<PAGE> 1
EX. 99-B
Supplementary Consolidated Financial Statements
<PAGE> 2
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 and June 30, 2000 (unaudited)............... F-5
Supplementary Consolidated Statements of Operations for the
years ended December 31, 1997, 1998 and 1999 and the six
months ended June 30, 1999 and 2000 (unaudited)........... F-6
Supplementary Consolidated Statements of Changes in
Shareholders' Equity for the years ended December 31,
1997, 1998 and 1999 and the six months ended June 30, 2000
(unaudited)............................................... F-7
Supplementary Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1998 and 1999 and for the
six months ended June 30, 1999 and 2000 (unaudited)....... F-8
Notes to Supplementary Consolidated Financial Statements.... F-10
</TABLE>
F-1
<PAGE> 3
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. and its subsidiaries at December 31, 1998
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As described in Note 21, on August 31, 2000, the Company merged with Jones
Pharma Incorporated ("Jones") 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 Jones. 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, based upon our audits and the report of the other auditors,
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 and its subsidiaries at December 31, 1998 and 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these supplementary financial statements based on our audits. We did
not audit the financial statements of Jones, which statements reflect total
assets of $248.8 million and $300.5 million at December 31, 1998 and 1999,
respectively, and total revenues of $88.8 million, $103.4 million and $132.5
million for the years ended December 31, 1997, 1998 and 1999, respectively.
Those statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for Jones, is based solely on the report of the other auditors.
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
F-2
<PAGE> 4
believe that our audits and the report of other auditors provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Greensboro, North Carolina
February 25, 2000, except for
the information in Note 17
for which the date is June 21, 2000,
the information in Note 21(a) for
which the date is March 17, 2000
and the information in Note 21(b) for
which the date is August 31, 2000
F-3
<PAGE> 5
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Jones Pharma Incorporated
We have audited the consolidated balance sheets of Jones Pharma
Incorporated as of December 31, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999 (not presented separately herein).
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 in accordance with auditing standards generally
accepted in the United States. Those standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Jones Pharma Incorporated at December 31, 1999 and 1998, and the consolidated
results of its operations and its 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.
Ernst & Young LLP
St. Louis, Missouri
January 31, 2000
F-4
<PAGE> 6
KING PHARMACEUTICALS, INC.
SUPPLEMENTARY CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1999 AND JUNE 30, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
1998 1999 2000
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash, cash equivalents and short-term investments...... $128,646 $ 131,723 $ 234,252
Investments............................................ 21,434 80,229 52,347
Trade accounts receivable, net of allowance for
doubtful accounts of $2,379, $3,407 and $3,731....... 67,084 91,821 106,939
Inventory.............................................. 34,048 44,997 71,219
Deferred income taxes.................................. 9,598 18,198 16,657
Prepaid expenses and other current assets.............. 3,789 10,965 9,971
-------- ---------- -----------
Total current assets......................... 264,599 377,933 491,385
-------- ---------- -----------
Property and equipment, net............................ 118,139 122,268 126,339
Other assets........................................... 22,780 26,666 18,130
Investments............................................ 25,074 33,583 --
Intangible assets, net................................. 548,538 621,356 610,993
-------- ---------- -----------
Total assets................................. $979,130 $1,181,806 $ 1,246,847
======== ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................... $ 15,895 $ 28,942 $ 40,446
Accrued expenses....................................... 27,821 61,497 65,445
Income taxes payable................................... 5,295 9,225 7,870
Current portion of long term debt...................... 13,310 14,502 2,912
-------- ---------- -----------
Total current liabilities.................... 62,321 114,166 116,673
Long-term debt:
Revolving credit facility............................ 19,000 45,000 --
Term loans........................................... 414,750 354,194 137,540
Senior subordinated notes............................ 75,000 150,000 150,000
Other................................................ 5,737 4,161 3,932
Deferred income taxes.................................. 10,007 17,773 16,545
Other liabilities...................................... 150 1,500 26,500
-------- ---------- -----------
Total liabilities............................ 586,965 686,794 451,190
Commitments and contingencies (notes 14 and 21)
Shareholders' equity................................. 392,165 495,012 795,657
-------- ---------- -----------
Total liabilities and shareholders' equity... $979,130 $1,181,806 $ 1,246,847
======== ========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
<PAGE> 7
KING PHARMACEUTICALS, INC.
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, 1999
AND THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998 1999 1999 2000
-------- -------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Net sales............................ $136,132 $261,594 $480,815 $196,767 $269,079
Royalty revenue...................... 20,000 27,544 31,650 16,503 22,872
Development revenue.................. 558 5,283 -- -- --
-------- -------- -------- -------- --------
Total revenues............... 156,690 294,421 512,465 213,270 291,951
-------- -------- -------- -------- --------
Operating costs and expenses:
Costs of sales....................... 36,567 86,316 136,473 52,810 69,706
Selling, general and
administrative.................... 40,255 59,445 107,219 43,977 65,605
Royalty expense...................... 4,343 6,617 7,355 783 1,242
Depreciation and amortization........ 8,576 15,566 33,864 15,804 18,778
Research and development expense..... 7,792 10,866 17,659 7,892 9,681
Merger & restructuring costs......... -- -- -- -- 20,789
Non-recurring charge................. -- 10,500 -- -- --
-------- -------- -------- -------- --------
Total operating costs and
expenses.................. 97,533 189,310 302,570 121,266 185,801
-------- -------- -------- -------- --------
Operating income..................... 59,157 105,111 209,895 92,004 106,150
-------- -------- -------- -------- --------
Other income (expenses):
Interest income...................... 4,672 7,746 10,507 4,607 7,004
Interest expense..................... (3,025) (14,866) (55,371) (26,062) (24,156)
Other, net........................... 673 4,016 (3,239) (74) (114)
-------- -------- -------- -------- --------
Total other income
(expense)................. 2,320 (3,104) (48,103) (21,529) (17,266)
-------- -------- -------- -------- --------
Income before income taxes and
extraordinary item................ 61,477 102,007 161,792 70,475 88,884
Income tax expense..................... 19,608 36,877 61,150 26,421 41,576
-------- -------- -------- -------- --------
Income from continuing operations.... 41,869 65,130 100,642 44,054 47,308
Income from discontinued
operations........................ 6,926 18,768 -- -- --
-------- -------- -------- -------- --------
Income before extraordinary item..... 48,795 83,898 100,642 44,054 47,308
Extraordinary item, net of income taxes
of $2,787 and $445 in 1998 and 1999
and $445 and $2,894 for periods ended
June 30, 1999 and 2000............... -- (4,411) (705) (705) (4,685)
-------- -------- -------- -------- --------
Net income............................. $ 48,795 $ 79,487 $ 99,937 $ 43,349 $ 42,623
======== ======== ======== ======== ========
Income per common share:
Basic: Continuing operations........... $ 0.29 $ 0.43 $ 0.65 $ 0.28 $ 0.30
Discontinued operations.......... 0.05 0.13 -- -- --
Extraordinary item............... -- (0.03) (0.01) -- (0.03)
-------- -------- -------- -------- --------
$ 0.34 $ 0.53 $ 0.64 $ 0.28 $ 0.27
======== ======== ======== ======== ========
Diluted: Continuing operations......... $ 0.29 $ 0.43 $ 0.63 $ 0.27 $ 0.29
Discontinued operations........ 0.05 0.12 -- -- --
Extraordinary item............. -- (0.03) -- -- (0.03)
-------- -------- -------- -------- --------
$ 0.34 $ 0.52 $ 0.63 $ 0.27 $ 0.26
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-6
<PAGE> 8
KING PHARMACEUTICALS, INC.
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
AND THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED DUE FROM COST OF
RETAINED LOSS ON RELATED TREASURY
SHARES AMOUNT EARNINGS SECURITIES PARTY STOCK TOTAL
----------- -------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 as previously
reported...................................... 15,643,452 $ 8,448 $ 7,938 $(16) $ (677) $ -- $ 15,693
Medco pooling of interests.................... 10,885,560 52,216 (11,394) (4,323) 36,499
Jones Pharma pooling of interests............. 31,989,882 109,719 52,200 -- -- -- 161,919
----------- -------- -------- ---- ------- -------- --------
Balance, December 31, 1996 as adjusted........ 58,518,894 170,383 48,744 (16) (677) (4,323) 214,111
Issuance of common shares, net of $743 of
expenses...................................... 6,856,548 8,007 -- -- -- -- 8,007
Realized loss on securities.................... -- -- -- 16 -- -- 16
Advances to Benevolent Fund.................... -- -- -- -- (994) -- (994)
2.8 to 1 common stock split.................... 40,500,000 -- -- -- -- -- --
Stock options exercised........................ 596,199 993 -- -- -- -- 993
Shares tendered in payment of option price..... (25,774) (340) -- -- -- -- (340)
Tax benefits associated with the exercise of
nonqualified stock options.................... -- 287 -- -- -- -- 287
Return of escrowed shares...................... (6,816) (87) -- -- -- -- (87)
Cash dividend declared -- Jones................ -- -- (2,719) -- -- -- (2,719)
Purchase of stock held in treasury............. (256,631) -- -- -- -- (2,353) (2,353)
Net income..................................... -- -- 48,795 -- -- -- 48,795
----------- -------- -------- ---- ------- -------- --------
Balance, December 31, 1997..................... 106,182,420 179,243 94,820 -- (1,671) (6,676) 265,716
Issuance of common shares, net of expenses..... 9,235,643 50,117 -- -- -- -- 50,117
Payments from Benevolent Fund.................. -- -- -- -- 1,075 -- 1,075
Stock options exercised........................ 512,196 2,856 -- -- -- -- 2,856
Shares tendered in payment of option price..... (10,791) -- -- -- -- -- --
Tax benefits associated with the exercise of
nonqualified stock options.................... -- 353 -- -- -- -- 353
Cash dividend declared -- Jones................ -- -- (3,307) -- -- -- (3,307)
Purchase of stock held in treasury............. (223,386) -- -- -- -- (4,132) (4,132)
Net income..................................... -- -- 79,487 -- -- -- 79,487
----------- -------- -------- ---- ------- -------- --------
Balance, December 31, 1998..................... 115,696,082 232,569 171,000 -- (596) (10,808) 392,165
3 to 2 common stock split declared July 13,
1999.......................................... 15,994,942 -- -- -- -- -- --
Stock options exercised........................ 934,279 7,184 -- -- -- -- 7,184
Shares tendered in payment of option price..... (34,264) -- -- -- -- -- --
Amortization of unearned compensation.......... -- 74 -- -- -- -- 74
Tax benefits associated with the exercise of
nonqualified stock options.................... -- 632 -- -- -- -- 632
Stock warrants exercised....................... 40,542 540 -- -- -- -- 540
Payments from Benevolent Fund.................. -- -- -- -- 596 -- 596
Retirement of treasury stock................... -- (15,263) -- -- -- 15,263 --
Tax benefit.................................... -- 2,475 -- -- -- -- 2,475
Purchase of stock held in treasury............. (187,406) -- -- -- -- (4,455) (4,455)
Cash dividend declared -- Jones................ -- -- (4,042) -- -- -- (4,042)
Net unrealized losses on marketable securities,
net of tax.................................... -- -- -- (94) -- -- (94)
Net income..................................... -- -- 99,937 -- -- -- 99,937
----------- -------- -------- ---- ------- -------- --------
Balance, December 31, 1999..................... 132,444,175 228,211 266,895 (94) -- -- 495,012
3 to 2 common stock split declared February 3,
2000 (unaudited).............................. 23,992,412 -- -- -- -- -- --
Stock options exercised (unaudited)............ 1,420,626 20,225 -- -- -- -- 20,225
Shares tendered in payment of option price
(unaudited)................................... (27,273) (1) -- -- -- -- (1)
Amortization of unearned compensation
(unaudited)................................... -- 25 -- -- -- -- 25
Cash dividend declared -- Jones (unaudited).... -- -- (2,619) -- -- -- (2,619)
Net change in unrealized losses on marketable
securities, net of tax (unaudited)............ -- -- -- 42 -- -- 42
April 19, 2000 issuance of common shares, net
of $170 expenses (unaudited).................. 6,000,000 165,350 -- -- -- -- 165,350
June 22, 2000 issuance of common shares
(unaudited)................................... 1,928,021 75,000 -- -- -- -- 75,000
Net income (unaudited)......................... -- -- 42,623 -- -- -- 42,623
----------- -------- -------- ---- ------- -------- --------
Balance, June 30, 2000 (unaudited)............. 165,757,961 $488,810 $306,899 $(52) $ -- $ -- $795,657
=========== ======== ======== ==== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the
supplementary consolidated financial statements.
F-7
<PAGE> 9
KING PHARMACEUTICALS, INC.
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
AND THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998 1999 1999 2000
------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $48,795 $ 79,487 $ 99,937 $ 43,349 $ 42,623
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 9,182 15,566 33,864 15,770 18,803
Amortization of deferred financing costs................ -- 728 2,834 603 4,685
Extraordinary loss...................................... -- 7,198 1,150 1,150 --
Deferred income taxes................................... (937) (5,061) (834) -- 314
Pretax gain on sale of discontinued operations.......... -- (30,616) -- -- --
Nonrecurring charge..................................... -- 10,500 -- -- --
Other non-cash items, net............................... 796 (534) 1,895 232 1,193
Changes in operating assets and liabilities:
Accounts receivable................................... (12,452) (36,305) (27,054) (12,338) (15,092)
Royalty receivable.................................... (226) (2,345) 1,696 (1,073) (26,691)
Inventories........................................... (7,357) (15,899) (10,949) (15,811) 470
Prepaid expenses and other assets..................... (4,940) 2,912 (4,481) (2,233) 1,172
Other assets.......................................... 1,445 (3,474) (1,755) 1,042 2,997
Accounts payable...................................... 1,557 12,126 13,520 (2,887) 14,766
Accrued expenses and other............................ 7,861 7,215 34,553 14,181 370
Deferred revenue...................................... (548) -- -- -- --
Deferred royalty payment.............................. (1,266) (1,451) -- -- --
Other long-term liabilities........................... -- -- -- -- 25,000
Income taxes.......................................... 3,964 1,983 3,930 685 (1,355)
------- --------- --------- --------- ---------
Net cash provided by operating activities........... 45,874 42,030 148,306 42,670 69,255
------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchase of investment securities......................... (20,162) (34,293) (88,820) (16,000) (50,680)
Proceeds from maturity and sale of investment
securities.............................................. 8,682 25,922 21,500 13,000 112,152
Purchases of property, plant and equipment................ (6,996) (83,765) (13,219) (4,766) (9,062)
Purchases of intangible assets............................ (76,961) (345,618) (98,199) -- --
Other purchases........................................... -- -- -- -- (4,000)
Merger related costs...................................... (373) -- (2,094) -- --
Proceeds from sale of assets.............................. 278 47 80 19 411
Proceeds from the sale of discontinued operations......... -- 55,000 -- -- --
------- --------- --------- --------- ---------
Net cash (used in) provided by investing
activities........................................ (95,532) (382,707) (180,752) (7,747) 48,821
------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from revolving credit facility................... 29,599 -- 92,000 7,000 14,000
Payments on revolving credit facility..................... (23,447) -- (66,000) (22,174) (59,000)
Proceeds from issuance of common shares and exercise of
stock options, net...................................... 8,660 52,973 10,199 1,726 260,574
Payments of cash dividends................................ (3,279) (3,307) (4,042) (1,873) (2,619)
Purchase of stock held in treasury........................ (2,353) (4,132) (4,455) (4,456) --
Book overdraft............................................ 1,423 -- -- -- --
Repayment on shareholder notes receivable................. 2,093 -- -- -- --
Proceeds from other long-term debt........................ 55,923 658,741 150,000 150,081 --
Payments on other long-term debt.......................... (26,798) (262,318) (136,021) (130,918) (228,502)
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) (6,746) --
------- --------- --------- --------- ---------
Net cash provided by financing activities........... 39,659 416,651 35,523 (7,360) (15,547)
------- --------- --------- --------- ---------
Increase (decrease) in cash................................. (9,999) 75,974 3,077 27,563 102,529
Cash and cash equivalents, beginning of period.............. 62,671 52,672 128,646 128,646 131,723
------- --------- --------- --------- ---------
Cash and cash equivalents, end of period.................... $52,672 $ 128,646 $ 131,723 $ 156,209 $ 234,252
======= ========= ========= ========= =========
Supplemental disclosure of cash paid for:
Interest.................................................. $ 2,594 $ 14,144 $ 50,411
======= ========= =========
Taxes..................................................... $18,972 $ 34,305 $ 57,576
======= ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-8
<PAGE> 10
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
consolidated financial statements.
F-9
<PAGE> 11
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, cardiologists, endocrinologists, pediatricians and
hospitals across the country. The Company also provides contract manufacturing
for a number of the world's leading pharmaceutical and biotechnology companies.
These consolidated financial statements include the accounts of King and
its wholly owned subsidiaries, Monarch Pharmaceuticals, Inc., Parkedale
Pharmaceuticals, Inc., Medco Research, Inc. (acquired February 25, 2000), Jones
Pharma Incorporated (acquired August 31, 2000) and King Pharmaceuticals of
Nevada, Inc. All intercompany transactions and balances have been eliminated in
consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates. The preparation of the consolidated financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions. Assets, liabilities, revenues and expenses,
and disclosure of contingent assets and liabilities are affected by such
estimates and assumptions. Actual results could differ from those estimates.
Revenue Recognition. Sales are reported net of an estimate for returns and
allowances, rebates and chargebacks when goods are shipped to the customer.
Product sales and sales of manufactured products are recognized upon shipment.
Development revenue is recognized upon approval of the product from the Food and
Drug Administration. The Company records royalty revenue when it is earned,
based on third party net sales of products under license.
Cash and Cash Equivalents. The Company considers all highly liquid
investments with an original maturity of three months or less when purchased to
be cash equivalents. The Company's cash and cash equivalents are placed in large
domestic banks which limit the amount of credit exposure.
Inventories. Inventories are stated at the lower of cost or market. Cost
is determined using the first-in, first-out (FIFO) method. Inventory of product
samples not distributed to third parties represent 8.6% 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-10
<PAGE> 12
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 Medco merger and recognized a loss on sale of $662. In
addition, the Company liquidated its investments as a result of the Jones Merger
and recognized a loss on sale of $45.
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, automobiles,
furniture 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 5 to 40 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
F-11
<PAGE> 13
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
territories where the Company anticipates receiving significant future benefits
from the patent, and 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 30 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
and amounts related to life insurance policies on the lives of certain key
officers. Deferred financing costs 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 and the six months ended June 30, 2000, 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, $705, net of
related tax benefits of $445, in 1999, and $4,685, net of related tax benefits
of $2,894 in the six months ended June 30, 2000, 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,
$10,866 and $17,659, 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 $11,572, $22,324 and $40,460,
respectively.
New Accounting Pronouncements. 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.
F-12
<PAGE> 14
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," ("SAB 101") which clarifies
accounting and reporting standards for revenue recognition. As a result of a
deferral of the effective date, SAB 101 will be effective for the fourth quarter
of fiscal years beginning after December 15, 1999. The Company does not believe
that SAB 101 will have any impact on its financial position or results of
operations.
Comprehensive Income. The Company had other comprehensive income of $16,
net of tax, related to an unrealized loss on securities in 1997, no other
comprehensive income in 1998, and other comprehensive loss of $94 in 1999, net
of tax, related to an unrealized loss on securities. Accumulated other
comprehensive income was $48,811, $79,487, and $99,843 for the years ended
December 31, 1997, 1998, and 1999, respectively.
3. CONCENTRATIONS OF CREDIT RISK
A significant portion of the Company's sales is to customers in the
pharmaceutical industry. Approximately, 13% and 14% of accounts receivable at
December 31, 1998 and 1999, respectively were due from one customer. At December
31, 1998 and 1999, an additional 17% and 13%, 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................................................. n/a n/a 12.5%
Customer B................................................. 12.8% n/a n/a
Customer C................................................. 14.2% n/a n/a
Customer D................................................. 11.5% n/a 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.
F-13
<PAGE> 15
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENTS
The aggregate fair values of investment securities at December 31, 1999 and
1998 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
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
======== ==== ===== ========
U.S. Government obligations...................... $ 10,581 $ -- $ (9) $ 10,572
Municipal obligations............................ 22,353 -- (123) 22,230
Corporate bonds.................................. 30,447 21 (42) 30,426
-------- ---- ----- --------
Total securities available-for-sale.............. $ 63,381 $ 21 $(174) $ 63,228
======== ==== ===== ========
1998
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.
The following represents the contractual maturities of investments held as
of December 31, 1999.
<TABLE>
<S> <C>
Less than 1 year............................................ $ 57,929
1 to 5 years................................................ 56,036
--------
Total............................................. $113,965
========
</TABLE>
The difference between amortized cost and market value of $153 (less
deferred taxes of $59) was recorded as an other comprehensive loss within
stockholders' equity as of December 31, 1999.
At December 31, 1999, approximately $92,470 of available-for-sale
securities with original maturities of 90 days or less were included in cash and
short-term investments. The market value of these securities approximates cost,
and the cost of investments sold is determined by the specific identification
method. A portion of short-term investments are comprised of variable auction
rate securities that provide for optional or early redemption within five weeks
and the contractual maturities are generally greater than twelve months.
5. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Finished goods.............................................. $18,519 $25,649
Work-in-process............................................. 5,892 7,580
Raw materials............................................... 9,637 11,768
------- -------
$34,048 $44,997
======= =======
</TABLE>
F-14
<PAGE> 16
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Land...................................................... $ 6,017 $ 6,183
Buildings and improvements................................ 67,623 70,128
Machinery, automobiles, furniture and equipment........... 50,546 57,799
Equipment under capital lease............................. 2,713 2,537
Construction in progress.................................. 6,234 8,501
-------- --------
133,133 145,148
Less accumulated depreciation............................. (14,994) (22,880)
-------- --------
$118,139 $122,268
======== ========
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1997, 1998 and 1999 was $3,235, $6,274 and $8,401, respectively.
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 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.
F-15
<PAGE> 17
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On February 28, 1998, the Company acquired the rights, titles and interest
to certain product lines, production facilities (the "Parkedale Facility"), and
assumed contracts for manufacturing for third parties from Warner-Lambert
Company (the "Sterile Products Acquisition"). The purchase price, including
assumed liabilities of $2,913, of $127,913 was allocated to real estate and
equipment based on fair values ($44,130 and $28,914, respectively) with the
residual $54,869 being allocated to intangibles and is being amortized over 5 to
40 years and 25 years, respectively. The purchase price was financed under the
Company's Credit Agreement.
On June 30, 1997, the Company acquired two products, Cytomel and Triostat,
from SKB for a cash purchase price of $22,800. The purchase price has been
allocated to the acquired intangibles with amortizable lives ranging from 10 to
25 years. In connection with the acquisition, the Company entered into
manufacturing agreements for the supply of both Cytomel and Triostat.
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.............................................. $509,708 $549,478
======== ========
Net income.................................................. $ 78,805 $109,597
======== ========
Basic and diluted income per common share................... $ 0.51 $ 0.70
======== ========
</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
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,
F-16
<PAGE> 18
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
Distribution systems, trademark, licenses and
patents -- Jones related................................ 66,805 66,577
Other product rights and intangible assets................ 44,761 51,254
-------- --------
568,144 666,208
Less accumulated amortization............................. (19,606) (44,852)
-------- --------
$548,538 $621,356
======== ========
</TABLE>
Amortization expense for the years ended December 31, 1997, 1998, and 1999
was $5,947, $9,495, and $25,463, respectively.
In June 1998, the Company recorded a noncash accounting charge related to
an impairment of certain under-performing long-lived assets. As a result of the
Company's strategic review process of its product lines and related intangible
assets, the Company determined that a portion of the goodwill associated with
certain lower-margin pharmaceutical products has been impaired. The revised
carrying value of the respective goodwill was calculated on the basis of
discounted estimated future cash flows and resulted in a noncash, after-tax
charge of $10,500. This nonrecurring charge, which has been reported as a
separate line item in the accompanying 1998 consolidated statement of
operations, has no impact on the Company's 1998 cash flow or its ability to
generate cash flow in the future.
F-17
<PAGE> 19
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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........................................................ $5,276
2001........................................................ 4,154
2002........................................................ 2,642
2003........................................................ 1,387
2004........................................................ 397
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $370, $2,015, and $4,245, 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............................. $12,305 $17,946
Rebates..................................................... 508 13,598
Accrued interest............................................ 1,176 6,517
Other....................................................... 13,832 23,436
------- -------
$27,821 $61,497
======= =======
</TABLE>
F-18
<PAGE> 20
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-19
<PAGE> 21
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-20
<PAGE> 22
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, 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........................................... $20,493 $38,918 $61,918
Deferred.......................................... (885) (2,041) (768)
------- ------- -------
Total expense................................... $19,608 $36,877 $61,150
======= ======= =======
</TABLE>
The provision for income taxes from discontinued operations in 1997 and
1998 of $4,244 and $13,537, respectively, has been netted against the income
from discontinued operations in the accompanying consolidated statements of
income.
F-21
<PAGE> 23
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................................. 35.0% 35.0% 35.0%
State income taxes, net of federal benefit................. 2.1 3.0 3.1
Change in valuation allowance.............................. (5.3) (5.7) --
Other...................................................... 0.1 3.9 (0.3)
---- ---- ----
Effective tax rate....................................... 31.9% 36.2% 37.8%
==== ==== ====
</TABLE>
The effective tax rate in 1998 reflects the nondeductibility of certain
nonrecurring accounting charges.
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.......................................... $ 7,563 $ 15,609
State net operating loss carryforward..................... 793 1,648
Tax credit carryforwards.................................. 1,264 1,436
Other..................................................... 2,332 2,589
-------- --------
Total deferred tax assets....................... 11,952 21,282
-------- --------
Property, plant and equipment............................. (5,157) (8,138)
Intangible assets......................................... (7,039) (12,584)
Miscellaneous............................................. (165) (135)
-------- --------
Total deferred tax liabilities.................. (12,361) (20,857)
-------- --------
Net deferred tax asset (liability).............. $ (409) $ 425
======== ========
</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 three 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 $949, $1,762 and $2,265, respectively. The plans
also provide for discretionary profit-sharing contributions by the Company.
F-22
<PAGE> 24
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES
Fen/Phen Litigation:
Many distributors, marketers and manufacturers of anorexigenic drugs have
been subject to claims relating to the use of these drugs. The Company is a
defendant in various lawsuits which claim damages for personal injury arising
from the Company's production of the anorexigenic drug, phentermine, under
contract for SmithKline. Generally, the lawsuits allege that the defendants (1)
misled users of the products with respect to the dangers associated with them,
(2) failed to adequately test the products and (3) knew or should have known
about the negative effects of the drugs, and should have informed the public
about the risks of such negative effects. The actions generally have been
brought by individuals in their own right and have been filed in various state
and federal jurisdictions throughout the United States. They seek, among other
things, compensatory and punitive damages and/or court supervised medical
monitoring of persons who have ingested the product. The Company expects to be
named in additional lawsuits related to the company's production of the
anorexigenic drug under contract for SmithKline.
While the Company cannot predict the outcome of these suits, the Company
believes that the claims against it are without merit and intends to vigorously
pursue all defenses available to it. The Company is being indemnified in all of
these suits by SmithKline for which it manufactured the anorexigenic product,
provided that neither the lawsuits nor the associated liabilities are based upon
the independent negligence or intentional acts of the Company, and intends to
submit a claim for all unreimbursed costs to its product liability insurance
carrier. However, in the event that SmithKline is unable to satisfy or fulfill
its obligations under the indemnity, the Company would have to defend the
lawsuit and be responsible for damages, if any, which are awarded against it or
for amounts in excess of the Company's product liability coverage.
In addition, the Company is a defendant in more than two thousand five
hundred multi-defendant lawsuits involving the manufacture and sale of
dexfenfluramine, fenfluramine, and phentermine. Although the Company has not at
any time manufactured dexfenfluramine, fenfluramine, or phentermine, the Company
was a distributor of a generic phentermine product, and, after the acquisition
of Abana Pharmaceuticals, was a distributor of Obenix, its branded phentermine
product. The plaintiffs in these cases claim injury as a result of ingesting a
combination of these weight-loss drugs and are seeking compensatory and punitive
damages as well as medical care and court supervised medical monitoring. The
plaintiffs claim liability based on a variety of theories including but not
limited to, product liability, strict liability, negligence, breach of warranty,
and misrepresentation. These suits have been filed in various jurisdictions
throughout the United States, and in each of these suits, the Company is one of
many defendants, including manufacturers and other distributors of these drugs.
The Company denies any liability incident to the distribution of Obenix or
its generic phentermine product and intends to pursue all defenses available to
it. The Company has tendered defense of these lawsuits to its insurance carriers
for handling and they are currently defending the Company in these suits. The
lawsuits are in various stages of litigation, and it is too early to determine
what, if any, liability the Company will have with respect to the claims set
forth in these lawsuits. In the event that the Company's insurance coverage is
inadequate to satisfy any resulting liability, the Company will have to resume
defense of these lawsuits and be responsible for the damages, if any, that are
awarded against it. Management of the Company does not believe that the
F-23
<PAGE> 25
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outcome of these lawsuits will have a material adverse effect on the Company's
business, financial condition, or results of operations.
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 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.
In connection with certain product line acquisitions, the Company is
obligated to pay royalties of up to 10 percent of certain product sales through
2008. Total royalty expense in 1997, 1998, and 1999 was approximately $4,343,
$6,617, and $7,355, respectively.
F-24
<PAGE> 26
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 intends,
when appropriate, to petition for relief from the Consent Decree.
The FDA announced in an August 14, 1997 Federal Register Notice that orally
administered drug products containing levothyroxine sodium are now classified as
new drugs. Manufacturers who wish to continue to market these products must
submit new drug applications (NDAs). After August 14, 2000, any levothyroxine
sodium product marketed without an approved NDA will be subject to regulatory
action. Levoxyl, since it was marketed prior to the date of this notice, will
continue to be eligible for marketing until August 14, 2000. The Company has
filed the NDA requirement. Research and development expense of approximately
$1.3 million in 1999 was incurred with respect to the NDA approval process.
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-25
<PAGE> 27
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...................... $121,961 $228,493 $434,896
Licensed Products............................ 20,000 27,544 31,650
Contract manufacturing....................... 12,694 55,054 72,176
All Other.................................... 3,015 6,453 9,511
Eliminations................................. (980) (23,123) (35,768)
-------- -------- --------
Consolidated total revenues............... $156,690 $294,421 $512,465
======== ======== ========
Gross profit (loss):
Branded pharmaceuticals...................... $ 93,577 $173,607 $340,731
Licensed Products............................ 17,015 22,671 25,990
Contract manufacturing....................... 3,291 (280) (3,683)
All Other.................................... 1,897 5,490 5,599
-------- -------- --------
Consolidated gross profit................. $115,780 $201,488 $368,637
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------
1998 1999
-------- ----------
<S> <C> <C>
Total assets:
Branded pharmaceuticals................................ $770,996 $ 937,690
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........................... $979,130 $1,181,806
======== ==========
</TABLE>
Capital expenditures of $6,996, $83,765 and $13,219 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
Certain executives of the United Company serve as directors of the Company.
In connection with its purchase of Cortisporin in 1997, the Company received
$8,750 from The United Company for 6,856,549 common shares.
OTHER
Certain management and employees of the Company sit on the board of
directors of a private foundation. The Company made contributions to this
foundation and expensed approximately $994 and $247 for the years ended December
31, 1997 and 1998, respectively. At December 31, 1997 and 1998, the Company had
receivables from this foundation of approximately $1,671 and $596,
F-26
<PAGE> 28
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively, for expenses paid by the Company on their behalf. The remaining
balance was paid in full during 1999.
The Company donated inventory to the private foundation with a cost of
$1,780 in 1999.
For the year ended December 31, 1998 and 1999, the Company paid Bourne &
Co., Inc., an affiliate of a director and since January 1999 an officer of the
Company, $2,475 and $108 for consulting services and the purchase of furniture.
In connection with the Altace Acquisition and related financing, Bourne & Co.,
Inc., received $1,250 in January 1999. For the year ended December 31, 1997, the
Company paid Bourne & Co., Inc., approximately $651 for its advisory services in
the acquisition of the Cortisporin product line and $62 for consulting services.
In September 1998, the Company purchased for approximately $350 the primary
residence of an officer of the Company in connection with his relocation to the
Parkedale Facility. The Company believes the purchase price was at fair market
value. The property was sold in February 2000.
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 300 million shares of no par value
common stock. As of December 31, 1998 and 1999 there were 115,696,082 and
132,444,175 shares outstanding, respectively.
In addition, the Company is authorized to issue 15 million shares of
"blank-check" preferred stock. The terms and conditions of which will be
determined by the board of directors. As of December 31, 1998 and 1999 there
were no shares issued or outstanding.
STOCK SPLITS
On June 2, 2000, the Company's Board of Directors declared a three for two
stock split for shareholders of record as of June 12, 2000, to be distributed
June 21, 2000. The stock split has been reflected in all share data contained in
these financial statements.
On October 4, 1999 the Company's board of directors declared a three for
two stock split for shareholders of record as of October 28, 1999, to be
distributed November 11, 1999. The stock split has been reflected in all share
data contained in these financial statements.
On November 15, 1997, the shareholders approved a stock split of 2.8 common
shares for each share of the Company's common shares outstanding. The stock
split has been reflected in all share data contained in these financial
statements.
On July 13, 1999 and February 3, 2000 three for two stock splits were
recorded by Jones. These splits have been reflected in all share data contained
in these financial statements.
F-27
<PAGE> 29
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTION PLANS
The Company has various incentive stock plans for executives and employees.
In connection with the plans, options to purchase common stock are granted at
option prices not less than the fair market values of the common stock at the
time the options are granted and vest ratably over a period of immediate vest to
ten years from the grant date. At December 31, 1999, options for 8,063,970
shares of common stock are available for future grant. A total of 7,407,217
options to purchase common stock are outstanding under these plans at December
31, 1999, of which 3,147,992 are currently exercisable. Included in the
outstanding options under these plans are options to purchase 1,708,594 shares
of common stock that have been granted to certain officers of the Company under
time accelerated stock option agreements. The options become exercisable at the
end of eight years from the grant date; however, the options may become
exercisable at earlier dates if certain targeted common stock prices are
attained.
Certain of the incentive stock plans allow for employee payment of option
exercise prices in the form of either cash or previously held common stock of
the Company. Shares tendered in payment of the option exercise price must be
owned by the employee making the tender for not less than six months prior to
the date of tender.
As of December 31, 1999, the Company had 1,047,053 options outstanding of
which 366,263 are exercisable under one plan. As a result of the merger with
Medco all outstanding options under this plan vested immediately and are
exercisable.
A summary of the status of the Company's plans as of December 31, 1999 and
changes during the years ended December 31, 1997, 1998 and 1999 are presented in
the table below:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Outstanding options, January 1............................ 4,397,951 4,790,786 6,712,027
Exercised............................................... (596,199) (507,891) (934,522)
Granted................................................. 1,462,298 2,716,184 2,165,167
Cancelled............................................... (473,264) (287,052) (535,454)
---------- ---------- -----------
Outstanding options, December 31.......................... 4,790,786 6,712,027 7,407,218
========== ========== ===========
Weighted average price of options outstanding, January
1....................................................... $ 3.13 $ 4.95 $ 5.38
========== ========== ===========
Weighted average price of options exercised............... $ 1.40 $ 3.25 $ 5.62
========== ========== ===========
Weighted average price of options granted................. $ 11.01 $ 8.33 $ 21.99
========== ========== ===========
Weighted average price of options cancelled............... $ 8.37 $ 9.82 $ 10.89
========== ========== ===========
Weighted average price of options outstanding, December
31...................................................... $ 6.07 $ 7.01 $ 10.55
========== ========== ===========
</TABLE>
Options outstanding at December 31, 1999 have exercise prices between $1.29
and $30.04, with a weighted average exercise price of $10.55 and a remaining
contractual life of approximately 8.9 years.
F-28
<PAGE> 30
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.................................... $48,795 $83,898 $100,642
======= ======= ========
Pro Forma...................................... $46,389 $80,344 $ 85,665
======= ======= ========
Net income:
As reported.................................... $48,795 $79,487 $ 99,937
======= ======= ========
Pro Forma...................................... $46,389 $75,933 $ 84,960
======= ======= ========
Diluted income per share:
Income before extraordinary item:
As reported.................................... $ 0.34 $ 0.55 $ 0.63
======= ======= ========
Pro Forma...................................... $ 0.32 $ 0.52 $ 0.54
======= ======= ========
Net income:
As reported.................................... $ 0.34 $ 0.52 $ 0.63
======= ======= ========
Pro Forma...................................... $ 0.32 $ 0.50 $ 0.54
======= ======= ========
</TABLE>
The fair value of each option grant is estimated on the date of grant using
an option pricing model in accordance with SFAS No. 123 with the following
weighted-average assumptions used for grants in 1997, 1998, and 1999: expected
lives ranging from 3 to 5 years; expected volatility ranging from .594% to 72%,
expected dividend yields of 0% to .35% and risk-free interest rates ranging from
5.19% to 6.57%.
F-29
<PAGE> 31
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. INCOME PER COMMON SHARE
The basic and diluted income before extraordinary item per common share was
determined as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Income from continuing operations
before extraordinary item......... $ 41,869 $ 65,130 $ 100,642
Income from discontinued
operations........................ 6,926 18,768 --
Extraordinary item.................. -- (4,411) (705)
------------ ------------ ------------
$ 48,795 $ 79,487 $ 99,937
============ ============ ============
Income per common share:
Basic: Continuing operations........ $ 0.29 $ 0.43 $ 0.65
Discontinued operations....... 0.05 0.13 --
Extraordinary item............ -- (0.03) (0.01)
------------ ------------ ------------
$ 0.34 $ 0.53 $ 0.64
============ ============ ============
Diluted: Continuing operations...... $ 0.29 $ 0.43 $ 0.63
Discontinued operations..... 0.05 0.12 --
Extraordinary item.......... -- (0.03) --
------------ ------------ ------------
$ 0.34 $ 0.52 $ 0.63
============ ============ ============
Basic income per common share:
Weighted average common shares.... 142,143,300 151,172,221 155,847,709
============ ============ ============
Diluted income per common share
weighted average common shares.... 142,143,300 151,172,221 155,847,709
Effect of stock options........... 1,759,122 1,922,982 2,820,590
------------ ------------ ------------
Weighted average common shares
plus assumed conversions....... 143,902,422 153,095,203 158,668,299
============ ============ ============
</TABLE>
F-30
<PAGE> 32
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...................... $59,099 $ 73,326 $ 80,902 $ 81,094
Gross profit........................ 40,838 51,919 53,246 55,484
Operating income.................... 23,411 17,858 31,803 32,039
Income before extraordinary item.... 16,015 27,174 19,671 21,038
Net income.......................... 15,729 27,174 19,671 16,913
Basic and diluted income per common
share(1):
Income before extraordinary
item........................... $ 0.11 $ 0.18 $ 0.12 $ 0.14
Net income........................ 0.11 $ 0.18 0.12 0.11
</TABLE>
<TABLE>
<CAPTION>
1999 BY QUARTER FIRST SECOND THIRD FOURTH
--------------- ------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues...................... $97,046 $116,225 $148,657 $150,537
Gross profit........................ 73,279 86,398 103,855 105,106
Operating income.................... 41,645 50,359 61,814 56,077
Income before extraordinary item.... 19,284 24,770 30,944 25,644
Net income.......................... 18,579 24,770 30,944 25,644
Basic income per common share(1):
Income before extraordinary
item........................... $ 0.12 $ 0.16 $ 0.20 $ 0.17
Net income........................ 0.12 0.16 0.20 0.17
</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., Jones Pharma Incorporated
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-31
<PAGE> 33
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...................................................... $127,487 $123,272
Investments, held to maturity............................. 21,434 80,229
Accounts Receivable....................................... 49,628 79,297
Royalty receivable........................................ 8,349 6,691
Inventory................................................. 27,581 39,020
Prepaid expenses and other current assets................. 2,177 7,904
Deferred income taxes..................................... 3,800 4,162
-------- --------
Total current assets.............................. 240,456 340,575
-------- --------
Property, plant, and equipment, net....................... 96,783 99,776
Intangible assets, net.................................... 185,813 183,117
Other assets.............................................. 6,011 8,851
Investments, held to maturity............................. 25,074 33,583
-------- --------
Total assets...................................... $554,137 $665,902
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 18,747 $ 33,532
Current portion of long-term debt......................... -- 27
Accrued expenses and other liabilities.................... 16,082 44,694
Income taxes payable...................................... 1,771 9,224
-------- --------
Total current liabilities......................... 36,600 87,477
-------- --------
Long-term debt............................................ -- 42
Other long-term liabilities............................... 150 1,500
Intercompany payable...................................... 175,613 57,290
Deferred income taxes..................................... 4,386 5,135
-------- --------
Total liabilities................................. 216,749 151,444
-------- --------
Shareholders' equity...................................... 337,388 514,458
-------- --------
Total liabilities and shareholders' equity........ $554,137 $665,902
======== ========
</TABLE>
F-32
<PAGE> 34
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........................... $146,693 $287,015 $497,369
-------- -------- --------
OPERATING COSTS AND EXPENSES:
Cost of sales........................................ 28,337 82,317 127,456
Royalty expense...................................... 2,985 4,873 5,661
Selling, general, and administrative................. 34,561 49,724 96,353
Depreciation and amortization........................ 7,550 13,576 20,954
Research and development expense..................... 6,328 9,857 15,016
Non-recurring charges................................ -- 10,500 --
-------- -------- --------
Total operating costs and expenses........... 79,761 170,847 265,440
-------- -------- --------
OPERATING INCOME....................................... 66,932 116,168 231,929
OTHER (EXPENSES) INCOME................................ 2,920 (5,707) 7,133
-------- -------- --------
Income before income taxes........................... 69,852 110,461 239,062
-------- -------- --------
Income tax expense................................... 22,975 40,510 62,851
-------- -------- --------
NET INCOME........................................ $ 46,877 $ 69,951 $176,211
======== ======== ========
</TABLE>
F-33
<PAGE> 35
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........................................... $ 53,803 $ 88,719 $176,211
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization and depreciation...................... 8,156 13,576 20,954
Amortization of deferred compensation.............. -- -- 74
Provision for uncollectibles....................... 809 (219) 566
Pre-tax gain on sale of discontinued operations.... -- (30,616) --
Non-recurring charge............................... -- 10,500 --
Loss on sale of marketable securities.............. 31 -- 170
Other non-cash item, net........................... -- -- 935
Deferred income taxes.............................. 43 (2,435) 536
Loss on disposition of assets...................... -- -- 143
Changes in operating assets and liabilities:
Accounts payable................................... 2,492 10,699 19,811
Inventory.......................................... (7,603) (15,283) (11,439)
Prepaid expenses and other assets.................. (5,149) (1,425) (1,224)
Accrued expenses................................... 4,664 6,968 25,404
Income taxes....................................... 1,450 (1,365) 6,902
Accounts receivable................................ (12,389) (30,441) (28,670)
Other assets....................................... 1,445 (3,474) (1,755)
--------- --------- --------
Net cash provided by operating
activities.............................. 47,752 45,204 208,618
--------- --------- --------
Cash flow from investing activities:
Purchase of investment securities.................. (20,162) (34,293) (88,820)
Proceeds from maturity or sale of investments...... 8,755 25,922 21,500
Merger related costs............................... (715)
Proceeds from sale of property and equipment....... -- 17 62
Proceeds from sale of discontinued operations...... -- 55,000 --
Purchases of intangible assets..................... (88,086) (60,901) (6,400)
Purchases of property and equipment................ (5,667) (77,991) (10,633)
--------- --------- --------
Net cash used in investing activities...... (105,160) (92,246) (85,006)
--------- --------- --------
Cash flows from financing activities:
Increase (decrease) in inter-company payable....... 52,236 128,271 (123,218)
Increase (decrease) in long-term debt.............. (1,238) (1,762) 69
Proceeds from exercise of stock options and
warrants........................................ 5,469 2,856 1,717
Purchase of stock held in treasury................. (4,455) (4,132) (2,353)
Payments of cash dividends......................... (3,279) (3,307) (4,042)
--------- --------- --------
Net cash provided by (used in) financing
activities.............................. 48,733 121,926 (127,827)
--------- --------- --------
Change in cash and cash equivalents.................. (8,675) 74,884 (4,215)
Cash and cash equivalents at beginning of period..... 61,278 52,603 127,487
--------- --------- --------
Cash and cash equivalents at end of period........... $ 52,603 $ 127,487 $123,272
========= ========= ========
</TABLE>
F-34
<PAGE> 36
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. SUBSEQUENT EVENTS
A. MERGER WITH MEDCO
On February 25, 2000, the Company completed a merger with Medco Research,
Inc. ("Medco") by exchanging 7,221,125 (10,831,688 post-split) shares of its
common stock for all of the common stock of Medco. Each share of Medco was
exchanged for .6757 (1.0136 for 1 post-split) of one share of King common stock.
In addition, outstanding Medco stock options were converted at the same exchange
rate into options to purchase approximately 695,164 (1,042,746 post-split)
shares of King common stock.
The Medco merger has been accounted for as a pooling of interests. In
connection with this transaction the Company charged to expense $20,789 of
merger related costs in the first quarter of 2000.
In February 2000, the Company paid $2,823 to a director for services
performed in connection with the successful completion of the merger.
B. MERGER WITH JONES
On August 31, 2000, the Company completed a merger with Jones Pharma
Incorporated ("Jones") by exchanging 73,770,626 shares of its common stock for
all of the common stock of Jones. Each share of Jones was exchanged for 1.125
shares of King common stock. In addition, outstanding Jones stock options were
converted at the same exchange rate into options to purchase approximately
4,024,459 shares of King common stock.
The Jones merger has been accounted for as a pooling of interests. In
connection with this transaction the Company expects to charge to expense
between $20,000 and $24,000 of merger related costs in the third quarter of
2000.
The following information presents certain unaudited financial statement
data of the separate companies as of December 31, 1998, and 1999 and for the
three years in the period ended December 31, 1999, preceding the mergers:
<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
Jones.......................................... 88,781 103,414 132,544
-------- -------- --------
Total.................................. $156,690 $294,421 $512,465
======== ======== ========
Net income:
King........................................... $ 6,612 $ 20,910 $ 44,949
Medco.......................................... 10,213 16,242 6,044
Jones.......................................... 31,970 42,335 48,944
-------- -------- --------
Total.................................. $ 48,795 $ 79,487 $ 99,937
======== ======== ========
</TABLE>
F-35
<PAGE> 37
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------
1998 1999
-------- ----------
<S> <C> <C>
Total assets
King................................................... $668,171 $ 805,689
Medco.................................................. 62,181 75,652
Jones.................................................. 248,778 300,465
-------- ----------
$979,130 $1,181,806
======== ==========
</TABLE>
22. FINANCIAL INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
The interim consolidated financial data with respect to June 30, 1999 and
2000 have been prepared without audit; however, in the opinion of management,
all adjustments (which are normal and recurring) necessary to prevent fairly the
consolidated financial position at June 30, 2000 and the results of operations,
changes in shareholders' equity and cash flow for the six months ended June 30,
1999 and 2000, have been made. The results of operations for the six months
ended June 30, 2000 are not necessarily indicative of the results of operations
for a full year. Interim financial data conforms to the requirements of Article
X of Regulation S-X and, therefore, does not include all the disclosures
normally required under generally accepted accounting principles in the United
States.
a. Inventory consists of the following at June 30, 2000:
<TABLE>
<S> <C>
Finished goods.............................................. $36,975
Work-in-process............................................. 21,552
Raw materials............................................... 12,692
-------
$71,219
=======
</TABLE>
b. Product Line Acquisitions
On June 22, 2000, the Company entered into a co-promotion agreement with
the Wyeth-Ayerst division of American Home Products Corporation related to the
marketing of Altrace(R). In addition, the agreement transferred sales rights of
Nordette(R), Wycillin(R) and Bicillin(R) to King. Subsequently, on July 7, 2000,
the Company completed the acquisition of marketing rights in the United States
and Puerto Rico to the Nordette(R), Bicillin(R), and Wycillin(R) product lines
from American Home Products for $200.0 million as contemplated by the
co-promotion agreement, plus assumed liabilities of $1.8 million.
This acquisition was financed with a draw of $10.0 million on a $50.0
million bridge loan, $25.0 million in the form of a note issued to American Home
Products, $37.5 million of the proceeds from the sale of stock to American Home
Products, $25.0 million received in connection with the co-promotion agreement
with American Home Products, $90.0 million from the Revolving Credit Facility
and $12.5 million in excess cash from operations.
The following unaudited pro forma summary presents the financial
information as if the acquisition of the Nordette(R), Wycillin(R) and
Bicillin(R) product lines had occurred as of June 30, 2000 or at the beginning
of the periods presented. These pro forma results have been prepared for
comparative purposes and do not purport to be indicative of what would have
occurred had the
F-36
<PAGE> 38
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquisition been made on June 30, 2000 or at the beginning of the periods
presented, nor is it indicative of future results.
<TABLE>
<CAPTION>
FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 1999 JUNE 30, 2000
------------- -------------
<S> <C> <C>
Net revenues................................................ $244,701 $ 323,627
-------- ----------
Income before extraordinary item............................ $ 53,032 $ 56,190
-------- ----------
Income per common share before extraordinary item........... $ 0.33 $ 0.35
======== ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 2000
-------------
<S> <C>
Intangible assets........................................... $ 812,825
==========
Total assets................................................ $1,448,679
==========
c. Accrued expenses at June 30, 2000 consist of the
following:
Product returns and chargebacks............................. $ 17,515
Rebates..................................................... 19,499
Accrued interest............................................ 6,337
Other....................................................... 22,094
----------
$ 65,445
==========
</TABLE>
<TABLE>
<S> <C>
d. Long-term debt consisted of the following at June 30,
2000:
Tranche B Term Loans........................................ $ 137,540
Senior subordinated notes with interest at 10 3/4% payable
semiannually due March 2009............................... 150,000
Other notes payable......................................... 3,932
----------
291,472
Less current portion........................................ 2,912
----------
$ 288,560
==========
</TABLE>
e. Merger and Restructuring Costs
On February 25, 2000, the Company completed a merger with Medco. The merger
has been accounted for as a pooling of interests and accordingly, the
consolidated financial statements for the periods presented have been restated
to include the accounts of Medco.
F-37
<PAGE> 39
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unaudited revenues and net income (loss) of the separate companies for
the periods indicated below were as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues:
King...................................................... $171,714 $136,005
Medco..................................................... 22,871 16,502
Jones..................................................... 97,366 60,762
-------- --------
$291,951 $213,269
======== ========
Net income (loss):
King...................................................... $ 8,950 $ 15,883
Medco..................................................... (5,635) 6,103
Jones..................................................... 39,308 21,363
$ 42,623 $ 43,349
======== ========
</TABLE>
In connection with the merger with Medco, in the first quarter of 2000, the
Company incurred merger and restructuring related costs of $20.8 million. The
types of costs incurred, the actual activity and the remaining accrued balances
at June 30, 2000 are summarized below:
<TABLE>
<CAPTION>
INCOME ACTIVITY ACCRUED
STATEMENT THROUGH BALANCE AT
IMPACT JUNE 30, 2000 JUNE 30, 2000
--------- ------------- -------------
<S> <C> <C> <C>
Transaction costs........................................... $14,389 $13,457 $ 932
Employee costs and other.................................... 6,400 5,561 839
------- ------- ------
Total............................................. $20,789 $19,018 $1,771
======= ======= ======
</TABLE>
On September 27, 2000, the Company announced that it would incur a $45.0
million merger and restructuring cost in the third quarter related to its merger
with Jones.
f. Commitments and contingencies
On September 27, 2000, following the receipt by the Company's facility in
Rochester, Michigan, "Parkedale," of a written notification from the FDA, the
Company decided to discontinue permanently Fluogen(R) rather than devote
additional resources to the product. 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. As a
result of the discontinuance of the product, the Company will not recognize any
revenue from Fluogen(R) during 2000. The Company has generally recognized
revenue from Fluogen(R) during the third and fourth quarters of the past two
calendar years. As a result of the discontinuance of Fluogen(R), the Company
will incur non-recurring charges totaling approximately $45 million, before tax,
in the third quarter of 2000. These estimated non-recurring charges related to
Fluogen(R) include the write-off of related property, plant and equipment and
intangible assets, existing inventory and employee severance.
F-38
<PAGE> 40
KING PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
g. The following represents selected information for the Company's
reporting segments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Total revenue:
Branded pharmaceuticals................................... $246,187 $172,892
Licensed products......................................... 22,871 16,503
Contract manufacturing.................................... 28,232 25,624
All other................................................. 5,255 6,479
Eliminations.............................................. (10,594) (8,228)
-------- --------
Consolidated total revenues....................... $291,951 $213,270
======== ========
Gross profit:
Branded pharmaceuticals................................... $195,023 $142,680
Licensed products......................................... 19,365 13,595
Contract manufacturing.................................... 4,022 (876)
All other................................................. 2,573 4,277
-------- --------
Consolidated gross profit......................... $221,003 $159,677
======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 2000
-------------
<S> <C>
Total assets:
Branded pharmaceuticals................................... $ 990,475
Licensed products......................................... 17,203
Contract manufacturing.................................... 235,958
All other................................................. 4,720
Eliminations.............................................. (1,509)
----------
Consolidated total assets......................... $1,246,847
==========
</TABLE>
Capital expenditures were $9,062 and $4,766 for the six months ended June
30, 2000 and 1999, respectively. Capital expenditures are substantially utilized
for contract manufacturing.
F-39
<PAGE> 41
h. Guarantor Subsidiary Financial Statements as of and for the six months ended
June 30, 2000
CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
2000
------------
(UNAUDITED)
<S> <C>
ASSETS
Current assets:
Cash...................................................... $163,504
Investments............................................... 52,347
Accounts Receivable....................................... 94,967
Inventory................................................. 66,649
Prepaid expenses and other current assets................. 3,562
Deferred income taxes..................................... 2,742
--------
Total current assets.............................. 383,771
--------
Property, plant, and equipment, net....................... 104,216
Intangible assets, net.................................... 182,054
Intercompany receivable................................... 49,320
Other assets.............................................. 9,068
Investments............................................... --
--------
Total assets...................................... $728,429
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 49,611
Current portion of long-term debt......................... 27
Accrued expenses and other liabilities.................... 46,173
Income taxes payable...................................... 20,680
--------
Total current liabilities......................... 116,491
--------
Long-term debt............................................ 29
Other long-term liabilities............................... 1,500
Intercompany payable...................................... --
Deferred income taxes..................................... 4,029
--------
Total liabilities................................. 122,049
--------
Shareholders' equity...................................... 606,380
--------
Total liabilities and shareholders' equity........ $728,429
========
</TABLE>
F-40
<PAGE> 42
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------
1999 2000
-------- --------
<S> <C> <C>
REVENUES:
Total net revenues................................ $209,736 $290,689
-------- --------
OPERATING COSTS AND EXPENSES:
Cost of revenues.......................................... 54,004 74,320
Selling, general, and administrative...................... 41,427 60,291
Depreciation and amortization............................. 11,491 7,055
Research and development expense.......................... 4,669 9,148
Non-recurring charges..................................... -- 14,564
-------- --------
Total operating costs and expenses................ 111,591 165,378
-------- --------
OPERATING INCOME............................................ 98,145 125,311
OTHER (EXPENSES) INCOME, NET................................ 4,435 6,379
-------- --------
Income before income taxes................................ 102,580 131,690
-------- --------
Income tax expense........................................ 39,249 49,695
-------- --------
NET INCOME............................................. $ 63,331 $ 81,995
======== ========
</TABLE>
F-41
<PAGE> 43
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
---------------------
1999 2000
-------- ---------
<S> <C> <C>
Net cash provided by operating activities................... $ 55,854 $ 97,027
-------- ---------
Cash flow from investing activities:
Purchase of investment securities......................... (16,000) (50,680)
Proceeds from maturity or sale of investments............. 13,000 112,152
Proceeds from sale of property and equipment.............. -- 13
Purchases of intangible assets............................ (4,889) (4,000)
Purchases of property and equipment....................... (3,665) (7,771)
-------- ---------
Net cash used in investing activities............. (11,554) 49,714
-------- ---------
Cash flows from financing activities:
Increase (decrease) in inter-company payable.............. (15,792) (106,610)
Increase (decrease) in long-term debt..................... 81 (13)
Proceeds from exercise of stock options and warrants...... 1,690 2,733
Purchase of stock held in treasury........................ (4,456) --
Payments of cash dividends................................ (1,873) (2,619)
-------- ---------
Net cash provided by (used in) financing
activities...................................... (20,350) (106,509)
-------- ---------
Change in cash and cash equivalents......................... 23,950 40,232
Cash and cash equivalents at beginning of period............ 126,076 123,272
-------- ---------
Cash and cash equivalents at end of period.................. $150,026 $ 163,504
======== =========
</TABLE>
F-42
<PAGE> 44
i. The basic and diluted income before extraordinary item per common share
was determined as follows:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
----------------------------
JUNE 30, JUNE 30,
2000 1999
------------ ------------
<S> <C> <C>
Income per common share before extraordinary
item............................................. $ 47,308 $ 44,054
Extraordinary item................................. (4,685) (705)
------------ ------------
$ 42,623 $ 43,349
============ ============
Income per common share:
Basic: Income per common share before extraordinary
item............................................. $ 0.30 $ 0.28
Extraordinary item........................... (0.03) --
------------ ------------
$ 0.27 $ 0.28
============ ============
Diluted: Income per common share before
extraordinary item............................... $ 0.29 $ 0.27
Extraordinary item......................... (0.03) --
------------ ------------
$ 0.26 $ 0.27
============ ============
Basic income per share:
Weighted average common shares................... 159,325,875 158,644,125
============ ============
Diluted income per share weighted average common
shares........................................... 159,325,875 158,644,125
Effect of stock options.......................... 3,483,250 2,780,125
------------ ------------
Weighted average common shares plus assumed
conversions................................... 162,809,125 161,424,250
============ ============
</TABLE>
F-43
