KING PHARMACEUTICALS INC - 10-K Annual Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

OR

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 0-24425

KING PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)

TENNESSEE 54-1684963
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

501 FIFTH STREET
BRISTOL, TENNESSEE 37620
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code: (423) 989-8000

Securities registered under Section 12(b) of the Exchange Act:

(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
COMMON STOCK NEW YORK STOCK EXCHANGE

Securities registered under Section 12(g) of the Exchange Act:
NONE

Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the shares of common stock held by
nonaffiliates of the Registrant as of March 27, 2002 is approximately $7.9
billion. (For purposes of this calculation only, all executive officers and
directors are classified as affiliates.)

Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. Outstanding at March
27, 2002, Common Stock, no par value, 247,914,137.

DOCUMENTS INCORPORATED BY REFERENCE: NONE

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

King Pharmaceuticals, Inc. was incorporated in the State of Tennessee in
1993. Our principal executive offices are located at 501 Fifth Street, Bristol,
Tennessee 37620. Our telephone number is (423) 989-8000 and our facsimile number
is (423) 274-8677. Our wholly-owned subsidiaries are Monarch Pharmaceuticals,
Inc.; Parkedale Pharmaceuticals, Inc.; King Research and Development, Inc.
(formerly Medco Research, Inc.); Jones Pharma Incorporated (acquired August 31,
2000); and King Pharmaceuticals of Nevada, Inc.

King is a vertically integrated pharmaceutical company that manufactures,
markets and sells primarily branded prescription pharmaceutical products. By
"vertically integrated," we mean that we have the capabilities of a major
pharmaceutical company, including

- sales and marketing,

- manufacturing,

- packaging,

- distribution,

- quality control and assurance,

- regulatory affairs, and

- research and development.

Through a national sales force of approximately 715 representatives and
marketing alliances, we market our branded pharmaceutical products to
general/family practitioners, internal medicine physicians, cardiologists,
endocrinologists, pediatricians, obstetrician/gynecologists, and hospitals
across the United States and in Puerto Rico.

Our primary business strategy is to acquire established branded
pharmaceutical products and to increase their sales through focused marketing
and promotion and product life cycle management. By "product life cycle
management," we mean, the extension of the life of a product, including seeking
and gaining all necessary related governmental approvals, by such means as:

- securing U.S. Food and Drug Administration approved new label
indications,

- developing and producing different strengths,

- producing different package sizes,

- developing new dosages, and

- developing new product formulations.

We acquire branded products from larger pharmaceutical companies. These
companies sell products for various reasons including limiting their costs or
eliminating duplicate products. We also seek attractive company acquisitions
which add products or products in development, technologies or sales and
marketing capabilities to our key therapeutic areas or that otherwise complement
our operations.

Unlike many of our competitors, we have a broad therapeutic focus that
provides us with opportunities to purchase a wide variety of products. In
addition, we have well known products in all of our therapeutic categories that
generate high prescription volumes. Our branded pharmaceutical products can be
divided primarily into four therapeutic areas:

- cardiovascular (including Altace(R), Corzide(R), Procanbid(R) and
Thalitone(R)),

- women's health/endocrinology (including Menest(R), Delestrogen(R),
Nordette(R), Levoxyl(R), Cytomel(R), and Triostat(R))

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- anti-infectives (including Lorabid(R), Cortisporin(R), Neosporin(R),
Bicillin(R) and Coly-Mycin M(R)), and

- critical care (including Thrombin-JMI(R) and Brevital(R)).

We acquired from Glaxo Wellcome, Inc., predecessor to GlaxoSmithKline for
$54.0 million, including $3.1 million of assumed liabilities, the Cortisporin(R)
product line in March 1997, the Viroptic(R) product line in May 1997 and six
additional branded products, including Septra(R), and exclusive licenses, free
of royalty obligations, for the prescription formulations of Neosporin(R) and
Polysporin(R) in November 1997.

In February 1998 we acquired from Warner-Lambert Company (predecessor to
Pfizer), 15 branded pharmaceutical products, the Parkedale facility located in
Rochester, Michigan and certain manufacturing contracts for third parties for
$127.9 million, including $2.9 million of assumed liabilities.

In December 1998 we acquired from Hoechst Marion Roussel, Inc. (predecessor
to Aventis Pharmaceuticals, Inc.), for $362.5 million, the United States and
Puerto Rico rights to Altace(R) and two other small branded pharmaceutical
products. Altace(R) is an Angiotensin Converting Enzyme inhibitor, which we
refer to in this report as an "ACE" inhibitor. We refer to this acquisition in
this report as the "Altace Acquisition." We are currently manufacturing and
packaging Altace(R) in our facility in Bristol, Tennessee. Aventis also remains
a supplier of Altace(R). Altace(R) has United States patent protection to 2008.
On October 4, 2000 the U.S. Food and Drug Administration, which we call the
"FDA," approved the new indications for Altace(R) requested under a supplemental
New Drug Application. In addition to the treatment of hypertension, this
approval permits the promotion of Altace(R) to reduce the risk of stroke,
myocardial infarction (heart attack) and death from cardiovascular causes in
patients 55 and over either with a history of coronary artery disease, stroke or
peripheral vascular disease or with diabetes and one other cardiovascular risk
factor (hypertension, elevated total cholesterol levels, low HDL levels,
cigarette smoking or documented microalbuminuria). Altace(R) is also indicated
in stable patients who have demonstrated clinical signs of congestive heart
failure after sustaining acute myocardial infarction. Altace(R) is marketed by
our subsidiary Monarch and by Wyeth-Ayerst Laboratories, a division of American
Home Products (predecessor to Wyeth Corporation) pursuant to the Co-Promotion
Agreement we entered into in June 2000 described below.

In August 1999, we acquired the antibiotic Lorabid(R) from Eli Lilly and
Company for $91.7 million including acquisition costs plus sales performance
milestones that could bring the total value of the transaction to $158.0
million. As of December 31, 2001, no milestone payments had been made and we do
not currently anticipate any payments. The final contingent payment will be made
if we achieve $140.0 million in annual net sales of Lorabid(R). Lilly
manufactures Lorabid(R) for us. Lorabid(R) has United States patent protection
through December 31, 2005.

On February 25, 2000, we acquired Medco Research, Inc. in an all stock
transaction accounted for as a pooling of interests valued at approximately
$366.0 million. We exchanged approximately 14.4 million shares of King common
stock for all of the outstanding shares of Medco. Each share of Medco was
exchanged for 1.3514 shares of King common stock. In addition, outstanding Medco
stock options were converted at the same exchange ratio to purchase
approximately 1.4 million shares of King common stock. Medco is now one of our
wholly owned subsidiaries and, effective November 1, 2000, was renamed "King
Pharmaceuticals Research and Development, Inc." Through King Research and
Development, we are engaged in product life cycle management to develop new
indications and line extensions for existing and acquired products and the
development and global commercialization of cardiovascular medicines and
adenosine-receptor technologies for multiple indications and markets. These
products in development and the related intellectual property rights are
typically obtained under license from academic or corporate sources who have
received United States patents. We then sponsor and direct any additional
preclinical studies and clinical testing needed for product registration and
marketing approval. These late-stage product development activities are
outsourced to independent clinical research organizations to maximize efficiency
and minimize internal overhead. King Research and Development has successfully
developed two currently marketed adenosine-based products, Adenocard(R) and
Adenoscan(R), the New Drug Applications for which are held by Fujisawa
Healthcare, Inc. We receive a royalty based on the sales of the products.
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On June 23, 2000, we entered into a marketing alliance with Wyeth, to
market Altace(R), in the United States and Puerto Rico. We refer to this
agreement in this report as the "Co-Promotion Agreement." Subject to the terms
of the Co-Promotion Agreement, we will pay Wyeth a quarterly fee based on a
percentage of net sales in exchange for its marketing efforts. Wyeth purchased
$75.0 million of our common stock and paid us $25.0 million in cash upon
execution of the Co-Promotion Agreement. Wyeth paid us an additional $50.0
million in November 2000 as a result of the FDA's final approval on October 4,
2000 of new indications for Altace(R).

On August 31, 2000, we acquired Jones Pharma Incorporated in an all stock
transaction accounted for as a pooling of interests valued at approximately $2.4
billion. We exchanged approximately 98.4 million shares of King common stock for
all of the outstanding shares of Jones. Each share of Jones was exchanged for
1.5 shares of King common stock. In addition, outstanding Jones stock options
were converted at the same exchange ratio to purchase approximately 5.4 million
shares of King common stock. Jones is now one of our wholly-owned subsidiaries.

On December 20, 2000, we acquired an exclusive license from Novavax, Inc.
to use its proprietary cell line to develop and potentially commercialize
recombinant human papillomavirus (HPV) virus-like particle (VLP) vaccines.
Pursuant to the license agreement, we have an exclusive worldwide license to
develop, manufacture and market HPV-16 VLP vaccines for the prevention and/or
treatment of HPV infection, except that Novavax retained the right to co-market
the product in the United States, including Puerto Rico. We will pay Novavax
during the term of the license a royalty based on 17% of any net sales, less
cost of goods, of any HPV product successfully developed under the license
agreement. Novavax and we are currently working together on manufacturing HPV-16
VLP vaccines being evaluated by the National Cancer Institute in clinical
trials. The vaccines are designed to prevent and/or treat HPV-16 infection and
associated cervical cancer.

On January 8, 2001, we entered into a license agreement with Novavax to
promote, market, distribute and sell Estrasorb(TM) worldwide, except in the
United States, Canada, Italy, Netherlands, Greece, Switzerland and Spain. On
June 29, 2001, Novavax submitted to the FDA a New Drug Application for
Estrasorb(TM). Also on June 29, we expanded our January 2001 exclusive license
with Novavax to promote, market, distribute and sell Estrasorb(TM) worldwide,
following approval, except for the United States and Puerto Rico, where we will
together with Novavax market Estrasorb(TM). We will pay Novavax during the term
of the license a royalty based on 9.0% of net sales of Estrasorb(TM) in Canada,
8.0% of net sales of Estrasorb(TM) in Italy, the Netherlands, Greece,
Switzerland, and Spain, and 7.5% of net sales of Estrasorb(TM) in all other
territories except the United States and Puerto Rico. We and Novavax will
together market Estrasorb(TM) in the United States and Puerto Rico and Novavax
will pay King an amount equal to 50% of Estrasorb(TM) margins. We and Novavax
will share equally approved marketing expenses for Estrasorb(TM).

We also agreed to a similar exclusive licensing arrangement with Novavax
for the promotion, marketing, distribution and sale of Androsorb(TM), a topical
testosterone replacement therapy for testosterone deficient women, following
approval. We will pay Novavax a royalty on net sales of Androsorb(TM) based on
the same percentages for the same corresponding territories as described above
for Estrasorb(TM). Likewise, we will exclusively market Androsorb(TM) with
Novavax in the United States and Puerto Rico and receive an amount equal to 50%
of Androsorb(TM) margins. Marketing expenses for Androsorb(TM) approved pursuant
to our agreement will be shared equally by the parties.

We also entered into a co-promotion agreement on January 8, 2001 with
Novavax for Nordette(R). This agreement relating to Nordette(R), as subsequently
amended, provides for us and Novavax to share equally all quarterly net sales
that exceed established baselines that in the aggregate total $25.0 million per
year. We will share equally all expenses associated with net sales of
Nordette(R) that exceed these established baselines.

On May 25, 2001, the FDA approved our previously filed New Drug Application
for Levoxyl(R), our levothyroxine sodium drug product. We had filed this
application as a result of the FDA's August 14, 1997 announcement in the Federal
Register (62 FR 43535) that orally administered levothyroxine sodium drug
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products are new drugs. The notice stated that manufacturers who wish to
continue to market these products must submit applications as required by the
Food, Drug and Cosmetic Act by August 14, 2000. On April 26, 2000, the FDA
issued a second Federal Register notice extending the deadline for filing these
applications until August 14, 2001.

On August 8, 2001, we acquired three branded pharmaceutical products and a
license to a fourth product from Bristol-Myers Squibb for $285.0 million plus
approximately $1.5 million of expenses. The products acquired include
Bristol-Myers Squibb's rights in the United States to Corzide(R),
Delestrogen(R), and Florinef(R). We also acquired a fully paid license to
Corgard(R) in the United States. Corzide(R), a combination beta blocker and
thiazide diuretic, is indicated for the management of hypertension. Corgard(R),
a beta blocker, is indicated also for the management of hypertension, as well as
long term management of patients with angina pectoris. Delestrogen(R) is an
injectable estrogen replacement therapy. Florinef(R) is a partial replacement
therapy for primary and secondary adrenocortical insufficiency in Addison's
disease and for the treatment of salt-losing adrenogenital syndrome.

On December 13, 2001, the FDA approved our New Drug Application for
Tigan(R) 300mg capsules. Tigan(R) is indicated for the treatment of
post-operative nausea and vomiting and for nausea associated with
gastroenteritis.

We manufacture pharmaceutical products for a variety of pharmaceutical and
biotechnology companies under contracts expiring at various times within the
next four years. We intend to enter into additional manufacturing contracts in
cases where we identify contracts that offer significant volumes and attractive
revenues. We have not accepted or renewed manufacturing contracts for third
parties where we perceived insignificant volumes or revenues. In accordance with
our focus on branded pharmaceutical products, we expect that, over time, our
contract manufacturing will continue to decrease as a percentage of revenues.

The following summarizes approximate net revenues by operating segment (in
thousands).

For additional segment information, please see the sections entitled
"Selected Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and related notes elsewhere in this report.

INDUSTRY

Growth in the pharmaceutical industry is being driven primarily by:

- the aging population;

- technological breakthroughs which have increased the number of ailments
which can be treated with or prevented by drugs;

- managed care's preference for drug therapy over surgery since drug
therapy is generally less costly; and

- direct-to-consumer television advertising which has increased public
awareness of available drug therapies.

During the past decade, the pharmaceutical industry has been faced with
cost containment initiatives from government and managed care organizations and
has begun to consolidate. Consolidation is being

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driven by a desire among pharmaceutical companies to reduce costs through
economies of scale and synergies, to add previously lacking United States or
European sales strength or to add promising product pipelines or manufacturing
capabilities in key therapeutic categories.

Industry consolidation and cost containment pressures have increased the
level of sales necessary for an individual product to justify active marketing
and promotion from large pharmaceutical companies. This has led large
pharmaceutical companies to focus their marketing efforts on drugs with high
volume sales, newer or novel drugs which have the potential for high volume
sales and products which fit within core therapeutic or marketing priorities. As
a result, major pharmaceutical companies have sought to divest relatively small
or non-strategic product lines which can be profitable for emerging
pharmaceutical companies, like us, to manufacture and market.

PRODUCTS AND PRODUCT DEVELOPMENT

We market a variety of branded prescription products primarily over four
therapeutic areas, including

- cardiovascular products (including Altace(R), Corzide(R), Thalitone(R)
and Procanbid(R)),

- women's health products/endocrinology products (including Menest(R),
Delestrogen(R), Nordette(R), Levoxyl(R), Cytomel(R), and Triostat(R)).

- anti-infective products (including Lorabid(R), Bicillin(R),
Cortisporin(R), Neosporin(R), and Coly-Mycin(R)) and,

- critical care products (including Thrombin-JMI(R) and Brevital(R)).

Our branded pharmaceutical products are generally in high volume categories
and are well known for their indications (e.g., Altace(R) and Levoxyl(R)).
Additionally, many of our branded products have limited or no generic
competition, including patent protected products and products that are difficult
to formulate (e.g., creams, ophthalmic suspensions). Branded pharmaceutical
products represented 91.0% and 85.3% of our net revenues for each of the years
ended December 31, 2001 and 2000.

Cardiovascular products. Altace(R), an ACE inhibitor, is our primary
product within this category. In August 1999, the results of the Heart Outcomes
Prevention Evaluation trial, which we refer to in this report as the "HOPE
trial," were released. The HOPE trial determined that Altace(R) significantly
reduces the rates of stroke, myocardial infarction (heart attack) and death from
cardiovascular causes in a broad range of high-risk cardiovascular patients. On
October 4, 2000, the FDA approved our supplemental New Drug Application. This
approval permits the promotion of Altace(R) to reduce the risk of stroke,
myocardial infarction (heart attack) and death from cardiovascular causes in
patients 55 and over either with a history of coronary artery disease, stroke or
peripheral vascular disease or with diabetes and one other cardiovascular risk
factor (hypertension, elevated total cholesterol levels, low HDL levels,
cigarette smoking or documented microalbuminuria). In August 2001 we acquired
Corzide(R) and a license for Corgard(R) from Bristol-Myers Squibb. Corzide(R) is
a combination beta blocker and thiazide diuretic indicated for the management of
hypertension. Corgard(R) is a beta blocker indicated for the management of
hypertension as well as long term management of patients with angina pectoris.
In February 1998, we acquired Procanbid(R) from Pfizer. Procanbid(R) is a
branded pharmaceutical product used to treat arrhythmia. Thalitone(R), which we
acquired in December 1996, is a hypertension diuretic tablet indicated for the
management of hypertension with patent protection through 2007.

Women's health products/endocrinology products. We have a number of
leading branded pharmaceutical products in this category including Menest(R),
Delestrogen(R), and Nordette(R). Menest(R), which we acquired from
GlaxoSmithKline in June 1998 and Delestrogen(R), which we acquired from Bristol
Myers Squibb in August 2001, compete in the growing $2.0 billion estrogen
replacement category. We previously manufactured Menest(R) for GlaxoSmithKline.
Our products Levoxyl(R), Cytomel(R), and Triostat(R) are indicated for the
treatment of thyroid disorders.

Anti-infective products. Our anti-infective products are marketed
primarily to general/family practitioners, internal medicine physicians and
pediatricians and are prescribed to treat uncomplicated
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infections of the respiratory tract, urinary tract, eyes, ears and skin. Our
products are generally in technologically mature product segments and as a
result have limited product liability risk. Lorabid(R) is our largest product in
the category followed by Bicillin(R) and Cortisporin(R).

Critical care products. Products in this category are marketed primarily
to hospitals. Our largest two products in this category are Thrombin-JMI(R) and
Brevital(R) . Thrombin-JMI(R) aids in controlling minor bleeding during surgery.
Brevital(R) is an anesthetic solution for intravenous use in adults and for
rectal and intramuscular use in pediatric patients. Brevital(R) is marketed as a
short-term and long-term anesthetic because of its rapid onset of action and
quick recovery time. Brevital(R) is used alone and in combination with other
anesthetics. Its rapid onset of action makes it a useful induction agent prior
to the administration of other agents to maintain anesthesia.

Certain of our products are described below:

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(1) We acquired licenses for the exclusive rights in the United States under
various patents to the active ingredient in Altace(R).
(2) We acquired the trademark and patents for this product from Boehringer
Ingelheim Pharmaceuticals, Inc.
(3) We acquired a fully paid license to this product in the United States.
(4) We have exclusive licenses, free of royalty obligations, to manufacture and
market prescription formulations of these products.

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ROYALTIES

We have successfully developed two currently marketed adenosine-based
products, Adenocard(R) and Adenoscan(R), for which we receive royalty revenues.
Revenues from royalties increased 12.8% to $46.8 million in 2001 from $41.5
million in 2000. Fujisawa is the source for substantially all of our royalty
revenues.

CONTRACT MANUFACTURING

We utilize our excess manufacturing capacity to provide third party
contract manufacturing. We currently provide contract manufacturing for many
pharmaceutical and biotechnology companies, including Pfizer, Centocor, Inc.,
Santen Incorporated and Hoffman-LaRoche Inc. Many of the products that we
contract manufacture are difficult to manufacture and, therefore, do not attract
significant competition. Contract manufacturing as a percentage of sales has
declined from 85% in 1994 to 7.0% of net revenues for the year ended December
31, 2000 and 3.4% for the year ended December 31, 2001 as we have acquired
branded pharmaceuticals products. We believe contract manufacturing provides the
following benefits:

- a stable, recurring source of cash flows;

- a means of absorbing overhead costs, and as such is an efficient
utilization of excess capacity; and

- experience in manufacturing a broad line of formulations which is
advantageous to us in pursuing and integrating acquired products.

SALES AND MARKETING

We have a national sales force of approximately 715 sales representatives.
We distribute our branded pharmaceutical products primarily through wholesale
pharmaceutical distributors. These products are ordinarily dispensed to the
public through pharmacies on the prescription of a physician. For branded
pharmaceutical products, our marketing and sales promotions principally target
general/family practitioners, internal medicine physicians, cardiologists,
endocrinologists, pediatricians, obstetrician/gynecologists and hospitals
through detailing and sampling to encourage physicians to prescribe more of our
products. The sales force is supported and supplemented by co-promotion
arrangements, telemarketing and direct mail, as well as through advertising in
trade publications and representations at regional and national medical
conventions. Our telemarketing and direct mailing efforts are performed
primarily by using a computer sampling system, which we developed to distribute
samples to physicians. We identify and target physicians through data available
from IMS America, Ltd. and Scott-Levin, suppliers of prescriber prescription
data. We intend to seek new markets in which to promote our product lines and
will continue expansion of our field sales force as product growth or product
acquisitions warrant. We seek new international markets for product lines for
which we have international rights. The marketing and distribution of these
products in foreign countries generally require the prior registration of the
products in those countries. We generally seek to enter into distribution
agreements with companies with established marketing and distribution
capabilities to distribute the products in foreign countries since we do not
have a distribution mechanism in place for distribution outside the United
States and Puerto Rico.

Similar to other pharmaceutical companies, our principal customers are
wholesale pharmaceutical distributors. The wholesale distributor network for
pharmaceutical products has in recent years been subject to increasing
consolidation, which has increased our, and other industry participants',
customer concentration. In addition, the number of independent drug stores and
small chains has decreased as retail consolidation has occurred. For the year
ended December 31, 2001, approximately 56.1% of our sales were attributable to
three distributors: McKesson Corporation (20.2%), Cardinal/Bindley (17.5%) and
Amerisource/Bergen (18.4%).

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MANUFACTURING

Our manufacturing facilities are located in Bristol, Tennessee; Rochester,
Michigan; Middleton, Wisconsin; St. Petersburg, Florida; and St. Louis,
Missouri. These facilities have in the aggregate approximately 1.5 million
square feet of manufacturing, packaging, laboratory, office and warehouse space.
We are licensed by the Drug Enforcement Agency, known as the "DEA," to procure
and produce controlled substances. We manufacture certain of our own branded
pharmaceutical products as well as products owned by other pharmaceutical
companies under manufacture and supply contracts which expire over periods
ranging from one to four years.

We can produce a broad range of dosage formulations, including sterile
solutions, lyophylized (freeze-dried) products, injectables, tablets and
capsules, liquids, creams and ointments, suppositories and powders. We believe
our manufacturing capabilities allow us to capture higher margins and pursue
product line extensions more efficiently. However, currently all or a part of 26
of our product lines, including Altace(R), Lorabid(R), some of the products
acquired from GlaxoSmithKline and Pfizer are manufactured for us by third
parties. As of December 31, 2001, capacity utilization was approximately 65% at
the Bristol facility, approximately 40% at the Parkedale facility located in
Rochester, Michigan, approximately 100% at the Middleton facility, approximately
65% at the St. Petersburg facility and approximately 30% at the St. Louis,
Missouri facility. With the exception of the Middleton facility, we believe our
facilities provide us with substantial manufacturing capacity for future growth.
We intend to transfer, when advantageous, production of acquired branded
pharmaceutical products and their product line extensions to our manufacturing
facilities as soon as practicable after regulatory requirements and contract
manufacturing requirements are satisfied. Our Bristol facility is now qualified
in accordance with FDA guidance to manufacture and distribute the finished
dosage form of Altace(R) 2.5mg, 5mg and 10mg capsules.

In addition to manufacturing, we have fully integrated manufacturing
support systems including quality assurance, quality control, regulatory
compliance and inventory control. These support systems enable us to maintain
high standards of quality for our products and simultaneously deliver reliable
services and goods to our customers on a timely basis. Companies that do not
have such support systems in-house must out source these services.

We require a supply of quality raw materials and components to manufacture
and package drug products for us and for third parties with which we have
contracted. Generally we have not had difficulty obtaining raw materials and
components from suppliers in the past. Currently, we rely on more than 500
suppliers to deliver the necessary raw materials and components. We have no
reason to believe we will be unable to procure adequate supplies of raw
materials and components on a timely basis.

RESEARCH AND DEVELOPMENT

We are involved in product development and continually seek to develop
extensions to our product lines and to improve the quality and efficiency of our
manufacturing processes. Our laboratories and product development scientists
have produced several product line extensions to existing branded pharmaceutical
products.

Through King Research and Development, we are engaged in product life cycle
management to develop new indications and line extensions for existing and
acquired products and the development and global commercialization of
cardiovascular medicines and adenosine-receptor technologies, including the
development of MRE0470, a myocardial pharmacologic stress imaging agent. These
products in development and the related intellectual property rights are
typically obtained under license from academic or corporate sources who have
received United States patents. We then sponsor and direct any additional
preclinical studies and clinical testing needed for product registration and
marketing approval. These late-stage product development activities are
outsourced to independent clinical research organizations to maximize efficiency
and minimize internal overhead.

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Additionally, we have entered into licensing arrangements with Novavax to
develop and potentially commercialize HPV-16 VLP vaccines. We have exclusive
worldwide rights to HPV-16 VLP except in the United States and Puerto Rico which
we share with Novavax.

We also acquired an exclusive license from Novavax to promote, market,
distribute and sell Estrasorb(TM) and Androsorb(TM) worldwide except in the
United States and Puerto Rico. We will exclusively co-market Estrasorb(TM) and
Androsorb(TM) in the United States and Puerto Rico with Novavax. Novavax
submitted a New Drug Application for Estrasorb(TM) in June 2001.

GOVERNMENT REGULATION

Our business and our products are subject to extensive and rigorous
regulation at both the federal and state levels. Most importantly, nearly all of
our products are subject to pre-market approval requirements. New drugs are
approved under, and are subject to, the Federal Food, Drug and Cosmetic Act,
known as the "FDC Act," and the respective related regulations. Biological drugs
are subject to both the FDC Act and the Public Health Service Act, known as the
"PHS Act," and the related regulations. Biological drugs are licensed under the
PHS Act.

At the federal level, we are principally regulated by the FDA as well as by
the DEA, the Consumer Product Safety Commission, the Federal Trade Commission,
the U.S. Department of Agriculture, Occupation Safety and Health Administration
and the U.S. Environmental Protection Agency known as the "EPA." The FDC Act,
the regulations promulgated thereunder, and other federal and state statutes and
regulations, govern, among other things, the development, testing, manufacture,
safety, effectiveness, labeling, storage, record keeping, approval, advertising
and promotion of our products and those manufactured by and for third parties.
Product development and approval within this regulatory framework requires a
number of years and involves the expenditure of substantial resources.

When we acquire the right to market an existing approved pharmaceutical
product, both we and the former application holder are required to submit
certain information to the FDA. This information, if adequate, results in the
transfer to us of marketing rights to the pharmaceutical products. We are also
required to advise the FDA about any changes in certain conditions in the
approved application as set forth in the FDA's regulations. Our strategy focuses
on acquiring branded pharmaceutical products and transferring, when
advantageous, their manufacture to our manufacturing facilities as soon as
practicable after regulatory requirements are satisfied. In order to transfer
manufacturing of the acquired branded products, we must demonstrate, by filing
information with the FDA, that we can manufacture the product in accordance with
current Good Manufacturing Practices, which we refer to in this report as
"cGMPs," and the specifications and conditions of the approved marketing
application. For changes requiring prior approval, there can be no assurance
that the FDA will grant such approval in a timely manner, if at all.

The FDA also mandates that drugs be manufactured, packaged and labeled in
conformity with cGMPs. In complying with cGMP regulations, manufacturers must
continue to expend time, money and effort in production, record keeping and
quality control to ensure that the product meets applicable specifications and
other requirements to ensure product safety and efficacy. The FDA periodically
inspects drug manufacturing facilities to ensure compliance with applicable cGMP
requirements. Failure to comply with the statutory and regulatory requirements
subjects the manufacturer to possible legal or regulatory action, such as
suspension of manufacturing, seizure of product or voluntary recall of a
product. Adverse experiences with the use of products must be reported to the
FDA and could result in the imposition of market restrictions through labeling
changes or in product removal. Product approvals may be withdrawn if compliance
with regulatory requirements is not maintained or if problems concerning safety
or efficacy of the product occur following approval.

The federal government has extensive enforcement powers over the activities
of pharmaceutical manufacturers, including authority to withdraw product
approvals, commence actions to seize and prohibit the sale of unapproved or
non-complying products, to halt manufacturing operations that are not in
compliance with cGMPs, and to impose or seek injunctions, voluntary recalls, and
civil monetary and

12

criminal penalties. Such a restriction or prohibition on sales or withdrawal of
approval of products marketed by us could materially adversely affect our
business, financial condition and results of operations.

Marketing authority for our products is subject to revocation by the
applicable government agencies. In addition, modifications or enhancements of
approved products or changes in manufacturing locations are in many
circumstances subject to additional FDA approvals which may or may not be
received and which may be subject to a lengthy application process. Our
manufacturing facilities are continually subject to inspection by such
governmental agencies and manufacturing operations could be interrupted or
halted in any such facilities if such inspections prove unsatisfactory.

We also manufacture and sell pharmaceutical products which are "controlled
substances" as defined in the Controlled Substances Act and related federal and
state laws, which establish certain security, licensing, record keeping,
reporting and personnel requirements administered by the DEA, a division of the
Department of Justice, and state authorities. The DEA has a dual mission-law
enforcement and regulation. The former deals with the illicit aspects of the
control of abusable substances and the equipment and raw materials used in
making them. The DEA shares enforcement authority with the Federal Bureau of
Investigation, another division of the Department of Justice. The DEA's
regulatory responsibilities are concerned with the control of licensed
manufacturers, distributors and dispensers of controlled substances, the
substances themselves and the equipment and raw materials used in their
manufacture and packaging in order to prevent such articles from being diverted
into illicit channels of commerce. We maintain appropriate licenses and
certificates with the applicable state authorities in order to engage in
pharmaceutical development, manufacturing and distribution of pharmaceutical
products containing controlled substances. We are licensed by the DEA to
manufacture and distribute certain pharmaceutical products containing controlled
substances.

The distribution of pharmaceutical products is subject to the Prescription
Drug Marketing Act, known as "PDMA," as part of the FDC Act, which regulates
such activities at both the federal and state level. Under the PDMA and its
implementing regulations, states are permitted to require registration of
manufacturers and distributors who provide pharmaceuticals even if such
manufacturers or distributors have no place of business within the state. States
are also permitted to adopt regulations limiting the distribution of product
samples to licensed practitioners. The PDMA also imposes extensive licensing,
personnel record keeping, packaging, quantity, labeling, product handling and
facility storage and security requirements intended to prevent the sale of
pharmaceutical product samples or other diversions.

Our Parkedale facility, located in Rochester, Michigan, manufactures both
drug and biological pharmaceutical products. Prior to our acquisition of
Parkedale in February 1998, it was one of six Pfizer facilities subject to a
consent decree issued by the U.S. District Court of New Jersey in August 1993.
We plan to petition for relief from the consent decree with respect to the
Parkedale facility when appropriate.

The Parkedale facility was inspected by the FDA in December 2001. During
these inspections, the FDA made cGMP observations in written reports provided to
us. These written reports are known as "FDA Form 483s" or simply as a "483." The
observations in a 483 are reported to the manufacturer in order to assist the
manufacturer in complying with the FDC Act and the regulations enforced by the
FDA. Often a pharmaceutical manufacturer receives a 483 after an inspection. Our
Parkedale facility received a 483 following this inspection. While no law or
regulation requires us to respond to a 483, we provided the FDA with a written
response to the 483, including action plans to address the observations. The 483
from December 2001 does not require us to delay or discontinue the production of
any products made at the Parkedale facility.

We cannot determine what effect changes in regulations or statutes or legal
interpretation, when and if promulgated or enacted, may have on our business in
the future. Changes could, among other things, require changes to manufacturing
methods, expanded or different labeling, the recall, replacement or
discontinuance of certain products, additional record keeping or expanded
documentation of the properties of certain products and scientific
substantiation. Such changes, or new legislation, could have a material adverse
effect on our business, financial condition and results of operations.

13

ENVIRONMENTAL MATTERS

Our operations are subject to numerous and increasingly stringent federal,
state and local environmental laws and regulations concerning, among other
things, the generation, handling, storage, transportation, treatment and
disposal of toxic and hazardous substances and the discharge of pollutants into
the air and water. Environmental permits and controls are required for some of
our operations and these permits are subject to modification, renewal and
revocation by the issuing authorities. We believe that our facilities are in
substantial compliance with our permits and environmental laws and regulations
and do not believe that future environmental compliance will have a material
adverse effect on our business, financial condition or results of operations.
Our environmental capital expenditures and costs for environmental compliance
may increase in the future as a result in changes in environmental laws and
regulations or as a result of increased manufacturing activities at any of our
facilities.

Under the Comprehensive Environmental Response, Compensation, and Liability
Act, known as "CERCLA," the EPA can impose liability for the entire cost of
cleanup of contaminated properties upon each or any of the current and former
site owners, site operators or parties who sent waste to the site, regardless of
fault or the legality of the original disposal activity. Many states, including
Tennessee, Michigan, Wisconsin, Florida and Missouri have statutes and
regulatory authorities similar to CERCLA and to the EPA. We have hazardous waste
hauling agreements with licensed third parties to properly dispose of hazardous
wastes. We cannot assure you that we will not be found liable under CERCLA or
any applicable state statute or regulation for the costs of undertaking a clean
up at a site to which our wastes were transported.

COMPETITION

General

We compete with other pharmaceutical companies for product and product line
acquisitions. These competitors include Biovail Corporation, Elan Corporation
plc, Forest Laboratories, Inc., Galen Holdings, plc, Shire Pharmaceuticals Group
plc, Medicis Pharmaceutical Corporation, Watson Pharmaceuticals, Inc., and other
companies which also acquire branded pharmaceutical products and product lines
from other pharmaceutical companies. Additionally, since our products are
generally established and commonly sold, they are subject to competition from
products with similar qualities. Our branded pharmaceutical products may be
subject to competition from alternate therapies during the period of patent
protection and thereafter from generic equivalents. The manufacturers of generic
products typically do not bear the related research and development costs and
consequently are able to offer such products at considerably lower prices than
the branded equivalents. There are, however, a number of factors, which enable
products to remain profitable once patent protection has ceased. These include
the establishment of a strong brand image with the prescriber or the consumer,
supported by the development of a broader range of alternative formulations than
the manufacturers of generic products typically supply.

Generic Substitutes

Many of our branded pharmaceutical products have either a strong market
niche or competitive position. Some of our branded pharmaceutical products face
competition from generic substitutes. For a manufacturer to launch a generic
substitute, it must prove to the FDA when filing an application to make a
generic substitute that the branded pharmaceutical and the generic substitute
have bioequivalence. It typically takes two or three years to prove
bioequivalence and receive FDA approval for many generic substitutes. By
focusing our efforts in part on products with challenging bioequivalence or
complex manufacturing requirements, we are better able to protect market share
and produce sustainable, high margins and cash flows.

14

INTELLECTUAL PROPERTY

Patents, Licenses and Proprietary Rights

We consider the protection of discoveries in connection with our
development activities important to our business. The patent positions of
pharmaceutical firms, including ours, are uncertain and involve legal and
factual questions, which can be difficult to resolve. We intend to seek patent
protection in the United States and selected foreign countries where and when
deemed appropriate.

In connection with the Altace(R) product line, we acquired a license for
the exclusive rights in the United States and Puerto Rico to various Aventis
patents, including the rights to the active ingredients in Altace(R) having
patent protection until 2008. Our rights include the use of the active
ingredients in Altace(R) generally in combination as human therapeutic or human
diagnostic products in the United States. We also own U.S. Patents for
Procanbid(R) and for Novel Chlorthalidone Process and Product, covering the raw
materials used in the manufacture of Thalitone(R). These patents expire in 2014
and 2007, respectively.

In connection with the acquisition of Lorabid(R), we acquired, among other
things, all of Lilly's rights in approximately 30 patents and received a broad
royalty-free non-exclusive license in the U.S. and Puerto Rico to 12 other
patents and associated technology. We also received an exclusive sublicense to 4
other patents for which we must pay a royalty to Lilly if certain sales
thresholds are met. Lorabid(R) has patent protection through 2005.

We have exclusive licenses expiring June 2036 for the prescription
formulations of Neosporin(R) and Polysporin(R) and a license expiring February
2038 for the prescription formulation of Anusol-HC(R). Such licenses are subject
to early termination in the event we fail to meet specified quality control
standards, including cGMP regulations with respect to the products, or commit a
material breach of other terms and conditions of the licenses which would have a
significant adverse effect on the uses of the licensed products retained by the
licensor, which would include among other things, marketing products under these
trade names outside the prescription field.

We are party to an agreement under which Fujisawa Healthcare, Inc.,
manufactures and markets Adenocard(R) and Adenoscan(R) in the United States and
Canada in exchange for royalties. We are also party to an agreement with
Sanofi-Synthelabo, France, for the manufacture and marketing of Adenocard(R) in
countries other than the United States, Canada and Japan in exchange for
royalties. We are party to an agreement under which Suntory manufactures and
markets Adenocard(R) and Adenoscan(R) in Japan. We pay one-half of all royalties
received from Adenocard(R) sales to the University of Virginia Alumni Patents
Foundation from which we acquired rights to Adenocard(R).

Royalties received by us from sales outside of the United States and Canada
are shared equally with Fujisawa. Fujisawa, on its own behalf and ours, obtained
a license to additional intellectual property rights for intravenous adenosine
in cardiac imaging and the right to use intravenous adenosine as a
cardioprotectant in combination with thrombolytic therapy, balloon angioplasty
and coronary bypass surgery and secured intellectual property rights to extend
the exclusivity of Adenoscan(R) until 2015.

We have licensed exclusive rights to Sanofi to manufacture and market
Adenoscan(R) worldwide except in the United States, Canada, Japan, Korea and
Taiwan. Sanofi has received marketing approval for Adenoscan(R) in a number of
different countries.

We are party to a Development and Commercialization Agreement with
Discovery Therapeutics, Inc. (predecessor to Aderis Pharmaceuticals) dedicated
to the discovery, development and commercialization of compounds that stimulate
the A2a subfamily of adenosine receptors which we call "A2a-agonists." Under the
terms of that agreement, Aderis granted us an exclusive license under certain
U.S. and foreign patents and pending applications relating to A2a-agonists. We
have exclusive rights under this license to market and sell developed compounds,
either directly or through sublicense. In exchange for these rights,

15

we agreed to pay Aderis licensing fees, development milestones and royalties on
future sales of A2a-agonist products.

We have filed in excess of 20 patent applications related to Levoxyl(R).
The pending patent applications generally cover, among other things, formulation
methodologies and equipment, formulation technologies, biopharmaceutical
characteristics, drug delivery systems, and methods-of-use. If such applications
are granted, the resulting patents will potentially provide us with patent
protection on our FDA-approved new formulation of Levoxyl(R) for 20 years from
the respective filing dates of the applications.

We have filed with the U.S. Patent and Trademark Office applications for
patents covering our new Tigan(R) technology, including our FDA-approved
Tigan(R) 300mg capsules. The pending patent applications are drawn to, among
other things, formulations, dosages, dosage forms, biopharmaceutical
characteristics, methods-of-production, methods-of-use and
methods-of-instruction. If the applications are granted, the resulting patents
will potentially provide us with patent protection for our FDA-approved Tigan(R)
300mg capsules for 20 years from the filing date of the applications.

We also rely upon trade secrets, unpatented proprietary know-how and
continuing technological innovation, where patent protection is not believed to
be appropriate or attainable, to develop and sustain our competitive position.
There can be no assurance that others will not independently develop
substantially equivalent proprietary technology and techniques or otherwise gain
access to our trade secrets or disclose the technology or that we can adequately
protect our trade secrets.

Trademarks

We sell our branded products under a variety of trademarks. While we
believe that we have valid proprietary interests in all currently used
trademarks, only some of the trademarks are registered with the U.S. government,
or foreign governmental entities, including those for our principal branded
pharmaceutical products registered in the United States.

BACKLOG

As of March 22, 2002, we had no material backlog.

EMPLOYEES

As of March 22, 2002, we employed 1,827 full-time and 16 part-time persons.
Some employees of the Parkedale facility, representing approximately 13.1% of
our employees, are covered by a collective bargaining agreement with the Oil,
Chemical & Atomic Workers, International Union which expires February 28, 2003.
We believe our employee relations are good. We employ two full-time Chaplains
and offer as part of our employee benefits package access to additional
counseling services.

16

RISK FACTORS

Before you purchase our securities, you should carefully consider the risks
described below and the other information contained in this report, including
our financial statements and related notes. The risks described below are not
the only ones facing our company. Additional risks not presently known to us or
that we currently deem immaterial may also impair our business operations. If
any of the adverse events described in this "Risk Factors" section actually
occurs, our business, results of operations and financial condition could be
materially adversely affected, the trading price, if any, of our securities
could decline and you might lose all or part of your investment.

RISKS RELATED TO OUR BUSINESS

IF SALES OF OUR MAJOR PRODUCTS OR ROYALTY PAYMENTS TO US DECREASE, OUR RESULTS
OF OPERATIONS COULD BE ADVERSELY
AFFECTED.

Altace(R) accounted for approximately 32.6% and Levoxyl(R) accounted for
approximately 12.1% of our net sales for the year ended December 31, 2001, and
Altace(R), Levoxyl(R), Thrombin-JMI(R), Lorabid(R), and royalty revenues
collectively accounted for approximately 61.9% of our net sales during the same
period. We believe that sales of these products will continue to constitute a
significant portion of our total revenues for the foreseeable future.
Accordingly, any factor adversely affecting sales of any of these products or
products for which we receive royalty payments could have a material adverse
effect on our business, financial condition, results of operations and cash
flows.

WE MAY NOT ACHIEVE OUR INTENDED BENEFITS FROM THE CO-PROMOTION AGREEMENT WITH
WYETH FOR THE PROMOTION OF ALTACE(R).

We entered into the Co-Promotion Agreement with Wyeth for Altace(R)
partially because we believed a larger pharmaceutical company with more sales
representatives and, in our opinion, with substantial experience in the
promotion of pharmaceutical products to physicians would significantly increase
the sales revenue potential of Altace(R). By efficiently co-marketing the new
indications for Altace(R) which were approved by the FDA on October 4, 2000, we
intend to increase the demand for the product. In the agreement, both of us have
incentives to maximize the sales and profits of Altace(R) and to optimize the
marketing of the product by coordinating our promotional activities.

Under the Co-Promotion Agreement, Wyeth and we agreed to establish an
annual budget of marketing expenses to cover, among other things,
direct-to-consumer advertising, such as television advertisements and
advertisements in popular magazines and professional journals. One of the goals
of the direct-to-consumer advertising campaign is to encourage the targeted
audience to ask their own physicians about Altace(R) and whether it might be of
benefit for them. The direct-to-consumer campaign may not be effective in
achieving this goal. Physicians may not prescribe Altace(R) for their patients
to the extent we might otherwise hope if patients for whom Altace(R) is
indicated do not ask their physicians about Altace(R).

It is possible that we or Wyeth or both of us will not be successful in
effectively promoting Altace(R) or in optimizing its sales. The content of
agreed-upon promotional messages for Altace(R) may not sufficiently convey the
merits of Altace(R) and may not be successful in convincing physicians to
prescribe Altace(R) instead of other ACE inhibitors or competing therapies. The
targets for sales force staffing, the number and frequency of details to
physicians and the physicians who are called upon may be inadequate to realize
our expectations for the revenues from Altace(R). Neither we nor Wyeth may be
able to overcome the perception by physicians of a class effect, which we
discuss below. Further, developments in technologies, the introduction of other
products or new therapies may make it more attractive for Wyeth to concentrate
on the promotion of a product or products other than Altace(R) or to lessen
their emphasis on the marketing of Altace(R). Our strategic decisions in dealing
with managed health care organizations may not prove to be correct and we could
consequently lose sales in this market to competing ACE inhibitor products or
alternative therapies. If any of these situations occurred, they could have a
material adverse effect on our business, financial condition, results of
operations and cash flows.

17

IF OUR BRISTOL FACILITY DOES NOT RECEIVE FINAL APPROVAL FROM THE FDA TO
MANUFACTURE AND DISTRIBUTE ALTACE(R) OR IF THERE IS AN INTERRUPTION IN THE
SUPPLY OF RAW MATERIAL FOR ALTACE(R), THE DISTRIBUTION, MARKETING AND SUBSEQUENT
SALES OF THE PRODUCT COULD BE ADVERSELY AFFECTED.

We have qualified our Bristol facility as a manufacturing and packaging
site for Altace(R) in accordance with FDA guidelines and are currently
manufacturing and distributing Altace(R) at that site. Aventis Pharma
Deutscheland GmbH (Germany) will continue to be our single supplier of ramipril,
the active ingredient in Altace(R). Because the manufacture of ramipril is a
patented process, we cannot secure the raw material from another source. Aventis
(USA) will remain an alternative or back-up supplier of Altace(R) for us. Any
interruptions or delays in manufacturing or receiving the finished product or
raw material used for the future production of Altace(R) or the failure of the
FDA to issue formal written approval for the continued manufacturing and
distribution of Altace(R) at our Bristol facility could have a material adverse
effect on our business, financial condition, results of operations and cash
flows. We have entered into a supply agreement with Aventis and we believe that
it adequately protects our supply of raw material, but there can be no guarantee
that there will not be interruptions or delays in the supply of the raw
material.

SALES OF ALTACE(R) MAY BE AFFECTED BY THE PERCEPTION OF A CLASS EFFECT, AND
ALTACE(R) AND OUR OTHER PRODUCTS MAY BE SUBJECT TO VARIOUS SOURCES OF
COMPETITION FROM ALTERNATE THERAPIES.

Although the FDA has approved new indications for Altace(R), we may be
unable to meet investors' expectations regarding sales of Altace(R) due to a
perceived class effect or the inability to market Altace(R)'s new uses and
indications effectively.

All prescription drugs currently marketed by pharmaceutical companies may
be grouped into existing drug classes, but the criteria for inclusion vary from
class to class. For some classes, specific biochemical properties may be the
defining characteristic. For example, Altace(R) (ramipril) is a member of a
class of products known as ACE inhibitors because ramipril is one of several
chemicals that inhibits the production of enzymes that convert angiotensin,
which could otherwise lead to hypertension.

When one drug from a class is demonstrated to have a particularly
beneficial or previously undemonstrated effect (e.g., the benefit of Altace(R)
as shown by the HOPE trial), marketers of other drugs in the same class (for
example, other ACE inhibitors) will represent that their products offer the same
benefit simply by virtue of membership in the same drug class. Consequently,
other companies with ACE inhibitors that compete with Altace(R) will represent
that their products are equivalent to Altace(R). By doing so, these companies
will represent that their products offer the same efficacious results
demonstrated by the HOPE trial. Regulatory agencies do not decide whether
products within a class are quantitatively equivalent in terms of efficacy or
safety. Because comparative data among products in the same drug class are rare,
marketing forces often dictate a physician's decision to use one ACE inhibitor
over another. We may not be able to overcome other companies' representations
that their ACE inhibitors will offer the same benefits as Altace(R) as
demonstrated by the HOPE trial. As a result, sales of Altace(R) may suffer from
the perception of a class effect.

Currently, there is no generic form of Altace(R) available. That is, there
is no product that has the same active ingredient as Altace(R). Although no
generic substitute for Altace(R) has been approved by the FDA, there are other
ACE inhibitors whose patents have expired or will expire in the next few years
and there are generic forms of other ACE inhibitors. Also, there are different
therapeutic agents that may be used to treat certain conditions treated by
Altace(R). For example, the group of products known as angiotensin II receptor
blocker, which we refer to as an "ARB" in this report beta-blockers, calcium
channel blockers and diuretics, may be prescribed to treat certain conditions
that Altace(R) is used to treat. New ACE inhibitors or other anti-hypertensive
therapies, increased sales of generic forms of other ACE inhibitors or of other
therapeutic agents that compete with Altace(R) may adversely affect the sales of
Altace(R).

18

OUR CO-PROMOTION AGREEMENT FOR ALTACE(R) WITH WYETH COULD BE TERMINATED BEFORE
WE REALIZE ALL OF THE BENEFITS OF THE AGREEMENT OR IT COULD BE ASSIGNED TO
ANOTHER COMPANY BY WYETH OR WYETH COULD MARKET A COMPETING PRODUCT.

Our exclusive Co-Promotion Agreement for Altace(R) with Wyeth could be
terminated before we realize all of the benefits of the agreement. Wyeth and we
each have the right to terminate the agreement if annualized net sales of
Altace(R) have not reached $300.0 million by October 4, 2003. There are other
reasons why either Wyeth or we could terminate the Co-Promotion Agreement. If
the Co-Promotion Agreement is terminated for any reason, we may not realize
increased sales which we believe may result from the expanded promotion of
Altace(R). If we must unwind our marketing alliance efforts because of the
reasons mentioned above, there may be a material adverse effect on the sales of
Altace(R).

If another company were to acquire, directly or indirectly, over 50% of the
combined voting power of Wyeth's voting securities or more than half of its
total assets, then Wyeth could assign its rights and obligations under the
Altace(R) Co-Promotion Agreement to a successor without our prior consent.
However, a successor would be required to first assume in writing the
obligations of Wyeth under the Co-Promotion Agreement before the rights of Wyeth
were assigned to it. Another party might not market Altace(R) as effectively or
efficiently as Wyeth did. Also, a company which acquires Wyeth might not place
as much emphasis on the Co-Promotion Agreement, might expend fewer marketing
resources, such as a fewer number of sales representatives, than Wyeth did, or
might have less experience or expertise in marketing pharmaceutical products to
physicians. In any of these cases, there may be a material adverse effect on the
sales of Altace(R).

When feasible, Wyeth must give us six months' written notice of its intent
to sell, market or distribute any product competitive with Altace(R). Under the
Co-Promotion Agreement, a product competes with Altace(R) if it is an ACE
inhibitor, an ARB, or an ACE inhibitor or ARB in combination with other
cardiovascular agents in a single product. However, an ARB alone or in
combination with other cardiovascular agents competes with Altace(R) only if the
level of promotional effort used by Wyeth for the ARB is greater than 50% of
that applied to Altace(R). A product would not compete with Altace(R) if in the
last 12 months it had net sales of less than $100.0 million or 15% of net sales
of Altace(R), whichever was higher. Also, a product would not compete with
Altace(R) under the Co-Promotion Agreement if the product were acquired by Wyeth
through a merger with or acquisition by a third party and the product was no
longer actively promoted by Wyeth or its successor through detailing the product
to physicians.

Once we have been notified in writing of Wyeth's intent to market, sell or
distribute a competing product, then Wyeth has 90 days to inform us as to
whether it intends to divest its interest in the competing product. If Wyeth
elects to divest the competing product, it must try to identify a purchaser and
to enter into a definitive agreement with the purchaser as soon as practicable.
If Wyeth elects not to divest the competing product or fails to divest the
product within one year of providing notice to us of its plan to divest the
competing product, then both of us must attempt to establish acceptable terms
under which we would co-promote the competing product for the remaining term of
our Altace(R) Co-Promotion Agreement. Alternatively, Wyeth and we could agree
upon another commercial relationship, such as royalties payable to us for the
sale of the competing product, or we could agree to adjust the promotion fee we
pay to Wyeth for the co-promotion of Altace(R). If Wyeth and we are unable to
establish acceptable terms under any of these options, then we have the option
at our sole discretion to reacquire all the marketing rights to Altace(R) and
terminate the Co-Promotion Agreement upon 180 days' prior written notice to
Wyeth. In the event we decided to reacquire all the marketing rights to
Altace(R) we would be obligated to pay Wyeth an amount of cash equal to twice
the net sales of Altace(R) in the United States for the 12 month period
preceding the reacquisition. The foregoing could have a material effect on our
business, financial condition, results of operations and cash flows.

19

OUR SALES OF LEVOXYL(R) COULD BE AFFECTED BY FUTURE ACTIONS OF THE FDA AND BY
UNCERTAINTY IN THE LEVOTHYROXINE SODIUM PRODUCT MARKET.

On August 14, 1997, the FDA announced in the Federal Register (62 FR 43535)
that orally administered levothyroxine sodium drug products are new drugs. The
notice stated that manufacturers who wish to continue to market these products
must submit applications as required by the FDC Act by August 14, 2000. On April
26, 2000, the FDA issued a second Federal Register notice extending the deadline
for filing these applications until August 14, 2001.

On May 25, 2001, the FDA approved our previously filed New Drug Application
for Levoxyl(R), our levothyroxine sodium drug product. Other manufacturers of
levothyroxine sodium drug products have filed New Drug Applications for their
levothyroxine sodium products. Jerome Stevens, Inc. has also received approval
for its levothyroxine sodium product Unithroid. Jerome Stevens, Inc. has
licensed Unithroid to Watson Pharmaceuticals. The FDA has announced that after
August 14, 2001, it will not accept New Drug Applications for levothyroxine
sodium drug products. However, the FDA has stated it will continue to review
applications which were submitted by August 14, 2001. Further, the FDA is
requiring a phasing-out of the distribution of levothyroxine sodium products for
which New Drug Applications were pending but not approved by August 14, 2001.
Other manufacturers who wish to submit an application for an equivalent product
after August 14, 2001 must submit an Abbreviated New Drug Application. Also,
since the Jerome Stevens product has been approved, a manufacturer could submit
an Abbreviated New Drug Application demonstrating in vivo bioequivalence (in
other words, the two products produce identical effects on the body) to the
Jerome Stevens product. If the FDA were to determine that another levothyroxine
sodium product is bioequivalent to Levoxyl(R), generic substitution for
Levoxyl(R) may become possible which could result in a decrease in sales of our
product Levoxyl(R).

To further protect against the possibility of generic substitution, during
2001 we filed with the U.S. Patent and Trademark Office in excess of 20
applications for U.S. patents concerning our FDA-approved new formulation of
Levoxyl(R). The pending patent applications generally cover, among other things,
formulation methodologies and equipment, formulation technologies,
biopharmaceutical characteristics, drug delivery systems, and methods-of-use. If
such applications are granted, the resulting patents will potentially provide us
with patent protection on our FDA-approved new formulation of Levoxyl(R) for 20
years from the respective filing dates of the applications. However, we cannot
assure you that any or all of the patent applications will be granted, or
whether any or all of the resulting patents will provide Levoxyl(R) with
protection from possible generic substitution.

WE CANNOT ASSURE YOU THAT SALES OF LORABID(R) WILL INCREASE IN THE FUTURE. IF
SALES DO NOT INCREASE, THERE MAY BE A MATERIAL ADVERSE EFFECT UPON OUR RESULTS
OF OPERATIONS.

Prior to our acquisition of Lorabid(R), sales of that product were on the
decline because we believe that the prior owner was not actively promoting the
product. Increased sales of Lorabid(R) depend upon effective marketing to
physicians which leads them to write prescriptions for our product. Since the
antibiotic market is very competitive, we cannot assure you that sales of
Lorabid(R) will increase in the future. Lilly manufactures Lorabid(R) for us
under a supply agreement containing minimum purchase requirements. If Lorabid(R)
sales continue to decrease, there may be a material adverse effect upon our
results of operations and cash flows.

IF WE CANNOT IMPLEMENT OUR STRATEGY TO GROW OUR BUSINESS THROUGH INCREASED SALES
AND ACQUISITIONS, OUR COMPETITIVE POSITION IN THE PHARMACEUTICAL INDUSTRY MAY
SUFFER.

We have historically increased our sales and net income through strategic
acquisitions and related internal growth initiatives intended to develop
marketing opportunities with respect to acquired product lines. Our strategy is
focused on increasing sales and enhancing our competitive standing through
acquisitions that complement our business and enable us to promote and sell new
products through existing marketing and distribution channels. Moreover, since
we engage in limited proprietary research

20

activity with respect to product development, we rely heavily on purchasing
product lines from other companies.

Other companies, some of which have substantially greater financial,
marketing and sales resources than we do, compete with us for the acquisition of
products or companies. We may not be able to acquire rights to additional
products or companies on acceptable terms, if at all, or be able to obtain
future financing for acquisitions on acceptable terms, if at all. The inability
to effect acquisitions of additional branded products could limit the overall
growth of our business. Furthermore, even if we obtain rights to a
pharmaceutical product or acquire a company, we may not be able to generate
sales sufficient to create a profit or otherwise avoid a loss. For example, our
marketing strategy, distribution channels and levels of competition with respect
to acquired products may be different than those of our current products,
limiting our ability to compete favorably in those product categories.

IF WE CANNOT INTEGRATE THE BUSINESS OF COMPANIES OR PRODUCTS WE ACQUIRE, OUR
BUSINESS MAY SUFFER.

We anticipate that the integration of newly acquired companies and products
into our business will require significant management attention and expansion of
our sales force. In order to manage our acquisitions effectively, we must
maintain adequate operational, financial and management information systems and
motivate and effectively manage an increasing number of employees. Our
acquisitions, have significantly expanded our product offerings, operations and
number of employees. Our future success will also depend in part on our ability
to retain or hire qualified employees to operate our expanding facilities
efficiently in accordance with applicable regulatory standards. If we cannot
integrate our acquisitions successfully, these changes and acquisitions could
have a material adverse effect on our business, financial condition, results of
operations and cash flows.

IF WE ARE NOT ABLE TO DEVELOP OR LICENSE NEW PRODUCTS, OUR BUSINESS MAY SUFFER.

We compete with other pharmaceutical companies, including large
pharmaceutical companies with financial resources and capabilities substantially
greater than ours, in the development and licensing of new products. We cannot
assure you that we will be able to

- engage in product life cycle management to develop new indications and
line extensions for existing and acquired products;

- develop, license or successfully commercialize new products on a timely
basis or at all; or

- develop or license new products in a cost effective manner.

For example, we are

- in exclusive license agreements with Novavax to promote, market,
distribute and sell Estrasorb(TM), a topical transdermal estrogen
replacement therapy, and Androsorb(TM), a topical testosterone
replacement therapy for testosterone deficient women, upon their approval
by the FDA;

- engaged in the development of MRE0470, a myocardial pharmacologic stress
imaging agent; and

- in a licensing agreement with Novavax to develop recombinant human
papillomavirus (HPC) virus-like particle (VLP) vaccines.

However, we cannot assure you that we will be successful in any or all of
these projects.

Further, other companies may license or develop products or may acquire
technologies for the development of products that are the same as or similar to
the products we have in development or that we license. Because there is rapid
technological change in the industry and because many other companies may have
more financial resources than we do, other companies may

- develop or license their products more rapidly than we can,

- complete any applicable regulatory approval process sooner than we can,

21

- market or license their products before we can market or license our
products, or

- offer their newly developed or licensed products at prices lower than our
prices,

and thereby have a negative impact on the sales of our newly developed or
licensed products. Technological developments or the FDA's approval of new
therapeutic indications for existing products may make our existing products or
those products we are licensing or developing obsolete or may make them more
difficult to market successfully, which could have a material adverse effect on
our business, financial condition, results of operations and cash flows.

WE DO NOT HAVE PROPRIETARY PROTECTION FOR MOST OF OUR BRANDED PHARMACEUTICAL
PRODUCTS, AND OUR SALES COULD SUFFER FROM COMPETITION BY GENERIC SUBSTITUTES.

Although most of our revenue is generated by products not subject to
competition from generic products, there is no proprietary protection for most
of our branded pharmaceutical products, and generic substitutes for most of
these products are sold by other pharmaceutical companies. In addition,
governmental and other pressure to reduce pharmaceutical costs may result in
physicians prescribing products for which there are generic substitutes.
Increased competition from the sale of generic pharmaceutical products may cause
a decrease in revenue from our branded products and could have a material
adverse effect on our business, financial condition and results of operations.
In addition, our branded products for which there is no generic form available
may face competition from different therapeutic agents used for the same
indications for which our branded products are used.

THIRD PARTIES MANUFACTURE OR SUPPLY MATERIALS FOR MANY OF OUR PRODUCTS, AND ANY
DELAYS OR DIFFICULTIES EXPERIENCED BY THEM MAY REDUCE OUR PROFIT MARGINS AND
REVENUES OR HARM OUR REPUTATION.

A portion or all of many of our product lines, including Altace(R),
Lorabid(R) and Cortisporin(R), are currently manufactured by third parties. Our
dependence upon third parties for the manufacture of our products may adversely
impact our profit margins or may result in unforeseen delays or other problems
beyond our control. If for any reason we are unable to obtain or retain
third-party manufacturers on commercially acceptable terms, we may not be able
to distribute our products as planned. If we encounter delays or difficulties
with contract manufacturers in producing or packaging our products, the
distribution, marketing and subsequent sales of these products would be
adversely affected, and we may have to seek alternative sources of supply or
abandon or sell product lines on unsatisfactory terms. We might not be able to
enter into alternative supply arrangements at commercially acceptable rates, if
at all. We also cannot assure you that the manufacturers we utilize will be able
to provide us with sufficient quantities of our products or that the products
supplied to us will meet our specifications. DSM Pharmaceuticals, Inc. (formerly
DSM Catalytica Pharmaceuticals, Inc.), one of our third-party manufacturers,
informed us on November 21, 2001, that they ceased operations at their sterile
manufacturing facilities in Greenville, North Carolina, as a result of FDA
concerns relating to compliance issues. Due to the compliance issues, DSM
Pharmaceuticals recommended that we initiate a voluntary recall of all products
that they manufacture for us. As a result, we initiated a voluntary recall of
these products on December 18, 2001. The products affected are Cortisporin(R)
Otic Suspension, Cortisporin(R) Otic Solution, Cortisporin(R) Ophthalmic
Suspension, Pediotic(R) Otic Suspension, Septra(R) IV Infusion, and Neosporin(R)
GU Irrigant. DSM Pharmaceuticals has since notified us that it has addressed the
compliance issues and has resumed production of our products. Based on this
assurance, we have resumed distribution of some of the affected products during
the first quarter of 2002 and we expect to resume distribution of the remaining
affected products during the first half of 2002. However, we cannot assure you
that we will resume distribution as planned or that additional product recalls
will not occur in the future. The failure of DSM Pharmaceuticals to adequately
address the compliance issues at its sterile manufacturing facilities in
Greenville, North Carolina, and recommence production of our products in a
manner that allows us to resume distribution in accordance with its written
assurances to us or additional product recalls could have a material adverse
effect on our business, financial condition, results of operations and cash
flows.

22

We require a supply of quality raw materials and components to manufacture
and package pharmaceutical products for us and for third parties with which we
have contracted. Generally, we have not had difficulty obtaining raw materials
and components from suppliers in the past. Currently, we rely on over 500
suppliers to deliver the necessary raw materials and components. We have no
reason to believe that we will be unable to procure adequate supplies of raw
materials and components on a timely basis. However, if we are unable to obtain
sufficient quantities of any of the raw materials or components required to
produce and package our products, we may not be able to distribute our products
as planned. In this case, our business, financial condition and results of
operations could be materially and adversely affected.

OUR PARKEDALE FACILITY HAS BEEN THE SUBJECT OF FDA CONCERNS. IF WE CANNOT
ADEQUATELY ADDRESS THE FDA'S CONCERNS, WE MAY BE UNABLE TO OPERATE THE PARKEDALE
FACILITY AND, ACCORDINGLY, OUR BUSINESS MAY SUFFER.

Our Parkedale facility, located in Rochester, Michigan, manufactures both
drug and biological pharmaceutical products. Prior to our acquisition of the
Parkedale facility in February 1998, it was one of six Pfizer facilities subject
to a consent decree issued by the U.S. District Court of New Jersey in August
1993 as a result of FDA concerns about compliance issues within Pfizer
facilities in the period before the decree was entered.

The Parkedale facility was inspected by the FDA in December 2001. When an
FDA inspector completes an authorized inspection of a manufacturing facility,
the FDC Act mandates that the inspector give to the owner/operator of the
facility a written report listing the inspector's observations of objectionable
conditions and practices. This written report is known as an "FDA Form 483" or
simply as a "483." The observations in a 483 are reported to the manufacturer in
order to assist the manufacturer in complying with the FDC Act and the
regulations enforced by the FDA. Often a pharmaceutical manufacturer receives a
483 after an inspection and our Parkedale facility received a 483 following the
December 2001 inspection. While no law or regulation requires us to respond to a
483 we have submitted a written response detailing our plan of action with
respect to each of the observations made on the December 483 and our commitment
to correct the objectionable practice or condition. The risk to us of a 483, if
left uncorrected, could include, among other things, the imposition of civil
monetary penalties, the commencement of actions to seize or prohibit the sale of
unapproved or non-complying products, or the cessation of manufacturing
operations at the Parkedale facility that are not in compliance with cGMP. While
we believe the receipt of the 483 will not have a material adverse effect on our
business, financial condition, results of operation and cash flows, we cannot
assure you that future inspections may not result in adverse regulatory actions.
The 483 from December 2001 does not require us to delay or discontinue the
production of any products made at the Parkedale facility.

WE ARE AT 100% OF CAPACITY AT OUR MIDDLETON FACILITY WHICH WILL LIMIT OUR
ABILITY TO INCREASE PRODUCTION OF THROMBIN-JMI(R).

Our inability to expand our production capacity at our Middleton facility
will limit our ability to increase production of Thrombin-JMI(R) thereby
limiting our unit sales growth for this product.

AN INCREASE IN PRODUCT LIABILITY CLAIMS, PRODUCT RECALLS OR PRODUCT RETURNS
COULD HARM OUR BUSINESS.

We face an inherent business risk of exposure to product liability claims
in the event that the use of our technologies or products are alleged to have
resulted in adverse effects. These risks will exist for those products in
clinical development and with respect to those products that receive regulatory
approval for commercial sale. While we have taken, and will continue to take,
what we believe are appropriate precautions, we may not be able to avoid
significant product liability exposure. We currently have product liability
insurance in the amount of $60.0 million for aggregate annual claims with a
$100,000 deductible per incident and a $1,000,000 aggregate annual deductible;
however, we cannot assure you that the level or breadth of any insurance
coverage will be sufficient to cover fully all potential claims. Also, adequate
insurance coverage might not be available in the future at acceptable costs, if
at all.

23

Product recalls may be issued at our discretion or at the discretion of the
FDA, other government agencies or other companies having regulatory authority
for pharmaceutical product sales. From time to time, we may recall products for
various reasons. To date, however, these recalls have not been significant and
have not had a material adverse effect on our business, financial condition,
results of operations and cash flows. However, we cannot assure you that the
number and significance of recalls will not increase in the future.

Although product returns were approximately 2.4% of gross sales for the
year ended December 31, 2001, we cannot assure you that actual levels of returns
will not increase or significantly exceed the amounts we have anticipated.

OUR WHOLLY OWNED SUBSIDIARY, JONES PHARMA INCORPORATED, IS A DEFENDANT IN
LITIGATION WHICH IS CURRENTLY BEING HANDLED BY ITS INSURANCE CARRIERS. SHOULD
THIS COVERAGE BE INADEQUATE OR SUBSEQUENTLY DENIED OR WERE WE TO LOSE SOME OF
THESE LAWSUITS, OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED.

Our wholly owned subsidiary, Jones Pharma Incorporated, is a defendant in
906 multi-defendant lawsuits involving the manufacture and sale of
dexfenfluramine, fenfluramine and phentermine, which is usually referred to as
"fen/phen." In 1996, Jones acted as a distributor of Obenix(R), a branded
phentermine product. Jones also distributed a generic phentermine product. We
believe that Jones' phentermine products have been identified in less than 100
of the foregoing cases. The plaintiffs in these cases claim injury as a result
of ingesting a combination of these weight-loss drugs. They seek 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 warranties and misrepresentation. These suits are 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. Jones denies any liability incident to the distribution of its
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. In the event that
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.

SALES OF THROMBIN-JMI(R) MAY BE AFFECTED BY THE PERCEPTION OF RISKS ASSOCIATED
WITH SOME OF THE RAW MATERIALS USED IN ITS MANUFACTURE.

The source material for our product Thrombin-JMI(R) comes from bovine
plasma and lung tissue. Bovine-sourced materials from outside the United States
may be of some concern because of potential transmission of Bovine Spongiform
Encephalopathy, or BSE. However, we have taken precautions to minimize the risks
of contamination from BSE in our source materials including, primarily, the use
of bovine materials only from FDA-approved sources in the United States.
Although no BSE has been documented in the United States, the United States is
considered a Category II BSE-risk country, meaning that the United States is
probably BSE-free but has some history of importing cattle from the United
Kingdom.

We receive the bovine raw materials from a single vendor and any
interruption or delay in the supply of that material could adversely affect the
sales of Thrombin-JMI(R). In addition to other actions taken by us and our
vendor to minimize the risk of BSE, we are developing steps to further purify
the material of other contaminants. While we believe that our procedures and
those of our vendor for the supply, testing and handling of the bovine material
comply with all federal, state, and local regulations, we cannot eliminate the
risk of contamination or injury from these materials. We will continue
surveillance of the source and believe that the risk of BSE-contamination in the
source materials for Thrombin-JMI(R) is very low. There are high levels of
global public concern about BSE. Physicians could determine not to administer
Thrombin-JMI(R) because of the perceived risk which could adversely affect our
sales of the product. Any injuries resulting from BSE contamination could expose
us to extensive liability. Also there is currently no alternative to the
bovine-sourced materials for Thrombin-JMI(R). If BSE spreads to the United

24

States, the manufacture and sale of Thrombin-JMI(R) and our business, financial
condition and results of operations could be materially and adversely affected.

THE LOSS OF OUR KEY PERSONNEL COULD HARM OUR BUSINESS.

We are highly dependent on the principal members of our management staff,
the loss of whose services might impede the achievement of our acquisition and
development objectives. Although we believe that we are adequately staffed in
key positions and that we will be successful in retaining skilled and
experienced management, operational, scientific and development personnel, we
cannot assure you that we will be able to attract and retain key personnel on
acceptable terms. The loss of the services of key personnel could have a
material adverse effect on us, especially in light of our recent growth. We do
not maintain key-person life insurance on any of our employees. In addition, we
do not have employment agreements with any of our key employees.

IF WE ARE UNABLE TO SECURE OR ENFORCE PATENT RIGHTS, TRADEMARKS, TRADE SECRETS
OR OTHER INTELLECTUAL PROPERTY, OUR BUSINESS COULD BE HARMED.

We may not be successful in securing or maintaining proprietary patent
protection for products we develop or technologies we license. In addition, our
competitors may develop products, including generic products, similar to ours
using methods and technologies that are beyond the scope of our intellectual
property protection, which could reduce our sales. The validity of patents can
be subject to expensive litigation. We can give you no assurance that our
patents will not be challenged. Competitors may be able to develop similar or
competitive products outside the scope of our patents which could have a
material adverse effect on sales of our products or the amounts of royalty
revenues we receive.

We also rely upon trade secrets, unpatented proprietary know-how and
continuing technological innovation, where patent protection is not believed to
be appropriate or attainable, in order to maintain our competitive position. We
cannot assure you that others will not independently develop substantially
equivalent proprietary technology and techniques or otherwise gain access to our
trade secrets or disclose the technology, or that we can adequately protect our
trade secrets.

OUR SHAREHOLDER RIGHTS PLAN AND BYLAWS DISCOURAGE UNSOLICITED TAKEOVER PROPOSALS
AND COULD PREVENT SHAREHOLDERS FROM REALIZING A PREMIUM ON THEIR COMMON STOCK.

We have a shareholder rights plan that may have the effect of discouraging
unsolicited takeover proposals. The rights issued under the shareholder rights
plan would cause substantial dilution to a person or group which attempts to
acquire us on terms not approved in advance by our board of directors. In
addition, our charter and bylaws contain provisions that may discourage
unsolicited takeover proposals that shareholders may consider to be in their
best interests. These provisions include:

- a classified board of directors;

- the ability of the board of directors to designate the terms of and issue
new series of preferred stock;

- advance notice requirements for nominations for election to the board of
directors; and

- special voting requirements for the amendment of our charter and bylaws.

We are also subject to anti-takeover provisions under Tennessee laws, each
of which could delay or prevent a change of control. Together these provisions
and the rights plan may discourage transactions that otherwise could involve
payment of a premium over prevailing market prices for common stock.

25

OUR STOCK PRICE IS VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR
INVESTORS PURCHASING SHARES.

The trading price of our common stock is likely to be volatile. The stock
market in general and the market for emerging growth companies, such as King in
particular, have experienced extreme volatility. Many factors contribute to this
volatility, including

- general market conditions;

- perceptions about market conditions in the pharmaceutical industry;

- announcements of technological innovations;

- changes in marketing, product pricing and sales strategies or development
of new products by us or out competitors;

- changes in domestic or foreign governmental regulations or regulatory
approval processes; and

- variations in our results of operations.

This volatility may have a significant impact on the market price of our
common stock. Moreover, the possibility exists that the stock market (and in
particular the securities of emerging growth companies such as King) could
experience extreme price and volume fluctuations unrelated to operating
performance. The volatility of our common stock imposes a greater risk of
capital losses on our shareholders than would a less volatile stock. In
addition, such volatility makes it difficult to ascribe a stable valuation to a
shareholder's holdings of our common stock.

RISKS RELATED TO OUR INDUSTRY

FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS COULD AFFECT OUR ABILITY TO
OPERATE OUR BUSINESS.

Virtually all aspects of our activities are regulated by federal and state
statutes and government agencies. The manufacturing, processing, formulation,
packaging, labeling, distribution and advertising of our products, and disposal
of waste products arising from these activities, are subject to regulation by
one or more federal agencies, including the FDA, the DEA, the Federal Trade
Commission, the Consumer Product Safety Commission, the U.S. Department of
Agriculture, the Occupational Safety and Health Administration and the EPA, as
well as by foreign governments in countries where we distribute some of our
products.

Noncompliance with applicable FDA policies or requirements could subject us
to enforcement actions, such as suspensions of manufacturing or distribution,
seizure of products, product recalls, fines, criminal penalties, injunctions,
failure to approve pending drug product applications or withdrawal of product
marketing approvals. Similar civil or criminal penalties could be imposed by
other government agencies, such as the DEA, the EPA or various agencies of the
states and localities in which our products are manufactured, sold or
distributed and could have ramifications for our contracts with government
agencies such as the Veteran's Administration or the Department of Defense.
These enforcement actions could have a material adverse effect on our business,
financial condition and results of operations.

All manufacturers of human pharmaceutical products are subject to
regulation by the FDA under the authority of the FDC Act or the PHS Act or both.
New drugs, as defined in the FDC Act, and new human biological drugs, as defined
in the PHS Act, must be the subject of an FDA-approved new drug or biologic
license application before they may be marketed in the United States. Some
prescription and other drugs are not the subject of an approved marketing
application but, rather, are marketed subject to the FDA's regulatory discretion
and/or enforcement policies. Any change in the FDA's enforcement discretion
and/or policies could have a material adverse effect on our business, financial
condition and results of operations.

We manufacture some pharmaceutical products containing controlled
substances and, therefore, are also subject to statutes and regulations enforced
by the DEA and similar state agencies which impose security, record keeping,
reporting and personnel requirements on us. Additionally, we manufacture

26

biological drug products for human use and are subject to regulatory burdens as
a result of these aspects of our business. There are additional FDA and other
regulatory policies and requirements covering issues such as advertising,
commercially distributing, selling, sampling and reporting adverse events
associated with our products with which we must continuously comply.
Noncompliance with any of these policies or requirements could result in
enforcement actions which could have a material adverse effect on our business,
financial condition and results of operations.

The FDA has the authority and discretion to withdraw existing marketing
approvals and to review the regulatory status of marketed products at any time.
For example, the FDA may require an approved marketing application for any drug
product marketed if new information reveals questions about a drug's safety or
efficacy. All drugs must be manufactured in conformity with cGMP requirements,
and drug products subject to an approved application must be manufactured,
processed, packaged, held and labeled in accordance with information contained
in the approved application.

While we believe that all of our currently marketed pharmaceutical products
comply with FDA enforcement policies, have approval pending or have received the
requisite agency approvals, our marketing is subject to challenge by the FDA at
any time. Through various enforcement mechanisms, the FDA can ensure that
noncomplying drugs are no longer marketed and that advertising and marketing
materials and campaigns are in compliance with FDA regulations. In addition,
modifications, enhancements, or changes in manufacturing sites of approved
products are in many circumstances subject to additional FDA approvals which may
or may not be received and which may be subject to a lengthy FDA review process.
Our manufacturing facilities and those of our third-party manufacturers are
continually subject to inspection by governmental agencies. Manufacturing
operations could be interrupted or halted in any of those facilities if a
government or regulatory authority is unsatisfied with the results of an
inspection. Any interruptions of this type could have a material adverse effect
on our business, financial condition, results of operations and cash flows.

We cannot determine what effect changes in regulations, enforcement
positions, statutes or legal interpretation, when and if promulgated, adopted or
enacted, may have on our business in the future. Changes could, among other
things, require changes to manufacturing methods or facilities, expanded or
different labeling, new approvals, the recall, replacement or discontinuance of
certain products, additional record keeping and expanded documentation of the
properties of certain products and scientific substantiation. These changes, or
new legislation, could have a material adverse effect on our business, financial
condition, results of operations and cash flows.

ANY REDUCTION IN REIMBURSEMENT LEVELS BY MANAGED CARE ORGANIZATIONS OR OTHER
THIRD-PARTY PAYORS MAY HAVE AN ADVERSE EFFECT ON OUR REVENUES.

Commercial success in producing, marketing and selling products depends, in
part, on the availability of adequate reimbursement from third-party health care
payors, such as government and private health insurers and managed care
organizations. Third-party payors are increasingly challenging the pricing of
medical products and services. For example, many managed health care
organizations are now controlling the pharmaceutical products that are on their
formulary lists. The resulting competition among pharmaceutical companies to
place their products on these formulary lists has reduced prices across the
industry. In addition, many managed care organizations are considering formulary
contracts primarily with those pharmaceutical companies that can offer a full
line of products for a given therapy sector or disease state. We cannot assure
you that our products will be included on the formulary lists of managed care
organizations or that downward pricing pressures in the industry generally will
not negatively impact our operations.

NEW LEGISLATION OR REGULATORY PROPOSALS MAY ADVERSELY AFFECT OUR REVENUES.

A number of legislative and regulatory proposals aimed at changing the
health care system, including the cost of prescription products, reimportation
of prescription products and changes in the levels at which pharmaceutical
companies are reimbursed for sales of their products, have been proposed. While
we

27

cannot predict when or whether any of these proposals will be adopted or the
effect these proposals may have on our business, the pending nature of these
proposals, as well as the adoption of any proposal, may exacerbate industry-wide
pricing pressures and could have a material adverse effect on our financial
condition, results of operations or cash flows.

THE INDUSTRY IS HIGHLY COMPETITIVE, AND OTHER COMPANIES IN OUR INDUSTRY HAVE
MUCH GREATER RESOURCES THAN WE DO.

In the industry, comparatively smaller pharmaceutical companies like us
compete with large, global pharmaceutical companies with substantially greater
financial resources for the acquisition of products, technologies and companies.
We cannot assure you that

- we will be able to continue to acquire commercially attractive
pharmaceutical products, companies or technologies;

- additional competitors will not enter the market; or

- competition for acquisition of products, companies, technologies and
product lines will not have a material adverse effect on our business,
financial condition and results of operations.

We also compete with pharmaceutical companies in developing, marketing and
selling pharmaceutical products. The selling prices of pharmaceutical products
typically decline as competition increases. Further, other products now in use
or acquired by other pharmaceutical companies may be more effective or offered
at lower prices than our current or future products. Competitors may also be
able to complete the regulatory process sooner and, therefore, may begin to
market their products in advance of ours. We believe that competition for sales
of our products will be based primarily on product efficacy, safety,
reliability, availability and price.

COMPETITION FOR ACQUISITIONS. We compete with other pharmaceutical
companies for product and product line acquisitions. These competitors include
Biovail Corporation, Elan Corporation, Forest Laboratories, Inc., Galen Holdings
plc, Medicis Pharmaceutical Corporation, Shire Pharmaceuticals Group plc.,
Watson Pharmaceuticals, Inc., and other companies which also acquire branded
pharmaceutical products and product lines from other pharmaceutical companies.
We cannot assure you that

- we will be able to continue to acquire commercially attractive
pharmaceutical products, companies or technologies;

- additional competitors will not enter the market; or

- competition for acquisition of products, companies, technologies and
product lines will not have a material adverse effect on our business,
financial condition and results of operations.

PRODUCT COMPETITION. Additionally, since our products are generally
established and commonly sold, they are subject to competition from products
with similar qualities.

Our largest product Altace(R) competes in the market with other
cardiovascular therapies, including in particular, the following ACE inhibitors:

- Zestril(R) (AstraZeneca PLC),

- Acupril(R) (Pfizer Inc.),

- Prinivil(R) (Merck & Co., Inc.),

- Lotensin(R) (Novartis AG), and

- Monopril(R) (Bristol-Myers Squibb Company).

28

Our second largest product Levoxyl(R) competes with the following
levothyroxine sodium products:

- Synthroid(R) (Abbott Laboratories),

- Levothroid(R) (Forest Laboratories, Inc.) and

- Unithroid(R) (Watson Pharmaceuticals, Inc.).

We intend to market these products aggressively by, among other things

- detailing and sampling to the primary prescribing physician groups,

- sponsoring physician symposiums, including continuing medical education
seminars, and

- conducting a direct-to-consumer advertising campaign for Altace(R).

Many of our branded pharmaceutical products have either a strong market
niche or competitive position. Some of our branded pharmaceutical products face
competition from generic substitutes. For example, the FDA approved for sale
generic substitutes for Tapazole(R) during 2000 and Florinef(R) in March 2002.

The manufacturers of generic products typically do not bear the related
research and development costs and, consequently, are able to offer such
products at considerably lower prices than the branded equivalents. There are,
however, a number of factors which enable products to remain profitable once
patent protection has ceased. For a manufacturer to launch a generic substitute,
it must prove to the FDA when filing an application to make a generic substitute
that the branded pharmaceutical and the generic substitute have bioequivalence.
We believe it typically takes two or three years to prove bioequivalence and
receive FDA approval for many generic substitutes. By focusing our efforts in
part on products with challenging bioequivalence or complex manufacturing
requirements and products with a strong brand image with the prescriber or the
consumer, supported by the development of a broader range of alternative product
formulations or dosage forms, we are better able to protect market share and
produce sustainable high margins and cash flows. However, we cannot assure you
that, for any of the products, we can maintain exclusivity, protect market share
or produce high margins and cashflow as a result of these efforts.

A WARNING ABOUT 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 "Business," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and 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,
Estrasorb(TM) and Androsorb(TM) by Novavax and King;

- the development by King Pharmaceuticals Research and Development of
MREO470, pre-clinical programs, and product life cycle development
projects;

29

- our continued successful execution of our growth strategies;

- anticipated developments and expansions of our business;

- anticipated increases in sales of acquired products or royalty payments;

- the success of existing co-promotion agreements, including our
Co-Promotion Agreement with Wyeth;

- 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, including the pending application related to
Estrasorb(TM), and other regulatory agencies worldwide;

- the products which we expect to offer;

- 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;

- expectations regarding patent approval including those patents pending
for Levoxyl(R) and Tigan(R) 300mg capsules; and

- expectations regarding our financial condition and liquidity as well as
future cash flows and earnings.

These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different from those contemplated by our forward-looking statements. These known
and unknown risks, uncertainties and other factors are described in detail in
the section entitled "Risk Factors" beginning on page 17.

ITEM 2. PROPERTIES

We own the facilities listed below. These facilities include space for
manufacturing, packaging, laboratories, offices and warehousing. We believe
these facilities are adequate for the conduct of our operations.

ITEM 3. LEGAL PROCEEDINGS

In the normal course of business, we are subject to various regulatory
proceedings, lawsuits, claims and other matters. Such matters are subject to
many uncertainties and outcomes are not predictable with assurance.

State of Wisconsin Investment Board

On November 30, 1999, we entered into an agreement of merger with Medco
pursuant to which we acquired Medco in an all stock, tax-free pooling of
interests transaction, which was subject to approval by the Medco shareholders.
On January 5, 2000, Medco issued to its stockholders a proxy statement with

30

respect to the proposed transaction and noticed a meeting to approve the
transaction for February 10, 2000.

On January 11, 2000, the State of Wisconsin Investment Board, whom we call
SWIB, a Medco shareholder which held approximately 11.6% of the outstanding
stock of Medco, filed suit on behalf of a proposed class of Medco shareholders
in the Court of Chancery for the State of Delaware, New Castle County, against
Medco and members of Medco's board of directors to enjoin the shareholder vote
on the merger and the consummation of the merger. State of Wisconsin Investment
Board v. Bartlett, et al., C.A. No. 17727. SWIB alleged, among other things,
that the proxy materials failed to disclose all material information and
included misleading statements regarding the transaction, its negotiation, and
its approval by the Medco board of directors; that the Medco directors were not
adequately informed and did not adequately inform themselves of all reasonably
available information before recommending the transaction to Medco shareholders;
and that the Medco directors were disloyal and committed waste in allegedly
enabling one of the Medco directors to negotiate the transaction purportedly for
his own benefit and in agreeing to terms that precluded what the complaint
alleged were more beneficial alternative transactions. SWIB also moved for a
preliminary injunction to enjoin the shareholder vote and the merger based on
the claims asserted in its complaint. Medco and the other defendants denied all
allegations and continue to deny them.

After Medco distributed a supplemental proxy statement on January 31, 2000
and the court postponed the February 10, 2000 vote on the merger agreement for
15 days to allow shareholders sufficient time to consider the supplemental
disclosures, the court rejected SWIB's claims in a February 24 Memorandum
Opinion and denied preliminary injunctive relief because SWIB had not shown a
reasonable likelihood of success following trial on the merits. The court made a
number of preliminary findings, including that the Medco board of directors
properly delegated to one of its directors the responsibility to negotiate the
merger; that the payment of the negotiating fee was a proper exercise of
business judgment and did not constitute waste; that the other merger provisions
were also valid; that the Medco directors were adequately informed of all
material information reasonably available to them prior to approving the merger
agreement; that the Medco directors acted independently and in good faith to
benefit the economic interests of the Medco shareholders; that the alleged
omissions in the proxy statements were not material; and that the Medco board of
directors fully met its duty of complete disclosure with respect to the
transaction.

SWIB has filed an Application for a Scheduling Order stating its intention
to dismiss the case, before a class has been certified, without prejudice. In
the meantime, the action is still pending. While SWIB has indicated that it does
not intend to prosecute the merits of the case further, another shareholder
could intervene and continue the action. Even though SWIB lost its motion for
preliminary injunction, and is going to dismiss the case, SWIB has claimed that
its attorneys are entitled to an award of attorneys' fees and costs. SWIB has
petitioned the court for approximately $7.26 million in attorneys' fees and
approximately $270,000 in costs.

We believe that SWIB's case, including SWIB's claim for attorneys' fees, is
meritless, and we are vigorously contesting it. We believe SWIB's actions did
not confer a benefit on the Medco shareholders. We also believe it is unlikely
that another shareholder will intervene to continue the action, but if that
results then we will vigorously contest it. Although there can be no assurance
as to the outcome of these matters, an unfavorable resolution could have a
material adverse effect on our results of operations and our financial condition
in the future. This information is current as of the date of this report.

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

31

their own right and have been filed in various state and federal jurisdictions
throughout the United States. They seek, among other things, compensatory and
punitive damages and/or court-supervised medical monitoring of persons who have
ingested the product. We are one of many defendants in more than 32 lawsuits
which claim damages for personal injury arising from our production of the
anorexigenic drug phentermine under contract for GlaxoSmithKline. We expect to
be named in additional lawsuits related to our production of the anorexigenic
drug under contract for GlaxoSmithKline.

While we cannot predict the outcome of these suits, we believe that the
claims against us are without merit and intend to vigorously pursue all defenses
available to us. We are being indemnified in all of these suits by
GlaxoSmithKline for which we manufactured the anorexigenic product, provided
that neither the lawsuits nor the associated liabilities are based upon our
independent negligence or intentional acts, and intend to submit a claim for all
unreimbursed costs to our product liability insurance carrier. However, in the
event that GlaxoSmithKline is unable to satisfy or fulfill its obligations under
the indemnity, we would have to defend the lawsuit and be responsible for
damages, if any, which are awarded against us or for amounts in excess of our
product liability coverage.

In addition, Jones, a wholly-owned subsidiary of King, is a defendant in
906 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 its 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.

While we cannot predict the outcome of these suits, we believe that the
claims against us are without merit and intend to vigorously pursue all defenses
available to us. 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 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.

Thimerosal/Vaccine Related Litigation

King and/or its wholly-owned subsidiary, Parkedale Pharmaceuticals, Inc.
("Parkedale"), have been named as defendants in California and Mississippi,
along with Abbott Laboratories, American Home Products, Aventis Pharmaceuticals,
and other pharmaceutical companies, which have manufactured or sold vaccine
products containing the mercury-based preservative, thimerosal.

In these cases, the plaintiffs attempt to link the receipt of the
mercury-based vaccinations to neurological defects. The plaintiffs in these
cases claim that the vaccines in question would have had their beneficial
effects with or without thimerosal, and that thimerosal was a tool for
undercutting other products on the market, thereby increasing defendants' sales
and profits. The plaintiffs also claim unfair business practices, fraudulent
misrepresentations, negligent misrepresentations, and breach of implied
warranty, which are all arguments premised on the idea that the defendants
promoted vaccines without any reference to the toxic hazards and potential
public health ramifications resulting from the mercury-containing preservative.
The plaintiffs also allege that the defendants knew of the dangerous
propensities of thimerosal in their products.

The only vaccine that King/Parkedale has manufactured, distributed,
marketed and/or sold was Fluogen(R) vaccine, which did contain the mercury-based
preservative, thimerosal. Fluogen(R) was only distributed by King for two flu
seasons. King's product liability insurance carrier, has been given proper
notice of all of these matters, and defense counsel are vigorously defending our
interests. We seek to be
32

dismissed from the litigation due to lack of product identity in plaintiff's
complaints. In 2001, King and Parkedale were dismissed on this basis in a
similar case.

Other Legal Proceedings

The Parkedale facility was one of six facilities owned by Pfizer 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. King intends, when appropriate, to petition for relief
from the Consent Decree.

We are involved in various routine legal proceedings incident to the
ordinary course of our business.

Summary

Management believes that the outcome of all pending legal proceedings in
the aggregate will not have a material adverse affect on King's consolidated
financial position, results of operations, or cash flow.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

33

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The following table sets forth the range of high and low sales prices per
share of our common stock for the periods indicated. Prior to May 23, 2000, our
common stock was quoted on the Nasdaq Stock Market. Our common stock is
currently listed on the New York Stock Exchange, where our stock trades under
the symbol "KG." There were approximately 1,225 shareholders on December 31,
2001, based on the number of record holders of the common stock.

On March 27, 2002, the closing price of the common stock as reported on the
New York Stock Exchange was $34.99.

We have never paid cash dividends on our common stock. The payment of cash
dividends is subject to the discretion of the board of directors and will be
dependent upon many factors, including our earnings, our capital needs, and our
general financial condition. We anticipate that for the foreseeable future, we
will retain our earnings.

34

ITEM 6. SELECTED FINANCIAL DATA

The table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and related notes included elsewhere in this report.

- ---------------

(1) We developed four Abbreviated New Drug Applications which were filed with
the FDA on behalf of Mallinkrodt Inc., predecessor to Tyco International
Ltd., for a maximum of $2.5 million which was paid upon FDA approval and
validation of the process.
(2) Reflects loss on early extinguishment of debt in connection with the
repayment of certain debt instruments during 1998, 1999, 2000 and 2001 of
$4.4 million (net of taxes of $2.8 million), $705,000 (net of taxes of
$445,000), $12.8 million (net of taxes of $7.6 million), and $14.4 million
(net of taxes of $8.5 million), respectively. Additionally, reflects certain
asset impairment charges related to discontinuing the production and
distribution for Fluogen(R) of $9.4 million (net of taxes of $5.6 million)
in 2000.
(3) Reflects the cumulative effect of a change in accounting principle of
$545,000 (net of taxes of $325,000) due to the adoption of SFAS No. 133"
Accounting for Derivative Instruments and Hedging Activities," during the
first quarter of 2001.
(4) Income per common share reflects the four-for-three stock split declared by
our board of directors on June 20, 2001.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with the description
of our business in Item 1 and the consolidated financial statements and related
notes included elsewhere in this report. Historical results and percentage
relationships set forth in the statement of income, including trends that might
appear, are not necessarily indicative of future operations. Please see "Forward
Looking Statements" and "Risk Factors" for a discussion of the uncertainties,
risks and assumptions associated with these statements.

OVERVIEW

General

King continued its record of sustained revenue and earnings growth, along
with several milestone events during 2001. These events include the FDA's
approval of New Drug Applications for Levoxyl(R) and Tigan(R), the acquisition
of licenses related to the potential commercialization of Estrasorb(TM) and
Androsorb(TM), the submission of the New Drug Application for Estrasorb(TM), the
acquisition of three branded products and a license to a fourth from
Bristol-Myers Squibb, and the equity and convertible debenture offerings through
which we raised approximately $1.0 billion.

Approval of New Drug Applications

Our New Drug Application for Levoxyl(R) was approved by the FDA on May 25,
2001. Levoxyl(R) is a synthetic hormone used for the treatment of hypothyroidism
and suppression of thyroid-stimulating hormone. The New Drug Application for
Levoxyl(R) was submitted to the FDA pursuant to the FDA's August 14, 1997,
notice in the Federal Register that orally administered levothyroxine sodium
drug products are new drugs. The FDA notice required that manufacturers of such
drugs who wish to continue to market these products must submit applications as
required by the FDC Act by August 14, 2000. On April 26, 2000, the FDA issued a
second Federal Register notice extending the deadline for filing these
applications until August 14, 2001. With approval of our New Drug Application ,
Levoxyl(R) is the number one prescribed FDA approved levothyroxine sodium
product in the United States. The FDA is requiring unapproved levothyroxine
sodium products that have had New Drug Applications pending since on or

36

before August 14, 2001 to be gradually phased out of distribution by August 14,
2003. Also, the FDA has suggested that healthcare providers begin transitioning
patients from non-approved levothyroxine sodium products to FDA-approved
products such as Levoxyl(R). As the number one prescribed FDA-approved
levothyroxine sodium product in the United States, we believe Levoxyl(R) is well
positioned to continue to gain market share. Also, we have filed with the U.S.
Patent and Trademark Office applications for in excess of 20 patents on
Levoxyl(R). If granted, these patents should support the long-term viability of
the product. We believe these factors enhance the future growth potential of
Levoxyl(R).

On December 13, 2001, we received approval from the FDA for our New Drug
Application for Tigan(R) 300mg capsules. Tigan(R) is indicated for the treatment
of post-operative nausea and vomiting and for nausea associated with
gastroenteritis. We began distributing and marketing Tigan(R) 300mg capsules in
February 2002. As the only trimethobenzamide hydrochloride capsule proven safe
and effective, we are working diligently to protect the long-term growth
potential of Tigan(R) 300mg capsules. Specifically, we have filed with the U.S.
Patent and Trademark Office applications for patents covering our new Tigan(R)
technology, including our FDA-approved Tigan(R) 300mg capsules. The pending
patent applications are drawn to, among other things, formulations, dosages,
dosage forms, biopharmaceutical characteristics, methods-of-production,
methods-of-use and methods-of-instruction. If the applications are granted, the
resulting patents will potentially provide us with patent protection for our
FDA-approved Tigan(R) 300mg capsules for 20 years from the filing date of the
applications.

Estrasorb(TM) and Androsorb(TM) Licenses

We acquired an exclusive worldwide license from Novavax to promote, market,
distribute and sell Estrasorb(TM), except in the United States and Puerto Rico
where the parties will co-market the product, following approval. Estrasorb(TM)
is a topical estrogen replacement therapy which employs Novavax's proprietary
micellar nanoparticle technology designed to deliver 17-beta-estradiol, a
naturally occurring hormone, through the skin when applied topically in the form
of a lotion. Once approved, we will pay Novavax a royalty based on a percentage
of net sales of Estrasorb(TM)outside of the United States and Puerto Rico.
Novavax will pay King a co-promotion fee equal to 50% of net sales less cost of
goods of Estrasorb(TM) within the United States and Puerto Rico. Marketing
expenses for Estrasorb(TM) in the United States and Puerto Rico, following
approval, will be shared equally by the parties. On June 29, 2001, Novavax
submitted a New Drug Application for Estrasorb(TM) to the FDA. The FDA has
accepted the New Drug Application for review.

We also acquired an exclusive worldwide license from Novavax to promote,
market, distribute and sell Androsorb(TM), except in the United States and
Puerto Rico, where the parties will co-market the product following approval.
Androsorb(TM) is a topical testosterone replacement therapy for testosterone
deficient women. Once approved, we will pay Novavax a royalty based on a
percentage of net sales of Androsorb(TM) outside of the United States and Puerto
Rico. Novavax will pay King a co-promotion fee equal to 50% of net sales less
cost of goods of Androsorb(TM) within the United States and Puerto Rico.
Androsorb(TM) is currently in Phase II of its development.

Acquisition of Products from Bristol-Myers Squibb

On August 8, 2001, we acquired three branded prescription pharmaceutical
products, along with a fully paid license to a fourth product, from
Bristol-Myers Squibb for $286.5 million. The products acquired include
Bristol-Myers Squibb's rights in the United States to Corzide(R), a combination
beta-adrenergic receptor blocker ("beta blocker") and thiazide diuretic;
Delestrogen(R), an injectable estrogen; and Florinef(R), a corticosteroid. We
also acquired a fully paid license to and the trademark for Corgard(R), a beta
blocker, in the United States. Corzide(R) and Corgard(R) complement our key
cardiovascular product portfolio. Delestrogen(R), an injectable estrogen
replacement therapy, expands our women's health product line. Florinef(R), an
endocrinology product, is a partial replacement therapy for primary and
secondary adrenocortical insufficiency in Addison's disease and for the
treatment of salt-losing adrenogenital syndrome.

37

Equity and Convertible Debenture Offerings

During November 2001, we completed the sale of 17,992,000 newly issued
shares of common stock for $38.00 per share, raising a total of approximately
$662.0 million. Additionally, during November 2001, we issued $345.0 million of
2 3/4% Convertible Debentures due November 15, 2021 in a private placement. In
February 2002, the convertible debentures were registered with the Securities
and Exchange Commission. On December 12, 2001, we completed a tender offer to
retire approximately $96.3 million in principal amount of our 10 3/4% Senior
Subordinated Notes due 2009. With over $900 million in cash and cash
equivalents, we believe King is well-positioned for the continued successful
execution of our growth strategies in 2002.

The following summarizes net revenues by operating segment (in thousands).

RESULTS OF OPERATIONS

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Revenues

Total net revenue increased $252.1 million, or 40.6%, to $872.3 million in
2001 from $620.2 million in 2000, due primarily to the growth and acquisition of
branded pharmaceutical products.

Net sales from branded pharmaceutical products increased $264.4 million, or
50.0%, to $793.5 million in 2001 from $529.1 million in 2000. The continued
strong growth in net sales of Altace(R) and Levoxyl(R), together with the
acquisitions of Nordette(R) and Bicillin(R) from Wyeth in July 2000, and the
acquisition of Corzide(R), Delestrogen(R) and Florinef(R) and a license to
Corgard(R) from Bristol-Myers Squibb in August 2001, accounted for the majority
of the increase in net sales of our branded pharmaceutical products. While we
expect continued growth in net sales of our branded pharmaceuticals, we refer
you to the "Risk Factors" that appear elsewhere in this report, particularly
those related to Altace(R) and Levoxyl(R), that could cause results to
materially differ.

Revenue from royalties is derived from payments we receive based on sales
of Adenoscan(R) and Adenocard(R). Revenues from royalties increased $5.3
million, or 12.8%, to $46.8 million in 2001 from $41.5 million in 2000.

Revenues from contract manufacturing decreased $13.1 million, or 30.6%, to
$29.7 million in 2001 from $42.8 million in 2000. The majority of the decrease
was due to the expiration in October 2000 of a distribution agreement pursuant
to which Jones previously supplied Thrombogen(R), a line of thrombin-based
products, to Ethicon, Inc., a subsidiary of Johnson and Johnson Products, Inc.
Sales of our branded pharmaceutical product, Thrombin-JMI(R), benefited from the
expiration of the distribution agreement. Although contract manufacturing is not
a focus of our growth strategies, we expect net sales from contract
manufacturing to increase in 2002.

Net sales from generic and other sources decreased $4.7 million, or 67.1%,
to $2.3 million in 2001 from $7.0 million in 2000 primarily due to decreased
sales of a private-label generic product line to another pharmaceutical company.

38

Gross Profit

Total gross profit increased $236.7 million, or 52.7%, to $685.7 million in
2001 from $449.0 million in 2000. Total gross profit, excluding special charges,
increased $216.0 million, or 45.2% to $693.7 million in 2001 from $477.7 million
in 2000. The increase was primarily due to increased gross profit from branded
pharmaceutical products. Gross profit was impacted by some special charges in
2001 and 2000 as follows:

- We incurred a non-recurring write-off of inventory in the amount of $5.9
million during the fourth quarter 2001 related to our voluntary recall of
products manufactured for us by DSM Pharmaceuticals as a result of
regulatory issues related to DSM's manufacturing facility in Greenville,
North Carolina. DSM has notified us that it has addressed the relevant
compliance issues and resumed production of our products. We have resumed
distribution of some of the affected products during the first quarter of
2002 and we expect to resume distribution of the remaining affected
products during the first half of 2002.

- During the third quarter of 2001, we incurred a nonrecurring write-off of
obsolete Levoxyl(R) inventory of $2.1 million. The FDA approved the New
Drug Application for a new formulation of Levoxyl(R) on May 25, 2001.
Pursuant to FDA guidance, we may distribute only the FDA approved new
formulation of Levoxyl(R) after August 14, 2001.

- During the third quarter of 2000, we recorded a nonrecurring write-off of
inventory of $28.7 million associated with our decision to discontinue
Fluogen(R), an influenza virus vaccine.

Gross profit from branded pharmaceutical products increased $248.9 million,
or 61.4%, to $654.3 million in 2001 from $405.4 million in 2000. Gross profit
from branded pharmaceutical products, excluding the special charges described
above, increased $228.2 million, or 52.6%, to $662.3 million in 2001 from $434.1
million in 2000. This increase was primarily due to increases in gross profit
from the Altace(R) and Levoxyl(R) product lines as well as additional gross
profit arising from the acquisition of Nordette(R) and Bicillin(R) from Wyeth in
July 2000, and the acquisition of Corzide(R), Delestrogen(R) and Florinef(R) and
a license to Corgard(R) from Bristol-Myers Squibb in August 2001. While we
expect continued growth in gross profit from our branded pharmaceuticals, we
refer you to the "Risk Factors" that appear elsewhere in this report,
particularly those related to Altace(R) and Levoxyl(R), that could cause results
to materially differ.

Gross profit from royalties increased $4.0 million, or 11.6%, to $38.5
million in 2001 from $34.5 million in 2000. While we believe gross profit from
royalties will continue to grow, we refer you to the "Risk Factors" that appear
elsewhere in this report that could cause results to materially differ.

Gross profit associated with contract manufacturing decreased $13.6
million, to $(7.2) million in 2001 from $6.4 million in 2000. The decrease was
primarily due to the expiration in October 2000 of a distribution agreement
pursuant to which Jones previously supplied Thrombogen(R), a line of thrombin-
based products, to Ethicon, Inc., a subsidiary of Johnson and Johnson Products,
Inc. Sales of our branded pharmaceutical product, Thrombin-JMI(R), benefited
from the expiration of the distribution agreement. We believe the gross loss
associated with contract manufacturing may decrease during 2002 in comparison to
2001.

The gross profit from generic and other products decreased $2.7 million, or
96.4%, to $0.1 million in 2001 from $2.8 million in 2000 primarily due to
decreased sales of a private-label generic product line to another
pharmaceutical company.

Operating Costs and Expenses

Total operating costs and expenses increased $70.5 million, or 16.2%, to
$506.0 million in 2001 from $435.5 million in 2000. The increase was primarily
due to increased fees and expenses associated with the promotion of Altace(R)
under the Co-Promotion Agreement with Wyeth, offset by a $60.6 million reduction
in merger, restructuring, and other nonrecurring charges. Fees and expenses
associated with the promotion

39

of Altace(R) under the Co-Promotion Agreement will continue to increase based on
anticipated growth in net sales of Altace(R). Therefore, we believe that total
operating costs and expenses will continue to increase.

Cost of revenues, increased $15.3 million, or 8.9%, to $186.6 million in
2001 from $171.3 million in 2000. The increase was primarily due to costs
associated with increased unit sales of our branded pharmaceutical products,
including Altace(R) and Levoxyl(R), the acquisition of Nordette(R) and
Bicillin(R) from Wyeth in July 2000, and the acquisition of Corzide(R),
Delestrogen(R) and Florinef(R) and a license to Corgard(R) from Bristol-Myers
Squibb in August 2001, partially offset by a reduction in special charges
related to the write-off of product inventory in 2001 as compared to 2000. As a
percentage of revenues, cost of revenues decreased to 21.4% in 2001 from 27.6%
in 2000 due to an increase in sales of higher margin products and higher special
charges related to the write-off of product inventory in 2000 compared to 2001.

We have royalty expense obligations that arise in connection with our sales
of Brevital(R) and Tapazole(R) and sales of Adenoscan(R) and Adenocard(R)
generated by our licensees. Royalty expense increased $0.8 million, or 8.9% to
$9.8 million in 2001 from $9.0 million in 2000.

Selling, general and administrative expenses increased $108.0 million, or
81.3% to $240.9 million in 2001 from $132.9 million in 2000. As a percentage of
total revenues, selling, general and administrative expenses increased to 27.6%
in 2001 from 21.4% in 2000. This increase was primarily attributable to fees and
expenses associated with the promotion of Altace(R) under the Co-Promotion
Agreement with Wyeth and the growth of our dedicated national field sales force
from approximately 520 to 715 representatives during 2001. Fees and expenses
associated with the promotion of Altace(R) under the Co-Promotion Agreement will
continue to increase based on anticipated growth in net sales of Altace(R).
Therefore, we believe that selling, general and administrative expenses will
continue to increase based in part on the anticipated growth in net sales of
Altace(R).

Depreciation and amortization expense increased $6.1 million, or 14.6%, to
$48.0 million in 2001 from $41.9 million in 2000. This increase was primarily
attributable to the amortization of the intangible assets related to the
acquisitions of Nordette(R) and Bicillin(R) from Wyeth in July 2000, and the
acquisition of Corzide(R), Delestrogen(R) and Florinef(R) and a license to
Corgard(R) from Bristol-Myers Squibb in August 2001.

Research and development expenses, including the special license rights,
increased $7.8 million to $26.5 million in 2001 from $18.7 million in 2000. We
continue to increase our commitment to research and development. Therefore, we
believe research and development expense will continue to increase at a
comparable rate.

In addition to the special charges related to the write-off of inventory
described above, King incurred the following additional special charges:

- During the year ended December 31, 2001, we incurred merger and
restructuring charges of $4.1 million resulting from the further
integration of Jones.

- During the year ended December 31, 2000, we incurred merger,
restructuring, and other nonrecurring charges of $56.1 million relating
to the tax-free pooling of interests transactions with King
Pharmaceuticals Research and Development in February 2000 and Jones in
August 2000. In addition, we incurred nonrecurring charges of $8.6
million relating to our decision to discontinue Fluogen(R) and $6.1
million relating to our decision to discontinue the development of
Pallacor(TM).

Operating Income

Operating income increased $181.6 million, or 98.3%, to $366.3 million in
2001 from $184.7 million in 2000. Excluding special charges, operating income
increased $94.1 million, or 33.1%, to $378.3 million in 2001 from $284.2 million
in 2000 due to higher special charges in 2000 compared to 2001. This increase
was primarily due to increased revenues from Altace(R) and Levoxyl(R), plus the
acquisition of Nordette(R) and

40

Bicillin(R) from Wyeth in July 2000, and the acquisition of Corzide(R),
Delestrogen(R) and Florinef(R) and a license to Corgard(R) from Bristol-Myers
Squibb in August 2001. As a percentage of net revenues, operating income
increased to 42.0% in 2001 from 29.8% in 2000 due to a reduction in the amount
of special charges. Excluding special charges, operating income decreased as a
percentage of net revenues to 43.4% in 2001 from 45.8% in 2000 due primarily to
the fees and expenses associated with the promotion of Altace(R) under the
Co-Promotion Agreement with Wyeth. While we believe operating income in 2002
will continue to grow due to increased net sales of our branded pharmaceutical
products, we refer you to the "Risk Factors" that appear elsewhere in this
report, particularly those related to branded pharmaceutical products such as
Altace(R) and Levoxyl(R) that could cause results to materially differ.

Other Income (Expense)

Interest income decreased $0.9 million, or 7.6% to $11.0 million in 2001
from $11.9 million in 2000. This decrease was primarily due to lower average
investments and reduced rates of return on investments in 2001.

Interest expense decreased $24.3 million, or 65.7%, to $12.7 million in
2001 from $37.0 million in 2000, due to a significant reduction in average
borrowings outstanding.

Other income increased $3.0 million, or 90.9% to $6.3 million in 2001 from
$3.3 million in 2000. During 2001, other income related primarily to unrealized
gains on our Novavax convertible notes. During 2000, other income was due
primarily to the gain realized on an interest rate swap.

Income Tax Expense

The effective tax rate in 2001 of 37.2% and 2000 of 46.8% was higher than
the federal statutory rate of 35.0% primarily due to permanent differences
related to certain nondeductible merger related costs in 2000 as well as state
income taxes in both 2001 and 2000. We anticipate a similar tax rate in 2002 as
that experienced in 2001.

Income before Extraordinary Items and Cumulative Effect of Change in
Accounting Principle

Due to the factors set forth above, income before extraordinary items and
the cumulative effect of change in accounting principle increased $146.3
million, or 168.9%, to $232.9 million in 2001 from $86.6 million in 2000. Income
before extraordinary items and the cumulative effect of a change in accounting
principle, excluding nonrecurring charges, increased $76.0 million, or 46.2% to
$240.4 million in 2001 from $164.4 million in 2000.

Extraordinary Items

During the year ended December 31, 2001, we recognized an extraordinary
loss of $22.9 million ($14.4 million net of income taxes) due to the write-off
of unamortized financing costs and premiums paid resulting from the repayment of
debt during this period.

We recognized an extraordinary loss of $20.3 million ($12.8 million net of
income taxes) during the year ended December 31, 2000 due to the write-off of
unamortized financing costs and premiums paid in connection with the repayment
of debt during the period. Also during 2000, we recorded extraordinary losses on
disposed and impaired assets totaling $9.4 million (net of income tax benefit of
$5.6 million) in connection with our decision to discontinue Fluogen(R).

Cumulative Effect of Change in Accounting Principle

We recognized the cumulative effect of a change in accounting principle of
$0.5 million, net of income taxes of $0.3 million, during the first quarter of
2001, due to the adoption of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and hedging activities.

41

Net Income

Due to the factors set forth above, net income increased $153.4 million, or
237.8%, to $217.9 million in 2001 from $64.5 million in 2000.

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Revenues

Total net revenue increased $107.7 million, or 21.0%, to $620.2 million in
2000 from $512.5 million in 1999, due primarily to the acquisition and growth of
branded pharmaceutical products.

Net sales from branded pharmaceutical products increased $94.2 million, or
21.7%, to $529.1 million in 2000 from $434.9 million in 1999. The acquisitions
of Nordette(R) and Bicillin(R) from Wyeth in July 2000, the acquisition of
Lorabid(R) from Eli Lilly in August 1999, and increases in net sales of
Altace(R), Levoxyl(R), and Thrombin-JMI(R) offset by the discontinuance of
Fluogen(R), which generated $28.7 million net sales in 1999, accounted for the
majority of the net sales increase in branded pharmaceutical products.

Revenues from royalties increased $9.8 million, or 31.0%, to $41.5 million
in 2000 from $31.7 million in 1999. The increase was primarily due to continued
year-over-year increases in unit sales of Adenoscan(R) by Fujisawa, our North
American licensee.

Revenues from contract manufacturing increased $6.4 million, or 17.4%, to
$42.8 million in 2000 from $36.4 million in 1999. Contract manufacturing
revenues increased due to increased contract sales of thrombin products.

Net sales from generic and other sources decreased $2.5 million, or 26.8%,
to $7.0 million in 2000 from $9.5 in 1999 primarily due to decreased sales of a
generic product line.

In the fourth quarter of 2000, we adopted Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements," (SAB101) which clarifies
accounting and reporting standards for revenue recognition. The new policy
recognizes that risks of ownership in some transactions do not substantively
transfer to customers until the product has been received by them, without
regard to when legal title has transferred. Previously, we had recognized
revenue on product sales upon shipment. The effect of the change on the year
ended December 31, 2000 was to decrease revenue by $3.4 million and decrease net
income by $1.6 million, or $.01 per share on a diluted basis.

Gross Profit

Total gross profit (namely, revenues less cost of revenues, royalty expense
and the nonrecurring write-off of inventory related to the discontinuance of
Fluogen(R)) increased $80.4 million, or 21.8%, to $449.0 million in 2000 from
$368.6 million in 1999. Total gross profit excluding the nonrecurring inventory
charge increased $109.1 million, or 29.6% to $477.7 million in 2000 from $368.6
million in 1999. The increase was primarily due to increased gross profit from
branded pharmaceutical products. On September 27, 2000, we received notification
from the FDA that we must cease manufacturing and distribution of Fluogen(R), an
influenza vaccine, until we demonstrate compliance with related FDA regulations.
In addition, the notification recommended that we properly dispose of Fluogen(R)
inventory on hand. As a result of this notification, we decided to permanently
discontinue Fluogen(R) production and distribution. We recorded a nonrecurring
write-off of inventory of $28.7 million associated with these events (the
"Nonrecurring Inventory Charge").

Gross profit from branded pharmaceutical products increased $64.7 million,
or 19.0%, to $405.4 million in 2000 from $340.7 million in 1999. Gross profit
from branded pharmaceutical products excluding the Nonrecurring Inventory Charge
increased $93.4 million, or 27.4%, to $434.1 million in 2000 from $340.7 million
in 1999. This increase was primarily due to increases in gross profit from the
Altace(R) and Levoxyl(R) product lines and a reduction in costs associated with
the production of Fluogen(R) discontinued in 2000.

42

Gross profit from royalties increased $8.5 million, or 32.6%, to $34.5
million in 2000 from $26.0 million in 1999. The increase is primarily due to the
continued year-over-year increases in unit sales of Adenoscan(R), by Fujisawa.

Gross profit associated with contract manufacturing increased $10.1
million, or 272.6%, to $6.4 million in 2000 from $(3.7) in 1999 due primarily to
increased profit relating to contract sales of thrombin products.

The gross profit from generic and other decreased $2.8 million, or 49.9%,
to $2.8 million in 2000 from $5.6 million in 1999.

Operating Costs and Expenses

Total operating costs and expenses increased $132.9 million, or 43.9%, to
$435.5 million in 2000 from $302.6 million in 1999. The increase was primarily
due to increases in the costs associated with our growth, particularly an
increase in the size of the sales force by approximately 100 representatives and
the merger, restructuring, and other nonrecurring charges.

Cost of revenues, including royalty expense and the Nonrecurring Inventory
Charge, increased $27.5 million, or 19.1%, to $171.3 million in 2000 from $143.8
million in 1999. The increase was primarily due to the Nonrecurring Inventory
Charge. As a percentage of revenues, cost of revenues, including royalty expense
and the Nonrecurring Inventory Charge, decreased to 27.6% in 2000 from 28.1% in
1999 due to an increase in sales of higher margin products, offset by the
Nonrecurring Inventory Charge in 2000.

We have royalty expense obligations that arise in connection with our sales
of Brevital(R) and Tapazole(R) and sales of Adenoscan(R) and Adenocard(R)
generated by our licensees. Royalty expense increased $1.6 million, or 23.0% to
$9.0 million in 2000 from $7.4 million in 1999. The increase was associated with
the increased royalty revenue for Adenocard(R) and Adenoscan(R).

Selling, general and administrative expenses increased $25.7 million, or
23.9% to $132.9 million in 2000 from $107.2 million in 1999. The increase was
primarily attributable to sales commissions, increased sales force, other
personnel costs, marketing, and sampling costs associated with the branded
product lines. As a percentage of total revenues, selling, general and
administrative expenses increased slightly to 21.4% in 2000 from 20.9% in 1999.

Depreciation and amortization expense increased $8.0 million, or 23.9%, to
$41.9 million in 2000 from $33.9 million in 1999. This increase was primarily
attributable to the amortization of the intangible assets related to the
acquisitions of products from Wyeth in July 2000 and Lorabid(R) in August 1999.

Research and development increased $1.0 million to $18.7 million in 2000
from $17.7 million in 1999.

During the year ended December 31, 2000, we incurred merger, restructuring,
and other nonrecurring charges of $56.1 million relating to the tax-free pooling
of interests transactions with Medco in February 2000 and Jones in August 2000.
In addition, we incurred nonrecurring charges of $8.6 million relating to the
discontinuance of the Fluogen(R) product and $6.1 million relating to the
discontinuance of the development of Pallacor(TM) in 2000.

Operating Income

Operating income decreased $25.2 million, or 12.0%, to $184.7 million in
2000 from $209.9 million in 1999. Excluding the special nonrecurring charges
described above, operating income increased $74.3 million, or 35.4%, to $284.2
million in 2000 from $209.9 million in 1999. This increase was primarily due to
increased revenues from certain branded pharmaceutical products. As a percentage
of net revenues, operating income decreased to 29.8% in 2000 from 41.0% in 1999
due to the special nonrecurring charges described above. Excluding merger,
restructuring, and other nonrecurring charges described above in the amount of
$99.5 million, operating income increased as a percentage of net revenues to
45.8% from 41.0% in 1999.

43

Other Income (Expense)

Interest income increased $1.4 million, or 13.0% to $11.9 million in 2000
from $10.5 million in 1999. This increase was primarily due to higher average
investment balances held during 2000.

Interest expense decreased $18.4 million, or 33.2%, to $37.0 million in
2000 from $55.4 million in 1999, as a result of the extinguishments of debt
during 2000.

Other income increased $6.5 million, or 202.9% to $3.3 million of other
income in 2000 from $3.2 million of other expense in 1999. This increase was due
primarily to the gain on the interest rate swap of $1.9 million in 2000 and $3.3
million of fees for a 1999 patent protection legal settlement.

Income Tax Expense

The effective tax rate in 2000 of 46.8% and 1999 of 37.8% was higher than
the federal statutory rate of 35.0% primarily due to permanent differences
related to certain nondeductible merger related costs in 2000 as well as state
income taxes in both 2000 and 1999.

Income from Continuing Operations

Due to the factors set forth above, income from continuing operations
decreased $14.0 million, or 13.9%, to $86.6 million in 2000 from $100.6 million
in 1999. Income from continuing operations excluding non-recurring charges
increased $63.8 million, or 63.3% to $164.4 million in 2000 from $100.6 million
in 1999.

Extraordinary Items

We recognized an extraordinary loss of $20.3 million ($12.8 million net of
income taxes) during the year ended December 31, 2000 due to the write-off of
unamortized financing costs and premiums paid resulting from the early repayment
of debt during this period. During the year ended December 31, 1999, we
recognized an extraordinary loss of $1.2 million ($705,000 net of income taxes)
due to the write-off of unamortized financing costs resulting from the early
repayment of debt during this period.

On September 27, 2000, we received notification from the FDA that we must
cease manufacturing and distribution of Fluogen(R), an influenza vaccine, until
we demonstrate compliance with related FDA regulations. As a result of this
notification, we decided to permanently discontinue Fluogen(R) production and
distribution. We recorded extraordinary losses on disposed and impaired assets
associated with these events. The related losses were recorded in the year ended
December 31, 2000 and amounted to $15.0 million ($9.4 million net of income tax
benefit).

Net Income

Due to the factors set forth above, net income decreased $35.4 million, or
35.5%, to $64.5 million in 2000 from $99.9 million in 1999.

44

OFF BALANCE SHEET ARRANGEMENTS

We do not have any off balance sheet arrangements, except for operating
leases in the normal course of business as described in Note 10 to the financial
statements, and as reflected in the table below.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following summarizes contractual obligations and commitments at
December 31, 2001 (in thousands):

Our unconditional purchase obligations are primarily related to minimum
purchase requirements under contracts with suppliers to purchase raw materials
and finished goods related to our branded pharmaceutical products.

LIQUIDITY AND CAPITAL RESOURCES

General

We believe that cash generated from operations and the cash obtained from
the issuance of the equity and convertible debentures noted above 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.

During the first quarter of 2002, we signed a commitment letter for a
$400.0 million five-year senior credit facility.

At present, we are actively pursuing acquisitions that may require the use
of substantial capital resources.

Year ended December 31, 2001

We generated net cash from operations of $279.6 million for the year ended
December 31, 2001. Our net cash provided from operations was primarily the
result of $217.9 million in net income, adjusted for non-cash depreciation and
amortization of $48.0 million, extraordinary charges of $22.9 million, a change
in deferred income taxes of $15.2 million, tax benefits of stock options
exercised of $12.4 million, an increase in accrued expenses and other
liabilities of $41.5 million and an increase in income taxes payable of $29.0
million. Primary uses of cash flow included an increase in accounts receivable
of $44.1 million, an increase in inventories of $46.5 million, a decrease in
accounts payable of $9.7 million, non-cash amortization of deferred revenue of
$9.2 million, and a non-cash unrealized gain of $8.5 million on the Novavax
convertible senior notes.

Cash flows used in investing activities was $382.7 million primarily due to
the purchase of intangible assets of $286.5 million, capital expenditures of
$40.2 million, the purchase of investment securities of $49.9 million, loans of
$15.0 million to a supplier, and the issuance of Novavax convertible senior
notes of $10.0 million offset by proceeds from the repayment of loans of $14.1
million made to a supplier.

Financing activities provided $901.3 million of cash flow comprised
principally of $75.0 million in proceeds from the revolving credit facility,
$684.4 million in proceeds from the issuance of common shares

45

and the exercise of stock options and $345.0 million in proceeds from the
issuance of convertible debentures, offset by repayments of $75.0 million on the
revolving credit facility, $115.1 million on the senior subordinated notes, and
$11.1 million of debt issuance costs.

Year ended December 31, 2000

We generated net cash from operations of $181.4 million for the year ended
December 31, 2000. Our net cash provided from operations was primarily the
result of $64.5 million in net income, adjusted for non-cash depreciation and
amortization of $41.9 million, amortization of deferred financing costs of $1.9
million, non-cash extraordinary charges of $28.3 million, non-cash nonrecurring
charges of $37.2 million, an increase in accounts receivable of $31.2 million,
an increase in inventories of $48.8 million, an increase in accrued expenses of
$15.5 million, an increase in deferred revenue of $75.0 million, and a decrease
in income taxes payable of $31.4 million.

Cash flows used in investing activities was $153.8 million primarily due to
the purchase of intangible assets, a Novavax convertible senior note, and loans
made to a supplier of $207.0 million, $20.0 million, and $15.4 million,
respectively, $25.1 million of capital expenditures, and $142.9 million of
investment security purchases offset by proceeds from the maturity and sale of
investment securities of $256.1 million.

Financing activities used $82.9 million of cash flow comprised principally
of $159.0 million in proceeds from the revolving credit facility and $387.8
million in proceeds from the issuance of common shares and the exercise of stock
options, offset by repayments of $204.0 million on the revolving credit
facility, $53.6 million on the senior subordinated notes, and $368.7 million on
other long-term debt.

Year ended December 31, 1999

We generated net cash from operations of $148.3 million for the year ended
December 31, 1999. Our net cash provided from operations was primarily the
result of $99.9 million in net income, adjusted for non-cash depreciation and
amortization of $33.9 million and amortization of deferred financing costs of
$2.8 million, a non-cash extraordinary charge of $1.2 million before income tax
benefit, an increase in accounts receivable of $25.4 million, an increase in
inventories of $10.9 million, an increase in prepaid and other current assets of
$4.5 million, an increase in accrued expenses of $34.6 million, and an increase
in accounts payable and income taxes payable of $13.5 million and $3.9 million,
respectively.

Cash flows used in investing activities was $180.8 million primarily due to
the purchase of Lorabid(R) for $91.7 million, other investing activities of $2.1
million and $13.2 million of capital expenditures.

Financing activities provided $35.5 million of cash flow comprised
principally of $150.0 million in proceeds from senior subordinated notes and
$92.0 million in net proceeds from the revolving credit facility. These amounts
were offset by repayments of $66.0 million on the revolving credit facility and
$136.0 million on the senior subordinated seller notes.

Certain Indebtedness and Other Matters

As of December 31, 2001, we had $347.8 million of long-term debt (including
current portion). At December 31, 2001, none of our debt agreements contain
financial covenants.

On September 20, 2001, we registered a $1.3 billion universal shelf
registration statement on Form S-3 with the Securities and Exchange Commission.
This universal shelf registration statement allows us to sell any combination of
debt and/or equity securities in one or more offerings up to a total of $1.3
billion. During November 2001, we completed the sale of 17,992,000 newly issued
shares of common stock for $38.00 per share ($36.67 per share net of commissions
and expenses) resulting in net proceeds of $659.8 million. Additionally, during
November 2001, we issued $345.0 million of 2 3/4% Convertible Debentures due
November 15, 2021 in a private placement. At December 31, 2001, $616.0 million
remains available to us under the $1.3 billion universal shelf registration.

46

During November 2001, we terminated a senior credit facility which had
included a revolving credit facility and term loans. As a result of the
termination of the facility, we recorded an extraordinary charge resulting from
the write-off of deferred financing costs of $1.6 million ($1.0 million net of
income taxes).

On December 12, 2001, we completed a tender offer for approximately $96.3
million in principal amount of our 10 3/4% Senior Subordinated Notes due 2009.
As a result of the tender offer we recorded an extraordinary charge resulting
from the write-off of deferred financing costs and the payment of an early
redemption premium totaling $21.3 million ($13.4 million net of income taxes).

During the first quarter of 2002, we signed a commitment letter for a
$400.0 million five year senior secured revolving credit facility. This facility
will require us to maintain certain minimum net worth, debt to EBITDA, and
interest coverage ratios. Interest will be based on LIBOR plus a factor
dependent upon leverage ratios.

On August 8, 2001, we acquired Corzide(R), Delestrogen(R), and Florinef(R)
and a license to Corgard(R) in the United States from Bristol-Myers Squibb for
$286.5 million. The acquisition was financed with a combination of borrowings
under our senior secured credit facility and cash on hand.

Capital Expenditures

Capital expenditures, including capital lease obligations, were $40.2
million and $25.1 million for the years ended December 31, 2001 and 2000,
respectively. The principal capital expenditures included property and equipment
purchases and building improvements for ongoing compliance and increased
capacity. We expect to further increase our capital expenditures over the next
few years as a part of our acquisition and growth strategy. We also expect an
increase in our capital expenditures during 2002 due to the implementation of an
enterprise resource planning system.

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 July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." SFAS
No. 141 requires all business combinations to be accounted for under the
purchase method of accounting. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001. SFAS No. 141 will be utilized on all
business combinations of King after July 1, 2001. Therefore, pooling of interest
transactions, such as our prior acquisitions of Medco and Jones, will no longer
be permitted.

In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 modifies the accounting and
reporting for acquired intangible assets at the time of acquisition and in
subsequent periods. Intangible assets which have finite lives must be amortized
over their estimated useful life. Intangible assets with indefinite lives will
not be amortized but evaluated annually for impairment. Any impairment loss
determined upon adoption of SFAS No. 142 is to be treated as a cumulative effect
of an accounting change. Goodwill will not be amortized but instead tested for
impairment annually. SFAS No. 142 was effective immediately for goodwill and
intangible assets acquired after June 30, 2001 and is effective beginning in
2002 for all previously acquired goodwill and intangible assets.

We have applied the provisions of SFAS No. 142 for the acquisitions of
intangible assets in the third quarter of 2001 related to the Corgard(R),
Corzide(R), Delestrogen(R) and Florinef(R) products.

47

In accordance with SFAS No. 142, we are in the process of:

(a) assessing the useful lives of our intangible assets, including
whether any would have indefinite-lives;

(b) determining whether a transitional impairment charge will be
required as of January 1, 2002 as the cumulative effect of a change in
accounting principle; and

(c) determining whether reclassification of certain intangible assets
as goodwill (and vice versa) is necessary.

Although we have not completed our assessment of the impact of implementing
SFAS No. 142, we are not expecting such implementation to have a material impact
on future results of operations.

In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations" and SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002.
SFAS No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144 is effective for fiscal years beginning
after December 15, 2001. We are in the process of reviewing the impact of these
pronouncements.

CRITICAL ACCOUNTING POLICIES

We have chosen accounting policies that we believe are appropriate to
accurately and fairly report our operating results and financial position, and
we apply those accounting policies in a consistent manner. The significant
accounting policies are summarized in Note 2 to the consolidated financial
statements.

The preparation of financial statements in conformity with generally
accepted accounting principles requires that we make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses.
These estimates and assumptions are based on historical and other factors
believed to be reasonable under the circumstances. We evaluate these estimates
and assumptions on an ongoing basis and may retain outside professional advisors
to assist in our evaluation. We believe the following accounting policies are
the most critical because they involve the most significant judgments and
estimates used in preparation of our consolidated financial statements:

- Allowance for doubtful accounts We maintain an allowance for doubtful
receivables for estimated losses resulting from the inability of our
trade customers to make required payments. We provide an allowance for
specific customer accounts where collection is doubtful and also provide
a general allowance for other accounts based on historical collection
and write-off experience. Judgment is necessary and if the financial
condition of our customers were to worsen, additional allowances may be
required.

- Inventories. Our inventories are valued at the lower of cost or market
value. We evaluate all of our inventory for short dated or slow moving
product based on projections of future demand and market conditions. For
those units in inventory that are so identified, we estimate their
market value or net sales value based on current realization trends. If
the projected net realizable value is less than cost, on a product
basis, we provide a provision to reflect the lower value of that
inventory. This methodology recognizes projected inventory losses at the
time such losses are evident rather than at the time goods are actually
sold.

- Intangible assets. When we purchase products we classify the purchase
price, including expenses and assumed liabilities, as intangible assets.
The purchase price is allocated to product rights, trademarks, patents
and other intangibles using the assistance of valuation experts. We
estimate the useful lives of the assets by factoring in the
characteristics of the products such as: patent protection, competition
by products prescribed for similar indications, estimated future
introductions of competing products, and other issues. The factors that
drive the estimate of the life of the asset are inherently uncertain.

48

- Long-lived assets. We review our property and intangible assets for
possible impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. Assumptions and
estimates used in the evaluation of impairment may affect the carrying
value of long-lived assets, which could result in impairment charges in
future periods. Such assumptions include projections of future cash
flows and, in some cases, the current fair value of the asset. In
addition, our depreciation and amortization policies reflect judgments
on the estimated useful lives of assets.

- Accruals for rebates, returns, and chargebacks. Accrued rebates are
estimated based on a percentage of selling price determined from
historical information. Returns are accrued based on historical
experience equal to the cost of replacement product in accordance with
our return policy. Chargebacks are based on the estimated days of
unprocessed claims using historical experience. In all cases, judgment
is required in estimating these reserves and actual claims for rebates,
returns and chargebacks could be different from the estimates.

- Revenue recognition. We recognize revenue when the risks and rewards of
ownership are assumed by the buyer. This generally occurs upon delivery
of product to the buyer.

- Novavax convertible senior notes. Our Novavax 4% convertible senior
notes are carried at cost. We monitor the notes for possible impairment
based on Novavax's ability to pay and the underlying market value of
Novavax's common stock.

- Co-promotion Agreement with Wyeth. We have a Co-Promotion Agreement
with Wyeth to promote Altace(R). A $75.0 million upfront fee was paid to
King by Wyeth and this fee is being amortized on a straight line basis
over the life of the agreement as a reduction of co-promotion marketing
expenses. Co-promotion fees are paid to Wyeth based on a percentage of
net sales of Altace(R). We accrue co-promotion fees paid by us at the
rate expected for the entire year. The rate is adjusted during the year,
if necessary, as it becomes clearer what the actual rate will be. Co-
promotion marketing expenses are marketing costs incurred by either King
or Wyeth in accordance with the Co-Promotion Agreement. Co-promotion
marketing expenses are expensed ratably throughout the year based on
King's expected portion of the total co-marketing expenses incurred by
both parties.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Certain of our financial instruments are subject to market risks, including
interest rate risk. Our financial instruments are not currently subject to
foreign currency risk or commodity price risk. We have no financial instruments
held for trading purposes.

We have marketable securities which are carried at fair value based on
current market quotes. Gains and losses on securities are based on the specific
identification method.

The fair market value of long-term fixed interest rate debt is subject to
interest rate risk. Generally, the fair market value of fixed interest rate debt
will increase as interest rates rise and decrease as interest rates fall. In
addition, the fair value of our convertible debentures would be impacted by our
stock price. The estimated fair value of our total long-term debt at December
31, 2001 was $379.7 million. Fair values were determined from available market
prices, using current interest rates and terms to maturity.

During 2000, we terminated previously existing derivative instruments used
to manage long-term interest rate exposure and at December 31, 2001 and 2000, we
did not hold any derivatives.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is set forth at the pages indicated
in Item 14(a) below.

ITEM 9. CHANGES IN ACCOUNTANTS AND DISAGREEMENT ON ACCOUNTING AND FINANCIAL
DISCLOSURE

None.
49

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers and directors as of March 1, 2002 were as follows:

John M. Gregory has served as Chairman of the Board of Directors since
King's inception in 1993 and until January 1, 2002, Chief Executive Officer. He
previously co-founded General Injectables and Vaccines, Inc. and served as its
President from 1984 through 1994. Prior to this time, he was the owner and
registered pharmacist of a pharmacy located in Bastian, Virginia. He graduated
from the University of Maryland School of Pharmacy with a Bachelor of Science
degree in Pharmacy in 1976.

Jefferson J. Gregory has served as President of King Pharmaceuticals, Inc.,
since 1993, as President of Parkedale Pharmaceuticals, Inc., a wholly owned
subsidiary of King since February 1998, as President of King Pharmaceuticals
Research and Development, Inc. since February 2000, as President of Jones Pharma
Incorporated since November 2000 and as a director since 1995. He assumed the
position of Chief Executive Officer of King Pharmaceuticals, Inc. on January 1,
2002. He was formerly the Director of Regulatory Affairs and Product Information
for General Injectables and Vaccines, Inc. from 1991 to 1993 and was a
consultant to the pharmaceutical industry from 1989 to 1991. He formerly served
as a registered pharmacist in retail pharmacies in the Washington D.C. and
Baltimore, Maryland metropolitan areas. He graduated from the University of
Maryland School of Law with a Juris Doctor in 1985, University of Maryland
School of Pharmacy with a Bachelor of Science degree in Pharmacy in 1979, and
Montgomery College with an Associate of Arts degree in 1976.

Joseph R. Gregory has served as President of Monarch Pharmaceuticals, Inc.,
a wholly owned subsidiary of King, since 1994, has served as a director of King
since 1993 and as Vice Chairman of the Board of Directors since December 1997.
Prior to joining King, he was the Chief Operating Officer of General Injectables
and Vaccines, Inc. from 1987 to 1994 and also served as the President of its
subsidiary Insource/Williams, Inc. from 1989 to 1994. He previously served as
President of The Buying Group Network/A Service of Pharmacist Shared Services.
He graduated from the University of Maryland School of Business with a Bachelor
of Science degree in Business Administration in 1977.

50

Ernest C. Bourne has served as President of the International Division
since January 1999 and as a director since October 1997. From 1968 until January
1999, he had been employed with Bourne & Co., Inc., an investment banking firm,
where he served as President

James R. Lattanzi, CPA has served as King's Chief Financial Officer since
September 2000. Prior to joining King, Mr. Lattanzi, a Certified Public
Accountant, was a partner with PricewaterhouseCoopers for 11 years, serving most
recently as the managing partner of PricewaterhouseCoopers' Greensboro, North
Carolina office. Mr. Lattanzi is a licensed Certified Public Accountant and a
member of the American Institute of Certified Public Accountants. He graduated
from Indiana University of Pennsylvania in 1976 with a degree in accounting.

John A. A. Bellamy has served as Executive Vice President of Legal Affairs
and General Counsel since February 1995. He was formerly a corporate attorney
with the law firm of Hunter, Smith & Davis in Kingsport, Tennessee from 1990 to
1995. He graduated from the University of Tennessee College of Law with a Juris
Doctor with Honors in 1990, and graduated Summa Cum Laude with Honors in
Independent Study from King College in 1984 with a Bachelor of Arts degree in
Classics and English. He is a member of the Licensing Executives Society and
related professional organizations.

Kyle P. Macione has served as Executive Vice President, Corporate Affairs
since January 1998 and as Corporate Counsel since March 1996. He was formerly a
corporate attorney with the law firm of Elliott Lawson & Pomrenke in Bristol,
Virginia from 1992 to 1996. He graduated from Washington & Lee University School
of Law with a Juris Doctor in 1991, University of Alabama with a Masters of
Accountancy in 1987, and University of Mississippi with a Bachelor of
Accountancy in 1986. He is a Certified Public Accountant and licensed to
practice law in Tennessee and Virginia.

Earnest W. Deavenport, Jr., has served as a director since May 2000. He was
formerly Chairman of the Board and Chief Executive Officer of Eastman Chemical
Company, Kingsport, Tennessee, where he had served 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 AmSouth Bancorporation and
Theragenics Corporation, each a publicly-held corporation. Mr. Deavenport
graduated from Mississippi State University with a Bachelor of Science in
Chemical Engineering in 1960 and from Massachusetts Institute of Technology with
a Masters of Science in Management in 1985.

Frank W. DeFriece, Jr. has served as a director since October 1997. He has
served as President, Vice President, fund administrator and board member of the
Massengill DeFriece Foundation, Inc. since 1950. Since 1946 he served in various
capacities with the S.E. Massengill Company. He served as President of the S.E.
Massengill Company from 1960 to 1971 when the company was purchased by Beecham,
Inc. From 1971 to 1973, he served as Board Member Vice Chairman of Beecham, Inc.
He graduated from Roanoke College with a Bachelor of Science in Chemistry in
1946.

Gregory D. Jordan 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 a Bachelor of Arts degree from
Belhaven College and Masters of Arts and Divinity degrees from Trinity
Evangelical Divinity School. He earned his Doctorate in Hebraic and Cognate
Studies from Hebrew Union College -- Jewish Institute of Religion.

R. Charles Moyer, Ph.D., has served as a director of King since December
2000. Dr. Moyer also currently serves as the Dean of the Babcock Graduate School
of Management at Wake Forest University, a position he has held since 1996, and
presently holds the GMAC Insurance Chair of Finance. 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 Masters of Business
Administration from the University of Pittsburgh in 1968, and his Bachelor of
Arts degree in Economics from Howard University in 1967.

D. Greg Rooker has served as a director of King since October 1997. Mr.
Rooker is the former owner and President of Family Community Newspapers of
Southwest Virginia, Inc., Wytheville, Virginia, which
51

consists of six community newspapers and a national monthly motor sports
magazine. 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 without compensation as Secretary/Treasurer of the
Jason Foundation and the President of Brain Injury Services of SWVA, Inc. Mr.
Rooker is a graduate of Northwestern University with a degree in Journalism.

Messrs. John, Joseph and Jefferson Gregory are brothers.

COMPENSATION OF DIRECTORS

Each non-employee director of King receives annual fees of $18,000 payable
quarterly plus a fee of $1,000 for participation in each board meeting.
Non-employee directors also receive $500 for each committee meeting that is held
on a day when a meeting of the board is not convened and $250 for each meeting
attended that is held on a day when a meeting of the board is convened. The
chairman of the Audit Committee is paid an annual fee of $6,000 and the chairman
of the Stock Option Committee is paid an annual fee of $3,000. A non-employee
director who performs special assignments at the direction of the chairman of
the board receives a fee of $2,000 per day when at least one-half of the
business day has been completely devoted to the assignment requested by the
chairman. Travel expenses related to board or committee meetings are reimbursed.
The 1998 Non-Employee Director Plan was adopted by the Board of Director in
February 1998. Currently options exercisable for 153,332 shares of common stock
have been issued to our current non-employee directors.

MEETINGS OF DIRECTORS

The Board of Directors held 15 meetings during 2001. No director attended
less than 75% of all meetings held, except for Mr. Deavenport.

CLASSIFICATION OF BOARD OF DIRECTORS

Pursuant to the Bylaws, the Board of Directors is divided into three
classes of directors each containing, as nearly as possible, an equal number of
directors. Directors within each class are elected to serve three-year terms and
approximately one-third of the directors sit for election at each annual meeting
of the shareholders. A classified board of directors may have the effect of
deterring or delaying any attempt by any group to obtain control of King by a
proxy contest since such third party would be required to have its nominees
elected at two separate meetings of the Board of Directors in order to elect a
majority of the members of the Board of Directors.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors has appointed an Audit Committee and a Stock Option
Committee.

Audit Committee. The Audit Committee, which currently consists of D. Greg
Rooker, Earnest W. Deavenport, Jr., Frank W. DeFriece, Jr., Gregory D. Jordan
and R. Charles Moyer has the authority and responsibility to hire one or more
independent public accountants to audit our books, records and financial
statements and to review our systems of accounting (including our systems of
internal control); to discuss with the independent accountants the results of
the annual audit and quarterly reviews; to conduct periodic independent reviews
of the systems of accounting (including systems of internal control); and to
make reports periodically to the Board of Directors with respect to its
findings. The audit committee met five times in 2001.

Stock Option Committee. The Stock Option Committee, which currently
consists of Joseph R. Gregory, Frank W. DeFriece, Jr. and D. Greg Rooker, is
responsible for administering and determining awards under King's stock option
plans.

52

ITEM 11. EXECUTIVE COMPENSATION

The following table summarizes all compensation earned by our chief
executive officer and by each of the four other most highly compensated
executive officers whose total annual salary and bonus exceeded $100,000 for
services rendered in all capacities for the year ended December 31, 2001.

SUMMARY COMPENSATION TABLE

- ---------------

(1) Mr. Lattanzi became chief financial officer during 2000.

The following table sets forth the number of options to purchase shares of
common stock that had been granted to executive officers named in the Summary
Compensation Table above as of December 31, 2001.

OPTIONS/SARS GRANTED IN LAST FISCAL YEAR

53

The following table disclosed information regarding stock options held at
the end of or exercised in fiscal year 2001 for executive officers named in the
summary Compensation Table above as of December 31, 2001.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES

- ---------------

(1) Based on $42.13 per share, the closing price of the common stock as quoted
on the New York Stock Exchange Stock at December 31, 2001.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Board of Directors served as the Compensation Committee in 2001.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the ownership
of the common stock as of March 1, 2002, for (i) each person who owns more than
5% of the common stock, (ii) each director and executive officer of King, and
(iii) all executive officers and directors of King as a group.

- ---------------

* Less than 1%
(1) Unless otherwise indicated, beneficial ownership consists of sole voting
and investing power based on 247,910,275 shares issued and outstanding as
of March 22, 2002. Options to purchase shares which are exercisable or
become exercisable within 60 days of March 22, 2002 are deemed to be
outstanding for the purpose of computing the percentage of outstanding
shares owned by each person

54

to whom a portion of such options relate but are not deemed to be
outstanding for the purpose of computing the percentage owned by any other
person.
(2) Includes 8,003,054 shares jointly owned with Mr. Gregory's spouse; 925,633
shares owned by S.J., LLC, a limited liability company, the primary members
of which are Mr. Gregory's children, 3,999,999 shares held in blind trusts
and 75,800 shares registered in the name of The Lazarus Foundation, Inc., a
private foundation controlled by John M. Gregory. Mr. Gregory's address is
501 Fifth Street, Bristol, Tennessee 37620.
(3) Includes 1,206,082 shares owned through Kingsway L.L.C., a limited
liability company, the primary members of which are Mr. Gregory, his spouse
and his son, 1,599,999 shares held in blind trusts and 183,331 shares
issuable upon the exercise of options. Mr. Gregory's address is 501 Fifth
Street, Bristol, Tennessee 37620.
(4) Includes 1,169,881 shares jointly owned with Mr. Gregory's spouse, 466,666
held in a blind trust and 87,333 shares beneficially owned by Gregory
Investments, L.P., the general partners of which are Mr. Gregory and his
spouse and 183,331 shares issuable upon the exercise of options granted to
Mr. Gregory.
(5) Includes 138,331 shares issuable upon the exercise of options.
(6) Includes 300 shares jointly owned with Mr. Lattanzi's spouse and 40,000
shares issuable upon the exercise of options.
(7) Includes 54,999 shares issuable upon the exercise of options.
(8) Includes 37,000 shares issuable upon the exercise of options.
(9) Includes 13,333 shares issuable upon the exercise of options.
(10) Includes 63,333 shares issuable upon the exercise of options.
(11) Includes 13,333 shares issuable upon the exercise of options.
(12) Includes 33,332 shares held in trust for the benefit of Mr. Rooker's
children; 8,549 shares owned by Mr. Rooker's spouse, 13,420 shares owned by
The Jason Foundation, a private foundation controlled by Mr. Rooker and
63,333 shares issuable upon the exercise of options.
(13) Includes 790,324 shares subject to options exercisable within 60 days.
(14) Based on a Schedule 13G filed with the SEC on behalf of Putnam Investments,
LLC; Marsh & McLennon Companies, Inc.; Putnam Investment Management, LLC;
and The Putnam Advisory Company, LLC, One Post Office Square, Boston,
Massachusetts 02109.
(15) Based on a Schedule 13G filed with the SEC on behalf The Summit Fund, LLC,
The United Company, United Management Company, LLC, Nicholas D. Street,
James W. McGlothlin, Lois A. Clarke, Wayne L. Bell and Ted G. Wood. The
address of The Summit Fund, LLC is 1005 Glenway Avenue, Bristol, Virginia
24201. Nicholas D. Street, James W. McGlothlin, Lois A. Clarke, Wayne L.
Bell and Ted G. Wood, affiliates of The Summit Fund, LLC, own 1,664,799
shares; 1,103,332 shares; 168,807 shares; 83,200 shares; and 42,666 shares,
respectively.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

King Pharmaceuticals Benevolent Fund, Inc. is a nonprofit corporation
organized under the laws of the Commonwealth of Virginia and is exempt from
taxation under Section 501(c)(3) of the Internal Revenue Code. The Board of
Directors of the Benevolent Fund includes John M. Gregory, Joseph R. Gregory and
Jefferson J. Gregory who are also executive officers of King. Messrs. John M.,
Joseph R. and Jefferson J. Gregory are also directors of King. At December 31,
2001, the Benevolent Fund was not indebted to King. The Benevolent Fund is
independent of King, maintains its own accounting records and its activities are
not directly related to the business of King. We donated to the Benevolent Fund
inventory with a cost of approximately $4.1 million in 2001 and $3.3 million in
2000.

King made charitable contributions during 2001 to King College, Bristol,
Tennessee, of approximately $100,000. Mr. Jordan, one of our directors, serves
as the President of King College.

55

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Documents filed as a part of this report:

(1) Financial Statements

All other schedules have been omitted because of the absence of conditions
under which they are required or because the required information is given in
the above-listed financial statements or notes thereto.

(b) Reports on Form 8-K.

During the quarter ended December 31, 2001, we filed two Current Reports on
Form 8-K.

(1) A report was filed on October 19, 2001 under Item 7 and included the
following financial statements:

(i) Financial Statement of Business Acquired

Report on Independent Accountants

Statements of Net Sales and Product Contribution for the Year ended
December 31, 2000 and the Six Months Ended June 30, 2001 and 2000
(Unaudited)

(ii) Unaudited Proforma Consolidated Financial Information

Unaudited Proforma Consolidated Financial Statements

King Pharmaceuticals, Inc. Unaudited Pro Forma Consolidated Balance
Sheet as of June 30, 2001

Notes to Unaudited Pro Forma Consolidated Balance Sheet

Kings Pharmaceuticals, Inc. Unaudited Pro Forma Consolidated
Statement of Operations for the Year Ended December 31, 2000

King Pharmaceuticals, Inc. Unaudited Pro Forma Consolidated
Statement of Operations for the Six Months Ended June 30, 2001

Notes to Unaudited Pro Forma Consolidated Statements of Operations

(2) A report was filed on November 2, 2001 under Item 5 including a press
release announcing earnings results for the three months and nine months ended
September 30, 2001.

56

(c) Exhibits

The following Exhibits are filed herewith or incorporated herein by
reference:

- ---------------

(1) Incorporated by reference to King's Registration Statement on Form S-1
(Registration No. 333-38753) filed October 24, 1997.
(2) Incorporated by reference to King's Current Report on Form 8-K filed June
30, 2000.
(3) Incorporated by reference to King's Registration Statement on Form S-4
(Registration No. 333-42568) filed July 20, 2000.
(4) Incorporated by reference to King's Schedule 13-D filed December 29, 2000.
(5) Incorporated by reference to King's Current Report on Form 8-K/A filed
August 24, 2001.
(6) Incorporated by reference to King's Registration Statement on Form S-3
(Registration No. 333-82126) filed February 4, 2002.
(7) Incorporated by reference to King's Registration Statement on Form S-8 filed
February 26, 1999.
(8) Incorporated by reference to King's Registration Statement on Form S-8 filed
March 9, 2000.
(9) Incorporated by reference to King's Registration Statement on Form S-8 filed
September 6, 2000.

58

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
King Pharmaceuticals, Inc.:

In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements listed in the index appearing under Item
14(a)(1) on page 56 present fairly, in all material respects, the financial
position of King Pharmaceuticals, Inc. and its subsidiaries at December 31, 2000
and 2001, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, based on our audits and the report of other auditors,
the financial statement schedule listed in the index appearing under Item
14(a)(2) on page 56 presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. The consolidated financial statements give
retroactive effect to the merger of Jones Pharma Incorporated on August 31, 2000
in a transaction accounted for as a pooling of interests, as described in Note 3
to the consolidated financial statements. We did not audit the financial
statements and financial statement schedule of Jones Pharma Incorporated, which
statements reflect total assets of $300.5 million as of December 31, 1999 and
total revenues of $132.5 million for the year ended December 31, 1999. Those
statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for Jones Pharma Incorporated, is based solely on the report of
the other auditors. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for our opinion.

As discussed in Note 21 to the consolidated financial statements, in 2000
the Company changed its method of recognizing revenue to conform to the
Securities and Exchange Commission's Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements.

As discussed in Note 21 to the consolidated financial statements, in 2001
the Company adopted Statement of Financial Accounting Standards ("SFAS") No.
133, Accounting for Derivative Instruments and Hedging Activities, as amended by
SFAS 138 and interpreted by certain Financial Accounting Standards Board
Derivative Implementation Group issues.

PricewaterhouseCoopers LLP
Atlanta, Georgia
February 15, 2002

F-1

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Jones Pharma Incorporated

We have audited the consolidated statements of income, shareholders' equity
and cash flows of Jones Pharma Incorporated for the year ended December 31, 1999
(not presented separately herein). Our audit also included the financial
statement schedule of Jones Pharma Incorporated included in its Annual Report on
Form 10-K for the fiscal year ended December 31, 1999 (not presented separately
herein). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of Jones Pharma Incorporated for the year ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

Ernst & Young LLP

St. Louis, Missouri
January 31, 2000

F-2

KING PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of the consolidated financial
statements.

F-3

KING PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

(IN THOUSANDS, EXCEPT PER SHARE DATA)

The accompanying notes are an integral part of the consolidated financial
statements.

F-4

KING PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

AND OTHER COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

(IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of the consolidated financial
statements.

F-5

KING PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(IN THOUSANDS)

The accompanying notes are an integral part of the consolidated financial
statements.
F-6

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)

1. THE COMPANY

King Pharmaceuticals, Inc. ("King" or the "Company") is a vertically
integrated pharmaceutical company that develops, manufactures, markets and sells
primarily branded prescription pharmaceutical products. Through a national sales
force and co-promotion arrangements, King markets its branded pharmaceutical
products to general/family practitioners, internal medicine physicians,
cardiologists, endocrinologists, pediatricians, obstetrician/gynecologists, and
hospitals across the United States and in Puerto Rico. The Company also provides
contract manufacturing for a number of the world's leading pharmaceutical and
biotechnology companies. In addition, the Company receives royalties from the
rights of certain products (Adenocard(R) and Adenoscan(R)) previously sold.

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.,
Jones Pharma Incorporated, and King Pharmaceuticals of Nevada, Inc. All
intercompany transactions and balances have been eliminated in consolidation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates. The preparation of the consolidated financial statements
in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions. Assets, liabilities,
revenues and expenses, and disclosure of contingent assets and liabilities are
affected by such estimates and assumptions. Actual results could differ from
those estimates.

Revenue Recognition. Product sales are reported net of an estimate for
returns and allowances, rebates and chargebacks. During the fourth quarter of
2000, the Company changed its accounting policy for recognizing product sales in
accordance with the SEC's Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements." Previously, sales were recorded upon
shipment of goods to the customer. The new policy recognizes that the risks of
ownership in some transactions do not substantively transfer to customers until
the product has been received by them, without regard to when legal title has
transferred (Note 21). Royalty revenue is recognized based on a percentage of
sales reported by third parties.

Shipping and Handling Costs. The Company incurred $1,695, $1,619, and
$2,455 in 1999, 2000 and 2001, respectively, related to shipping and handling
costs classified with selling, general and administrative expenses in the
consolidated statement of operations. The Company does not bill customers for
such costs.

Cash and Cash Equivalents. The Company considers all highly liquid
investments with an original maturity of three months or less when purchased to
be cash equivalents. The Company's cash and cash equivalents are placed in large
domestic banks which limit the amount of credit exposure.

Marketable Securities. The Company classifies its existing marketable
securities as available-for-sale. These securities are carried at fair market
value based on current market quotes, with unrealized gains and losses reported
in shareholders' equity as a component of other comprehensive income. Gains or
losses on securities sold are based on the specific identification method. The
Company's policy is to only invest in high-grade corporate bonds, government
agencies and municipalities. The Company reviews its investment portfolio as
deemed necessary and, where appropriate, adjusts individual securities for
other-than-temporary impairments. There was no material unrealized gain or loss
at December 31, 2000 or 2001. The company does not hold these securities for
speculative or trading purposes.

Inventories. Inventories are stated at the lower of cost or market. Cost
is determined using the first-in, first-out (FIFO) method. Inventory of product
samples held for distribution to third parties represent 10% and 17% of
inventory as of December 31, 2000 and December 31, 2001, respectively.

F-7

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Income Taxes. Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is recorded when, in
the opinion of management, it is more likely than not that some or all of the
deferred tax assets will not be realized.

Financial Instruments and Derivatives. The Company does not use financial
instruments for trading purposes. Interest rate protection agreements, which are
a type of derivative instrument, are sometimes used to manage interest rate
risks. The notional amounts of the interest rate protection agreements entered
into by the Company are used to measure the interest to be paid or received and
do not represent the amount of exposure to loss. At December 31, 2000 and 2001
the Company did not have any interest rate protection agreements or other
derivatives outstanding.

The fair value of financial instruments are determined by reference to
various market data or other valuation techniques as appropriate. Unless
otherwise disclosed, the fair values of financial instruments approximate their
recorded values.

Property, Plant and Equipment. Property, plant and equipment are stated at
cost. Maintenance and repairs are expensed as incurred. Depreciation is computed
over the estimated useful lives of the related assets using the straight-line
method for financial statement purposes and accelerated methods for income tax
purposes. The estimated useful lives are principally 15 to 40 years for
buildings and improvements and 3 to 15 years for machinery and equipment.
Retirements, sales and disposals of assets are recorded by removing the cost and
accumulated depreciation with any resulting gain or loss reflected in income.

In the event that facts and circumstances indicate that the carrying amount
of property, plant and equipment may be impaired, evaluation of recoverability
is performed using the estimated future undiscounted cash flows associated with
the asset compared to the asset's carrying amount to determine if a writedown is
required. To the extent such projection indicates that undiscounted cash flow is
not expected to be adequate to recover the carrying amount, the asset is written
down to discounted cash flows.

Capitalized Interest. For the years ended December 31, 1999, 2000 and
2001, the Company capitalized interest of approximately $381, $645,and $1,256,
respectively.

Intangible Assets. Intangible assets which include primarily product
rights, patents and goodwill are stated at cost, net of accumulated
amortization. Amortization is computed over the estimated useful lives, ranging
from 5 to 36 years, using primarily the straight-line method.

The Company evaluates the propriety of the carrying amount of intangibles
as well as the related amortization period to determine whether current events
and circumstances warrant adjustments to the carrying values and/or revised
estimates of useful lives. This evaluation is performed using the estimated
projected future undiscounted cash flows associated with the asset compared to
the asset's carrying amount to determine if a writedown is required. To the
extent such projection indicates that undiscounted cash flow is not expected to
be adequate to recover the carrying amount, the asset is written down to its
fair value.

Deferred Financing Costs. Financing costs related to the $345 million
convertible debt are being amortized over five years to the first date the debt
can be put by the holders to the Company.

Self-Funded Health Insurance. The Company is self-insured with respect to
its health care benefit program. The Company pays a fee to a third party to
administer the plan. The Company has stop loss coverage on a per employee basis
as well as in the aggregate. Self-insured costs are accrued based upon reported
claims and an estimated liability for claims incurred but not reported.

F-8

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Advertising. The Company expenses advertising costs as incurred and these
costs are included as selling, general and administrative expenses. Advertising
costs for the years ended December 31, 1999, 2000, and 2001 were $22,657,
$28,035, and $48,460, respectively.

Promotional Fees To Wyeth. On June 22, 2000, the Company entered into a
co-promotion agreement with Wyeth to promote Altace(R) in the United States and
Puerto Rico through October 29, 2008. Under the agreement, Wyeth paid an up
front fee of $75.0 million to King which was classified as other liabilities and
is being amortized as a reduction of marketing expenses over the life of the
agreement.

In connection with the co-promotion agreement with Wyeth, the Company
agreed to pay Wyeth a promotional fee as follows:

- - For 2000, an amount equal to a percentage of annualized Altace(R) net sales
from October 5, 2000 through December 31, 2000.

- - For 2001 and 2002, 20% of Altace(R) net sales up to $165 million, 50% of
Altace(R) net sales from $165 million to $465 million and 52% of Altace(R) net
sales in excess of $465 million.

- - For years subsequent to 2002 through 2008 the fee is based on the same
formula, except the fee for the first $165 million will be 15% of Altace(R)
net sales.

The co-promotion fee is accrued quarterly based on a percentage of
Altace(R) net sales at a rate equal to the expected relationship of the expected
co-promotion fee for the year to applicable expected Altace(R) net sales for the
year.

Statement of Accounting Standards Not Yet Adopted. In July 2001, the
Financial Accounting Standards Board issued SFAS No. 141, "Business
Combinations." SFAS No. 141 requires all business combinations to be accounted
for under the purchase method of accounting. SFAS No. 141 is effective for all
business combinations initiated after June 30, 2001, as well as all business
combinations accounted for under the purchase method of accounting for which the
date of acquisition is July 1, 2001, or later. SFAS No. 141 will be utilized on
all business combinations of the Company after July 1, 2001. Therefore, pooling
of interest transactions, such as the Company's prior acquisitions with Medco
and Jones, will no longer be permitted.

In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 modifies the accounting and
reporting for acquired intangible assets at the time of acquisition and in
subsequent periods. Intangible assets which have finite lives must be amortized
over their estimated useful life. Intangible assets with indefinite lives will
not be amortized but evaluated annually for impairment. Any impairment loss
determined upon adoption of SFAS No. 142 is to be treated as the cumulative
effect of an accounting change. Goodwill will not be amortized but instead
tested for impairment annually. SFAS No. 142 was effective immediately for
goodwill and intangible assets acquired after June 30, 2001 and is effective
beginning in 2002 for all previously acquired goodwill and intangible assets.

The Company has applied the provisions of SFAS 142 for acquisitions in the
third quarter of 2001 related to the Corgard(R), Corzide(R), Delestrogen(R) and
Florinef(R) products.

In accordance with SFAS No. 142, the Company is in the process of:

(a) assessing the useful lives of our intangible assets, including
whether any would have indefinite-lives;

(b) determining if a transitional impairment charge will be required
as of January 1, 2002 as the cumulative effect of a change in accounting
principle; and

F-9

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(c) determining whether reclassification of certain intangible assets
as goodwill (and vice versa) is necessary.

Although at the present time we do not know the specific impact of
implementing SFAS No. 142, we are not expecting such implementation to have a
material impact on future financial statements.

In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations" and SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002.
SFAS No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. We are in the process of reviewing the impact
of these pronouncements.

Reclassifications. Certain amounts from the prior consolidated financial
statements have been reclassified to conform to the presentation adopted in
2001.

3. MERGERS, RESTRUCTURING AND NONRECURRING CHARGES

A. Merger with Medco

On February 25, 2000, the Company completed a merger with Medco Research,
Inc. ("Medco") by exchanging 7,221,000 (14,440,972 post-splits) shares of its
common stock for all of the common stock of Medco. Each share of Medco was
exchanged for .6757 (1.3514 for 1 post-splits) of one share of King common
stock. In addition, outstanding Medco stock options were converted at the same
exchange rate into options to purchase approximately 695,000 (1,389,299
post-splits) shares of King common stock.

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, the actual cash
payments made and the remaining accrued balances at December 31, 2001 are
summarized below:

B. Merger with Jones

On August 31, 2000, the Company completed a merger with Jones Pharma
Incorporated ("Jones") by exchanging 73,770,000 (98,357,541 post split) shares
of its common stock for all of the common stock of Jones. Each share of Jones
was exchanged for 1.125 (1.50 post split) shares of King common stock. In
addition, outstanding Jones stock options were converted at the same exchange
rate into options to purchase approximately 4,024,000 (5,365,199 post
split)shares of King common stock.

F-10

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, the actual cash payments
made and the remaining accrued balances at December 31, 2001 are summarized
below:

All activity was paid in cash except for $4.7 million in 2000 and $3.9
million in 2001 for non-cash compensation and a $3.2 million asset write-down
for a negotiated contract termination in 2000.

The following information presents certain financial statement data of the
separate pre-merger companies as of December 31, 1999 and for the year ended
December 31, 1999:

F-11

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In addition, the following information presents certain unaudited financial
data of the separate companies from the beginning of 2000 to the respective
dates of the mergers:

C. Discontinuance of Fluogen(R) Product

On September 27, 2000, the Company received written notification from the
FDA that it must cease manufacturing and distributing Fluogen(R), an influenza
vaccine, until the Company demonstrates 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 our
decision to discontinue Fluogen(R) and as required by paragraph 60 of APB No.
16, the Company recorded extraordinary losses on disposed and impaired assets of
$15.0 million, before tax benefit of $5.6 million, and a nonrecurring charge of
$37.3 million for the year ended December 31, 2000. A summary of the types of
costs accrued and incurred are summarized below:

- ---------------

(1) Includes non-cash asset write-downs.

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 management's 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 2001, the Company
has $4.7 million and $0.0, respectively, accrued for all estimated remaining
contractual commitments associated with Pallacor(TM).

F-12

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

E. Inventory Recall

DSM Pharmaceuticals, Inc. one of the Company's third-party manufacturers,
informed the Company on November 21, 2001, that they ceased operations at their
sterile manufacturing facilities in Greenville, North Carolina, as a result of
U.S. Food and Drug Administration ("FDA") concerns relating to compliance
issues. Due to the compliance issues, DSM Pharmaceuticals recommended that the
Company initiate a voluntary recall of all products that they manufacture for
King. As a result, the Company initiated a voluntary recall of these products on
December 18, 2001. As a result, the Company recorded a special charge, included
as cost of revenues, of $5,933 to provide primarily for product returns and the
write-off of inventory.

4. CONCENTRATIONS OF CREDIT RISK

A significant portion of the Company's sales are to customers in the
pharmaceutical industry. The Company monitors the extension of credit to
customers and has not experienced significant credit losses. The following table
represents a summary of accounts receivable from significant customers to net
accounts receivable:

The following table represents a summary of sales to significant customers
as a percentage of the Company's total revenues:

n/a -- sales or receivable balances were less than 10% for the year.

The Company invests its excess cash primarily in Government, municipal
obligations and high-quality corporate debt securities and commercial paper. The
commercial paper securities are highly liquid and the remaining investments
typically mature within two years (although there is an established secondary
market for sales at any given time). Based on the nature of the financial
instruments and/or historical realization of these financial instruments,
management believes they bear minimal risk.

5. MARKETABLE SECURITIES

The following table represents the contractual maturities of marketable
securities held as of December 31, 2001:

Less than one year.......................................... $777,923
One to five years........................................... 29,582
--------
Total securities available-for-sale............... $807,505
========

All available-for-sale securities are considered current, as the Company
intends to use them for current operating and investing purposes. At December
31, 2000 and 2001, approximately $60,000 and $757,625, respectively, of
available-for-sale securities with original maturities of 90 days or less were
included in cash and short-term investments. The remaining amounts totaling
approximately $49.9 million at December 31, 2001 are classified as marketable
securities on the Company's balance sheet.

F-13

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 2001, the market value of the marketable securities
approximated cost. There were no realized gains or losses in 1999 or 2001.
During 2000, the Company liquidated its marketable securities and recognized a
net loss of $707.

6. INVENTORY

Inventory consists of the following:

7. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

Depreciation expense for the years ended December 31, 1999, 2000 and 2001
was $8,401, $8,888, and $9,749 respectively.

8. ACQUISITIONS/INTANGIBLE ASSETS

Goodwill and Product Rights

On August 8, 2001, the Company acquired three branded pharmaceutical
products and a fully paid license to a fourth product from Bristol-Myers Squibb
("BMS") for $285.0 million plus approximately $1.5 million of expenses. The
products acquired include BMS's rights in the United States to Corzide(R),
Delestrogen(R), and Florinef(R). King also acquired a fully paid license to and
trademark for Corgard(R) in the United States. The acquisition was financed with
a combination of borrowings under its senior secured credit facility and cash on
hand. The Company's allocation of purchase price was based upon the estimated
fair value of assets acquired and liabilities assumed in accordance with SFAS
No. 142. The purchase price allocation among the various products acquired and
the determination of useful lives has been completed and the difference between
the original and final determination was not material. The products are being
amortized over 20 to 30 years.

On June 22 and July 7, 2000, the Company acquired the sales and marketing
rights, respectively, of Nordette(R), Wycillin(R) and Bicillin(R) from Wyeth for
$200.0 million plus assumed liabilities of $3.0 million. The purchase price was
allocated to intangible assets which are being amortized over their estimated
useful lives of 25 years. This acquisition was financed with a draw of $10.0
million on a $50.0 million bridge loan, $25.0 million in the form of a note
issued to Wyeth, $37.5 million of the proceeds from the

F-14

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

sale of stock to Wyeth, $25.0 million received in connection with the
co-promotion agreement with Wyeth, $90.0 million from the revolving credit
facility and $12.5 million in excess cash from operations.

On November 12, 1999, the Company purchased the rights, title and interest
to the Tigan(R) product line from Roberts Pharmaceuticals, Inc. for a purchase
price of $6,493, including $93 of indebtedness. The purchase price was allocated
to intangible assets and is being amortized over its estimated useful life of 20
years. The acquisition was financed through borrowings on the Company's
revolving credit facility.

On August 19, 1999, the Company acquired the antibiotic Lorabid(R) in the
United States and Puerto Rico from Eli Lilly and Company for a purchase price of
$91.7 million, including acquisition costs, plus sales performance milestones.
As of December 31, 2001, no milestone payments have been made and the Company
does not currently anticipate any such payments. The purchase price was
allocated to intangible assets and is being amortized over its estimated useful
life of 15 to 25 years.

The following unaudited pro forma summary presents the financial
information as if the above described acquisitions had occurred as of January 1,
1999 for the acquisitions occurring in 1999 and 2000 or January 1, 2000 for the
acquisitions occurring in 2001. These pro forma results have been prepared for
comparative purposes and do not purport to be indicative of what would have
occurred had the acquisitions been made on January 1, 1999 or January 1, 2000,
nor is it indicative of future results.

Intangible assets consist of the following:

Amortization expense for the years ended December 31, 1999, 2000, and 2001
was $25,463, $33,054, and $38,217, respectively.

F-15

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. OTHER ASSETS

Other assets consist of the following:

On December 19, 2000 and September 7, 2001, the Company acquired
convertible senior notes of $20,000 and $10,000, respectively, from Novavax,
Inc. The convertible senior notes earn interest at 4% payable semi-annually in
June and December. The convertible senior notes are due December 19, 2007. The
convertible senior notes are convertible to common shares of Novavax, Inc. at a
specified conversion price. At December 31, 2001, the convertible senior notes
were convertible to 12.0% of the outstanding common shares of Novavax, Inc.
During 2001, the Company recognized an unrealized gain net of amortization of
$8,081 related to the conversion option on the convertible senior notes in
accordance with SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities". The gain has been recorded in other income in the accompanying
financial statements. During September 2001, the Company modified the agreement
with Novavax which resulted in the option no longer being considered a
derivative. The unrealized gain recognized prior to this change is being
amortized over the remaining life of the agreement.

On June 22, 2000, the Company entered into an agreement with Aventis Pharma
Deutschland GMBH ("Aventis") to provide Aventis with funds for a facilities
expansion which will provide additional production of an outsourced product of
the Company. During 2000 and 2001, the Company loaned Aventis $15,000 and
$15,000 under this agreement. This loan bears interest at 8% and is being repaid
by reducing amounts otherwise payable on the purchase of inventory. During 2001,
inventory in the amount of $14,086 was received as payment against these loans.

Amortization expense related to deferred financing costs was $2,834,
$1,927, and $1,040 for 1999, 2000, and 2001, respectively, and has been included
in interest expense. During 1999, 2000, and 2001, the Company repaid certain
debt prior to maturity resulting in extraordinary losses of $705, $12,768, and
$14,383, net of income taxes

10. LEASE OBLIGATIONS

The Company leases certain office and manufacturing equipment and
automobiles under non-cancelable operating leases with terms from one to five
years. Estimated future minimum lease payments, as of December 31, 2001 for
leases with initial or remaining terms in excess of one year are as follows:

2002........................................................ $7,885
2003........................................................ 3,830
2004........................................................ 1,876
2005........................................................ 1,271
2006........................................................ 368

Rent expense for the years ended December 31, 1999, 2000 and 2001 was
approximately $4,245, $5,690, and $7,846 respectively.

F-16

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. ACCRUED EXPENSES

Accrued expenses consist of the following:

12. LONG-TERM DEBT

Long-term debt consists of the following:

- ---------------

(a) During the fourth quarter of 2001, the Company issued $345 million of 2 3/4%
Convertible Debentures due November 15, 2021. The debentures are unsecured
unsubordinated obligations and the payment of principal and interest is
guaranteed by the Company's domestic subsidiaries on a joint and several
basis. The debentures accrue interest at an initial rate of 2 3/4%, which
will be reset (but not below 2 3/4% or above 4 1/2%) on May 15, 2006, May
15, 2011, and May 15, 2016. Interest is payable on May 15 and November 15 of
each year.

On or after November 20, 2006, the Company may redeem for cash all or part
of the debentures that have not previously been converted or repurchased at
a price equal to 100% of the principal amount of the debentures plus
accrued interest up to but not including the date of redemption. Holders
may require us to repurchase for cash all or part of their debentures on
November 15, 2006, November 15, 2011 or November 15, 2016, at a price equal
to 100% of the principal amount of the debentures plus accrued interest up
to but not including the date of repurchase. In addition, upon a change of
control, each holder may require us to repurchase for cash all or a portion
of the holder's debentures.

F-17

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Holders may surrender their debentures for conversion into shares of King
common stock at the conversion price (initially $50.16 per share and
subject to certain adjustments) if any of the following conditions is
satisfied:

- if the closing sale price of King common stock, for at least 20 trading
days in the 30 trading day period ending on the trading day prior to the
date of surrender, exceeds 110% of the conversion price per share of King
common stock on that preceding trading day;

- if we have called the debentures for redemption; or

- upon the occurrence of specified corporate transactions.

The Company has reserved 6,877,990 shares of common stock in the event such
debentures are converted into shares of the Company's common stock.

(b) On March 3, 1999, the Company issued $150,000 of 10 3/4% Senior Subordinated
Notes due 2009. During 2000 and 2001, the Company redeemed $53,618 and
$96,289, respectively, at a price of $59,144 and $114,299, respectively.

(c) The Senior Credit Facility, as amended, provided for up to $525,000 of
aggregate borrowing capacity, consisting of: a $150,000 tranche A term loan
(the "Tranche A Term Loan"); a $275,000 tranche B term loan (the "Tranche B
Term Loan"); and a revolving credit facility in an aggregate amount of
$100,000 (the "Revolving Credit Facility"). The Revolving Credit Facility
included a $10,000 sublimit available for the issuance of letters of credit
and a $5,000 sublimit available for swingline loans. During the year ended
December 31, 2000, the Company paid the Tranche A Term Loan and Tranche B
Term Loan in full and no amounts were outstanding under its Revolving Credit
Facility at December 31, 2000. During 2001, the Company terminated the
Senior Credit Facility.

At December 31, 2001, none of the Company's debt agreements contain
financial covenants.

During 2001, as a result of terminating its Senior Credit Facility and
redemption, through a tender offer of $96.3 million of 10 3/4% Senior
Subordinated Notes prior to maturity, the Company recorded an extraordinary
charge of $22,903 ($14,383 net of income taxes) or $0.06 per share in the fourth
quarter of 2001, resulting from the write-off of deferred financing costs and
the payment of an early redemption premium.

During 2000, the Company repaid the Tranche A and Tranche B Term Loans and
$53,618 of Senior Subordinated Notes prior to maturity resulting in an
extraordinary charge of $20,348 ($12,768 net of income taxes) due to the
write-off of deferred financing costs and the payment of an early redemption
premium for the Senior Subordinated Notes.

During the year ended December 31, 2000, the Company terminated its
interest rate swap agreements and recognized a gain of $1,911, which is included
in other income.

The aggregate maturities of long-term debt (including capital lease
obligations -- Note 10) at December 31, 2001 are as follows:

2002........................................................ $ 1,357
2003........................................................ 1,304
2004........................................................ --
2005........................................................ --
2006........................................................ 345,000
Thereafter.................................................. 93
--------
$347,754
========

F-18

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. FINANCIAL INSTRUMENTS

The following disclosures of the estimated fair values of financial
instruments are made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies.

Cash and Cash Equivalents, Accounts Receivable and Accounts Payable. The
carrying amounts of these items are a reasonable estimate of their fair values.

Marketable Securities. The fair value of marketable securities was based
primarily on quoted market prices (Note 5). If quoted market prices are not
readily available, fair values are based on quoted market prices of comparable
instruments.

Convertible Senior Notes Receivable from Novavax. The fair value of the
convertible senior notes receivable from Novavax is determined using option
pricing models. The fair value of the convertible senior notes receivable of
December 31, 2001 is estimated to be approximately $38,830. Key assumptions used
in determining the fair value are as follows: volatility of 58% and a discount
rate of 5%.

Long-Term Debt. The fair value of the Company's long-term debt, including
the current portion, at December 31, 2000 and 2001, is estimated to be
approximately $105,508 and $379,709 respectively, using discounted cash flow
analyses and based on the Company's incremental borrowing rates for similar
types of borrowing arrangements.

14. INCOME TAXES

The net income tax expense (benefit) is summarized as follows:

A reconciliation of the difference between the federal statutory tax rate
and the effective income tax rate as a percentage of income before income taxes
and extraordinary item is as follows:

F-19

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liability are as follows:

Management has determined, based on estimates of future taxable income and
existing tax planning opportunities, it is more likely than not that the
deferred tax assets will be realizable and no valuation allowance is necessary.

15. BENEFIT PLANS

The Company maintains a defined contribution employee benefit plan which
covers all employees over 21 years of age. The plan allows for employees' salary
deferrals, which are matched by the Company up to a specific amount under
provisions of the plan. Company contributions during the years ended December
31, 1999, 2000 and 2001, were $2,265, $2,404, and $2,134 respectively. The plan
also provides for discretionary profit-sharing contributions by the Company.
There were no discretionary contributions during the years ended December 31,
1999, 2000 and 2001.

16. COMMITMENTS AND CONTINGENCIES

Fen/Phen Litigation

Many distributors, marketers and manufacturers of anorexigenic drugs have
been subject to claims relating to the use of these drugs. 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 32 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, 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

F-20

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. A
reasonable estimate of possible losses related to these suits cannot be made.

In addition, Jones, a wholly-owned subsidiary of the Company is a defendant
in 906 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 intend to
vigorously pursue all defenses available. The Company is unable to disclose an
aggregate dollar amount of damages claimed. Many of these complaints are multi-
party suits and do not state specific damage amounts. Rather, these claims
typically state damages as may be determined by the court or similar language
and state no specific amount of damages against Jones. The Company, at this
time, cannot provide an aggregate dollar amount of damages claimed or a
reasonable estimate of possible losses related to the lawsuits.

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 3), 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
F-21

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

claims asserted in its complaint. Medco and the other defendants denied all
allegations and continue to deny them.

After Medco distributed a supplemental proxy statement on January 31, 2000
and the court postponed the February 10, 2000 vote on the merger agreement for
15 days to allow shareholders sufficient time to consider the supplemental
disclosures, the court rejected SWIB's claims in a February 24, 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.

Thimerosal/Vaccine Related Litigation

King and/or its wholly-owned subsidiary, Parkedale Pharmaceuticals, Inc.
("Parkedale"), have been named as defendants in California and Mississippi,
along with Abbott Laboratories, American Home Products, Aventis Pharmaceuticals,
and other pharmaceutical companies, which have manufactured or sold vaccine
products containing the mercury-based preservative, thimerosal.

In these cases, the plaintiffs attempt to link the receipt of the
mercury-based vaccinations to neurological defects. The plaintiffs in these
cases claim that the vaccines in question would have had their beneficial
effects with or without thimerosal, and that thimerosal was a tool for
undercutting other products on the market, thereby increasing defendants' sales
and profits. The plaintiffs also claim unfair business practices, fraudulent
misrepresentations, negligent misrepresentations, and breach of implied
warranty, which are all arguments premised on the idea that the defendants
promoted vaccines without any reference to the toxic hazards and potential
public health ramifications resulting from the mercury-containing preservative.
The plaintiffs also allege that the defendants knew of the dangerous
propensities of thimerosal in their products.

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KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The only vaccine that King/Parkedale has manufactured, distributed,
marketed and/or sold was Fluogen(R) vaccine, which did contain the mercury-based
preservative, thimerosal. Fluogen(R) was only distributed by King for two flu
seasons. King's product liability insurance carrier, has been given proper
notice of all of these matters, and defense counsel are vigorously defending our
interests. We seek to be dismissed from the litigation due to lack of product
identity in plaintiff's complaints. In 2001, King and Parkedale were dismissed
on this basis in a similar case.

Other Legal Proceedings

The Parkedale Facility was one of six facilities owned by Pfizer 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 Company is involved in various routine legal proceedings incident to
the ordinary course of its business.

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 flow.

Other Commitments and Contingencies

The following summarizes the Company's unconditional purchase obligations
at December 31, 2001:

2002........................................................ $ 78,336
2003........................................................ 96,252
2004........................................................ 93,948
2005........................................................ 94,500
2006........................................................ 80,123
Thereafter.................................................. 132,120
--------
Total............................................. $575,279
========

The unconditional purchase obligations of the Company are primarily related
to minimum purchase requirements under contracts with suppliers to purchase raw
materials and finished goods related to our branded pharmaceutical products.

17. SEGMENT INFORMATION

The Company's business is classified into three reportable segments;
Branded Pharmaceuticals, Contract Manufacturing, and Royalties. Branded
Pharmaceuticals include a variety of branded prescription products over four
therapeutic areas, including cardiovascular, anti-infective, critical care and
women's health/endocrinology. These branded prescription products have been
aggregated because of the similarity in regulatory environment, manufacturing
process, method of distribution, and type of customer. Contract Manufacturing
represents contract manufacturing services provided for pharmaceutical and
biotechnology companies. Royalties 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

F-23

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. Revenues among the segments are presented in the individual
segments and removed through eliminations in the information below.
Substantially all of the eliminations relate to sales of contract manufacturing
to the branded pharmaceutical segment.

The following represents selected information for the Company's operating
segments for the periods indicated:

The Company evaluates impairment of long-term assets at the lowest level of
measurable cash flow in accordance with SFAS 121, including operating cash flows
generated by sales to the ultimate third party.

The following represents revenues by therapeutic area:

F-24

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Capital expenditures of $13,219, $25,149, and $40,168 for the years ended
December 31, 1999, 2000 and 2001, respectively, are substantially utilized for
contract manufacturing and branded pharmaceutical products purposes.

18. RELATED PARTY TRANSACTIONS

Certain management and employees of the Company sit on the board of
directors of a private foundation. The Company donated and recognized an expense
for short dated inventory to the private foundation with a cost of $1,780,
$3,346, and $4,107 for the years ended December 31, 1999, 2000, and 2001,
respectively.

During 2001, the Company donated $103 to King College. One of the directors
of the Company is the president of King College.

For the year ended December 31, 1999, the Company paid Bourne and Co.,
Inc., an affiliate of a director and since January 1999 an officer of the
Company, $108 for consulting services and the purchase of furniture. In
connection with the Altace Acquisition and related financing, Bourne & Co.,
Inc., received $1,250 in January 1999.

In February 2000, the Company paid $2,823 to a director for services
performed in connection with the successful completion of the Medco merger. In
addition, this director received fees for consulting services of $180 in 2000.

19. STOCKHOLDERS' EQUITY

Preferred Shares

The Company is authorized to issue 15 million shares of "blank-check"
preferred stock. The terms and conditions of which will be determined by the
board of directors. As of December 31, 2000 and 2001 there were no shares issued
or outstanding.

2001 Offering

On November 7, 2001 and November 20, 2001, the Company completed the sale
of 16,000,000 and 1,992,000, respectively, newly issued shares of common stock
for $38.00 per share ($36.67 per share net of commissions and expenses)
resulting in net proceeds of $659.8 million.

Stock Splits

On June 20, 2001, the Company's Board of Directors declared a four for
three stock split for shareholders of record as of July 3, 2001, to be
distributed July 19, 2001. The stock split has been reflected in all share data
contained in these financial statements.

On June 2, 2000, the Company's Board of Directors declared a three for two
stock split for shareholders of record as of June 12, 2000, to be distributed
June 21, 2000. The stock split has been reflected in all share data contained in
these financial statements.

On October 4, 1999 the Company's board of directors declared a three for
two stock split for shareholders of record as of October 28, 1999, to be
distributed November 11, 1999. The stock split has been reflected in all share
data contained in these financial statements.

On July 13, 1999 and February 3, 2000 three for two stock splits were
recorded by Jones. These splits have been reflected in all share data contained
in these financial statements.

F-25

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock Option Plans

The Company has various incentive stock plans for executives and employees.
In connection with the plans, options to purchase common stock are granted at
option prices not less than the fair market values of the common stock at the
time the options are granted and either vest immediately or ratably over a
period of up to ten years from the grant date. At December 31, 2001, options for
9,088,319 shares of common stock are available for future grant. A total of
4,648,646 options to purchase common stock are outstanding under these plans at
December 31, 2001, of which 3,276,934 are currently exercisable.

Certain of the incentive stock plans allow for employee payment of option
exercise prices in the form of either cash or previously held common stock of
the Company. Shares tendered in payment of the option exercise price must be
owned by the employee making the tender, for either six months or one year
depending on how the shares were acquired, prior to the date of tender.

A summary of the status of the Company's plans as of December 31, 2001 and
changes during the years ended December 31, 1999, 2000 and 2001 are presented in
the table below:

Options outstanding at December 31, 2001 have exercise prices between $3.16
and $44.26, with a weighted average exercise price of $20.83 and a remaining
contractual life of approximately 6.56 years.

F-26

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During 2000 and 2001, the Company granted 79,998 and 53,332 options,
respectively, of common stock to its directors under the 1998 Stock Option Plan
at an exercise price equal to market value at the date of grant. The options
vested immediately upon grant. As of December 31, 2001, 184,965 of the options
under the 1998 Stock Option Plan were vested and outstanding. Options under the
1998 Stock Option Plan expire 10 years from the date of grant.

The Company has adopted the disclosure only provision of SFAS No. 123,
"Accounting for Stock Based Compensation." Accordingly, since options were
granted at fair value, no compensation cost has been recognized for stock
options granted to date. Had compensation cost for these plans been determined
for options granted, consistent with SFAS No. 123, the Company's net income and
diluted income per share would have decreased to the following pro forma amounts
for the year ended December 31, 2000:

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1999, 2000 and 2001:

The weighted average fair value of options granted during 1999, 2000 and
2001 is $12.82, $21.45, and $19.38 respectively.

F-27

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

20. INCOME PER COMMON SHARE

The basic and diluted income before extraordinary item(s) per share was
determined based on the following share data:

The weighted average stock options which were anti-dilutive at December 31,
2001 were 221,316 shares. The convertible debentures could also be converted
into 6,877,990 shares of common stock in the future, subject to the indenture
(Note 12).

21. CHANGE IN ACCOUNTING PRINCIPLE AND QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)

The following table sets forth summary financial information for the year
ended December 31, 2001:

- ---------------

(1) Quarterly amounts do not add to annual amounts due to the effect of rounding
on a quarterly basis.

In the fourth quarter of 2000, the Company adopted Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," ("SAB 101")
which clarifies accounting and reporting standards for revenue recognition. The
new policy recognizes that the risks of ownership in some transactions do not
substantively transfer to customers until the product has been received by them,
without regard to when legal title has transferred. Previously, the Company had
recognized revenue on product sales upon shipment. There was no cumulative
effect of the change on prior years due to the timing of shipments at December
31, 1999. The effect of the change on the year ended December 31, 2000 was to
decrease revenue by $3,435 and decrease net income by $1,582, or $.01 per share
on a diluted basis. The unaudited

F-28

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

pro forma amounts presented below were calculated assuming the accounting change
was made retroactively to January 1, 1999.

The effect of SAB 101 on each of the quarters in the year 2000 are as
follows:

Certain reclassifications have been made to the pre SAB 101 amounts to
conform the presentations of the pooled companies.

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 first
quarter of 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. As of December 31, 2001, the Company held no derivative
financial instruments.

22. GUARANTOR FINANCIAL STATEMENTS

The Company's wholly-owned subsidiaries Monarch Pharmaceuticals, Inc.,
Parkedale Pharmaceuticals, Inc., Jones Pharma Incorporated, King Pharmaceuticals
Research and Development, Inc., and King Pharmaceuticals of Nevada, Inc. (the
"Guarantor Subsidiaries") have guaranteed the Company's performance under the
$345,000, 2 3/4% Convertible Debentures due 2021 on a joint and several basis.
There are no restrictions under the Company's financing arrangements on the
ability of the Guarantor Subsidiaries to distribute funds to the Company in the
form of cash dividends, loans or advances. The following combined financial data
provides information regarding the financial position, results of
F-29

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

GUARANTOR SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

F-30

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

GUARANTOR SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS

F-31

KING PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

GUARANTOR SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS

F-32

In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

KING PHARMACEUTICALS, INC.

By: /s/ JEFFERSON J. GREGORY
------------------------------------
Jefferson J. Gregory
Chief Executive Officer and
President

March 29, 2002

In accordance with the requirements of the Securities Exchange Act, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.

II-1

KING PHARMACEUTICALS, INC.
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

- ---------------

(1) Amounts represent write-offs of accounts.

S-1