provides us with opportunities to purchase a wide
variety of products, as evidenced by our acquisition of 31 products over the
last 36 months, including Altace(R) and Lorabid(R). In addition, we have well
known products in all of our therapeutic categories that generate high
prescription volumes. Our portfolio of well-recognized prescription brand names
includes, among others, Altace(R), Lorabid(R), Neosporin(R), Cortisporin(R),
Menest(R), Pitocin(R), Anusol-HC(R) and Fluogen(R).
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<PAGE> 17
We acquired from Glaxo Wellcome the Cortisporin(R) product line in
March 1997, the Viroptic(R) product line in May 1997 and six additional branded
products, including Septra(R), and exclusive licenses, free of royalty
obligations, for the prescription formulations of Neosporin(R) and Polysporin(R)
in November 1997 (the "Glaxo Acquisition").
In February 1998 we acquired from Warner-Lambert 15 branded
pharmaceutical products, the Parkedale Facility located in Rochester, Michigan
and certain manufacturing contracts for third parties for $127.9 million,
including $2.9 million of assumed liabilities (the "Sterile Products
Acquisition").
In June 1998 we launched our new Cortisporin(R)-TC Otic line.
Cortisporin(R)-TC Otic is a product line extension for our Cortisporin(R) Otic
Suspension product.
In December 1998 we acquired from Hoechst Marion Roussel, Inc.,
predecessor to Aventis ("HMR"), for $362.5 million the United States rights to
Altace(R), an Angiotensin Converting Enzyme inhibitor, HMR's worldwide rights to
Silvadene(R) and HMR's worldwide rights to AVC(TM), (the "Altace Acquisition").
Aventis currently manufactures Altace(R) for us. We anticipate moving the
manufacturing of Altace(R) to the Bristol facility prior to December 31, 2001.
Aventis will continue to supply raw materials for the process and we anticipate
that Aventis will continue to be the secondary manufacturer for this product.
In August 1999, we acquired the antibiotic Lorabid(R) from Eli Lilly
and Company for $91.7 million including acquisition costs plus sales performance
milestones that could bring the total value of the deal to $158.0 million. The
final contingent payment will be made if we achieve $140.0 million in annual net
sales of Lorabid(R). As part of the agreement, we acquired or licensed all of
Lilly's rights in the United States and Puerto Rico to Lorabid(R) including
Lorabid(R)'s new drug applications, investigational new drug applications, and
certain patents and associated United States copyright and trademark material.
Lilly manufactures Lorabid(R) for us. Lorabid(R) has United States patent
protection through December 31, 2005.
In November 1999, we entered into a definitive agreement to acquire
Medco in an all stock transaction accounted for as a pooling of interests. Medco
is a research and development company engaged in the development and global
commercialization of cardiovascular medicines and adenosine-based products. On
February 25, 2000, we completed the merger with Medco by exchanging
approximately 7.2 million shares of King common stock for all of the outstanding
shares of Medco. Each share of Medco was exchanged for 0.6757 of one share of
King common stock. In addition, outstanding Medco stock options were converted
at the same exchange ratio to purchase approximately 700,000 shares of King
common stock.
Our strategy is to continue to acquire branded pharmaceutical products
and to create value by leveraging our marketing, manufacturing and product
development capabilities. The success of our marketing strategy will be aided by
gaining approval of the new indications for Altace(R) requested under the
Supplemental New Drug Application, which is now before the FDA, and capitalizing
on that approval by increasing our marketing efforts related to Altace(R),
including the potential execution of copromotion agreements, and our ability to
continue to develop product line extensions. As soon as practicable after
regulatory requirements are satisfied and when advantageous, we expect that
manufacturing some of these acquired pharmaceutical products ourselves will
increase our margins because the cost of producing pharmaceutical products on
our own should be lower than the cost of having these products manufactured by
third parties. As discussed above, we anticipate beginning the manufacturing of
Altace(R) in our Bristol facility prior to December 31, 2001.
We manufacture pharmaceutical products for a variety of pharmaceutical
and biotechnology companies under contracts expiring at various times within the
next four years. We intend to enter into additional manufacturing contracts in
cases where we identify contracts that offer significant volumes and attractive
revenues. We have not accepted or renewed manufacturing contracts for third
parties where we perceived insignificant
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<PAGE> 18
volumes or revenues. In accordance with our focus on branded pharmaceutical
products, we expect that, over time, our contract manufacturing will continue
to be a smaller percentage of revenues.
The following summarizes approximate net revenues by operating segment
(in thousands).
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Branded pharmaceuticals $37,912 $125,399 $304,004
Contract manufacturing 6,982 31,611 34,756
Other ................. 3,015 6,453 9,511
------- -------- --------
Total ............ $47,909 $163,463 $348,271
======= ======== ========
</TABLE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues
Net revenues increased $184.8 million, or 113.0%, to $348.3 million in
1999 from $163.5 million in 1998, due primarily to the acquisition and growth of
branded pharmaceutical products. The increase in revenues is primarily
attributable to the Altace Acquisition, the acquisition of Lorabid(R), and
revenue growth of certain branded pharmaceutical products.
Net sales from branded pharmaceutical products increased $178.6
million, or 142.4%, to $304.0 million in 1999 from $125.4 million in 1998. The
Altace Acquisition, the acquisition of Lorabid(R) and revenue gains by
Fluogen(R) and the Cortisporin(R) and Neosporin(R) product lines accounted for
most of the sales increase. From time to time we announce price increases on
some of our pharmaceutical products. In advance of a price increase, many of our
customers may order pharmaceutical products in larger than normal quantities. We
cannot determine the exact quantity of additional inventory that our customers
may order in anticipation of a price increase. The ordering of excess quantities
in any quarter could cause sales of some of our branded pharmaceutical products
to be lower in the subsequent quarter than they would have been otherwise. Net
revenues from Fluogen(R) increased from $17.7 million in 1998 to $28.7 million
in 1999. However, the amount of revenue, if any, that we can anticipate from
Fluogen(R) in the future is not certain at this time. On March 10, 2000 we
received written notice from the FDA that we must cease and discontinue
manufacturing, processing, packaging, labeling, and distributing all lots of
Fluogen(R) pending performance, and FDA review and acceptance, of certain
actions described in detail in a press release we issued on March 13, 2000. We
are working with the FDA and outside consultants to address the FDA's concerns
and complete the actions required by the FDA related to Fluogen(R) to gain FDA
approval for us to produce and distribute Fluogen(R) in a timely manner in
advance of and during the 2000 influenza virus vaccine season. However, we
cannot be certain that we will be able to adequately address the FDA's concerns
or complete the actions required by the FDA, or to gain the FDA's approval of
these actions in a timely manner without negatively impacting sales of
Fluogen(R) during the third and fourth quarters of 2000.
Revenues from contract manufacturing increased $3.2 million, or 10.1%,
to $34.8 million in 1999 from $31.6 million in 1998. Contract manufacturing
revenues increased primarily because we had a full year of contract revenue from
the Sterile Products Acquisition that closed in February 1998.
Net sales from generic and other sources increased $3.0 million, or
46.2%, to $9.5 million in 1999 from $6.5 in 1998. The increase in revenues is
primarily attributable to increased sales of a generic product line, offset by a
decrease in development revenue. We have recognized no development revenues in
1999. In 1998, we recognized $5.0 million in development revenues as a result of
the FDA approval and our validation of the process of two additional Abbreviated
New Drug Applications pursuant to an agreement with Mallinckrodt. Currently, we
have no ongoing agreements that will result in future development revenue
recognition.
Gross Profit
Total gross profit increased $135.7 million or 137.9% to $235.1 million
in 1999 from $98.4 million in 1998. The increase was primarily due to increased
gross profit from branded pharmaceutical products, offset by a decrease in
contract manufacturing gross profit contribution.
The gross profit from branded pharmaceutical products increased $139.9
million or 148.0% to $234.3 million from $94.5 million. This increase was
primarily due to increases in gross profit from the Altace product line acquired
in December 1998, and the Lorabid product acquired in August 1999.
Gross profit associated with contract manufacturing decreased $4.3
million to $4.9 million. This decrease in gross profit is primarily related to
an increase in costs associated with the contract manufacturing business.
The gross profit from generic and other increased $109,000 or 2.0% to
$5.6 million from $5.5 million.
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<PAGE> 19
Operating Costs and Expenses
Total operating costs and expenses increased $112.1 million, or 103.8%,
to $220.1 million in 1999 from $108.0 million in 1998. The increase was due to
increases in the costs associated with our growth, particularly the Sterile
Products Acquisition and the Altace Acquisition.
Cost of sales increased $49.1 million, or 76.6%, to $113.2 million in
1999 from $64.1 million in 1998. The increase was due primarily to the costs
associated with the newly acquired branded product lines and increases in the
production of Fluogen.
Selling, general and administrative expenses increased $45.3 million,
or 130.6%, to $80.0 million in 1999 from $34.7 million in 1998. The increase was
primarily attributable to the hiring of additional sales representatives during
the second half of 1998 and first part of 1999; as well as other personnel
costs, marketing, and sampling costs associated with the new branded product
lines. As a percentage of net sales, selling, general and administrative
expenses increased to 23.0% in 1999 from 21.9% in 1998.
Depreciation and amortization expense increased $17.6 million, or
189.3%, to $26.9 million in 1999 from $9.3 million in 1998. This increase was
primarily attributable to the amortization of the fixed assets and intangible
assets acquired in the Sterile Products Acquisition, the Altace Acquisition and
the acquisition of Lorabid(R).
Operating Income
Operating income increased $72.8 million, or 131.4%, to $128.2 million
in 1999 from $55.4 million in 1998. This increase was primarily due to increased
revenues from the acquisition of branded products and revenue growth of certain
branded pharmaceutical products offset by increased expenses described above. As
a percentage of total revenues, operating income increased to 36.8% in 1999 from
33.9% in 1998.
Interest Expense
Interest expense increased $40.5 million, or 271.8%, to $55.4 million
in 1999 from $14.9 million in 1998, as a result of additional term loans used to
finance, in part, the Sterile Products Acquisition, the Altace Acquisition and
the acquisition of Lorabid(R).
Income Tax Expense
The effective tax rate in 1999 of 37.5% and 1998 of 37.8% was higher
than the federal statutory rate of 35.0% primarily due to state income taxes.
The effective tax rate was lower in 1999 as compared to 1998 because of an
inventory donation.
Extraordinary Item
During the first quarter of 1999, we repaid $75.0 million of senior
subordinated seller notes prior to maturity. The early repayment of the notes
resulted in an extraordinary loss of $705,000, net of related tax benefits of
$445,000, from the write-off of certain deferred financing costs. During 1998,
we repaid other long-term debt prior to maturity. The repayment resulted in
extraordinary charges of $4.4 million, net of related tax benefits of $2.8
million, from the write off of certain deferred financing costs.
Net Income
Due to the factors set forth above, net income increased $24.0 million,
or 114.8%, to $44.9 million in 1999 from $20.9 million in 1998.
- 19 -
<PAGE> 20
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues
Net revenues increased $115.6 million, or 241.3%, to $163.5 million in
1998 from $47.9 million in 1997, due primarily to the acquisition of branded
products in 1998 and late 1997 and increased contract manufacturing related to
the Sterile Products Acquisition.
Net sales from branded pharmaceuticals increased $87.5 million, or
230.9%, to $125.4 million in 1998 from $37.9 million in 1997. The Glaxo
Acquisition, Sterile Products Acquisition, Menest(R) and the Altace Acquisition
accounted for most of the sales increase.
Revenues from contract manufacturing increased $24.6 million, or
351.4%, to $31.6 million in 1998 from $7.0 million in 1997, due primarily to the
increased contract manufacturing related to the Sterile Products Acquisition.
Additionally, we recognized other revenues in 1998 of $5.0 million for
the development and related FDA approval of two ANDAs filed in connection with
our agreement with Mallinckrodt.
Gross Profit
Total gross profit increased $64.6 million, or 185%, to $99.4 million
in 1998 from $34.9 million in 1997. The increase was primarily due to the
increase in gross profit associated with branded pharmaceutical products of
$61.3 million. Additionally, gross profit associated with contract development
revenues, generic pharmaceutical sales and companion animal health sales
increased by $3.6 million.
The gross profit of branded pharmaceutical products increased $61.3
million to $94.5 million in 1998 from $33.2 million in 1997. This increase was
primarily due to increases in revenues from certain products acquired in the
Sterile Products Acquisitions, the Cortisporin Acquisition, the Glaxo
Acquisition, and the Altace transaction in December 1998.
The gross profit associated with contract development revenue, generic
pharmaceutical sales, and companion animal health sales increased by $3.6
million to $5.5 million in 1998 from $1.9 million in 1997. The increase was
primarily due to an increase in contract development revenue offset by a
decrease in gross profit contribution of generic pharmaceutical and companion
animal products.
Operating Costs and Expenses
Total operating costs and expenses increased $73.4 million, or 212.1%,
to $108.0 million in 1998 from $34.6 million in 1997. The increase was due to
increases in the costs associated with our growth, particularly the Sterile
Products Acquisition and the Glaxo Acquisition.
Cost of sales increased $51.1 million, or 393.1%, to $64.1 million in
1998 from $13.0 million in 1997. The increase was due primarily to the costs
associated with the newly acquired branded product lines.
Selling, general and administrative expenses increased $15.6 million,
or 81.7%, to $34.7 million in 1998 from $19.1 million in 1997. This increase was
primarily attributable to the hiring of additional sales representatives in 1998
and during the second half of 1997, as well as other personnel costs and
marketing, promotion and sampling costs associated with the newly acquired
branded product lines. As a percentage of net sales, selling, general and
administrative expenses decreased to 21.9% in 1998 from 40.3% in 1997.
Depreciation and amortization expense increased $6.9 million, or
287.5%, to $9.3 million in 1998 from $2.4 million in 1997. This increase was
primarily attributable to the depreciation and amortization of the fixed assets
and intangibles assets acquired with the branded product acquisitions in 1997
and the Sterile Products and Altace Acquisitions in 1998.
Operating Income
Operating income increased $42.0 million, or 313.4%, to $55.4 million
in 1998 from $13.4 million in 1997. This increase was primarily due to
incremental revenues and costs associated with the acquisition of branded
products. As a percentage of total revenues, operating income increased to 33.9%
in 1998 from 28.0% in 1997.
Interest Expense
Interest expense increased $12.1 million, or 432.1%, to $14.9 million
in 1998 from $2.8 million in 1997, as a result of additional term loans used to
finance, in part, the acquisitions in 1998.
Income Tax Expense
The effective tax rate in 1998 of 37.8% and 1997 of 37.5% was higher
than the federal statutory rate of 35.0% primarily due to state income taxes.
- 20 -
<PAGE> 21
Extraordinary Item
During 1998, we repaid certain long-term debt prior to maturity. The
repayment resulted in extraordinary charges of $4.4 million, net of related tax
benefits of $2.8 million, associated with the write-off of deferred financing
costs.
Net Income
Due to the factors set forth above, net income increased $14.3 million,
or 216.7%, to $20.9 million in 1998 from $6.6 million in 1997.
LIQUIDITY AND CAPITAL RESOURCES
General
Our liquidity requirements arise from debt service, working capital
requirements and funding of acquisitions of branded pharmaceutical products.
As of December 31, 1999 we have available up to $55.0 million under a
revolving line of credit, which allows for total borrowing of up to $100.0
million.
Year ended December 31, 1999
We generated net cash from operations of $80.7 million for the year
ended December 31, 1999. Our net cash provided from operations was primarily the
result of $44.9 million in net income, adjusted for non-cash depreciation and
amortization of $26.9 million and amortization of deferred financing costs of
$2.8 million, a non-cash extraordinary charge of $1.2 million before income tax
benefit, an increase in accrued expenses of $30.0 million, and an increase in
accounts payable and income taxes payable of $12.8 million and $1.2 million,
respectively, and a decrease in other assets of $2.0 million. While cash flow
from operations was reduced by an increase in accounts receivable of $29.7
million and an increase in inventory of $6.9 million.
Cash flows used in investing activities was $108.4 million primarily
due to the purchase of Lorabid(R) for $91.7 million, merger related costs of
$1.4 million and $8.8 million of capital expenditures.
Financing activities provided $35.0 million of cash flow comprised
principally of $150.0 million in proceeds from senior subordinated notes and
$26.0 million in net proceeds from the revolving credit facility. These amounts
were offset by repayments of the $75.0 million senior subordinated seller notes
and $61.0 million relating to the term loans.
Year ended December 31, 1998
We generated net cash from operations of $5.8 million for the year
ended December 31, 1998. Our net cash provided by operating activities was
primarily the result of $20.9 million in net income resulting from sales from
recently purchased branded pharmaceutical products, adjusted for non-cash
charges for depreciation and amortization of $9.3 million, and an extraordinary
loss on early retirement of existing indebtedness of $7.2 million. Our net cash
provided by operating activities was impacted by an increase in receivables and
inventory of $31.1 million and $15.7 million, and increases in accounts payable,
accrued expenses and income taxes of $6.7 million, $5.7 million, and $1.7
million, respectively.
Cash flows used in investing activities was $426.0 million due
principally to the Sterile Products and the Altace Acquisitions, the Menest(R)
acquisition, and other purchases of property and equipment.
Financing activities provided $421.2 million, which was a result of the
net proceeds from the initial public offering, and proceeds from long-term debt
to finance the Sterile Products and the Altace Acquisitions.
- 21 -
<PAGE> 22
Year ended December 31, 1997
We generated net cash from operations of $5.0 million for the year
ended December 31, 1997. Our net operating cash in 1997 was primarily the result
of $6.6 million in net income resulting from sales from recently purchased
branded pharmaceutical products, adjusted for non-cash charges of $2.4 million
for depreciation and amortization, additional income taxes and deferred taxes of
$1.5 million, and related increases in accounts receivable, inventories,
accounts payable and accrued expenses of $6.3 million, $4.8 million, $3.6
million and $2.2 million, respectively.
Net cash used in investing activities for the year ended December 31,
1997 was $54.0 million and was the result of cash of $52.4 million paid for the
acquisition of new branded product lines as well as cash of $1.4 million paid
for purchases of property and equipment.
Financing activities provided $47.6 million, which was the result of
(i) aggregate borrowings of $14.0 million to finance the acquisition of the
Cortisporin product line, other product acquisitions totaling $6.6 million, the
refinancing of all remaining acquisition term loans along with the acquisition
of six additional products for $23.0 million, and the net increase in the
revolving line of credit of $6.2 million, offset by payments on long-term debt
and capital lease obligations of $23.8 million, (ii) proceeds from issuance of
common shares of $8.0 million in connection with the acquisition of the
Cortisporin product line and (iii) repayment on shareholder notes receivable of
$2.1 million.
Certain Indebtedness and Other Matters
As of December 31, 1999, we have outstanding approximately $522.9
million of long-term debt (including current portion), and $45.0 million in
borrowings under our revolving credit facility. Of these amounts, approximately
$412.2 million were at variable rates based on LIBOR and the remainder at fixed
rates. We have entered into $285.0 million of interest rate hedging transactions
with a group of commercial banks to exchange our variable LIBOR for a fixed rate
of interest. We do not believe our exposure to changes in interest rates under
the remaining variable rate agreements will have a material effect on our
financial condition or results of operations. We have also entered into a $150.0
million interest rate hedging agreement to exchange our fixed interest rate for
a variable LIBOR-based interest rate. Certain financing arrangements require us
to maintain certain minimum net worth, debt to equity, cash flow and current
ratio requirements. As of December 31, 1999, we were in compliance with these
covenants.
Subsequent to the completion of the merger with Medco, we utilized
approximately $55.0 million of cash and other investments from Medco to repay
$35.0 million on our revolving credit facility and $20.0 on term loans.
We believe that existing credit facilities and cash generated from
operations are sufficient to finance our current operations and working capital
requirements. However, in the event we make significant future acquisitions or
change our capital structure, we may be required to raise funds through
additional borrowings or the issuance of additional debt or equity securities.
At present, we are actively pursuing acquisitions that may require the
use of substantial capital resources. There are no present agreements or
commitments with respect to any such acquisitions.
We financed the acquisition of Lorabid(R) with borrowings under the
revolving credit facility and cash generated from operations.
Capital Expenditures
Capital expenditures, including capital lease obligations, were $8.8
million and $81.1 million for the years December 31, 1999 and 1998,
respectively. The principal capital expenditures included property and
equipment purchases and building improvements, including the Sterile Products
Acquisition in 1998. We expect to increase our capital expenditures over the
next few years as a part of our acquisition and growth strategy.
Year 2000 Compliance
We conducted an evaluation of our IT and non-IT computer systems with
respect to the "Year 2000" issue. This issue arose because many electronic
systems use two digits rather than four to determine dates. This could have
caused information technology systems such as software applications, hardware,
network systems and embedded systems to misread important dates beginning in
the year 2000, which could cause system failures and disruption of operations.
We completed a Year 2000 readiness assessment of our business critical
IT and non-IT systems. As a result of the assessment, we developed and
implemented corrective action plans designed to address Year 2000 issues. These
plans included modification, upgrade and replacement of our critical
administrative, production and research and development computer systems to
make them Year 2000 ready. Implementation of corrective action plans was
completed before the end of the year, and we did not encounter any significant
issues with respect to Year 2000.
Because our operations depend on the uninterrupted flow of materials
and services from our suppliers, we requested and received analyzing
information from our suppliers with regard to Year 2000 issues. We monitored
the progress of our key suppliers toward Year 2000 readiness, and no
significant issues were encountered.
We do not manufacture any products that were subject to Year 2000
risks. Contingency plans were developed to avoid or mitigate the risks that
either key suppliers or we might not achieve Year 2000 readiness in time to
avoid disruption of our operations. We have not encountered any significant
issues with respect to Year 2000 risks. The costs associated with the Year 2000
computer problem as of December 31, 1999 have not been material.
IMPACT OF INFLATION
We have experienced only moderate raw material and labor price
increases in recent years. While we have passed some price increases along to
its customers, we have primarily benefited from rapid sales growth negating most
inflationary pressures.
RECENT ACCOUNTING PRONOUNCEMENTS
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<PAGE> 23
In June 1998, the Financial Accounting Standards Board adopted 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.
We are evaluating the provisions of SFAS No. 133, but do not anticipate its
adoption to have a material impact on financial position or results of
operations.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements relate to analyses and other information which are based on
forecasts of future results and estimates of amounts not yet determinable. These
statements also relate to our future prospects, developments and business
strategies.
These forward-looking statements are identified by their use of terms
and phrases, such as "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "plan," "predict," "project," "will" and similar terms and
phrases, including references to assumptions. These statements are contained in
sections entitled "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and other sections of
this Annual Report on Form 10-K.
Such forward-looking statements include, but are not limited to: (a)
anticipated developments and expansions of our business; (b) increases in sales
of recently acquired products, (c) development of product line extensions; (d)
future findings and determinations of the FDA, including the outcome of any
future inspections, arising from or in relation to the referenced notification
to Parkedale, or otherwise by the FDA; (e) significant debt service and leverage
requirements; (f) the products which we expect to offer; (g) the intent to
market and distribute certain of our products internationally; (h) the intent to
manufacture certain products in our own facilities which are currently
manufactured for us by third parties; (i) the intent, belief or current
expectations, primarily with respect to our future operating performance; (j)
expectations regarding sales growth, gross margins, manufacturing productivity,
capital expenditures and effective tax rates; and (k) expectations regarding our
financial condition and liquidity as well as future cash flows and earnings.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. Such factors include, but are not limited to, the following: changes
in general economic and business conditions; dependence on continued acquisition
of products; management of growth of business and integration of product
acquisitions; changes in current pricing levels; development of new competitive
products; changes in economic conditions and federal and state regulations;
competition for acquisition of products; manufacturing capacity constraints; and
the availability, terms and deployment of capital. We also refer you to the
section entitled "Risk Factors" in our registration statement on Form S-3 filed
with the SEC in January 2000.
We do not undertake to update our forward-looking statements to
reflect future events or circumstances.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Certain of our financial instruments are subject to market risks,
including interest rate risk. Our financial instruments are not currently
subject to foreign currency risk or commodity price risk. We have no financial
instruments held for trading purposes.
The fair market value of long-term fixed interest rate debt is subject
to interest rate risk. Generally, the fair market value of fixed interest rate
debt will increase as interest rates rise and decrease as interest rates fall.
The estimated fair value of the Company's total long-term debt at December 31,
1999 was $563.3 million. Fair values were determined from available market
prices, using current interest rates and terms to maturity.
We are exposed to market risk related to changes in interest rates on
borrowings under our senior credit facility. The senior credit facility bears
interest based on LIBOR. However, we have entered into an aggregate notional
principal amount of $285.0 million in interest rate swap agreements to manage a
portion of our exposure to interest rate changes. The swaps involve the exchange
of fixed and variable interest rate payments based on contractual principal
amount and time period. Payments or receipts on the agreements are recorded as
adjustments to interest expense. At December 31, 1999, our swap agreements
expire between 2004 and 2006. Under these agreements, we pay a fixed weighted
average interest rate of 5.8% and receive a floating interest rate based on the
one-month LIBOR.
On November 12, 1999, we entered into an interest rate swap agreement
related to our 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 we exchanged our 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 we pay a floating rate based on the three month LIBOR.
The fair value of the interest rate swap agreements represent the
estimated payments or receipts that would be made to terminate the agreements.
At December 31, 1999, we would have received approximately $1.0 million upon
termination of the agreements. The fair value is based on dealer quotes. We have
$127.0 million of debt remaining that bears interest at a variable rate.
Accordingly, an increase in interest rates would adversely affect interest
expense.
- 23 -
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth at the
pages indicated in Item 14(a) below.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
- 24 -
<PAGE> 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers, directors and key employees of the Company as
of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
John M. Gregory 46 Chairman of the Board of Directors and Chief Executive Officer
Jefferson J. Gregory 44 President of King Pharmaceuticals, Inc. and of Parkedale
Pharmaceuticals, Inc. and Director
Joseph R. Gregory 45 Vice Chairman of Operations for the Board of Directors of the
Company, President of Monarch Pharmaceuticals, Inc.
Brian G. Shrader 31 Chief Financial Officer
James E. Gregory 48 Executive Vice President, General Manager (Bristol)
R. Henry Richards, M.D. 55 Executive Vice President, Medical Affairs
John P. McCoy 51 Executive Vice President, Quality
Terri D. White-Gregory 37 Executive Vice President, Financial Analyst
John A. A. Bellamy 37 Executive Vice President, Legal Affairs and General Counsel
Ronald C. Siegfried 58 Executive Vice President, Development
Steven M. Samet 49 Executive Vice President, General Manager (Parkedale)
Kyle P. Macione 36 Executive Vice President, Investor Relations
Thomas K. Rogers, III 46 Vice President, Regulatory Affairs
Edward J. Reilly 47 Vice President, Brand Management
Moises Saporta 62 Vice President, Manufacturing
Norman T. Miller 66 Senior Director, Regulatory Affairs (Compliance)
Ernest C. Bourne 58 Director and President of the International Division
Lois A. Clarke 54 Director
Frank W. De Friece, Jr. 78 Director
D. Greg Rooker 52 Director
Ted G. Wood 62 Director
Richard C. Williams(1) 56 Director, Vice Chairman of Research for the Board of Directors of
the Company
</TABLE>
(1) Effective February 25, 2000 with acquisition of Medco.
John M. Gregory has served as Chairman of the Board of Directors since
the Company's inception in 1993 and Chief Executive Officer since 1994. He
previously co-founded General Injectables and Vaccines, Inc. ("GIV") and served
as President of GIV from 1984 through 1994. Prior to co-founding GIV, he was the
owner and registered pharmacist of a pharmacy located in Bastian, Virginia. He
graduated from the University of Maryland School of Pharmacy with a B.S. in
Pharmacy in 1976.
Jefferson J. Gregory has served as President of King Pharmaceuticals,
Inc., since 1993, and as President of Parkedale Pharmaceuticals, Inc., a wholly
owned subsidiary of the Company, since February 1998 and as a Director since
1995. He was formerly the Director of Regulatory Affairs and Product Information
for GIV from 1991 to 1993 and was a consultant to the pharmaceutical industry
from 1989 to 1991. He formerly served as a registered pharmacist in retail
pharmacies in the Washington D.C. and Baltimore, Maryland metropolitan areas. He
graduated from the University of Maryland School of Law with a Juris Doctor in
1985, University of Maryland School of Pharmacy with a B.S. in Pharmacy in 1979,
and Montgomery College with an Associate of Arts in 1976.
Joseph R. Gregory has served as President of Monarch Pharmaceuticals,
Inc., a wholly owned subsidiary of the Company, since 1994, has served as a
Director since 1993 as Vice Chairman of the Board of Directors of the Company
since December 1997 and as Vice Chairman of Operations for the Board of
Directors since February 2000. Prior to joining the Company, he was the Chief
Operating Officer of GIV from 1987 to 1994 and also served as the President of
Insource/Williams, Inc., a GIV subsidiary, from 1989 to 1994. He previously
Ernest C. Bourne has served as President of the International Division
since January 1999 and as a Director since October 1997. From 1968 until January
1999, he had been employed with Bourne & Co., Inc., an investment banking firm,
where he served as President.
- 25 -
<PAGE> 26
served as President of The Buying Group Network/A Service of Pharmacist Shared
Services. He graduated from the University of Maryland School of Business with a
B.S. in Business Administration in 1977.
Brian G. Shrader, CPA, has served as Chief Financial Officer since 1993.
He was formerly the Manager of Accounting for GIV from 1990 to 1993. He is a
current member of the American Institute of Certified Public Accountants and
Virginia Society of CPA's. He graduated from the Virginia Polytechnic Institute
and State University with a B.S. in Accounting in 1990 and a Masters of
Accountancy in 1991.
James E. Gregory has served as Executive Vice President, General Manager
(Bristol) and Production/Administration since February 1995. Previously, he was
the Deputy Executive Officer of the Washington D.C. Court system from 1990
through 1995 and a senior administrator with that court from 1987 to 1990. He
was responsible for managing all business affairs for another major urban court
system in Phoenix, Arizona from 1982 to 1985 and was the Deputy County Recorder
for Maricopa County (Phoenix) from 1985 to 1987. Through management consulting
firms, he provided administrative systems consulting services to various state
court systems from 1973 to 1982. He graduated from American University with a
Masters of Public Administration in 1979 and the University of Maryland with a
B.A. in History in 1973.
R. Henry Richards, M.D. has served as Executive Vice President of
Medical Affairs since 1994. He also was the Medical Director/Director of Managed
Care for GIV during 1993. He served as the Vice President Medical Director for
Medical Dimensions, Inc. from 1991 to 1993, after having served as a M.D. in
private practice (Internal Medicine, Hypertension and Nephrology) since 1976. He
was also the Medical Director for the Hypertension Medical Clinic of San Jose
and Review Services Inc., Resource Consultant for Health Strategies in San Jose,
was associated with Samaritan Kidney Medical Associates, San Jose and Medical
Director, Hospital Private Review in Campbell, California. Dr. Richards
graduated from the University of Maryland with a M.D. in 1971, the Atlantic
Christian College with a B.S. in Biology in 1966, and Montgomery College with an
Associate of Arts in 1963.
John P. McCoy has served as Executive Vice President of Quality since
1994. He previously served as the Director of Total Quality
Management/Marketing/Logistics, Material Management and Planning for Connaught
Laboratories in Swiftwater, Pennsylvania from 1986 to 1993. He was the Group
Manager, Logistics Services Manager and Manufacturing Planner for McNeil
Pharmaceuticals from 1982 to 1986; Distribution Planning Manager from 1979 to
1982; and Manager, Marketing/Sales Systems, Distribution Center Manager and
Traffic Manager from 1971 to 1979. He graduated from Pennsylvania State
University with a B.S. in Business in 1970, and he also completed graduate work
at the University of Pennsylvania from 1983 to 1986.
Terri D. White-Gregory, CPA, has served as Executive Vice President,
Financial Analyst since 1996. She served as a financial analyst for Westinghouse
Electric in 1995 and as a consultant and sole proprietor in public accounting
from 1993 to 1996. From 1988 to 1993, she was an audit manager and supervisor in
the Emerging Business Services Group of Coopers & Lybrand L.L.P., in Washington
D.C. and Roanoke, Virginia and was a senior associate on the audit staff of
Ernst & Young LLP in Columbia, South Carolina from 1985 to 1988. She graduated
from The Ohio State University with a B.S. in Business Administration in 1985.
John A. A. Bellamy has served as Executive Vice President of Legal
Affairs and General Counsel since February 1995. He was formerly a corporate
attorney with the law firm of Hunter, Smith & Davis in Kingsport, Tennessee from
1990 to 1995. He graduated from the University of Tennessee College of Law with
a J.D. with Honors in 1990, and graduated Summa Cum Laude with Honors in
Independent Study from King College in 1984 with a B. A. degree in Classics and
English. He is a member of the Licensing Executives Society.
Ronald C. Siegfried has served as Executive Vice President of
Development, Vice President of Development, Technical Services and Manufacturing
since December 1993. He previously served as Director of Manufacturing for RSR
Laboratories, Inc. ("RSR Laboratories"), from 1990 to 1993, was the Manager of
Manufacturing and a Product Development Chemist for Beecham Laboratories from
1972 to 1990, and was a Product Development Chemist for Bristol Laboratories, a
division of Bristol-Myers Squibb from 1964 to 1972. He graduated from the
Rochester Institute of Technology with a B.S. in Chemistry in 1964.
- 26 -
<PAGE> 27
Steven M. Samet has served as Executive Vice President, General Manager
(Parkedale Facility) since its acquisition by the Company on February 28, 1998.
For the 12 years prior, he served as Vice President, General Manager of
Parke-Davis Sterile Products Operations, overseeing both Rochester, Michigan and
Dublin, Ireland operations. From 1973 to 1986, Mr. Samet held various operations
positions with both Elkins-Sinn, Inc. and Sterling Drugs. Mr. Samet received an
M.B.A. from the Michigan State Advanced Management Program in 1989 and a B. S.
in Biology from the State University of New York in 1972.
Kyle P. Macione has served as Executive Vice President, Investor
Relations since January 1998 and as Corporate Counsel since March 1996. He was
formerly a corporate attorney with the law firm of Elliott Lawson & Pomrenke in
Bristol, Virginia from 1992 to 1996. He graduated from Washington & Lee
University School of Law with a Juris Doctor in 1991, University of Alabama with
a Masters of Accountancy in 1987, and University of Mississippi with a Bachelor
of Accountancy in 1986. He is a Certified Public Accountant and licensed to
practice law in Tennessee and Virginia.
Thomas K. Rogers, III has served as Vice President, Regulatory Affairs,
since April 1997. He previously served as Director of Regulatory Affairs from
1995 to 1997 and as Manager of Regulatory Affairs from 1994 to 1995. Prior to
joining the Company, he served RSR Laboratories as Manager of Scientific
Development from 1991 to 1993, and Manager of Quality Assurance from 1990 to
1991. He served Beecham Laboratories as Manager of Quality Assurance from 1988
to 1990 and as Microbiologist from 1979 to 1988. He graduated from East
Tennessee State University with a M.S. in Microbiology in 1977 and from Milligan
College with a B.S. in Biology in 1975.
Edward J. Reilly has served as Vice President, Brand Management of
Monarch Pharmaceuticals, Inc., since January 1999. Previously, he was Product
Manager with Hoechst Marion Roussel, Inc., from 1990 to 1998. Since 1981 he
served in various sales and management and product management capacities with
Merrell Dow Pharmaceuticals and Marion Merrell Dow Pharmaceuticals. He graduated
from the State University of New York in 1976 with a B. S. in Biology.
Moises Saporta has served as Vice President of Manufacturing of King
Pharmaceuticals, Inc. since 1998. He was formerly Senior Director of Technology
Development. He previously served as Vice President World Wide Manufacturing
Operations for Roberts Pharmaceutical Corporation from 1991 to 1997. From 1988
to 1991, he was Assistant Director, Manufacturing and Engineering, with
Whitehall International. He served as plant manager and area manager for
American Cyanamid Company from 1981 to 1988 in Argentina. From 1977 to 1981, he
was manager of Pharmaceutical Technology for E. R. Squibb & Sons International.
He served in a series of technical operations and planned management positions
for USV Pharmaceutical internationally and domestically from 1966 to 1977. From
1961 to 1966, he served as manager of technical operations for F.
Hoffman-LaRoche. He graduated from the University of Chile in 1960 as a
Pharmaceutical Chemist.
Norman T. Miller has served as Senior Director, Regulatory Affairs
(Compliance), since December 1993. He previously served as a Research Compliance
Specialist and as acting Director of Compliance for Beecham Laboratories from
1988 to 1990. From 1990 to 1993 he served as Manager of Regulatory Affairs for
RSR Laboratories. Prior to 1988, he served as Resident-in-Charge, Senior
Investigator and Inspector for the FDA for 28 years. He graduated from South
Dakota State University with a M.S. in Animal Science-Biochemistry minor in 1960
and a B.S. in Animal Husbandry in 1958.
Lois A. Clarke has served as a Director of the Company since April 1997.
Presently she is Executive Vice President and Chief Financial Officer of The
United Company in Bristol, Virginia, one of the Company's principal
shareholders. She also serves as President of United Investment Corporation, a
registered investment advisor, and an affiliate of The United Company. Ms.
Clarke has been with The United Company since 1971 and has been responsible for
financial matters of the Company. She is a graduate of McClains College with a
degree in Accounting.
- 27 -
<PAGE> 28
Frank W. De Friece, Jr. has served as a Director of the Company since
October 1997. He has served as President, Vice President, Fund Administrator and
Board member of the Massengill De Friece Foundation, Inc. since 1950. Since 1946
he served in various capacities with the S.E. Massengill Company. He served as
President of the S.E. Massengill Company from 1960 to 1971 when the company was
purchased by Beecham, Inc. From 1971 to 1973, he served as Board Member Vice
Chairman of Beecham, Inc. He graduated from Roanoke College with a B.S. in
Chemistry in 1946.
D. Greg Rooker has served as a Director of the Company since October
1997. Mr. Rooker is the owner and President of Family Community Newspapers of
Southwest Virginia, Inc., Wytheville, Virginia ("FCN"). FCN consists of six
community newspapers and a national monthly motor sports magazine. He is the
founder of the Jason Foundation. Mr. Rooker is a graduate of Northwestern
University with a degree in Journalism.
Ted G. Wood has served as a Director of the Company since April 1997.
Presently, he is President, United Operating Companies, affiliates of The United
Company in Bristol, Virginia, one of the Company's principal shareholders. From
1992 to 1993, he was President of Boehringer Mannheim Pharmaceutical Corporation
in Rockville, Maryland. From 1993 to 1994 he was President of KV Pharmaceuticals
in St. Louis, Missouri. From 1975 to 1991, he was employed by SmithKline where
he served as President of Beecham Laboratories from 1988 to 1989 and Executive
Vice President of SmithKline from 1990 to 1991. He served as account supervisor
at Frank J. Corbett, Inc. in Chicago, Illinois from 1972 to 1974. From 1962 to
1971, he held various sales and marketing management positions with The Dow
Chemical Company. He graduated from the University of Kentucky with a B.S. in
Commerce in 1960. In 1986 he completed the Advanced Management Program at
Harvard University.
Richard C. Williams has served as a Director and Vice Chairman of
Research for the Board of Directors of the Company since February 25, 2000. He
was Chairman of Medco which merged with King in February 2000, since 1992 and a
Director of Medco since 1991. He was a Director of Vysis, Inc. from 1997 to
September 1999 and Co-chairman from January to September 1999. He has been
President of Conner-Thoele Limited, a consulting and financial advisory firm
which services the health care and pharmaceutical industries, since March 1989.
From November 1983 to March 1989, Mr. Williams served as Vice President-Finance
and Chief Financial Officer of Erbamont N.V., a pharmaceutical company. Prior to
that, he served in various financial and operational executive positions with
Field Enterprises, Inc., Abbott Laboratories and American Hospital Supply
Corporation. Mr. Williams also serves as a director of Immunomedics, Inc., a
biopharmaceutical research company. Mr. Williams is also a director of Centaur,
Inc., a private equine diagnostic company. He has a B.A. degree from DePauw
University and an M.B.A. from the Wharton School of Finance.
Messrs. John, Joseph, Jefferson, and James Gregory, and R. Henry
Richards, M.D., are brothers. Ms. Terri D. White-Gregory is the spouse of
Jefferson Gregory.
COMPENSATION OF DIRECTORS
For the year ended December 31, 1999, directors of the Company received
no fees for serving in such capacity. The 1998 Non-Employee Director Plan was
adopted by the Board of Director in February 1998. Currently options exercisable
for 75,000 shares of common stock have been issued to non-employee directors.
MEETINGS OF DIRECTORS
The Board of Directors held 10 meetings during 1999. No director
attended less than 75% of all meetings held.
CLASSIFICATION OF BOARD OF DIRECTORS
Pursuant to the Company's Bylaws, the Board of Directors is divided into
three classes of directors each containing, as nearly as possible, an equal
number of directors. Directors within each class are elected to serve three-year
terms and approximately one-third of the directors sit for election at each
annual meeting of the Company's shareholders. A classified board of directors
may have the effect of deterring or delaying any attempt by any group to obtain
control of the Company by a proxy contest since such third party would be
required to have its nominees elected at two separate meetings of the Board of
Directors in order to elect a majority of the members of the Board of Directors.
- 28 -
<PAGE> 29
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has appointed an Audit Committee and a Stock
Option Committee.
Audit Committee. The Audit Committee, which currently consists of
D. Greg Rooker, Lois A. Clarke and Frank W. DeFriece, Jr., has the authority and
responsibility to hire one or more independent public accountants to audit
our books, records and financial statements and to review our systems of
accounting (including our systems of internal control); to discuss with the
independent accountants the results of the annual audit and quarterly reviews;
to conduct periodic independent reviews of the systems of accounting (including
systems of internal control); and to make reports periodically to the Board of
Directors with respect to its findings.
Stock Option Committee. The Stock Option Committee, which currently
consists of Lois A. Clarke, Frank W. DeFriece, Jr. and D. Greg Rooker, is
responsible for administering, and determining awards under, the 1997 Incentive
and Nonqualified Stock Option Plan for Employees.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes all compensation earned by our Chief
Executive Officer and by each of the four other most highly compensated
executive officers whose total annual salary and bonus exceeded $100,000 for
services rendered in all capacities for the year ended December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($)(1)
- --------------------------- ---- ---------- --------- -------------------
<S> <C> <C> <C> <C>
John M. Gregory............................................... 1999 361,188 -0- 4,800
Chairman of the Board and Chief Executive Officer 1998 361,566 -0- 4,800
1997 360,918 -0- 4,800
Joseph R. Gregory............................................. 1999 301,188 -0- 4,800
Vice Chairman of Operations of the Board and President and 1998 282,882 -0- 4,800
Chief Operating Officer, Monarch Pharmaceuticals, Inc. 1997 265,854 -0- 4,800
Jefferson J. Gregory.......................................... 1999 300,729 -0- 4,800
President and Chief Operating Officer, King 1998 281,099 -0- 4,800
Pharmaceuticals, Inc. and Parkedale Pharmaceuticals 1997 242,588 -0- 4,800
Ernest C. Bourne(2)........................................... 1999 303,186 -0- 4,800
President, International Division
James E. Gregory.............................................. 1999 237,441 -0- 4,800
Executive Vice President, General Manager 1998 228,795 10,000 2,250
1997 201,569 4,000 4,800
</TABLE>
(1) All Other Compensation reflects matching contributions to the
401(k) plan.
(2) Mr. Bourne became an executive officer in January 1999. For other
information regarding payments to Mr. Bourne, see the section below
entitled "Certain Relationships and Related Transactions."
The following table discloses the grant of stock options in fiscal year
1999 to the executive officers.
- 29 -
<PAGE> 30
OPTIONS/SARS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS Potential realizable
value at assumed
annual rates of stock
price appreciation for
option term(1)
- ---------------------------------------------------------------------------------- ------------------------
Number of Percent of
securities total options
underlying granted to Exercise or
options employees in base price Expiration
Name granted(#) fiscal year ($/sh) date 5%($) 10% ($)
- ---------------------- ----------- ------------ ----------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Jefferson J. Gregory . 25,000 4.3% 45.06 2009 1,156,396 2,508,630
Joseph R. Gregory .... 25,000 4.3% 45.06 2009 1,156,396 2,508,630
James E. Gregory ..... 7,500 1.3% 45.06 2009 346,919 752,589
Ernest C. Bourne ..... 25,000 4.3% 45.06 2009 1,156,396 2,508,630
</TABLE>
(1) Based on $56.06 per share, the closing price of the common stock as
quoted on the Nasdaq Stock Market at December 31, 1999.
The following table discloses information regarding stock options held
at the end of or exercised in fiscal year 1999 for each of the executive
officers as of December 31, 1999.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Securities underlying Value of unexercised
acquired on Value unexercised options in-the-money options
NAME exercise realized at December 31, 1999 at December 31, 1999 (1)
- ----------------------------- -------- -------- -------------------- ------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jefferson J. Gregory ........ -0- n/a 43,750 18,750 $1,151,188 $876,188
Joseph R. Gregory............ -0- n/a 43,750 18,750 $1,151,188 $876,188
James E. Gregory............. -0- n/a 13,125 5,625 $ 345,356 $262,856
Ernest C. Bourne ............ -0- n/a 40,000 -0- $ 975,950 $ -0-
</TABLE>
- -----------------
(1) Based on $56.06 per share, the closing price of the common stock as
quoted on the Nasdaq Stock Market at December 31, 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors served as the Compensation Committee in 1999.
- 30 -
<PAGE> 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
ownership of the common stock as of March 8, 2000, for (i) each person who owns
more than 5% of the common stock, (ii) each director and executive officer of
the Company, and (iii) all executive officers and directors of the Company as a
group.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP OF
COMMON STOCK
---------------------------------
PERCENTAGE
EXECUTIVE OFFICERS, DIRECTORS NUMBER OUTSTANDING
AND 5% SHAREHOLDERS SHARES SHARES(1)
----------------------------- --------- -----------
<S> <C> <C>
John M. Gregory(2)................................................. 11,319,172 20.4
Joseph R. Gregory(3)............................................... 4,137,404 7.4
Jefferson J. Gregory(4)............................................ 1,406,327 2.5
James E. Gregory(5)................................................ 136,728 *
R. Henry Richards, M.D.(6)......................................... 253,858 *
Brian G. Shrader(7)................................................ 641,264 1.2
John McCoy(8)...................................................... 34,114 *
Terri D. White-Gregory(4).......................................... 5,625 *
John A. A. Bellamy(9).............................................. 64,848 *
Steven M. Samet(10)................................................ 39,000 *
Kyle P. Macione(11)................................................ 22,252 *
Ernest C. Bourne(12)............................................... 192,505 *
Lois A. Clarke(13)(14)............................................. 156,100 *
Frank W. DeFriece, Jr. (15)........................................ 15,000 *
D. Greg Rooker(16)................................................. 94,945 *
Richard C. Williams (17)........................................... 112,299 *
Ted G. Wood(14)(18)................................................ 57,000 *
All executive officers and directors as a group (17 persons)....... 18,368,431 41.3
The Summit Fund, LLC(19)........................................... 6,958,891 12.5
Janus Capital Corporation(20)...................................... 3,983,900 7.2
</TABLE>
* Less than 1%.
(1) Unless otherwise indicated, beneficial ownership consists of sole
voting and investing power based on 55,546,468 shares issued and
outstanding as of March 8, 2000. Options to purchase shares which are
exercisable or become exercisable within 60 days of March 8, 2000 are
deemed to be outstanding for the purpose of computing the percentage of
outstanding shares owned by each person to whom a portion of such
options relate but are not deemed to be outstanding for the purpose of
computing the percentage owned by any other person.
(2) Includes 8,518,514 shares jointly owned with Mr. Gregory's spouse;
2,743,808 shares owned by S.J., LLC, a limited liability company, the
primary members of which are Mr. Gregory's children and 56,850 shares
registered in the name of The Lazarus Foundation, Inc., a private
foundation controlled by John M. Gregory . Mr. Gregory's address is 501
Fifth Street, Bristol, Tennessee 37620.
(3) Includes 1,410,375 shares owned through Kingsway L.L.C., a limited
liability company, the primary members of which are Mr. Gregory, his
spouse and his son and 43,750 shares issuable upon the exercise of
options. Mr. Gregory's address is 501 Fifth Street, Bristol, Tennessee
37620.
(4) Includes 1,200,274 shares jointly beneficially owned by Ms.
White-Gregory and Jefferson J. Gregory and 87,000 shares beneficially
owned by Gregory Investments, L.P., the general partners of which are
Mr. Gregory and Ms. White-Gregory and 43,750 and 5,625 shares issuable
upon the exercise of options granted to Mr. Gregory and Ms.
White-Gregory, respectively.
(5) Includes 122,553 shares jointly owned with Mr. Gregory's spouse, 1,050
shares owned by Mr. Gregory's spouse and 13,125 shares issuable upon
the exercise of options.
(6) Includes 214,353 shares jointly owned with Dr. Richards' spouse and
13,125 shares issuable upon the exercise of options.
(7) Includes 322,250 shares owned by C.B.B., L.L.C., a limited liability
company, the primary members of which are Mr. Shrader and his parents;
15,934 shares jointly owned with Mr. Shrader's mother; 30,000 shares
held in the name of Mr. Shrader as custodian for M. B. Shrader; and
17,500 shares issuable upon the exercise of options.
- 31 -
<PAGE> 32
(8) Includes 20,989 shares jointly owned with Mr. McCoy's spouse and 13,125
shares issuable upon the exercise of options.
(9) Includes 13,125 shares issuable upon the exercise of options.
(10) Includes 7,500 shares issuable upon the exercise of options.
(11) Includes 8,625 shares issuable upon the exercise of options.
(12) Includes 40,000 shares issuable upon the exercise of options.
(13) Includes 24,500 shares held in the name of Ms. Clarke as custodian for
Donald Alan Clarke, a minor, and 15,000 shares issuable upon the
exercise of options.
(14) Ms. Clarke and Mr. Wood are affiliates of The United Company.
(15) Includes 15,000 shares issuable upon the exercise of options.
(16) Includes 25,080 shares held in trust for the benefit of Mr. Rooker's
children; 4,275 shares owned by Mr. Rooker's spouse, 10,710 shares
owned by Family Community Newspapers of Southwest Virginia, 8,710
shares owned by The Jason Foundation, a private foundation controlled
by Mr. Rooker and 15,000 shares issuable upon the exercise of options.
(17) Includes 67,637 shares jointly owned with Mr. Williams' spouse and
35,135 shares issuable upon the exercise of options.
(18) Includes 15,000 shares issuable upon the exercise of options.
(19) The Summit Fund, LLC is an affiliate of The United Company, The Summit
Fund, LLC along with other affiliates of The United Company
beneficially own in the aggregate 9,354,288 shares representing
approximately 16.8% of the outstanding shares. The address of The
Summit Fund, LLC is 1005 Glenway Avenue, Bristol, Virginia 24201.
(20) Based on a Schedule 13G filed with the SEC on behalf of Janus Capital
Corporation and Thomas H. Bailey, the address of which is 100 Fillmore
Street, Denver, Colorado 80206.
Messrs. John M. Gregory, Joseph R. Gregory, Jefferson J. Gregory, James
E. Gregory, Richards, Shrader, McCoy, Bellamy, Samet, Macione and Ms.
White-Gregory serve as executive officers. Messrs. John M. Gregory, Joseph R.
Gregory and Jefferson J. Gregory also serve as directors. For more information,
see "Directors and Executive Officers of the Registrant."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
King Pharmaceuticals Benevolent Fund, Inc. (the "Benevolent Fund") is a
nonprofit corporation organized under the laws of the Commonwealth of Virginia
and is exempt from taxation under Section 501(c)(3) of the Internal Revenue
Code. The Board of Directors of the Benevolent Fund includes John M. Gregory,
Joseph R. Gregory, Jefferson J. Gregory, James E. Gregory and R. Henry Richards,
M.D. who are also executive officers of the Company. Messrs. John M., Joseph R.
and Jefferson J. Gregory are also directors of King. King advanced $1.0 million
in 1997 to the Benevolent Fund which was used for general operating purposes. At
December 31, 1999, the Benevolent Fund was not indebted to King. The Benevolent
Fund is independent of King, maintains its own accounting records and its
activities are not directly related to the business of King. We donated
inventory with a cost of approximately $1.8 million to the Benevolent Fund in
1999.
The Summit Fund, LLC is an affiliate of The United Company, a Virginia
corporation. The Summit Fund, LLC and certain of The United Company's
shareholders, officers, directors and employees are the beneficial owners of
approximately 16.8% of our common stock. Currently, two members of our Board of
Directors, Lois A. Clarke and Ted G. Wood, are affiliates of The United Company.
As part of the sale of stock to The United Company on March 17, 1997, we
executed a Promissory Note in the amount of $1.8 million payable to The United
Company. The Promissory Note was paid in full in March 1999. Proceeds of the
loan from The United Company were used to fund, in part, the acquisition of the
Cortisporin(R) and Pediotic(R) product lines from Glaxo Wellcome.
For the year ended December 31, 1998, King had paid Bourne & Co., Inc.,
an affiliate of Mr. Bourne (a director and since January 1999, the President of
the International Division) $2,475,000 for consulting services. Additionally, in
connection with the Altace(R) Acquisition and the related financing, Bourne &
Co., Inc., received $1,250,000 in January 1999. We also purchased office
furniture, accessories and supplies for our international division office in
Charlotte, North Carolina from Bourne & Co., Inc. for approximately $79,000.
Bourne & Co., Inc. provided consulting services in areas such as corporate
development, financing alternatives and strategies, and general business
planning.
In September 1998, we purchased for approximately $350,000 the
primary residence of Jefferson J. Gregory in connection with his relocation to
the Parkedale facility. We sold the property for $250,000 in February 2000.
- 32 -
<PAGE> 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT ON FORM 8-K
(a) Documents filed as a part of this report:
(1) FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants............................................................................F-1
Consolidated Balance Sheets as of December 31, 1998 and 1999 ................................................F-2
Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and 1999 ..................F-3
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1997, 1998 and 1999 ..................................................................F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999 ..................F-5
Notes to Consolidated Financial Statements...................................................................F-7
(2) FINANCIAL STATEMENT SCHEDULE
Report of Independent Accountants............................................................................S-1
Valuation and Qualifying Accounts............................................................................S-2
</TABLE>
All other schedules have been omitted because of the absence of conditions under
which they are required or because the required information is given in the
above-listed financial statements or notes thereto.
(b) REPORTS ON FORM 8-K.
During the quarter ended December 31, 1999, we filed two Current Reports
on Form 8-K. Both Reports were filed on December 10, 1999. The first Report
announced King's entry, on November 30, 1999, into a definitive Agreement and
Plan of Merger with Medco Research, Inc., a Delaware corporation, to merge the
two companies in a tax-free pooling of interests transaction. The second Report
restated our consolidated financial statements for the years ended December 31,
1996, 1997 and 1998, which appeared in our Form 10-K for the fiscal year ended
December 31, 1998, to reflect a three for two split of our common stock which
became effective November 11, 1999 for shareholders of record as of October 28,
1999.
(c) EXHIBITS
The following Exhibits are filed herewith or incorporated herein by reference:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
*3.1 -- Second Amended and Restated Charter of King
Pharmaceuticals, Inc.
*3.2 -- Amended and Restated Bylaws of King Pharmaceuticals,
Inc.
*4.1 -- Specimen Common Stock Certificate.
*4.2 -- Form of Rights Agreement by and between King
Pharmaceuticals, Inc. and Union Planters National
Bank.
*10.1 -- Promissory Note between RSR Acquisition Corporation
(predecessor to King Pharmaceuticals, Inc.) and RSR
Laboratories, Inc., dated December 28, 1993, in the
amount of $3,500,000.
</TABLE>
- 33 -
<PAGE> 34
<TABLE>
<S> <C>
*10.2 -- Toll Manufacturing Agreement for APAP/Hydrocodone
Bitartrate Tablets by and between Mallinckrodt
Chemical, Inc. and King Pharmaceuticals, Inc.
*10.3 -- Credit Agreement, dated as of February 27, 1998, as
amended and restated as of December 22, 1998 among
King Pharmaceuticals, Inc., and the Lenders therein,
Credit Suisse First Boston, as Administrative Agent,
as Collateral Agent and as Swingline Lender, First
Union National Bank, as Issuing Bank, and First Union
National Bank and NationsBank, N.A., as Syndication
Agents.
*10.4 -- Manufacture and Supply Agreement with Novartis
(Ciba-Geigy Corporation) dated July 17, 1995.
*10.5 -- Supply Agreement with SmithKline Beecham Corporation
dated July 16, 1996.
*10.6 -- Trademark, Patent, Copyright and Know-How License
Agreement between Warner-Lambert Company and Glaxo
Wellcome Inc. dated as of June 30, 1996.
*10.7 -- Asset Purchase Agreement by and among Parkedale
Pharmaceuticals, Inc., Warner-Lambert Company and
Parke, Davis & Company, dated February 27, 1998, for
the acquisition of assets related to the Parkedale
Facility, Rochester, Michigan.
*10.8 -- Product Asset Purchase Agreement between Parkedale
Pharmaceuticals, Inc. and Warner-Lambert Company,
dated February 27, 1998, for the acquisition of
Anusol-HC(R) and other products.
*10.9 -- License Agreement by and among Warner-Lambert
Company, Parke Davis & Company, and Parkedale
Pharmaceuticals, Inc., dated February 27, 1998, for
the use of the Anusol Trademark, the Anusol Mold, and
Other Trademarks.
</TABLE>
- 34 -
<PAGE> 35
<TABLE>
<S> <C>
***10.10 -- General Products Agreement dated as of December
17, 1998, by and among Hoechst Marion Roussel, Inc.,
Hoechst Marion Roussel, Deutschland GmbH, and King
Pharmaceuticals, Inc.
****10.11 -- Agreement and Plan of Merger, dated November 30,
2000, by and among King Pharmaceuticals, Inc., Medco
Research, Inc. and Merlin Acquisition I Corp.
*10.12 -- 1998 King Pharmaceuticals, Inc. Non-Employee Director
Stock Option Plan.
*10.13 -- 1997 Incentive and Nonqualified Stock Option Plan
for Employees of King Pharmaceuticals, Inc.
**21.1 -- Subsidiaries of the Registrant
**23.1 -- Consent of PricewaterhouseCoopers LLP
**27.1 -- Financial Data Schedule (for SEC use only)
</TABLE>
* Incorporated by reference to King's Registration Statement on
Form S-1 (registration No. 333-38753) filed October 24, 1997.
** Filed herewith.
*** Incorporated by reference to King's Current Report on Form 8-K
filed January 6, 1999.
**** Incorporated by reference to King's Current Report on Form 8-K
filed December 10, 1999.
- 35 -
<PAGE> 36
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, 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 our audits
provide a reasonable basis for the opinion expressed above.
Greensboro, North Carolina
February 25, 2000, except for the information
presented in Note 20 for which the
date is March 17, 2000.
F-1
<PAGE> 37
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 $ 1,159 $ 8,451
Accounts receivable, net of allowance
for doubtful accounts $1,402 and $1,864, respectively 39,666 69,215
Inventories 26,556 33,410
Deferred income taxes 6,675 13,915
Prepaid expenses and other assets 1,554 5,682
--------- --------
Total current assets 75,610 130,673
Property, plant and equipment, net 93,981 97,151
Intangible assets, net 480,583 557,544
Other assets 17,997 20,321
--------- --------
Total assets $ 668,171 $805,689
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
Term loans $ 10,250 $ 12,962
Other 3,060 1,540
Accounts payable 12,594 25,370
Accrued expenses 15,095 45,122
Income taxes payable 3,524 4,756
--------- --------
Total current liabilities 44,523 89,750
Long-term debt:
Revolving Credit Facility 19,000 45,000
Term loans 414,750 354,194
Senior Subordinated Notes 75,000 150,000
Other 5,736 4,161
Deferred income taxes 7,726 14,148
--------- --------
Total liabilities 566,735 657,253
--------- --------
Commitments and contingencies (notes 13 and 20)
Shareholders' equity:
Common shares no par value, 150,000,000 shares
authorized, 48,157,095 and 48,205,594 shares
issued and outstanding, respectively 66,572 68,027
Retained earnings 35,460 80,409
Due from related party (596) --
--------- --------
Total shareholders' equity 101,436 148,436
--------- --------
Total liabilities and shareholders' equity $ 668,171 $805,689
========= ========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-2
<PAGE> 38
KING PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1997, 1998 and 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
Development revenues 558 5,283 --
-------- --------- ---------
Total revenues 47,909 163,463 348,271
-------- --------- ---------
OPERATING COSTS AND EXPENSES:
Cost of sales 13,034 64,052 113,204
Selling, general and administrative 19,123 34,718 79,982
Depreciation and amortization 2,395 9,255 26,914
-------- --------- ---------
Total operating costs and expenses, net 34,552 108,025 220,100
-------- --------- ---------
Operating Income 13,357 55,438 128,171
-------- --------- ---------
OTHER (EXPENSES) INCOME:
Interest expense (2,787) (14,866) (55,371)
Interest income 38 145 338
Other (28) -- (92)
-------- --------- ---------
Total other (2,777) (14,721) (55,125)
-------- --------- ---------
Income before Income Taxes and
Extraordinary Item 10,580 40,717 73,046
Income tax expense 3,968 15,396 27,392
-------- --------- ---------
Income before Extraordinary Item 6,612 25,321 45,654
Extraordinary loss on early extinguishment
of long-term debt, net of income taxes
of $2,787 and $445 -- (4,411) (705)
-------- --------- ---------
NET INCOME $ 6,612 $ 20,910 $ 44,949
======== ========= =========
Basic and diluted income (loss) per common share:
Income before extraordinary item $ 0.17 $ 0.56 $ 0.94
Extraordinary item -- (0.10) (0.01)
-------- --------- ---------
Net income $ 0.17 $ 0.46 $ 0.93
======== ========= =========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-3
<PAGE> 39
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 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, 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 16) 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
Options exercised 48,499 1,191 -- -- -- 1,191
Tax benefit related to option exercises -- 264 -- -- -- 264
Payments from Benevolent Fund -- -- -- -- 596 596
Net income -- -- 44,949 -- -- 44,949
---------- ------- ------- ---- ------- ---------
Balance, December 31, 1999 48,205,594 $68,027 $80,409 $ -- $ -- $ 148,436
========== ======= ======= ==== ======= =========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-4
<PAGE> 40
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 $ 6,612 $ 20,910 $ 44,949
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,395 9,255 26,914
Amortization of deferred financing costs -- 728 2,834
Loss on sale of marketable securities 32 -- --
Extraordinary loss -- 7,198 1,150
Net loss on sale of property and equipment -- 22 134
Deferred income taxes (980) (940) (818)
Changes in operating assets and liabilities:
Accounts receivable (6,256) (31,105) (29,642)
Inventories (4,753) (15,706) (6,854)
Prepaid expenses and other assets (332) 1,405 (2,041)
Accounts payable 3,604 6,723 12,776
Accrued expenses 2,180 5,679 30,027
Income taxes 2,514 1,662 1,232
-------- --------- ---------
Net cash provided by operating activities 5,016 5,831 80,661
-------- --------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (1,379) (81,099) (8,826)
Purchases of intangible assets (52,428) (344,906) (98,199)
Merger related costs (373) -- (1,379)
Proceeds from sale of property and equipment -- 30 20
Proceeds from sale of marketable securities 203 -- --
-------- --------- ---------
Net cash used in investing activities (53,977) (425,975) (108,384)
-------- --------- ---------
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,
net of expenses paid 8,007 50,117 1,191
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) (6,751)
-------- --------- ---------
Net cash provided by financing activities 47,638 421,234 35,015
-------- --------- ---------
Increase (decrease) in cash (1,323) 1,090 7,292
Cash and cash equivalents, beginning of period 1,392 69 1,159
-------- --------- ---------
Cash and cash equivalents, end of period $ 69 $ 1,159 $ 8,451
======== ========= =========
Supplemental disclosure of cash paid for:
Interest $ 2,335 $ 13,929 $ 50,411
======== ========= =========
Taxes $ 2,445 $ 10,662 $ 27,026
======== ========= =========
</TABLE>
F-5
<PAGE> 41
KING PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW for
the years ended December 31, 1997, 1998 and 1999, Continued
(in thousands, except share data)
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-6
<PAGE> 42
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 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. Chargebacks, rebates 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.
Inventory of product samples not distributed to third parties represent
11.3% of inventory as of December 31, 1999.
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.
F-7
<PAGE> 43
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. The estimated useful
lives are principally 15 to 40 years for buildings and improvements and
8 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,
patents 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.
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 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.
F-8
<PAGE> 44
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
$890, $401 and $2,025, for 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.
RECLASSIFICATIONS - Certain amounts from the prior consolidated
financial statements have been reclassified to conform to the
presentation adopted in 1999.
3. Concentrations of Credit Risk:
A significant portion of the Company's sales are to customers in the
pharmaceutical industry. Approximately 17% and 15% 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.
F-9
<PAGE> 45
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>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Customer A 16.7% 11.4% 18.3%
Customer B 13.4% 12.6% 14.6%
Customer C 14.0% 10.8% 12.6%
Customer D 10.6% n/a n/a
</TABLE>
n/a - sales were less than 10% for the year.
4. Property, Plant and Equipment:
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Land $ 3,949 $ 4,115
Buildings and improvements 55,990 59,230
Machinery and equipment 32,522 37,925
Equipment under capital lease 2,713 2,537
Construction in progress 6,106 6,189
--------- ---------
101,280 109,996
Less accumulated depreciation (7,299) (12,845)
--------- ---------
$ 93,981 $ 97,151
========= =========
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1997, 1998 and 1999 was $985, $4,236 and $5,607, respectively.
5. 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>
F-10
<PAGE> 46
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
6. Acquisitions/Intangible Assets:
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
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 (Note 9).
F-11
<PAGE> 47
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
6. Acquisitions/Intangible Assets, continued:
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 $ 374,644 $ 385,284
=========== ===========
Net income $ 31,288 $ 54,488
=========== ===========
Basic and diluted income per
common share $ 0.69 $ 1.21
=========== ===========
</TABLE>
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 37,035
--------- ---------
487,144 585,412
Less accumulated amortization (6,561) (27,868)
--------- ---------
$ 480,583 $ 557,544
========= =========
</TABLE>
Amortization expense for the years ended December 31, 1997, 1998, and
1999 was $1,410, $5,019, and $21,307, respectively.
F-12
<PAGE> 48
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
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,
1999 for leases with initial or remaining terms in excess of one year
are as follows:
<TABLE>
<S> <C>
2000 $4,153
2001 3,015
2002 1,787
2003 815
2004 397
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $138, $1,230, and $2,777, 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, 1998
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>
F-13
<PAGE> 49
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
8. 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 4,256 9,276
======== ========
$ 15,095 $ 45,122
======== ========
</TABLE>
9. 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 34 13
-------- --------
527,796 567,857
Less current portion 13,310 14,502
-------- --------
$514,486 $553,355
======== ========
</TABLE>
F-14
<PAGE> 50
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
9. Long-term Debt, continued:
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.
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.
F-15
<PAGE> 51
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
9. Long-term Debt, continued:
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 6),
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.
The aggregate maturities of long-term debt (including capital lease
obligations - Note 7) 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>
F-16
<PAGE> 52
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
10. 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, 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 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.
11. Income Taxes:
The net income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Current $ 4,948 $ 16,336 $ 28,210
Deferred (980) (940) (818)
------- -------- --------
Total expense $ 3,968 $ 15,396 $ 27,392
======= ======== ========
</TABLE>
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
Permanent differences 0.4 0.1 (0.6)
Other 0.1 (0.6) 0.1
------ ------ ------
Effective tax rate 37.5% 37.8% 37.5%
====== ====== ======
</TABLE>
F-17
<PAGE> 53
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
11. 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>
1998 1999
-------- --------
<S> <C> <C>
Allowance for doubtful accounts $ 389 $ 713
Uniform cost capitalization 228 --
Accrued expenses 101 4,714
State net operating loss carryforward 793 1,648
Accrued liabilities 5,164 8,488
Other -- 121
-------- --------
Total deferred tax assets 6,675 15,684
-------- --------
Property, plant and equipment (3,840) (7,117)
Intangible assets (3,721) (8,635)
Miscellaneous (165) (165)
-------- --------
Total deferred tax liabilities (7,726) (15,917)
-------- --------
Net deferred tax liability $ (1,051) $ (233)
======== ========
</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.
12. 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, 1997, 1998 and 1999, were $307,
$1,066 and $1,505, respectively. The plan also provides for
discretionary profit-sharing contributions by the Company.
F-18
<PAGE> 54
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
13. 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 affect on the Company's consolidated financial
position, results of operations, or cash flow.
F-19
<PAGE> 55
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
14. Segment Information:
The Company's business is classified into two reportable segments;
Branded Pharmaceuticals and Contract Manufacturing. Branded
Pharmaceuticals include a variety of branded prescription products over
four therapeutic areas, including cardiovascular, anti-infective,
vaccines and biologicals and women's health products. These branded
prescription products have been aggregated because of the similarity in
regulatory environment, manufacturing process, method of distribution,
and type of customer. Contract Manufacturing represents contract
manufacturing services provided for pharmaceutical and biotechnology
companies. The classification all other primarily includes generic
pharmaceutical, companion animal health products and development
services.
The Company primarily evaluates its segments based on gross profit.
Reportable segments were separately identified based on revenues, gross
profit and total assets.
The following represents selected information for the Company's
operating segments for the periods indicated:
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Total revenues:
Branded pharmaceuticals $ 37,912 $ 125,399 $ 304,004
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 $ 47,909 $ 163,463 $ 348,271
======== ========= =========
Gross profit (loss):
Branded pharmaceuticals $ 33,165 $ 94,452 $ 234,325
Contract manufacturing (187) (531) (4,858)
All Other 1,897 5,490 5,599
-------- --------- ---------
Consolidated gross profit $ 34,875 $ 99,411 $ 235,066
======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
as of December 31,
------------------------
1998 1999
--------- ---------
<S> <C> <C>
Total assets:
Branded pharmaceuticals $ 522,218 $ 637,225
Contract manufacturing 144,614 168,484
All Other 1,735 1,070
Eliminations (396) (1,090)
--------- ---------
Consolidated total assets $ 668,171 $ 805,689
========= =========
</TABLE>
Capital expenditures of $1,379, $8,099 and $8,826 for the years ended
December 31, 1997, 1998 and 1999, respectively, are substantially
utilized for contract manufacturing purposes.
F-20
<PAGE> 56
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
15. 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 4,571,033 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.
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.
16. Stockholders' Equity:
Stock Splits:
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.
F-21
<PAGE> 57
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
16. Stockholders' Equity. Continued:
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. On March 1, 1999, the Company
granted 398,175 options of common stock to employees under the 1997
Stock Option Plan at an exercise price of $16.083 per share and on
November 24, 1999 the Company granted 575,750 options of common stock
to employees at an exercise price of $45.0625 per share.
As of December 31, 1999, the Company had 1,212,294 options outstanding
of which 764,675 are vested and exercisable. 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 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. The options vested immediately
upon grant. As of December 31, 1999, 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, 1999:
<TABLE>
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
Income before extraordinary item:
As reported $ 25,321 $ 45,654
======== ==========
Pro Forma $ 24,520 $ 34,788
======== ==========
Net income:
As reported $ 20,910 $ 44,949
======== ==========
Pro Forma $ 20,109 $ 34,083
======== ==========
Diluted income per share:
Income before extraordinary item:
As reported $ 0.56 $ 0.94
======== ==========
Pro Forma $ 0.54 $ 0.72
======== ==========
Net income:
As reported $ 0.46 $ 0.93
======== ==========
Pro Forma $ 0.45 $ 0.70
======== ==========
</TABLE>
F-22
<PAGE> 58
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
16. 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 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%.
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 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
Granted 973,925 39.33 -- --
Exercised (48,499) 23.93 -- --
Forfeited (43,432) 15.33 -- --
--------- ---------- ------- -----
Outstanding at December 31, 1999 1,212,294 $ 27.72 75,000 $9.33
========= ========== ======= =====
Weighted average fair value
of options granted N/A $ 19.72 N/A $9.33
========= ========== ======= =====
Options available for grant
at December 31, 1999 3,539,207 N/A 375,000 N/A
========= ========== ======= =====
</TABLE>
Options outstanding at December 31, 1999 have exercise prices between
$9.33 and $45.06, with a weighted average exercise price of $27.72 and
a remaining contractual life of approximately 9.4 years.
F-23
<PAGE> 59
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
17. 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 $ 6,612 $ 25,321 $ 45,654
========== =========== ===========
Basic income per share:
Weighted average common shares 39,405,153 45,191,291 48,169,008
---------- ----------- -----------
Basic income per common share $ 0.17 $ 0.46 $ 0.94
========== =========== ===========
Diluted income per share
Weighted average common shares 39,405,153 45,191,291 48,169,008
Effect of stock options -- 44,836 422,533
---------- ----------- -----------
Weighted average common shares
plus assumed conversions 39,405,153 45,236,127 48,591,541
---------- ----------- -----------
Diluted income per share $ 0.17 $ 0.46 $ 0.93
========== =========== ===========
</TABLE>
18. 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 $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 0.16
Net income(1) 0.10 0.15 0.15 0.07
</TABLE>
<TABLE>
<CAPTION>
1999 By Quarter First Second Third Fourth
--------------- ------- ------- -------- --------
<S> <C> <C> <C> <C>
Total revenues $60,002 $76,003 $104,909 $107,357
Gross profit 44,192 52,870 68,797 69,207
Operating income 23,659 28,774 38,808 36,930
Income before extraordinary item 6,698 9,890 15,079 13,987
Net income 5,993 9,890 15,079 13,987
Basic and diluted income per common share:
Income before extraordinary item(1) 0.14 0.21 0.31 0.29
Net income 0.12 0.21 0.31 0.29
</TABLE>
(1) Quarterly amounts do not add to annual amounts due to the effect of
rounding on a quarterly basis.
F-24
<PAGE> 60
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
19. Guarantor Financial Statements:
The Company's wholly-owned subsidiaries Monarch Pharmaceuticals, Inc.,
Parkedale Pharmaceuticals, Inc. and King Pharmaceuticals of Nevada,
Inc. (the "Guarantor Subsidiaries") have guaranteed the Company's
performance under the $150,000 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.
GUARANTOR SUBSIDIARIES
CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
-------- --------
<S> <C> <C>
Current assets:
Cash $ -- $ --
Accounts Receivable 30,475 63,336
Inventory 20,089 27,433
Prepaid expense 27 2,667
-------- --------
Total current assets 50,591 93,436
-------- --------
Intercompany receivable
Property, plant, and equipment, net 72,625 74,659
Intangible assets, net 117,858 119,305
Other assets -- 875
-------- --------
Total assets $241,074 $288,275
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 8,157 $ 22,198
Current portion of long-term debt -- 27
Accrued expenses 10,645 36,081
Income taxes payable -- 4,755
-------- --------
Total current liabilities 18,802 63,061
-------- --------
Long-term debt -- 42
Intercompany payable 175,613 57,290
-------- --------
Total liabilities 194,415 120,393
-------- --------
Shareholders' equity 46,659 167,882
-------- --------
Total liabilities and shareholder's equity $241,074 $288,275
======== ========
</TABLE>
F-25
<PAGE> 61
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
19. Guarantor 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:
Net sales $ 37,912 $ 151,057 $ 333,175
Development revenue -- 5,000 --
-------- --------- ---------
Total revenues 37,912 156,057 333,175
-------- --------- ---------
OPERATING COSTS AND EXPENSES:
Cost of sales 4,804 60,053 104,187
Selling, general, and administrative 10,606 22,244 64,779
Depreciation and Amortization 1,369 7,265 14,004
-------- --------- ---------
Total operating costs and expenses 16,779 89,562 182,970
-------- --------- ---------
OPERATING INCOME 21,133 66,495 150,205
OTHER (EXPENSES) INCOME 2,177 7,904 (111)
-------- --------- ---------
Income before income taxes 18,956 49,171 150,316
-------- --------- ---------
Income tax expense 7,336 19,029 29,093
-------- --------- ---------
NET INCOME $ 11,620 $ 30,142 $ 121,223
====== ========= =========
</TABLE>
F-26
<PAGE> 62
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
19. Guarantor 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 $ 11,620 $ 30,142 $ 121,223
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization and Depreciation 1,369 7,265 14,004
Loss on disposition of assets -- -- 143
Changes in operating assets and liabilities:
Accounts payable 3,634 4,524 14,041
Inventory (4,999) (15,090) (7,344)
Prepaid expenses (62) 36 (2,641)
Other assets (81) 82 (875)
Accrued expenses 4,543 6,102 25,436
Income taxes -- -- 4,756
Accounts receivable (6,419) (24,056) (32,954)
-------- --------- ---------
Net cash provided by operating activities 9,605 9,005 135,789
-------- --------- ---------
Cash flow from investing activities:
Purchases of intangible assets (63,553) (60,189) (6,400)
Purchases of property and equipment (50) (75,325) (6,240)
-------- --------- ---------
Net cash used in investing activities (63,603) (135,514) (12,640)
-------- --------- ---------
Cash flows from financing activities:
Increase (decrease) in inter-company payable 52,158 128,271 (123,218)
Increase (decrease) in long-term debt 1,762 (1,762) 69
-------- --------- ---------
Net cash provided by (used in) financing activities 53,920 126,509 (123,149)
-------- --------- ---------
Change in cash and cash equivalents -- -- --
Cash and cash equivalents at beginning of period -- -- --
-------- --------- ---------
Cash and cash equivalents at end of period $ -- $ -- $ --
======== ========= =========
</TABLE>
F-27
<PAGE> 63
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
20. Subsequent Events
On February 25, 2000, the Company completed a merger with Medco
Research, Inc. ("Medco") by exchanging 7,221,125 shares of it common
stock for all of the common stock of Medco. Each share of Medco was
exchanged for .6757 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 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.
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 34,369
-------- -------- --------
$ 67,909 $191,007 $382,640
======== ======== ========
Net income:
King $ 6,612 $ 20,910 $ 44,949
Medco 10,213 16,242 7,634
-------- -------- --------
$ 16,825 $ 37,152 $ 52,583
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
---------------------------
1998 1999
--------- ---------
<S> <C> <C>
Total assets
King $668,171 $805,689
Medco 64,285 79,034
-------- --------
$732,456 $884,723
======== ========
</TABLE>
On March 17, 2000, the FDA concluded that the methods, facilities and
controls used by Parkedale in the manufacture, processing and packaging of
Fluogen were not in compliance with cGMP requirements. The FDA therefore
informed Parkedale, pursuant to the consent decree, that it must suspend
production and distribution of Fluogen until the facility meets cGMP standards.
The production and distribution of Fluogen is currently suspended pursuant to
the FDA's order. The Company is working to meet all of the FDA's requirements
for the production and distribution of Fluogen to resume, which can occur upon
the FDA's verification that Parkedale has substantially complied with all
required corrective measures. 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. The
Company generally recognizes revenue from Fluogen(R) during the third and fourth
quarters of each calendar year. The Company is presently evaluating strategies
pertaining to Fluogen(R). Presently, the Company intends to pursue all actions
reasonably necessary to assure Fluogen(R)'s availability during the upcoming flu
season commencing September 2000.
In March 2000, the FDA also wrote to provide comments and requests for
further information and clarification of previous information submitted by
Parkedale to the FDA in relation to certain process validation issues of
Aplisol(R) (tuberculin purified protein derivative diluted). The FDA's
correspondence does not require Parkedale to discontinue or delay, in any
manner, the production and distribution of Aplisol(R), and the FDA continues to
approve the release and distribution of Aplisol(R) by Parkedale.
The Company cannot determine what effect changes in regulations or
statutes or legal interpretation, when and if promulgated or enacted, may have
on the Company's business in the future. Changes could, among other things,
require changes to manufacturing methods, expanded or different labeling, the
recall, replacement or discontinuance of certain products, additional record
keeping or expanded documentation of the properties of certain products and
scientific substantiation. Such changes, or new legislation, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
F-28
<PAGE> 64
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(in thousands, except share data)
20. Subsequent Events, continued:
<PAGE> 65
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
KING PHARMACEUTICALS, INC.
By: /s/ John M. Gregory
----------------------------------
Chairman of the Board
Date: March 30, 2000
In accordance with the requirements of the Exchange Act, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ John M. Gregory Chairman of the Board (principal executive officer) March 30, 2000
- ------------------------------
John M. Gregory
/s/ Brian G. Shrader Chief Financial Officer (principal financial and March 30, 2000
- ------------------------------ accounting officer)
Brian G. Shrader
Director March __, 2000
- ------------------------------
Jefferson J. Gregory
/s/ Joseph R. Gregory Director March 30, 2000
- ------------------------------
Joseph R. Gregory
Director March __, 2000
- ------------------------------
Ernest C. Bourne
Director March __, 2000
- ------------------------------
Lois A. Clarke
/s/ Frank W. De Friece, Jr. Director March 30, 2000
- -----------------------------
Frank W. De Friece, Jr.
/s/ D. Greg Rooker Director March 30, 2000
- -----------------------------
D. Greg Rooker
/s/ Richard C. Williams Director March 30, 2000
- -----------------------------
Richard C. Williams
/s/ Ted G. Wood Director March 30, 2000
- -----------------------------
Ted G. Wood
</TABLE>
<PAGE> 66
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of King
Pharmaceuticals, Inc., is included on page F-1 of this Form 10- K. In connection
with our audits of such consolidated financial statements, we have also audited
the related financial statement schedule listed under Item 14 of this Form 10-K.
In our opinion, the consolidated financial statement schedule referred
to above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
PricewaterhouseCoopers LLP
Greensboro, North Carolina
February 25, 2000, except for the
information presented in Note 20
for which the date is March 17, 2000
S-1
<PAGE> 67
KING PHARMACEUTICALS, INC.
Schedule II. Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
Column C
Column A Column B Additions Column D Column E
-------- -------- ------------------------------- -------- --------
Charged
Balances at Charged (Credited) Balance at
Beginning of to Costs to Other End of
Period and Expenses Accounts Deductions(1) Period
------ ------------ -------- ------------- ------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts,
deducted from accounts receivable in
the balance sheets
Year ended December 31, 1999 ....... $1,402 $ 874 $ -- $412 $1,864
Year ended December 31, 1998 ....... 638 1,169 -- 405 1,402
Year ended December 31, 1997 ....... 93 565 -- 20 638
</TABLE>
(1) Amounts represent write-offs of accounts.
S-2
<PAGE> 1
Exhibit 21.1
Subsidiaries State of Incorporation
- ------------ ----------------------
Monarch Pharmaceuticals, Inc. Tennessee
Parkedale Pharmaceuticals, Inc. Michigan
Medco Research, Inc. (effective
February 25, 2000) Delaware
King Pharmaceuticals of Nevada, Inc. Nevada
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 333-95181) and the Registration Statements on Form
S-8 (Nos. 333-70203 and 333-73053) of King Pharmaceuticals, Inc. of our report
dated February 25, 2000, except for the information in Note 20 for which the
date is March 17, 2000, relating to the consolidated financial statements and
financial statement schedule, which appear in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Greensboro, North Carolina
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF KING PHARMACEUTICALS FOR THE YEAR ENDED DECEMBER 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 8,451
<SECURITIES> 0
<RECEIVABLES> 71,079
<ALLOWANCES> (1,864)
<INVENTORY> 33,410
<CURRENT-ASSETS> 130,673
<PP&E> 109,996
<DEPRECIATION> (12,845)
<TOTAL-ASSETS> 805,689
<CURRENT-LIABILITIES> 89,750
<BONDS> 150,000
0
0
<COMMON> 0
<OTHER-SE> 148,436
<TOTAL-LIABILITY-AND-EQUITY> 805,689
<SALES> 348,271
<TOTAL-REVENUES> 348,271
<CGS> 113,204
<TOTAL-COSTS> 220,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55,371
<INCOME-PRETAX> 73,046
<INCOME-TAX> 27,392
<INCOME-CONTINUING> 45,654
<DISCONTINUED> 0
<EXTRAORDINARY> (705)
<CHANGES> 0
<NET-INCOME> 44,949
<EPS-BASIC> .93
<EPS-DILUTED> .93
</TABLE>
