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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NO. 0-24425
KING PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 54-1684963
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
501 FIFTH STREET, BRISTOL, TN 37620
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 989-8000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of The Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Number of shares outstanding of Registrant's common stock as of May 10,
2001: 171,420,917
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2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KING PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2001 2000
---------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 169,088 $ 76,395
Accounts receivable, net of allowance for doubtful
accounts of $5,360 and $5,000.......................... 116,381 120,702
Inventories............................................... 80,590 65,089
Deferred income taxes..................................... 26,733 26,733
Prepaid expenses and other current assets................. 6,670 28,324
---------- ----------
Total current assets.............................. 399,462 317,243
---------- ----------
Property, plant and equipment, net.......................... 132,395 128,521
Intangible assets, net...................................... 780,429 790,324
Other assets................................................ 45,154 46,307
---------- ----------
Total assets...................................... $1,357,440 $1,282,395
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 14,959 $ 25,010
Accrued expenses.......................................... 88,953 78,545
Income taxes payable...................................... 25,228 --
Current portion of long-term debt......................... 1,524 1,527
---------- ----------
Total current liabilities......................... 130,664 105,082
Long-term debt:
Senior subordinated notes................................. 96,382 96,382
Other..................................................... 2,511 2,623
Deferred income taxes....................................... 16,989 16,989
Other liabilities........................................... 71,064 73,586
---------- ----------
Total liabilities................................. 317,610 294,662
---------- ----------
Commitments and contingencies (notes 4 and 5)
Shareholders' equity...................................... 1,039,830 987,733
---------- ----------
Total liabilities and shareholders' equity........ $1,357,440 $1,282,395
========== ==========
See accompanying notes.
1
3
KING PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
--------- --------
Revenues:
Net sales................................................. $169,900 $122,453
Royalty revenue........................................... 11,417 12,742
-------- --------
Total revenues.................................... 181,317 135,195
-------- --------
Operating costs and expenses:
Cost of revenues, including royalty expense of $2,847 and
$2,425................................................. 37,416 30,375
Selling, general and administrative....................... 32,266 33,198
Co-promotion fees......................................... 17,464 --
Co-promotion marketing expense............................ 5,529 --
Depreciation and amortization............................. 11,375 9,277
Research and development.................................. 4,015 3,665
Merger, restructuring, and other nonrecurring charges..... -- 20,789
-------- --------
Total operating costs and expenses................ 108,065 97,304
-------- --------
Operating income.......................................... 73,252 37,891
-------- --------
Other income (expense):
Interest income........................................... 2,509 4,021
Interest expense.......................................... (2,867) (14,032)
Other, net................................................ (1,571) (126)
-------- --------
Total other income (expense)...................... (1,929) (10,137)
-------- --------
Income before income taxes and cumulative effect of change
in accounting principle................................... 71,323 27,754
Income tax expense.......................................... (26,604) (17,958)
-------- --------
Income before cumulative effect of change in accounting
principle................................................. 44,719 9,796
Cumulative effect of change in accounting principle, net of
income taxes of $325...................................... (545) --
-------- --------
Net income.................................................. $ 44,174 $ 9,796
======== ========
Income per common share:
Basic:
Income before cumulative effect of change in accounting
principle............................................. $ 0.26 $ 0.06
Cumulative effect of change in accounting principle.... -- --
-------- --------
Net income............................................. $ 0.26 $ 0.06
======== ========
Diluted:
Income before cumulative effect of change in accounting
principle............................................. $ 0.26 $ 0.06
Cumulative effect of change in accounting principle.... -- --
-------- --------
Net income............................................. $ 0.26 $ 0.06
======== ========
See accompanying notes.
2
4
KING PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND OTHER
COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
RETAINED
SHARES AMOUNT EARNINGS TOTAL
----------- -------- -------- ----------
Balance at December 31, 2000................ 170,841,178 $658,948 $328,785 $ 987,733
Net income and total comprehensive income... -- -- 44,174 44,174
Exercise of stock options................... 429,054 5,741 -- 5,741
Effect of acceleration of vesting options
from restructuring........................ -- 2,182 -- 2,182
----------- -------- -------- ----------
Balance at March 31, 2001................... 171,270,232 $666,871 $372,959 $1,039,830
=========== ======== ======== ==========
See accompanying notes.
3
5
KING PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
---------------------
2001 2000
-------- --------
Cash flows from operating activities........................ $ 95,767 $ 34,068
-------- --------
Cash flows from investing activities:
Purchase of investment securities......................... -- (9,857)
Proceeds from maturity and sale of investment
securities............................................. -- 85,424
Loans receivable.......................................... (5,000) --
Purchases of property, plant and equipment................ (7,041) (5,150)
Proceeds from sale of product rights...................... 3,332 --
Proceeds from sale of assets.............................. 43 275
-------- --------
Net cash (used in) provided by investing
activities...................................... (8,666) 70,692
-------- --------
Cash flows from financing activities:
Proceeds from revolving credit facility................... -- 9,000
Payments on revolving credit facility..................... -- (54,000)
Proceeds from issuance of common shares and exercise of
stock options, net..................................... 5,741 5,089
Payments of cash dividends-Jones.......................... -- (1,309)
Payments on other long-term debt and capital lease
obligations............................................ (115) (26,630)
Other..................................................... (34) --
-------- --------
Net cash provided by (used in) financing
activities...................................... 5,592 (67,850)
-------- --------
Increase in cash and cash equivalents....................... 92,693 36,910
Cash and cash equivalents, beginning of period.............. 76,395 131,723
-------- --------
Cash and cash equivalents, end of period.................... $169,088 $168,633
======== ========
See accompanying notes.
4
6
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
(IN THOUSANDS)
1. GENERAL
The accompanying unaudited interim condensed consolidated financial
statements of King Pharmaceuticals, Inc. (the "Company") have been prepared by
the Company in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X, and accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of items of a normal recurring nature) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 2001 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2001. These interim statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's latest Annual Report on Form 10-K. The year-end condensed
balance sheet was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
These consolidated financial statements include the accounts of King and
its wholly owned subsidiaries, Monarch Pharmaceuticals, Inc.; Parkedale
Pharmaceuticals, Inc.; King Pharmaceuticals Research and Development, Inc.
(formerly Medco Research, Inc.); Jones Pharma Incorporated; and King
Pharmaceuticals of Nevada, Inc. All intercompany transactions and balances have
been eliminated in consolidation.
2. EARNINGS PER SHARE
The basic and diluted income per common share was determined using the
following share data:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2001 2000
--------- ------------
Basic income per common share:
Weighted average common shares............................ 171,047 156,771
======== ========
Diluted income per common share:
Weighted average common shares............................ 171,047 156,771
Effect of stock options................................... 1,956 3,625
-------- --------
Weighted average common shares plus assumed conversions... 173,003 160,396
======== ========
3. INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Finished goods (including $9,672 and $6,821 of sample
inventory, respectively).................................. $ 62,264 $ 49,825
Work-in-process............................................. 5,221 6,662
Raw materials............................................... 13,105 8,602
-------- --------
$ 80,590 $ 65,089
======== ========
5
7
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. MERGERS, RESTRUCTURING AND NONRECURRING CHARGES
A. Merger with Medco
On February 25, 2000, the Company completed a merger with Medco Research,
Inc. ("Medco"). The Medco merger was 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. The types of costs incurred
and the actual cash payments made in the first quarter of 2001 as well as the
remaining accrued balances at March 31, 2001 are summarized below:
ACCRUED ACCRUED
BALANCE AT BALANCE AT
DECEMBER 31, MARCH 31,
2000 PAYMENTS 2001
------------ ---------- ----------
Transaction costs................................... $ 797 $17 $ 780
Employee costs and other............................ 439 -- 439
------ --- ------
Total..................................... $1,236 $17 $1,219
====== === ======
B. Merger with Jones
On August 31, 2000, the Company completed a merger with Jones Pharma
Incorporated ("Jones"). The Jones merger was accounted for as a pooling of
interests. In connection with the merger with Jones, the Company incurred total
merger and restructuring related costs of $35,317. The types of costs incurred
and the actual cash payments made in the first quarter of 2001 as well as the
remaining accrued balances at March 31, 2001 are summarized below:
ACTIVITY
JANUARY 1,
ACCRUED 2001 ACCRUED
BALANCE AT THROUGH BALANCE AT
DECEMBER 31, MARCH 31, MARCH 31,
2000 2001 2001
------------ ---------- ----------
Transaction costs.................................... $ 620 $ 248 $ 372
Employee costs, including severance and acceleration
of vesting of options.............................. 3,707 2,439 1,268
------ ------ ------
Total...................................... $4,327 $2,687 $1,640
====== ====== ======
All activity was paid in cash except for a $1.3 million reclassification of
acceleration of vesting of options to shareholders' equity.
The following information presents certain unaudited financial data of the
separate companies during the first quarter of 2000:
NET NET
REVENUE INCOME
------- -------
Medco (through date of acquisition)......................... $ 9,169 $ 7,244
Jones....................................................... 45,734 19,172
------- -------
Total............................................. $54,903 $26,416
======= =======
6
8
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
C. Discontinuance of Fluogen(R)
On September 27, 2000, the Company received written notification from the
United States Food and Drug Administration (FDA) that it must cease
manufacturing and distributing Fluogen(R), an influenza vaccine, until the
Company demonstrated compliance with related FDA regulations. In addition, the
notification recommended that the Company properly dispose of Fluogen(R)
inventory on hand. As a result of this notification, the Company decided to
permanently discontinue Fluogen(R) production and distribution. This
restructuring plan resulted in the elimination of approximately 160 employees of
which approximately 110 were hourly and 50 were salaried. As a result of these
events, the Company recorded extraordinary losses on disposed and impaired
assets of $43.7 million, before tax benefit of $16.4 million, and a nonrecurring
charge of $8.6 million for the year ended December 31, 2000. A summary of the
types of costs incurred in the first quarter 2001 and the remaining accrued
balances at March 31, 2001 are summarized below:
ACCRUED ACCRUED
BALANCE AT BALANCE AT
DECEMBER 31, MARCH 31,
2000 PAYMENTS OTHER(1) 2001
------------ -------- -------- ----------
Nonrecurring charges
Employee costs, including severance and
acceleration of vesting of options.......... $5,270 $4,412 $858 $ --
Contractual commitments and cleanup
activities.................................. 1,296 203 -- 1,093
------ ------ ---- ------
Total............................... $6,566 $4,615 $858 $1,093
====== ====== ==== ======
---------------
(1) Includes reclassification of acceleration of vesting of options to
shareholders' equity.
D. Discontinuance of Pallacor(TM) Research and Development Efforts
In September 2000 management decided to discontinue the research and
development efforts relating to Pallacor(TM) due to the Company's inability to
out-license rights to the product and its assessment of the significance of
projected research and development costs relative to the likelihood of the
project's success resulting in a nonrecurring research and development charge of
$6.1 million. At December 31, 2000 and March 31, 2001 the Company had $4.7
million and $3.1 million, respectively, accrued for all estimated remaining
contractual commitments associated with Pallacor(TM).
5. CONTINGENCIES
Fen/Phen Litigation
Many distributors, marketers and manufacturers of anorexigenic drugs have
been subject to claims relating to the use of these drugs. 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 is one of many defendants in more than 33 lawsuits
which claim damages for personal injury arising from the Company's production of
the anorexigenic drug, phentermine, under contract for GlaxoSmithKline. The
Company expects to be named in additional lawsuits related to the Company's
production of the anorexigenic drug under contract for GlaxoSmithKline.
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 GlaxoSmithKline for which it manufactured the anorexigenic
product,
7
9
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 GlaxoSmithKline 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, Jones, a wholly-owned subsidiary of 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. These
suits have been filed in various jurisdictions throughout the United States, and
in each of these suits, Jones is one of many defendants, including manufacturers
and other distributors of these drugs. Although Jones has not at any time
manufactured dexfenfluramine, fenfluramine, or phentermine, Jones 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.
Jones denies any liability incident to the distribution of Obenix or its
generic phentermine product and intends to pursue all defenses available to it.
Jones has tendered defense of these lawsuits to its insurance carriers for
handling and they are currently defending Jones in these suits. The
manufacturers of fenfluramine and dexfenfluramine have settled many of these
cases. In the event that Jones' insurance coverage is inadequate to satisfy any
resulting liability, Jones will have to resume defense of these lawsuits and be
responsible for the damages, if any, that are awarded against it.
While the Company cannot predict the outcome of these suits, management
believes that the claims against Jones are without merit and intends to
vigorously pursue all defenses available.
State of Wisconsin Investment Board
On November 30, 1999, the Company entered into an agreement of merger with
Medco Research, Inc. ("Medco") pursuant to which the Company acquired Medco in
an all stock, tax-free pooling of interests transaction (Note 4), which was
subject to approval by the Medco shareholders. On January 5, 2000, Medco issued
to its stockholders a proxy statement with respect to the proposed transaction
and noticed a meeting to approve the transaction for February 10, 2000.
On January 11, 2000, the State of Wisconsin Investment Board, ("SWIB"), a
Medco shareholder which held approximately 11.6% of the outstanding stock of
Medco, filed suit on behalf of a proposed class of Medco shareholders in the
Court of Chancery for the State of Delaware, New Castle County, (State of
Wisconsin Investment Board v. Bartlett, et al., C.A. No. 17727) against Medco
and members of Medco's board of directors to enjoin the shareholder vote on the
merger and the consummation of the merger. SWIB alleged, among other things,
that the proxy materials filed by Medco failed to disclose all material
information and included misleading statements regarding the transaction, its
negotiation, and its approval by the Medco board of directors; that the Medco
directors were not adequately informed and did not adequately inform themselves
of all reasonably available information before recommending the transaction to
Medco shareholders; and that the Medco directors were disloyal and committed
waste in allegedly enabling one of the Medco directors to negotiate the
transaction purportedly for his own benefit and in agreeing to terms that
precluded what the complaint alleged were more beneficial alternative
transactions. SWIB also moved for a preliminary injunction to enjoin the
shareholder vote and the merger based on the claims asserted in its complaint.
Medco and the other defendants denied all allegations and continue to deny them.
8
10
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
After Medco distributed a supplemental proxy statement on January 31, 2000
and the court postponed the February 10, 2000 vote on the merger agreement for
15 days to allow shareholders sufficient time to consider the supplemental
disclosures, the court rejected SWIB's claims in a February 24, 2000 Memorandum
Opinion and denied preliminary injunctive relief because SWIB had not shown a
reasonable likelihood of success following trial on the merits. The court made a
number of preliminary findings, including that the Medco board of directors
properly delegated to one of its directors the responsibility to negotiate the
merger; that the payment of the negotiating fee was a proper exercise of
business judgment and did not constitute waste; that the other merger provisions
were also valid; that the Medco directors were adequately informed of all
material information reasonably available to them prior to approving the merger
agreement; that the Medco directors acted independently and in good faith to
benefit the economic interests of the Medco shareholders; that the alleged
omissions in the proxy statements were not material; and that the Medco board of
directors fully met its duty of complete disclosure with respect to the
transaction.
SWIB has filed an Application for a Scheduling Order stating its intention
to dismiss the case, before a class has been certified, without prejudice. In
the meantime, the action is still pending. While SWIB has indicated that it does
not intend to prosecute the merits of the case further, another shareholder
could intervene and continue the action. Even though SWIB lost its motion for
preliminary injunction, and is going to dismiss the case, SWIB has claimed that
its attorneys are entitled to an award of attorney's fees and costs. SWIB has
petitioned the court for approximately $7.26 million in attorney's fees and
approximately $270,000 in costs.
A hearing on SWIB's petition to dismiss and for attorney's fees and costs
was held on June 26, 2000 in the Court of Chancery for the State of Delaware. No
ruling has yet been issued.
The Company believes that SWIB's case, including SWIB's claim for
significant attorney's fees which includes fees based on a formula related to an
alleged benefit conferred on Medco shareholders, is meritless, and the Company
is vigorously contesting it. The Company believes SWIB's actions did not confer
a benefit on the Medco shareholders. The Company also believes it is unlikely
that another shareholder will intervene to continue the action, but if that
results then the Company will vigorously contest it.
Other
The Parkedale Facility was one of six facilities owned by Warner-Lambert
Company (predecessor in interest to Pfizer, Inc.) 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, 2001, any levothyroxine
sodium product marketed without an approved NDA will be subject to regulatory
action. Levoxyl(R), since it was marketed prior to the date of this notice, will
continue to be eligible for marketing until August 14, 2001. The Company filed
for an NDA for Levoxyl(R) and is awaiting a response from the FDA.
The Company is involved in various routine legal proceedings incident to
the ordinary course of its business.
9
11
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summary
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 flows.
6. LONG-TERM DEBT
Long-term debt consists of the following:
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Senior subordinated notes................................... $96,382 $96,382
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........................... 3,276 3,276
Various capital leases with interest rates ranging from 8.3%
to 12.7% and maturing at various times through 2002....... 756 869
Other notes payable......................................... 3 5
------- -------
100,417 100,532
Less current portion.............................. 1,524 1,527
------- -------
Total........................................ $98,893 $99,005
======= =======
As of March 31, 2001 the Company has $100.0 million of availability under a
revolving credit facility.
7. SEGMENT REPORTING
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: cardiovascular, anti-infective, critical care and women's
health/endocrinology. Contract Manufacturing represents contract manufacturing
services provided for pharmaceutical and biotechnology companies. Licensed
Products represent products for which the Company has transferred the
manufacturing and marketing rights to corporate partners in exchange for
licensing fees and royalty payments on product sales. The classification "all
other" primarily includes generic pharmaceutical 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.
10
12
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following represents selected information for the Company's operating
segments for the periods indicated:
THREE MONTHS ENDED
MARCH 31,
--------------------------
2001 2000
---------- ------------
Total revenues:
Branded pharmaceuticals.................................. $ 161,481 $ 113,830
Licensed products........................................ 11,417 12,742
Contract manufacturing................................... 15,028 13,692
All other................................................ 524 339
Eliminations............................................. (7,133) (5,408)
---------- ----------
Consolidated total revenues...................... $ 181,317 $ 135,195
========== ==========
Gross profit:
Branded pharmaceuticals.................................. $ 134,368 $ 92,239
Licensed products........................................ 8,916 10,847
Contract manufacturing................................... 579 1,658
All other................................................ 38 76
---------- ----------
Consolidated gross profit........................ $ 143,901 $ 104,820
========== ==========
AS OF AS OF
MARCH 31, DECEMBER 31,
2001 2000
---------- ------------
Total assets:
Branded pharmaceuticals.................................. $1,254,894 $1,189,997
Licensed products........................................ 14,723 10,723
Contract manufacturing................................... 89,940 82,314
All other................................................ 445 720
Eliminations............................................. (2,562) (1,359)
---------- ----------
Consolidated total assets........................ $1,357,440 $1,282,395
========== ==========
8. CO-PROMOTION AGREEMENT WITH AHP
On June 22, 2000, the Company entered into a co-promotion agreement with
American Home Products Corporation ("AHP") to promote Altace(R) in the United
States and Puerto Rico through October 29, 2008. Under the agreement, AHP and
the Company have agreed to share various marketing expenses related to the
promotion of Altace(R). The Company's share of these expenses are included in
the caption "co-promotion marketing expense" in the accompanying financial
statements. In addition, AHP paid an up-front fee of $75.0 million to King which
was classified as other liabilities and is being amortized over the life of the
agreement. The amortization is included as a reduction of co-promotion marketing
expense in the accompanying financial statements.
In connection with the co-promotion agreement with AHP, the Company has
agreed to pay AHP a promotional fee as follows:
- For 2001 and 2002, 20% of net sales up to $165.0 million, 50% of net
sales from $165.0 million to $465.0 million and 52% of net sales in
excess of $465.0 million.
- For years subsequent to 2002 through 2008 the fee is based on the same
formula, except the fee for the first $165.0 million will be 15% of net
sales.
11
13
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The co-promotion fee is being accrued quarterly based on a percentage of
net sales at a rate equal to the expected relationship of the expected
co-promotion fee for the year to applicable expected net sales for the year.
9. CHANGE IN ACCOUNTING PRINCIPLE
In the first quarter of 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS No. 138, which establishes
accounting and reporting standards for derivative instruments and hedging
activities. The cumulative effect of the change in accounting principle was $0.5
million, net of income taxes of $0.3 million. In addition, the change in the
value of the derivatives in the quarter ended March 31, 2001 of $1.5 million was
included in other expense.
The primary derivative of the Company relates to the conversion feature in
the $20,000 convertible senior note from Novavax, Inc. The conversion feature
allows the Company to convert the convertible senior note to common shares of
Novavax, Inc. at a specified conversion price.
10. GUARANTOR FINANCIAL STATEMENTS
The Company's wholly-owned subsidiaries Monarch Pharmaceuticals, Inc.; King
Pharmaceuticals Research and Development, 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 consolidating
financial data provides information regarding the financial position, results of
operations and cash flows of the Guarantor Subsidiaries (condensed consolidating
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.
12
14
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 2001 DECEMBER 31, 2000
------------------------------------------------------ -------------------------
GUARANTOR ELIMINATING KING GUARANTOR
KING SUBSIDIARIES ENTRIES CONSOLIDATED KING SUBSIDIARIES
---------- ------------ ----------- ------------ ---------- ------------
ASSETS
Current assets:
Cash and cash
equivalents........ $ 171,346 $ (2,258) $ -- $ 169,088 $ 82,316 $ (5,921)
Accounts receivable,
net................ 8,591 110,352 (2,562) 116,381 7,027 115,034
Inventories.......... 9,282 71,308 -- 80,590 3,856 61,233
Deferred income
taxes.............. 23,939 2,794 -- 26,733 23,939 2,794
Prepaid expenses and
other current
assets............. 4,894 1,776 -- 6,670 39,637 (11,313)
---------- --------- --------- ---------- ---------- ---------
Total current
assets....... 218,052 183,972 (2,562) 399,462 156,775 161,827
---------- --------- --------- ---------- ---------- ---------
Property, plant, and
equipment, net....... 32,611 99,784 -- 132,395 28,831 99,690
Intangible assets,
net.................. 412,686 367,743 -- 780,429 418,895 371,429
Investment in
subsidiaries......... 987,880 -- (987,880) -- 911,602 --
Other assets........... 22,465 22,689 -- 45,154 24,940 21,367
---------- --------- --------- ---------- ---------- ---------
Total assets... $1,673,694 $ 674,188 $(990,442) $1,357,440 $1,541,043 $ 654,313
========== ========= ========= ========== ========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..... $ 1,932 $ 15,589 $ (2,562) $ 14,959 $ 2,080 $ 24,289
Accrued expenses..... 7,018 81,935 -- 88,953 13,048 65,497
Income taxes
payable............ 9,662 15,566 -- 25,228 -- --
Current portion of
long-term debt..... 1,495 29 -- 1,524 1,498 29
---------- --------- --------- ---------- ---------- ---------
Total current
liabilities... 20,107 113,119 (2,562) 130,664 16,626 89,815
---------- --------- --------- ---------- ---------- ---------
Long-term debt......... 98,887 6 -- 98,893 98,992 13
Deferred income
taxes................ 14,592 2,397 -- 16,989 14,592 2,397
Other liabilities...... 69,192 1,872 -- 71,064 71,714 1,872
Intercompany
(receivable)
payable.............. 431,086 (431,086) -- -- 351,386 (351,386)
---------- --------- --------- ---------- ---------- ---------
Total
liabilities... 633,864 (313,692) (2,562) 317,610 553,310 (257,289)
---------- --------- --------- ---------- ---------- ---------
Shareholders' equity... 1,039,830 987,880 (987,880) 1,039,830 987,733 911,602
---------- --------- --------- ---------- ---------- ---------
Total
liabilities
and
shareholders'
equity....... $1,673,694 $ 674,188 $(990,442) $1,357,440 $1,541,043 $ 654,313
========== ========= ========= ========== ========== =========
DECEMBER 31, 2000
--------------------------
ELIMINATING KING
ENTRIES CONSOLIDATED
----------- ------------
ASSETS
Current assets:
Cash and cash
equivalents........ $ -- $ 76,395
Accounts receivable,
net................ (1,359) 120,702
Inventories.......... -- 65,089
Deferred income
taxes.............. -- 26,733
Prepaid expenses and
other current
assets............. -- 28,324
--------- ----------
Total current
assets....... (1,359) 317,243
--------- ----------
Property, plant, and
equipment, net....... -- 128,521
Intangible assets,
net.................. -- 790,324
Investment in
subsidiaries......... (911,602) --
Other assets........... -- 46,307
--------- ----------
Total assets... $(912,961) $1,282,395
========= ==========
LIABILITIES AND SHAREHO
Current liabilities:
Accounts payable..... $ (1,359) $ 25,010
Accrued expenses..... -- 78,545
Income taxes
payable............ -- --
Current portion of
long-term debt..... -- 1,527
--------- ----------
Total current
liabilities... (1,359) 105,082
--------- ----------
Long-term debt......... -- 99,005
Deferred income
taxes................ -- 16,989
Other liabilities...... -- 73,586
Intercompany
(receivable)
payable.............. -- --
--------- ----------
Total
liabilities... (1,359) 294,662
--------- ----------
Shareholders' equity... (911,602) 987,733
--------- ----------
Total
liabilities
and
shareholders'
equity....... $(912,961) $1,282,395
========= ==========
13
15
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GUARANTOR SUBSIDIARIES
CONSOLIDATING STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2001
-------------------------------------------------------
GUARANTOR ELIMINATING KING
KING SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ----------- ------------
Revenues:
Net sales.......... $ 5,307 $168,767 $ (4,174) $169,900
Royalty revenue.... -- 11,417 -- 11,417
-------- -------- -------- --------
Total
revenues... 5,307 180,184 (4,174) 181,317
-------- -------- -------- --------
Operating costs and
expenses:
Costs of
revenues......... 4,650 36,940 (4,174) 37,416
Selling, general
and
administrative... 1,513 53,746 -- 55,259
Depreciation and
amortization..... 5,309 6,066 -- 11,375
Research and
development...... 198 3,817 -- 4,015
Merger,
restructuring and
other
nonrecurring
charges.......... -- -- -- --
-------- -------- -------- --------
Total
operating
costs and
expenses... 11,670 100,569 (4,174) 108,065
-------- -------- -------- --------
Operating income... (6,363) 79,615 -- 73,252
-------- -------- -------- --------
Other income
(expense):
Interest income.... 2,021 488 -- 2,509
Interest expense... (3,029) 162 -- (2,867)
Other, net......... (1,445) (126) -- (1,571)
Equity in earnings
of
subsidiaries..... 76,278 -- (76,278) --
Intercompany
interest
(expense)........ 2,912 (2,912) -- --
-------- -------- -------- --------
Total other
income
(expense).. 76,737 (2,388) (76,278) (1,929)
-------- -------- -------- --------
Income before income
taxes and
cumulative effect
of change in
accounting
principle.......... 70,374 77,227 (76,278) 71,323
-------- -------- -------- --------
Income tax (expense)
benefit............ (25,655) (949) -- (26,604)
-------- -------- -------- --------
Income before
cumulative effect
of change in
accounting
principle.......... 44,719 76,278 (76,278) 44,719
Cumulative effect of
change in
accounting
principle.......... (545) -- -- (545)
-------- -------- -------- --------
Net income... $ 44,174 $ 76,278 $(76,278) $ 44,174
======== ======== ======== ========
THREE MONTHS ENDED MARCH 31, 2000
-------------------------------------------------------
GUARANTOR ELIMINATING KING
KING SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ----------- ------------
Revenues:
Net sales.......... $ 3,535 $120,292 $ (1,374) $122,453
Royalty revenue.... -- 12,742 -- 12,742
-------- -------- -------- --------
Total
revenues... 3,535 133,034 (1,374) 135,195
-------- -------- -------- --------
Operating costs and
expenses:
Costs of
revenues......... 3,160 28,589 (1,374) 30,375
Selling, general
and
administrative... 3,356 29,842 -- 33,198
Depreciation and
amortization..... 5,234 4,043 -- 9,277
Research and
development...... 260 3,405 -- 3,665
Merger,
restructuring and
other
nonrecurring
charges.......... 6,225 14,564 -- 20,789
-------- -------- -------- --------
Total
operating
costs and
expenses... 18,235 80,443 (1,374) 97,304
-------- -------- -------- --------
Operating income... (14,700) 52,591 -- 37,891
-------- -------- -------- --------
Other income
(expense):
Interest income.... 206 3,815 -- 4,021
Interest expense... (14,031) (1) -- (14,032)
Other, net......... (92) (34) -- (126)
Equity in earnings
of
subsidiaries..... 29,192 -- (29,192) --
Intercompany
interest
(expense)........ 1,102 (1,102) -- --
-------- -------- -------- --------
Total other
income
(expense).. 16,377 2,678 (29,192) (10,137)
-------- -------- -------- --------
Income before income
taxes and
cumulative effect
of change in
accounting
principle.......... 1,677 55,269 (29,192) 27,754
-------- -------- -------- --------
Income tax (expense)
benefit............ 8,119 (26,077) -- (17,958)
-------- -------- -------- --------
Income before
cumulative effect
of change in
accounting
principle.......... 9,796 29,192 (29,192) 9,796
Cumulative effect of
change in
accounting
principle.......... -- -- -- --
-------- -------- -------- --------
Net income... $ 9,796 $ 29,192 $(29,192) $ 9,796
======== ======== ======== ========
14
16
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GUARANTOR SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001
----------------------------------------------------
GUARANTOR ELIMINATING KING
KING SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ----------- ------------
Net cash flows (used in)
provided by operating
activities.................... $ 5,211 $ 90,556 $ -- $ 95,767
-------- -------- -------- --------
Cash flows from investing
activities:
Purchase of investment
securities.................. -- -- -- --
Proceeds from maturity and
sale of investment
securities.................. -- -- -- --
Loans receivable.............. -- (5,000) -- (5,000)
Purchases of property, plant
and equipment............... (4,246) (2,795) -- (7,041)
Proceeds from sale of product
rights...................... 3,332 -- -- 3,332
Proceeds from sale of
assets...................... -- 43 -- 43
-------- -------- -------- --------
Net cash (used in)
provided by investing
activities............ (914) (7,752) -- (8,666)
-------- -------- -------- --------
Cash flows from financing
activities:
Proceeds from revolving credit
facility.................... -- -- -- --
Payments on revolving credit
facility.................... -- -- -- --
Proceeds from issuance of
common shares and exercise
of stock options, net....... 5,741 -- -- 5,741
Payments of cash
dividends-Jones............. -- -- -- --
Payment of senior subordinated
debt........................ -- -- -- --
Payments on other long-term
debt........................ (108) (7) -- (115)
Other......................... (34) -- -- (34)
Intercompany.................. 79,134 (79,134) -- --
-------- -------- -------- --------
Net cash provided by
(used in) financing
activities............ 84,733 (79,141) -- 5,592
-------- -------- -------- --------
Increase (decrease) in cash and
cash equivalents.............. 89,030 3,663 -- 92,693
Cash and cash equivalents,
beginning of period........... 82,316 (5,921) -- 76,395
-------- -------- -------- --------
Cash and cash equivalents, end
of period..................... $171,346 $ (2,258) $ -- $169,088
======== ======== ======== ========
THREE MONTHS ENDED MARCH 31, 2000
----------------------------------------------------
GUARANTOR ELIMINATING KING
KING SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ----------- ------------
Net cash flows (used in)
provided by operating
activities.................... $(22,455) $ 56,523 $ -- $ 34,068
-------- -------- -------- --------
Cash flows from investing
activities:
Purchase of investment
securities.................. -- (9,857) -- (9,857)
Proceeds from maturity and
sale of investment
securities.................. -- 85,424 -- 85,424
Loans receivable.............. -- -- -- --
Purchases of property, plant
and equipment............... (394) (4,756) -- (5,150)
Proceeds from sale of product
rights...................... -- -- -- --
Proceeds from sale of
assets...................... 290 (15) -- 275
-------- -------- -------- --------
Net cash (used in)
provided by investing
activities............ (104) 70,796 -- 70,692
-------- -------- -------- --------
Cash flows from financing
activities:
Proceeds from revolving credit
facility.................... 9,000 -- -- 9,000
Payments on revolving credit
facility.................... (54,000) -- -- (54,000)
Proceeds from issuance of
common shares and exercise
of stock options, net....... 2,911 2,178 -- 5,089
Payments of cash
dividends-Jones............. -- (1,309) -- (1,309)
Payment of senior subordinated
debt........................ (26,497) -- -- (26,497)
Payments on other long-term
debt........................ (128) (5) -- (133)
Other......................... -- -- -- --
Intercompany.................. 90,274 (90,274) -- --
-------- -------- -------- --------
Net cash provided by
(used in) financing
activities............ 21,560 (89,410) -- (67,850)
-------- -------- -------- --------
Increase (decrease) in cash and
cash equivalents.............. (999) 37,909 -- 36,910
Cash and cash equivalents,
beginning of period........... 11,683 120,040 -- 131,723
-------- -------- -------- --------
Cash and cash equivalents, end
of period..................... $ 10,684 $157,949 $ -- $168,633
======== ======== ======== ========
15
17
PART I -- FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion contains certain forward-looking statements that
reflect management's current views of future events and operations. This
discussion should be read in conjunction with the following: (a) "Risk Factors"
and other sections of our Annual Report on Form 10-K for the year ended December
31, 2000, which are supplemented by the discussion which follows; (b) our
audited consolidated financial statements which are included in our Annual
Report on Form 10-K for the year ended December 31, 2000; and (c) our unaudited
consolidated financial statements and related notes thereto included in this
report.
OVERVIEW
General
The following summarizes net revenues by operating segment (in thousands).
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
2001 2000
-------- --------
Branded pharmaceuticals..................................... $161,228 $113,830
Licensed products........................................... 11,417 12,742
Contract manufacturing...................................... 8,148 8,284
Other....................................................... 524 339
-------- --------
Total............................................. $181,317 $135,195
======== ========
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
Revenues
Net revenues increased $46.1 million, or 34.1%, to $181.3 million in 2001
from $135.2 million in 2000, due primarily to the acquisition and growth of
branded pharmaceutical products.
Net sales from branded pharmaceutical products increased $47.4 million, or
41.6%, to $161.2 million in 2001 from $113.8 million in 2000. This increase was
due primarily to growth in net sales of Altace(R) and Levoxyl(R) and net sales
attributable to Nordette(R) and Bicillin(R) which were acquired from American
Home Products in July 2000. While we expect continued growth in net sales of our
branded pharmaceuticals in the future, we refer you to the "Risk Factors" that
appear in our Annual Report on Form 10-K for the year ended December 31, 2000,
particularly those related to Altace(R), Levoxyl(R), and Thrombin-JMI(R), that
could cause results to differ.
Revenues from licensed products decreased $1.3 million, or 10.4%, to $11.4
million in 2001 from $12.7 million in 2000.
Revenues from contract manufacturing and other remained relatively flat in
2001 compared to 2000.
Operating Costs and Expenses
Total operating costs and expenses increased $10.8 million, or 11.1%, to
$108.1 million in 2001 from $97.3 million in 2000. The increase was due
primarily to an increase in cost of revenues of $7.0 million in 2001 and $23.0
million in co-promotion fees and marketing expense in 2001 related to the
co-promotion agreement with American Home Products for the promotion of
Altace(R) in the United States and Puerto Rico, offset by $20.8 million of
merger, restructuring, and other nonrecurring charges related to the Medco
merger in 2000.
Cost of revenues increased $7.0 million, or 23.2% to $37.4 million in 2001
from $30.4 million in 2000. The increase resulted from cost of revenues
associated with the increase in net sales of branded pharmaceuti-
16
18
cal products described above. As a percentage of revenues, cost of revenues
decreased to 20.6% in 2001 from 22.5% in 2000 due to an increase in sales of
higher margin products.
Selling, general and administrative expenses remained relatively flat at
$32.3 million in 2001 as compared to $33.2 million in 2000. As a percentage of
revenues, selling, general, and administrative expenses decreased to 17.8% in
2001 from 24.6% in 2000 due to increased revenues and the classification of all
Altace(R) related marketing expenses as co-promotion marketing expense rather
than selling, general and administrative during the three months ended March 31,
2001.
During the three months ended March 31, 2001, the Company incurred $17.5
million in co-promotion fees and $5.5 million in co-promotion marketing expense
pursuant to the June 2000 co-promotion agreement with American Home Products for
the promotion of Altace(R) in the United States and Puerto Rico.
Depreciation and amortization expense increased $2.1 million, or 22.6%, to
$11.4 million in 2001 from $9.3 million in 2000. This increase was due primarily
to additional amortization expense resulting from the acquisition of
Nordette(R), Bicillin(R), and Wycillin(R) in July 2000.
Research and development expense increased to $4.0 million in 2001 from
$3.7 million in 2000.
Operating Income
Operating income increased $35.4 million, or 93.3%, to $73.3 million in
2001 from $37.9 million in 2000. This increase was due primarily to the increase
in branded pharmaceutical sales during the three months ended March 31, 2001 as
compared to the three months ended March 31, 2000 as well as $20.8 million of
merger, restructuring, and other nonrecurring charges related to the Medco
merger in 2000.
Other Income(Expense)
Interest income decreased $1.5 million from $4.0 million in 2000 to $2.5
million in 2001 due to lower balances of invested cash and cash equivalents
during the quarter ended March 31, 2001 as compared to the quarter ended March
31, 2000.
Interest expense decreased $11.2 million, or 79.6%, to $2.9 million in 2001
from $14.0 million in 2000. This decrease is due to the reduced average debt
balance in 2001 resulting from the Company's prepayment of debt obligations
during 2000.
Other expense increased from $0.1 million in 2000 to $1.6 million in 2001
due to unrealized losses of $1.5 million incurred as a result of the
implementation of Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities".
Income Tax Expense
The effective tax rate in 2000 of 64.7% was reduced to 37.3% in 2001 due
primarily to nondeductible merger related costs in 2000.
Cumulative Effect of Change in Accounting Principle
The Company recognized the cumulative effect of a change in accounting
principle of $0.5 million, net of income taxes of $0.3 million, during the three
months ended March 31, 2001 due to the adoption of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No. 138,
which establishes accounting and reporting standards for derivative instruments
and hedging activities.
Net Income
Due to the factors set forth above, net income increased $34.4 million, or
350.9%, to $44.2 million in 2001 from $9.8 million in 2000.
17
19
LIQUIDITY AND CAPITAL RESOURCES
General
We believe that existing credit facilities and cash generated from
operations are sufficient to finance our current operations and working capital
requirements. However, in the event we make significant future acquisitions or
change our capital structure, we may be required to raise funds through
additional borrowings or the issuance of additional debt or equity securities.
At present, we are actively pursuing acquisitions that may require the use
of substantial capital resources. There are no present agreements or commitments
with respect to any such acquisition.
THREE MONTHS ENDED MARCH 31, 2001
As of March 31, 2001 we have available up to $100.0 million under a
revolving line of credit.
We generated net cash from operations of $95.8 million for the three months
ended March 31, 2001. Our net cash provided from operations was primarily the
result of $44.2 million in net income, adjusted for non-cash depreciation and
amortization of $11.4 million, a change in income taxes payable/receivable of
$45.2 million, an increase in accrued expenses of $10.4 million, and unrealized
losses on derivative instruments of $2.4 million. Additionally, we decreased
accounts receivable by $3.9 million and prepaid expenses and other current
assets by $2.2 million. An increase in inventory of $12.1 million, a decrease in
accounts payable of $9.8 million, and amortization of deferred revenue of $2.3
million offset the items previously described.
Cash flows used in investing activities was $8.7 million due to $7.0
million of capital expenditures, and $5.0 million of loans receivable offset by
$3.3 million received as proceeds from the sale of product rights.
Financing activities provided $5.6 million comprised principally of $5.7
million from the exercise of employee stock options.
Certain Indebtedness and Other Matters
As of March 31, 2001, we had $100.4 million of long-term debt (including
current portion) and we have available up to $100.0 million under our revolving
credit facility. Certain financing arrangements require us to maintain certain
minimum net worth, debt to equity, cash flow and current ratio requirements. As
of March 31, 2001, we were in compliance with these covenants.
Capital Expenditures
Capital expenditures, including capital lease obligations, were $7.0
million and $5.2 million for the three months ended March 31, 2001 and 2000,
respectively. The principal capital expenditures included property and equipment
purchases and building improvements.
IMPACT OF INFLATION
We have experienced only moderate raw material and labor price increases in
recent years. While we have passed some price increases along to our customers,
we have primarily benefited from rapid sales growth negating most inflationary
pressures.
RECENT ACCOUNTING PRONOUNCEMENTS
In the first quarter of 2001, we adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
which establishes accounting and reporting standards for derivative instruments
and hedging activities. The cumulative effect of the change in accounting
principle was $0.5 million, net of income taxes of $0.3 million. In addition,
the change in the value of the derivatives in the quarter ended March 31, 2001
of $1.5 million was included in other expense.
18
20
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements relate to
analyses and other information which are based on forecasts of future results
and estimates of amounts not yet determinable. These statements also relate to
our future prospects, developments and business strategies.
These forward-looking statements are identified by their use of terms and
phrases, such as "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "plan," "predict," "project," "will" and similar terms and
phrases, including references to assumptions. These statements are contained in
sections entitled "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" in our Annual
Report on Form 10-K for the year ended December 31, 2000 and in other sections
of this report.
Forward-looking statements include, but are not limited to:
- the future growth potential of, and prescription trends for our branded
pharmaceutical products, particularly Altace(R), Levoxyl(R) and
Thrombin-JMI(R);
- expected trends with respect to particular income and expense line items;
- the development and potential commercialization of HPV vaccines and
Estrasorb(TM) by Novavax and King;
- the development by King Pharmaceuticals Research and Development of
Binodisine, pre-clinical programs, and product life cycle development
projects;
- our continued successful execution of our growth strategies;
- anticipated developments and expansions of our business;
- increases in sales of recently acquired products or royalty payments;
- the success of existing co-promotion agreements and the development of
future co-promotion agreements;
- the high cost and uncertainty of research, clinical trials and other
development activities involving pharmaceutical products;
- development of product line extensions;
- the unpredictability of the duration or future findings and
determinations of the FDA and other regulatory agencies worldwide;
- debt service and leverage requirements;
- the products which we expect to offer;
- the intent to market and distribute certain of our products
internationally;
- the intent to manufacture certain products in our own facilities which
are currently manufactured for us by third parties;
- the intent, belief or current expectations, primarily with respect to our
future operating performance;
- expectations regarding sales growth, gross margins, manufacturing
productivity, capital expenditures and effective tax rates; and
- expectations regarding our financial condition and liquidity as well as
future cash flows and earnings.
19
21
These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different from those contemplated by our forward-looking statements. These other
factors include, but are not limited to, the following:
- changes in general economic and business conditions;
- dependence on continued acquisition of products;
- management of growth of business and integration of product acquisitions;
- changes in current pricing levels;
- development of new competitive products;
- changes in economic conditions and federal and state regulations;
- competition for acquisition of products;
- manufacturing capacity constraints; and
- the availability, terms and deployment of capital.
We do not undertake to publicly update or revise any of our forward-looking
statements even if experience or future changes show that the indicated results
or events will not be realized.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Certain of our financial instruments are subject to market risks, including
interest rate risk. Our financial instruments are not currently subject to
foreign currency risk or commodity price risk. We have no financial instruments
held for trading purposes.
As of March 31, 2001, there were no significant changes in our qualitative
or quantitative market risk since the prior reporting period.
20
22
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this Item is incorporated by reference to Note
5 to the Condensed Consolidated Financial Statements included elsewhere in this
document.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
We filed the following Current Reports on Form 8-K during the quarter ended
March 31, 2001:
(1) A Current Report on Form 8-K filed February 28, 2001 furnished
under Item 9 additional quarterly financial information (Condensed
Consolidated Statement of Operations for the quarters ended March 31, June
30, September 30 and December 31, 1999 and 2000 and the years ended
December 31, 1999 and 2000) as a result of the mergers of King and Medco
Research, Inc. on February 25, 2000 and King and Jones Pharma Incorporated
on August 31, 2000, both accounted for under the pooling of interest
method, as well as the restated amounts in the first three quarters of 2000
resulting from the adoption of Staff Accounting Bulletin 101 in the fourth
quarter of 2000.
(2) A Current Report on Form 8-K filed January 8, 2001, reported under
Item 5 the following transactions with Novavax, Inc. which were effective
January 8, 2001:
(a) King obtained an exclusive license from Novavax, Inc. to promote,
market, distribute and sell Estrasorb(TM), worldwide except in
the United States, Canada, Italy, the Netherlands, Greece,
Switzerland and Spain. King and Novavax will co-market
Estrasorb(TM) in the United States and Puerto Rico.
(b) King divested to Novavax its rights to AVC(TM) in the United
States and Puerto Rico.
(c) King entered into a Co-promotion Agreement with Novavax to market
jointly King's product Nordette(R) in the United States and
Puerto Rico.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KING PHARMACEUTICALS, INC.
Date: May 14, 2001 By: /s/ JOHN M. GREGORY
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John M. Gregory
Chairman and Chief Executive Officer
Date: May 14, 2001 By: /s/ JAMES R. LATTANZI
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James R. Lattanzi
Chief Financial Officer
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