KING PHARMACEUTICALS INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ____________ TO ____________

COMMISSION FILE NO. 0-24425

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

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

501 FIFTH STREET, BRISTOL, TN 37620
(Address of principal executive offices) (Zip Code)

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

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of The Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Number of shares outstanding of Registrant's common stock as of August 9,
2002: 243,706,342

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PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

KING PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

See accompanying notes.

1

KING PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

See accompanying notes.

2

KING PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND OTHER COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

See accompanying notes.

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KING PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

As of June 30, 2002, the Company had a liability of $25,234 for stock
repurchases for which settlement had not occurred.

See accompanying notes.

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KING PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
(IN THOUSANDS)

1. GENERAL

The accompanying unaudited interim condensed consolidated financial
statements of King Pharmaceuticals, Inc. (the "Company") have been prepared by
the Company in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X, and accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of items of a normal recurring nature unless otherwise disclosed) considered
necessary for a fair presentation have been included. Operating results for the
six months ended June 30, 2002 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2002. These interim
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's latest Annual Report on Form 10-K. The
year-end condensed balance sheet was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles.

These consolidated financial statements include the accounts of King and
its wholly owned subsidiaries, Monarch Pharmaceuticals, Inc.; Parkedale
Pharmaceuticals, Inc.; King Pharmaceuticals Research and Development, Inc.;
Jones Pharma Incorporated; and King Pharmaceuticals of Nevada, Inc. All
intercompany transactions and balances have been eliminated in consolidation.

Certain amounts from the prior consolidated financial statements have been
reclassified to the presentation adopted in 2002.

2. EARNINGS PER SHARE

The basic and diluted income per common share was determined using the
following share data:

3. INVENTORIES

Inventory consists of the following:

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KING PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. ACQUISITIONS

On May 29, 2002, the Company acquired the exclusive rights to
Ortho-Prefest(R) tablets in the United States, its territories and possessions
and the Commonwealth of Puerto Rico, including the related drug application,
investigational new drug application, copyrights, and patents or licenses to the
related patents from Ortho-McNeil Pharmaceutical, Inc., a Johnson & Johnson
subsidiary. The Company paid $108,000 for the product rights upon closing plus
approximately $3,300 of expenses. The Company will pay an additional $7,000 upon
receipt of the U.S. Food and Drug Administration's permission to rename the
product "Prefest(TM)". The acquisition was financed with cash on hand. The
Company has included the acquisition in product rights and assigned a temporary
life of twenty years. The purchase price allocation among the assets acquired,
the determination as to whether the useful life is indefinite or finite and the
assignment of lives to the intangibles designated as having finite lives under
Statement of Financial Accounting Standards ("SFAS") No. 142 are preliminary and
subject to further evaluation.

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 $285,000 plus approximately $1,500 of expenses. The products
acquired include BMS's rights in the United States to Corzide(C),
Delestrogen(C), and Florinef(C). King also acquired a fully paid license to and
trademark for Corgard(C) in the United States. The acquisition was financed with
a combination of borrowings under its senior secured credit facility and cash on
hand.

The following unaudited pro forma summary presents the financial
information as if the acquisition of the Corzide(R), Delestrogen(R),
Florinef(R), Corgard(R) and Ortho-Prefest(R) product lines had occurred as of
January 1, 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
acquisition been made on January 1, 2001, nor is it indicative of future
results.

5. ACCOUNTING DEVELOPMENTS

The results for the three and six months ended June 30, 2002, include the
effect of adopting SFAS No. 141, "Business Combinations" and SFAS No. 142
"Goodwill and Other Intangible Assets" in the first quarter of 2002. SFAS No.
141 provides that all business combinations initiated after June 30, 2001 shall
be accounted for using the purchase method. In addition, it provides that the
cost of an acquired entity must be allocated to the assets acquired, including
identifiable intangible assets, and liabilities assumed based on their estimated
fair values at the date of acquisition. The excess cost over the fair value of
the net assets acquired must be recognized as goodwill. SFAS No. 142 provides
that goodwill is no longer amortized and the value of an identifiable intangible
asset must be amortized over its useful life, unless the asset is determined to
have an indefinite useful life. Goodwill must be tested for impairment as of the
beginning of the fiscal year in which SFAS No. 142 is adopted. In accordance
with SFAS No. 142, the Company has completed its impairment testing resulting in
no impairment of goodwill. Amounts assigned to indefinite-life intangible assets
primarily represent the trade name for products acquired which meet specified
criteria and have a carrying value of $19,192.

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KING PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table reflects consolidated results adjusted as though the
adoption of SFAS No. 142 occurred as of January 1, 2001:

The following table reflects the components of intangible assets as of June
30, 2002:

Amortization expense for the three months and six months ended June 30,
2002 was $11,903 and $22,995 respectively. Estimated annual amortization expense
for each of the five succeeding fiscal years is as follows:

In the first quarter of 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
which establishes accounting and reporting standards for derivative instruments
and hedging activities. The cumulative effect of the change in accounting
principle was $870, or $545 net of tax. In addition, the change in the value of
the derivatives in the quarter and six months ended June 30, 2001 of $4,358 and
$2,839, respectively, was included in other expense. The Company had no
derivative financial instruments as of June 30, 2002.

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KING PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. These standards were adopted by the
Company effective January 1, 2002. The implementation of these standards did not
have any impact on the Company's financial statements.

In May 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections as of April 2002." SFAS No. 145 is effective for
fiscal periods beginning after May 15, 2002. The primary impact on the Company
of adopting SFAS No. 145 will be that gains and losses incurred upon the
extinguishment of debt may no longer qualify for extraordinary item treatment in
the income statement.

In July 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Exit or Disposal Activities." SFAS No. 146 addresses the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including costs related to terminating a contract that
is not a capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 supercedes Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)" SFAS No. 146 will be effective for exit or disposal
activities of the Company that are initiated after December 31, 2002.

6. 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 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 767 multi-defendant lawsuits involving the manufacture and sale of
dexfenfluramine, fenfluramine and phentermine. These suits

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KING PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, which was subject to
approval by the Medco shareholders. On January 5, 2000, Medco issued to its
stockholders a proxy statement with respect to the proposed transaction and
noticed a meeting to approve the transaction for February 10, 2000.

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

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
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KING PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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
petitioned the court for approximately $7,260 in attorney's fees and
approximately $270 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. On
April 10, 2002, the court granted the motion to dismiss with prejudice and
awarded SWIB $234 in fees and $94 in costs, for a total award of $328. SWIB has
appealed the court's decision to the Delaware Supreme Court, where the case is
still pending.

The Company believes that SWIB's case 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 its wholly-owned subsidiary, Parkedale Pharmaceuticals, Inc.
("Parkedale"), have been named as defendants in California, Illinois and
Mississippi, along with Abbott Laboratories, Wyeth, 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 the Company has manufactured, distributed, marketed
and/or sold was the Fluogen(R) vaccine, which did contain the mercury-based
preservative, thimerosal. Fluogen(R) was only distributed by the Company for two
flu seasons. The Company's product liability insurance carrier, has been given
proper notice of all of these matters, and defense counsel are vigorously
defending the Company's interests. The Company is moving to be dismissed from
the litigation due to lack of product identity in the plaintiffs' complaints. In
2001, the Company was 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
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KING PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

7. SEGMENT REPORTING

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 royalty payments on product sales. The classification "all other"
primarily includes generic pharmaceutical products and development services.

The Company primarily evaluates its segments based on gross profit. Gross
profit excludes manufacturing depreciation. 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:

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KING PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company evaluates impairment of long-term assets at the lowest level of
measurable cash flow in accordance with SFAS 144, including operating cash flows
generated by sales to the ultimate third party.

The following represents revenues by therapeutic area:

8. OTHER SECOND QUARTER TRANSACTIONS

On May 13, 2002, the Company's board of directors authorized a plan to
repurchase up to 7.5 million shares of the Company's common stock. Under the
plan, the Company may repurchase shares of its common stock in the open-market
from time to time, depending on market conditions, share price and other
factors. During the second quarter the Company repurchased 4.3 million shares of
common stock. As of June 30, 2002, the Company had a liability of $25,234 for
stock repurchases for which settlement had not occurred. The Company has
recorded a current liability for its cost to purchase the shares.

In April 2002, the Company established a $400,000 five year senior secured
revolving credit facility. This facility requires the Company to maintain a
certain minimum net worth and EBITDA to interest expense ratio and maintain a
funded debt to EBITDA ratio below an established maximum. The facility has been
collateralized in general by all real estate with a value of $5,000 or more and
all personal property of the Company and its significant subsidiaries. The
Company incurred $4,835 of deferred financing costs which are being amortized
over five years, the life of the revolving credit facility. The revolving credit
facility accrues interest at the Company's option, at either (a) the base rate
(which is based on the prime rate and the federal funds rate plus one-half of
1%) plus an applicable spread ranging from 0.0% to 0.75% (based on a leverage
ratio) or the applicable LIBOR rate plus an applicable spread ranging from 1.0%
to 1.75% (based on a leverage ratio).

The Company recorded a special charge in the amount of $1,827 during the
quarter ending June 30, 2002, primarily related to the Company's voluntary
recall of Liqui-Char(R) and Theravac(R), two of King's smaller products.

12

KING PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. NOVAVAX CONVERTIBLE NOTES RECEIVABLE

During the period from December 2000 through June 2002, the Company
provided $40,000 in financing to Novavax in the form of notes receivable
convertible to common stock of Novavax, including $10,000 that was provided in
June 2002. The loan is impaired as defined under SFAS 114, "Accounting by
Creditors for Impairment of a Loan." SFAS 114 requires the creditor to evaluate
the cash flows available from any collateral (in King's situation, the Novavax
common stock obtainable upon conversion) in order to determine the amount of any
valuation allowance for an impaired loan. Because of the recent significant
decline in the share price of Novavax common stock to levels below that
established by King's common stock conversion options associated with the
Novavax convertible notes, the Company recorded a valuation allowance of $27,926
in the second quarter of 2002. The amount of the charge was determined by
reference to the June 30, 2002 quoted market price of the Novavax common stock.
The amount of the valuation allowance will be adjusted in future periods based
on the value of the underlying collateral (Novavax common stock) as of the last
business day of each respective calendar quarter or until such time as the loan
is no longer considered to be impaired.

10. GUARANTOR FINANCIAL STATEMENTS

The Company's wholly-owned subsidiaries Monarch Pharmaceuticals, Inc.; King
Pharmaceuticals Research and Development, Inc.; Parkedale Pharmaceuticals, Inc.;
Jones Pharma Incorporated and King Pharmaceuticals of Nevada, Inc. (the
"Guarantor Subsidiaries") have guaranteed the Company's performance under the
$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 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.

13

KING PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

GUARANTOR SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

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KING PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

GUARANTOR SUBSIDIARIES

CONSOLIDATING STATEMENTS OF INCOME

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KING PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

GUARANTOR SUBSIDIARIES

CONSOLIDATING STATEMENTS OF INCOME

16

KING PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

GUARANTOR SUBSIDIARIES

CONSOLIDATING STATEMENTS OF CASH FLOWS

17

PART I -- FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

The following discussion contains certain forward-looking statements that
reflect management's current views of future events and operations. This
discussion should be read in conjunction with the following: (a) "Risk Factors"
set out below and other sections of our Annual Report on Form 10-K for the year
ended December 31, 2001, which are supplemented by the discussion which follows;
(b) our audited consolidated financial statements which are included in our
Annual Report on Form 10-K for the year ended December 31, 2001; and (c) our
unaudited consolidated financial statements and related notes thereto included
in this report.

OVERVIEW

General

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

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2002 AND 2001

Revenues

Total revenues increased $76.0 million, or 36.8%, to $282.5 million in 2002
from $206.5 million in 2001, due primarily to the growth of our branded
pharmaceutical products and the acquisition of additional branded pharmaceutical
products.

Net sales from branded pharmaceutical products increased $71.1 million, or
38.1%, to $257.8 million in 2002 from $186.7 million in 2001. This increase was
due primarily to growth in net sales of Altace(R) and Levoxyl(R), the
acquisition of three branded pharmaceutical products, along with a fully paid
license to a fourth product, from Bristol-Myers Squibb Company in August 2001,
and the acquisition of Ortho-Prefest(R) from Ortho-McNeil Pharmaceutical, Inc.
on May 29, 2002. While we expect continued growth in net sales of our branded
pharmaceuticals in the future, we refer you to the "Risk Factors" that appear
below.

Revenues from royalties is derived from payments we receive based on sales
of Adenoscan(R) and Adenocard(R). Revenue from royalties increased $1.5 million,
or 11.5%, to $14.5 million in 2002 from $13.0 million in 2001.

Revenues from contract manufacturing increased $3.9 million, or 66.1%, to
$9.8 million in 2002 from $5.9 million in 2001 primarily due to increased unit
sales under existing contracts.

Gross Profit

Total gross profit (revenues less cost of revenues, including royalty
expense) increased $65.1 million, or 40.1%, to $227.3 million in 2002 from
$162.2 million in 2001. The increase was primarily due to increased sales of
higher margin branded pharmaceutical products.

Gross profit from branded pharmaceutical products increased $61.0 million,
or 39.1%, to $217.0 million in 2002 from $156.0 million in 2001. This increase
was primarily due to increased sales of Altace(R) and Levoxyl(R),

18

additional sales arising from the acquisition of three branded pharmaceutical
products and a license to a fourth from Bristol-Myers Squibb in August 2001, and
additional sales arising from the acquisition of Ortho-Prefest(R) from
Ortho-McNeil on May 29, 2002.

Gross profit from royalties increased $1.6 million, or 15.5%, to $11.9
million in 2002 from $10.3 million in 2001.

Gross profit associated with contract manufacturing increased $2.3 million
to ($1.9) million in 2002 from ($4.2) million in 2001.

Operating Costs and Expenses

Total operating costs and expenses increased $44.4 million, or 36.8%, to
$165.1 million in 2002 from $120.7 million in 2001. The increase was primarily
due to costs associated with increased unit sales of our branded pharmaceutical
products, including Altace(R) and Levoxyl(R), increased fees 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
representatives in 2001 to 715 representatives in 2002.

Cost of revenues increased $10.9 million, or 24.6%, to $55.2 million in
2002 from $44.3 million in 2001. 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 three branded
pharmaceutical products and a license to a fourth from Bristol-Myers Squibb in
August 2001, and the acquisition of Ortho-Prefest(R) from Ortho-McNeil on May
29, 2002. Cost of revenues during 2002 included a $1.8 million charge primarily
related to voluntary recalls of Liqui-Char(R) and Theravac(R), two of our
smaller products. As a percentage of revenues, cost of revenues decreased to
19.5% in 2002 from 21.5% in 2001 due to an increase in sales of higher margin
products.

Selling, general and administrative expenses increased $33.2 million, or
59.9%, to $88.6 million in 2002 from $55.4 million in 2001. This increase was
primarily attributable to fees 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 representatives in 2001 to 715
representatives in 2002. As a percentage of revenues, selling, general, and
administrative expenses increased to 31.4% in 2002 compared to 26.8% in 2001.

Depreciation and amortization expense increased $3.2 million, or 28.1%, to
$14.6 million in 2002 from $11.4 million in 2001. This increase was primarily
attributable to the amortization of the intangible assets related to the
acquisition of three branded pharmaceutical products and a license to a fourth
from Bristol-Myers Squibb in August 2001 and the acquisition of Ortho-Prefest(R)
from Ortho-McNeil on May 29, 2002.

Research and development expense increased to $6.7 million in 2002 from
$6.5 million in 2001.

In June 2001, we incurred a $3.0 million expense designated "Research and
development -- special license rights" for fees we paid Novavax, Inc. as
consideration for an agreement which (1) expands our exclusive license to
promote, market, distribute and sell Estrasorb(TM) worldwide, following
approval, except in the United States and Puerto Rico where the parties will
co-market the product; and (2) grants us an additional exclusive worldwide
license to promote, market and distribute Androsorb(TM), following approval,
except in the United States and Puerto Rico where the parties will co-market the
product.

Operating Income

Operating income increased $31.6 million, or 36.8%, to $117.4 million in
2002 from $85.8 million in 2001. This increase was primarily due to increased
revenues from Altace(R) and Levoxyl(R), the acquisition of three branded
pharmaceutical products and a license to a fourth from Bristol-Myers Squibb in
August 2001, plus the acquisition of Ortho-Prefest(R) from Ortho-McNeil on May
29, 2002. As a percentage of net revenues, operating income remained consistent
at 41.6% in 2002 and 2001.

19

Other Income (Expense)

Interest income increased $3.7 million, or 119.4%, to $6.8 million in 2002
from $3.1 million in 2001 due to higher balances of invested cash, cash
equivalents, and marketable securities during 2002 as compared to 2001.

Interest expense increased $0.4 million, or 14.8%, to $3.1 million in 2002
from $2.7 million in 2001.

Other, net, decreased from $4.5 million in 2001 to ($0.3) million in 2002
primarily due to the recognition of an unrealized gain of approximately $4.4
million on a $20.0 million convertible senior note from Novavax during 2001.

During the period from December 2000 through June 2002, we provided $40.0
million in financing to Novavax in the form of notes receivable convertible to
common stock of Novavax, including $10.0 million that was provided in June 2002.
The loan is impaired as defined under SFAS 114, "Accounting by Creditors for
Impairment of a Loan." SFAS 114 requires the creditor to evaluate the cash flows
available from any collateral (in King's situation, the Novavax common stock
obtainable upon conversion) in order to determine the amount of any valuation
allowance for an impaired loan. Because of the recent significant decline in the
share price of Novavax common stock to levels below that established by King's
common stock conversion options associated with the Novavax convertible notes,
we recorded a valuation allowance of $27.9 million, or $17.6 million net of tax,
in the second quarter of 2002. We determined the amount of the charge by
reference to the June 30, 2002 quoted market price of the Novavax common stock.
We will adjust the amount of the valuation allowance in future periods based on
the value of the underlying collateral (Novavax common stock) as of the last
business day of each respective calendar quarter or until the loan is no longer
considered to be impaired.

Income Tax Expense

The effective tax rate of 37.1% in 2002 and 37.3% in 2001 was higher than
the federal statutory rate of 35.0% due primarily to permanent differences
related to state income taxes in both 2002 and 2001.

Net Income

Due to the factors set forth above, net income increased $1.6 million, or
2.8%, to $58.4 million in 2002 from $56.8 million in 2001.

SIX MONTHS ENDED JUNE 30, 2002 AND 2001

Revenues

Total revenues increased $152.8 million, or 39.4%, to $540.6 million in
2002 from $387.8 million in 2001, due primarily to the growth of our branded
pharmaceutical products and the acquisition of additional branded pharmaceutical
products.

Net sales from branded pharmaceutical products increased $147.0 million, or
42.3%, to $494.9 million in 2002 from $347.9 million in 2001. This increase was
due primarily to growth in net sales of Altace(R) and Levoxyl(R), and the
acquisition of three branded pharmaceutical products, along with a fully paid
license to a fourth product, from Bristol-Myers Squibb in August 2001. While we
expect continued growth in net sales of our branded pharmaceuticals in the
future, we refer you to the "Risk Factors" that appear below.

Revenues from royalties is derived from payments we receive based on sales
of Adenoscan(R) and Adenocard(R). Revenue from royalties increased $1.6 million,
or 6.6%, to $26.0 million in 2002 from $24.4 million in 2001.

Revenues from contract manufacturing increased $5.3 million, or 37.9%, to
$19.3 million in 2002 from $14.0 million in 2001, primarily due to increased
unit sales under existing contracts.

20

Gross Profit

Total gross profit (revenues less cost of revenues, including royalty
expense) increased $131.2 million, or 42.9%, to $437.3 million in 2002 from
$306.1 million in 2001. The increase was primarily due to increased sales of
higher margin branded pharmaceutical products.

Gross profit from branded pharmaceutical products increased $126.0 million,
or 43.4%, to $416.3 million in 2002 from $290.3 million in 2001. This increase
was primarily due to increased sales of Altace(R) and Levoxyl(R), and the
additional sales arising from the acquisition of three branded pharmaceutical
products and a license to a fourth from Bristol-Myers Squibb in August 2001.

Gross profit from royalties increased $2.2 million, or 11.4%, to $21.5
million in 2002 from $19.3 million in 2001.

Gross profit associated with contract manufacturing increased $2.9 million
to ($0.8) million in 2002 from ($3.7) million in 2001.

Operating Costs and Expenses

Total operating costs and expenses increased $82.1 million, or 35.9%, to
$310.9 million in 2002 from $228.8 million in 2001. The increase was primarily
due to an increase in cost of revenues associated with increased unit sales of
our branded pharmaceutical products, including Altace(R) and Levoxyl(R),
increased fees 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 representatives in 2001 to 715 representatives in 2002.

Cost of revenues increased $21.5 million, or 26.3%, to $103.3 million in
2002 from $81.8 million in 2001. The increase was primarily due to costs
associated with increased unit sales of our branded pharmaceutical products,
including Altace(R) and Levoxyl(R), and the acquisition of three branded
pharmaceutical products and a license to a fourth from Bristol-Myers Squibb in
August 2001. As a percentage of revenues, cost of revenues decreased to 19.1% in
2002 from 21.1% in 2001 due to the increase in sales of higher margin products.

Selling, general and administrative increased $56.4 million, or 50.9%, to
$167.1 million in 2002 from $110.7 million in 2001. This increase was primarily
attributable to fees 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 representatives in 2001 to 715
representatives in 2002. As a percentage of revenues, selling, general, and
administrative expenses increased to 30.9% in 2002 from 28.5% in 2001.

Depreciation and amortization expense increased $5.3 million, or 23.2%, to
$28.1 million in 2002 from $22.8 million in 2001. This increase was primarily
attributable to the amortization of the intangible assets related to the
acquisition of three branded pharmaceutical products and a license to a fourth
from Bristol-Myers Squibb in August 2001. Amortization expense was reduced by
$0.8 million in 2002 due to the implementation of SFAS 142 (see Note 5 to
financial statements).

Research and development expense increased to $12.3 million in 2002 from
$10.5 million in 2001.

In June 2001, we incurred a $3.0 million expense designated "Research and
development -- special license rights" for fees we paid Novavax as consideration
for an agreement which (1) expands our exclusive license to promote, market,
distribute and sell Estrasorb(TM) worldwide, following approval, except in the
United States and Puerto Rico where the parties will co-market the product; and
(2) grants us an additional exclusive worldwide license to promote, market and
distribute Androsorb(TM), following approval, except in the United States and
Puerto Rico where the parties will co-market the product.

Operating Income

Operating income increased $70.6 million, or 44.4%, to $229.7 million in
2002 from $159.1 million in 2001. This increase was primarily due to increased
revenues from Altace(R) and Levoxyl(R), and the acquisition of three branded
pharmaceutical products and a license to a fourth from Bristol-Myers Squibb in
August 2001.

21

As a percentage of net revenues, operating income increased to 42.5% in 2002
from 41.0% in 2001 primarily due to an increase in sales of higher margin
branded pharmaceutical products.

Other Income (Expense)

Interest income increased $5.9 million, or 105.4%, to $11.5 million in 2002
from $5.6 million in 2001 due to higher balances of invested cash, cash
equivalents, and marketable securities during the six months ended June 30, 2002
as compared to the six months ended June 30, 2001.

Interest expense remained relatively consistent at $5.9 million in 2002
compared to $5.6 million in 2001.

Other, net, decreased from $2.9 million in 2001 to ($1.1) million in 2002
primarily due to the recognition of an unrealized gain of approximately $2.8
million on a $20.0 million convertible senior note from Novavax during 2001.

During the period from December 2000 through June 2002, we provided $40.0
million in financing to Novavax in the form of notes receivable convertible to
common stock of Novavax, including $10.0 million that was provided in June 2002.
The loan is impaired as defined under SFAS 114, "Accounting by Creditors for
Impairment of a Loan." SFAS 114 requires the creditor to evaluate the cash flows
available from any collateral (in King's situation, the Novavax common stock
obtainable upon conversion) in order to determine the amount of any valuation
allowance for an impaired loan. Because of the recent significant decline in the
share price of Novavax common stock to levels below that established by King's
common stock conversion options associated with the Novavax notes, we recorded a
valuation allowance of $27.9 million, or $17.6 million net of tax, in the second
quarter of 2002. We determined the amount of the charge by reference to the June
30, 2002 quoted market price of the Novavax common stock. We will adjust the
amount of the valuation allowance in future periods based on the value of the
underlying collateral (Novavax common stock) as of the last business day of each
respective calendar quarter or until the loan is no longer considered to be
impaired.

Income Tax Expense

The effective tax rate of 37.1% in 2002 and of 37.3% in 2001 was higher
than the federal statutory rate of 35% primarily due to permanent differences
related to state income taxes in both 2002 and 2001.

Cumulative Effect of Accounting Change

During the first quarter of 2001, we recorded a charge of $0.9 million, or
$0.5 million net of tax, due to the cumulative effect of a change in accounting
principle as a result of the adoption of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No. 138,
which establishes accounting and reporting standards for derivative instruments
and hedging activities.

Net Income

Due to the factors set forth above, net income increased $28.7 million, or
28.4%, to $129.7 million in 2002 from $101.0 million in 2001.

LIQUIDITY AND CAPITAL RESOURCES

General

We believe that existing balances of cash, cash equivalents and marketable
securities, cash generated from operations, and an existing revolving credit
facility are sufficient to finance our current operations and working capital
requirements. However, in the event we make significant future acquisitions or
change our capital structure, we may be required to raise funds through
additional borrowings or the issuance of additional debt or equity securities.

At present, we are actively pursuing acquisitions that may require the use
of substantial capital resources. There are no present agreements or commitments
with respect to any such acquisition.

22

SIX MONTHS ENDED JUNE 30, 2002

As of June 30, 2002 we had available up to $400.0 million under a revolving
line of credit.

We generated net cash from operations of $148.7 million for the six months
ended June 30, 2002. Our net cash provided from operations was primarily the
result of $129.7 million in net income, adjusted for non-cash depreciation and
amortization of $28.4 million, a valuation allowance of $27.9 million on the
Novavax convertible senior notes we hold, an increase in accounts payable of
$22.3 million, and an increase in accrued expenses of $46.2 million. An increase
in accounts receivable of $60.5 million, an increase in inventory of $37.3
million, and a decrease in income taxes payable of $15.0 million offset the
items previously described.

Cash flows used in investing activities for the six months ended June 30,
2002 was $443.1 million primarily due to the purchase of marketable securities
of $283.9 million, the purchase of Ortho-Prefest(R) and other intangible assets
of $120.3 million, $33.2 million of capital expenditures, and the purchase of
Novavax convertible senior notes of $10.0 million.

Cash flows used in financing activities for the six months ended June 30,
2002 was $82.2 primarily due to the purchase of our common stock of $80.5
million.

Certain Indebtedness and Other Matters

As of June 30, 2002, we had $347.6 million of long-term debt (including
current portion) and we have available up to $400.0 million under our revolving
credit facility.

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. As of June 30, 2002, $616.0 million
remains available to us under the $1.3 billion universal shelf registration.

In April 2002, we established a $400.0 million five year senior secured
revolving credit facility. This facility requires us to maintain a certain
minimum net worth, EBITDA to interest expense ratio above an established
minimum, and funded debt to EBITDA ratio below an established maximum. As of
June 30, 2002, we were in compliance with these covenants.

On May 13, 2002, our Board of Directors authorized a plan to repurchase up
to 7.5 million shares of our common stock. Under the plan, we may repurchase
shares of our common stock in the open-market from time to time, depending on
market conditions, share price and other factors. During the second quarter the
Company repurchased 4.3 million shares of common stock.

On May 29, 2002, we acquired the exclusive rights to Ortho-Prefest(R)
tablets in the United States, its territories and possessions and the
Commonwealth of Puerto Rico, including the related drug application,
investigational new drug application, copyrights, and patents or licenses to
related patents from Ortho-McNeil. We paid $108.0 million for the product rights
upon closing plus approximately $3.3 million of expenses. We will pay
Ortho-McNeil an additional $7.0 million upon receipt of the permission of the
U.S. Food and Drug Administration (which we refer to in this report as the
"FDA") to rename the product "Prefest(TM)". The acquisition was financed with
cash on hand. We included the acquisition in product rights and assigned a
temporary life of 20 years. The purchase price allocation among the assets
acquired, the determination as to whether the useful life is indefinite or
finite and the assignment of lives to the intangibles designated as having
finite lives under SFAS No. 142 are preliminary and subject to further
evaluation.

Capital Expenditures

Capital expenditures, including capital lease obligations, were $10.8
million and $7.1 million for the three months ended June 30, 2002 and 2001,
respectively, and $33.2 million and $14.2 million for the six months

23

ended June 30, 2002 and 2001, respectively. The principal capital expenditures
included property and equipment purchases, new information technology system
implementation costs, and building improvements for facility upgrades and
increased capacity.

We are continuing the process of implementing a new information technology
system which we expect to complete next year. This new system will support many
of our business functions including manufacturing, distribution, logistics,
sales reporting, accounting, inventory, quality control, budgeting, and other
company functions. During the second half of 2002 and the first half of 2003 we
anticipate that capital expenditures associated with the implementation of this
new system will be approximately $20.0 million.

IMPACT OF INFLATION

We have experienced only moderate raw material and labor price increases in
recent years. While we have passed some price increases along to our customers,
we have primarily benefited from rapid sales growth negating most inflationary
pressures.

RECENT ACCOUNTING PRONOUNCEMENTS

In the first quarter of 2001, we adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
which establishes accounting and reporting standards for derivative instruments
and hedging activities. The cumulative effect of the change in accounting
principle was $0.9 million, or $0.5 million net of tax. In addition, the change
in the value of the derivatives in the quarter and six months ended June 30,
2001 of $4.4 million and $2.8 million, respectively, was included in other
income.

In the first quarter of 2002, we adopted SFAS No. 141 "Business
Combinations", and SFAS No. 142 "Goodwill and Other Intangible Assets". SFAS No.
141 requires all business combinations to be accounted for under the purchase
method of accounting. SFAS No. 141 was effective for all business combinations
initiated after June 30, 2001. 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. The results for the
quarter and six months ended June 30, 2002 include the effect of adopting SFAS
Nos. 141 and 142, which resulted in a $0.4 million and $0.8 million reduction in
expenses, respectively, or $0.3 million and $0.5 million net of tax,
respectively, and no increase in basic and diluted earnings per share.

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. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. We adopted these standards
effective January 1, 2002. The implementation of these standards did not have
any effect on our financial statements.

In May 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13 and Technical Corrections as of April 2002." SFAS No. 145 is effective for
fiscal periods beginning after May 15, 2002. The primary effect of our adopting
SFAS No. 145 will be that gains and losses incurred upon the extinguishment of
debt may no longer qualify for extraordinary items treatment in the income
statement.

In July 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Exit or Disposal Activities." SFAS No. 146 addresses the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including costs related to terminating a contract that
is not a capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 supercedes Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including

24

Certain Costs Incurred in a Restructuring)" SFAS No. 146 will be effective for
exit or disposal activities that we initiate after December 31, 2002.

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 38.8% and Levoxyl(R) accounted for
approximately 14.7% of our revenues for the six months ended June 30, 2002, and
Altace(R), Levoxyl(R), Thrombin-JMI(R) and royalty revenues collectively
accounted for approximately 65.8% of our revenues during the same period. We
believe that sales of these products will continue to constitute a significant
portion of our 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

25

occurred, they could have a material adverse effect on our business, financial
condition, results of operations and cash flows.

IF OUR BRISTOL FACILITY AND THE AVENTIS (USA) FACILITY DO NOT REMAIN
FDA-APPROVED MANUFACTURING AND PACKAGING SITES FOR 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.

Our Bristol facility is an FDA-approved manufacturing and packaging site
for Altace(R). Aventis (USA) in Kansas City, Missouri, is our alternative or
back-up FDA-approved manufacturing and packaging site for Altace(R). Aventis
Pharma Deutscheland GmbH (Germany) is 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. We have
entered into a long-term supply agreement with Aventis (Germany) 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. 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 to maintain our Bristol facility and the Aventis (USA) facility as
FDA-approved manufacturing and packaging sites for Altace(R) could have a
material adverse effect on our business, financial condition, results of
operations and cash flows.

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).

26

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) are not equal to or greater than $300.0 million on 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.

27

OUR SALES OF LEVOXYL(R) COULD BE AFFECTED BY FUTURE ACTIONS OF THE FDA, THE
POSSIBLE DEVELOPMENT AND APPROVAL OF A GENERIC SUBSTITUTE FOR LEVOXYL(R), OUR
ABILITY TO TIMELY OBTAIN AND, IF ISSUED, MAINTAIN EFFECTIVE PATENT PROTECTION
FOR LEVOXYL(R), AND THE FDA'S APPROVAL OF A NEW DRUG APPLICATION FOR THE
COMPETING PRODUCT SYNTHROID(R).

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, including Abbott Laboratories who
manufactures the competing product Synthroid(R), have received FDA approval of
New Drug Applications for their levothyroxine sodium products. 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 seeking approval of a generic substitute for a levothyroxine sodium
product with an approved New Drug Application. 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 Levoxyl(R). 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) and
have a material adverse effect upon our results of operations and cash flows.

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 17
years or more from the date(s) these patents issue. 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. Until potential patents issue that effectively
provide Levoxyl(R) with protection from possible generic substitution, the FDA
may approve an Abbreviated New Drug Application for a generic substitute for
Levoxyl(R).

On March 26, 2002, Jerome Stevens filed a Petition for Stay of Action
(assigned Docket No. 02P1035) with the FDA seeking redress from the FDA for the
public disclosure on the FDA's website of alleged trade secrets relating to the
manufacturing process for Jerome Stevens' orally-administered levothyroxine
sodium drug product Unithroid. While Jerome Stevens does not specifically
request that the FDA stay any action with respect to our levothyroxine sodium
drug product Levoxyl(R), Jerome Stevens does request, among other broad
remedies, that the FDA "immediately and indefinitely stay . . . all grants of
drug pre-market authority that used, relied on, or were based on Jerome
confidential and trade secret manufacturing information . . ." We have filed a
Comment on Jerome Stevens' Petition with the FDA, stating that the New Drug
Application for Levoxyl(R) was filed with the FDA before the disclosure of
Jerome Stevens' alleged trade secrets, and that the approval of the Levoxyl(R)
New Drug Application is unrelated to such disclosure. Based on these facts, we
do not believe that Jerome Stevens' Petition applies to Levoxyl(R). However, if
the FDA were to determine that there is a valid legal basis for suspension or
withdrawal of FDA approval of the Levoxyl(R) New Drug Application, it could have
a material adverse effect on our business, financial condition, results of
operation and cash flows.

28

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. Eli Lilly and Company manufactures
Lorabid(R) for us under a supply agreement containing significant minimum
purchase requirements. If Lorabid(R) sales do not increase, there may be a
material adverse effect upon our results of operations and cash flows,
including, but not limited to, a potential write-off of excess inventory.

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 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;

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

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

- obtain FDA approvals necessary to successfully implement the strategies
described above.

29

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. If we are not successful, including the failure to obtain any
necessary FDA approval, our business, financial condition and results of
operations could be materially adversely affected.

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,

- 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), Bicillin(R), Ortho-Prefest(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

30

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. The occurrence of any of these events could have a
material adverse effect on our business, financial condition, results of
operations and cash flows.

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 were 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 all our affected products, except Septra(R) IV Infusion. However,
we cannot assure you 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 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.

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 current
Good Manufacturing Practices, which we refer to as "cGMPs". 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.

31

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

We are currently implementing short-term and long-term strategies to expand
our production capacity at our Middleton facility where we manufacture
Thrombin-JMI(R). If we cannot successfully expand our production capacity at our
Middleton facility, our ability to increase production of Thrombin-JMI(R) will
be limited thereby limiting our unit sales growth for this product.

IF THE IMPLEMENTATION OF OUR NEW INFORMATION TECHNOLOGY SYSTEM NEXT YEAR IS NOT
SUCCESSFUL, OUR BUSINESS COULD BE DISRUPTED.

We are in the process of implementing a new information technology system
which is to be effective next year. This system will support many of our
business functions including manufacturing, distribution, logistics, sales
reporting, accounting, inventory, quality control, budgeting, and other company
functions. In the event we do not successfully convert in a timely manner from
our existing information system to the new one or in the event the new system
does not operate as expected, our business could be disrupted. This disruption
could have a material adverse effect on our business, financial condition,
results of operations and cash flows.

OUR QUARTERLY RESULTS MAY FLUCTUATE, AND THESE FLUCTUATIONS MAY ADVERSELY AFFECT
OUR PROFITABILITY.

Our results of operations, including, in particular, product sales revenue,
may vary from quarter to quarter due to many factors. These factors include
expenditures related to the acquisition, sale and promotion of pharmaceutical
products, a changing customer base, the availability and cost of raw materials,
interruptions in supply by third-party manufacturers, new products introduced by
us or our competitors, the mix of products we sell, sales and marketing
expenditures, competitive pricing pressures and general economic and industry
conditions that may affect customer demand. For example, in advance of an
anticipated or announced price increase, many of our customers may order
pharmaceutical products in larger than normal quantities. The ordering of excess
quantities in any quarter could cause sales of some of our branded
pharmaceutical products to be lower in the subsequent quarter than they would
have been otherwise. We cannot assure you that we will be successful in
maintaining or improving our profitability or avoiding losses in any future
period.

IF THE STOCK PRICE OF NOVAVAX CONTINUES TO DECLINE, OUR INVESTMENT IN NOVAVAX
CONVERTIBLE NOTES COULD RESULT IN ADDITIONAL SPECIAL CHARGES RELATED TO A
VALUATION ALLOWANCE FOR THESE NOTES.

During the period from December 2000 through June 2002, we provided $40.0
million in financing to Novavax in the form of notes receivable convertible to
common stock of Novavax, including $10.0 million that was provided in June 2002.
The loan is impaired as defined under SFAS 114, "Accounting by Creditors for
Impairment of a Loan." SFAS 114 requires the creditor to evaluate the cash flows
available from any collateral (in King's situation, the Novavax common stock
obtainable upon conversion) in order to determine the amount of any valuation
allowance for an impaired loan. Because of the recent significant decline in the
share price of Novavax common stock to levels below that established by King's
common stock conversion options associated with the Novavax convertible notes,
we recorded a valuation allowance of $27.9 million, or $17.6 million net of tax,
in the second quarter of 2002. We determined the amount of the charge by
reference to the June 30, 2002 quoted market price of the Novavax common stock.
We will adjust the amount of the valuation allowance in future periods based on
in the value of the underlying collateral (Novavax common stock) as of the last
business day of each respective calendar quarter or until the loan is no longer
considered to be impaired. If the Novavax common stock price continues to
decline, we may incur additional special charges related to the investment in
the convertible notes. Accordingly, our earnings may be adversely impacted by
these special charges.

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

32

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 thousand deductible per
incident and a $1.0 million aggregate annual deductible; however, we cannot
assure you that the level or breadth of any insurance coverage will be
sufficient to cover fully all potential claims. Also, adequate insurance
coverage might not be available in the future at acceptable costs, if at all.

Product recalls may be issued at our discretion or at the discretion of the
FDA, other government agencies or other companies having regulatory authority
for pharmaceutical product sales. 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 2.5% of gross sales for the six
months ended June 30, 2002, 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
767 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

33

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 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 our products or 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. Some of our major branded
pharmaceutical products have proprietary patent protection, including Altace(R)
with a composition of matter patent through October 2008. 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.

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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 our 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 Drug Enforcement Agency,
which we refer to as 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 U.S. Environmental Protection Agency,
which we refer to as 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 Federal Food, Drug and Cosmetic
Act, known as the "FDC Act," or the Public Health Service Act, known as 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,

35

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

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

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 cannot predict when or whether any of these proposals will be adopted or the
effect these proposals may have on our

36

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 business, financial condition, results of
operations and 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, 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).

37

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 cash flow 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 "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;

- our continued successful execution of our growth strategies;

- anticipated developments and expansions of our business;

38

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

- the success of our co-promotion agreements with Wyeth;

- the high cost and uncertainty of research, clinical trials and other
development activities involving pharmaceutical products;

- the 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 approvals including those patents pending
for Levoxyl(R) and Tigan(R) 300mg capsules and the protections to be
provided by these patents if issued;

- the planned implementation of our new information technology system; 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 above
in the section entitled "Risk Factors."

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

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

As of June 30, 2002, there were no significant changes in our qualitative
or quantitative market risk since the prior reporting period.

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.

39

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information required by this Item is incorporated by reference to Note
6 to the Condensed Consolidated Financial Statements included elsewhere in this
document.

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

At the annual meeting of shareholders on June 28, 2002, the shareholders
voted on the following proposals with the results as indicated:

1. Elected three directors to serve in office for a three-year terms as
follows:

Directors continuing in service include: Jefferson J. Gregory; Joseph R.
Gregory; Earnest W. Deavenport, Jr.; Ernest C. Bourne; Frank W. DeFriece, Jr.;
and Gregory D. Jordan.

2. Ratified the appointment of PricewaterhouseCoopers LLP as the
independent accountants and auditors for 2002 as follows:

For:........................................................ 220,294,787
Against:.................................................... 8,056,410
Abstention:................................................. 3,568,462

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

99.1 -- Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by Jefferson J. Gregory, the Chairman and Chief
Executive Officer of King Pharmaceuticals, Inc., on August
14, 2002.
99.2 -- Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by James R. Lattanzi, the Chief Financial Officer of
King Pharmaceuticals, Inc., on August 14, 2002.

(b) Reports on Form 8-K

None

40

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

KING PHARMACEUTICALS, INC.

Date: August 14, 2002 By: /s/ JEFFERSON J. GREGORY
------------------------------------
Jefferson J. Gregory
Chairman and Chief Executive Officer

Date: August 14, 2002 By: /s/ JAMES R. LATTANZI
------------------------------------
James R. Lattanzi
Chief Financial Officer

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