KING PHARMACEUTICALS INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended March 31, 2005
		OR

o		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 incorporation or organization)		(I.R.S. Employer Identification No.)
501 Fifth Street, Bristol, TN		37620
(Address of principal executive offices)		(Zip Code)

(423) 989-8000

(Registrant’s telephone number, including area code)

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 þ No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

Number of shares outstanding of Registrant’s common stock as of May 9, 2005: 241,730,668

TABLE OF CONTENTS


PART I -- FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
RISK FACTORS
	Item 3. Quantitative and Qualitative Disclosure about Market Risk
	Item 4. Controls and Procedures
PART II -- OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICAION OF THE CFO

PART I — FINANCIAL INFORMATION


Item 1.	*Financial Statements*

KING PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)


			March 31,
			2005		December 31,
			(unaudited)		2004

ASSETS
Current Assets:
	Cash and cash equivalents		$	348,589	$	342,086
	Restricted cash			65,000		97,730
	Marketable securities			8,534		16,498
	Accounts receivable, net of allowance for doubtful accounts of $15,095 and $15,348			206,170		180,963
	Inventories			255,408		274,412
	Deferred income taxes			122,857		153,979
	Prepaid expenses and other current assets			63,706		61,395

		Total current assets		1,070,264		1,127,063

Property, plant and equipment, net				281,222		280,731
Goodwill				121,152		121,152
Intangible assets, net				1,251,697		1,285,961
Other assets (includes restricted cash of $13,882 and $2,775)				26,689		16,318
Deferred income taxes				99,429		92,931

		Total assets	$	2,850,453	$	2,924,156

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
	Accounts payable		$	44,028	$	92,920
	Accrued expenses			499,752		596,010
	Income taxes payable			14,367		—

		Total current liabilities		558,147		688,930

Long-term debt				345,000		345,000
Other liabilities				29,226		41,436

		Total liabilities		932,373		1,075,366

Commitments and contingencies (Note 10)
Shareholders’ equity				1,918,080		1,848,790

		Total liabilities and shareholders’ equity	$	2,850,453	$	2,924,156

See accompanying notes.

KING PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)


				Three Months Ended
				March 31,

							2004*
				2005			(restated)

Revenues:
	Net sales			$	350,570		$	274,693
	Royalty revenue				18,055			16,757

			Total revenues		368,625			291,450

Operating costs and expenses:
	Cost of revenues, exclusive of depreciation, amortization and impairments shown below				72,216			83,541

	Selling, general and administrative, exclusive of co-promotion fees				92,850			87,602
	Mylan transaction costs				3,277			—
	Co-promotion fees				34,655			23,544

			Total selling, general and administrative expenses		130,782			111,146

	Research and development				11,472			16,023
	Depreciation and amortization				41,426			39,318
	Intangible asset impairment				—			34,936
	Restructuring charges				2,023			—
	Gain on sale of intangible assets				(847	)		(858	)

			Total other operating costs and expenses		54,074			89,419

			Total operating costs and expenses		257,072			284,106

	Operating income				111,553			7,344

Other income (expense):
	Interest income				2,277			1,054
	Interest expense				(2,701	)		(3,105	)
	Valuation charge — convertible notes receivable				—			(449	)
	Write-down of investments				(6,853	)		—
	Other, net expense				(249	)		(703	)

			Total other expense		(7,526	)		(3,203	)

Income from continuing operations before income taxes					104,027			4,141
Income tax expense					36,922			1,839

Income from continuing operations					67,105			2,302

Discontinued operations:
	Income (loss) from discontinued operations, including expected loss on disposal				4,682			(167,462	)
	Income tax expense (benefit)				1,732			(61,084	)

			Total income (loss) from discontinued operations		2,950			(106,378	)

Net income (loss)				$	70,055		$	(104,076	)

Income (loss) per common share:
	Basic:
		Income from continuing operations		$	0.28		$	0.01
		Total income (loss) from discontinued operations			0.01			(0.44	)

		Net income (loss)		$	0.29		$	(0.43	)

	Diluted:
		Income from continuing operations		$	0.28		$	0.01
		Total income (loss) from discontinued operations			0.01			(0.44	)

		Net income (loss)		$	0.29		$	(0.43	)

* See Note 2.

See accompanying notes.

KING PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

AND OTHER COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except share data)


										Accumulated
			Common Stock							Other
							Retained			Comprehensive
			Shares		Amount		Earnings			Income			Total

Balance at December 31, 2003				241,190,852	$	1,205,970	$	797,408		$	1,113		$	2,004,491
Comprehensive income:
	Net loss			—		—		(104,076	)		—			(104,076	)
	Net unrealized loss on marketable securities, net of tax of $(16)			—		—		—			(30	)		(30	)
	Foreign currency translation			—		—		—			99			99

		Total comprehensive loss												(104,007	)
Stock option activity				177,792		946		—			—			946

Balance at March 31, 2004, as restated				241,368,644	$	1,206,916	$	693,332		$	1,182		$	1,901,430

Balance at December 31, 2004				241,706,583	$	1,210,647	$	637,120		$	1,023		$	1,848,790
Comprehensive income:
	Net income			—		—		70,055			—			70,055
	Net unrealized loss on marketable securities, net of tax of $429			—		—		—			(742	)		(742	)
	Foreign currency translation			—		—		—			(79	)		(79	)

		Total comprehensive income												69,234
Stock option activity				24,085		56		—			—			56

Balance at March 31, 2005				241,730,668	$	1,210,703	$	707,175		$	202		$	1,918,080

See accompanying notes.

KING PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


			Three Months Ended
			March 31,

						2004*
			2005			(restated)

Cash flows from operating activities of continuing operations			$	23,503		$	60,318

Cash flows from investing activities of continuing operations:
	Transfer to restricted cash			(7,982	)		(351	)
	Proceeds from loan receivable			—			248
	Purchases of property, plant and equipment			(9,075	)		(12,585	)
	Proceeds from sale of property and equipment			1			—
	Payment of contingent consideration			—			(36,000	)

		Net cash used in investing activities of continuing operations		(17,056	)		(48,688	)

Cash flows from financing activities of continuing operations:
	Proceeds from exercise of stock options, net			56			946
	Payments on other long-term debt and capital lease obligations			—			(93	)

		Net cash provided by financing activities of continuing operations		56			853

Net cash provided by discontinued operations				—			2,790

Increase in cash and cash equivalents				6,503			15,273
Cash and cash equivalents, beginning of period				342,086			146,053

Cash and cash equivalents, end of period			$	348,589		$	161,326

* See Note 2.

See accompanying notes.

KING PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005 and 2004

(Unaudited)

(In thousands)


1.	General

The accompanying unaudited interim condensed consolidated financial statements of King Pharmaceuticals, Inc. (“King” or the “Company”) have been prepared by the Company in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of items of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. These consolidated statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. The year-end condensed balance sheet was derived from the audited consolidated financial statements but does not include all disclosures required by generally accepted accounting principles.

These consolidated financial statements include the accounts of King and all of its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.


2.	Restatement of Previously Issued Financial Statements

As previously disclosed and discussed in detail in Note 2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, the Company has in prior filings restated its financial statements for the years 2002 and 2003, including interim periods in 2003, and the first two quarters of 2004, primarily to reflect the correction of methodological errors related to its reserve for product returns. All amounts referenced in this Quarterly Report for those periods reflect the relevant amounts on a restated basis.

KING PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Previous Restatement of Income Statement Amounts

The table below sets forth the effect of the previously disclosed restatement for the three months ended March 31, 2004:


						Returns			Other
			As Originally			Reserve			Immaterial			As Previously
			Reported			Errors			Items			Restated

Revenues:
	Net sales		$	273,887		$	420		$	386		$	274,693
	Royalty revenue			16,757			—			—			16,757

		Total revenues		290,644			420			386			291,450

Operating costs and expenses:
	Cost of revenues, exclusive of depreciation shown below			87,714			(138	)		(4,035	)		83,541
	Selling, general and administrative, exclusive of co-promotion fees			86,602			—			1,000			87,602
	Co-promotion fees			27,504			(3,206	)		(754	)		23,544

		Total selling, general and administrative expense		114,106			(3,206	)		246			111,146

	Research and development			16,023			—			—			16,023
	Depreciation and amortization			39,318			—			—			39,318
	Intangible asset impairment			34,936			—			—			34,936
	Gain on sale of assets			(858	)		—			—			(858	)

		Total operating costs and expenses		291,239			(3,344	)		(3,789	)		284,106

	Operating (loss) income			(595	)		3,764			4,175			7,344

Total other expense				(2,803	)		—			(400	)		(3,203	)

(Loss) income from continuing operations before income taxes				(3,398	)		3,764			3,775			4,141
Income tax (benefit) expense				(1,048	)		1,441			1,446			1,839

(Loss) income from continuing operations				(2,350	)		2,323			2,329			2,302

Discontinued operations:
	(Loss) income from discontinued operations, including expected loss on disposal			(171,242	)		4,027			(24

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