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Filed Pursuant to Rule 424(b)(5)
Registration No. 333-95181
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PROSPECTUS SUPPLEMENT
APRIL 19, 2000
(TO PROSPECTUS DATED APRIL 19, 2000)
KING PHARMACEUTICALS, INC.
4,000,000 SHARES OF COMMON STOCK
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THE COMPANY:
- - We are a vertically integrated pharmaceutical company that manufactures,
markets and sells primarily branded prescription pharmaceutical products.
- - King Pharmaceuticals, Inc.
501 Fifth Street
Bristol, Tennessee 37620
(423) 989-8000
- - NASDAQ National Market Symbol: KING
THE OFFERING:
- - We are selling 4,000,000 shares of common stock to the underwriter at a price
of $41.38 per share.
- - The underwriter has an option to purchase up to an additional 600,000 shares
from us to cover over-allotments.
- - The underwriter has purchased all of the 4,000,000 shares for $165,520,000 and
proposes to re-offer them from time to time for sale in one or more
transactions in the over-the-counter market through negotiated transactions or
otherwise, at prevailing market prices, at prices related to prevailing market
prices or at negotiated prices.
- - There is an existing trading market for these shares. The reported last sale
price on April 18, 2000 was $41 5/8 per share.
- - We plan to use the proceeds from this offering to repay debt under our senior
credit facility.
- - Closing: April 25, 2000.
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE S-8.
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Neither the SEC nor any state securities commission has determined whether
this prospectus is truthful or complete. Nor have they made, nor will they make,
any determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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DONALDSON, LUFKIN & JENRETTE
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TABLE OF CONTENTS
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PROSPECTUS SUPPLEMENT PAGE
WHERE YOU CAN FIND MORE
INFORMATION........................ S-2
A WARNING ABOUT FORWARD-LOOKING
STATEMENTS......................... S-3
SUMMARY.............................. S-5
RISK FACTORS......................... S-8
USE OF PROCEEDS...................... S-21
PRICE RANGE OF COMMON STOCK AND
DIVIDEND POLICY.................... S-21
CAPITALIZATION....................... S-22
UNAUDITED PRO FORMA SUPPLEMENTARY
CONSOLIDATED FINANCIAL
STATEMENTS......................... S-23
DESCRIPTION OF CAPITAL STOCK......... S-28
UNDERWRITING......................... S-33
NOTICE TO CANADIAN RESIDENTS......... S-35
LEGAL MATTERS........................ S-36
EXPERTS.............................. S-36
INDEX TO FINANCIAL STATEMENTS........ F-1
PROSPECTUS PAGE
ABOUT THIS PROSPECTUS................ 1
WHERE YOU CAN FIND MORE
INFORMATION........................ 1
A WARNING ABOUT FORWARD-LOOKING
STATEMENTS......................... 2
KING PHARMACEUTICALS, INC............ 2
RATIOS OF EARNINGS TO FIXED
CHARGES............................ 3
USE OF PROCEEDS...................... 3
LEGAL OWNERSHIP...................... 4
DESCRIPTION OF DEBT SECURITIES WE MAY
OFFER.............................. 6
REGARDING THE TRUSTEE................ 15
DESCRIPTION OF DEBT WARRANTS WE MAY
OFFER.............................. 15
DESCRIPTION OF PREFERRED STOCK WE MAY
OFFER.............................. 18
PLAN OF DISTRIBUTION................. 19
VALIDITY............................. 20
INDEPENDENT ACCOUNTANTS.............. 20
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS OR TO WHICH WE HAVE REFERRED YOU. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS MAY ONLY BE USED
WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS MAY ONLY BE ACCURATE ON THE DATE OF
THIS DOCUMENT.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings are also available on the SEC's
Website at "http://www.sec.gov."
The SEC allows us to "incorporate by reference" information from other
documents that we file with them, which means that we can disclose important
information by referring to those documents. The information incorporated by
reference is considered to be part of this prospectus supplement and the
accompanying prospectus, and information that we file later with the SEC will
automatically update and supersede this information. We incorporate by reference
the document listed below and any future filings we make with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Securities
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Exchange Act of 1934 prior to the sale of all the shares covered by this
prospectus supplement and the accompanying prospectus:
- Our Annual Report on Form 10-K for the year ended December 31, 1999.
You may request a copy of these filings, at no cost, by writing or
telephoning:
King Pharmaceuticals, Inc.
501 Fifth Street
Bristol, Tennessee 37620
Attention: Kyle P. Macione, Executive Vice President, Investor Relations
Telephone: 423.989.8077
You should rely only on the information incorporated by reference or
provided in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone else to provide you with different information. We will
not make an offer of these securities in any state where the offer is not
permitted. You should not assume that the information in this prospectus
supplement and the accompanying prospectus is accurate as of any date other than
the date on the front of these documents.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
This prospectus supplement 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 prospectus supplement.
Forward-looking statements include, but are not limited to:
- anticipated developments and expansions of our business;
- increases in sales of recently acquired products or royalty payments;
- development of product line extensions;
- future findings and determinations of the FDA;
- significant debt service and leverage requirements;
- the products which we expect to offer;
- the intent to market and distribute certain of our products
internationally;
- the intent to manufacture in our own facilities some of our products
currently manufactured for us by third parties;
- the intent, belief or current expectations, primarily with respect to our
future operating performance;
- expectations regarding sales growth, gross margins, manufacturing
productivity, capital expenditures and effective tax rates; and
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- expectations regarding our financial condition and liquidity as well as
future cash flows and earnings.
These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different from those contemplated by our forward-looking statements. These other
factors include, but are not limited to, the following:
- changes in general economic and business conditions;
- dependence on continued acquisition of products or companies;
- management of growth of business and integration of 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 or companies;
- manufacturing capacity constraints; and
- the availability, terms and deployment of capital.
We do not undertake to update our forward-looking statements to reflect
future events or circumstances.
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SUMMARY
This summary highlights some information from this prospectus supplement
and the accompanying prospectus. Because this is a summary, it does not contain
all the information that may be important to you. To understand this offering
fully, you should read the entire prospectus supplement and accompanying
prospectus carefully, including the Risk Factors section beginning on page S-8,
the financial statements beginning on page F-1 and the documents incorporated by
reference herein. You should also keep in mind the following points as you read
this prospectus supplement:
- Unless the context otherwise indicates, references in this prospectus
supplement and accompanying prospectus to "we," "us," "our" and "King"
refer to King Pharmaceuticals, Inc. and its subsidiaries.
- Unless we tell you otherwise, the information in this prospectus
supplement assumes that the underwriter will not exercise its
over-allotment option to purchase additional shares of our common stock.
- Unless the context otherwise indicates, references in this prospectus
supplement and the accompanying prospectus to the "senior credit
facility" include the revolving credit facility and the term loans,
including tranche A and tranche B.
WHO WE ARE
King is a vertically integrated pharmaceutical company that manufactures,
markets and sells primarily branded prescription pharmaceutical products.
Through a national sales force of almost 300 representatives and co-promotion
arrangements, we market our branded pharmaceutical products to general/family
practitioners, internal medicine physicians, cardiologists and hospitals across
the country.
Our primary business strategy is to acquire established branded
pharmaceutical products and to increase their sales through focused marketing
and promotion, life cycle management as well as by securing new indications,
developing product line extensions and devising new formulations or dosages. In
pursuing product 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 seek
attractive company acquisitions that add products or product pipelines,
technologies or sales and marketing capabilities to our key therapeutic areas.
These activities are attractive for us because they may expand the market for
our branded pharmaceutical products, provide 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 Hoffmann-La Roche Inc.
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RECENT DEVELOPMENTS
On March 10, 2000, the United States Food and Drug Administration, which we
refer to in this prospectus as the "FDA," notified us that the methods,
facilities and controls used by our Parkedale facility in the manufacture,
processing and packaging of Fluogen(R), our influenza virus vaccine, were not in
compliance with current Good Manufacturing Practices, which we refer to in this
prospectus 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 for the manufacture and
distribution of Fluogen(R). The FDA has received our initial response to its
March 10 notification and following discussions with the FDA, we have filed with
the FDA our written certification of conformance that we are now sufficiently in
compliance with cGMP manufacturing standards to resume the manufacture of
Fluogen(R) and we have now resumed the manufacture of Fluogen(R). The
distribution of Fluogen(R) remains suspended pursuant to the FDA's order. We
cannot resume the distribution of Fluogen(R) until the FDA conducts an on-site
inspection of our Parkedale facility and finds the facility in substantial
compliance with cGMPs. We are working to meet all of the FDA's requirements to
resume distribution of Fluogen(R), which can occur upon the FDA's verification
that Parkedale has satisfactorily completed all required corrective measures and
is in substantial compliance with cGMP standards. Fluogen(R)'s gross sales
totaled $32.0 million, while net sales equaled $28.7 million, for the year ended
December 31, 1999. Gross profit for Fluogen(R) equaled $6.9 million for the same
period. We generally recognize revenue from Fluogen(R) during the third and
fourth quarters of each calendar year. While we are pursuing all actions
reasonably necessary to assure Fluogen(R)'s availability during the upcoming flu
season commencing in September 2000, we cannot assure you that we will be able
to satisfy the FDA's concerns respecting the cGMP standards applicable to
Fluogen(R). Consequently, we cannot assure you that we will be able to market or
distribute any amount of the vaccine, if at all, in the future.
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, now one of our wholly-owned subsidiaries, 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 U.S. 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, to obtain the FDA's clearance to market the drug. Medco has
successfully developed two adenosine-based products, Adenocard(R) and
Adenoscan(R). The New Drug Applications for Adenocard(R) and Adenoscan(R) are
held by Fujisawa Healthcare, Inc. and Medco receives a royalty based on the
sales of the products principally by Fujisawa and Sanofi Synthelabo. Medco also
provides us with a potential pipeline of proprietary products.
RISK FACTORS
Investing in our common stock involves risks. You should carefully consider
all of the information in this prospectus supplement and the accompanying
prospectus. In particular, you should evaluate the specific risk factors set
forth under "Risk Factors" beginning on page S-8 for a discussion of certain
risks involved with an investment in the offering.
OUR ADDRESS
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.
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THE OFFERING
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Common stock offered by us................. 4,000,000 shares
Common stock outstanding after the 59,546,468 shares(1)
offering.................................
Use of proceeds............................ We will use the net proceeds from the sale
of the shares for repayment of
approximately $165.0 million of debt
outstanding under the senior credit
facility.
For more information, see "Use of
Proceeds."
The Nasdaq National Market symbol.......... KING
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(1) Excludes 1,287,294 shares of common stock issuable upon the exercise of
stock options outstanding at December 31, 1999 at a weighted average
exercise price of $27.72 per share and 3,914,207 shares reserved for
issuance under our stock plans.
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RISK FACTORS
Before you purchase our securities, you should carefully consider the risks
described below and the other information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus, including our
financial statements and related notes. The risks described below are not the
only ones facing our company. Additional risks not presently known to us or that
we currently deem immaterial may also impair our business operations. If any of
the adverse events described in this risk factors section actually occur, our
business, results of operations and financial condition could be materially
adversely affected, the trading price of our common stock could decline and you
might lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH.
We have a high level of debt. As of December 31, 1999, our total debt was
approximately $568 million and our total debt, as a percentage of total
capitalization, was approximately 79.0%. Our high level of debt could have a
significant adverse future effect on our business. For example:
- we will have limited ability to borrow additional amounts for working
capital, capital expenditures, acquisitions, debt service requirements,
execution of our growth strategy, research and development costs or other
purposes;
- a substantial portion of our cash flow will be used to pay principal and
interest on our debt, which will reduce the funds available for working
capital, capital expenditures, acquisitions and other purposes;
- our senior credit facility covenants require us to meet certain financial
objectives and impose other significant restrictions on our business
operations. These covenants and the covenants contained in the indenture
governing our senior subordinated notes will limit our ability to borrow
additional funds or dispose of assets, pay dividends and limit our
flexibility in planning for and reacting to changes in our business;
- we may be more vulnerable to adverse changes in general economic,
industry and competitive conditions and adverse changes in government
regulation;
- our high debt level and the various covenants contained in the indenture
related to our senior subordinated notes and the documents governing our
other existing indebtedness may place us at a relative competitive
disadvantage as compared to certain of our competitors; and
- borrowings under our senior credit facility are at floating rates of
interest, which could result in higher interest expense in the event of
an increase in interest rates.
Our ability to pay principal of and interest on our senior subordinated
notes, to service our other debt and to refinance indebtedness when necessary
depends on our financial and operating performance, each of which is subject to
prevailing economic conditions and to financial, business and other factors
beyond our control.
We cannot assure you that we will generate sufficient cash flow from
operations or that we will be able to obtain sufficient funding to satisfy all
of our obligations, including the senior subordinated notes. If we are unable to
meet our debt obligations, we will be required to pursue one or more alternative
strategies, such as selling assets, refinancing or restructuring our
indebtedness or selling additional equity capital. However, we cannot assure you
that any alternative strategies will be
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feasible at the time or prove adequate. Also, certain alternative strategies
will require the consent of our senior secured lenders before we engage in any
such strategy.
IF WE CANNOT IMPLEMENT OUR STRATEGY TO GROW OUR BUSINESS THROUGH ACQUISITIONS,
OUR COMPETITIVE POSITION IN THE INDUSTRY MAY SUFFER.
We have historically increased our sales and net income through strategic
acquisitions and related internal growth initiatives intended to develop
marketing opportunities with respect to acquired product lines. Our strategy is
focused on increasing sales and enhancing our competitive standing through
acquisitions that complement our business and enable us to promote and sell new
products through existing marketing and distribution channels. Moreover, since
we engage in limited proprietary research activity with respect to product
development, we rely heavily on purchasing product lines from other companies.
Other companies, many of whom have substantially greater financial,
marketing and sales resources than we do, compete with us for products or
companies.
We may not be able to acquire rights to additional products on acceptable
terms, if at all, or be able to obtain future financing for such acquisitions on
acceptable terms, if at all. The inability to effect acquisitions of additional
branded products will prevent us from introducing new products and limit the
overall growth of our business. Furthermore, even if we obtain rights to a
pharmaceutical product, we may not be able to generate sales sufficient to
create a profit or otherwise avoid a loss. For example, our marketing strategy,
distribution channels and levels of competition with respect to acquired
products may be different than those of our current products, limiting our
ability to compete favorably in those product categories.
IF WE CANNOT INTEGRATE THE BUSINESSES OF COMPANIES WE ACQUIRE, INCLUDING MEDCO,
OUR BUSINESS MAY SUFFER.
We anticipate that the integration of newly-acquired products, and other
assets into our business will require significant management attention and
expansion of our sales force. In order to effectively manage our acquisitions,
we must maintain adequate operational, financial and management information
systems and motivate and effectively manage an increasing number of employees.
Our recent acquisitions have significantly expanded our product offerings,
operations and number of employees. Our future success will also depend in part
on our ability to retain or hire qualified employees to operate our expanding
facilities efficiently in accordance with applicable regulatory standards. If we
cannot integrate our acquisitions successfully, these changes and acquisitions
could have a material adverse effect on our business, financial condition,
results of operations and cash flows.
For example, on February 25, 2000, we merged with Medco in a tax-free
pooling-of-interests transaction. We will realize the anticipated benefits of
this merger only if we can integrate our cultures, operations and personnel in a
timely and efficient manner. See "Recent Developments" on page S-6 for more
information about our merger with Medco.
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IF WE ARE NOT ABLE TO DEVELOP OR LICENSE NEW PRODUCTS, OUR BUSINESS MAY SUFFER.
We compete with other pharmaceutical companies, including large
pharmaceutical companies with financial resources and capabilities substantially
greater than ours, in the development and licensing of new products. We cannot
assure you that we will be able to
- develop, license or successfully commercialize new products on a timely
basis or at all, or
- develop or license new products in a cost effective manner.
Further, other companies may license or develop products or may acquire
technology for the development of products that are the same as or similar to
the products we have in development or that we license. Because there is rapid
technological change in the industry and because other companies have more
resources than we do, other companies may
- develop or license their products more rapidly than we can,
- complete any applicable regulatory approval process sooner than we can,
- market or license their products before we can market or license our
products,
- offer their newly developed or licensed products at prices lower than
ours
and thereby negatively impact the sales of our newly developed or licensed
products. Technological developments or the FDA's approval of new therapeutic
indications for existing products may make our existing products or those
products we are licensing or developing obsolete or may make them more difficult
to market successfully, which could have a material adverse effect on our
business, financial condition, results of operation and cash flows.
IF SALES OF OUR MAJOR PRODUCTS OR ROYALTY PAYMENTS TO US DECREASE, OUR RESULTS
OF OPERATIONS COULD BE ADVERSELY EFFECTED.
Altace(R) accounted for approximately 35.2% of net sales for the year ended
December 31, 1999 and Altace(R), Lorabid(R), Fluogen(R), and the Cortisporin(R)
product lines, collectively accounted for approximately 58.6% of net sales for
1999. We believe that sales of these products will continue to constitute a
significant portion of our total revenues for the foreseeable future.
Accordingly, any factor adversely affecting sales of any of these products or
products for which we receive royalty payments could also have a material
adverse effect on our business, financial condition, results of operation and
cash flows.
WE CANNOT ASSURE YOU THAT SALES OF LORABID(R) WILL INCREASE IN THE FUTURE. IF
SALES DO NOT INCREASE, THERE MAY BE A MATERIAL, ADVERSE EFFECT UPON OUR RESULTS
OF OPERATIONS.
Prior to our acquisition of Lorabid(R), its sales were on the decline.
Increased sales of Lorabid(R) depend upon effective marketing to physicians
which leads them to write prescriptions for our product. We believe that our
marketing efforts have stabilized Lorabid(R) sales, but we cannot assure you
that sales of Lorabid(R) will increase in the future. If Lorabid(R) sales do not
increase or if they decrease, there may be a material adverse effect upon our
results of operations.
THE FDA MAY NOT APPROVE SOME OR ALL OF THE NEW INDICATIONS FOR ALTACE(R) FOR
WHICH WE HAVE APPLIED WHICH COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO
DROP SIGNIFICANTLY.
We have filed a Supplemental New Drug Application with the FDA to request
approval for new and unique indications for Altace(R). Our Supplemental New Drug
Application is based on the results of a clinical study called the "HOPE Study."
Until new indications for Altace(R) are approved by the
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FDA, however, there are restrictions on our dissemination of information about
Altace(R) in connection with the HOPE study. We may not promote Altace(R) for
the new indications until the FDA approves the new indications. If the FDA does
not approve some or all of the new indications, we will not be able to market
Altace(R) for these new indications. We can give you no assurance that the FDA
will approve any or all of the new indications for Altace(R) The FDA review
process also may take longer than we expect, delaying by several months any
revenue recognition we would otherwise derive from these new indications. If we
violate governmental regulations applicable to dissemination of the HOPE Study
results or fail to secure new indications for Altace(R) there may be a material
adverse effect on our business, financial condition, results of operation and
cash flows. In addition, any failure or perceived failure by King regarding
Altace(R) could cause the price of our common stock to decline.
IF THE FDA APPROVES OUR NEW AND UNIQUE INDICATIONS FOR ALTACE(R) BASED ON THE
HOPE STUDY, SALES OF ALTACE(R) MAY BE AFFECTED BY THE PERCEPTION OF A CLASS
EFFECT, AND ALTACE(R) AND OUR OTHER PRODUCTS MAY BE SUBJECT TO VARIOUS SOURCES
OF COMPETITION FROM ALTERNATE THERAPIES.
We can give you no assurance that the FDA will approve our application for
new indications for Altace(R). Even if the FDA approves some or all of the new
indications for Altace(R), we may be unable to meet investors' expectations
regarding sales of Altace(R) due to a perceived class effect and the inability
to market Altace(R)'s new uses and indications effectively.
All prescription drugs currently marketed by pharmaceutical companies may
be grouped into existing drug classes, but the criteria for inclusion vary from
class to class. For some classes, specific biochemical properties may be the
defining characteristic. For example, Altace(R) (ramipril) is a member of a
class of products known as Angiotensin Converting Enzyme Inhibitors, which we
refer to as ACE inhibitors, because ramipril is one of several chemicals that
inhibits the production of enzymes that convert angiotensin, which could
otherwise lead to hypertension.
When one drug from a class is demonstrated to have a particularly
beneficial or previously undemonstrated effect (e.g., the benefit of Altace(R)
as shown by the HOPE Study), many marketers of other drugs in the same class
(for example, other ACE inhibitors) will claim that their products offer the
same benefit simply by virtue of membership in the same drug class.
Consequently, other companies with ACE inhibitors that compete with Altace(R)
will claim that their products are equivalent to Altace(R). By doing so, these
companies will be able to claim that their products offer the same efficacious
results demonstrated by the HOPE Study. Regulatory agencies do not decide
whether products within a class are quantitatively equivalent in terms of
efficacy or safety and because comparative data among products in the same drug
class is rare, marketing forces often dictate a physician's decision to use one
ACE inhibitor over another. We may not be able to overcome other companies'
claims that their ACE inhibitors will offer the same benefits of Altace(R) as
demonstrated by the HOPE Study. As a result, sales of Altace(R) may suffer from
the perception of class effect.
Currently, there is no generic form of Altace(R) available. That is, there
is no product that has the same active ingredient as Altace(R). Although no
generic substitute for Altace(R) has been approved by the FDA, there are other
ACE inhibitors whose patents will expire in the next few years and there are
generic forms of other ACE inhibitors. Also there are different therapeutic
agents that may be used to treat the same conditions treated by Altace(R). For
example, generic forms of ACE inhibitors, the group of products known as
beta-blockers, may be prescribed to treat certain conditions that Altace(R) is
used to treat. New ACE inhibitors, increased sales of generic forms of other ACE
inhibitors or of other therapeutic agents that compete with Altace(R) may
adversely affect the sales of Altace(R).
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We are evaluating marketing strategies for Altace(R), including entering
into a co-promotion agreement with a larger pharmaceutical company. Our business
and results of operations will suffer if we are delayed or unsuccessful in
reaching an agreement with another company to co-promote Altace(R).
WE DO NOT HAVE PROPRIETARY PROTECTION FOR MOST OF OUR BRANDED PHARMACEUTICAL
PRODUCTS AND OUR SALES COULD SUFFER FROM COMPETITION BY GENERIC SUBSTITUTES.
Although most of our revenue is generated by products not subject to
competition from generic products, there is no proprietary protection for most
of our branded pharmaceutical products, and generic substitutes for most of
these products are sold by other pharmaceutical companies. In addition,
governmental and other pressure to reduce pharmaceutical costs may result in
physicians prescribing products for which there are generic substitutes.
Increased competition from the sale of generic pharmaceutical products may cause
a decrease in revenue from our branded products and could have a material
adverse effect on our business, financial condition and results of operations.
While we will seek to mitigate the effect of this substitution through, among
other things, creation of strong brand name recognition and product line
extensions for our branded pharmaceutical products, we may not be successful in
these efforts. In addition, our branded products for which there is no generic
form available may face competition from different therapeutic agents used for
the same indications for which our branded products are used.
THIRD PARTIES MANUFACTURE OR SUPPLY MATERIALS FOR MANY OF OUR PRODUCTS, AND ANY
DELAYS OR DIFFICULTIES EXPERIENCED BY THEM MAY REDUCE OUR PROFIT MARGINS
REVENUES OR HARM OUR REPUTATION.
Fifteen of our product lines, including Altace(R), Lorabid(R) and
Cortisporin(R), are currently manufactured by third parties. Until these
products can be moved to our manufacturing facilities, our dependence upon third
parties for the manufacture of our products may adversely impact our profit
margins or may result in unforseen delays or other problems beyond our control.
If for any reason we are unable to obtain or retain third-party manufacturers on
commercially acceptable terms, we may not be able to distribute our products as
planned. If we encounter delays or difficulties with contract manufacturers in
producing or packaging our products, the distribution, marketing and subsequent
sales of these products would be adversely affected, and we may have to seek
alternative sources of supply or abandon or sell a product line on
unsatisfactory terms. We might not be able to enter into alternative supply
arrangements at commercially acceptable rates, if at all. We also cannot assure
you that the manufacturers we utilize will be able to provide us with sufficient
quantities of our products or that the products supplied to us will meet our
specifications.
We require a supply of quality raw materials and components to manufacture
and package pharmaceutical products for us and for third parties with which we
have contracted. Generally, we have not had difficulty obtaining raw materials
and components from suppliers in the past. Currently, we rely on approximately
400 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 that we will be unable to procure adequate supplies of raw materials and
components on a timely basis. However, if we are unable to obtain sufficient
quantities of any of the raw materials or components required to produce and
package our products, we may not be able to distribute our products as planned.
In this case, our business, financial condition and results of operations could
be materially and adversely affected.
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FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS COULD AFFECT OUR ABILITY TO
OPERATE OUR BUSINESS.
Virtually all aspects of our activities are regulated by Federal and state
statutes and government agencies. The manufacturing, processing, formulation,
packaging, labeling, distribution and advertising of our products, and disposal
of waste products arising from such activities, are subject to regulation by one
or more federal agencies, including the FDA, the Drug Enforcement Agency, the
Federal Trade Commission, the Consumer Product Safety Commission, the U. S.
Department of Agriculture, the Occupational Safety and Health Administration and
the Environmental Protection Agency, as well as by foreign governments.
Noncompliance with applicable FDA policies or requirements could subject us
to enforcement actions, such as suspension of manufacturing or distribution,
seizure of products, product recalls, fines, criminal penalties, injunctions,
failure to approve pending drug product applications or withdrawal of product
marketing approvals. Similar civil or criminal penalties could be imposed by
other government agencies, such as the Drug Enforcement Agency, the
Environmental Protection Agency or various agencies of the states and localities
in which our products are manufactured and sold, and could have ramifications
for our contracts with government agencies such as the Veteran's Administration.
These enforcement actions could have a material adverse effect on our business,
financial condition and results of operations.
All manufacturers of human pharmaceutical products are subject to
regulation by the FDA under the authority of the Federal Food, Drug, and
Cosmetic Act or the Public Health Service Act or both. New drugs, as defined in
the Federal Food, Drug and Cosmetic Act, and new human biological drugs, as
defined in the Public Health Service Act, must be the subject of an FDA-
approved new drug or biologic license application before they may be marketed in
the United States. Some prescription and other drugs are not the subject of an
approved marketing application but, rather, are marketed subject to the FDA's
regulatory discretion and/or enforcement policies. Any change in the FDA's
enforcement discretion and/or policies, such as any decision by the FDA to
require an approved marketing application for one of our products not currently
subject to the approved marketing application, could have a material adverse
effect on our business, financial condition and results of operations.
We manufacture some pharmaceutical products containing controlled
substances and, therefore, are also subject to statutes and regulations enforced
by the Drug Enforcement Agency and similar state agencies which impose security,
recordkeeping, reporting and personnel requirements on us. Additionally, we
manufacture biological drug products for human use and are subject to regulatory
burdens as a result of these aspects of our business. There are additional FDA
and other regulatory policies and requirements covering issues such as
advertising, commercially distributing, selling, sampling and reporting adverse
events associated with our products with which we must continuously comply.
Noncompliance with any of these policies or requirements could result in
enforcement actions which could have a material adverse effect on our business,
financial condition and results of operations.
The FDA has the authority and discretion to withdraw existing marketing
approvals and to review the regulatory status of marketed products at any time.
For example, the FDA may require an approved marketing application for any drug
product marketed if new information reveals questions about the drug's safety or
effectiveness. All drugs must be manufactured in conformity with cGMPs and drug
products subject to an approved application must be manufactured, processed,
packaged, held and labeled in accordance with information contained in the
approved application.
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While we believe that all of our currently marketed pharmaceutical products
comply with FDA enforcement policies or have received the requisite agency
approvals, such marketing is subject to challenge by the FDA at any time.
Through various enforcement mechanisms, the FDA can ensure that noncomplying
drugs are no longer marketed. In addition, modifications, enhancements, or
changes in manufacturing sites of approved products are in many circumstances
subject to additional FDA approvals which may or may not be received and which
may be subject to a lengthy FDA review process. Our manufacturing facilities and
those of our third-party manufacturers are continually subject to inspection by
governmental agencies. Manufacturing operations could be interrupted or halted
in any of those facilities if the government is unsatisfied with the results of
its inspections. This could have a material adverse effect on our business,
financial condition, results of operation and cash flows.
We cannot determine what effect changes in regulations, enforcement
positions, statutes or legal interpretation, when and if promulgated, adopted or
enacted, may have on our business in the future. Changes could, among other
things, require changes to manufacturing methods or facilities, expanded or
different labeling, new approvals, the recall, replacement or discontinuance of
certain products, additional record keeping and expanded documentation of the
properties of certain products and scientific substantiation. Such changes, or
new legislation, could have a material adverse effect on our business, financial
condition, results of operation and cash flows.
OUR PARKEDALE FACILITY HAS BEEN THE SUBJECT OF FDA CONCERNS. IF WE CANNOT
ADEQUATELY ADDRESS THE FDA'S CONCERNS, WE MAY BE UNABLE TO OPERATE THE PARKEDALE
FACILITY AND, ACCORDINGLY, OUR BUSINESS MAY SUFFER.
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 as a result of FDA concerns about
compliance issues within Warner-Lambert facilities in the period before the
decree was entered.
The Parkedale facility was inspected by the FDA's Team Biologics in March
and April 1998. During that inspection, the FDA made observations about our
compliance with cGMPs 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 review our compliance with the FDA's cGMP
requirements. At the end of that inspection, the FDA issued another 483 listing
its 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 that
resulted from the May 1999 inspection. The FDA also stated it would require
additional product testing for the product Histoplasmin. Since revenues
attributable to Histoplasmin were minimal we discontinued 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
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<PAGE> 15
issued a 483 listing certain cGMP observations. In November 1999, we submitted a
written response containing our plan to address those observations.
On March 10, 2000, the FDA notified us that the methods, facilities and
controls used by the Parkedale facility in the manufacture, processing and
packaging of Fluogen(R) were not in compliance with cGMP requirements. The FDA
therefore informed us, pursuant to the consent decree, that we must suspend
production and distribution of Fluogen(R) until the Parkedale facility meets the
applicable cGMP standards for the manufacture and distribution of Fluogen(R).
The FDA has received our initial response to its March 10 notification and
following discussions with the FDA, we have filed with the FDA our written
certification of conformance that we are now sufficiently in compliance with
cGMP manufacturing standards to resume the manufacture of Fluogen(R) and we have
now resumed the manufacture of Fluogen(R). The distribution of Fluogen(R)
remains suspended pursuant to the FDA's order. We cannot resume the distribution
of Fluogen(R) until the FDA conducts an on-site inspection of our Parkedale
facility and finds the facility in substantial compliance with cGMPs. We are
working to meet all of the FDA's requirements to resume distribution of
Fluogen(R), which can occur upon the FDA's verification that Parkedale has
satisfactorily completed all required corrective measures and is in substantial
compliance with cGMP standards. Fluogen(R)'s gross sales totaled $32.0 million,
while net sales equaled $28.7 million, for the year ended December 31, 1999.
Gross profit for Fluogen(R) equaled $6.9 million for the same period. We
generally recognize revenue from Fluogen(R) during the third and fourth quarters
of each calendar year. While we are pursuing all actions reasonably necessary to
assure Fluogen(R)'s availability during the upcoming flu season commencing
September 2000, we cannot assure you that we will be able to satisfy the FDA's
concerns respecting the cGMP standards applicable to Fluogen(R). Consequently,
we cannot assure you that we will be able to market or distribute any amount of
Fluogen(R) in the future.
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.
OUR QUARTERLY RESULTS MAY FLUCTUATE, AND THESE FLUCTUATIONS MAY ADVERSELY AFFECT
OUR PROFITABILITY.
Our results of operations may vary from quarter to quarter due to many
factors. These factors include expenditures related to the acquisition, sale and
promotion of pharmaceutical products, a changing customer base, the availability
and cost of raw materials, interruptions in supply by third-party manufacturers,
new products introduced by us or our competitors, the mix of products we sell,
seasonality of certain product sales, changes in sales due to anticipated price
increases, changes in sales and marketing expenditures, competitive pricing
pressures and general economic and industry conditions that may affect customer
demand. For example, in advance of a price increase, many of our customers may
order pharmaceutical products in larger than normal quantities. 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. These factors could also affect our annual results of
operations. We cannot assure you that we will be successful in maintaining or
improving our profitability or avoiding losses in any future period. For more
information about our operations, please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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<PAGE> 16
AN INCREASE IN PRODUCT LIABILITY CLAIMS, PRODUCT RECALLS OR PRODUCT RETURNS
COULD HARM OUR BUSINESS.
We face an inherent business risk of exposure to product liability claims
in the event that the use of our technologies or products is alleged to have
resulted in adverse effects. These risks will exist for those products in
clinical development and with respect to those products that receive regulatory
approval for commercial sale. While we have taken, and will continue to take,
what we believe are appropriate precautions, we may not be able to avoid
significant product liability exposure. We currently have product liability
insurance in the amount of $50.0 million for aggregate annual claims with a
$50,000 deductible per incident and a $500,000 aggregate annual deductible;
however, we cannot assure you that the level or breadth of any insurance
coverage will be sufficient to cover fully all potential claims. Also, adequate
insurance coverage might not be available in the future at acceptable costs, if
at all.
Product recalls may be issued at our discretion or at the discretion of the
FDA, other government agencies or other companies having regulatory authority
for pharmaceutical product sales. In November 1998, the Parke-Davis division of
Warner-Lambert initiated a voluntary Class III recall for one lot of
Procanbid(R) manufactured prior to our acquisition of Procanbid(R). 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. In February 2000, American Pharmaceutical Partners, Inc. which
manufactures Adenoscan(R), initiated a Class II recall for 30 mL single-dose
vials used for intravenous infusion only because of chipped and leaking vials
and the possible presence of glass particles in vials. A Class II recall is one
in which the use of, or exposure to, the product may cause temporary or
medically reversible adverse health consequences or where the probability of
serious adverse health consequences is remote. The FDA estimated that 100,000
vials remained on the market at the time of the recall. In April 2000, we
initiated a voluntary Class II recall for one lot of Vira-A(R) ophthalmic
ointment, as a result of leaking tubes. We cannot assure you that additional
product recalls will not occur in the future. Any product recalls could have a
material adverse effect on our business, financial condition, results of
operations and cash flows.
Although product returns were approximately 2.7% of gross sales for the
year ended December 31, 1999, we cannot assure you that actual levels of returns
will not increase or significantly exceed the amounts we have anticipated.
THE LOSS OF OUR KEY PERSONNEL COULD HARM OUR BUSINESS.
We are highly dependent on the principal members of our management staff,
the loss of whose services might impede the achievement of our acquisition and
development objectives. Although we believe that we are adequately staffed in
key positions and that we will be successful in retaining skilled and
experienced management, operational, scientific and development personnel, we
cannot assure you that we will be able to attract and retain key personnel on
acceptable terms. The loss of the services of key personnel could have a
material adverse effect on us, especially in light of our recent growth. We do
not maintain key-person life insurance on any of our employees. In addition, we
do not have employment agreements with any of our key employees.
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OUR RECENTLY ESTABLISHED INTERNATIONAL DIVISION IS NOT YET PROFITABLE, AND
THERE CAN BE NO ASSURANCE THAT IT WILL BE PROFITABLE IN THE FUTURE.
In January 1999, we established our International Division in Charlotte,
North Carolina in order to seek new international markets for product lines for
which we have international rights. The marketing and distribution of these
products in foreign countries generally require the prior registration of the
products in those countries. We do not have a distribution mechanism in place
for distribution outside the United States and Puerto Rico and would need to
enter into distribution agreements with local companies to distribute the
products effectively. We cannot assure you that we will be successful in
securing the registrations outside the U.S. or that we will do so in a timely
manner. We cannot assure you that our International Division will be successful
in entering into distribution agreements or that we will be able to secure
additional products with international rights in the future. Initial sales
generated from the International Division may not exceed the associated costs of
its operations.
IF WE ARE UNABLE TO SECURE OR ENFORCE PATENT RIGHTS, TRADEMARKS, TRADE SECRETS
OR OTHER INTELLECTUAL PROPERTY, OUR BUSINESS COULD BE HARMED.
We may not be successful in securing or maintaining proprietary patent
protection for products we develop or technologies we license. In addition, our
competitors may develop products similar to ours using methods and technologies
that are beyond the scope of our intellectual property protection, which could
reduce our sales. The validity of patents can be subject to expensive
litigation. We can give you no assurance that our patents will not be
challenged. 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.
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, in order to maintain our competitive position. We
cannot assure you 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.
RISKS RELATED TO OUR INDUSTRY
ANY REDUCTION IN REIMBURSEMENT LEVELS BY MANAGED CARE ORGANIZATIONS OR OTHER
THIRD-PARTY PAYORS MAY HAVE AN ADVERSE EFFECT ON OUR REVENUES.
In our industry commercial success in producing, marketing and selling
products depends, in part, on the availability of adequate reimbursement from
third-party health care payers, such as government and private health insurers
and managed care organizations. Third-party payors are increasingly challenging
the pricing of medical products and services. For example, many managed health
care organizations are now controlling the pharmaceutical products that are on
their formulary lists. The resulting competition among pharmaceutical companies
to place their products on these formulary lists has reduced prices across the
industry. In addition, many managed care organizations are considering formulary
contracts primarily with those pharmaceutical companies that can offer a full
line of products for a given therapy sector or disease state. We cannot assure
you that our products will be included on the formulary lists of managed care
organizations or that downward pricing pressures in the industry generally will
not negatively impact our operations.
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<PAGE> 18
In addition, a number of legislative and regulatory proposals aimed at
changing the health care system, including the levels at which pharmaceutical
companies are reimbursed for sales of their products, have been proposed. While
we cannot predict whether any such proposals will be adopted or the effect such
proposals may have on our business, the pending nature of such proposals, as
well as the adoption of any proposal, may exacerbate industry-wide pricing
pressures and could have a material adverse effect on our financial condition,
results of operations or cash flows.
OUR INDUSTRY IS HIGHLY COMPETITIVE.
In our industry, smaller pharmaceutical companies like ours compete with
large, global pharmaceutical companies with substantially greater financial
resources for the acquisition of products, technologies and companies. We cannot
assure you that
- we will be able to continue to acquire commercially attractive
pharmaceutical products, companies or technologies,
- additional competitors will not enter the market, or
- competition for acquisition of products, companies, technologies and
product lines will not have a material adverse effect on our business,
financial condition and results of operations.
We also compete with pharmaceutical companies in developing, marketing and
selling pharmaceutical products. The selling prices of pharmaceutical products
typically decline as competition increases. Further, other products now in use
or acquired by other pharmaceutical companies may be more effective or offered
at lower prices than our current or future products. Competitors may also be
able to complete the regulatory process sooner and, therefore, may begin to
market their products in advance of ours. We believe that competition for sales
of our products will be based primarily on product efficacy, safety,
reliability, availability and price.
RISKS RELATED TO THIS OFFERING
OWNERSHIP OF OUR COMPANY IS CONCENTRATED IN A FEW INDIVIDUALS WHO CAN INFLUENCE
OUR MANAGEMENT AND POLICIES.
Following this offering of common stock, our present executive officers and
directors (17 persons) and their affiliates will beneficially own approximately
30.9% of the outstanding shares of our common stock. Accordingly, they will have
the ability to exercise significant influence over the management and policies
of King. Independent directors do not currently, and may not in the future,
constitute a majority of the board of directors. In the absence of a majority of
independent directors, King's executive officers, who also are principal
shareholders and directors, could establish policies and enter into transactions
without independent review and approval thereof. Transactions without an
independent review could present the potential for a conflict of interest
between King and its shareholders generally and its executive officers or
directors. We do not intend to implement any formal procedures to address any
such potential conflicts of interest.
WE DO NOT PLAN TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE AND, AS A RESULT,
SHAREHOLDERS WILL NEED TO SELL SHARES TO REALIZE ANY RETURN ON THEIR INVESTMENT.
We have never declared or paid any cash dividends on our common stock.
Furthermore, the payment of any dividend or distribution on any shares of our
capital stock is limited by the senior credit facility. We intend to retain any
future earnings to finance the operation and expansion of our business and do
not anticipate paying any cash dividends in the foreseeable future.
Consequently, shareholders will need to sell shares of common stock in order to
realize a return on their investment, if any.
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<PAGE> 19
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial price to public is substantially higher than the net tangible
book value per share of our common stock. Therefore, you will incur immediate
dilution in net tangible book value of $46.06 per share, based on an initial
price to public of $41.38 per share. You may incur additional dilution if
holders of stock options, whether currently outstanding or subsequently granted,
exercise their options.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE.
If our existing shareholders sell a large number of shares of our common
stock or the public market perceives that existing shareholders might sell
shares of common stock, the market price of the common stock could significantly
decline. All of the shares offered under this prospectus supplement and the
accompanying prospectus will be freely tradable without restriction or further
registration under the federal securities laws unless purchased by our
"affiliates" as that term is defined in Rule 144 under the Securities Act of
1933. The shares subject to a lock-up agreement with Donaldson, Lufkin &
Jenrette may be sold 60 days after the effective date of this offering.
Finally, it is possible that Donaldson, Lufkin & Jenrette will release
shares subject to the lock-up agreements referred to above prior to the
scheduled expiration dates. This would result in the shares of our common stock
that are subject to such agreements becoming eligible for sale in the public
market at an earlier time than currently anticipated. The decision as to whether
to release the shares subject to these lock-up agreements is in the discretion
of Donaldson, Lufkin & Jenrette.
OUR SHAREHOLDER RIGHTS PLAN AND BYLAWS DISCOURAGE UNSOLICITED TAKEOVER PROPOSALS
AND COULD PREVENT YOU FROM REALIZING A PREMIUM FOR YOUR COMMON STOCK.
We have a shareholder rights plan that may have the effect of discouraging
unsolicited takeover proposals. The rights issued under the shareholder rights
plan would cause substantial dilution to a person or group that attempts to
acquire us on terms not approved in advance by our board of directors. In
addition, our charter and bylaws contain provisions that may discourage
unsolicited takeover proposals that shareholders may consider to be in their
best interests. These provisions include:
- a classified board of directors;
- the ability of the board of directors to designate the terms of and issue
new series of preferred stock;
- advance notice requirements for nominations for election to the board of
directors; and
- special voting requirements for the amendment of our charter and bylaws.
We are also subject to antitakeover provisions under Tennessee law, each of
which could delay or prevent a change of control. Together these provisions and
the rights plan may discourage transactions that otherwise could involve payment
of a premium over prevailing market prices for your common stock. For
information about these laws, see "Description of Capital Stock."
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OUR STOCK PRICE COULD BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR
INVESTORS PURCHASING SHARES IN THIS OFFERING. INVESTORS MAY NOT BE ABLE TO
RESELL THEIR SHARES AT OR ABOVE THE PRICE TO THE PUBLIC.
The trading price of our common stock is likely to be volatile. The stock
market in general and the market for emerging growth companies, such as King in
particular, have experienced extreme volatility. Many factors contribute to this
volatility, including
- announcements of technological innovations,
- changes in marketing, product pricing and sales strategies or development
of new products by us or our competitors,
- changes in domestic or foreign governmental regulations or regulatory
approval processes,
- variations in our results of operations,
- perceptions about market conditions in the pharmaceutical industry, and
- general market conditions.
This volatility may have a significant impact on the market price of our common
stock. Moreover, the possibility exists that the stock market (and in particular
the securities of emerging growth companies such as King) could experience
extreme price and volume fluctuations unrelated to operating performance. The
volatility of our common stock imposes a greater risk of capital losses on our
shareholders than would a less volatile stock. In addition, such volatility
makes it difficult to ascribe a stable valuation to a shareholder's holdings of
our common stock.
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USE OF PROCEEDS
The net proceeds to us from the sale of common stock in this offering are
estimated to be $165.0 million ($189.8 million if the underwriters'
over-allotment option is exercised in full), after deducting the estimated
offering expenses payable by us. The net proceeds of the offering will be used
for repayment of approximately $165.0 million of debt outstanding under the
senior credit facility.
The senior credit facility includes a six-year $100.0 million revolving
line of credit, a six-year $150.0 million amortizing Tranche A term loan
facility and an eight-year $275.0 million Tranche B term loan facility with
customary covenants, financial ratios and events of default and with a floating
interest rate based on either LIBOR, the prime rate, or the federal funds rate,
plus an applicable margin, selected at our discretion. At December 31, 1999,
interest rates for the various components of the senior credit facility ranged
from approximately 9.71% to 10.24%.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The following table sets forth the range of high and low sales prices per
share for our common stock as reported on The Nasdaq National Market, where our
stock trades under the symbol "KING," for the periods indicated. The initial
public offering price of our common stock on June 25, 1998 was $9.33 per share
($14.00 per share before adjusting for a 3 for 2 stock split effective November
11, 1999).
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
------------------
HIGH LOW
------ ------
<S> <C> <C>
1998:
Second Quarter (from June 25, 1998).................... $ 9.50 $ 9.17
Third Quarter.......................................... 14.25 8.50
Fourth Quarter......................................... 19.17 7.08
1999:
First Quarter.......................................... $19.92 $12.92
Second Quarter......................................... 21.75 13.83
Third Quarter.......................................... 27.83 16.33
Fourth Quarter......................................... 68.00 20.13
2000:
First Quarter.......................................... $68.75 $29.63
Second Quarter (through April 18, 2000)................ 47.50 31.50
</TABLE>
On April 18, 2000, the last sale price of the common stock as reported on
The Nasdaq National Market was $41.63 per share. As of April 3, 2000, there were
approximately 2,300 holders of record of the common stock.
We have never paid cash dividends on our common stock. Furthermore, the
payment of any dividend or other distribution on any shares of our capital stock
is limited by the senior credit facility to an aggregate amount of up to $1.0
million provided that no event of default under the senior credit facility has
occurred or is continuing. Assuming removal of this limitation, the payment of
cash dividends is subject to the discretion of the board of directors and will
be dependent upon many factors, including our earnings, our capital needs, and
our general financial condition. We anticipate that for the foreseeable future,
we will retain our earnings, if any, in order to finance the expansion and
development of our business.
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<PAGE> 22
CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE DATA)
This table sets forth our capitalization as of December 31, 1999
(1) on an actual basis,
(2) on an as adjusted basis to reflect the issuance of 4.0 million
shares pursuant to this offering and the application of the net proceeds
therefrom,
(3) supplementary for the merger with Medco and
(4) supplementary pro forma to reflect cash and proceeds from
investments sold as a result of the merger with Medco as adjusted to
reflect the issuance of 4.0 million shares pursuant to this offering and
the application of the net proceeds.
The net proceeds of $165.0 million from this offering and $53.3 million
cash and proceeds from the sale of investments will be used to repay borrowings
under the senior credit facility. This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the other information in our annual report on Form 10-K for the
year ended December 31, 1999 incorporated by reference herein, "Unaudited Pro
Forma As Adjusted Condensed Financial Data," and our consolidated financial
statements and related notes and the supplementary consolidated financial
statements and related notes included elsewhere in this prospectus supplement or
incorporated by reference therein.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------------------------------------
SUPPLEMENTARY
PRO FORMA AS
ACTUAL AS ADJUSTED SUPPLEMENTARY ADJUSTED
-------- ----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Long-term debt (including current
portion)(1):
Senior credit facility................... $412,156 $247,156 $412,156 $193,900
Senior subordinated notes................ 150,000 150,000 150,000 150,000
Other debt(1)............................ 5,701 5,701 5,701 5,701
-------- -------- -------- --------
Total debt............................ 567,857 402,857 567,857 349,601
-------- -------- -------- --------
Shareholders' equity:
Common stock, no par value; 150,000,000
shares authorized; 48,205,594 issued and
outstanding, Actual; 52,205,594 issued
and outstanding, As Adjusted; 55,424,078
issued and outstanding, Supplementary;
and 59,424,078 shares issued and
outstanding, Supplementary Pro Forma As
Adjusted(2).............................. 68,027 233,027 113,894 278,894
Retained earnings(3)....................... 80,409 76,461 101,514 96,929
-------- -------- -------- --------
Total shareholders' equity............ 148,436 309,488 215,408 375,823
-------- -------- -------- --------
Total capitalization.................. $716,293 $712,345 $783,265 $725,424
======== ======== ======== ========
</TABLE>
- ---------------
(1) For additional information relating to long-term obligations, see notes 2
and 9 to the consolidated financial statements included in our annual report
on Form 10-K for the year ended December 31, 1999 which is incorporated by
reference herein.
(2) Excludes 3,914,207 shares available for grants under our stock option plans.
Options for 1,287,294 shares were outstanding as of December 31, 1999.
(3) Reflects write-off unamortized deferred financing costs from the term loans
outstanding under the senior credit facility, net of taxes.
S-22
<PAGE> 23
UNAUDITED PRO FORMA SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
We have presented below the unaudited pro forma supplementary consolidated
balance sheet for the year ended December 31, 1999, and the unaudited pro forma
supplementary consolidated statement of operations for the year ended December
31, 1999, in each case which have been derived from the audited consolidated
statements of King included in our annual report on Form 10-K for the year ended
December 31, 1999, incorporated by reference herein, and from the audited
supplementary consolidated financial statements and the notes thereto included
elsewhere in this prospectus supplement, adjusted to give pro forma effect to
the (1) reduction in interest expense of approximately $4.9 million due to
repayment of $30.0 million of the debt outstanding under revolving credit
facility, and $23.2 million of debt outstanding under the term loans that are a
part of the senior credit facility with Medco's cash and proceeds from the sale
of investments, (2) the elimination of approximately $3.1 million in interest
income and (3) the reflection of a 36.7% effective tax rate on the unaudited pro
forma income before taxes.
The unaudited pro forma supplementary consolidated balance sheet as of
December 31, 1999 gives effect to the above as if the above occurred on December
31, 1999. The unaudited pro forma supplementary consolidated statement of
operations for the year ended December 31, 1999 gives effect to the above as if
it had occurred on January 1, 1999. The unaudited pro forma adjustments are
based upon available information and certain assumptions that we believe are
reasonable under the circumstances. The unaudited pro forma supplementary
consolidated financial statements do not purport to represent what King's
results of operations or financial condition would actually have been had the
above in fact occurred on January 1, 1999, nor do they purport to project King's
results of operations or financial condition for any future period or date.
The unaudited supplementary pro forma as adjusted information reflects the
reduction in interest expense of $21.2 million from the assumed retirement of
existing debt under the senior credit facility with (i) cash and proceeds from
the sale of investments of $53.2 million from Medco as a result of the merger
and (ii) estimated net proceeds of $165.0 million from the sale of 4.0 million
shares of common stock in this offering. As a result of the sale of investments,
interest income of approximately $3.1 million was eliminated. This information
also reflects incremental income tax expense at an effective rate of 36.7%.
These adjustments also resulted in a write-off of unamortized deferred financing
costs of $7.2 million, net of taxes of $2.7 million.
The unaudited supplementary pro forma as adjusted consolidated balance
sheet information as of December 31, 1999 gives effect to the above as if the
above occurred on December 31, 1999. The unaudited supplementary pro forma as
adjusted consolidated statement of operations data gives effect to the above as
if the above occurred on January 1, 1999.
The information set forth below should be read together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements included in our annual report on Form 10-K
for the year ended December 31, 1999 and incorporated herein by reference and
the other information contained under the caption "Capitalization," and in the
supplementary consolidated financial statements and related notes included
elsewhere in this prospectus supplement.
S-23
<PAGE> 24
UNAUDITED PRO FORMA SUPPLEMENTARY CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS
SUPPLEMENTARY PRO FORMA ADJUSTED
------------- --------- --------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $ 20,720 $ 18,048(1) $ 18,048
Investments, held to maturity....................... 17,001 --(2) --
Accounts receivable, net of allowance for doubtful
accounts of $1,402 and $1,864..................... 69,215 69,215 69,215
Royalty receivable.................................. 6,691 6,691 6,691
Inventory........................................... 33,410 33,410 33,410
Deferred income taxes............................... 14,643 14,643 14,643
Prepaid expenses and other current assets........... 9,443 9,443 9,443
-------- -------- --------
Total current assets.............................. 171,123 151,450 151,450
-------- -------- --------
Property and equipment, net......................... 97,759 97,759 97,759
Other assets........................................ 20,321 19,315(3) 13,078(3)
Investments, held to maturity....................... 33,583 --(2) --
Intangible assets, net.............................. 558,555 558,555 558,555
-------- -------- --------
Total assets...................................... $881,341 $827,079 $820,842
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................... $ 25,447 $ 25,447 $ 25,447
Accrued expenses and other liabilities.............. 53,735 53,735 53,735
Income taxes payable................................ 4,756 4,387(4) 2,098(4)
Current portion of long term debt................... 14,502 14,502 14,502(6)
-------- -------- --------
Total current liabilities......................... 98,440 98,071 95,782
Long-term debt:
Revolving credit facility......................... 45,000 15,000(5) 15,000
Term loans........................................ 354,194 330,938(6) 165,938(6)
Senior subordinated notes......................... 150,000 150,000 150,000
Other............................................. 4,161 4,161 4,161
Deferred income taxes............................... 12,638 12,638 12,638
Other long-term liabilities......................... 1,500 1,500 1,500
-------- -------- --------
Total liabilities................................. 665,933 612,308 445,019
Shareholders' equity................................ 215,408 214,771(7) 375,823(7)
-------- -------- --------
Total liabilities and shareholders' equity........ $881,341 $827,079 $820,842
======== ======== ========
</TABLE>
See notes to Unaudited Pro Forma
Supplementary Consolidated Balance Sheet.
S-24
<PAGE> 25
NOTES TO UNAUDITED PRO FORMA SUPPLEMENTARY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
(1) Cash -- to reflect adjustments to record the following:
<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED
--------- -----------
<S> <C> <C>
To record the reduction for cash used for the repayment
of a portion of the revolving credit facility and term
loans under the senior credit facility................ $ (2,672) $ --
======== =========
</TABLE>
(2) Investments held to maturity -- to reflect adjustments to record the
following:
<TABLE>
<S> <C> <C>
To record the sale of investments held to maturity in
order to repay a portion of the revolving credit
facility and term loans under the senior credit
facility:
Short-term investments held to maturity............ $(17,001) $ --
Long-term investments held to maturity............. (33,583) --
-------- ---------
$(50,584) $ --
======== =========
</TABLE>
(3) Other assets -- to reflect adjustments to record the following:
<TABLE>
<S> <C> <C>
To eliminate unamortized deferred financing costs
related to the terms loans of the senior credit
facility.............................................. $ (1,006) $ (6,237)
======== =========
</TABLE>
(4) Income taxes payable -- to reflect adjustment to record the following:
<TABLE>
<S> <C> <C>
To record income tax benefit related to write-off of
deferred financing costs from the term loans of the
senior credit facility at an assumed 36.7% tax rate... $ (369) $ (2,289)
======== =========
</TABLE>
(5) Revolving credit facility -- to reflect adjustment to record the
following:
<TABLE>
<S> <C> <C>
Repayment of the revolving credit facility with proceeds
from the sale of investments and cash................. $(30,000) $ --
======== =========
</TABLE>
(6) Long-term debt -- to reflect adjustments to record the following:
<TABLE>
<S> <C> <C>
Repayment of a portion of term loans with proceeds from
the sale of investments and cash and net proceeds from
this offering......................................... $(23,256) $(165,000)
======== =========
</TABLE>
(7) Shareholders' equity -- to reflect adjustments to record the following:
<TABLE>
<S> <C> <C>
To record the write-off of the unamortized deferred
financing costs from the term loans of the senior
credit facility, net of tax effect.................... $ (637) $ (3,948)
To record net proceeds from the issuance of common stock
in this offering...................................... -- 165,000
-------- ---------
$ (637) $ 161,052
======== =========
</TABLE>
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<PAGE> 26
UNAUDITED PRO FORMA SUPPLEMENTARY CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS
SUPPLEMENTARY PRO FORMA ADJUSTED
------------- --------- ---------
<S> <C> <C> <C>
Revenues:
Net sales......................................... $348,271 $ 348,271 $348,271
Royalty revenue................................... 31,650 31,650 31,650
-------- --------- --------
Total revenues................................. 379,921 379,921 379,921
-------- --------- --------
Operating costs and expenses:
Costs of sales.................................... 113,204 113,204 113,204
Selling, general and administrative............... 80,213 80,213 80,213
Royalty expense................................... 5,661 5,661 5,661
Depreciation and amortization..................... 27,734 27,734 27,734
Research and development expense.................. 16,316 16,316 16,316
-------- --------- --------
Total operating costs and expenses............. 243,128 243,128 243,128
-------- --------- --------
Operating income.................................. 136,793 136,793 136,793
-------- --------- --------
Other income (expenses):
Other, net........................................ (3,052) (3,052) (3,052)
Interest income................................... 3,314 245(2) 245
Interest expense.................................. (55,371) (50,515)(1) (34,183)(1)
-------- --------- --------
Total other income (expense)................... (55,109) (53,322) (36,990)
-------- --------- --------
Income before income taxes........................ 81,684 83,471 99,803
Income tax expense.................................. 29,986 30,642(3) 36,636(3)
-------- --------- --------
Net income.......................................... $ 51,698 $ 52,829 $ 63,167
======== ========= ========
Income per share:
Basic............................................. $ 0.94 $ 0.96 $ 1.07
======== ========= ========
Diluted........................................... $ 0.93 $ 0.95 $ 1.06
======== ========= ========
</TABLE>
See notes to Unaudited Pro Forma
Supplementary Consolidated Statement of Operations.
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<PAGE> 27
NOTES TO UNAUDITED PRO FORMA SUPPLEMENTARY
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
(1) Adjustment to reflect the decrease in interest expense as a result of the
repayment of a portion of the term loans and the revolving credit facility
of the senior credit facility:
<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED
--------- -----------
<S> <C> <C>
Adjustment to interest from assumed retirement of
existing debt.................................... $ 4,706 $15,323
Adjustment to interest from write-off of a portion
of unamortized deferred financing costs related
to the term loans................................ 150 1,009
------- -------
$ 4,856 $16,332
======= =======
(2) Adjustment to reflect the elimination of interest
income on cash and investment used to retire
existing debt....................................... $(3,069) $ --
======= =======
</TABLE>
(3) Adjustment to reflect a 36.7% effective tax rate applied to the incremental
pro forma income before income taxes.
S-27
<PAGE> 28
DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
Our authorized capital stock consists of 150,000,000 shares of common
stock, no par value, and 15,000,000 shares of preferred stock, no par value.
Upon consummation of the offering, 59,546,468 shares of common stock will be
issued and outstanding and no shares of preferred stock will be outstanding. The
following summary of our capital stock is qualified in its entirety by the
provisions of our charter and bylaws, which have been filed as exhibits to the
registration statement of which this prospectus supplement and the accompanying
prospectus forms a part and by the provisions of applicable law.
COMMON STOCK
The issued and outstanding shares of common stock are validly issued, fully
paid and nonassessable. Subject to the prior rights of any preferred stock, the
holders of outstanding shares of common stock are entitled to receive dividends
out of assets legally available therefor at such times and in such amounts as
the board of directors may from time to time determine. See "Price Range of
Common Stock and Dividend Policy." The shares of common stock are not redeemable
or convertible, and the holders thereof have no preemptive or subscription
rights to purchase any of our securities. Upon our liquidation, dissolution or
winding up, the holders of common stock are entitled to receive pro rata our
assets that are legally available for distribution after payment of all debts
and other liabilities and subject to the prior rights of any holders of
preferred stock then outstanding. Each outstanding share of common stock is
entitled to one vote on all matters submitted to a vote of shareholders. The
common stock is listed on the Nasdaq National Market under the symbol "KING."
PREFERRED STOCK
The board of directors has the authority to authorize the issuance of
shares of preferred stock in series, and may, at the time of issuance, determine
the rights, preferences and limitations of each series without any further
action by the shareholders. Satisfaction of any dividend preferences of
outstanding shares of preferred stock would reduce the amount of funds available
for the payment of dividends on shares of common stock. Holders of shares of
preferred stock may be entitled to receive a preference payment in the event of
our liquidation, dissolution or winding-up before any payment is made to the
holders of shares of common stock. Under certain circumstances, the issuance of
shares of preferred stock may have the effect of delaying, deferring or
preventing a change in control of our company, or could delay or prevent a
transaction that might otherwise give our shareholders an opportunity to realize
a premium over the then prevailing market price of the common stock. The board
of directors, without shareholder approval, may issue shares of preferred stock
with voting and conversion rights which could adversely affect the holders of
shares of common stock. Currently, there are no shares of preferred stock
outstanding, and we do not presently intend to issue any shares of preferred
stock.
CERTAIN PROVISIONS OF THE CHARTER AND BYLAWS AND STATUTORY PROVISIONS
The charter provides that the board of directors will be divided into three
classes, with each class serving for three years, and one class being elected
each year. A majority of the remaining directors then in office, though less
than a quorum, will be empowered to fill any vacancy on the board of directors
that arises during the term of a director. The provision for a classified board
may be amended, altered or repealed only upon the affirmative vote of the
holders of at least 80.0% of the
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<PAGE> 29
outstanding shares of our voting stock. The classification of the board of
directors may discourage a third party from making a tender offer or otherwise
attempting to gain control of our company and may have the effect of maintaining
the incumbency of the board of directors.
The bylaws provide that special meetings of our shareholders can be called
only by a majority of the entire board of directors or by certain officers. In
addition, the bylaws provide that shareholders seeking to bring business before
or to nominate directors at any annual meeting of shareholders must provide
timely notice thereof in writing. To be timely, the shareholders' notice must be
delivered to, or mailed and received at, our principal executive offices not
less than 60 days nor more than 90 days prior to the annual meeting or, if less
than 70 days' notice was given for the meeting, within 10 days following the
date on which the notice was given. The bylaws also specify the requirements for
a shareholders' notice to be in proper written form. These provisions restrict
the ability of shareholders to bring matters before the shareholders or to make
nominations for directors at meetings of shareholders.
We are subject to some antitakeover provisions provided under Tennessee
law.
Business Combination Statute. Tennessee's Business Combination Act
provides that a party owning 10.0% or more of stock in a "resident domestic
corporation" (this party is called an "interested shareholder") cannot engage in
a business combination with the resident domestic corporation unless the
combination (i) takes place at least five years after the interested shareholder
first acquired 10.0% or more of the resident domestic corporation, and (ii)
either (A) is approved by at least two-thirds of the non-interested voting
shares of the resident domestic corporation or (B) satisfies certain fairness
conditions specified in the Business Combination Act.
These provisions apply unless one of two events occurs. A business
combination with an entity can proceed without delay when approved by the target
corporation's board of directors before that entity becomes an interested
shareholder, or the resident corporation may enact a charter amendment or bylaw
to remove itself entirely from the Business Combination Act. This charter
amendment or bylaw must be approved by a majority of the shareholders who have
held shares for more than one year prior to the vote and, may not take effect
for at least two years after the vote. We have not adopted a charter or bylaw
amendment removing the company from coverage under the Business Combination Act.
An interested shareholder, for purposes of the Combination Act, is any
person who is an affiliate or associate of the corporation, or the beneficial
owner, directly or indirectly, of 10% or more of the outstanding voting shares
of the corporation.
The Business Combination Act further provides an exemption from liability
for officers and directors of resident domestic corporations who do not approve
proposed business combinations or charter amendments and bylaws removing their
corporations from the Business Combination Act's coverage. This exemption from
liability is available as long as the officers and directors act in "good faith
belief" that the proposed business combination would adversely affect their
corporation's employees, customers, suppliers, or the communities in which their
corporation operates and when these factors are permitted to be considered by
the board of directors under the charter.
Control Share Acquisition Act. The Tennessee Control Share Acquisition Act
strips a purchaser's shares of voting rights any time an acquisition of shares
in a covered Tennessee corporation brings the purchaser's voting power to
one-fifth, one-third or a majority of all voting power. The purchaser's voting
rights can be established only by a majority vote of the other shareholders. The
purchaser may demand a meeting of shareholders to conduct such a vote. The
purchaser can demand a meeting for this purpose before acquiring a control share
only if it holds at least 10.0% of outstanding shares and announces a good faith
intention to make the control share
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<PAGE> 30
acquisition. A target corporation may or may not redeem the purchaser's shares
if the shares are not granted voting rights.
Investor Protection Act. Tennessee's Investor Protection Act applies to
tender offers directed at corporations (called "offeree companies") that have
"substantial assets" in Tennessee and that are either incorporated in or have a
principal office in Tennessee. This act requires an offeror making a tender
offer for an offeree company to file with the Commissioner of Commerce and
Insurance a registration statement. When the offeror intends to gain control of
the offeree company, the registration statement must indicate any plans the
offeror has for the offeree company. The Commissioner may require additional
information material to the takeover offer and may call for hearings. This act
does not apply to an offer that the offeree company's board of directors
recommends to shareholders.
In addition to requiring the offeror to file a registration statement with
the Commissioner, This act requires the offeror and the offeree company to
deliver to the Commissioner all solicitation materials used in connection with
the tender offer. This act prohibits "fraudulent, deceptive, or manipulative
acts or practices" by either side, and gives the Commissioner standing to apply
for equitable relief to the Chancery Court of Davidson County, Tennessee, or to
any other chancery court having jurisdiction whenever it appears to the
Commissioner that the offeror, the offeree company, or any of its respective
affiliates has engaged in or is about to engage in a violation of this act. Upon
proper showing, the Chancery Court may grant injunctive relief. This act further
provides civil and criminal penalties for violations.
Tennessee Greenmail Act. The Tennessee Greenmail Act prohibits us from
purchasing or agreeing to purchase any of our securities, at a price higher than
fair market value, from a holder of 3% or more of any class of our securities
who has beneficially owned the securities for less than two years. We can make
this purchase if the majority of the outstanding shares of each class of voting
stock issued by us approves the purchase or we make an offer of at least equal
value per share to all holders of shares of that class.
The effect of the above may make a change of control of us harder by
delaying, deferring or preventing a tender offer or takeover attempt that you
might consider to be in your best interest, including those attempts that might
result in the payment of a premium over the market price for your shares. They
may also promote the continuity of our management by making it harder for you to
remove or change the incumbent members of the board of directors.
RIGHTS AGREEMENT
The board of directors has declared a dividend of one right for each share
of common stock outstanding. The holders of any additional common stock
subsequently issued before the earliest of the distribution date, the redemption
of the rights, the exchange of the rights or the expiration of the rights also
will be entitled to one right for each additional share. The rights entitle the
registered holder under certain circumstances to purchase from the company
one-thousandth of a share of Junior Participating Preferred Stock, Series A, at
a price of $60 per one-thousandth of a share of preferred stock, subject to
adjustment. The Rights Agreement sets forth the description and terms of the
rights.
The rights will be evidenced by the common stock certificates and not by
separate certificates until the earlier of:
(1) the day following the first date of public disclosure that an acquiring
person or group, together with persons affiliated, or associated with
the acquiring person, has acquired, or
S-30
<PAGE> 31
obtained the right to acquire, beneficial ownership of 15.0% of the
outstanding common stock and
(2) the tenth business day after the date of commencement or public
disclosure of an intention to commence a tender offer or exchange offer
by a person if, upon consummation of the offer, this person or group,
together with persons affiliated or associated with it would acquire
beneficial ownership of 15.0% or more of the outstanding common stock.
Until the earlier of the two dates described in (1) and (2) above, (or earlier
redemption, exchange, or expiration of the rights); (A) the rights will be
transferable only with the common stock (except with redemption of the rights);
(B) common stock certificates will contain a notation incorporating the Rights
Agreement by reference and (C) the surrender for transfer of any certificates
for common stock will also constitute the transfer of the right associated with
the common stock represented by such certificate. For the discussion above,
Messrs. John M., Joseph R. and Jefferson J. Gregory are not considered acquiring
persons.
As soon as practicable following the earlier of the two dates described in
(1) and (2) above, separate certificates evidencing the rights will be mailed to
holders of record of the common stock as of the close of business on this date.
From and after this date, the separate rights certificates alone will evidence
the rights.
The rights will become exercisable on or after the earlier of the two dates
described in (1) and (2) above, (unless sooner redeemed or exchanged). The
rights will expire at the close of business on the tenth anniversary of the date
of initial issuance unless earlier redeemed or exchanged by the company as
described below.
The purchase price payable and the number of shares of preferred stock or
other securities, cash or other property issuable upon exercise of the rights
are subject to adjustment from time to time to prevent dilution (1) in the event
of a stock dividend or distribution on, or a subdivision or combination of, or
reclassification of the preferred stock, (2) upon the grant to holders of the
preferred stock of some rights, options, or warrants to subscribe for preferred
stock or securities convertible into Preferred Stock at less than the current
market price of the Preferred Stock, or (3) upon the distribution to holders of
the preferred stock of other securities, cash (excluding regular periodic cash
dividends), property, evidences of indebtedness, or assets.
If a person becomes an acquiring person, the rights will "flip-in" and
entitle each holder of a right, except as provided below, to purchase, upon
exercise at the then-current purchase price, that number of shares of common
stock having a market value of two times the purchase price. In addition,
following a "flip-in," the board of directors has the option of exchanging all
or part of the rights, except as provided below, for common stock.
In the event that, following a "flip-in," we are acquired in a merger or
other business combination in which the common stock does not remain outstanding
or is exchanged or 50% or more of our consolidated assets or earning power is
transferred or disposed of (in one transaction or a series of related
transactions), the rights will "flip-over" and entitle each holder (other than
the acquiring person and certain related persons or transferees) of a right to
purchase, upon the exercise of the right at the then-current purchase price,
that number of shares of common stock of the acquiring company (or, in certain
circumstances, one of its affiliates) which at the time of such transaction
would have a market value of two times such purchase price.
Any rights beneficially owned at any time on or after the earlier of the
distribution date and the stock acquisition date by an acquiring person or an
affiliate or associate (other than an exempt person) of an acquiring person
(whether or not such ownership is subsequently transferred) will
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<PAGE> 32
become null and void upon the occurrence of a "Triggering Event," and any holder
of those rights will have no right to exercise the rights or have the rights
exchanged as provided above. A "Triggering Event" will be deemed to occur in the
event that the person becomes an acquiring person.
The number of outstanding rights and the number of one-thousandths of a
share of preferred stock issuable upon exercise of each right and the purchase
price are subject to adjustment. The adjustment will occur prior to the
distribution date in the event of a stock dividend on the common stock payable
in common stock or subdivision or combination of the common stock.
At any time prior to the earlier of the stock acquisition date and the
expiration date, we may redeem the rights.
The holder of a right will have no rights as a shareholder of King until a
right is exercised, including, without limitation, the right to vote or to
receive the dividends or distributions.
At any time prior to the stock acquisition date, a majority of the
directors, continuing in office may, without the approval of a holder of the
rights (except, in certain circumstances, an exempt person), supplement or amend
any provision of the rights agreement (including the date on which the
distribution date will occur after announcement of commencement of a tender
offer). Thereafter, the rights agreement may be amended by a majority of the
directors continuing in office without the approval of any holder of the rights
only to cure ambiguities, to correct defective or inconsistent provisions, or in
ways that do not adversely affect the rights holders. Notwithstanding the
foregoing, the rights agreement may not be amended to change the purchase price,
the number of shares of preferred stock, other securities, cash or other
property obtainable upon exercise of a right, the redemption price or the
expiration date.
The rights have certain anti-takeover effects. The right may cause
substantial dilution to a person or group other than an exempt person that
attempts to acquire us on terms not approved by the board of directors, except
pursuant to an offer conditioned on a substantial number of rights being
acquired. The rights should not interfere with any merger or other business
combination approved by the board of directors prior to the time a person or
group other than an exempt person has acquired beneficial ownership of 15.0% or
more of the common stock, because until such time the rights may be redeemed by
King at $.01 per right.
The foregoing description of the rights is qualified in its entirety by
reference to the rights agreement, a copy of the form of which is filed with the
SEC.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The charter limits the liability of directors to the fullest extent
permitted by the Tennessee Business Corporation Act. In addition, the charter
provides that we shall indemnify our directors and officers to the fullest
extent permitted by law.
TRANSFER AGENT, REGISTRAR, RIGHTS AGENT AND CUSTODIAN
The transfer agent, registrar and rights agent for our common stock and the
preferred stock purchase rights and the custodian for the selling shareholders
is Union Planters Bank, N.A., Belleville, Illinois.
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<PAGE> 33
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated April 19, 2000, we will sell to Donaldson, Lufkin & Jenrette
Securities Corporation all of the shares of common stock offered hereby.
The shares of the common stock may be sold by the underwriter from time to
time to purchasers in one or more transactions (which may involve block
transactions) in the over-the-counter market, in negotiated transactions, in a
combination of such methods or otherwise, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices. These sales are subject to prior sale, when, as and if
delivered to and accepted by the underwriter. If the price received by the
underwriter upon the sale of the common stock exceeds the price at which it buys
the common stock, such difference shall represent the underwriter's commission.
The underwriter may effect such transactions by selling shares of common stock
to or through dealers, who may be deemed to be underwriters, and such dealers
may receive compensation in the form of underwriting discounts, concessions or
commissions from the underwriter and/or the purchasers of the shares of common
stock offered hereby for whom they may act as agents or to whom they may sell as
a principal.
The underwriter is purchasing the common stock from us at $41.38 per share
of common stock (representing $165,520,000 aggregate proceeds to us, before we
deduct our out-of-pocket expenses of approximately $520,000).
The underwriting agreement provides that the underwriter will be obligated
to purchase all the shares of common stock in this offering if any are
purchased, other than those shares covered by the over-allotment option
described below.
Pursuant to the underwriting agreement, we have granted to the underwriter
a 30-day option to purchase up to an additional 600,000 shares of common stock
from us at $41.38. This option may be exercised only to cover any
over-allotments of common stock made in connection with this offering.
We have agreed not to offer, sell, contract to sell, announce an intention
to sell, pledge or otherwise dispose of, directly or indirectly, or file with
the Securities and Exchange Commission a registration statement under the
Securities Act of 1933 relating to, any additional shares of our common stock or
securities convertible into or exchangeable or exercisable for any shares of our
common stock, or publicly disclose the intention to make any offer, sale,
pledge, disposition or filing without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation for a period of 60 days after the date
of this prospectus supplement, except grants of employee or director stock
options under our stock incentive plans in effect on the date hereof, issuances
of securities as a result of the exercise of any options outstanding on the date
thereof or issuances of common stock resulting in gross proceeds of not more
than $100 million in connection with the execution of a co-promotion agreement
between the Company and such purchaser.
Our officers and directors have agreed that they will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, any
shares of our common stock or securities convertible into or exchangeable or
exercisable for any shares of our common stock, enter into a transaction which
would have the same effect, or enter into any swap, hedge or other arrangement
that transfers, in whole or in part, any of the economic consequences of
ownership of our common stock, whether any such aforementioned transaction is to
be settled by delivery of our common stock or such other securities, in cash or
otherwise, or publicly disclose the intention to make any such offer, sale,
pledge or disposition, or to enter into any such transaction, swap, hedge or
other arrangement, without, in
S-33
<PAGE> 34
each case, the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation for a period of 60 days after the date of this prospectus
supplement.
We have agreed to indemnify the underwriter against liabilities under the
Securities Act of 1933, or to contribute to payments which the underwriter may
be required to make in that respect.
Our common stock is traded on The Nasdaq Stock Market's National Market
under the symbol "KING".
The underwriter may engage in over-allotment, stabilizing transactions,
covering transactions, penalty bids and "passive" market making in accordance
with Regulation M under the Securities Exchange Act of 1934.
- Over-allotment involves sales in excess of the size of the offering,
which creates a short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Covering transactions involve purchases of the common stock in the open
market after the distribution has been completed in order to cover short
positions.
- Penalty bids permit the representatives to reclaim a selling concession
when the common stock originally sold is purchased in a stabilization
transaction or a covering transaction to cover short positions.
- In "passive" market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to certain
limitations, make bids for or purchases of the common stock until the
time, if any, at which a stabilizing bid is made.
These stabilizing transactions, covering transactions, penalty bids and
"passive" market making may cause the price of the common stock to be higher
than it would otherwise be in the absence of these transactions. These
transactions may be effected on The Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
S-34
<PAGE> 35
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of our common stock in Canada is being made only on a
private placement basis exempt from the requirement that King and the selling
shareholders prepare and file a prospectus with the securities regulatory
authorities in each province where trades of common stock are effected.
Accordingly, any resale of our common stock in Canada must be made in accordance
with the applicable securities laws which will vary depending on the relevant
jurisdiction, and which may require resales to be made in accordance with
available statutory exemptions or pursuant to a discretionary exemption granted
by the applicable Canadian securities regulatory authority. Purchasers are
advised to seek legal advice prior to any resale of our common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company, the selling
stockholders and the dealer from whom such purchase confirmation is received
that (1) such purchaser is entitled under applicable provincial securities laws
to purchase such common stock without the benefit of a prospectus qualified
under such securities laws, (2) where required by law, that such purchaser is
purchasing as principal and not as agent, and (3) such purchaser has reviewed
the text above under "Resale restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of King's directors and officers as well as the experts named herein
may be located outside of Canada and, as a result, it may not be possible for
Canadian purchasers to effect service of process within Canada upon the Company
or such persons. All or a substantial portion of the assets of the Company and
such persons may be located outside of Canada and, as a result, it may not be
possible to satisfy a judgment against King or the selling shareholders in
Canada or to enforce a judgment obtained in Canadian courts against King or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to the offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
S-35
<PAGE> 36
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchaser of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in our common
stock in their particular circumstances and with respect to the eligibility of
our common stock for investment by the purchaser under relevant Canadian
legislation.
LEGAL MATTERS
The validity of our common stock offered in this offering will be passed
upon for King by Baker, Donelson, Bearman & Caldwell, Johnson City, Tennessee.
The underwriters have been represented by Cravath, Swaine & Moore, New York, New
York.
EXPERTS
The consolidated financial statements and supplementary pooled consolidated
financial statements as of December 31, 1998 and 1999 and for each of the three
years in the period ended December 31, 1999, either incorporated by reference or
included in this prospectus supplement have been so incorporated or included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in accounting and auditing.
S-36
<PAGE> 37
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Accountants on Supplementary
Consolidated Financial Statements......................... F-2
Supplementary Consolidated Balance Sheets as of December 31,
1998 and 1999............................................. F-3
Supplementary Consolidated Statements of Operations for the
years ended December 31, 1997, 1998 and 1999.............. F-4
Supplementary Consolidated Statements of Changes in
Shareholders' Equity for the years ended December 31,
1997, 1998 and 1999....................................... F-5
Supplementary Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1998 and 1999.............. F-6
Notes to Supplementary Consolidated Financial Statements.... F-8
</TABLE>
F-1
<PAGE> 38
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 of cash flows present fairly, in all material respects, the financial
position of King Pharmaceuticals, Inc. at December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As described in Note 21, on February 25, 2000, the Company merged with
Medco Research, Inc. ("Medco") in a transaction accounted for as a pooling of
interests. The accompanying supplementary consolidated financial statements give
retroactive effect to the merger of the Company with Medco. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of the Company and its
subsidiaries after financial statements covering the date of consummation of the
business combination are issued.
In our opinion, the accompanying supplementary consolidated balance sheets
and the related supplementary consolidated statements of operations, changes in
shareholders' equity and of cash flows present fairly, in all material respects
the financial position of the Company 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 supplementary financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Greensboro, North Carolina
February 25, 2000, except for
the information in Note 21 for
which the date is March 17, 2000
F-2
<PAGE> 39
KING PHARMACEUTICALS, INC.
SUPPLEMENTARY CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 5,901 $ 20,720
Investments, held to maturity............................... 21,434 17,001
Trade accounts receivable, net of allowance for doubtful
accounts of $1,402 and $1,864............................. 39,666 69,215
Royalty receivable.......................................... 8,349 6,691
Inventory................................................... 26,556 33,410
Deferred income taxes....................................... 6,256 14,643
Prepaid expenses and other current assets................... 2,460 9,443
-------- --------
Total current assets...................................... 110,622 171,123
-------- --------
Property and equipment, net................................. 94,447 97,759
Other assets................................................ 17,997 20,321
Investments, held to maturity............................... 25,074 33,583
Intangible assets, net...................................... 482,212 558,555
-------- --------
Total assets.............................................. $730,352 $881,341
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 13,233 $ 25,447
Accrued expenses............................................ 20,532 53,735
Income taxes payable........................................ 3,524 4,756
Current portion of long term debt........................... 13,310 14,502
-------- --------
Total current liabilities................................. 50,599 98,440
Long-term debt:
Revolving credit facility................................. 19,000 45,000
Term loans................................................ 414,750 354,194
Senior subordinated notes................................. 75,000 150,000
Other..................................................... 5,737 4,161
Deferred income taxes....................................... 5,621 12,638
Other liabilities........................................... 150 1,500
-------- --------
Total liabilities......................................... 570,857 665,933
Commitments and contingencies (notes 14 and 21)
Shareholders' equity........................................ 159,495 215,408
-------- --------
Total liabilities and shareholders' equity................ $730,352 $881,341
======== ========
</TABLE>
The accompanying notes are an integral part of the
supplementary consolidated financial statements.
F-3
<PAGE> 40
KING PHARMACEUTICALS, INC.
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Revenues:
Net sales............................................. $47,351 $158,180 $348,271
Royalty revenue....................................... 20,000 27,544 31,650
Development revenue................................... 558 5,283 --
------- -------- --------
Total revenues..................................... 67,909 191,007 379,921
------- -------- --------
Operating costs and expenses:
Costs of sales........................................ 13,034 64,052 113,204
Selling, general and administrative................... 19,950 36,193 80,213
Royalty expense....................................... 2,985 4,873 5,661
Depreciation and amortization......................... 3,071 9,963 27,734
Research and development expense...................... 7,792 10,749 16,316
------- -------- --------
Total operating costs and expenses................. 46,832 125,830 243,128
------- -------- --------
Operating income...................................... 21,077 65,177 136,793
------- -------- --------
Other income (expenses):
Interest income....................................... 2,792 6,879 3,314
Interest expense...................................... (2,787) (14,866) (55,371)
Other, net............................................ -- -- (3,052)
------- -------- --------
Total other income (expense)....................... 5 (7,987) (55,109)
------- -------- --------
Income before income taxes and extraordinary item..... 21,082 57,190 81,684
Income tax expense...................................... 4,257 15,627 29,986
------- -------- --------
Income before extraordinary item........................ 16,825 41,563 51,698
Extraordinary item, net of income taxes of $2,787 and
$445 in 1998 and 1999................................. -- (4,411) (705)
------- -------- --------
Net income.............................................. $16,825 $ 37,152 $ 50,993
======= ======== ========
Income per common share:
Basic................................................. $ 0.36 $ 0.71 $ 0.92
------- -------- --------
Diluted............................................... $ 0.36 $ 0.71 $ 0.91
======= ======== ========
</TABLE>
The accompanying notes are an integral part of the
supplementary consolidated financial statements.
F-4
<PAGE> 41
KING PHARMACEUTICALS, INC.
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DUE
COMMON UNREALIZED FROM COST OF TOTAL
--------------------- RETAINED LOSS ON RELATED TREASURY SHAREHOLDERS'
SHARES AMOUNT EARNINGS SECURITIES PARTY STOCK EQUITY
---------- -------- -------- ---------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 as
previously reported.......... 10,428,968 $ 8,448 $ 7,938 $(16) $ (677) $ -- $ 15,693
Medco pooling of interests..... 7,257,040 52,216 (11,394) -- -- (4,323) 36,499
---------- -------- -------- ---- ------- -------- --------
Balance, December 31, 1996, as
adjusted..................... 17,686,008 60,664 (3,456) (16) (677) (4,323) 52,192
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...................... 27,000,000 -- -- -- -- -- --
Stock options exercised...... 18,244 297 -- -- -- -- 297
Purchase of stock held in
treasury................... (171,087) -- -- (2,353) (2,353)
Net income................... -- -- 16,825 -- -- -- 16,825
---------- -------- -------- ---- ------- -------- --------
Balance, December 31, 1997..... 49,104,197 68,968 13,369 -- (1,671) (6,676) 73,990
Issuance of common shares,
net of expenses............ 6,157,095 50,117 -- -- -- -- 50,117
Payments from Benevolent
Fund....................... -- -- -- -- 1,075 -- 1,075
Stock options exercised...... 78,314 1,293 -- -- -- -- 1,293
Purchase of stock held in
treasury................... (148,924) -- -- -- -- (4,132) (4,132)
Net income................... -- -- 37,152 -- -- -- 37,152
---------- -------- -------- ---- ------- -------- --------
Balance, December 31, 1998..... 55,190,682 120,378 50,521 -- (596) (10,808) 159,495
Stock options exercised...... 331,305 5,764 -- -- -- -- 5,764
Stock warrants exercised..... 27,028 540 -- -- -- -- 540
Purchase of stock held in
treasury................... (124,937) -- -- -- -- (4,455) (4,455)
Retirement of treasury
stock...................... -- (15,263) -- -- -- 15,263 --
Tax benefit.................. -- 2,475 -- -- -- -- 2,475
Payments from Benevolent
Fund....................... -- -- -- -- 596 -- 596
Net income................... -- -- 50,993 -- -- -- 50,993
---------- -------- -------- ---- ------- -------- --------
Balance, December 31, 1999..... 55,424,078 $113,894 $101,514 $ -- $ -- $ -- $215,408
========== ======== ======== ==== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the
supplementary consolidated financial statements.
F-5
<PAGE> 42
KING PHARMACEUTICALS, INC.
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 16,825 $ 37,152 $ 50,993
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 3,071 9,963 27,734
Amortization of deferred financing costs................ -- 728 2,834
Loss on sale of marketable securities................... 32 -- --
Net amortization of investments premium (discount)...... (102) (334) 16
Extraordinary loss...................................... -- 7,198 1,150
Net loss on sale of property and equipment.............. 26 19 134
Deferred income taxes................................... (980) (2,626) (1,370)
Changes in operating assets and liabilities:
Accounts receivable................................... (6,256) (31,105) (29,642)
Royalty receivable.................................... (226) (2,345) 1,696
Inventories........................................... (4,753) (15,706) (6,854)
Prepaid expenses and other assets..................... (4,940) 2,912 (4,481)
Accounts payable...................................... 2,898 6,806 12,214
Accrued expenses and other............................ 7,861 7,215 34,553
Deferred revenue...................................... (548) -- --
Deferred royalty payment.............................. (1,266) (1,451) --
Income taxes.......................................... 2,514 1,662 1,232
-------- --------- ---------
Net cash provided by operating activities.......... 14,156 20,088 90,209
-------- --------- ---------
Cash flows from investing activities:
Purchase of investment securities......................... (20,162) (34,293) (25,592)
Proceeds from maturity and sale of investment
securities.............................................. 8,682 25,922 21,500
Purchases of property, plant and equipment................ (1,430) (81,432) (9,170)
Purchases of intangible assets............................ (54,161) (345,618) (98,199)
Merger related costs...................................... (373) -- (2,094)
Proceeds from sale of property and equipment.............. 2 44 20
-------- --------- ---------
Net cash used in investing activities.............. (67,442) (435,377) (113,535)
-------- --------- ---------
Cash flows from financing activities:
Proceeds from revolving credit facility................... 29,599 -- 92,000
Payments on revolving credit facility..................... (23,447) -- (66,000)
Proceeds from issuance of common shares and exercise of
stock options, net...................................... 8,304 51,410 8,779
Purchase of stock held in treasury........................ (2,353) (4,132) (4,455)
Book overdraft............................................ 1,423 -- --
Repayment on shareholder notes receivable................. 2,093 -- --
Proceeds from other long-term debt........................ 55,923 658,741 150,000
Payments on other long-term debt.......................... (23,798) (262,318) (136,021)
Payments on notes payable................................. -- (916) --
Due to affiliate.......................................... (994) 1,075 596
Initial public offering costs............................. (710) -- --
Debt issuance costs....................................... (458) (25,465) (6,754)
-------- --------- ---------
Net cash provided by financing activities.......... 45,582 418,395 38,145
-------- --------- ---------
Increase (decrease) in cash................................. (7,704) 3,106 14,819
Cash and cash equivalents, beginning of period.............. 10,499 2,795 5,901
-------- --------- ---------
Cash and cash equivalents, end of period.................... $ 2,795 $ 5,901 $ 20,720
======== ========= =========
Supplemental disclosure of cash paid for:
Interest.................................................. $ 2,335 $ 13,929 $ 50,411
======== ========= =========
Taxes..................................................... $ 2,974 $ 11,507 $ 30,576
======== ========= =========
</TABLE>
The accompanying notes are an integral part of
the supplementary consolidated financial statements.
F-6
<PAGE> 43
KING PHARMACEUTICALS, INC.
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
Supplemental schedule of non-cash investing and financing activities:
For the years ended December 31, 1997, 1998 and 1999, the Company
entered into capital leases totalling $85, $1,004 and $83, respectively.
The Company purchased intangible assets financed by the seller of
$75,000 in 1998.
In connection with its purchases of intangible assets the Company
assumed estimated liabilities of $3,062 and $2,913 for returns of products
shipped prior to acquisition date during 1997 and 1998, respectively.
The accompanying notes are an integral part of the
supplementary consolidated financial statements.
F-7
<PAGE> 44
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
1. THE COMPANY
King Pharmaceuticals, Inc. ("King" or the "Company") is a vertically
integrated pharmaceutical company that researches, develops, manufactures,
markets and sells primarily branded prescription pharmaceutical products.
Through a national sales force and copromotion arrangements, King markets its
branded pharmaceutical products to general/family practitioners, internal
medicine physicians and hospitals across the country. The Company also provides
contract manufacturing for a number of the world's leading pharmaceutical and
biotechnology companies.
These supplementary 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 supplementary consolidated
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions. Assets, liabilities,
revenues and expenses, and disclosure of contingent assets and liabilities are
affected by such estimates and assumptions. Actual results could differ from
those estimates.
Revenue Recognition. Sales are reported net of an estimate for returns and
allowances, rebates and chargebacks when goods are shipped to the customer.
Product sales and sales of manufactured products are recognized upon shipment.
Development revenue is recognized upon approval of the product from the Food and
Drug Administration. The Company records royalty revenue when it is earned,
based on third party net sales of products under license.
Cash and Cash Equivalents. The Company considers all highly liquid
investments with an original maturity of three months or less when purchased to
be cash equivalents. The Company's cash and cash equivalents are placed in large
domestic banks which limit the amount of credit exposure.
Inventories. Inventories are stated at the lower of cost or market. Cost
is determined using the first-in, first-out (FIFO) method. Inventory of product
samples not distributed to third parties represent 11.3% of inventory as of
December 31, 1999.
Investments. The Company's investments primarily include marketable
securities, which are recorded at cost, net of amortization of premiums and
discounts. All premiums and/or discounts are amortized over the remaining term
of the related security using the straight-line method, which does not differ
significantly from the effective interest rate method. The Company's investments
are accounted for in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". This Statement addresses the
accounting and reporting for investments in equity securities that have readily
determinable fair values and for all investments on debt securities. These
investments are classified in three categories and are accounted for as follows:
(1) debt securities that the Company has the positive intent and the ability to
hold to maturity are classified as held-to-maturity and reported at cost; (2)
debt and equity securities that are bought and held principally for the purpose
of selling them in the near term are classified as trading securities and
reported at fair
F-8
<PAGE> 45
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value, with unrealized gains and losses included in earnings; (3) debt and
equity securities not classified as either held-to-maturity or trading
securities are classified as available-for-sale securities and reported at fair
value, with unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity. All of the Company's investments are
accounted for as held-to-maturity securities as of December 31, 1998 and 1999.
The classification of investments is determined on the date of acquisition. The
Company reviews its investment portfolio as deemed necessary and, where
appropriate, adjusts individual investments for other-than-temporary
impairments. In February 2000, the Company sold its held to maturity investments
as a result of the merger and recognized a loss on sale of $662.
Income Taxes. Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is recorded when, in
the opinion of management, it is more likely than not that some or all of the
deferred tax assets will not be realized.
Financial Instruments and Derivatives. The Company does not use financial
instruments for trading purposes. Financial instruments, which are a type of
derivative instrument, are used to manage interest rate risks. The notional
amounts of the interest rate protection agreements entered into by the Company
are used to measure the interest to be paid or received and do not represent the
amount of exposure to loss.
The fair value of financial instruments are determined by reference to
various market data or other valuation techniques as appropriate. Unless
otherwise disclosed, the fair values of financial instruments approximate their
recorded values.
Property, Plant and Equipment. Property, plant and equipment are stated at
cost. Maintenance and repairs are expensed as incurred. Depreciation is computed
over the estimated useful lives of the related assets using the straight-line
method for financial statement purposes and accelerated methods for income tax
purposes. The estimated useful lives are principally 15 to 40 years for
buildings and improvements and 3 to 15 years for machinery and equipment.
Retirements, sales and disposals of assets are recorded by removing the cost and
accumulated depreciation with any resulting gain or loss reflected in income.
In the event that facts and circumstances indicate that the cost of
property, plant and equipment may be impaired, evaluation of recoverability is
performed using the estimated future undiscounted cash flows associated with the
asset compared to the asset's carrying amount to determine if a writedown is
required.
Capitalized Interest. For the years ended December 31, 1998 and 1999, the
Company capitalized interest of approximately $239 and $381, respectively. The
Company had no capitalized interest for the year ended December 31, 1997.
Intangible Assets. Intangible assets which include product rights and
goodwill are stated at cost, net of accumulated amortization. Amortization is
computed over the estimated useful lives, ranging from 10 to 30 years, using the
straight-line method. In addition, the Company capitalizes certain acquisition
costs incurred in connection with the application for and the procurement of
patents, trademarks and distribution rights. Costs are capitalized on a
case-by-case basis relating to those territories where the Company anticipates
receiving significant future benefits from the patent, and
F-9
<PAGE> 46
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are amortized over the life of the patent beginning at date of grant.
Amortization periods on capitalized patent costs trademarks and distribution
rights range from 3 to 20 years.
The Company periodically reevaluates the propriety of the carrying amount
of intangibles as well as the related amortization period to determine whether
the current events and circumstances warrant adjustments to the carrying values
and/or revised estimates of useful lives. This evaluation is performed using the
estimated projected future undiscounted cash flows associated with the asset
compared to the asset's carrying amount to determine if a writedown is required.
To the extent such projection indicates that undiscounted cash flow is not
expected to be adequate to recover the carrying amounts, the assets are written
down to discounted cash flows.
Other Assets. Other assets consist primarily of deferred financing costs
which are being amortized over periods ranging from six to ten years.
Amortization expense related to deferred financing costs was $0, $728 and $2,834
for 1997, 1998 and 1999, respectively, and has been included in interest
expense.
During 1998 and 1999, the Company repaid certain debt prior to maturity.
The repayment resulted in extraordinary charges of $4,411, net of related tax
benefits of $2,787 in 1998, and $705, net of related tax benefits of $445, in
1999, associated with the write-off of certain deferred financing costs.
Self-Funded Health Insurance. The Company is self-insured with respect to
its health care benefit program. The Company contributes estimated amounts to a
third-party administrator on a monthly basis which are used to pay health care
claims during the year. Under the plan, the Company pays a minimum amount
annually and has an aggregate stop-loss limit based upon the number of
participants and their insured status. Self-insured costs are accrued based upon
reported claims and an estimated liability for claims incurred but not reported.
Research and Development. The Company incurs research and development
costs that are expensed as incurred. These costs were approximately $7,792,
$10,749 and $16,316, for the years ended December 31, 1997, 1998 and 1999,
respectively.
Advertising and Promotion. The Company expenses advertising and promotion
costs as incurred and these costs are included as selling, general and
administrative expenses. Advertising and promotion costs for the years ended
December 31, 1997, 1998 and 1999 were $1,583, $10,744 and $26,513, respectively.
Statement of Accounting Standards Not Yet Adopted. In June 1998, the Board
adopted Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments and
hedging activities. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the effective date
of FASB Statement No. 133 -- an amendment of FASB Statement No. 133", that
revises SFAS No. 133, to become effective in the first quarter of fiscal 2001.
The Company is evaluating the provisions of SFAS No. 133, but does not
anticipate its adoption to have a material impact on financial position or
results of operations.
Comprehensive Income. In 1997, the Company had other comprehensive income
of $16, net of tax, related to an unrealized loss on securities. The Company had
no other comprehensive income in 1998 or 1999.
F-10
<PAGE> 47
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. CONCENTRATIONS OF CREDIT RISK
A significant portion of the Company's sales is to customers in the
pharmaceutical industry. Approximately, 19% and 17% of accounts receivable at
December 31, 1998 and 1999, respectively were due from one customer. At December
31, 1998 and 1999, an additional 25% and 16%, respectively, were due from two
other customers. The Company monitors the extension of credit to customers and
has not experienced significant credit losses.
The following table represents a summary of sales to significant customers
as a percentage of the Company's total revenues:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Customer A.................................................. 11.8% n/a% 16.8%
Customer B.................................................. n/a 10.8 13.4
Customer C.................................................. n/a n/a 11.6
Customer D.................................................. 29.5 14.4 n/a
</TABLE>
n/a -- sales were less than 10% for the year.
The majority of the royalty receivable balance at December 31, 1998 and
1999 relates to Fujisawa USA, Inc.
The Company invests its excess cash primarily in U.S. Government and
high-quality corporate debt securities and commercial paper. The commercial
paper securities are highly liquid and the government securities typically
mature within one to three years (although there is an established secondary
market for sales at any given time). Based on the nature of the financial
instruments and/or historical realization of these financial instruments,
management believes they bear minimal risk.
4. INVESTMENTS
The aggregate fair values of investment securities at December 31, 1998 and
1999 along with unrealized gains and losses determined on an individual security
basis are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
COST GAINS LOSSES MARKET
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
1999 HELD TO MATURITY
U.S. Government Obligations................ $25,951 $ -- $ (278) $25,673
Corporate Obligations...................... 24,633 29 (235) 24,427
------- ---- ------ -------
Total securities held to maturity.......... $50,584 $ 29 $ (513) $50,100
======= ==== ====== =======
1998 HELD TO MATURITY
U.S. Government Obligations................ $26,046 $217 $ -- $26,263
Corporate Obligations...................... 20,462 -- (99) 20,363
------- ---- ------ -------
Total securities held to maturity.......... $46,508 $217 $ (99) $46,626
======= ==== ====== =======
</TABLE>
There were no realized gains or losses in 1999, 1998 or 1997.
F-11
<PAGE> 48
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following represents the contractual maturities of investments held as
of December 31, 1999.
<TABLE>
<S> <C>
Less than 1 year............................................ $17,001
1 to 5 years................................................ 33,583
-------
Total............................................. $50,584
=======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Land........................................................ $ 3,949 $ 4,115
Buildings and improvements.................................. 56,015 59,309
Machinery and equipment..................................... 33,430 39,100
Equipment under capital lease............................... 2,713 2,537
Construction in progress.................................... 6,106 6,189
-------- --------
102,213 111,250
Less accumulated depreciation............................... (7,766) (13,491)
-------- --------
$ 94,447 $ 97,759
======== ========
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1997, 1998 and 1999 was $1,087, $4,336 and $5,809, respectively.
6. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Finished goods.............................................. $13,772 $18,085
Work-in-process............................................. 5,386 6,120
Raw materials............................................... 7,398 9,205
------- -------
$26,556 $33,410
======= =======
</TABLE>
7. ACQUISITIONS/INTANGIBLE ASSETS
Goodwill and Product Rights:
On November 12, 1999, the Company purchased the rights, title and interest
to the Tigan product line from Roberts Pharmaceuticals, Inc. for a purchase
price of $6,493, including $93 related to the forgiveness of certain
indebtedness owed by the Company. The purchase price is being amortized over its
estimated useful life of 20 years. The acquisition was financed through
borrowings on the Company's revolving credit facility.
On July 30, 1999, the Company purchased the rights, title and interest in
and to the trademark Lorabid within the United States and Puerto Rico, from Eli
Lilly and Company for a purchase price of $90,500, plus acquisition costs of
$1,299 and sales performance milestones. The sales performance milestones could
bring the total price to $158,000 if the Company achieves annual product sales
of $140,000. The entire purchase price of $90,500 was allocated to intangible
assets and is being
F-12
<PAGE> 49
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amortized over its estimated useful life of 25 years for goodwill and 15 years
for amounts allocated to the patents. The acquisition was financed through
borrowings on the Company's revolving credit facility.
On December 22, 1998, the Company acquired three branded pharmaceutical
products from Hoechst Marion Roussel, Inc. ("HMR" or "Seller") for a purchase
price of $362,500, plus acquisition costs of approximately $450. The acquired
products were: (a) the U.S. rights to the Altace product line with patents
expiring through 2008, (b) worldwide rights to the Silvadene product line, and
(c) worldwide rights to the AVC product line (collectively the "Altace
Acquisition"). The purchase price was principally allocated to intangible assets
and financed under the Company's Senior Credit Facility and a $75,000 note from
the Seller (Note 9). Intangible assets are being amortized over 15 to 30 years.
On June 30, 1998, the Company acquired the rights, title and interest to
the Menest(R) product line for approximately $5,000. The entire purchase was
allocated to intangible assets and is being amortized over its estimated useful
life of 25 years. The acquisition was financed with proceeds resulting from the
completion of the Company's June 25, 1998 initial public offering.
On February 28, 1998, the Company acquired the rights, titles and interest
to certain product lines, production facilities (the "Parkedale Facility"), and
assumed contracts for manufacturing for third parties from Warner-Lambert
Company (the "Sterile Products Acquisition"). The purchase price, including
assumed liabilities of $2,913, of $127,913 was allocated to real estate and
equipment based on fair values ($44,130 and $28,914, respectively) with the
residual $54,869 being allocated to intangibles and is being amortized over 5 to
40 years and 25 years, respectively. The purchase price was financed under the
Company's Credit Agreement.
The following unaudited pro forma summary presents the financial
information as if the acquisitions had occurred on January 1, 1998 These pro
forma results have been prepared for comparative purposes and do not purport to
be indicative of what would have occurred had the acquisitions been made on
January 1, 1998, nor is it indicative of future results.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
---------------------------
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Total revenues.............................................. $406,294 $416,934
======== ========
Net income.................................................. $ 36,470 $ 60,653
======== ========
Basic and diluted income per common share................... $ 0.70 $ 1.16
======== ========
</TABLE>
In October 1989, the Company received FDA approval to market Adenocard in
the United States. The Company entered into agreements with Fujisawa USA, Inc.
("Fujisawa") for the manufacture and marketing of Adenocard in the United States
and Canada and receives royalties from Fujisawa based on a percentage of
Adenocard net sales. The Company has also entered into an agreement with Sanofi
Pharma (France) (Sanofi) for the manufacture and marketing of Adenocard in all
countries other than the United States and Canada. In September 1991, Sanofi
received marketing approval (under the trade name Adenocor) in the United
Kingdom and, in May 1992, received marketing approval (under the trade name
Krenosin) in Switzerland. The Company receives royalties from Sanofi based on a
percentage of Adenocor and Krenosin sales. One half of all royalties received
from Adenocard, Adenocor and Krenosin sales are payable by the Company to the
F-13
<PAGE> 50
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
University of Virginia Alumni Patents Foundation from which the Company acquired
rights to Adenocard.
In 1988, the Company entered into a Development and License Agreement (the
"Agreement") with Fujisawa that provides for Fujisawa to fund one-half of the
development costs (as incurred) of Adenoscan, and other products. Under the
agreement, Fujisawa will have manufacturing and marketing rights to these drugs
in the United States and Canada upon the Company's receipt of the required
regulatory approvals, and will pay the Company royalties based on sales of these
drugs. Royalties received by the Company from sales of these drugs outside of
the United States and Canada will be shared equally with Fujisawa. In May 1995,
the FDA granted marketing clearance for Adenoscan in the United States. In May
1996, the parties entered into an agreement to jointly develop adenosine-based
products having indications as cardioprotective agents. In March 1998, Fujisawa
on behalf of itself and the Company, licensed additional intellectual property
rights for intravenous adenosine in cardiac imaging and the right to use
intravenous adenosine as a cardioprotectant in combination with thrombolytic
therapy, balloon angioplasty and coronary bypass surgery and secured
intellectual property rights to extend the exclusivity of Adenoscan until 2015.
Pursuant to the Agreement and the May 1996 agreement, the Company paid its 50%
share of the one-time up-front fee due to the licensor, which the Company
capitalized and is amortizing over the life of the patents, and is obligated to
pay its 50% share of a 6% royalty on Adenoscan net sales to this third party.
In June 1998, Fujisawa assigned and transferred to the Company all of its
right, title and interest in the May 1996 cardioprotective product development
agreement, including all of Fujisawa's related scientific data and intellectual
properties in the United States and Canada. In the event that the Company
markets an adenosine-containing cardioprotective product, Fujisawa will receive
an 8% royalty on the Company's net sales. In the event that the Company licenses
a third party to sell such product, Fujisawa will receive 25% of licensing fees,
milestone payments, royalties, and other considerations received by the Company
from such third party after the Company has recouped $2,000 toward its
investment plus its substantiated future development costs. Also in June 1998,
the Company transferred the NDA for Adenocard and Adenoscan to Fujisawa and
provided assistance to Fujisawa in connection with the contract manufacturing
agreement for both products with a third party.
Intangible assets consist of the following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Altace, Silvadene, AVC...................................... $362,950 $362,950
Lorabid..................................................... -- 91,799
Sterile Products............................................ 54,509 54,509
Septra, Proloprim, Mantadil, Kemadrin....................... 15,425 15,425
Cortisporin................................................. 23,694 23,694
Other....................................................... 30,566 37,059
Patents, trademark and distribution rights.................. 2,514 2,514
-------- --------
489,658 587,950
Less accumulated amortization............................... (7,446) (29,395)
-------- --------
$482,212 $558,555
======== ========
</TABLE>
F-14
<PAGE> 51
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amortization expense for the years ended December 31, 1997, 1998, and 1999
was $1,984, $5,627, and $21,925, respectively.
8. LEASE OBLIGATIONS
The Company leases certain office and manufacturing equipment and
automobiles under noncancelable operating leases with terms from one to five
years. Estimated future minimum lease payments, as of December 31, 1999 for
leases with initial or remaining terms in excess of one year are as follows:
<TABLE>
<S> <C>
2000........................................................ $4,676
2001........................................................ 3,554
2002........................................................ 2,342
2003........................................................ 1,387
2004........................................................ 397
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $349, $2,004, and $4.020, respectively.
Additionally, the Company leases office space in its building to tenants
under agreements ranging from one to twenty years. Such leases are accounted for
as operating leases. Rental income for the years ended December 31, 1997, 1998
and 1999 was approximately $44, $40 and $40, respectively. As of December 31,
1999 estimated future minimum rental payments to be received each year from 2000
to 2004 is $40.
Capital lease obligations for certain equipment as of December 31, 1999 are
as follows:
<TABLE>
<S> <C>
2000........................................................ $ 628
2001........................................................ 447
2002........................................................ 292
2003........................................................ 160
------
Total minimum lease payments................................ 1,527
Less imputed interest....................................... 86
------
Present value of minimum lease payments..................... 1,441
Less current maturities..................................... 562
------
$ 879
======
</TABLE>
9. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Product returns and chargebacks............................. $ 9,397 $16,822
Rebates..................................................... 266 12,507
Accrued interest............................................ 1,176 6,517
Other....................................................... 9,693 17,889
------- -------
$20,532 $53,735
======= =======
</TABLE>
F-15
<PAGE> 52
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Senior Credit Facility:
Revolving Credit Facility................................. $ 19,000 $ 45,000
Tranche A Term Loan....................................... 150,000 97,235
Tranche B Term Loan....................................... 275,000 269,921
Senior Subordinated Notes with interest at 10 3/4% payable
semiannually due March 2009............................... -- 150,000
Senior Subordinated Notes due to seller paid in March
1999...................................................... 75,000 --
Notes payable to former owners, due in equal annual
installments of principal and interest (at a rate of 6%)
of $1,226 through December 2003........................... 5,163 4,247
Note payable to shareholder, paid March 1999................ 1,750 --
Various capital leases with interest rates ranging from 8.3%
to 12.7% and maturing at various times through 2002....... 1,849 1,441
Other notes payable......................................... 35 13
-------- --------
527,797 567,857
Less current portion................................. 13,310 14,502
-------- --------
$514,487 $553,355
======== ========
</TABLE>
On March 3, 1999, the Company issued $150,000 of 10 3/4% Senior
Subordinated Notes due 2009. Net proceeds of approximately $144,000 were used to
repay outstanding indebtedness under the Senior Credit Facility ($69,000) and a
note due to seller ($75,000). The debt is guaranteed by the Company's wholly
owned subsidiaries.
On December 22, 1998, the Company amended and restated its Credit Agreement
(as defined below) dated as of February 27, 1998 (the "Senior Credit Facility")
to: (a) finance the Altace Acquisition; (b) refinance the Company's then
existing indebtedness; and (c) provide for ongoing working capital and other
financing requirements. The Senior Credit Facility, as amended, provides for up
to $525,000 of aggregate borrowing capacity, consisting of: a $150,000 tranche A
term loan (the "Tranche A Term Loan"); a $275,000 tranche B term loan (the
"Tranche B Term Loan"); and a revolving credit facility in an aggregate amount
of $100,000 (the "Revolving Credit Facility"). The Revolving Credit Facility
includes a $10,000 sublimit available for the issuance of letters of credit and
a $5,000 sublimit available for swingline loans.
As of December 31, 1999, the Company had $55,000 of available borrowings
under its Revolving Credit Facility.
The Tranche A Term Loan is subject to certain specified amortization
payments required to be made in quarterly installments until December 22, 2004.
The Tranche B Term Loan is subject to certain specified amortization payments
required to be made in quarterly installments until December 22, 2006. The
Revolving Credit Facility is available until December 22, 2004. In addition, the
loans and the aggregate available commitments under the Senior Credit Facility
will be reduced upon the occurrence of certain specified events.
F-16
<PAGE> 53
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The loans under the Senior Credit Facility accrue interest, at the
Company's option, at either (a) the base rate (which is based on the prime rate
or the federal funds rate plus one-half of 1%) plus (i) in the case of the
Tranche A Term Loan and borrowings under the Revolving Credit Facility, an
applicable spread ranging from 1.25% to 2.25% (based on a leverage ratio) and
(ii) in the case of the Tranche B Term Loan, 2.75% or (b) the applicable LIBOR
rate plus (i) in the case of the Tranche A Term Loan and borrowings under the
Revolving Credit Facility, an applicable spread ranging from 2.25% to 3.25%
(based on a leverage ratio) and (ii) in the case of the Tranche B Term Loan,
3.75%. In addition, the lenders under the Senior Credit Facility are entitled to
customary facility fees based on (a) unused commitments under the Revolving
Credit Facility and (b) letters of credit outstanding.
The interest rates for borrowings under the Revolving Credit Facility, the
Tranche A Term Loan and the Tranche B Term Loan as of December 31, 1999 were
9.71%, 9.74% and 10.24%, respectively.
The Company's obligations under the Senior Credit Facility are
unconditionally guaranteed on a senior basis by each direct and indirect
majority owned U.S. subsidiary of the Company (collectively, the
"Subsidiaries"). In addition, the Senior Credit Facility is collateralized by
substantially all of the real and personal property of the Company.
The Company's debt agreements contain covenants which, among other things,
require the Company to comply with certain financial and other covenants. The
financial covenants require the maintenance of certain ratios including interest
coverage and leverage as defined in the agreements. As of December 31, 1999 the
Company has complied with the covenants.
On February 27, 1998, the Company entered into a $195,000 credit agreement
("Credit Agreement"). The Company used the proceeds from the Credit Agreement to
finance the Warner Lambert Acquisition (Note 7), and pay off a $40,000 term loan
and outstanding borrowings under a revolving credit facility as of February 27,
1998. The Credit Agreement was paid in full on December 22, 1998, with proceeds
from the Senior Credit Facility.
The Company has entered into several interest rate swap agreements
designated as a partial hedge of the Company's variable interest rate debt. The
purpose of these swaps is to fix interest rates on variable rate debt and reduce
certain exposures to interest rate fluctuations. At December 31, 1999, the
Company had interest rate swaps with notional amounts aggregating $285,000.
Under these agreements, the Company pays a weighted average fixed rate of 5.78%
and receives a rate equivalent to the three-month and one-month LIBOR. The
notional amounts do not represent the amounts exchanged by the parties. The
agreements expire between 2004 and 2006.
On November 12, 1999, the Company entered into an interest rate swap
agreement related to its fixed rate senior subordinated notes. The notional
amount at December 31, 1999 was $150.0 million and the agreement expires in
2009. Under this agreement the Company exchanged its fixed rate 10.75% for a
floating rate based on LIBOR with the floating rate being fixed at 9.89% through
November 15, 2002. Thereafter the Company pays a floating rate based on the
three month LIBOR.
F-17
<PAGE> 54
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt (including capital lease
obligations -- Note 8) at December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000...................................................... $ 14,502
2001...................................................... 19,576
2002...................................................... 24,553
2003...................................................... 29,623
2004...................................................... 28,315
Thereafter................................................ 451,288
--------
$567,857
========
</TABLE>
11. FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair values of financial
instruments are made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies.
Cash and Cash Equivalents, Trade Receivables, Royalty Receivable and
Accounts Payable. The carrying amounts of these items are a reasonable estimate
of their fair values.
Investments. The fair value of investments was based primarily on quoted
market prices (see Note 4). If quoted market prices are not readily available,
fair values are based on quoted market prices of comparable instruments.
Long-Term Debt. The fair value of the Company's long-term debt, including
the current portion, at December 31, 1998 and 1999, is estimated to be
approximately $527,500 and $563,300, respectively, using discounted cash flow
analyses and based on the Company's incremental borrowing rates for similar
types of borrowing arrangements.
Interest Rate Swaps. The estimated fair market value of the interest rate
swap agreements at December 31, 1998 and 1999, as determined by the issuing
financial institution and based on the estimated termination values, was an
unrealized loss of approximately $2,787 and an unrealized gain of $1,045,
respectively.
12. INCOME TAXES
The net income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------- -------
<S> <C> <C> <C>
Current.................................................... $5,237 $17,890 $31,356
Deferred................................................... (980) (2,263) (1,370)
------ ------- -------
Total expense.................................... $4,257 $15,627 $29,986
====== ======= =======
</TABLE>
F-18
<PAGE> 55
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the difference between the federal statutory tax rate
and the effective income tax rate as a percentage of income before income taxes
and extraordinary item is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- ----
<S> <C> <C> <C>
Federal statutory tax rate.................................. 34.0% 35.0% 35.0%
State income taxes, net of federal benefit.................. 3.0 3.3 3.0
Change in valuation allowance............................... (15.5) (10.3) --
Permanent differences....................................... 0.4 0.1 (0.6)
Other....................................................... (1.7) (0.8) (0.7)
----- ----- ----
Effective tax rate........................................ 20.2% 27.3% 36.7%
===== ===== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liability are as follows:
<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
Accrued expenses............................................ $ 5,307 $ 13,809
State net operating loss carryforward....................... 793 1,648
Tax credit carryforwards.................................... 1,264 1,436
Other....................................................... 949 834
------- --------
Total deferred tax assets......................... 8,313 17,727
------- --------
Property, plant and equipment............................... (3,792) (6,922)
Intangible assets........................................... (3,721) (8,635)
Miscellaneous............................................... (165) (165)
------- --------
Total deferred tax liabilities.................... (7,678) (15,722)
------- --------
Net deferred tax asset............................ $ 635 $ 2,005
======= ========
</TABLE>
The Company's state net operating loss carryforward of approximately
$50,000 expires in 2014. Management has determined, based on both their ability
to carryback earnings to prior years and existing deferred tax liabilities, it
is more likely than not that the deferred tax assets will be realizable and no
valuation allowance has been recorded.
At December 31, 1998 and 1999, the Company had federal tax credit
carryforwards of approximately $974 and $1,436 which expire through 2019.
13. BENEFIT PLANS
The Company maintains two defined contribution employee benefit plans which
covers substantially all employees. The plans allows for employees' salary
deferrals, which are matched by the Company up to a specific amount under
provisions of the plans. Company contributions during the years ended December
31, 1997, 1998 and 1999, were $335, $1,093 and $1,531, respectively. The plans
also provides for discretionary profit-sharing contributions by the Company.
14. COMMITMENTS AND CONTINGENCIES
Agreements with Fujisawa:
In June 1998, the Company received a $4,000 payment from Fujisawa for the
transfer of the Adenoscan and Adenocard NDAs and for the assistance provided by
the Company to Fujisawa in
F-19
<PAGE> 56
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
connection with its contract manufacturing agreement with a third party relating
to Adenoscan and Adenocard. The Company has included this payment in other
income. Additionally, the Company incurred a one-time charge of $2,361
pertaining to the purchase of Fujisawa's commercialization rights and related
intellectual properties for the cardioprotection application of intravenous
adenosine, which is included in research and development expenses.
In October 1999, Fujisawa entered into a world-wide, exclusive license for
the use of adenosine under U.S. Patent No. 4,824,660 ("the '660 patent") over
the seven year remaining life of the '660 patent. Fujisawa sub-licensed the
Company under the '660 patent and the Company is obligated to pay Fujisawa
sub-license fees of $2,250, of which $500 was paid in 1999. This license fee is
included in 1999 research and development expenses.
Patents, Trademarks and Distribution Rights:
The Company is engaged in the development of new prescription drugs in
pursuit of obtaining governmental marketing approvals in the United States and
other countries. The Company acquires from third parties exclusive rights to
develop and market various drugs, including related patents and trademarks
(where applicable), and develops drugs and seeks patents and trademarks for its
products on a proprietary basis. Agreements under which the Company acquires
such rights from third parties generally require the Company to finance the
costs of clinical trials and the filing of New Drug Applications ("NDAs") with
the United States Food and Drug Administration ("FDA") and, in some instances,
comparable applications with appropriate regulatory agencies in other countries.
The Company is also typically required to pay royalties to such third parties
based on sales of the applicable approved drugs. The Company also may be
obligated to pay to third parties advance royalties or licensing fees, some of
which may be based on the attainment of specified milestones.
Under present agreements with third parties, the Company has obligations as
of December 31, 1999 to pay $1,900 in nonrefundable payments which are payable
through April 25, 2006. At December 31, 1999, approximately $400 of this
obligation is included in accounts payable and accrued expenses and the
remaining obligation of $1,500 is included in other long-term obligations in the
consolidated balance sheet. The Company may also be required to pay a maximum of
$5,500 in nonrefundable payments generally upon the completion of development
milestones and the FDA's approvals of NDAs for certain compounds.
Legal:
In May 1998, the Company was named as a co-defendant in a wrongful death
and survival action in the District Court of Gregg County, Texas. The action
demands an unspecified amount. This action relates to the manufacture of the
anorexigenic product for SmithKline.
Many distributors, marketers and manufacturers of anorexigenic drugs have
been subject to claims relating to the use of these drugs. The Company is a
defendant in various lawsuits which claim damages for personal injury arising
from the Company's production of the anorexigenic drug, phentermine, under
contract for SmithKline. Generally, the lawsuits allege that the defendants (1)
misled users of the products with respect to the dangers associated with them,
(2) failed to adequately test the products and (3) knew or should have known
about the negative effects of the drugs, and should have informed the public
about the risks of such negative effects. The actions generally have been
brought by individuals in their own right and have been filed in various state
and
F-20
<PAGE> 57
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
federal jurisdictions throughout the United States. They seek, among other
things, compensatory and punitive damages and/or court supervised medical
monitoring of persons who have ingested the product. The Company expects to be
named in additional lawsuits related to the company's production of the
anorexigenic drug under contract for SmithKline.
While the Company cannot predict the outcome of these suits, the Company
believes that the claims against it are without merit and intends to vigorously
pursue all defenses available to it. The Company is being indemnified in all of
these suits by SmithKline for which it manufactured the anorexigenic product,
provided that neither the lawsuits nor the associated liabilities are based upon
the independent negligence or intentional acts of the Company, and intends to
submit a claim for all unreimbursed costs to its product liability insurance
carrier. However, in the event that SmithKline is unable to satisfy or fulfill
its obligations under the indemnity, the Company would have to defend the
lawsuit and be responsible for damages, if any, which are awarded against it or
for amounts in excess of the Company's product liability coverage.
Other:
The Parkedale Facility was one of six facilities owned by Warner-Lambert
subject to a Consent Decree of Permanent Injunction issued August 1993 in United
States of America v. Warner-Lambert Company and Melvin R. Goodes and Lodewijk
J.R. DeVink (U.S. Dist. Ct., Dist. of N.J.) (the "Consent Decree"). The
Parkedale Facility is currently manufacturing pharmaceutical products subject to
the Consent Decree which prohibits the manufacture and delivery of specified
drug products unless, among other things, the products conform to current good
manufacturing practices and are produced in accordance with an approved
abbreviated new drug application or new drug application. The Company is in the
process of petitioning for, and if appropriate, obtaining relief from the
Consent Decree.
The Company is involved in various routine legal proceedings incident to
the ordinary course of its business. Management believes that the outcome of all
pending legal proceedings in the aggregate will not have a material adverse
affect on the Company's consolidated financial position, results of operations,
or cash flow.
15. SEGMENT INFORMATION
The Company's business is classified into three reportable segments;
Branded Pharmaceuticals, Contract Manufacturing and Licensed Products. Branded
Pharmaceuticals include a variety of branded prescription products over four
therapeutic areas, including cardiovascular, anti-infective, vaccines and
biologicals and women's health products. These branded prescription products
have been aggregated because of the similarity in regulatory environment,
manufacturing process, method of distribution, and type of customer. Licensed
Products represents the licensed manufacturing and marketing rights to some of
the Company's products to corporate partners in exchange for licensing fees and
royalty payments on future product sales. Contract Manufacturing represents
contract manufacturing services provided for pharmaceutical and biotechnology
companies. The classification all other primarily includes generic
pharmaceutical, companion animal health products and development services.
The Company primarily evaluates its segments based on gross profit.
Reportable segments were separately identified based on revenues, gross profit
and total assets.
F-21
<PAGE> 58
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following represents selected information for the Company's operating
segments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Total revenues:
Branded pharmaceuticals............................... $37,912 $125,399 $304,004
Licensed Products..................................... 20,000 27,544 31,650
Contract manufacturing................................ 7,962 54,734 70,524
All Other............................................. 3,015 6,453 9,511
Eliminations.......................................... (980) (23,123) (35,768)
------- -------- --------
Consolidated total revenues........................ $67,909 $191,007 $379,921
======= ======== ========
Gross profit (loss):
Branded pharmaceuticals............................... $33,165 $ 94,452 $234,325
Licensed Products..................................... 17,015 22,671 25,990
Contract manufacturing................................ (187) (531) (4,858)
All Other............................................. 1,897 5,490 5,599
------- -------- --------
Consolidated gross profit.......................... $51,890 $122,082 $261,056
======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Total assets:
Branded pharmaceuticals................................... $522,218 $637,225
Licensed Products......................................... 64,285 77,162
Contract manufacturing.................................... 144,614 168,484
All Other................................................. 1,735 1,070
Eliminations.............................................. (2,500) (2,600)
-------- --------
Consolidated total assets.............................. $730,352 $881,341
======== ========
</TABLE>
Capital expenditures of $1,430, $81,432 and $9,170 for the years ended
December 31, 1997, 1998 and 1999, respectively, are substantially utilized for
contract manufacturing purposes.
16. RELATED PARTY TRANSACTIONS
THE UNITED COMPANY
In connection with its purchase of Cortisporin in 1997, the Company
received $8,750 from The United Company for 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.
F-22
<PAGE> 59
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company donated inventory to the private foundation with a cost of
$1,780 in 1999.
For the year ended December 31, 1998 and 1999, the Company paid Bourne &
Co., Inc., an affiliate of a director and since January 1999 an officer of the
Company, $2,475 and $108 for consulting services and the purchase of furniture.
In connection with the Altace Acquisition and related financing, Bourne & Co.,
Inc., received $1,250 in January 1999. For the year ended December 31, 1997, the
Company paid Bourne & Co., Inc., approximately $651 for its advisory services in
the acquisition of the Cortisporin product line and $62 for consulting services.
In September 1998, the Company purchased for approximately $350 the primary
residence of an officer of the Company in connection with his relocation to the
Parkedale Facility. The Company believes the purchase price was at fair market
value. The property was sold in February 2000.
Fees of $24, $108 and $144 as well as related travel expenses were paid in
1999, 1998 and 1997, respectively, to an individual director for consulting with
the Company on matters such as acquisitions, financial public relations and
pending litigation.
17. STOCKHOLDERS' EQUITY
COMMON SHARES
The Company is authorized to issue 150 million shares of no par value
common stock. As of December 31, 1998 and 1999 there were 55,190,682 and
55,424,078 shares outstanding, respectively.
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.
STOCK OPTION PLANS
In 1989, the Company adopted the 1989 Stock Option and Stock Appreciation
Rights Plan (the "1989 Stock Option Plan"). The 1997 Incentive and Nonqualified
Stock Option Plan for Employees (the "1997 Stock Option Plan") was adopted in
1997. In February 1998, the Company adopted the 1998 Non-employee Director Stock
Option Plan (the "1998 Stock Option Plan"), The aggregate number of shares which
may be issued under the 1989, 1997 and 1998 Stock Option Plans shall not exceed
6,662,213, (1,412,213, 4,800,000 and 450,000, respectively). No Stock
Appreciation Rights have been granted.
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.
F-23
<PAGE> 60
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1999, the Company had 698,035 options outstanding of
which 244,175 are exercisable under the 1989 Stock Option Plan. As a result of
the merger all outstanding options vested immediately and are exercisable.
As of December 31, 1999, the Company had 1,212,294 options outstanding of
which 764,675 are vested and exercisable under the 1997 stock option plan.
Options under the 1997 Stock Option Plan vest at various times through 2001 and
expire 10 years from the date of grant.
During 1998, the Company granted 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, exercisable and
outstanding. Options under the 1998 Stock Option Plan expire 10 years from the
date of grant.
A summary of the status of the Company's Plans of December 31, 1999 and
changes during the years, ended December 31, 1998 and 1999 are presented in the
table below:
<TABLE>
<CAPTION>
1997 STOCK OPTION 1998 STOCK OPTION 1989 STOCK OPTION
PLAN PLAN PLAN
-------------------- ------------------ -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Shares under option:
Outstanding at January 1, 1997................ -- $ -- -- $ -- $528,385 $ 7.43
Granted..................................... -- -- -- -- 270,334 9.46
Exercised................................... -- -- -- -- (18,244) 7.43
Forfeited, expired or cancelled............. -- -- -- -- (115,634) 9.46
--------- ------ ------- ------ -------- ------
Outstanding at December 31, 1997.............. -- -- -- -- 664,841 8.11
Granted..................................... 334,125 9.35 75,000 9.33 230,370 13.51
Exercised................................... -- -- -- -- (78,314) 7.43
Forfeited, expired or cancelled............. (3,825) 9.33 -- -- (60,583) 9.46
--------- ------ ------- ------ -------- ------
Outstanding at December 31, 1998.............. 330,300 9.35 75,000 9.33 756,314 9.46
Granted..................................... 973,925 39.33 -- -- 228,826 17.57
Exercised................................... (48,499) 23.93 -- -- (282,806) 7.43
Forfeited, expired or cancelled............. (43,432) 15.33 -- -- (4,299) 12.84
--------- ------ ------- ------ -------- ------
Outstanding at December 31, 1999.............. 1,212,294 $27.72 75,000 $ 9.33 698,035 $13.51
========= ====== ======= ====== ======== ======
Weighted average fair value of options granted
in 1999..................................... N/A $19.72 N/A $ 9.33 N/A $17.39
========= ====== ======= ====== ======== ======
Options available for grant at December 31,
1999........................................ 3,539,207 N/A 375,000 N/A -- N/A
========= ====== ======= ====== ======== ======
</TABLE>
Options outstanding at December 31, 1999 have exercise prices between $8.88
and $45.06, with a weighted average exercise price of $23.33 and a remaining
contractual life of approximately 8.9 years.
F-24
<PAGE> 61
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has adopted the disclosure only provision of SFAS No. 123,
"Accounting for Stock Based Compensation." Accordingly, since options were
granted at fair value, no compensation cost has been recognized for stock
options granted to date. Had compensation cost for these plans been determined
for options granted, consistent with SFAS No. 123, the Company's net income and
diluted income per share would have decreased to the following pro forma amounts
for the year ended December 31, 1999:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Income before extraordinary item:
As reported............................................. $16,825 $41,563 $51,698
======= ======= =======
Pro Forma............................................... $15,662 $39,471 $39,294
======= ======= =======
Net income:
As reported............................................. $16,825 $37,152 $50,993
======= ======= =======
Pro Forma............................................... $15,662 $35,060 $38,589
======= ======= =======
Diluted income per share:
Income before extraordinary item:
As reported............................................. $ 0.36 $ 0.79 $ 0.93
======= ======= =======
Pro Forma............................................... $ 0.34 $ 0.75 $ 0.71
======= ======= =======
Net income:
As reported............................................. $ 0.36 $ 0.71 $ 0.92
======= ======= =======
Pro Forma............................................... $ 0.34 $ 0.67 $ 0.69
======= ======= =======
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998 and 1999: expected lives ranging from 3 to 5
years; expected volatility of approximately 72%; expected dividend yield of $0
and risk-free interest rates ranging from 5.19% to 6.02%.
18. INCOME PER SHARE
The basic and diluted income before extraordinary item per share was
determined as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Income before extraordinary item available to
common shareholders........................... $ 16,825 $ 41,563 $ 51,698
=========== =========== ===========
Basic income per share:
Weighted average common shares................ 46,530,770 52,306,915 55,196,450
----------- ----------- -----------
Basic income per common share................. $ 0.36 $ 0.79 $ 0.94
=========== =========== ===========
Diluted income per share weighted average common
shares........................................ 46,530,770 52,306,915 55,196,450
Effect of stock options....................... 50,847 265,289 579,067
----------- ----------- -----------
Weighted average common shares plus assumed
conversions................................ 46,581,617 52,572,204 55,775,517
----------- ----------- -----------
Diluted income per share...................... $ 0.36 $ 0.79 $ 0.93
=========== =========== ===========
</TABLE>
F-25
<PAGE> 62
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth summary quarterly financial information for
the years ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 BY QUARTER FIRST SECOND THIRD FOURTH
- --------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues.................................... $31,356 $46,651 $54,515 $54,485
Gross profit...................................... 22,728 31,684 32,931 34,739
Operating income.................................. 12,452 15,872 18,698 18,155
Income before extraordinary item.................. 7,532 11,610 11,019 11,402
Net income........................................ 7,246 11,610 11,019 7,277
Basic and diluted income per common share(1):
Income before extraordinary item................ 0.15 0.23 0.20 0.22
Net income...................................... 0.15 0.23 0.20 0.14
</TABLE>
<TABLE>
<CAPTION>
1999 BY QUARTER FIRST SECOND THIRD FOURTH
- --------------- ------- ------- -------- --------
<S> <C> <C> <C> <C>
Total revenues.................................. $67,569 $84,939 $114,119 $113,294
Gross profit.................................... 50,430 60,227 76,197 74,202
Operating income................................ 27,161 32,984 43,023 33,625
Income before extraordinary item................ 9,508 13,183 18,397 10,610
Net income...................................... 8,803 13,183 18,397 10,610
Basic income per common share(1):
Income before extraordinary item.............. 0.17 0.24 0.33 0.19
Net income.................................... 0.16 0.24 0.33 0.19
</TABLE>
- ---------------
(1) Quarterly amounts do not add to annual amounts due to the effect of rounding
on a quarterly basis.
20. GUARANTOR FINANCIAL STATEMENTS
The Company's wholly-owned subsidiaries Monarch Pharmaceuticals, Inc.,
Medco Research, Inc., Parkedale Pharmaceuticals, Inc. and King Pharmaceuticals
of Nevada, Inc. (the "Guarantor Subsidiaries") have guaranteed the Company's
performance under the $150,000 10 3/4% Senior Subordinated Notes due 2009 on a
joint and several basis. There are no restrictions under the Company's financing
arrangements on the ability of the Guarantor Subsidiaries to distribute funds to
the Company in the form of cash dividends, loans or advances. The following
combined financial data provides information regarding the financial position,
results of operations and cash flows of the Guarantor Subsidiaries (condensed
consolidated/combined financial data). Separate financial statements and other
disclosures concerning the Guarantor Subsidiaries are not presented because
management has determined that such information would not be material to the
holders of the notes.
F-26
<PAGE> 63
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GUARANTOR SUBSIDIARIES
CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash...................................................... $ 4,742 $ 12,269
Investments, held to maturity............................. 21,434 17,001
Accounts Receivable....................................... 30,559 63,382
Royalty receivable........................................ 8,349 6,691
Inventory................................................. 20,089 27,433
Prepaid expenses and other current assets................. 848 6,382
Deferred income taxes..................................... 458 607
-------- --------
Total current assets.............................. 86,479 133,765
-------- --------
Property, plant, and equipment, net....................... 73,091 75,267
Intangible assets, net.................................... 119,487 120,316
Other assets.............................................. 1,228 2,506
Investments, held to maturity............................. 25,074 33,583
-------- --------
Total assets...................................... $305,359 $365,437
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 8,796 $ 22,275
Current portion of long-term debt......................... -- 27
Accrued expenses and other liabilities.................... 16,082 44,694
Income taxes payable...................................... -- 4,755
-------- --------
Total current liabilities......................... 24,878 71,751
-------- --------
Long-term debt............................................ -- 42
Other long-term liabilities............................... 150 1,500
Intercompany payable...................................... 175,613 57,290
-------- --------
Total liabilities................................. 200,641 130,583
-------- --------
Shareholders' equity...................................... 104,718 234,854
-------- --------
Total liabilities and shareholders' equity........ $305,359 $365,437
======== ========
</TABLE>
F-27
<PAGE> 64
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GUARANTOR SUBSIDIARIES COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
REVENUES:
Total net revenues................................ $57,912 $183,601 $364,825
------- -------- --------
OPERATING COSTS AND EXPENSES:
Cost of sales............................................. 4,804 60,053 104,187
Royalty expense........................................... 2,985 4,873 5,661
Selling, general, and administrative...................... 12,898 24,728 67,653
Depreciation and amortization............................. 2,045 7,973 14,824
Research and development expense.......................... 6,328 9,740 13,673
------- -------- --------
Total operating costs and expenses................ 29,060 107,367 205,998
------- -------- --------
OPERATING INCOME............................................ 28,852 76,234 158,827
OTHER (EXPENSES) INCOME..................................... 605 (10,590) 127
------- -------- --------
Income before income taxes................................ 29,457 65,644 158,954
------- -------- --------
Income tax expense........................................ 7,624 19,260 31,687
------- -------- --------
NET INCOME........................................ $21,833 $ 46,384 $127,267
======= ======== ========
</TABLE>
F-28
<PAGE> 65
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GUARANTOR SUBSIDIARIES COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
------------------------------
1997 1998 1999
------- --------- --------
<S> <C> <C> <C>
Net income.................................................. $21,833 $ 46,384 $127,267
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization and Depreciation............................. 2,045 7,973 14,824
Loss on disposition of assets............................. -- -- 143
Changes in operating assets and liabilities:
Accounts payable.......................................... 3,833 5,379 18,505
Inventory................................................. (4,999) (15,090) (7,344)
Prepaid expenses and other assets......................... (5,149) (1,425) (1,224)
Accrued expenses.......................................... 4,664 6,968 25,404
Income taxes.............................................. -- (1,686) 4,204
Accounts receivable....................................... (6,193) (25,241) (31,258)
------- --------- --------
Net cash provided by operating activities......... 16,034 23,262 150,521
------- --------- --------
Cash flow from investing activities:
Purchase of investment securities......................... (20,162) (34,293) (25,592)
Proceeds from maturity or sale of investments............. 8,479 25,922 21,500
Merger related costs...................................... (715)
Process from sale of property and equipment............... -- 14 2
Purchases of intangible assets............................ (65,286) (60,901) (6,400)
Purchases of property and equipment....................... (101) (75,658) (6,584)
------- --------- --------
Net cash used in investing activities............. (77,070) (144,916) (17,789)
------- --------- --------
Cash flows from financing activities:
Increase (decrease) in inter-company payable.............. 52,236 128,271 (123,218)
Increase (decrease) in long-term debt..................... 1,762 (1,762) 69
Proceeds from exercise of stock options and warrants...... 5,113 1,293 297
Purchase of stock held in treasury........................ (4,455) (4,132) (2,353)
------- --------- --------
Net cash provided by (used in) financing
activities...................................... 54,656 123,670 (125,205)
------- --------- --------
Change in cash and cash equivalents......................... (6,380) 2,016 7,527
Cash and cash equivalents at beginning of period............ 9,106 2,726 4,742
------- --------- --------
Cash and cash equivalents at end of period.................. $ 2,726 $ 4,742 $ 12,269
======= ========= ========
</TABLE>
21. SUBSEQUENT EVENTS
On February 25, 2000, the Company completed a merger with Medco Research,
Inc. ("Medco") by exchanging 7,221,125 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.
F-29
<PAGE> 66
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 2000, the Company paid $2,823 to a director for services
performed in connection with the successful completion of the merger.
The following information presents certain unaudited financial statement
data of the separate companies as of December 31, 1998, 1999 and for the three
years in the period ended December 31, 1999, preceding the merger:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Net revenues:
King...................................................... $47,909 $163,463 $348,271
Medco..................................................... 20,000 27,544 31,650
------- -------- --------
$67,909 $191,007 $379,921
======= ======== ========
Net income:
King...................................................... $ 6,612 $ 20,910 $ 44,949
Medco..................................................... 10,213 16,242 6,044
------- -------- --------
$16,825 $ 37,152 $ 50,993
======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Total assets
King...................................................... $668,171 $805,689
Medco..................................................... 62,181 75,652
-------- --------
$730,352 $881,341
======== ========
</TABLE>
In March 2000, the United States Food and Drug Administration notified the
Company that the methods, facilities and control used by the Parkedale facility
in the manufacture, processing and packaging of Fluogen(R), the Company's
influenza virus vaccine, were not in compliance with current Good Manufacturing
Practices ("cGMP"). The FDA therefore informed Parkedale that it must suspend
production and distribution of Fluogen(R) until the Parkedale facility meets the
applicable cGMP standards for the manufacture and distribution of Fluogen(R).
The FDA has received the Company's initial response to its March 10 notification
and following discussions with the FDA, the Company has filed with the FDA its
written certification of conformance that the Company is now sufficiently in
compliance with cGMP manufacturing standards to resume the manufacture of
Fluogen(R) and the Company has now resumed the manufacture of Fluogen(R). The
distribution of Fluogen(R) remains suspended pursuant to the FDA's order. The
Company cannot resume the distribution of Fluogen(R) until the FDA conducts an
on-site inspection of the Parkedale facility and finds the facility in
substantial compliance with cGMPs. The Company is working to meet all of the
FDA's requirements to resume distribution of Fluogen(R), which can occur upon
the FDA's verification that Parkedale has satisfactorily completed all required
corrective measures and is in substantial compliance with cGMP standards.
Fluogen(R)'s gross sales totaled $32.0 million, while net sales equaled $28.7
million, for the year ended December 31, 1999. Gross profit for Fluogen(R)
equaled $6.9 million for the same period. While the Company is pursuing all
actions reasonably necessary to assure Fluogen(R)'s availability during the
upcoming flu season commencing in September 2000, the Company cannot be sure
that it will be able to satisfy the FDA's concerns respecting the cGMP standards
applicable to Fluogen(R). Consequently, the Company cannot be sure that it will
be able to market or distribute any amount of vaccine, if at all, in the future.
F-30
<PAGE> 67
Prospectus
$350,000,000
KING PHARMACEUTICALS, INC.
COMMON STOCK
PREFERRED STOCK
DEBT SECURITIES
DEBT WARRANTS
-------------------------
King Pharmaceuticals, Inc. may offer and sell shares of common stock,
shares of preferred stock, debt securities and debt warrants. These securities
may be offered and sold from time to time for an aggregate offering price of up
to $350,000,000. We will provide the specific terms and the initial public
offering prices of these securities in an accompanying prospectus supplement.
We may sell the securities to or through underwriters and also to other
purchasers or through agents. The names of any underwriters or agents will be
stated in an accompanying prospectus supplement.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY
OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this prospectus is April 19, 2000.
<PAGE> 68
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
U.S. Securities and Exchange Commission using a shelf registration process.
Under this shelf process, we may sell any combination of the securities
described in this prospectus in one or more offerings up to a total of
$350,000,000.
This prospectus provides you with a general description of the securities
we may offer. Each time we sell securities, we will provide a prospectus
supplement that will contain specific information about the terms of that
offering. The prospectus supplement may also add to or update other information
contained in this prospectus. You should read both this prospectus and the
accompanying prospectus supplement together with additional information
described below under the heading "Where You Can Find More Information."
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings are also available on the SEC's
Website at "http://www.sec.gov."
The SEC allows us to "incorporate by reference" information from other
documents that we file with them, which means that we can disclose important
information by referring to those documents. The information incorporated by
reference is considered to be part of this prospectus, and information that we
file later with the SEC will automatically update and supersede this
information. We incorporate by reference the documents listed below and any
future filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934 prior to the sale of all the shares covered
by this prospectus our Annual Report on Form 10-K for the year ended December
31, 1999.
You may request a copy of these filings, at no cost, by writing or
telephoning:
King Pharmaceuticals, Inc.
501 Fifth Street
Bristol, Tennessee 37620
Attention: Kyle P. Macione, Executive Vice President, Investor Relations
Telephone: 423.989.8077
You should rely only on the information incorporated by reference or
provided in this prospectus or any supplement. We have not authorized anyone
else to provide you with different information. We will not make an offer of
these securities in any state where the offer is not permitted. You should not
assume that the information in this prospectus or any supplement is accurate as
of any date other than the date on the front of those documents.
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A WARNING ABOUT FORWARD-LOOKING STATEMENTS
In addition to historical information, this prospectus contains (or
incorporates by reference) certain "forward-looking statements," such as
statements concerning our anticipated financial or product performance and other
non-historical facts. Since these statements are based on factors that involve
risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. Such factors include,
among others:
- anticipated developments and expansions of our business;
- increases in sales of recently acquired products;
- development of product line extensions;
- the products which we expect to offer;
- the intent to market and distribute certain of our products
internationally;
- the intent to manufacture certain products in our own facilities which
are currently manufactured for us by third parties;
- the intent, belief or current expectations of King's directors or
officers with respect to its future operating performance;
- expectations regarding sales growth, gross margins, manufacturing
productivity, capital expenditures and effective tax rates;
- expectations or beliefs regarding regulatory matters or conditions; and
- expectations regarding King's financial condition and liquidity as well
as future cash flows and earnings.
KING PHARMACEUTICALS, INC.
King is a vertically integrated pharmaceutical company that manufactures,
markets and sells primarily branded prescription pharmaceutical products.
Through a national sales force of over 290 representatives, we market our
branded pharmaceutical products to general/family practitioners and internal
medicine physicians and hospitals across the country. Our business strategy is
to acquire established branded pharmaceutical products and to increase their
sales by focused marketing and promotion and through product life cycle
management. In pursuing acquisitions, we seek to capitalize on opportunities in
the pharmaceutical industry created by cost containment initiatives and
consolidation among large, global pharmaceutical companies. We also create value
by developing product line extensions for our branded pharmaceutical products
such as new formulations, dosages or new indications. These product line
extensions are profitable for us because they may have market exclusivity or
sales levels that do not attract significant competition. In addition to branded
pharmaceuticals, we also provide contract manufacturing for a number of the
world's leading pharmaceutical and biotechnology companies, including Amgen,
Inc., Warner-Lambert Company, Mallinckrodt Chemical Inc., Genetics Institute and
Hoffman-LaRoche, Inc.
We are a Tennessee corporation. Our executive offices are located at 501
Fifth Street, Bristol, Tennessee 37620, and our telephone number is
(423) 989-8000.
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RATIOS OF EARNINGS TO FIXED CHARGES
Our consolidated ratios of earnings to fixed charges for each of the years
ended December 31, 1997, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Ratios of earnings to fixed charges(a)...................... 3.6x 4.8x 2.3x
</TABLE>
- -------------------------
(a) For purposes of computing this consolidated ratio, earnings consist of
income before:
- income taxes and
- fixed charges excluding capitalized interest.
Fixed charges consist of:
- all interest expense;
- the portion of net rental expense which is deemed representative of the
interest factor;
- the amortization expense of debt issuance costs; and
- capitalized interest.
USE OF PROCEEDS
Unless otherwise indicated in the accompanying prospectus supplement, we
will use the net proceeds from the sale of the securities for general corporate
purposes, including the reduction of debt and the financing of future
acquisitions. We may temporarily invest funds that we do not immediately need
for these purposes in short-term marketable securities.
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<PAGE> 71
LEGAL OWNERSHIP
"STREET NAME" AND OTHER INDIRECT HOLDERS
Investors who hold securities in accounts at banks or brokers will
generally not be recognized by us as legal holders of securities. When we refer
to the "holders" of securities, we mean only the actual legal holders of the
securities. Holding securities in accounts at banks or brokers is called holding
in "street name." If you hold securities in "street name," we will recognize
only the bank or broker, or the financial institution the bank or broker uses to
hold its securities. These intermediary banks, brokers and other financial
institutions pass along principal, interest and other payments on the
securities, either because they agree to do so in their customer agreements or
because they are legally required to. If you hold securities in "street name,"
you should check with your own institution to find out:
- How it handles securities payments and notices.
- Whether it imposes fees or charges.
- How it would handle voting if ever required.
- Whether and how you can instruct it to send you securities registered in
your own name so you can be a direct holder as described below.
- How it would pursue rights under the securities if there were a default
or other event triggering the need for holders to act to protect their
interests.
DIRECT HOLDERS
Our obligations, as well as the obligations of the trustee and those of any
third parties employed by us or the trustee, run only to persons who are
registered as holders of securities. As noted above, we do not have obligations
to you if you hold in "street name" or other indirect means, either because you
choose to hold securities in that manner or because the securities are issued in
the form of global securities as described below. For example, once we make
payment to the registered holder, we have no further responsibility for the
payment even if that holder is legally required to pass the payment along to you
as a "street name" customer but does not do so.
GLOBAL SECURITIES
A global security is a special type of indirectly held security, as
described above under "'Street name' and other indirect holders." If we choose
to issue securities in the form of global securities, the ultimate beneficial
owners can only be indirect holders. We do this by requiring that the global
security be registered in the name of a financial institution we select and by
requiring that the securities included in the global security not be transferred
to the name of any other direct holder unless the special circumstances
described below occur. The financial institution that acts as the sole direct
holder of the global security is called the "depositary." Any person wishing to
own a security must do so indirectly by virtue of an account with a broker, bank
or other financial institution that in turn has an account with the depositary.
The prospectus supplement indicates whether your series of securities will be
issued only in the form of global securities.
SPECIAL INVESTOR CONSIDERATIONS FOR GLOBAL SECURITIES. As an indirect
holder, an investor's rights relating to a global security will be governed by
the account rules of the investor's financial institution and of the depositary,
as well as general laws relating to securities transfers. We do not recognize
this
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<PAGE> 72
type of investor as a holder of securities and instead deal only with the
depositary that holds the global security.
You should be aware that if securities are issued only in the form of
global securities:
- You cannot get securities registered in your own name.
- You cannot receive physical certificates for your interest in the
securities.
- You will be a "street name" holder and must look to your own bank or
broker for payments on the securities and protection of your legal rights
relating to the securities. See "Street name' and other indirect holders"
on page 4.
- You may not be able to sell interests in the securities to some insurance
companies and other institutions that are required by law to own their
securities in the form of physical certificates.
- The depositary's policies will govern payments, transfers, exchange and
other matters relating to your interest in the global security. We and
the trustee have no responsibility for any aspect of the depositary's
actions or for its records of ownership interests in the global security.
We and the trustee also do not supervise the depositary in any way.
Payment for purchases and sales in the market for corporate bonds and notes
is generally made in next-day funds. In contrast, the depositary will usually
require that interests in a global security be purchased or sold within its
system using same-day funds. This difference could have some effect on how
global security interests trade, but we do not know what that effect will be.
SPECIAL SITUATIONS WHEN A GLOBAL SECURITY WILL BE TERMINATED. In a few
special situations described later, the global security will terminate and
interests in it will be exchanged for physical certificates representing
securities. After that exchange, the choice of whether to hold securities
directly or in "street name" will be up to the investor. Investors must consult
their own bank or brokers to find out how to have their interests in securities
transferred to their own name, so that they will be direct holders. The rights
of "street name" investors and direct holders in the securities have been
previously described in the subsections entitled "'Street name' and other
indirect holders" on page 4 and "Direct holders" on page 4.
The special situations for termination of a global security are:
- When the depositary notifies us that it is unwilling, unable or no longer
qualified to continue as depositary.
- When an Event of Default on the securities has occurred and has not been
cured. Defaults are discussed later under "Default and related matters"
on page 14.
The prospectus supplement may also list additional situations for
terminating a global security that would apply only to the particular series of
securities covered by the prospectus supplement. When a global security
terminates, the depositary (and not we or the trustee) is responsible for
deciding the names of the institutions that will be the initial direct holders.
IN THE REMAINDER OF THIS DESCRIPTION "YOU" MEANS DIRECT HOLDERS AND NOT
"STREET NAME" OR OTHER INDIRECT HOLDERS OF SECURITIES. INDIRECT HOLDERS SHOULD
READ THE PREVIOUS SUBSECTION ON PAGE 4 ENTITLED "'STREET NAME' AND OTHER
INDIRECT HOLDERS."
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<PAGE> 73
DESCRIPTION OF DEBT SECURITIES WE MAY OFFER
As required by federal law for all bonds and notes of companies that are
publicly offered, the debt securities are governed by a document called the
"indenture." The indenture is a contract between us and , which
acts as trustee. The trustee has two main roles. First, the trustee can enforce
your rights against us if we default. There are some limitations on the extent
to which the trustee acts on your behalf, described later on page 14 under
"Remedies if an event of default occurs."
Second, the trustee performs administrative duties for us, such as sending
you interest payments, transferring your debt securities to a new buyer if you
sell and sending you notices.
The indenture and its associated documents contain the full legal text of
the matters described in this section. The indenture and the debt securities are
governed by New York law. A copy of the indenture has been filed with the SEC as
part of our Registration Statement. See "Where You Can Find More Information" on
page 1 on how to obtain a copy.
We may issue as many distinct series of debt securities under the indenture
as we wish. This section summarizes all the material terms of the debt
securities that are common to all series unless otherwise indicated in the
prospectus supplement relating to a particular series.
Because this section is a summary, it does not describe every aspect of the
debt securities. This summary is subject to and qualified in its entirety by
reference to all the provisions of the indenture, including definitions of
various terms used in the indenture. For example, in this section we describe
the meaning for only the more important terms that have been given special
meaning in the indenture. We also include references in parentheses to
applicable sections of the indenture. Whenever we refer to particular sections
or defined terms of the indenture in this prospectus or in the prospectus
supplement, those sections or defined terms are incorporated by reference here
or in the prospectus supplement.
We may issue the debt securities as original issue discount securities,
which will be offered and sold at a substantial discount below their stated
principal amount. A prospectus supplement relating to original issue discount
securities will describe federal income tax consequences and other special
considerations applicable to them. The debt securities may also be issued as
indexed securities or securities denominated in foreign currencies or currency
units, as described in more detail in a prospectus supplement relating to any of
these types of debt securities. A prospectus supplement relating to indexed debt
securities or foreign currency debt securities will also describe any additional
tax consequences or other special considerations applicable to these types of
debt securities.
In addition, the material specific financial, legal and other terms
particular to debt securities of each series are described in the prospectus
supplement relating to the debt securities of that series. The prospectus
supplement relating to debt securities of the series will describe the following
terms of the debt securities:
- the title of the debt securities of the series;
- any limit on the total principal amount of the debt securities of the
series (including any provision for the future offering of additional
debt securities of the series beyond any such limit);
- the date or dates on which the debt securities of the series will mature;
- any annual rate or rates, which may be fixed or variable, at which the
debt securities of the series will bear interest, if any, and the date or
dates from which any interest will accrue;
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- the date or dates on which any interest on the debt securities of the
series will be payable and the regular record date or dates we will use
to determine who is entitled to receive each interest payment;
- the place or places where the principal and any premium and interest will
be payable;
- any period or periods within which and the price or prices at which we
will have the option to redeem the debt securities of the series, and the
other detailed terms and provisions of any optional redemption right;
- any obligation we will have to redeem the debt securities of the series
under a sinking fund or analogous provision or to redeem your debt
securities at your option and the period or periods during which, the
price or prices at which and the other specific terms under which we
would be obligated to redeem the debt securities of the series under any
obligation of this kind;
- if other than integral multiples of $1,000, the denominations in which we
will issue the debt securities of the series;
- if other than U.S. dollars, the currency of payment of the principal and
any premium and interest on the debt securities of the series;
- any index or other special method we will use to determine the amount of
principal or any premium or interest we will pay on the debt securities
of the series;
- if we or you have a right to choose the currency or currency units in
which payments on any of the debt securities of the series will be made,
the currencies or currency units that we or you may elect, when the
election may be made and the other specific terms of the right to make an
election of this kind;
- if other than the principal amount, the portion of the principal amount
of the debt securities of the series which will be payable upon the
declaration of acceleration of the maturity of the debt securities of the
series;
- the applicability of the provisions described on page 13 under
"Defeasance;"
- if we will issue the debt securities of the series only in the form of
global securities as described above under "Global securities" on page 4,
the name of the depository for the debt securities of the series and the
circumstances under which the global securities may be terminated and
separate debt securities may be registered in the names of persons other
than the depositary or its nominee if other than those circumstances
described on page 5 under "Special situations when a global security will
be terminated"; and
- any other special terms of the debt securities of the series that are not
inconsistent with the provisions of the indenture.
The prospectus supplement relating to the debt securities of the series
will be attached to the front of this prospectus.
We may issue debt securities other than the debt securities described in
this prospectus. There is no requirement that any other debt securities that we
issue be issued under the indenture. Thus, any other debt securities that we
issue may be issued under other indentures or documentation. This documentation
may contain provisions different from those included in the indenture or
applicable to one or more issues of the debt securities described in this
prospectus.
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OVERVIEW OF THE REMAINDER OF THIS DESCRIPTION
The remainder of this description summarizes:
- ADDITIONAL MECHANICS relevant to the debt securities under normal
circumstances, such as how you transfer ownership and where we make
payments;
- your rights under several SPECIAL SITUATIONS, such as if we merge with
another company or, if we want to change a term of the debt securities;
- promises we make to you about how we will run our business, or business
actions we promise not to take (known as "RESTRICTIVE COVENANTS"); and
- your rights if we DEFAULT or experience other financial difficulties.
ADDITIONAL MECHANICS
FORM, EXCHANGE AND TRANSFER. The debt securities will be issued:
- only in fully registered form;
- without interest coupons; and
- in denominations that are even multiples of $1,000 unless otherwise
specified in a prospectus supplement.
You may have your debt securities broken into more debt securities of
smaller denominations or combined into fewer debt securities of larger
denominations, as long as the total principal amount is not changed. This is
called an "exchange."
You may exchange or transfer debt securities at the office of the trustee.
The trustee acts as our agent for registering debt securities in the names of
holders and transferring debt securities. We may change this appointment to
another entity or perform it ourselves. The entity performing the role of
maintaining the list of registered holders is called the "security registrar."
The security registrar will also perform transfers.
You will not be required to pay a service charge to transfer or exchange
debt securities, but you may be required to pay for any tax or other
governmental charge associated with the exchange or transfer. The transfer or
exchange will only be made if the security registrar is satisfied with your
proof of ownership.
If we have designated additional transfer agents, they are named in the
prospectus supplement. We may cancel the designation of any particular transfer
agent. We may also approve a change in the office through which any transfer
agent acts.
If the debt securities are redeemable and we redeem less than all of the
debt securities of a particular series, we may block the transfer or exchange of
debt securities during the period beginning 15 days before the day we mail the
notice of redemption and ending on the day of that mailing, in order to freeze
the list of holders to prepare the mailing. We may also refuse to register
transfers or exchanges of debt securities selected for redemption, except that
we will continue to permit transfers and exchanges of the unredeemed portion of
any security being partially redeemed.
PAYMENT AND PAYING AGENTS. We will pay interest to you if you are a direct
holder listed in the trustee's records at the close of business on a particular
day in advance of each due date for interest, even if you no longer own the
security on the interest due date. That particular day, usually about
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two weeks in advance of the interest due date, is called the "regular record
date" and is stated in the prospectus supplement. Holders buying and selling
debt securities must work out between them how to compensate for the fact that
we will pay all the interest for an interest period to the one who is the
registered holder on the regular record date. The most common manner is to
adjust the sale price of the debt securities to allocate interest fairly between
buyer and seller. This allocated interest amount is called "accrued interest."
We will pay interest, principal and any other money due on the debt
securities at the corporate trust office of the trustee in New York City. That
office is currently located at , New York, New York. You must
make arrangements to have your payments picked up at or wired from that office.
We may also choose to pay interest by mailing checks.
"STREET NAME" AND OTHER INDIRECT HOLDERS SHOULD CONSULT THEIR BANKS OR
BROKERS FOR INFORMATION ON HOW THEY WILL RECEIVE PAYMENTS.
We may also arrange for additional payment offices, and may cancel or
change these offices, including our use of the trustee's corporate trust office.
These offices are called "paying agents." We may also choose to act as our own
paying agent. We must notify you of changes in the paying agents for any
particular series of debt securities.
NOTICES. We and the trustee will send notices regarding the debt
securities only to direct holders, using their addresses as listed in the
trustee's records.
Regardless of who acts as paying agent, all money paid by us to a paying
agent that remains unclaimed at the end of two years after the amount is due to
direct holders will be repaid to us. After that two-year period, you may look
only to us for payment and not to the trustee, any other paying agent or anyone
else.
SPECIAL SITUATIONS
MERGERS AND SIMILAR EVENTS. We are generally permitted to consolidate or
merge with another company or firm. We are also permitted to sell substantially
all of our assets to another firm, or to buy substantially all of the assets of
another firm. However, we may not take any of these actions unless all the
following conditions are met:
- Where we merge out of existence or sell our assets, the other company or
firm must agree to be legally responsible for the debt securities.
- The merger, sale of assets or other transaction must not cause a default
on the debt securities, and we must not already be in default (unless the
merger or other transaction would cure the default). For purposes of this
no-default test, a default would include an event of default that has
occurred and not been cured, as described later on page 14 under "Events
of default" A default for this purpose would also include any event that
would be an event of default if the requirements for giving us default
notice or our default having to exist for a specific period of time were
disregarded.
- It is possible that the merger, sale of assets or other transaction would
cause some of our property to become subject to a mortgage or other legal
mechanism giving lenders preferential rights in that property over other
lenders or over our general creditors if we fail to pay them back. We
have promised to limit these preferential rights on our property, called
"liens", as discussed later on page 11 under "Restrictive
covenants -- Restrictions on liens." If a merger or other transaction
would create any liens on our property, we must comply with that
restrictive covenant. We would do this either by deciding that the liens
were permitted, or by
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following the requirements of the restrictive covenant to grant an
equivalent or higher-ranking lien on the same property to you and the
other direct holders of the debt securities.
- We must deliver certain certificates and other documents to the trustee.
- We must satisfy any other requirements specified in the prospectus
supplement.
MODIFICATION AND WAIVER. There are three types of changes we can make to
the indenture and the debt securities.
1. Changes Requiring Your Approval. First, there are changes that cannot be
made to your debt securities without your specific approval. Following is a list
of those types of changes:
- change the stated maturity of the principal or interest on a debt
security;
- reduce any amounts due on a debt security;
- reduce the amount of principal payable upon acceleration of the maturity
of a debt security following a default,
- change the place or currency of payment on a debt security;
- impair your right to sue for payment;
- reduce the percentage of holders of debt securities whose consent is
needed to modify or amend the indenture,
- reduce the percentage of holders of debt securities whose consent is
needed to waive compliance with certain provisions of the indenture or to
waive certain defaults, and
- modify any other aspect of the provisions dealing with modification and
waiver of the indenture.
2. Changes Requiring a Majority Vote. The second type of change to the
indenture and the debt securities is the kind that requires a vote in favor by
holders of debt securities owning a majority of the principal amount of the
particular series affected. Most changes fall into this category, except for
clarifying changes and certain other changes that would not adversely affect
holders of the debt securities. The same vote would be required for us to obtain
a waiver of all or part of the restrictive covenants described under
"Restrictive covenants" on page 11, or a waiver of a past default. However, we
cannot obtain a waiver of a payment default or any other aspect of the indenture
or the debt securities listed in the first category described previously on page
10 under "Changes Requiring Your Approval" unless we obtain your individual
consent to the waiver.
3. Changes Not Requiring Approval. The third type of change does not
require any vote by holders of debt securities. This type is limited to
clarifications and certain other changes that would not adversely affect holders
of the debt securities in any material way.
FURTHER DETAILS CONCERNING VOTING. When taking a vote, we will use the
following rules to decide how much principal amount to attribute to a security:
- For original issue discount securities, we will use the principal amount
that would be due and payable on the voting date if the maturity of the
debt securities were accelerated to that date because of a default.
- For debt securities whose principal amount is not known (for example,
because it is based on an index), we will use a special rule for that
security described in the prospectus supplement.
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- For debt securities denominated in one or more foreign currencies or
currency units, we will use the U.S. dollar equivalent.
Debt securities will not be considered outstanding, and therefore not
eligible to vote, if we have deposited or set aside in trust for you money for
their payment or redemption. Debt securities will also not be eligible to vote
if they have been fully defeased as described later on page 13 under "Full
defeasance."
We will generally be entitled to set any day as a record date for the
purpose of determining the holders of outstanding debt securities that are
entitled to vote or take other action under the indenture. In certain limited
circumstances, the trustee will be entitled to set a record date for action by
holders. If we or the trustee set a record date for a vote or other action to be
taken by holders of a particular series, that vote or action may be taken only
by persons who are holders of outstanding debt securities of that series on the
record date and must be taken within 180 days following the record date or a
shorter period that we may specify (or as the trustee may specify, if it set the
record date). We may shorten or lengthen (but not beyond 180 days) this period
from time to time.
"STREET NAME" AND OTHER INDIRECT HOLDERS SHOULD CONSULT THEIR BANKS OR
BROKERS FOR INFORMATION ON HOW APPROVAL MAY BE GRANTED OR DENIED IF WE SEEK TO
CHANGE THE INDENTURE OR THE DEBT SECURITIES OR REQUEST A WAIVER.
RESTRICTIVE COVENANTS
RESTRICTIONS ON LIENS. Some of our property may be subject to a mortgage
or other legal mechanism that gives our lenders preferential rights in that
property over other lenders (including you and the other direct holders of the
debt securities) or over our general creditors if we fail to pay them back.
These preferential rights are called "liens." We promise that we will not become
obligated on any new debt that is secured by a lien on any of our principal
manufacturing properties, or on any shares of stock or debt of any of our
principal subsidiaries, unless we grant an equivalent or higher-ranking lien on
the same property to you and the other direct holders of the debt securities.
We do not need to comply with this restriction if the amount of all debt
that would be secured by liens on principal manufacturing properties (including
the new debt, the debt securities which we would so secure as described in the
previous sentence, and all "attributable debt," as described under "Restriction
on sales and leasebacks" below, that results from a sale and leaseback
transaction involving principal manufacturing properties) is less than 10% of
our consolidated net tangible assets.
This restriction on liens does not apply to debt secured by certain types
of liens, and we can disregard this debt when we calculate the limits imposed by
this restriction. These types of liens include:
- liens on the property of any of our principal subsidiaries, or on their
shares of stock or debt, if those liens existed at the time the
corporation became our principal subsidiary;
- liens in favor of us or our principal subsidiaries;
- liens in favor of U.S. Governmental bodies that we granted in order to
assure our payments to such bodies that we owe by law or because of a
contract we entered into;
- liens on property that existed at the time we acquired the property
(including property we may acquire through a merger or similar
transaction) or that we granted in order to purchase the property
(sometimes called "purchase money mortgages"); and
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- liens on the buildings or property of our facilities in Bristol,
Tennessee and Rochester, Michigan.
We can also disregard debt secured by liens that extend, renew or replace
any of these types of liens.
We and our subsidiaries are permitted to have as much unsecured debt as we
may choose.
RESTRICTIONS ON SALES AND LEASEBACKS. We promise that neither we nor any
of our principal subsidiaries will enter into any sale and leaseback transaction
involving a principal manufacturing property, unless we comply with this
restrictive covenant. A "sale and leaseback transaction" generally is an
arrangement between us or a principal subsidiary and a bank, insurance company
or other lender or investor where we or the principal subsidiary lease a
property which was or will be sold by us or the principal subsidiary to that
lender or investor more than 120 days after the completion of construction of
the property and the beginning of its full operation.
We can comply with this restrictive covenant in either of two different
ways. First, we will be in compliance if we or our principal subsidiary could
grant a lien on the principal manufacturing property in an amount equal to the
attributable debt for the sale and leaseback transaction without being required
to grant an equivalent or higher-ranking lien to you and the other direct
holders of the debt securities under the restrictions on liens covenant
described above on page 11. Second, we can comply if we retire an amount of
funded debt, within 120 days of the transaction, equal to at least the net
proceeds of the sale of the principal manufacturing property that we lease in
the transaction or the fair value of that property (subject to credits for
certain voluntary retirements of debt securities and funded debt we may make),
whichever is greater.
This restriction on sale and leasebacks does not apply to any sale and
leaseback transaction that is between us and one of our principal subsidiaries
or between principal subsidiaries, or that involves a lease for a period of
three years or less.
CERTAIN DEFINITIONS RELATING TO OUR RESTRICTIVE COVENANTS. Following are
the meanings of the terms that are important in understanding the restrictive
covenants previously described.
- "attributable debt" means, in connection with any sale or leaseback
transaction, the lesser of (i) the fair value of the property subject to
the sale and leaseback transaction (as determined by our board of
directors) and (ii) the total net amount of rent (discounted at a rate
per annum equal to a composite rate of interest on all outstanding debt
securities) that is required to be paid during the remaining term of the
lease on this property.
- "consolidated net tangible assets" is the total amount of assets (less
reserves and certain other permitted deductible items), after subtracting
all current liabilities and all goodwill, trade names, trademarks,
patents, unamortized debt discounts and expenses and similar intangible
assets, as such amounts appear on our most recent consolidated balance
sheet and computed in accordance with generally accepted accounting
principles.
- "funded debt" means all debt for borrowed money that either has a
maturity of 12 months or more from the date on which the calculation of
funded debt is made or has a maturity of less than 12 months from that
date but is by its terms renewable or extendible beyond 12 months from
that date at the option of the borrower.
- A "principal manufacturing property" is any building or other structure
or facility, and the land on which it sits and its associated fixtures,
that we or our principal subsidiaries use primarily for manufacturing or
processing, other than a building, structure or other facility that
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our board of directors has determined is not of material importance to
the total business that we and our principal subsidiaries conduct.
- A "principal subsidiary" means any of Monarch Pharmaceuticals, Inc.,
Parkedale Pharmaceuticals, Inc., or King Pharmaceuticals of Nevada, Inc.
DEFEASANCE
The following discussion of full defeasance and covenant defeasance will be
applicable to your series of debt securities only if we choose to have them
apply to that series. If we do so choose, we will state that in the prospectus
supplement.
FULL DEFEASANCE. If there is a change in federal tax law, as described
below, we can legally release ourselves from any payment or other obligations on
the debt securities (called "full defeasance") if we put in place the following
other arrangements for you to be repaid:
- We must deposit in trust for your benefit and the benefit of all other
direct holders of the debt securities a combination of money and U.S.
government or U.S. government agency notes or bonds that will generate
enough cash to make interest, principal and any other payments on the
debt securities on their various due dates.
- There must be a change in current federal tax law or an IRS ruling that
lets us make the above deposit without causing you to be taxed on the
debt securities any differently than if we did not make the deposit and
just repaid the debt securities ourselves. (Under current federal tax
law, the deposit and our legal release from the debt securities would be
treated as though we took back your debt securities and gave you your
share of the cash and notes or bonds deposited in trust. In that event,
you could recognize gain or loss on the debt securities you give back to
us.)
- We must deliver to the trustee a legal opinion of our counsel confirming
the tax law change described above.
If we ever did accomplish full defeasance, as described above, you would
have to rely solely on the trust deposit for repayment on the debt securities.
You could not look to us for repayment in the unlikely event of any shortfall.
Conversely, the trust deposit would most likely be protected from claims of our
lenders and other creditors if we ever become bankrupt or insolvent.
COVENANT DEFEASANCE. Under current federal tax law, we can make the same
type of deposit described above and be released from some of the restrictive
covenants in the debt securities. This is called "covenant defeasance." In that
event, you would lose the protection of those restrictive covenants but would
gain the protection of having money and securities set aside in trust to repay
the debt securities. In order to achieve covenant defeasance, we must do the
following:
- We must deposit in trust for your benefit and the benefit of all other
direct holders of the debt securities a combination of money and U.S.
government or U.S. government agency notes or bonds that will generate
enough cash to make interest, principal and any other payments on the
debt securities on their various due dates.
- We must deliver to the trustee a legal opinion of our counsel confirming
that under current federal income tax law we may make the above deposit
without causing you to be taxed on the debt securities any differently
than if we did not make the deposit and just repaid the debt securities
ourselves.
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If we accomplish covenant defeasance, the following provisions of the
indenture and the debt securities would no longer apply:
- Our promises regarding conduct of our business previously described under
"Restrictive covenants" on page 11, and any other covenants applicable to
the series of debt securities and described in the prospectus supplement.
- The condition regarding the treatment of liens when we merge or engage in
similar transactions, as previously described on page 9 under "Mergers
and similar events."
- The events of default relating to breach of covenants and acceleration of
the maturity of other debt, described later under "Default and related
matters".
If we accomplish covenant defeasance, you can still look to us for
repayment of the debt securities if there were a shortfall in the trust deposit.
In fact, if one of the remaining events of default occurred (such as our
bankruptcy) and the debt securities become immediately due and payable, there
may be such a shortfall. Depending on the event causing the default, you may not
be able to obtain payment of the shortfall.
DEFAULT AND RELATED MATTERS
RANKING. The debt securities are not secured by any of our property or
assets. Accordingly, your ownership of debt securities means you are one of our
unsecured creditors. The debt securities are not subordinated to any of our
other debt obligations and therefore they rank equally with all our other
unsecured and unsubordinated indebtedness.
EVENTS OF DEFAULT. You will have special rights if an event of default
occurs and is not cured, as described later in this subsection.
The term "event of default" means any of the following:
- We do not pay the principal or any premium on a debt security on its due
date.
- We do not pay interest on a debt security within 30 days of its due date.
- We do not deposit any sinking fund payment on its due date.
- We remain in breach of a restrictive covenant described beginning on page
11 or any other term of the indenture for 60 days after we receive a
notice of default stating we are in breach. The notice must be sent by
either the trustee or holders of 10% of the principal amount of debt
securities of the affected series.
- We file for bankruptcy or certain other events in bankruptcy, insolvency
or reorganization occur.
- Any other event of default described in the prospectus supplement occurs.
An event of default for a particular series of debt securities does not
necessarily constitute an event of default for any other series of debt
securities issued under the indenture.
REMEDIES IF AN EVENT OF DEFAULT OCCURS. If an event of default has
occurred and has not been cured, the trustee or the holders of 25% in principal
amount of the debt securities of the affected series may declare the entire
principal amount of all the debt securities of that series to be due and
immediately payable. This is called a declaration of acceleration of maturity.
If an event of default occurs because of certain events in bankruptcy,
insolvency or reorganization, the principal amount of
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all the debt securities of that series will be automatically accelerated,
without any action by the trustee or any holder. A declaration of acceleration
of maturity may be canceled by the holders of at least a majority in principal
amount of the debt securities of the affected series.
Except in cases of default, where the trustee has some special duties, the
trustee is not required to take any action under the indenture at the request of
any holders unless the holders offer the trustee satisfactory protection from
expenses and liability. This protection is called an "indemnity."
If satisfactory indemnity is provided, the holders of a majority in
principal amount of the outstanding debt securities of the relevant series may
direct the time, method and place of conducting any lawsuit or other formal
legal action seeking any remedy available to the trustee. These majority holders
may also direct the trustee in performing any other action under the indenture.
Before you bypass the trustee and bring your own lawsuit or other formal
legal action or take other steps to enforce your rights or protect your
interests relating to the debt securities, the following must occur:
- You must give the trustee written notice that an event of default has
occurred and remains uncured.
- The holders of 25% in principal amount of all outstanding debt securities
of the relevant series must make a written request that the trustee take
action because of the default, and must offer reasonable indemnity to the
trustee against the cost and other liabilities of taking that action.
- The trustee must have not taken action for 60 days after receipt of the
above notice and offer of indemnity.
- The holders of a majority in principal amount of all outstanding debt
securities of the relevant series must not have given the trustee a
direction that is inconsistent with the above notice.
However, you are entitled at any time to bring a lawsuit for the payment of
money due on your debt security on or after its due date.
"STREET NAME" AND OTHER INDIRECT HOLDERS SHOULD CONSULT THEIR BANKS OR
BROKERS FOR INFORMATION ON HOW TO GIVE NOTICE OR DIRECTION TO OR MAKE A REQUEST
OF THE TRUSTEE AND TO MAKE OR CANCEL A DECLARATION OF ACCELERATION.
We will furnish to the trustee every year a written statement of certain of
our officers certifying that to their knowledge we are in compliance with the
indenture and the debt securities, or else specifying any default.
REGARDING THE TRUSTEE
The Bank of New York currently acts as trustee under the indenture for our
$150 million 10 3/4% Senior Subordinated Notes due 2009.
DESCRIPTION OF DEBT WARRANTS WE MAY OFFER
We may issue warrants for the purchase of debt securities. Debt warrants
may be issued separately or together with debt securities.
The debt warrants are to be issued under debt warrant agreements to be
entered into between King Pharmaceuticals, Inc. and one or more banks or trust
companies, as debt warrant agent, all as
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will be set forth in the prospectus supplement relating to the debt warrants
being offered by the prospectus supplement. A form of debt warrant agreement,
including a form of debt warrant certificate representing the debt warrants,
reflecting the alternative provisions that may be included in the debt warrant
agreements to be entered into with respect to particular offerings of debt
warrants, is included as an exhibit to the registration statement. See "Where
You Can Find More Information" on page 1 for information on how to obtain a copy
of the form of debt warrant agreement.
The following description of the debt warrant agreements and the debt
warrant certificates and summaries of some provisions of the debt warrant
agreements and the debt warrant certificates do not describe every aspect of the
debt warrants and are subject to, and are qualified in their entirety by
reference to, all the provisions of the applicable debt warrant agreements and
the debt warrant certificates, including definitions of terms used in the debt
warrant agreements and not otherwise defined in this prospectus. For example, in
this section we use some terms that have been given special meaning in the debt
warrant agreements. We also include references in parentheses to some sections
of the debt warrant agreements. Whenever we refer to particular sections or
defined terms of the debt warrant agreement in this prospectus, those sections
or defined terms are incorporated by reference here or in the relevant
prospectus supplement.
TERMS OF THE DEBT WARRANTS ARE TO BE DESCRIBED IN THE PROSPECTUS SUPPLEMENT
The particular terms of each issue of debt warrants, the debt warrant
agreement relating to the debt warrants and the debt warrant certificates
representing debt warrants will be described in the applicable prospectus
supplement. This description will include:
- the initial offering price;
- the currency or currency unit in which the price for the debt warrants is
payable;
- the title, aggregate principal amount and terms of the debt securities
purchasable upon exercise of the debt warrants;
- the title and terms of any related debt securities with which the debt
warrants are issued and the number of the debt warrants issued with each
debt security;
- the date, if any, on and after which the debt warrants and the related
debt securities will be separately transferable;
- the principal amount of debt securities purchasable upon exercise of each
debt warrant and the price at which that principal amount of debt
securities may be purchased upon exercise of each debt warrant;
- the date on which the right to exercise the debt warrants will commence
and the date on which this right will expire;
- the identity of the debt warrant agent;
- if applicable, a discussion of United States federal income tax,
accounting or other considerations applicable to debt warrants; and
- any other terms of the debt warrants.
Debt warrant certificates will be exchangeable for new debt warrant
certificates of different denominations and, if in registered form, may be
presented for registration of transfer, and debt warrants may be exercised, at
the corporate trust office of the debt warrant agent or any other office
indicated in the related prospectus supplement. Before the exercise of debt
warrants, holders of debt
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warrants will not be entitled to payments of principal, premium, if any, or
interest, if any, on the debt securities purchasable upon exercise of the debt
warrants, or to enforce any of the covenants in the indenture.
EXERCISE OF DEBT WARRANTS
Unless otherwise provided in the related prospectus supplement, each debt
warrant will entitle the holder of debt warrants to purchase for cash the
principal amount of debt securities at the exercise price that will in each case
be set forth in, or be determinable as set forth in, the related prospectus
supplement. Debt warrants may be exercised at any time up to the close of
business on the expiration date specified in the prospectus supplement relating
to the debt warrants. After the close of business on the expiration date or any
later date to which the expiration date may be extended by King, unexercised
debt warrants will become void.
Debt warrants may be exercised as set forth in the prospectus supplement
relating to the debt warrants. Upon receipt of payment and the debt warrant
certificate properly completed and duly executed at the corporate trust office
of the debt warrant agent or any other office indicated in the prospectus
supplement, we will, as soon as practicable, forward the debt securities
purchasable upon exercise of the debt warrants to the person entitled to them.
If fewer than all of the debt warrants represented by the debt warrant
certificate are exercised, a new debt warrant certificate will be issued for the
remaining amount of debt warrants.
If you hold your interest in a debt warrant indirectly, you should check
with the institution through which you hold your interest in the debt warrant to
determine how these provisions will apply to you. See "Legal Ownership" on page
4 for a general description of the procedures and rights applicable to indirect
owners of debt warrants.
MODIFICATIONS
The debt warrant agreement may be amended by King and the debt warrant
agent, without the consent of the holder of any debt warrant certificate, for
the purpose of curing any ambiguity, or of curing, correcting or supplementing
any defective provision contained in the debt warrant agreement, or making any
provisions in regard to matters or questions arising under the debt warrant
agreement that we may deem necessary or desirable; provided that the amendment
may not adversely affect the interest of the holders of debt warrant
certificates in any material respect. We and the debt warrant agent also may
modify or amend the debt warrant agreement and the terms of the debt warrants,
with the consent of the owners of not less than a majority in number of the then
outstanding unexercised debt warrants affected. However, any modification or
amendment that increases the exercise price, shortens the period of time during
which the debt warrants may be exercised or otherwise materially and adversely
affects the exercise rights of the owners of debt warrants or reduces the number
of debt warrants the consent of whose owners is required for modification or
amendment of the debt warrant agreement or the terms of the debt warrants may be
made only with the consent of the owners affected by the modification or
amendment.
MERGER, CONSOLIDATION, SALE OR OTHER DISPOSITIONS
Under the debt warrant agreement, we may, to the extent permitted in the
indenture, consolidate with, or sell or convey all or substantially all of our
assets to, or merge with or into, any other corporation. If at any time there is
a merger, consolidation, sale, transfer, conveyance or other disposition of
substantially all of the assets of King, the successor or assuming corporation
will succeed to and be substituted for King, with the same effect as if it had
been named in the debt
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warrant agreement and in the debt warrants as King. We will then be relieved of
any further obligation under the debt warrant agreement or under the debt
warrants.
ENFORCEABILITY OF RIGHTS; GOVERNING LAW
The debt warrant agent will act solely as an agent of King in connection
with the issuance and exercise of debt warrants and will not assume any
obligation or relationship of agency or trust for or with any holder of a debt
warrant certificate or any owner of a beneficial interest in debt warrants. The
holders of debt warrant certificates, without the consent of the debt warrant
agent, the trustee, the holder of any debt securities issued upon exercise of
debt warrants or the holder of any other debt warrant certificates, may, on
their own behalf and for their own benefit, enforce, and may institute and
maintain any suit, action or proceeding against King suitable to enforce, or
otherwise in respect of, their rights to exercise debt warrants evidenced by
their debt warrant certificates. Except as may otherwise be provided in the
related prospectus supplement, each issue of debt warrants and the applicable
debt warrant agreement will be governed by and construed in accordance with the
law of the State of New York.
DESCRIPTION OF PREFERRED STOCK WE MAY OFFER
Each series of preferred stock will have specific financial and other terms
which will be described in a prospectus supplement. The description of the
preferred stock that is set forth in any prospectus supplement is not complete
without reference to the Second Amended and Restated Charter of King of King
Pharmaceuticals, Inc.
Our Charter authorizes the Board of Directors to issue up to 15,000,000
shares of preferred stock, no par value per share, in one or more series. As of
December 31, 1999, we had neither designated nor issued shares of preferred
stock. The number of authorized shares of preferred stock may be increased or
decreased by the affirmative vote of the holders of a majority of the
outstanding stock of King without the separate vote of holders of preferred
stock as a class.
Our Board of Directors is authorized to designate, for each series of
preferred stock, the following items, among others:
- the maximum number of shares in the series;
- the designation of the series;
- the dividend rate, or basis for determining such rate, if any, on the
shares of the series;
- whether dividends will be cumulative and, if so, from which date or
dates;
- whether the shares of the series will be redeemable and, if so, the
dates, prices and other terms and conditions of redemption;
- whether we will be obligated to purchase or redeem shares of the series
pursuant to a sinking fund or otherwise, and the prices, periods and
other terms and conditions upon which the shares of the series will be
redeemed or purchased;
- whether the shares of the series will be convertible into, or
exchangeable for, shares of stock of any other class or classes and, if
so, the rate or rates of conversion or exchange, the terms of adjustment,
if any, and whether the shares of the series will be convertible or
exchangeable at our option or the option of holders of preferred shares,
or both;
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- whether the shares of the series will have voting rights, in addition to
the voting rights provided by law, and, if so, the terms of those voting
rights;
- the rights of the shares of the series in the event of the voluntary or
involuntary liquidation, dissolution or winding up of King; and
- any other relative rights, powers, preferences, qualifications,
limitations or restrictions relating to the shares of the series.
The shares of preferred stock of any one series will be identical with each
other except for the dates from which dividends will cumulate, if at all. The
shares of preferred stock will be fully paid and nonassessable.
PLAN OF DISTRIBUTION
We may sell the securities offered by this prospectus through agents,
underwriters or dealers, directly or indirectly to one or more purchasers.
The accompanying prospectus supplement will identify or describe:
- any underwriters, dealers or agents;
- their compensation;
- the net proceeds to King;
- the purchase price of the securities;
- the initial public offering price of the securities; and
- any exchange on which the securities are listed.
AGENTS. We may designate agents who agree to use their reasonable efforts
to solicit purchases for the period of their appointment to sell securities on a
continuing basis.
UNDERWRITERS. If we use underwriters for a sale of securities, the
underwriters will acquire the securities for their own account. The underwriters
may resell the securities in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale. Any initial public offering price and any discounts or
concessions allowed or re-allowed or paid to dealers may be changed from time to
time.
DIRECT SALES. We may also sell securities directly to one or more
purchasers without using underwriters or agents.
Underwriters, dealers, and agents that participate in the distribution of
the securities may be underwriters as defined in the Securities Act of 1933, and
any discounts or commissions they receive from us and any profit on their resale
of the debt securities may be treated as underwriting discounts and commissions
under the Securities Act. We may have agreements with the underwriters, dealers
and agents to indemnify them against certain civil liabilities, including
liabilities under the Securities Act. Underwriters, dealers and agents may
engage in transactions with or perform services for us in the ordinary course of
their businesses.
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VALIDITY
The validity of the securities offered by this prospectus will be passed
upon for King by Baker, Donelson, Bearman & Caldwell, Johnson City, Tennessee,
and for any underwriters or agents by counsel named in the prospectus
supplement.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of King as of December 31, 1998 and
1997 and for each of the three years in the period ended December 31, 1998,
incorporated in this registration statement by reference to the financial
statements in the Annual Report on Form 10-K, have been so incorporated in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of that firm as experts in auditing and accounting.
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APRIL 19, 2000
(KING PHARMACEUTICALS LOGO)
KING PHARMACEUTICALS, INC.
4,000,000 SHARES OF COMMON STOCK
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PROSPECTUS SUPPLEMENT
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DONALDSON, LUFKIN & JENRETTE
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We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus supplement and the accompanying
prospectus or to make representations as to matters not stated in this
prospectus supplement and the accompanying prospectus. You must not rely on
unauthorized information. This prospectus supplement and the accompanying
prospectus are not offers to sell these securities or our solicitation of your
offer to buy the securities in any jurisdiction where that would not be
permitted or legal. Neither the delivery of this prospectus supplement and the
accompanying prospectus nor any sales made hereunder after the date of this
prospectus supplement shall create an implication that the information contained
in this prospectus supplement and the accompanying prospectus or the affairs of
King have not changed since the date hereof.
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