Brian A. Markison

 

Chairman of the Board, President

and Chief Executive Officer

 

April 23, 2009

 

To the Shareholders of King Pharmaceuticals, Inc.:

 

You are cordially invited to attend the annual meeting of shareholders of King Pharmaceuticals, Inc., to be held on June 4, 2009 at 9:00 a.m. Eastern Daylight Time, at The Umstead Hotel, 100 Woodland Pond, Cary, North Carolina 27513. At the meeting, you will be asked to:

 

 

The Securities and Exchange Commission rules allow us to furnish proxy materials to our shareholders through the Internet. We are pleased to take advantage of these rules and believe that they enable us to provide our shareholders with the information that they need while lowering the cost of delivery and reducing the environmental impact of our annual meeting.

 

In connection with the meeting, we have mailed you a Notice of Availability of Proxy Materials, which provides instructions on how to obtain a proxy statement and a form of proxy through the Internet or, if you wish, in printed form.

 

Your vote is very important. Whether or not you plan to attend the meeting, please promptly vote using the available Internet or telephone voting systems or, if you have obtained a printed proxy card, by completing, signing, dating and returning your proxy card by mail. Instructions for using these alternatives are enclosed. I urge you to vote as soon as possible.

 

Detailed information relating to King’s activities and operating performance during 2008 is contained in our annual report. The annual report is available for viewing at the website indicated on the Notice of Availability of Proxy Materials, but it is not a part of the proxy soliciting material. If you would like to obtain a printed copy of the annual report, please see the instructions contained on the Notice of Availability of Proxy Materials.

 

Very truly yours,

 

Brian A. Markison

Chairman of the Board,

President and Chief Executive Officer

 

TABLE OF CONTENTS

 

KING PHARMACEUTICALS, INC.

501 Fifth Street

Bristol, Tennessee 37620

 

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

To Be Held June 4, 2009

 

 

The annual meeting of shareholders of King Pharmaceuticals, Inc. will be held on Thursday, June 4, 2009 at 9:00 a.m., Eastern Daylight Time, at The Umstead Hotel, 100 Woodland Pond, Cary, North Carolina 27513, for the following purposes:

 

 

Only those shareholders of record at the close of business on March 30, 2009 are entitled to notice of, and to vote at, the annual meeting and any adjournment thereof. On that day, 247,813,828 shares of common stock were outstanding. Each share entitles the holder to one vote.

 

BY ORDER OF THE BOARD OF DIRECTORS

 

James W. Elrod

Chief Legal Officer and Secretary

 

April 23, 2009

 

 

 

 

 

KING PHARMACEUTICALS, INC.

501 Fifth Street

Bristol, Tennessee 37620

 

 

PROXY STATEMENT

For 2009 Annual Meeting of Shareholders

 

 

The Board of Directors of King Pharmaceuticals, Inc. (“King” or “the company”) requests that you allow your common stock to be represented at the 2009 annual meeting of shareholders by the proxies named on the enclosed proxy card. The Notice of Availability of Proxy Materials was sent to you in connection with this request and was mailed to all shareholders beginning on or about April 23, 2009.

 

Why did you provide me this proxy statement?

 

We have made these proxy materials available to you through the Internet, or, upon your request, have delivered printed versions of these materials to you by mail. We are furnishing this proxy statement in connection with the solicitation by our Board of Directors of proxies to be voted at the 2009 annual meeting of shareholders. This proxy statement, along with the accompanying Notice of Annual Meeting of Shareholders, describes the purposes of the meeting and the information you need to know to vote at the meeting.

 

When is the annual meeting?

 

The meeting will be held on Thursday, June 4, 2009 at 9:00 a.m. Eastern Daylight Time.

 

Where will the annual meeting be held?

 

The meeting will be held at The Umstead Hotel, 100 Woodland Pond, Cary, North Carolina 27513.

 

What items will be voted on at the meeting?

 

You will be voting on the following matters:

 

 

Who can vote?

 

You are entitled to vote your common stock if our records show that you held your shares as of the close of business on the record date, March 30, 2009. Each shareholder is entitled to one vote for each share of common stock held on that date. On the record date, there were 247,813,828 shares of common stock outstanding and entitled to vote.

 

How do I vote by proxy?

 

You may choose one of the following ways to vote by proxy:

 

Vote by Internet:  You may vote using the Internet site listed on the Notice of Availability of Proxy Materials. This site will give you the opportunity to make your selections and confirm that your voting instructions have been followed. Internet voting procedures authenticate your identity by use of a unique control number found on the Notice. To vote through the Internet, you must subscribe to one of the various commercial services that offer access to the Internet. Costs normally associated with electronic access, such as usage and telephone charges, will be borne by you. King does not charge any separate fees for access to the Internet voting web site.

 

Vote by Telephone:  Registered and most beneficial shareholders can also vote by telephone (toll-free for calls originating in the United States). To do so, you must obtain the voting telephone number by either visiting the Internet site listed on the Notice of Availability Proxy Materials or by requesting printed proxy materials. Instructions for obtaining printed materials appear on the Notice of Availability of Proxy Materials. You may then vote by calling the voting telephone number, entering your unique control number (listed on your Notice of Availability Proxy Materials) and following the simple recorded instructions. Note that requests for printed proxy materials must be received by May 21, 2009.

 

Vote by Mail:  If you choose to vote by mail, you must request printed proxy materials. Instructions for obtaining these materials appear on the Notice of Availability of Proxy Materials. Once you receive your proxy card, simply mark it and then sign, date and return it in the envelope provided. Note that requests for printed proxy materials must be received by May 21, 2009.

 

If you hold your shares beneficially in street name through a nominee (such as a bank or broker), you may be able to vote by telephone or the Internet as well as by mail. You should follow the instructions you receive from your nominee to vote these shares.

 

How long do I have to vote?

 

If you choose to cast your vote using the Internet or by telephone, you must do so by 11:59 p.m., Eastern Daylight Time, on Wednesday, June 3, 2009, the day before the annual meeting. Votes submitted by mail must be received prior to the annual meeting. If you hold your shares beneficially in street name through a nominee, you should follow the instructions you receive from your nominee.

 

What are my voting options?

 

For the election of directors, you may vote for (1) all of the nominees, (2) none of the nominees, or (3) all of the nominees except those you designate. For the other proposals, you may vote “For” or “Against” or you may “Abstain” from voting.

 

What are the Board’s recommendations?

 

The Board recommends that you vote:

 

 

If you return a signed proxy card but do not specify how you want to vote your shares, we will vote them according to the recommendations of the Board described above.

 

If any matters other than those set forth above are properly brought before the annual meeting, the individuals named on your proxy card may vote your shares in accordance with the recommendations of management.

 

How do I change or revoke my proxy?

 

You can change or revoke your proxy at any time before it is voted at the annual meeting by:

 

 

If you choose to change or revoke your vote via the Internet or by telephone, you must do so by 11:59 p.m., Eastern Daylight Time, on Wednesday, June 3, 2009, the day before the annual meeting. Changes or revocations submitted by mail must be received prior to the annual meeting.

 

Will my shares be voted if I do not vote by proxy?

 

If your shares are registered in your name or if you have stock certificates, they will not be voted if you do not vote at the meeting in person or as described above under “How do I vote by proxy?”

 

If your shares are held in “street name” through a nominee (such as a bank or broker) and you do not provide voting instructions to the nominee that holds your shares, the nominee has the discretionary authority to vote your unvoted shares on certain matters. A “broker non-vote” arises when a broker, financial institution or other holder of record that holds shares in street name does not receive instructions from a beneficial owner and does not have the discretionary authority to vote on a particular item. Under current New York Stock Exchange rules, brokers have discretionary authority to vote on the proposal regarding the election of directors and the proposal regarding the ratification of the appointment of our independent registered public accounting firm. Brokers do not have discretionary authority to vote on the non-binding shareholder proposal requesting the adoption of a majority voting standard in the election of directors.

 

We encourage you to provide voting instructions to your nominee. Doing so will ensure that your shares will be voted in the manner you desire.

 

Who will count the votes?

 

A representative from Broadridge Financial Solutions, Inc. will count the votes and serve as our inspector of election. The inspector of election will be present at the meeting.

 

How many votes are required?

 

If a quorum is present at the annual meeting:

 

 

What constitutes a “quorum” for the meeting?

 

A majority of the outstanding shares of common stock, present or represented by proxy, constitutes a quorum. A quorum is necessary to conduct business at the annual meeting. You are part of the quorum if you have voted by proxy.

Abstentions, broker non-votes and votes withheld from director nominees count as “shares present” at the meeting for purposes of determining a quorum. Abstentions and broker non-votes do not count in the voting results and have no effect on the result of the vote on the proposal to elect directors, the proposal to ratify the appointment of the independent registered public accounting firm or the non-binding shareholder proposal requesting the adoption of a majority voting standard in the election of directors, so long as a quorum is present.

 

Who pays for the solicitation of proxies?

 

We will pay the cost of preparing, printing and mailing material in connection with this solicitation of proxies. In addition to solicitation by mail, regular employees of King and paid solicitors may make solicitations personally and by telephone or otherwise. We will, upon request, reimburse brokerage firms, banks and others for their reasonable out-of-pocket expenses in forwarding proxy materials to beneficial owners of stock or otherwise in connection with this solicitation of proxies. We have retained Georgeson Inc. to assist in the solicitation for a fee of approximately $8,000 plus reasonable out-of-pocket expenses.

 

When are 2010 shareholder proposals due?

 

Proposals by shareholders to be considered for inclusion in the materials related to solicitation of proxies by the Board of Directors for the annual meeting in 2010 must be received by our Assistant Secretary, William L. Phillips III, at 501 Fifth Street, Bristol, Tennessee 37620, no later than 120 days prior to the date that is one year from the date on which the Notice of Availability of Proxy Materials was first mailed to shareholders, April 23, 2009. The use of certified mail, return receipt requested, is advised. To be eligible for inclusion, a proposal must also comply with Rule 14a-8 and all other applicable provisions of Regulation 14A under the Securities Exchange Act of 1934, as amended.

 

Shareholder proposals not submitted for inclusion in the Board of Directors’ proxy statement but which are received not less than sixty nor more than ninety days prior to the date of the 2010 annual meeting may be eligible to be presented at the meeting. If less than seventy days’ notice or public disclosure of the date of the 2010 annual meeting is given or made to shareholders, notice of a shareholder proposal, to be timely, must be received by the Assistant Secretary not later than the close of business on the tenth day following the date on which notice of the date of the 2010 annual meeting is mailed or public disclosure of the date is made. Shareholder proposals which are received outside of these required periods will be considered untimely. The Chairman may exclude an untimely proposal from consideration or, if the proposal is considered, any proxy given pursuant to the Board’s solicitation of proxies will be voted in accordance with the recommendation of management.

 

We are committed to effective corporate governance and believe it is important to our long-term performance and ability to create value for our shareholders. Our Board of Directors has adopted Corporate Governance Guidelines which are available at www.kingpharm.com by first choosing “Investors” and then “Governance,” and they are also available to any shareholder who requests a copy from our Assistant Secretary, William L. Phillips III, 501 Fifth Street, Bristol, Tennessee 37620.

 

 

R. Charles Moyer, Ph.D., age 63, has served as a director since December 2000. Dr. Moyer presently serves as Dean of the College of Business at the University of Louisville. He is Dean Emeritus of the Babcock Graduate School of Management at Wake Forest University, having served as Dean from 1996 until his retirement from this position in August 2003, and as a professor from 1988 until 2005. Dr. Moyer held the GMAC Insurance Chair of Finance at Wake Forest University. Prior to joining the faculty at Wake Forest in 1988, Dr. Moyer was Finance Department Chairman at Texas Tech University. Dr. Moyer earned his Doctorate in Finance and Managerial Economics from the University of Pittsburgh in 1971, his Master of Business Administration degree from the University of Pittsburgh in 1968 and his Bachelor of Arts degree in Economics from Howard University in 1967.

 

D. Greg Rooker, age 61, has served as a director since October 1997. Mr. Rooker is the former owner and President of Family Community Newspapers of Southwest Virginia, Inc., Wytheville, Virginia, which consisted of six community newspapers and a national monthly motor sports magazine. He retired from this position in 2000. He is a co-founder of The Jason Foundation and Brain Injury Services of SWVA, Inc., each a non-profit organization providing services to brain injury survivors. Mr. Rooker serves as Secretary/Treasurer of The Jason Foundation and as a member of the Board of Directors of Brain Injury Services of SWVA, Inc. Mr. Rooker graduated from Northwestern University with a degree in Journalism in 1969.

 

Ted G. Wood, age 71, has served as a director since August 2003 and as Lead Independent Director since May 2007. Mr. Wood was the Non-Executive Chairman from May 2004 until May 2007. He is retired from The United Company in Bristol, Virginia, where he served as Vice Chairman from January 2003 until August 2003. He previously served as President of the United Operating Companies from 1998 to 2002. Mr. Wood was previously a director of King from April 1997 to May 2000. From 1992 to 1993, he was President of Boehringer Mannheim Pharmaceutical Corporation in Rockville, Maryland. From 1993 to 1994, he was President of KV Pharmaceutical Company in St. Louis, Missouri. From 1975 to 1991, he was employed by SmithKline Beecham Corporation where he served as President of Beecham Laboratories from 1988 to 1989 and Executive Vice President of SmithKline from 1990 to 1991. Mr. Wood is also a member of the board of directors of Alpha Natural Resources, Inc., a publicly-held corporation. He graduated from the University of Kentucky with a Bachelor of Science degree in Commerce in 1960. In 1986 he completed the Advanced Management Program at Harvard University.

 

Earnest W. Deavenport, Jr., age 71, has served as a director since May 2000. In 2002, he retired as Chairman of the Board and Chief Executive Officer of Eastman Chemical Company, Kingsport, Tennessee, where he was employed in various capacities since 1960. He was Chairman of the National Association of Manufacturers in 1998 and is currently a member of the National Academy of Engineering. Mr. Deavenport is also a member of the boards of directors of Zep, Inc. and Regions Financial Corporation, each a publicly-held company. Mr. Deavenport graduated from the Massachusetts Institute of Technology with a Master of Science degree in Management in 1985 and from Mississippi State University with a Bachelor of Science degree in Chemical Engineering in 1960.

 

Elizabeth M. Greetham, age 59, has served as a director since November 2003. She retired as the Chief Executive Officer and President of ACCL Financial Consultants Ltd. in December 2007. From 1998 until 2004 she was a director of DrugAbuse Sciences, Inc. and served as its Chief Executive Officer from August 2000 until 2004 and as Chief Financial Officer and Senior Vice President, Business Development from April 1999 to August 2000. Prior to joining DrugAbuse Sciences, Inc., Ms. Greetham was a portfolio manager with Weiss, Peck & Greer, an institutional investment management firm, where she managed the WPG Life Sciences Funds, L.P., which invests in select biotechnology stocks. She was previously a consultant to F. Eberstadt & Co. In total, Ms. Greetham has over 25 years of experience as a portfolio manager and health care analyst in the United States and Europe. Ms. Greetham earned a Master of Arts (Honours) degree in Economics from the University of Edinburgh, Scotland in 1971.

 

Philip A. Incarnati, age 55, has served as a director since November 2006. He has served as President and Chief Executive Officer of McLaren Health Care Corporation, an integrated health care system, since 1989. Before joining McLaren, Mr. Incarnati held top-level executive positions with the Wayne State University School of Medicine, Detroit Receiving Hospital and University Health Center, and Horizon Health System. Mr. Incarnati also serves on the board of Medical Staffing Network, Inc., a publicly-traded company, and on the boards of two privately-held companies, PHNS, Inc. and Reliant Renal Care Inc. Mr. Incarnati earned both a Bachelor’s Degree and a Master’s Degree in management and finance from Eastern Michigan University (EMU). He has been a member of the EMU Board of Regents since 1992, when he was appointed by then-Michigan Governor John Engler, serving as its Chairman from 1995 until 2005.

 

Gregory D. Jordan, Ph.D., age 57, has served as a director since June 2001. He has served as President of King College in Bristol, Tennessee since 1997, having joined the King College faculty in 1980. He received his Bachelor of Arts degree from Belhaven College in 1973; his Master of Arts and Divinity degrees from Trinity Evangelical Divinity School in 1976 and 1977, respectively; his Doctorate in Hebraic and Cognate Studies from Hebrew Union College Jewish Institute of

Religion in 1987; and his Master of Business Administration degree from the Babcock Graduate School of Management at Wake Forest University in 2004.

 

Brian A. Markison, age 49, was elected as Chairman of the Board in May 2007. He has served as President and Chief Executive Officer and a director since July 2004. He joined King as Chief Operating Officer and served in that position from March 2004 until July 2004. Previously, Mr. Markison held various positions with Bristol-Myers Squibb beginning in 1982, most recently as President of Bristol-Myers Squibb’s Oncology, Virology and Oncology Therapeutics Network businesses. Between 1998 and 2001, he served variously as Senior Vice President, Neuroscience/Infectious Disease; President, Neuroscience/Infectious Disease/Dermatology; and Vice President, Operational Excellence and Productivity. He also held various sales and marketing positions. Mr. Markison is a member of the Board of Directors of Immunomedics, Inc., a publicly-held corporation. He graduated from Iona College in 1982 with a Bachelor of Science degree.

 

Pursuant to Tennessee law, our business, property and affairs are managed under the direction of our Board of Directors. The Board has responsibility for establishing broad corporate policies and for the overall performance and direction of King Pharmaceuticals, Inc., but is not involved in day-to-day operations. Members of the Board keep informed of our business by participating in Board and committee meetings, by reviewing analyses and reports sent to them regularly, and through discussions with our executive officers and independent registered public accounting firm.

 

We currently have eight directors, divided into three groups: Class I directors, Class II directors and Class III directors. Formerly, each class of directors was elected to serve until the third annual meeting of shareholders following its election. At the 2007 annual meeting of shareholders, King’s shareholders approved an amendment to our charter to provide for the annual election of directors, commencing with the Class I directors whose terms expired in 2008. This change means that the Class I and Class II directors who are elected at the 2009 annual meeting will serve until the 2010 annual meeting of shareholders or until their successors are duly elected and qualified, unless they earlier resign or are removed. Class III directors are expected to complete their original three-year terms, which expire as of the 2010 annual meeting of shareholders. As of the annual meeting in 2010, all directors will stand for election annually.

 

The Board has determined that the following directors are independent from the company under the independence standards of the New York Stock Exchange: Earnest W. Deavenport, Jr., Elizabeth M. Greetham, Philip A. Incarnati, Gregory D. Jordan, R. Charles Moyer, D. Greg Rooker and Ted G. Wood.

 

In 2008, the Board met twenty-three times. All directors attended at least 75% of the aggregate of all of the Board meetings and meetings held by committees of which they were members.

 

The Board has appointed an Audit Committee, a Compensation and Human Resources Committee and a Nominating and Corporate Governance Committee, each member of which has been determined by our Board of Directors to be independent of King pursuant to the listing standards of the New York Stock Exchange (“NYSE”). Each of these committees operates pursuant to a written charter adopted by our Board of Directors. Each charter is available through our website, www.kingpharm.com, by first choosing “Investors” and then “Governance,” and each is also available to any shareholder who requests a copy from our Assistant Secretary, William L. Phillips III, 501 Fifth Street, Bristol, Tennessee 37620. The Board has also formed a Risk Committee composed of all directors.

 

The Audit Committee currently consists of R. Charles Moyer (Chair), Elizabeth M. Greetham, Philip A. Incarnati and D. Greg Rooker. The Audit Committee has the authority and responsibility, among other obligations, to select, retain, compensate, terminate and oversee the work of our independent registered public accounting firm; to assess the qualifications and independence of our independent registered public accounting firm; to pre-approve auditing, audit-related and permitted non-

auditing services rendered by our independent registered public accounting firm; to discuss with the independent registered public accounting firm the results of the annual audit and quarterly reviews of financial statements; to review and evaluate management’s conduct of King’s financial reporting processes (including the development and maintenance of systems of internal accounting and financial control); to oversee King’s compliance with certain legal and regulatory requirements; to oversee the performance of King’s internal audit function, which is a responsibility of the Compliance Office; to monitor compliance with King’s investment policy; and to make reports to the Board periodically with respect to its work. The Board of Directors has determined that each member of the Audit Committee meets the independence, experience and other qualification requirements of the NYSE and the Securities and Exchange Commission (“SEC”) and that Dr. Moyer and Ms. Greetham, each of whom serves on the Audit Committee, are “audit committee financial experts,” as defined by the rules of the Securities and Exchange Commission. None of the Committee’s members serves on more than three public company audit committees. The Audit Committee met seven times during 2008. For additional information regarding the Audit Committee, please see the Report of the Audit Committee of the Board of Directors that begins on page 10.

 

The Compensation and Human Resources Committee, which currently consists of Earnest W. Deavenport, Jr. (Chair), Gregory D. Jordan and Ted G. Wood, has the authority and responsibility, among other obligations, to establish and periodically review a general compensation philosophy for the executive officers; to annually review and approve the corporate goals and objectives upon which the compensation of the chief executive officer (“CEO”) is based, evaluate the CEO’s performance in light of these goals and objectives and determine the CEO’s compensation; to review and approve the recommendations of the CEO with regard to the compensation and benefits of the executive officers; in conjunction with the Nominating and Corporate Governance Committee, to review annually and make recommendations to the Board with respect to the compensation (including any equity-based compensation) of non-employee directors; to oversee the talent management process, including an annual review of plans for executive officer succession; and to oversee regulatory compliance with respect to compensation matters. In 2008, the Committee was advised with respect to executive compensation matters by an independent outside consultant, James F. Reda & Associates, LLC, retained by the Committee. The Compensation and Human Resources Committee met seven times during 2008. For additional information regarding the Compensation and Human Resources Committee and compensation matters generally, please see the Compensation Discussion and Analysis and related information that begins on page 13.

 

The Nominating and Corporate Governance Committee currently consists of Gregory D. Jordan (Chair), Earnest W. Deavenport, Jr. and R. Charles Moyer. The Nominating and Corporate Governance Committee has the authority and responsibility, among other obligations, to locate, evaluate and recommend to the Board persons to be nominated for election or appointment as a director; to recommend to the Board a chair and members for each of the Board’s committees; to assist the Board and its Committees in the development and implementation of performance evaluation processes; to review annually our Corporate Governance Guidelines and recommend to the Board any changes that the Committee determines to be necessary or desirable; to assist the Board with the orientation of new directors and continuing education for existing directors; in conjunction with the Compensation and Human Resources Committee, to annually review and make recommendations to the Board with respect to the compensation (including equity-based compensation) of non-employee directors; and to examine annually the independence from King of each non-employee director and deliver to the Board the results of its review. The Nominating and Corporate Governance Committee met four times during 2008.

 

The Nominating and Corporate Governance Committee may consider, in evaluating potential director nominees, any of the following factors, or other factors, which it determines to be relevant:

 

 

If reviewing the qualifications of an incumbent director, the Committee also considers the past performance of the incumbent director.

 

Shareholders may recommend candidates to the Committee by submitting a written recommendation to the Chief Legal Officer, 501 Fifth Street, Bristol, Tennessee 37620. The Chief Legal Officer will direct all such correspondence to the Committee.

 

In order for a written shareholder recommendation to be evaluated by the Committee, it must include all information about the candidate that is required to be disclosed in a solicitation of proxies for election of directors pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. The written recommendation must also be accompanied by the candidate’s written consent to be named in a proxy statement as a nominee, if recommended by the Committee and nominated by the Board, and to serve as a director if appointed or elected. Additional information about the candidate may be requested by the Committee from time to time, either from the recommended person or from the recommending shareholder.

 

The shareholder must also disclose, with the written recommendation, the number of shares of King’s common stock beneficially owned by the shareholder, the percentage of all outstanding common stock which the shares represent and the period of time the shareholder has beneficially owned the shares. If the shareholder is part of a group of shareholders that is making the recommendation, the shareholder must also disclose the names of the other members of the group and, for each member of the group, the number of shares of King’s common stock beneficially owned by the member, the percentage of all outstanding common stock which the shares represent and the period of time the member has beneficially owned the shares.

 

Once the Committee has received all required or requested information regarding a particular shareholder-recommended candidate, the Committee will evaluate that candidate according to its established evaluation practices and, based on the results of that evaluation, will determine whether to recommend the candidate to the Board for nomination for election or appointment as a director.

 

The procedure described above does not preclude a shareholder of record from making nominations of directors to be considered at an annual meeting, provided such nominations are in accordance with King’s bylaws as then in effect.

 

From time to time, the Committee has retained and paid a consultant to assist it in the process of identifying or evaluating Board candidates. No candidates have been recommended to serve on the Board of Directors by a shareholder or group of shareholders who beneficially owned more than 5% of our common stock.

 

The Risk Committee currently consists of all directors and is chaired by Mr. Markison. This Committee is responsible for oversight of King’s risk management processes; risk assessments; risk mitigation activities; the adoption of risk tolerances; and the activities and reports of management’s Enterprise Risk Management Committee, which uses an enterprise risk management approach to the management of material risks. This approach is designed to identify, assess, mitigate and manage material risks, and supports the Board’s corporate governance goals and the efforts of management to achieve strategic objectives.

 

The Board’s non-management directors regularly meet separately from the Board as a whole. King’s Corporate Governance Guidelines provide that the Chairman of the Board, if independent of King, shall serve as presiding director at meetings of the non-management directors. If the Chairman is not an independent director, then the non-management directors annually elect one of their members to serve as Lead Independent Director. Mr. Markison, King’s President and Chief Executive Officer, was appointed as Chairman of the Board in May 2007. Mr. Wood was elected at the same time to serve as Lead Independent Director, and he was re-elected in May 2008.

 

The duties of the Lead Independent Director include: meeting regularly with the Chairman; advising the Chairman as to an appropriate schedule of Board meetings; consulting with the Chairman in establishing agendas for Board meetings and consulting with the chair of each Committee in establishing agendas for Committee meetings; facilitating communications with other members of the Board; acting as the presiding director at meetings of the non-management directors; serving as a non-voting member of each committee on which he does not serve as a regular member; serving as a point of contact for shareholders who wish to contact the Company other than through its management; directing the

provision of any materials to the Board that he or she determines to be necessary for the independent directors to effectively and responsibly perform their duties; coordinating the Board’s annual self-evaluation process; and other duties as prescribed from time to time by King’s Corporate Governance Guidelines.

 

The Board has adopted a Corporate Code of Conduct and Ethics which applies to all of our directors, officers and employees. The Code appears on our website, www.kingpharm.com and is available to any shareholder who wishes to have a copy (by request to the Assistant Secretary, William L. Phillips III, 501 Fifth Street, Bristol, Tennessee 37620). To the extent permitted by the SEC and the NYSE regulations, we intend to disclose information as to any amendments to the Code and any waivers from provisions of the Code for our principal executive officer, principal financial officer, and certain other officers by posting the information on our website.

 

Interested parties may contact the Board of Directors:

 

 

Communications should specify whether they are intended for all directors, all non-management directors, only the Chairman, or only the Lead Independent Director. Any message which does not specify its intended recipients will be treated as if intended for the entire Board. All messages will be reviewed by King’s Legal Department and its Compliance Office and any message deemed by either department to be substantive will be forwarded to the intended recipients.

 

King’s Corporate Governance Guidelines provide that directors are expected to attend and participate in annual meetings of shareholders, subject to unavoidable conflicts. All directors attended the 2008 annual meeting of shareholders.

 

Our Corporate Code of Conduct and Ethics provides that no director, officer or employee of King shall permit his or her decisions with respect to the company to be influenced by any interest in, or personal relationship, personal contact or agreement with, King’s suppliers, contractors, customers or others doing business with King. Further, members of a director’s, officer’s or employee’s family are prohibited from receiving compensation, commissions or gifts from any company or organization that deals with King if such receipt could reasonably be construed to influence the director’s, officer’s or employee’s decisions with regard to King’s business. Actual or potential conflict of interest transactions are required to be reported to and reviewed by our Legal Department or our Compliance Office before they take place. Any change or waiver of these standards for a director or executive officer may be made only by the Board of Directors (with the interested director abstaining) and must be promptly disclosed as required by law or NYSE rules. Further, for any transaction in which a director or officer of King has a direct or indirect interest, King follows the requirements of the Tennessee Business Corporation Act, which requires that:

 

 

In addition to being required to report potential conflict transactions to the Legal Department or the Compliance Office before they take place, directors and all executive officers complete an annual questionnaire regarding their relationship with King and with other entities and persons who have a relationship with King, if any, whether for-profit businesses, non-profit or charitable organizations, civic groups or other entities or persons. These questionnaires are reviewed by the Legal Department, which advises the Board about any significant information reported.

 

Since the beginning of the last fiscal year, we are aware of no related party transactions between us and any of our directors, executive officers, 5% shareholders or their family members or other persons which required disclosure under Item 404 of Regulation S-K under the Securities Exchange Act of 1934.

 

The following Report of the Audit Committee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the company specifically incorporates this Report by reference therein.

 

The Audit Committee is typically appointed by the Board immediately following the annual meeting of shareholders. Since the time of the May 2008 annual meeting, R. Charles Moyer (Chair), Elizabeth M. Greetham, Philip A. Incarnati and D. Greg Rooker have served on the Audit Committee. The Board of Directors has determined that each member of the Audit Committee meets the independence, experience and other qualification requirements of the NYSE and the SEC. None of the Committee’s members serves on more than three public company audit committees.

 

The Audit Committee operates pursuant to a written charter adopted by the Board of Directors which is available on our website, www.kingpharm.com. The charter is also available to any shareholder by request to the Assistant Secretary, William L. Phillips III, 501 Fifth Street, Bristol, Tennessee 37620.

 

Management is responsible for internal controls and the financial reporting process. The independent registered public accounting firm is responsible for performing an audit of our financial statements and our systems of internal control, in accordance with the standards of the Public Company Accounting Oversight Board (United States), and for expressing an opinion about those statements and controls based upon its audit. The Audit Committee, on behalf of the Board, monitors and reviews the performance of the independent registered public accounting firm and the quality and integrity of internal accounting, auditing and financial reporting practices. The Audit Committee’s other chief duties include:

 

 

During 2008, the Audit Committee met seven times and regularly held separate executive sessions with the independent registered public accounting firm, PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”), and also with the Chief Financial Officer, the Corporate Compliance Officer, the Vice President for Internal Audit and among the Audit Committee members. There were also numerous informal meetings and communications among the Chair, various Audit Committee members, the independent registered public accounting firm and members of management.

 

The Audit Committee has reviewed and discussed with management the audited financial statements for the year ended December 31, 2008. The Audit Committee has also discussed with PricewaterhouseCoopers the matters required to be discussed by Statement on Auditing Standards No. 61, (“Communication with Audit Committees”) as amended, as adopted by the Public Company Accounting Oversight Board (United States) in Rule 3200T, and, with and without management present, discussed and reviewed the results of the independent registered public accounting firm’s examination of King’s financial statements and internal control over financial reporting. The Audit Committee has also discussed with the independent registered public accounting firm the quality of King’s accounting policies.

 

The Audit Committee has obtained from PricewaterhouseCoopers a formal written statement describing all relationships between the independent registered public accounting firm and King that might bear on the accounting firm’s independence. This statement conforms to Independence Standards Board Standard No. 1, as amended, “Independence Discussions with Audit Committees” as adopted by the Public Company Accounting Oversight Board (United States) in Rule 3600T. The Audit Committee has also discussed with PricewaterhouseCoopers any relationships that may impact its objectivity and independence. The Audit Committee has also considered whether provision of the services described under the section “Audit Fees” is compatible with maintaining the independence of the independent registered public accounting firm.

 

In October 2005, as part of the settlement of a government pricing investigation, the company entered into a five-year corporate integrity agreement (the “CIA”) with the Office of Inspector General of the United States Department of Health and Human Services. In December 2005, the Audit Committee approved management’s recommendation to appoint PricewaterhouseCoopers to serve as the independent review organization (“IRO”) in connection with the requirements of the CIA. PricewaterhouseCoopers acted as IRO during 2008. In late 2008, the Audit Committee approved the provision by PricewaterhouseCoopers of due diligence and integration assistance services to King in connection with King’s acquisition of Alpharma Inc. The Audit Committee has considered whether the service of PricewaterhouseCoopers as IRO, and its provision of due diligence and integration assistance services in connection with the Alpharma acquisition, are compatible with maintaining the independence of the independent registered public accounting firm. The Audit Committee is satisfied that PricewaterhouseCoopers is independent of King.

 

Based upon the results of the inquiries and actions discussed above, in reliance upon information from management and the independent registered public accounting firm, and subject to the limitations of its role, the Audit Committee recommended to the Board that the audited financial statements be included in the Annual Report on Form 10-K for the year ended December 31, 2008 for filing with the SEC.

 

The Audit Committee has appointed PricewaterhouseCoopers as our independent registered public accounting firm for 2009. In the event the shareholders do not ratify the appointment of PricewaterhouseCoopers as our independent registered public accounting firm, the Audit Committee will reconsider its appointment.

 

The Members of the Audit Committee
of the Board of Directors

 

R. Charles Moyer, Chair
Elizabeth M. Greetham
Philip A. Incarnati
D. Greg Rooker

 

The following table sets forth certain information regarding the ownership of the common stock as of April 10, 2009 for (i) each person who owns more than 5% of the common stock, (ii) each director, nominee for director and executive officer of King, and (iii) all executive officers and directors of King as a group.

 

 

 

 

The fundamental goal of our compensation program is to build long-term shareholder value. In order to accomplish that goal, we must attract and retain exceptionally talented and capable executives, and we must provide those executives with incentives that motivate and reward them for achieving King’s immediate and longer-term operational, financial and scientific goals and strategic objectives. To this end, our executive compensation is guided by the following key principles:

 

 

Vital to our compensation program are the decisions of, and guidance from, the Compensation and Human Resources Committee of our Board of Directors (which we refer to, for purposes of this analysis, as “the Committee”). The Committee is composed entirely of directors who are independent of King under the independence standards established by the NYSE, the securities exchange where our common stock is traded. The Committee operates pursuant to a written charter adopted by the Board. If you would like to review the Committee’s charter, it is freely available on our website, www.kingpharm.com, by first choosing “Investors” and then “Governance.” It is also available to any shareholder who requests a copy from our Assistant Secretary, William L. Phillips III, 501 Fifth Street, Bristol, Tennessee 37620.

 

The Committee has the authority and responsibility to establish and periodically review our executive compensation principles, described above. Importantly, the Committee also has sole responsibility for determining the corporate goals and objectives upon which the compensation of the Chief Executive Officer (the “CEO”) is based, for evaluating (in consultation with all non-management directors) the CEO’s performance in light of these goals and objectives and for determining the CEO’s compensation, including his equity-based compensation.

 

The Committee also reviews and approves the recommendations of the CEO with regard to the compensation and benefits of other executive officers. In accomplishing this responsibility, the Committee meets regularly with the CEO, approves cash and equity incentive objectives of the executive officers, reviews with the CEO the accomplishment of these objectives and approves the base salary and other elements of compensation for the executive officers. The Committee has full discretion to modify the recommendations of the CEO in the course of its approval of executive officer compensation.

 

The Committee also annually reviews, and makes recommendations to the Board about, the compensation of non-employee directors, a function it performs in conjunction with the Board’s Nominating and Corporate Governance Committee.

 

Our Incentive Plan, approved by shareholders in May 2005, provides for the grant of various equity awards, such as stock options, restricted stock and performance share units, as well as cash incentive awards, to King’s employees and directors. The Committee is responsible for administering this Plan and it has sole authority to make awards to the CEO or any other executive officer. Our Board of Directors has sole authority to make grants to directors under the Incentive Plan.

 

In conjunction with its responsibilities related to executive compensation, the Committee also oversees the talent management process, reviews plans for executive officer succession and performs various other functions.

 

The Committee consults regularly with an independent outside compensation consulting firm retained by the Committee. As it makes decisions about executive compensation, the Committee frequently obtains data from its consultant and from third party surveys regarding current compensation practices and trends among United States companies in general and pharmaceutical and biosciences companies in particular, and reviews this information with its consultant. The Committee also discusses various other compensation matters with its consultant, both during the course of the Committee’s regular meetings and in private meetings. In addition, the Chairman of the Committee is in regular

contact with the consultant and with management outside of Committee meetings regarding matters being considered or expected to be considered by the Committee.

 

During 2008, the Committee was advised by James F. Reda & Associates, LLC, an independent executive compensation consulting firm. James F. Reda & Associates did not provide any other services to King.

 

Throughout the discussion that follows the individuals who served as Chief Executive Officer and Chief Financial Officer during 2008, as well as the other individuals included in the Summary Compensation Table on page 27, are referred to as the “named executive officers.” At some points in the discussion we also refer more generally to our “executive officers,” the larger group of executives whose compensation requires the approval of the Committee under the terms of its charter.

 

In 2008, the Committee’s approach to compensation was intended to focus our executives on accomplishing King’s short-term, longer-term and strategic goals and had as its ultimate objective sustained growth in shareholder value. This approach was intended to compensate executives at levels at or near the median levels of compensation offered by other pharmaceutical companies similar in size to King and with whom we compete for executive talent. The Committee believes that retention of key talent is critical to King’s success.

 

In making decisions about the elements of 2008 compensation, the Committee not only considered available market information about each element but also, for each executive, aggregate compensation. Base salary provided core compensation to executives, but it was accompanied by:

 

Summary of 2008 Compensation Elements

 

The table below provides detailed information regarding each element of the 2008 compensation program.

 

 

 

The use of the above compensation tools enables King to reinforce its compensation philosophy as well as to strengthen its ability to attract and retain high-performing executive officers. The Committee believes that this combination of programs provides an appropriate mix of fixed and variable pay, balances short-term operational performance with long-term shareholder value creation, and encourages executive recruitment and retention.

Market Data and Our Comparator Group

 

In determining 2008 compensation for the named executive officers, the Committee relied on market data provided by its consultant, James F. Reda & Associates. This information was principally related to a group of 19 comparator companies similar in size to King (we refer to this group of companies as the “Comparator Group”). This group had median 2007 revenues of $1.8 billion. Information on these companies was derived from publicly-available information appearing in their proxy statements, supplemented with pharmaceutical industry information from published and proprietary third-party survey sources. The members of the Comparator Group for 2008 were:

 

 

We plan to evaluate the Comparator Group on an annual basis and revise it as necessary to ensure that it continues to be appropriate for benchmarking our executive compensation program.

 

In evaluating appropriate compensation program designs, the Committee also considered the approaches employed by larger pharmaceutical companies, but information related to these companies was not used in making decisions about the amount of compensation to be provided to any executive officer.

 

Base Salary

 

Base salaries for the named executive officers are intended to approximate median salaries for similarly situated executives among Comparator Group companies. A number of additional factors are considered, however, in determining base salary, such as the executive’s individual performance, his or her experience and tenure, internal compensation consistency, the need to attract new, talented executives, and the company’s overall annual budget. Base salaries are generally reviewed on an annual basis. Typically, the Committee reviews base salaries of the executive officers to allow adjustments to occur as of the beginning of the year. The only exception to this pattern is the CEO, whose base salary was reviewed by the Committee in March 2008 following the analysis, by all non-management members of the board of directors, of his performance during the prior year.

 

Mr. Markison’s base salary was increased by $40,000 to $990,000, effective March 25, 2008, which is lower than the median base salary of the chief executive officers among our Comparator Group. Mr. Squicciarino’s base salary was increased by $40,566 to $552,000, effective January 1, 2008. Mr. Elrod’s base salary was increased by $56,300 to $431,500, effective January 1, 2008. Mr. Bruce’s and Mr. Andrzejewski’s base salaries were each increased by $15,800 to $411,000 effective January 1, 2008.

 

2008 Executive Management Incentive Award

 

Design

 

In February 2008, the Committee approved the 2008 Executive Management Incentive Award (or “EMIA”) program. This program allowed executive officers the opportunity to earn cash awards upon the accomplishment of predetermined 2008 earnings per share and revenue objectives. The relative weighting of these objectives for each executive depended upon the executive’s ability to affect the accomplishment of the objective. Shown below are the weights of the various goals for each named executive officer.

 

 

Based on market data provided by its consultant, the Committee formulated potential EMIA awards which approximated the 50^th percentile among Comparator Group companies, expressed as percentages of base salary. Actual payouts depended upon the degree to which objectives were accomplished as well as the weight accorded to each objective, as described above. The table below shows the overall potential payout amounts for each of the named executive officers, expressed as percentages of base salary.

 

 

The Committee also determined that, if earnings per share and revenue results were between the threshold and target objectives, or between the target and maximum objectives, straight-line interpolation would be applied to determine the appropriate payout percentage.

 

As discussed above, each named executive officer’s objectives for 2008 included company revenue and/or earnings per share targets. The Committee reviewed and approved these targets in February 2008 following discussions with management, a review of our historical results, consideration of the various circumstances facing the company during 2008 and taking into account the expectations of our annual plan. The 2008 revenue and earnings per share EMIA targets approved by the Committee are detailed in the table below.

 

 

 

All payouts to executive officers under the 2008 EMIA were contingent upon the Committee’s review and certification of the degree to which King achieved the 2008 EMIA financial objectives. The program provided that no payout for any objective would occur in the event that the company failed to achieve at least 60% of target earnings per share.

 

The 2008 EMIA program provided that the Committee could, in its discretion: reduce or eliminate any EMIA in the event it determined it to be in the best interests of the company to do so; delay payment of any EMIA and adjust the amount of the payment based on a reasonable rate of interest or an actual predetermined investment; or amend or terminate the EMIA program.

 

Results

 

In February 2009, the Committee reviewed King’s 2008 financial results for purposes of the EMIA program. The Committee determined that, based upon the company’s financial performance, the stretch target was achieved for the earnings per share objective, and that a result between the target and stretch objectives was achieved for the revenues objective.

 

The results under the 2008 EMIA program were, however, significantly and positively affected by factors which had not been anticipated in the company’s business plan, and which were largely outside management’s control. Because of these factors, management recommended that the Committee use its authority under the program to reduce the payout under both the earnings per share and revenues objectives to the target payout level. The Committee considered

management’s recommendation and accepted it, determining that the adjusted payout of both the earnings per share and revenues objectives under the 2008 EMIA program would reflect target performance.

 

The table below shows the amounts which would have been paid to the named executive officers based upon the results of the 2008 EMIA program, as well as the amounts actually paid following the Committee’s reduction of the payouts, as described above.

 

 

The awards made to named executive officers under the 2008 EMIA program are also reflected in column (g) of the Summary Compensation Table on page 27.

 

2008 Long Term Incentive Awards (LTIA)

 

Design

 

The Committee believes that long-term equity incentives are an important part of a complete compensation package because they focus executives on achieving King’s long-term goals, align the interests of executives with those of shareholders, encourage sustained stock performance and help to retain executives.

 

In March 2008, the Committee granted four different types of incentive awards to executives, each designed to emphasize particular elements of the company’s immediate and long-term objectives and to retain key executives. We refer to these four grants collectively as the 2008 Long Term Incentive Awards (LTIA). The four types of grants were:

 

 

The Committee assessed the appropriate overall value of these equity grants to executives by reviewing survey results and other market data provided by its consultant. This information included the value of equity grants made to similarly situated executives among the Comparator Group. The overall value of LTIA grants for each executive was determined by multiplying the executive’s base salary by a percentage that approximates the median percentage used for similarly situated executives in the Comparator Group. These percentages were 300% of base salary for Mr. Markison, 200% for Mr. Squicciarino and 140% for Mr. Andrzejewski, Mr. Bruce and Mr. Elrod. Mr. Markison’s percentage was lower than for similarly situated Chief Executive Officers within the Comparator Group.

In determining the overall value of LTIA grants, the Committee also considered the potential value of equity compensation relative to other elements of compensation for each named executive officer. It likewise assessed the appropriate distribution of value among the four grant types, as well as the corporate objectives each type of grant was intended to encourage executives to address (please see the section above called “Summary of 2008 Compensation Elements” and the sections below called “Performance Share Units” and “Stock Options and Restricted Stock” for more information about the purposes of each grant type). Based on consideration of these issues, the Committee determined that 30% of the estimated equity grant value should be in the form of stock options, 20% should be in the form of restricted stock, 35% should be derived from One-Year PSUs (assuming target performance) and the remaining 15% should be in the form of Three-Year PSUs (assuming target performance).

 

Performance Share Units

 

Each executive officer had the opportunity to earn One-Year PSUs, the exact number of which depended upon King’s accomplishment of 2008 earnings per share objectives (the same as discussed above regarding the 2008 EMIA program, beginning on page 19). The Committee determined for each executive officer a target number of One-Year PSUs, taking into account the value of the PSUs relative to other elements of the 2008 LTIA program, relative to the executive’s base salary and overall compensation. The target numbers of One-Year PSUs for the named executive officers appear in the table below.

 

 

Under the terms of the One-Year PSUs, achievement of objectives would result in payouts as follows, with performance falling between defined objective levels determined by interpolation between the defined levels.

 

 

Each executive officer similarly has the opportunity to earn Three-Year PSUs, the exact number of which depends upon King’s total shareholder return for the years 2008 through 2010 relative to the companies making up the Dow Jones U.S. Pharmaceutical Index. The Committee determined for each executive officer a target number of Three-Year PSUs, taking into account the value of the PSUs relative to other elements of the 2008 LTIA program, relative to the executive’s base salary and overall compensation. The target numbers of Three-Year PSUs for the named executive officers appear in the table below.

 

Under the terms of the Three-Year PSUs, achievement of objectives would result in payouts as follows, with performance falling between defined objective levels determined by interpolation between the defined levels.

 

 

In February 2009, the Committee reviewed the 2008 financial results for purposes of determining the payout of the 2008 One-Year PSUs. The Committee determined, based upon the company’s financial performance, that the stretch objective was achieved for the earnings per share objective upon which these PSUs were based. Based upon the achievement of the stretch performance goal, the Committee determined that the number of PSUs granted to each executive officer was 200% of the target number of PSUs previously established for that officer. These PSUs are now subject to a restricted period which ends on December 31, 2010. These awards are detailed in column (e) in the Summary Compensation Table and also in the Grants of Plan Based Awards table, each below. The Committee has determined that subsequent grants of One-Year PSUs will provide a mechanism by which the Committee may reduce the number of PSUs to be awarded based on the results of the performance period if the Committee determines it to be in King’s best interest to do so.

 

King’s cumulative total shareholder return performance in 2008, 2007 and 2006 for the Three-Year PSUs granted in 2006 placed it in the 30.5^th percentile relative to the companies of the Dow Jones Pharmaceutical Index, resulting in a payout under the 2006 Three-Year PSU awards of 51.25% of the target number of shares for each executive officer. For more information about the payout of the 2006 Three-Year PSUs, please see page 33.

 

King’s total shareholder return performance for 2008 for the 2008 Three-Year PSU placed it in the 78^th percentile relative to the companies of the Dow Jones Pharmaceutical Index. If this percentile represented King’s performance during the entire performance period for the 2008 Three-Year PSUs, the payout under these awards would be 200% of the target number of shares. King’s cumulative total shareholder return performance in 2007 for the Three-Year PSUs granted in 2007 placed it in the 35^th percentile relative to the companies of the Dow Jones Pharmaceutical Index. If this percentile represented King’s performance during the entire performance period for the 2007 Three-Year PSUs, the payout under these awards would be 62.5% of the target number of shares.

 

Stock Options and Restricted Stock

 

The stock options and restricted stock granted as part of the 2008 LTIA were designed to reward sustained stock price appreciation and to encourage executive retention during a three-year vesting term and, in the case of stock options, a ten-year option life. Grants of stock options and restricted stock were not contingent upon any conditions. Stock options become exercisable approximately in thirds on the first three anniversaries of the date of grant. Restricted stock vests in full on the third anniversary of the date of grant. For more information about these stock option and restricted stock awards, please see “2008 Grants of Plan Based Awards” on page 29.

 

Perquisites and Other Benefits

 

We provide named executive officers with perquisites and other personal benefits that we believe are reasonable and consistent with our overall compensation program to better enable us to attract and retain superior employees for key positions. The Committee periodically reviews the levels of perquisites and other personal benefits provided to named executive officers.

 

During 2008, King matched employees’ contributions to the King Pharmaceuticals, Inc. 401(k) Retirement Savings Plan, up to 5% of an employee’s base salary, subject to regulatory limits. Contributions by the named executive officers were matched in this way, subject to the limitations of the Plan and applicable law. The named executive officers are also provided financial planning assistance, the costs of which (approximately $11,000 per executive in 2008) are grossed-up for income tax purposes.

The Committee is responsible for determining the general parameters for personal use of corporate aircraft by executives, and the Committee regularly reviews such usage, including usage by the Chief Executive Officer. The Committee has adopted a policy permitting limited personal use of corporate aircraft by the named executive officers and others. Personal use must not conflict with the needs of the company and each use must be specifically approved by the Chief Executive Officer. Personal flights are treated as income to the employee pursuant to the Standard Industry Fare Level standards established by the U.S. Department of Transportation. The incremental cost to King of personal aircraft use by the named executive officers is included in column (i) of the Summary Compensation table and the additional tables detailing “All Other Compensation” beginning on page 27.

 

King provides life insurance coverage to all employees. For the named executive officers this insurance would, in the event of death, pay $500,000 to designated beneficiaries. Premiums paid for coverage above $50,000 are treated as imputed income to the executive. King also provides short-term and long-term disability insurance to all employees. For the named executive officers this insurance would, in the event of disability, provide short-term disability payments equal to 100% of the officer’s base salary for up to 26 weeks. If the disability lasted longer than 26 weeks, the officer would receive long-term disability payments of 60% of base salary, not to exceed $15,000 per month.

 

The named executive officers participate in other qualified benefit plans, such as medical insurance plans, in the same manner as all other employees. Highly compensated employees such as the named executive officers pay a larger portion of the premiums for these benefit plans than lower-compensated employees pay.

 

The King Pharmaceuticals, Inc. Deferred Compensation Plan is a tax-deferred compensation program for a limited number of executives, including the named executive officers. It provides a tax-favorable vehicle for deferring cash compensation, including base salary and awards pursuant to the EMIA program. Under the plan, an executive may defer up to 75% of his or her base salary and up to 90% of annual incentive pay. Deferred balances are credited with gains or losses which mirror the performance of benchmark investment funds selected by the participant from among twelve available funds and eleven target date funds. Deferred amounts are paid, at the participant’s option, either in a lump sum or in annual installments over a period of up to ten years for retirement or termination distributions, or up to five years for scheduled in-service withdrawals. There are no above-market or preferential earnings on deferred compensation. Consequently, the Summary Compensation Table does not include earnings on deferred amounts. King matches contributions to this plan to the extent that deferrals reduce matching contributions otherwise available under the 401(k) plan.

 

Attributed costs of the personal benefits available to the named executive officers for the fiscal year ended December 31, 2008, are included in column (i) of the Summary Compensation Table on page 27.

 

We believe that reasonable severance and change in control benefits are necessary in order to recruit and retain effective senior executives and are generally required by the competitive recruiting environment within our industry. These severance benefits reflect the fact that it may be difficult for such executives to find comparable employment within a short period of time and are designed to alleviate an executive’s concerns about the loss of his or her position without cause. We also believe that a change in control arrangement will provide an executive security that will likely reduce any reluctance of an executive to pursue a change in control transaction that could be in the best interests of our shareholders. For a detailed discussion of potential severance and change of control benefits, see “Post-Termination Payments,” beginning on page 34.

 

The Committee has from time to time considered the adoption of share ownership guidelines, discussing the matter with management and with its consultant. The Committee has also reviewed information about the use of these guidelines in companies of King’s size and among pharmaceutical companies generally. Based on these reviews, the Committee has determined not to adopt ownership guidelines but to review the issue as warranted.

 

The Committee typically holds four or five regular meetings each year, and the timing of these meetings is generally established during the prior year. The Committee holds special meetings from time to time as its workload requires. Typically, annual grants of equity awards have been accomplished at a meeting of the Committee in March of each year. The 2008 LTIA grants were accomplished by the Committee in March 2008. Individual grants (for example, associated with the hiring of a new executive officer) may occur at other times of year. We do not coordinate the timing of equity award grants with the release of material non-public information. The exercise price of each stock option awarded to our executive officers is the closing price of our common stock on the date of grant.

 

We have adopted a policy related to the adoption and administration of equity incentive plans and related equity grants. This policy addresses the procedures for review and adoption of equity incentive plans, offers of equity grants to employees, prospective employees, directors and prospective directors. The policy defines the processes through which these grants are reviewed and approved, and it also addresses SEC reporting obligations, notification of grant recipients, recordkeeping requirements, tax requirements and other matters. Key elements of the policy include the following:

 

 

As noted above, the Committee has delegated to the CEO limited authority to make grants, pursuant to our Incentive Plan, of nonqualified stock options and restricted stock to employees who are not executive officers. Unless otherwise authorized by the Committee, the CEO is authorized to grant a total of no more than 250,000 stock options and shares of restricted stock per calendar year, and unused shares are not carried from one year to the next. No single grant of restricted stock may exceed 25,000 shares and no single grant of stock options may exceed 50,000 options. Further, no employee may receive, through this process, more than one grant of stock options and one grant of restricted stock per calendar year. The CEO is authorized to determine the vesting schedule of the grants made pursuant to this process, but all other terms must conform to a form of grant agreement previously approved by the Committee. The exercise price of all stock options may not be less than the closing price of our common stock on the grant date. The CEO is required to report to the Committee not less than twice per year regarding his use of this delegated authority.

 

Deductibility of Executive Compensation

 

Section 162(m) of the Internal Revenue Code of 1986, as amended, precludes the deductibility of an executive officer’s compensation that exceeds $1.0 million per year unless the compensation is paid under a performance-based plan that has been approved by shareholders. The Committee believes that it is generally preferable to comply with the requirements of Section 162(m) through, for example, the use of our Incentive Plan. However, to maintain flexibility in compensating executive officers in a manner that attracts, rewards and retains high quality individuals, the Committee may elect to provide compensation outside of those requirements when it deems appropriate. The Committee believes that shareholder interests are best served by not restricting the Committee’s discretion in this regard, even though such compensation may result in non-deductible compensation expenses to the company.

 

Nonqualified Deferred Compensation

 

On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law, changing the tax rules applicable to nonqualified deferred compensation arrangements. We believe we have operated in good faith compliance with the statutory provisions which were effective January 1, 2005. The final regulations pursuant to the Act were adopted in 2007. Since that time, we have acted in conformity with the final rules and have reviewed and amended several of our plans, agreements and arrangements affected by the final rules. We completed all necessary amendments prior to the end of 2008.

 

Accounting for Stock-Based Compensation

 

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R), “Share Based Payment,” which requires the recognition of the fair value of stock-based compensation in earnings. FAS 123(R) has not had a significant impact on decisions related to King’s compensation programs.

 

The Committee is closely monitoring the current economic climate and intends to assess any effects it may have on executive compensation matters.

 

The following Report of the Compensation and Human Resources Committee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the company specifically incorporates this Report by reference therein.

 

The Compensation and Human Resources Committee has reviewed and discussed with management the Compensation Discussion and Analysis set forth above. Taking this review and discussion into account, the undersigned Committee members recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement.

 

The Compensation and Human Resources Committee of the Board of Directors

 

Earnest W. Deavenport, Jr., Chair
Gregory D. Jordan
Ted G. Wood

 

The following table summarizes the compensation paid to the company’s named executive officers for 2008, 2007 and 2006.

 

Amounts listed under column (g), “Non-Equity Incentive Plan Compensation”, were determined by the Compensation Committee, pursuant to the terms of the Executive Management Incentive Award program and, to the extent not deferred by an executive, were paid shortly after these determinations. The named executive officers were not entitled to receive payments which would be characterized as “Bonus” payments for the years ended December 31, 2006, 2007 and 2008.

 

Based on the dollar amounts recognized for financial statement reporting purposes for equity incentives for the fiscal year ended December 31, 2008 and the base salary of the named executive officers, “Salary” in 2008 accounted for approximately 17% of the total compensation of the named executives, equity-based incentive compensation accounted for approximately 68% of total compensation, non-equity incentive compensation accounted for approximately 13% of total compensation and other compensation accounted for approximately 2% of total compensation. The Committee reviews at least annually a “tally sheet” for each named executive, and others, that shows the total compensation of the executive.

 

There are no above-market or preferential earnings on deferred compensation. Consequently, the table does not include earnings on deferred amounts. None of the named executive officers is eligible for pension benefits as King does not have any defined benefit programs in which the named executive officers are eligible to participate.

 

 

 

 

 

 

 

We regularly use offer letters in connection with the hiring of new employees. In addition to customary elements such as salary and benefit information, these letters have sometimes contained provisions related to post-termination pay and benefits when necessary to provide employment security to newly-hired executives. An offer letter between King and Mr. Markison provides for arrangements with respect to post-termination pay and benefits. For information regarding the terms of these offer letters, please see the section entitled “Post-Termination Payments” beginning on page 34.

 

The following table contains information on the company’s equity and non-equity incentive plan awards to named executive officers during 2008.

 

 

 

The following table discloses information relating to stock options, restricted stock and performance share units held by the named executive officers as of December 31, 2008.