<PAGE>   1
                                    FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                   For the fiscal year ended December 31, 1998
                                       OR

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

                         Commission file number 0-24425

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

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

                                501 FIFTH STREET
                            BRISTOL, TENNESSEE 37620

              (Address of principal executive offices and Zip Code)

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

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

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

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

         THE AGGREGATE MARKET VALUE OF THE SHARES OF COMMON STOCK HELD BY
NONAFFILIATES OF THE REGISTRANT AS OF MARCH 26, 1999 IS APPROXIMATELY
$458,700,000. (For purposes of this calculation only, all executive officers and
directors are classified as affiliates.)

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. OUTSTANDING AT MARCH 26, 1999,
COMMON STOCK, NO PAR VALUE, 32,104,730.

                    Documents Incorporated by Reference: NONE



<PAGE>   2
                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

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

         We are a vertically integrated pharmaceutical company that
manufactures, markets and sells primarily branded prescription pharmaceutical
products. Through a national sales force of over 200 representatives, we market
our branded pharmaceutical products to general/family practitioners and internal
medicine physicians and hospitals across the country. Our business strategy is
to acquire established branded pharmaceutical products and to increase their
sales by focused marketing and promotion and through product life cycle
management. In pursuing acquisitions, we seek to capitalize on opportunities in
the pharmaceutical industry created by cost containment initiatives and
consolidation among large, global pharmaceutical companies. We also create value
by developing product line extensions for our branded pharmaceutical products
such as new formulations, dosages or new indications. These product line
extensions are attractive for the Company because they may have market
exclusivity or sales levels that do not attract significant competition. In
addition to branded pharmaceuticals, we also provide contract manufacturing for
a number of the world's leading pharmaceutical and biotechnology companies,
including Amgen, Inc., Warner-Lambert Company, Mallinckrodt Chemical Inc.,
Genetics Institute and Hoffman-LaRoche, Inc.

         Cost containment initiatives and consolidation among large, global
pharmaceutical companies have created substantial opportunities for us to
acquire established branded pharmaceutical products. We generally seek branded
pharmaceutical products that:

                  -        have some patent protection or potential for market
                           exclusivity; 

                  -        lend themselves to product life cycle management;

                  -        can benefit from focused marketing efforts including
                           sampling, advertising and direct mail; or

                  -        complement our existing product lines.

         Consistent with our strategy to acquire established branded
pharmaceutical products, we have acquired 34 branded pharmaceutical products
since December 1994. Most recently, we acquired three branded pharmaceutical
products from Hoechst Marion Roussel, Inc. ("HMR"). The acquired products were
(1) the U.S. rights to the Altace(R) product line, an Angiotensin Converting
Enzyme inhibitor with patent protection until 2008; (2) HMR's worldwide rights
to the Silvadene(R) product line, a burn cream; and (3)HMR's worldwide rights to
the AVC(TM) product line, a vaginal anti-infective cream.

COMPETITIVE STRENGTHS

         We believe that our competitive position is attributable to a number of
key strengths, including the following:

-        Diverse Portfolio of Brand Name Products. Our branded pharmaceutical
         products can be divided into four therapeutic areas: (i)
         cardiovascular, (ii) anti-infectives, (iii) vaccines and biologicals
         and (iv) women's health. All of these products are marketed to
         general/family practitioners and internal medicine physicians. Unlike
         many of our competitors, we have a broad therapeutic focus that has
         provided us with opportunities to purchase a wide variety of products,
         as evidenced by our acquisition of 26 products over the last 18 months,
         including Altace. In addition, we have well known products in all of
         our therapeutic categories. Our portfolio of recognized brand names
         includes, among others, Altace(R), Neosporin(R), Cortisporin(R),
         Pitocin(R), Anusol-HC(R) and Fluogen(R).

-        Demonstrated Ability to Sustain and Improve Cash Flows. Our
         established, branded pharmaceutical product portfolio generated
         approximately 75% gross margins for the year ended December 31, 1998
         and requires limited research and development and capital expenditures.
         We have increased sales and improved cash flows of many of the products
         we have acquired. For example, in March 1997, we acquired from Glaxo
         Wellcome, Inc. a full line of prescription formulations of ophthalmic,
         otic and topical products marketed under the brand name Cortisporin(R).
         In June 1998 we launched an extension of this product line called
         Cortisporin(R)-TC Otic. In addition, we purchased the Proctocort(R)
         cream formulation in January 1997 from Solvay Pharmaceuticals, Inc.,
         and introduced the Proctocort(R) suppository product line extension in
         August 1997. For the year ended December 31, 1998, sales of
         Proctocort(R) suppositories exceeded sales of the original cream
         formulation. Overall, due to product line extensions and marketing
         efforts, we have increased sales of the Cortisporin(R) and
         Proctocort(R) product lines. The acquisition


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<PAGE>   3

         of Altace(R) will also provide strong cash flow, as we have entered
         into a five-year agreement with Hoechst Marion Roussel, Inc. to supply
         us with Altace(R) at a contract price which, at current selling prices,
         results in approximately 90% gross margins.

-        National Sales and Marketing Infrastructure. We have a national sales
         and marketing infrastructure which includes over 200 sales
         representatives dedicated to promoting and marketing our branded
         pharmaceutical products to general/family practitioners and internal
         medicine physicians. Our sales representatives are supported by 25
         telemarketers and customer service representatives. In addition, we
         expect to add approximately 50 sales representatives over the next six
         months, which will enhance our national coverage. We have an excellent
         relationship with our sales representatives as evidenced by an annual
         turnover rate of less than 5%. This low turnover rate results in stable
         relationships with general/family practitioners and internal medicine
         physicians.

-        Manufacturing Expertise. We have flexible manufacturing capabilities
         which give us the ability to acquire a variety of pharmaceutical
         products, to integrate such products at attractive operating margins
         and to develop new formulations and product line extensions. We
         currently operate two facilities with a total of approximately one
         million square feet of manufacturing, warehouse, laboratory and office
         space. The Parkedale facility is one of the largest sterile
         manufacturing facilities in the United States. The Parkedale facility
         and the Bristol facility together can produce a broad range of
         formulations and dosage forms such as sterile solutions, injectables,
         tablets, capsules, creams, lyophylized (freeze-dried) products,
         liquids, suppositories, ointments, suspensions, and powders. Our
         manufacturing operations are integrated with our quality control,
         quality assurance, regulatory compliance, purchasing, production
         planning, distribution and inventory management operations. These
         integrated services enable us to maintain high quality standards for
         our products as well as provide reliable and timely service to our
         customers. Currently, our capacity utilization is approximately 50% at
         the Bristol facility and 30% at the Parkedale facility, providing us
         with substantial manufacturing capacity for future growth.

-        Experienced and Dedicated Management Team. Our company has an
         experienced management team which is led by John M. Gregory, Chairman
         and Chief Executive Officer; Joseph R. Gregory, Vice Chairman; and
         Jefferson J. Gregory, President. These senior executives have an
         average of over 18 years of experience in the pharmaceutical industry.
         In addition, our company's management team (12 persons) owns
         approximately 41.3% of the our company's common stock.

GROWTH STRATEGY

         We believe that our ability to identify and integrate branded
pharmaceutical products and to leverage our marketing and manufacturing
infrastructure positions our company for continued growth. Specifically, we will
pursue the following growth strategies:

-        Seek Attractively Priced Product Acquisition Opportunities. We intend
         to continue to take advantage of industry consolidation and cost
         cutting trends and to selectively pursue acquisitions of branded
         pharmaceutical products. We generally seek branded pharmaceutical
         products that: (i) have some patent protection or potential for market
         exclusivity or product differentiation, (ii) lend themselves to product
         life cycle management, (iii) can benefit from focused marketing efforts
         in addition to product development, or (iv) complement our existing
         product lines.

-        Enhance Sales Through Focused Marketing and Promotion. We seek to
         increase the sales of our branded pharmaceutical products through
         one-on-one meetings with physicians ("details" or "detailing") and
         promotional efforts including sampling, advertising and direct mail.
         For many of our branded pharmaceutical products, this increased focus
         on product detailing and promotion is contrasted with the marketing
         efforts made prior to our acquisition of the product. For example, we
         intend to significantly increase the primary details and sampling of
         Altace(R)to general/family practitioners and internal medicine
         physicians as compared with the corresponding efforts by Hoechst Marion
         Roussel, Inc. In addition, we will continue to leverage our sales force
         of over 200 representatives by marketing a variety of products to
         general/family practitioners and internal medicine physicians and
         thereby increase sales of other branded products.

-        Increase Sales Through Product Life Cycle Management. Our product life
         cycle management includes pricing, product development, product
         position, identification of new therapeutic indications, maximization
         of pharmaceutical product exclusivity and competitor evaluation. To
         date, our product development efforts have focused on product line
         extension which allow us to 






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<PAGE>   4


         leverage our brand names, enhance product differentiation and minimize
         sales lost to generic substitution. The implementation of this strategy
         has resulted in the introduction of two line extensions,
         Cortisporin(R)-TC Otic and Proctocort(R) suppositories. We will
         continue to pursue product line extensions of existing and newly
         acquired products.

-        Capitalize on Global Distribution Rights. We have worldwide
         distribution rights to several of our branded pharmaceutical products.
         We intend to promote international sales of these products by entering
         into joint marketing and licensing agreements with international
         pharmaceutical companies and distributors. We believe one benefit will
         be low-cost access to foreign markets by utilizing the marketing and
         regulatory infrastructure of these companies.

COMPLETED ACQUISITIONS

         Certain information regarding our material acquisitions is set forth
below:

<TABLE>
<CAPTION>
                                                                                               DATE OF     
SELLER                                         PRODUCTS ACQUIRED(1)                            ACQUISITION        PURCHASE PRICE
------                                         --------------------                            -----------        --------------

<S>                                            <C>                                             <C>                <C>          
Hoechst Marion Roussel, Inc. ("HMR").......    Altace(R), Silvadene(R),AVC(TM)                 December 1998     $362.5 million
SmithKline Beecham Corporation (SmithKline")   Menest(R)                                       June 1998            5.0 million
Warner-Lambert Company ("Warner-Lambert)...    Fluogen(R), Anusol-HC(R), Procanbid(R),         February 1998      125.0 million(2)
                                               Pitocin(R) and others
Glaxo Wellcome, Inc ("Glaxo Wellcome").....    Septra(R), Proloprim(R), Mantadil(R),           November 1997       23.0 million
                                               Kemadrin(R), Neosporin(R), Polysporin(R)(3)
Glaxo Wellcome.............................    Viroptic(R)                                     May 1997             6.0 million
Glaxo Wellcome.............................    Cortisporin(R) product line                     March 1997          22.8 million
Solvay Pharmaceuticals, Inc................    Proctocort(R)                                   January 1997         1.5 million
Roberts Pharmaceutical Corporation.........    Nucofed(R), Quibron(R)                          October 1996         7.0 million
Boehringer Mannheim Pharmaceuticals        
Corporation................................    Anexsia(R) product line(4)                      December 1994       17.6 million
</TABLE>

(1)      For additional information, see Note 6 to the notes to consolidated
         financial statements.
(2)      The purchase price includes the acquisition of the Parkedale facility
         and certain manufacturing contracts for third parties.
(3)      We acquired the exclusive licenses, free of royalty obligations, to
         market and manufacture prescription formulations of Neosporin(R) and
         Polysporin(R).
(4)      We sold the Anexsia(R) product line to Mallinckrodt Chemical, Inc. in
         December 1995 for $32.0 million in cash and reported a $13.1 million
         net gain.

INDUSTRY

         Sales of pharmaceutical products in the United States were estimated to
be in excess of $85 billion in 1997. Growth in the pharmaceutical industry is
being driven primarily by: (i) the aging population; (ii) technological
breakthroughs which have increased the number of ailments which can be treated
with drugs; (iii) managed care's preference for drug therapy over surgery since
drug therapy is generally less costly; and (iv) direct-to-consumer television
advertising which has increased public awareness of available drug therapies.

         During the past decade, the pharmaceutical industry has been faced with
cost containment initiatives from government and managed care organizations and
has begun to consolidate. Consolidation is being driven by a desire among
pharmaceutical companies to reduce costs through economies of scale and
synergies, to add previously lacking U. S. or European sales strength or to add
promising product pipelines or manufacturing capabilities in key therapeutic
categories.

         Industry consolidation and cost containment pressures have increased
the level of sales necessary for an individual product to justify active
marketing and promotion from large pharmaceutical companies. For example, in
1997 the additional sales required for 1% sales growth for large global
pharmaceutical companies such as Merck, Johnson & Johnson and Novartis
Pharmaceuticals, a subsidiary of Novartis AG ("Novartis"), are $236 million,
$226 million and $214 million, respectively. This has led large pharmaceutical
companies to focus their marketing efforts on drugs with high volume sales,
newer or novel drugs which have the potential for high volume sales and products
which fit within core therapeutic or marketing priorities. As a result, major
pharmaceutical companies increasingly have sought to divest small or
non-strategic product lines which can be profitable for emerging pharmaceutical
companies, like us, to manufacture and market.






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<PAGE>   5

PRODUCTS AND PRODUCT DEVELOPMENT

Branded Products

         We market a variety of branded prescription products over four
therapeutic areas, including cardiovascular products (e.g., Altace(R)),
anti-infective products (e.g., Cortisporin(R)), vaccines and biologicals (e.g.,
Fluogen(R)) and women's health products (e.g., Pitocin(R)). Our branded
pharmaceutical products are generally in high volume categories and are well
known for their indications (e.g., Cortisporin(R) and Altace(R)). Additionally,
many of our branded products have limited or no generic competition, including
patent protected products, vaccines and biologicals that have no generic
equivalent or products that are difficult to formulate (e.g., creams, ophthalmic
suspensions and otic suspensions). Branded pharmaceutical products represented
77% and 79% of our net revenues for the year ended December 31, 1998 and 1997.

         Cardiovascular products. Altace(R) has become our primary product
within this segment. In February 1998, we acquired Procanbid(R), one of the
products we acquired from Warner-Lambert. Procanbid(R) is a branded
pharmaceutical product used to treat arrhythmia. Thalitone(R) is a
hypertension-diuretic tablet indicated for the management of hypertension with
patent protection through 2007. In connection with the Procanbid(R) acquisition,
we also acquired exclusive rights to Polymatrix(TM), a sustained release drug
delivery system patented through 2014, which we believe may have applications
for other of our products.

         Anti-infective products. Our anti-infective products are marketed
primarily to general/family practitioners and internal medicine physicians and
are prescribed to treat uncomplicated infections of the eyes, ears and skin. Our
products are generally in technologically mature product segments and as a
result have limited product risk. These mature, stable products are well suited
to our product life cycle management techniques. Cortisporin(R) is our largest
product in the category and is an example of one of our product life cycle
management techniques. In March 1997, we acquired a full line of prescription
formulations of ophthalmic, otic and topical products marketed under the
Cortisporin(R) brand name. The Cortisporin(R) brand name is well recognized and
has been marketed for over 20 years. Physicians routinely write prescriptions
for Cortisporin(R) ophthalmic ointments and suspensions, otic solutions and
topical creams and ointments. Cortisporin(R) otic products, however, are used to
fill prescriptions for only 3% of the total Cortisporin(R) otic prescriptions
written due to a high degree of generic substitution. In June 1998 we introduced
a product line extension, Cortisporin(R)-TC Otic suspension, used primarily in
treating swimmers ear infections. Cortisporin(R)-TC Otic has an additional
antibiotic and a dispersion agent which we believe helps in the absorption
process. There is currently no Cortisporin(R)-TC Otic suspension generic
substitute available and we believe that, because it is difficult to
manufacture, it will take several years before a generic substitute will become
available. We plan to market Cortisporin(R)-TC Otic suspension to physicians
through product sampling and detailing. As long as there is no generic
substitute, pharmacists filling Cortisporin(R)-TC Otic suspension prescriptions
must dispense our product as written. We believe this strategy will enable us to
capture a greater portion of the five to six million Cortisporin(R) otic
prescriptions that are written each year.

         Vaccines and biologicals. Fluogen(R), one of the products acquired in
February 1998 from Warner-Lambert, is a trivalent influenza virus vaccine that
has been marketed for over 25 years and has historically been one of the major
flu vaccines sold in the United States. The only other three companies
authorized to sell flu vaccine in the United States are American Home Product's
Wyeth division, Rhone Poulenc's Connaught division and Medeva. The U.S. market
for flu vaccine is estimated to be approximately 80-90 million doses. In 1997
Fluogen(R) was voluntarily taken off the market by Warner-Lambert for a product
reformulation to address the apparent lack of stability for one of the three
virus strains covered by the product. On August 20, 1998, we received Food and
Drug Administration ("FDA") approval to reintroduce Fluogen(R). We reintroduced
Fluogen(R) in the third quarter of 1998 and expect to increase 1999 Fluogen(R)
sales by increasing our production from 9 million doses to 20 million doses, for
which we have already received FDA approval. We own worldwide rights to
Fluogen(R) and expect to expand sales internationally. We believe that
international sales of Fluogen(R) represent a significant opportunity due to
limited supply and more attractive pricing for flu vaccine internationally.

         Women's health. We have a number of leading brand-name products in this
category including Pitocin(R), the most recognized brand name in labor
induction, and Anusol-HC(R), which is the number one prescribed hemorrhoidal
product, according to industry sources. Both of these products have been on the
market for many years and we believe were underpromoted by their previous
owners.

         In an effort to further strengthen our women's health franchise, we
acquired Menest(R) from SmithKline in June 1998. We previously manufactured this
product for SmithKline. Menest(R) competes in the growing $2 billion estrogen
replacement category. Menest(R) is well positioned in this category because the
primary ingredient in the market leader's product is derived from the urine of
pregnant mares. In contrast, Menest(R)'s active ingredient is derived from
Mexican yams. Menest(R) also lends itself to product line extensions.






                                     - 5 -
<PAGE>   6

         Certain of our products are described below:

<TABLE>
<CAPTION>
                          COMPANY ACQUIRED FROM                                                                        
PRODUCT                   AND DATE OF ACQUISITION     PRODUCT DESCRIPTION AND INDICATION
-------                   -----------------------     ----------------------------------
<S>                       <C>                        <C>
Cardiovascular Products

Altace(R)(1).............. HMR                       A hard-shell capsule for oral administration indicated for the treatment of
                           (December 1998)           hypertension.
Thalitone(R)(2)........... Horus Therapeutics, Inc.  A hypertension-diuretic tablet indicated for the management of hypertension,
                           (December 1996)           either alone or in combination with other antihypertensive drugs, and for
                                                     edema associated with congestive heart failure and various forms of renal
                                                     dysfunction.

Procanbid(R).............  Warner-Lambert            A procainamide extended-release tablet indicated for the treatment of
                           (February 1998)           documented ventricular arrhythmia, such as sustained ventricular tachycardia,
                                                     that, in the judgment of a physician, are life-threatening.

Anti-Infective Products

Cortisporin(R)............ Glaxo Wellcome            A full line of prescription antibiotic and anti-inflammatory formulations of
                           (March 1997)              ophthalmic ointments and suspensions, otic solutions and suspensions, and
                                                     topical creams and ointments indicated for the treatment of corticosteroid-
                                                     responsive dermatoses with secondary infections.

Viroptic(R)............... Glaxo Wellcome            A sterile solution indicated for the treatment of ocular Herpes simplex virus,
                           (May 1997)                idoxuridine-resistant Herpes and vidarabine-resistant Herpes.  In November
                                                     1997, the FDA approved the expanded use of Viroptic to include pediatric
                                                     patients, ages six and above.

Neosporin(R)(3)........... Glaxo Wellcome            A prescription strength ophthalmic ointment and solution indicated for the
                           (March 1997)              topical treatment of ocular infections. It is also formulated as a 
                                                     prescription strength genito-urinary concentrated sterile irrigant indicated 
                                                     for short-term use as a continuous irrigant or rinse to help prevent
                                                     infections associated with the use of indwelling catheters.

Polysporin(R)(3).......... Glaxo Wellcome            A prescription strength wide range antibacterial sterile ointment indicated for
                           (November 1997)           the topical treatment of superficial ocular infections.

Vira-A(R)................. Warner-Lambert            An antiviral ointment indicated for the topical treatment of ocular infections
                           (February 1998)           caused by the Herpes simplex virus types 1 and 2.

Chloromycetin(R).......... Warner-Lambert            A broad spectrum antibiotic ophthalmic ointment and solution indicated for
                           (February 1998)           the treatment of serious bacterial infections that are not responsive to other
                                                     antibiotics or when other antibiotics are contraindicated. This product is 
                                                     also available in an otic solution and sterile injectable form for intravenous
                                                     administration in the treatment of acute infections caused by salmonella and 
                                                     meningeal infections.

Septra(R)................. Glaxo Wellcome            An antibiotic indicated for the treatment of infectious diseases, including
                           (November 1997)           urinary tract infections, pneumonia, enteritis and ear infections in adults 
                                                     and children.

Coly-Mycin(R)............. Warner-Lambert            An antibiotic sterile parenteral indicated for the treatment of acute or 
                           (February 1998)           chronic infections due to sensitive strains of certain gram-negative bacteria 
                                                     and a sterile aqueous suspension for the treatment of superficial bacterial
                                                     infections of the external auditory canal.

Women's Health Products

Pitocin(R)................ Warner-Lambert            A sterile hormone solution used to initiate or improve uterine contractions
                           (February 1998)           during labor and to control bleeding or hemorrhage in the mother after
                                                     childbirth.

Menest(R)................. SmithKline                A film-coated esterified estrogen tablet for the treatment of vasomotor
                           (June 1998)               symptoms of menopause, atrophic vaginitis, kraurosis vulvae, female
                                                     hypogonadism, female castration, primary ovarian failure, breast cancer and 
                                                     prostatic carcinoma.

AVC(TM)(4)................. HMR                      Cream and suppositories for vaginal administration as indicated for the
                            (December 1998)          treatment of Candida albicans infections.

Anusol-HC(R)............... Warner-Lambert           A suppository and cream indicated for the relief of inflammation
                            (February 1998)          accompanying hemorrhoids (piles), post-irradiation proctitis, cryptitis and
                                                     other inflammatory conditions of the anorectum.

Proctocort(R).............. Solvay Pharmaceuticals,  A hemorrhoidal preparation cream with hydrocortisone acetate which the
                            Inc. (January 1997)      Company has also developed into a suppository form.

Vaccines and Biologicals

Fluogen(R)................. Warner-Lambert           A trivalent vaccine for immunization against influenza (flu); composition of
                            (February 1998)          the vaccine is determined each year by the Centers for Disease Control and
                                                     Center for Biologics Evaluation and Research.

Aplisol(R)................ Warner-Lambert            A sterile aqueous solution of purified protein fraction for intradermal
                           (February 1998)           administration as an aid in the diagnosis of tuberculosis.
</TABLE>









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<PAGE>   7

<TABLE>
<S>                       <C>                        <C>
Histoplasmin(R)............Warner-Lambert            An aqueous solution used as an aid in the diagnosis of histoplasmosis (a
                           (February 1998)           respiratory infection due to a fungus) and to differentiate histoplasmosis from
                                                     other myotic or bacterial respiratory infections.

Other Key Products

Adrenalin(R).............. Warner-Lambert            A sterile solution made from the active principle of the adrenal medulla used
                           (February 1998)           to relieve respiratory distress and hypersensitivity reactions and restore
                                                     cardiac rhythm in cardiac arrest due to various causes.

Quibron(R)................ Roberts Pharmaceutical    A respiratory preparation containing theophylline produced in capsule, tablet
                           Corporation               and sustained-release tablet forms; indicated for the relief, treatment and/or
                           (October 1996)            prevention of asthma, chronic bronchitis, emphysema and similar chronic
                                                     lung diseases.

Nucofed(R)...............  Roberts Pharmaceutical    A dye-free cough/cold preparation containing codeine and pseudoephedrine
                           Corporation               hydrochloride produced in syrup and capsule forms; indicated for the
                           (October 1996)            treatment of coughing and congestion where both are associated with upper
                                                     respiratory infections and related conditions, such as common cold,
                                                     bronchitis, influenza and sinusitis.

Tussend(R)(5)............  Not applicable            An internally developed cough/cold preparation containing hydrocodone
                                                     produced in syrup, tablet and elixir forms; indicated for the relief and 
                                                     treatment of nonproductive coughs accompanying respiratory tract congestions 
                                                     due to colds, acute respiratory infections, bronchitis and hay fever.

Silvadene(R)(3)........... HMR                       A topical antimicrobial cream indicated as an adjunct for the prevention and
                           (December 1998)           treatment of wound sepsis in patients with second-and third-degree burns.

Monafed(R)................ Not applicable            An internally developed non-narcotic cough/cold preparation produced in
                                                     sustained-release tablet form indicated for the treatment of coughing and
                                                     related conditions associated with upper respiratory infections, common cold,
                                                     bronchitis, influenza and sinusitis.
</TABLE>

(1)      We acquired licenses for the exclusive rights in the United States
         under various HMR patents to the active ingredient in Altace(R). 
(2)      We acquired the trademark for this product from Boehringer Ingelheim 
         Pharmaceuticals, Inc.
(3)      We have exclusive licenses, free of royalty obligations, to manufacture
         and market prescription formulations of these products.
(4)      We acquired HMR's worldwide rights to these products.
(5)      We acquired the trademark for this product from Marion Merrill Dow.

CONTRACT MANUFACTURING

         We utilize our excess manufacturing capacity to provide third party
contract manufacturing. We currently provide contract manufacturing for many
pharmaceutical and biotechnology companies, including Amgen, Inc.,
Warner-Lambert, Mallinckrodt, Genetics Institute, Inc. and Hoffman-LaRoche, Inc.
Many of the products that we contract manufacture are difficult to manufacture
and, therefore, do not attract significant competition. Contract manufacturing
as a percentage of sales has declined from 85% in 1994 to 19% of net revenues
for the year ended December 31, 1998 as we have acquired branded pharmaceuticals
products. Contract manufacturing, however, remains an important part of our
business because it:

                  -        provides a stable, recurring source of cash flows;


                  -        allows us to absorb overhead costs, and as such is an
                           efficient utilization of excess capacity; and

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

GENERICS AND OTHER

         We are engaged in the development, manufacturing, packaging, marketing,
distribution and sale of generic pharmaceutical products sold as prescription
drugs. We currently have two generic products on the market, two other generic
products which have been approved by the FDA and three abbreviated new drug
applications ("ANDA") on file. We intend to continue to add new development
projects as more pharmaceutical products lose their patent protection. Generic
products and companion animal health products represent less than 1% of our
total net sales for the year ended December 31, 1998. Through our companion
animal health division, we are engaged in developing and expanding a
comprehensive over-the-counter line of companion animal health products which
are marketed under the Royal Vet and Show Winner tradenames.







                                     - 7 -
<PAGE>   8

SALES AND MARKETING

         Our principal marketing focus is on the sales of branded pharmaceutical
products. We have a national sales force of over 200 sales representatives. We
distribute our branded pharmaceutical products primarily through wholesale drug
distributors. These products are ordinarily dispensed to the public through
pharmacies on the prescription of a physician. For branded pharmaceutical
products, our marketing and sales promotions principally target general/family
practitioners and internal medicine physicians through detailing and sampling to
encourage physicians to prescribe more of our products. The sales force is
supported and supplemented by telemarketing and direct mail, as well as through
advertising in trade publications and representations at regional and national
medical conventions. Our telemarketing and direct mailing efforts are performed
primarily by using a computer sampling system which we developed to distribute
samples to physicians. We identify and target physicians through data available
from IMS America, Ltd. and Scott-Levin, suppliers of prescriber prescription
data. We intend to seek new markets in which to promote our product lines and
will continue expansion of our field sales force as product growth or product
acquisitions warrant.

         We also market and sell generic pharmaceutical products as well as
companion animal health products. We market and sell our generic pharmaceutical
products primarily to major hospitals and hospital buying groups. These products
are marketed and sold primarily through 12 additional full-time sales
representatives, telemarketing and direct mail.

         Our companion animal health care products are sold to retailers such as
pet store chains, grocery stores and mass merchandisers. The promotion of our
companion animal health care products is focused on obtaining shelf space in
retail outlets through sales representatives and direct mail advertising.
PETsMart, Inc., an international operator of pet care superstores, is the
principal purchaser of our companion animal health care products under the Show
Winner label.

         Similar to other pharmaceutical companies, our principal customers are
wholesale pharmaceutical distributors. The wholesale distributor network for
pharmaceutical products has in recent years been subject to increasing
consolidation which has increased our, and other industry participants',
customer concentration. In addition, the number of independent drug stores and
small chains has decreased as retail consolidation has occurred. For the year
ended December 31, 1998, approximately 41.1% of our sales were attributable to
four distributors: McKesson Corporation (11.4%), Cardinal/Whitmire (10.8%),
Bergen Brunswig (12.6%) and AmeriSource (6.3%).

MANUFACTURING

         Our two manufacturing facilities are the Bristol facility, located in
Bristol, Tennessee, and the Parkedale facility, located in Rochester, Michigan.
These facilities have in the aggregate approximately one million square feet of
manufacturing, packaging, laboratory, office and warehouse space. We manufacture
our products in accordance with current good manufacturing practices ("cGMP")
requirements and are licensed by the Drug Enforcement Agency ("DEA") to procure
and produce controlled substances. We manufacture certain of our own branded and
generic pharmaceutical products and companion animal health products as well as
products owned by other pharmaceutical companies under manufacture and supply
contracts which expire over periods ranging from one to five years.

         We can produce a broad range of dosage formulations, including sterile
solutions, lyophylized (freeze-dried) products, injectables, tablets and
capsules, liquids, creams and ointments, suppositories and powders. We believe
our manufacturing capabilities allow us to capture higher margins and pursue
product line extensions more efficiently. However, currently 16 of our product
lines, including Cortisporin(R) and the six product lines acquired in from Glaxo
Wellcome, four of the product lines acquired from Warner- Lambert and all three
of the products, including Altace(R) acquired from HMR, are manufactured in the
same facilities in which they were previously manufactured as we have not yet
received regulatory approval for their manufacture at our facilities. Capacity
utilization is approximately 50% at the Bristol facility and is approximately
30% at the Parkedale facility, providing us with substantial manufacturing
capacity for future growth. We intend to transfer, when advantageous, production
of newly acquired branded pharmaceutical products and their product line
extensions to our manufacturing facilities as soon as practicable after
regulatory requirements and contract manufacturing requirements are satisfied.

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

         We manufacture pharmaceutical products for, among others, Amgen, Inc.,
Warner-Lambert, Centocor, B.V., Fujisawa Pharmaceutical Company, Genentech,
Inc., Genetics Institute, Inc., Hoffman-LaRoche, Inc., Mallinckrodt, Novartis,
Roberts Pharmaceutical Corporation, Santen Incorporated and SmithKline. Contract
manufacturing represented in the aggregate approximately 19.3% and 14.6% 






                                     - 8 -
<PAGE>   9

of our net sales for the year ended December 31, 1998 and 1997. In 1995, in
conjunction with our sale of the Anexsia(R) product line, we entered into a
manufacture and supply contract with Mallinckrodt for the manufacture of the
Anexsia(R) product line, which provides for a guaranteed minimum manufacturing
fee of $4.8 million through 1999 and renewals thereafter at the option of
Mallinckrodt for up to an additional three years.

         We require a supply of quality raw materials and components to
manufacture and package drug products for us and for third parties with which we
have contracted. Generally we have not had difficulty obtaining raw materials
and components from suppliers in the past. Currently, we rely on approximately
300 suppliers to deliver the necessary raw materials and components. The loss of
any one of these suppliers is not expected to have a material adverse effect on
our ability to acquire raw materials and components. We have no reason to
believe we will be unable to procure adequate supplies of raw materials and
components on a timely basis. However, if for any reason 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 such case, our business, financial condition and results of
operations could be materially and adversely affected.

RESEARCH AND DEVELOPMENT

         At the present time, we are not engaged in substantial clinical
research activities. We are, however, involved in product development and
continually seek to develop extensions to our product lines and to improve the
quality and efficiency of our manufacturing processes. Our laboratories and
product development scientists have produced several product line extensions to
existing branded pharmaceutical products for which the Company has secured
several ANDA approvals from the FDA.

GOVERNMENT REGULATION

         Our business and our products are subject to extensive and rigorous
regulation at both the federal and state levels. Most importantly, nearly all of
our products are subject to premarket approval requirements. Human and animal
drugs are subject to similar regulatory requirements. New drugs are approved
under, and are subject to, the Federal Food, Drug and Cosmetic Act (the "FDC
Act") and the respective related regulations and biological drugs are subject to
both the FDC Act and the Public Health Service Act (the "PHS Act") and the
related regulations. Biological drugs are licensed under the PHS Act. ANDAs may
be filed to secure marketing approval for generic forms of certain approved
human drugs, but generally not for biological products.

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

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

         The FDA regulatory regime applicable to our generic pharmaceutical
products depends on whether the branded drug is the subject of an approved
marketing application or is marketed pursuant to the FDA's enforcement
discretion and/or policies. If the pharmaceutical product to be offered as a
generic version of a branded product is the subject of an approved marketing
application, the generic product must be the subject of an ANDA and must be
approved by the FDA prior to marketing. Pharmaceutical products produced by any
manufacturer and marketed subject to the FDA's enforcement discretion and/or
policies are not subject to generic drug approvals.

         The FDA also mandates that drugs be manufactured, packaged and labeled
in conformity with cGMPs. In complying with cGMP regulations, manufacturers must
continue to expend time, money and effort in production, record keeping and
quality control to ensure that the product meets applicable specifications and
other requirements to ensure product safety and efficacy. The FDA periodically
inspects drug manufacturing facilities to ensure compliance with applicable cGMP
requirements. Failure to comply with the statutory and regulatory 





                                     - 9 -
<PAGE>   10

requirements subjects the manufacturer to possible legal or regulatory action,
such as suspension of manufacturing, seizure of product or voluntary recall of a
product. Adverse experiences with the product must be reported to the FDA and
could result in the imposition of market restrictions through labeling changes
or in product removal. Product approvals may be withdrawn if compliance with
regulatory requirements is not maintained or if problems concerning safety or
efficacy of the product occur following approval.

         The federal government has extensive enforcement powers over the
activities of pharmaceutical manufacturers, including authority to withdraw
product approvals, commence actions to seize and prohibit the sale of unapproved
or non-complying products, to halt manufacturing operations that are not in
compliance with cGMPs, and to impose or seek injunctions, voluntary recalls, and
civil monetary and criminal penalties. Such a restriction or prohibition on
sales or withdrawal of approval of products marketed by us could materially
adversely affect our business, financial condition and results of operation.

         In November 1998 the Parke-Davis division of Warner-Lambert initiated a
voluntary Class III recall for one lot of Procanbid(R) manufactured prior to our
acquisition of Procanbid(R). A Class III recall is one in which use of, or
exposure to, the product is not likely to cause adverse consequences. The recall
was instituted because the lot at issue failed a dissolution test as part of the
routine stability program at the 18-month interval. In February 1999 we notified
the FDA that two additional lots of Procanbid(R), also manufactured prior to our
acquisition of the product line, had failed the same dissolution test at the
24-month interval. If additional lots of Procanbid(R) are recalled, the
reputation of the product and the value of the trademark associated therewith
could be adversely affected.

         While we believe that all of our current pharmaceutical products are
legally marketed under applicable FDA enforcement policies or have received
requisite government approvals for manufacture and sale, such marketing
authority is subject to revocation by the applicable government agencies. In
addition, modifications or enhancements of approved products or changes in
manufacturing locations are in many circumstances subject to additional FDA
approvals which may or may not be received and which may be subject to a lengthy
application process. Our manufacturing facilities are continually subject to
inspection by such governmental agencies and manufacturing operations could be
interrupted or halted in any such facilities if such inspections prove
unsatisfactory.

         We also manufacture and sell pharmaceutical products which are
"controlled substances" as defined in the Controlled Substances Act and related
federal and state laws, which establish certain security, licensing, record
keeping, reporting and personnel requirements administered by the DEA, a
division of the Department of Justice, and state authorities. The DEA has a dual
mission--law enforcement and regulation. The former deals with the illicit
aspects of the control of abusable substances and the equipment and raw
materials used in making them. The DEA shares enforcement authority with the
Federal Bureau of Investigation, another division of the Department of Justice.
The DEA's regulatory responsibilities are concerned with the control of licensed
manufacturers, distributors and dispensers of controlled substances, the
substances themselves and the equipment and raw materials used in their
manufacture and packaging in order to prevent such articles from being diverted
into illicit channels of commerce. We maintain appropriate licenses and
certificates with the States of Tennessee and Michigan in order to engage in
pharmaceutical development, manufacturing and distribution of pharmaceutical
products containing controlled substances. We are licensed by the DEA to
manufacture and distribute certain pharmaceutical products containing controlled
substances. We have not experienced license revocations, restrictions or fines
for non-compliance with the foregoing regulations but no assurance can be given
that revocations, restrictions or fines which could have a material adverse
effect upon our business, financial condition and results of operations will not
be imposed upon us in the future.

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

         Our Parkedale facility was one of six facilities owned by
Warner-Lambert 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 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 cGMP regulations and are produced in
accordance with an approved ANDA or new drug application ("NDA"). We are in the
process of preparing for, and if appropriate, obtaining relief from the Consent
Decree. There is no assurance that relief when and if sought will be granted. We
believe the Parkedale facility is in compliance with the requirements of the
Consent Decree.

         As a result of an FDA inspection in March and April 1998, we received
an FDA Form 483 with respect to the Parkedale Facility. When an FDA inspector
completes an authorized inspection of a manufacturing facility, Section 704(b)
of the FDC Act mandates that the 






                                     - 10 -
<PAGE>   11

inspector give to the owner/operator of the facility a 483 listing the
inspector's observations of objectionable conditions and practices. 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.
While no law or regulation requires us to respond to a 483, we have submitted
our written response detailing the plan of action with respect to each of the
observations made on the 483 and our commitment to correct the objectionable
practice or condition. The risk to us of a 483, if left unaddressed, could
include adverse regulatory action, including, among other things, the
commencement of actions to seize or prohibit the sale of unapproved or
non-complying products. We believe the receipt of the 483 will not have a
material adverse effect on our business, financial condition or results of
operations. We have been informed by the FDA that a follow-up inspection will
occur in the second quarter of 1999. There can be no assurance that the outcome
of the inspection will be favorable.

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

ENVIRONMENTAL MATTERS

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

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

COMPETITION

General

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

Generic Substitutes

         Many of our branded pharmaceutical products have either a strong market
niche or competitive position. Some of our branded pharmaceutical products face
competition from generic substitutes. Of our branded pharmaceutical products
that have generic substitutes, we believe that only a small number face
significant competition because many of our branded pharmaceutical products have
sales levels that are too low to attract competition or are too difficult to
manufacture or prove bioequivalence (i.e., the two products produce identical
effects on the body).







                                     - 11 -
<PAGE>   12

         Approximately 17 of the Company's branded pharmaceutical products
generated between $29,000 and $3.0 million in net sales for the year ended
December 31, 1998. The Company believes that these products do not face
significant competition from generic manufacturers because the market is too
small to make competition from generic manufacturers profitable. In addition, we
believe that pharmacists generally do not carry generic versions of branded
drugs that have low sales volume because of the cost of carrying the inventory
and the low sales volume.

         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. This is easiest
to prove when a drug is systemically absorbed into and measurable in the
bloodstream. For example, some of our products are topical preparations and
because topical preparations are less likely to be absorbed into the bloodstream
it is more difficult to prove bioequivalence for topical products. While it
typically takes two or three years to prove bioequivalence and receive FDA
approval for many generic substitutes, we believe that for topical products the
approval period is longer. By focusing our efforts in part on products with
bioequivalence or complex manufacturing requirements, we are able to protect
market share and produce sustainable, high margins and cash flows.

INTELLECTUAL PROPERTY

Patents and Licenses

         We consider the protection of discoveries in connection with our
development activities important to our business. We intend to seek patent
protection in the United States and selected foreign countries where deemed
appropriate. We own U.S. Patents for Novel Chlorthalidone Process and Product,
covering the raw materials used in the manufacture of Thalitone(R), and for
Procanbid(R). These patents expire in 2007 and 2014, respectively. We also have
a paid-up and non-exclusive license to certain other patent rights owned or
controlled by Bristol-Myers Squibb which is used in the manufacture of
Quibron(R). We have also applied for patents for an analysis test and a certain
manufacturing process for products other than Quibron(R). We also rely upon
trade secrets, unpatented proprietary know-how and continuing technological
innovation, where patent protection is not believed to be appropriate or
attainable, to develop our competitive position.

         In connection with the Altace(R) product line, we acquired the
exclusive rights in the United States under various HMR patents to the active
ingredients in Altace(R) patented to 2008 and their metabolites patented to
2012. Our rights include the exclusive utilization of the active ingredients in
Altace(R) in any combination as human therapeutic or human diagnostic products.

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

Trademarks

         We sell our branded products under a variety of trademarks. While we
believe that we have valid proprietary interests in all currently used
trademarks, only certain of the trademarks are registered with the U.S.
government, including those for our principal branded pharmaceutical products
Altace(R), Coly-Mycin(R), Fluogen(R), Procanbid(R), Anusol-HC(R),
Cortisporin(R), Neosporin(R), Polysporin(R), Septra(R), Proctocort(R),
Thalitone(R), Pediotic(R), Viroptic(R), Silvadene(R), Menest(R), Adrenalin(R),
Pitocin(R), Aplisol(R), Quibron(R), Nocofed(R), Monafed(R), Tussend(R),
Mantadil(R), Vira-A(R), Chloromycetin(R), and Kemadrin(R). Additionally,
trademark applications for Monarchpharm(TM) and Show Winner(TM) are pending. We
intend to market products under the following trademarks: AVC(TM), Arthrose(TM),
Vetrin(TM) and Monahist(TM). We also own or have pending the Polymatrix(TM),
Pro-Kemadrin(R), Histoplasmin(TM) and Royal Vet(R) trademarks and own or have
pending the Classics That Work(SM) service mark and the registered service mark
Secure-A-Sample(R).

BACKLOG

         As of December 31, 1998, we had no material backlog.






                                     - 12 -
<PAGE>   13
EMPLOYEES

         As of December 31, 1998, we employed 1,041 full-time and 19 part-time
persons. Certain employees of the Parkedale Facility, representing approximately
31% of our employees, are covered by a collective bargaining agreement with the
Oil, Chemical & Atomic Workers, International Union which expires February 28,
2003. We believe our employee relations are good. We employ a full-time Chaplain
and offer as part of our employee benefits package access to additional
counseling services.

ITEM 2.  PROPERTIES

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

<TABLE>
<CAPTION>
                   Location                            Approximate Square Footage
                   --------                            --------------------------
<S>                                                             <C>    
               Bristol, Tennessee..................             500,000
               Rochester, Michigan ................             500,000
</TABLE>






                                     - 13 -
<PAGE>   14

ITEM 3.  LEGAL PROCEEDINGS

         Many distributors, marketers and manufacturers of anorexigenic drugs
have been subject to claims relating to the use of these drugs. As of December
31, 1998, we are a defendant in 52 lawsuits which claim damages for personal
injury arising from our production of the anorexigenic drug, phentermine, under
contract for SmithKline. 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. We expect to be named in
additional lawsuits related to our production of the anorexigenic drug under
contract for SmithKline.

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

         We are involved in various routine legal proceedings incident to the
ordinary course of our business. We believe that the outcome of all pending
legal proceedings in the aggregate will not have a material adverse effect on
our consolidated financial condition, results of operations or cash flows.

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

         None




                                     - 14 -
<PAGE>   15



                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Common Stock of King is traded on the Nasdaq Stock Market under the
symbol "KING." There were approximately 2,300 shareholders on December 31, 1998,
based on the number of record holders of the Common Stock and an estimate of the
number of individual participants represented by security position listings.

         The Company's Common Stock began trading on June 25, 1998 and the price
range of Common Stock is described below:

<TABLE>
<CAPTION>
                                                                                   1998
                                                                         -------------------------
                                                                         High                  Low
                                                                         ----                  ---
<S>                                                                     <C>                  <C>
Second quarter (June 25 through June 30).......................         14 1/4               13 3/4
Third quarter (ended September 30).............................         21 3/8               12 3/4
Fourth quarter (ended December 31).............................         28 3/4               10 5/8
</TABLE>

The Company has no plans to pay dividends in the foreseeable future.

ITEM 6.  SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>
                                                                                For the Year Ended December 31,
                                                             -------------------------------------------------------------------
                                                               1994          1995           1996           1997           1998
                                                             --------      --------      ---------      ---------      ---------
<S>                                                          <C>           <C>           <C>            <C>            <C>      
STATEMENT OF OPERATIONS DATA:
Net sales(1) ...........................................     $ 13,311      $ 25,441      $  15,457      $  47,351      $ 158,180
Development revenues(2) ................................           --            --          5,000            558          5,283
                                                             --------      --------      ---------      ---------      ---------
   Total revenue, ......................................       13,311        25,441         20,457         47,909        163,463
                                                             --------      --------      ---------      ---------      ---------
Gross profit ...........................................        3,557        13,311         11,675         34,875         99,411
Operating income (loss) ................................          931        16,031         (1,413)        13,357         55,438
Gain on sale of investment in affiliate(3) .............           --            --          1,760             --             --
Interest expense .......................................       (1,069)       (2,006)        (1,272)        (2,749)       (14,866)
Other income (expenses), net ...........................          554           367            578            (28)           145
                                                             --------      --------      ---------      ---------      ---------
Income (loss) before income taxes and extraordinary item          416        14,392           (347)        10,580         40,717
Income tax (benefit) expense ...........................         (501)        5,058           (107)         3,968         15,396
                                                             --------      --------      ---------      ---------      ---------
Income (loss) before extraordinary item ................          917         9,334           (240)         6,612         25,321
Extraordinary item net of income taxes(4) ..............           --           528             --             --         (4,411)
                                                             --------      --------      ---------      ---------      ---------
Net income (loss) ......................................     $    917      $  9,862      $    (240)     $   6,612      $  20,910
                                                             ========      ========      =========      =========      =========
Basic and diluted (loss) income per share:
  Income before extraordinary item......................     $   0.05      $   0.36      $   (0.02)     $    0.25      $    0.84
                                                             ========      ========      =========      =========      =========
  Net income............................................     $   0.05      $   0.36      $   (0.02)     $    0.25      $    0.69
                                                             ========      ========      =========      =========      =========

OTHER DATA:
EBITDA(5) ..............................................     $  2,124      $ 18,175      $   1,907      $  15,724      $  64,838
Capital expenditures(6) ................................          890         1,672          1,069          1,379         81,099
Cash flow from operating activities ....................          672        (2,585)        (6,269)         5,016          5,831
Cash flow from financing activities ....................         (890)       30,268         (2,126)       (53,977)      (425,975)
Cash flow from investing activities ....................          927       (18,143)          (781)        47,638        421,234

BALANCE SHEET DATA AS OF THE YEAR ENDED:
Working capital ........................................     $ (2,408)     $  7,599      $   7,749      $    (424)     $  31,087
Total assets ...........................................       38,477        33,942         39,279        104,863        668,171
Total debt .............................................       27,065         4,487         18,011         56,373        527,796
Shareholders' equity ...................................        1,935        11,011         15,697         29,334        101,436
</TABLE>

(1)      Total revenues decreased $4.9 million, or 19.3%, to $20.5 million in
         1996 from $25.4 million in 1995 due primarily to the disposition of the
         Anexsia(R)product line, which had generated net revenues of $9.6
         million in 1995.
(2)      The Company developed four abbreviated new drug applications which were
         filed with the FDA on Mallinckrodt's behalf for a maximum of $2.5
         million each paid upon FDA approval and validation of the process.
(3)      In September 1996, the Company sold its entire 6.0% interest in an
         affiliated, privately held pharmaceutical company.
(4)      Reflects gain on early extinguishment of debt in connection with the
         disposition of the Anexsia(R) product line in 1995 and the loss on
         early extinguishment of debt in connection with the repayment of 
         certain debt instruments during 1998, net of income taxes of $272,000
         and $2.8 million, respectively.






                                     - 15 -
<PAGE>   16

(5)      "EBITDA" is defined as net income (loss) from continuing operations
         before interest, taxes, depreciation and amortization. We believe that
         EBITDA provide useful information regarding our ability to service our
         indebtedness, but should not be considered in isolation or as a
         substitute for operating income or cash flow from operations (in each
         case as determined in accordance with generally accepted accounting
         principles) as an indicator of our operating performance or as a
         measure of our liquidity.
(6)      Capital expenditures represent the Company's purchases of property,
         plant and equipment. Capital expenditures exclude business and product
         acquisitions. For the year ended December 31, 1998, we completed
         approximately $495.9 million of business and product acquisitions.

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

         The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Annual Report on Form 10-K. Historical results and percentage relationships set
forth in the statement of operations, including trends which might appear, are
not necessarily indicative of future operations. See "Risk Factors" for trends
and uncertainties known to the Company that could cause reported financial
information to differ materially from future results.

OVERVIEW

         We are a vertically integrated pharmaceutical company that
manufactures, markets and sells primarily branded prescription pharmaceutical
products. Through a national sales force of over 200 representatives, we market
our branded pharmaceutical products to general/family practitioners and internal
medicine physicians and hospitals across the country. Our business strategy is
to acquire established branded pharmaceutical products and to increase their
sales by focused marketing and promotion and through product life cycle
management. In pursuing acquisitions, we seek to capitalize on opportunities in
the pharmaceutical industry created by cost containment initiatives and
consolidation among large, global pharmaceutical companies. We also create value
by developing product line extensions for our branded pharmaceutical products
such as new formulations, dosages or new indications. These product line
extensions are attractive for the Company because they may have market
exclusivity or sales levels that do not attract significant competition. In
addition to branded pharmaceuticals, we also provide contract manufacturing for
a number of the world's leading pharmaceutical and biotechnology companies,
including Amgen, Inc., Warner-Lambert, Mallinckrodt, Genetics Institute and
Hoffman-LaRoche, Inc.

         Our branded pharmaceutical products can be divided into four
therapeutic areas: (i) cardiovascular (including Altace(R), Thalitone(R) and
Procanbid(R)), (ii) anti-infectives (including Cortisporin(R), Neosporin(R) and
Coly-Mycin(R) M), (iii) vaccines and biologicals (including Fluogen(R),
Aplisol(R) and Histoplasmin(TM)) and (iv) women's health (including Pitocin(R)
and Menest(R)). All of these products are marketed to general/family
practitioners and internal medicine physicians. Unlike many of our competitors,
we have a broad therapeutic focus that provides us with opportunities to
purchase a wide variety of products, as evidenced by our acquisition of 26
products over the last 18 months, including Altace(R). In addition, we have well
known products in all of our therapeutic categories that generate high
prescription volumes. Our portfolio of recognized prescription brand names
includes, among others, Altace(R), Neosporin(R), Cortisporin(R), Pitocin(R),
Anusol-HC(R) and Fluogen(R).

         Since December 1994, we have acquired 34 branded pharmaceutical
products, developed three products internally, divested one product and
introduced eight product line extensions. We acquired from Glaxo Wellcome the
Cortisporin(R) product line in March 1997, (the "Cortisporin Acquisition") the
Viroptic(R) product line in May 1997 and six additional branded products
including Septra(R), and exclusive licenses, free of royalty obligations, for
the prescription formulations of Neosporin(R) and Polysporin(R) in November 1997
(the "Glaxo Acquisition").

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

         On June 30, 1998, we acquired the Menest(R) product line from 
SmithKline Beecham Corporation ("SmithKline") for $5.0 million.

         In June 1998, we launched our new Cortisporin(R)-TC Otic line.
Cortisporin(R)-TC Otic is a product line extension for our Cortisporin(R) Otic
Suspension product.

         In August 1998, we received approval by the FDA to reintroduce
Fluogen(R) (influenza virus vaccine, Trivalent, Types A & B), which was acquired
as part of the Sterile Products Acquisition and had been off the market since
1996. Fluogen(R) is a seasonal product with most of its sales occurring in the
third and fourth quarters.



                                     - 16 -
<PAGE>   17

         In December 1998, we acquired from HMR for $362.5 million the United
States rights to Altace(R), an ACE inhibitor, HMR's worldwide rights to
Silvadene(R), a burn cream, and HMR's worldwide rights to AVC(TM), a vaginal
anti-infective cream (the "Altace Acquisition").

         Our strategy is to continue to acquire branded pharmaceutical products
and to create value by leveraging our marketing, manufacturing and product
development capabilities. We expect that our strategy of acquiring branded
pharmaceutical products will increase our revenues as a result of sales of such
products and will increase gross margins. In general, margins are higher on our
branded pharmaceutical products than on our other products, making branded
products attractive to us. As soon as practicable after regulatory requirements
are satisfied and when advantageous, we expect that manufacturing these acquired
pharmaceutical products ourselves will increase our margins because the cost of
producing pharmaceutical products on our own is lower than the cost of having
these products manufactured by third parties. We may also be required to raise
funds through additional borrowings or the issuance of debt or equity securities
in order to finance additional branded product acquisitions and to expand or
remodel our manufacturing facilities.

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

         The following summarizes approximate net revenues by operating segment
(in thousands):
                         
<TABLE>
<CAPTION>
                                      For the Year Ended December 31,
                                     --------------------------------
                                      1996        1997         1998
                                     -------     -------     --------
<S>                                  <C>         <C>         <C>     
         Branded pharmaceuticals     $ 2,939     $37,912     $125,399
         Contract manufacturing       10,890       6,982       31,611
         Other .................       6,628       3,015        6,453
                                     -------     -------     --------
              Total ............     $20,457     $47,909     $163,463
                                     =======     =======     ========
</TABLE>

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

Revenues

         Net revenues increased $115.6 million, or 241.3%, to $163.5 million in
1998 from $47.9 million in 1997, due primarily to the acquisition of branded
products in 1998 and late 1997 and increased contract manufacturing related to
the Sterile Products Acquisition.

         Branded pharmaceutical products revenues increased $87.5 million, or
230.8%, to $125.4 million in 1998 from $37.9 million in 1997. The Glaxo
Acquisition, Sterile Products Acquisition, Menest(R) and the Altace Acquisition
collectively contributed $85.9 million in revenues from branded pharmaceuticals
in 1998, including $17.7 million in net revenues from Fluogen(R) sales.

         Revenues from contract manufacturing increased $24.6 million, or
351.4%, to $31.6 million in 1998 from $7.0 million in 1997, due primarily to the
increased contract manufacturing related to the Sterile Products Acquisition.

         Additionally, the Company recognized other revenues in 1998 of $5.0
million for the development and related FDA approval of two ANDAs filed in
connection with its agreement with Mallinckrodt Chemical, Inc.

         Gross Profit

         Total gross profit increased $64.6 million, or 185%, to $99.4 million
in 1998 from $34.9 million in 1997. The increase was primarily due to the
increase in gross profit associated with branded pharmaceutical products of
$61.3 million. Additionally, gross profit associated with contract
development revenues, generic pharmaceutical sales, and companion animal health
sales increased by $3.6 million.






                                     - 17 -
<PAGE>   18
         The gross profit of branded pharmaceutical products increased $61.3 
million to $94.5 million in 1998 from $33.2 million in 1997. This increase was 
primarily due to increases in revenues from certain products acquired in the 
Sterile Products Acquisition, the Cortisporin Acquisition, the Glaxo 
Acquisition, and the Altace transaction in December 1998.
         
         The gross profit associated with contract development revenue, generic 
pharmaceutical sales, and companion animal health sales increased by $3.6 
million to $5.5 million in 1998 from $1.9 million in 1997. The increase was 
primarily due to an increase in contract development revenue offset by a 
decrease in gross profit contribution of generic pharmaceutical and companion 
animal health products.

Selling, General and Administrative Expense

         Selling, general and administrative expenses increased $15.6 million,
or 81.7%, to $34.7 million in 1998 from $19.1 million in 1997. This increase was
primarily attributable to the hiring of additional sales representatives in 1998
and during the second half of 1997, as well as other additional personnel costs
and marketing, promotion and sampling costs associated with the newly acquired
branded product lines.

Depreciation and Amortization Expense

         Depreciation and amortization expense increased $6.9 million, or
287.5%, to $9.3 million in 1998 from $2.4 million in 1997. This increase was
primarily attributable to the depreciation and amortization of the fixed assets
and intangible assets acquired with the branded product acquisitions in 1997 and
the Sterile Products and Altace Acquisitions in 1998.

Operating Income

         Operating income increased $42.0 million, or 313.4%, to $55.4 million
in 1998 from $13.4 million in 1997. This increase was primarily due to
incremental revenues and costs associated with the acquisition of branded
products. As a percentage of net revenues, operating income increased to 33.9%
in 1998 from 27.9% in 1997.

Interest Expense

         Interest expense increased $12.2 million, or 451.9%, to $14.9 million
in 1998 from $2.7 million in 1997, as a result of additional long-term debt used
to finance, in part, the acquisitions in 1998.

Income Tax Expense

         The effective tax rate in 1998 of 37.8% and 1997 of 37.5% was higher
than the federal statutory rate of 35% primarily due to state income taxes.

Extraordinary item

         During 1998, the Company repaid certain long-term debt prior to
maturity. The repayment resulted in extraordinary charges of $4.4 million, net
of related tax benefits of $2.8 million, associated with the write-off of
deferred financing costs.

Net Income

         Due to the factors set forth above, net income increased $14.3 million,
or 216.7%, to $20.9 million in 1998 from $6.6 million in 1997.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

Revenues

         Net revenues increased $27.4 million, or 133.7%, to $47.9 million in
1997 from $20.5 million in 1996. This increase was due primarily to the
acquisition of 13 branded products since October 1996. Of these acquired branded
products, the Cortisporin(R) product line contributed $21.7 million from the
date of acquisition (March 21, 1997) through December 31, 1997, or 57.3% of
total branded pharmaceutical sales of $37.9 million and 45.37% of total
revenues, while the Company's additional branded products contributed an
additional $16.6 million, or 43.8% and 34.7% of total revenues. There were two
ANDAs on file with the FDA in connection with the disposal of the branded
product, 


                                     - 18 -
<PAGE>   19
Anexsia, and a related generic product line (the "Anexsia Product Line"), in
December 1995. However, the Company did not recognize any income in 1997 related
to this contract, compared to $5.0 million recognized in 1996. Revenues from
contract manufacturing decreased $3.9 million, or 35.8%, to $7.0 million in 1997
from $10.9 million in 1996, due primarily to the expiration of a manufacturing
contract.

Gross Profit

         Total gross profit increased $23.2 million, or 199% to $34.9 million in
1997 from $11.7 million in 1996. The increase was primarily due to the gross
profit from branded pharmaceutical products such as the Cortisporin(R) product
line which contributed $19.8 million of gross profit in 1997.

         Gross profit of $(187,000) in 1997 associated with contract
manufacturing decreased $3.0 million from $2.8 million in 1996 primarily due to
the expiration of a manufacturing contract. Additionally, gross profit from
contract development, generic pharmaceutical products and companion animal
health decreased $4.3 million or 69.0% to $1.9 million in 1997 from $6.2 million
in 1996 primarily due to a decline in contract development revenues.

Selling, General and Administrative Expense

         Selling, general and administrative expenses increased $7.0 million, or
57.9% to $19.1 million in 1997 from $12.1 million in 1996. This increase was
primarily attributable to the hiring of additional field sales representatives
during late 1996 and early 1997, other additional personnel costs and marketing,
promotion and sampling costs associated with the new branded product lines.

Depreciation and Amortization Expense

         Depreciation and amortization expense increased $1.4 million, or
142.6%, to $2.4 million in 1997 from $982,000 in 1996. This increase was
primarily attributable to the amortization of the purchase price of the new
branded product lines.

Operating Income

         Operating income increased $14.8 million to $13.4 million in 1997 from
an operating loss of $1.4 million in 1996. As a percentage of net revenues,
operating income was 27.9% in 1997. This increase was primarily due to increased
revenues from the acquisition of branded products.

Gain on Sale of Investment in Affiliate

         In September 1996, the Company sold its entire 6.0% interest in an
affiliated, privately-held pharmaceutical company, which had been co-founded by
the Company's Chief Executive Officer, for $2.0 million, resulting in a gain of
$1.8 million.

Interest Expense

         Interest expense increased $1.5 million, or 115.4%, to $2.8 million in
1997 from $1.3 million in 1996, as a result of additional term loans used to
finance, in part, the acquisitions of branded products.

Income Tax (Benefit) Expense

         The effective tax rate in 1997 of 37.5% was higher than the federal
statutory rate of 34% due to state income taxes.

Net Income

         Due to the factors set forth above, net income increased $6.8 million
to $6.6 million in 1997 from a net loss of $240,000 in 1996.

LIQUIDITY AND CAPITAL RESOURCES

General

         The Company's liquidity requirements arise from debt service, working
capital requirements and funding acquisitions of branded products.




                                     - 19 -
<PAGE>   20

         The Company's recent cash requirements arose primarily in connection
with the acquisition of branded pharmaceutical products. In 1996 the acquisition
of two branded pharmaceutical products for $7.0 million was financed with a
combination of cash and seller financing. In March 1997 the Company raised $23.0
million through a combination of equity ($8.0 million), notes payable with banks
and borrowing under its then existing revolving line of credit to finance the
acquisition of the Cortisporin(R) product line. Other product acquisitions in
1997, which totaled $6.6 million, were financed primarily with notes payable
from banks and internally generated funds.

         On February 27, 1998, the Company consummated the Sterile Products
Acquisition for $127.9 million, including assumed liabilities of $2.9 million,
which was financed with a prior bank facility. The Company also used a portion
of its prior bank facility to pay off approximately $50.0 million of long-term
debt, which was then outstanding, including the borrowings used for the Glaxo
Acquisition.

         On June 25, 1998 the Company completed its initial public offering of
4,000,000 shares of common stock, raising approximately $48.8 million of equity,
net of underwriting discounts and other offering expenses. On July 27, 1998 the
underwriters exercised the option to purchase additional shares to cover
over-allotments of shares. Pursuant to this option, the underwriters purchased
214,730 additional shares with 104,730 of the shares purchased from the Company
and 110,000 shares purchased from selling shareholders. The sale of the
over-allotment provided the Company with approximately $1.1 million of net
proceeds after underwriting discounts, commissions and offering expenses. The
Company used a portion of the net proceeds to repay approximately $37.4 million
of debt outstanding under its prior bank facility in July 1998.

         In December 1998, the Company completed the Altace Acquisition for
$363.0 million, including acquisition costs of approximately $450,000. A
portion of the purchase price, $287.5 million, was financed with proceeds from
the senior credit facility and the remainder of the purchase price, $75.0
million, with the seller notes. The balance of the proceeds from the senior
credit facility was used to refinance prior bank debt.

         As of December 31, 1998, the Company had available up to $56.0 million
under its revolving line of credit pursuant to the senior credit facility, which
allows for total borrowing of up to $75.0 million at any time.

Year ended December 31, 1998

         Net cash provided by operating activities was $5.8 million for the year
ended December 31, 1998. The Company's net cash provided by operating activities
was primarily the result of $20.9 million in net income resulting from sales
from recently purchased additional branded products, adjusted for non-cash
charges for depreciation and amortization of $9.3 million, and an extraordinary
loss on early retirement of existing indebtedness of $7.2 million. The Company's
net cash provided by operating activities was negatively impacted by an increase
in receivables and inventory of $31.1 million and $15.7 million, respectively.
However, cash flows from operations was positively impacted due to changes in
its accounts payable, accrued expenses and income taxes by $6.7 million, $5.7
million, and $1.7 million, respectively.

         Cash flows used in investing activities was $426.0 million due
principally to the Sterile Products and the Altace Acquisitions, the Menest(R)
acquisition, and other purchases of property and equipment.

         Net cash provided by financing activities was $421.2 million, which was
a result of the net proceeds from the initial public offering, and proceeds from
long-term debt to finance the Sterile Products and the Altace Acquisitions.

Year ended December 31, 1997

         Net cash provided by operating activities was $5.0 million for the year
ended December 31, 1997. The Company's net operating cash in 1997 was primarily
the result of $6.6 million in net income resulting from sales from recently
purchased additional branded products, adjusted for non-cash charges of $2.4
million for depreciation and amortization, additional income taxes and deferred
taxes of $1.5 million, and related increases in accounts receivable,
inventories, accounts payable and accrued expenses of $6.3 million, $4.8
million, $3.6 million and $2.2 million, respectively.

         Net cash used in investing activities for the year ended December 31,
1997 was $54.0 million and was the result of cash of $52.4 million paid for the
acquisition of new branded product lines as well as cash of $1.4 million paid
for purchases of property and equipment.



                                     - 20-
<PAGE>   21
         Net cash provided by financing activities was $47.6 million, which was
the result of (i) aggregate borrowings of $14.0 million to finance the
acquisition of the Cortisporin(R) product line in 1997, other product
acquisitions totaling $6.6 million financed in 1997, the refinancing of all
remaining acquisition term loans along with the acquisition of six additional
products for $23.0 million in November 1997, and the net increase in the
revolving line of credit of $6.2 million, offset by payments on long-term debt
and capital lease obligations of $23.8 million, (ii) proceeds from issuance of
common shares of $8.0 million in connection with the acquisition of the
Cortisporin(R) product line and (iii) repayment on shareholder notes receivable
of $2.1 million.

         As a result of the factors discussed above, cash and cash equivalents
decreased from $1.4 million at December 31, 1996 to $69,000 at December 31,
1997.

Year ended December 31, 1996

         Net cash used in operating activities was $6.3 million for the year
ended December 31, 1996. The Company's net use of operating cash in 1996 was
primarily a result of a $1.4 million operating loss, excluding the $1.8 million
gain on sale of investment in affiliate, offset by $1.0 million of depreciation
and amortization, an increase in income taxes receivable of approximately $3.6
million resulting from federal and state tax payments made by the Company in
1996, as well as an increase in inventory of $1.9 million due to the acquisition
of three branded pharmaceutical products and the internal development of a
complete generic product line in the fourth quarter of 1996.

         Net cash used in investing activities for the year ended December 31,
1996 was $2.1 million and was primarily the result of cash paid of $3.0 million
and $1.0 million for the acquisition of three new branded product lines and
costs associated with generic pharmaceutical products as well as property and
equipment purchases, respectively. Additionally, the Company received $2.0
million from the sale of its 6.0% investment in an affiliated, privately-held
pharmaceutical company.

         Net cash used in financing activities was $781,000 for the year ended
December 31, 1996, which was comprised of payments on the revolving line of
credit and other term loans of $3.4 million and $2.8 million, respectively,
offset by proceeds from a $2.5 million term loan used to finance, in part, the
acquisition of certain branded pharmaceutical products and $2.8 million raised
in an employee stock purchase plan and from shareholders and members of
management.

         As a result of the factors discussed above, cash and cash equivalents
decreased from $10.6 million as of December 31, 1995, to $1.4 million as of
December 31, 1996.


Certain Indebtedness and Other Matters

         As of December 31, 1998, the Company had outstanding approximately
$525.9 million of long-term debt (including current portion), including
borrowings under its revolving line of credit agreement and term loans. Of these
amounts, approximately $444.0 million were at variable rates based on LIBOR and
the remainder at fixed rates. The Company has entered into two interest rate
swap agreements with notional principal amounts aggregating $100.0 million with
a commercial bank to exchange its variable LIBOR for fixed LIBOR rate interest
of approximately 5.5%. The Company does not believe its exposure to changes in
interest rates under its remaining variable rate agreements will have a material
effect on its financial condition or results of operations. Certain financing
arrangements require the Company to maintain certain minimum net worth, debt to
equity, cash flow and current ratio requirements.


         On December 22, 1998, the Company amended and restated its prior bank
facility to (A) finance the Altace Acquisition; (B) refinance the Company's
prior bank facility and (C) provide for ongoing working capital and other
financing requirements. The senior credit facility provides for up to $500.0
million of aggregate borrowing capacity, consisting of a secured $150.0 million
tranche A term loan, a secured $275.0 million tranche B term loan, and a secured
revolving credit facility in an aggregate amount of $75.0 million. The revolving
credit facility includes a $10.0 million sublimit available for the issuance of
letters of credit and a $5.0 million sublimit available for swingline loans.

         The loans under the senior credit facility bear interest, at the
Company's option, at either:

(1) the base rate (which is based on the prime rate most recently announced by
Credit Suisse First Boston or the federal funds rate plus one-half of 1%) plus
(A) in the case of the tranche A term loan and borrowing under the revolving
credit facility, an applicable spread ranging from 1.25% to 2.25% (based on a
leverage ratio) and (B) in the case of the tranche B term loan, 2.75%; or

(2) the applicable London interbank rate plus (A) in the case of the tranche A
term loan and borrowings under the revolving credit facility, an applicable
spread ranging from 2.25% to 3.25% (based on a leverage ratio) and (B) in the
case of the tranche B term loan, 3.75%.


                                     - 21 -
<PAGE>   22

         The tranche A term loan is subject to certain specified amortization
payments required to be made in quarterly installments commencing on March 31,
1999 until December 22, 2004. The tranche B term loan is subject to certain
specified amortization payments required to be made in quarterly installments
commencing on March 31, 1999 until December 22, 2006. The revolving credit
facility is available until December 22, 2004. In addition, the loans and the
aggregate available commitments under the senior credit facility will be reduced
upon the occurrence of certain specified events as outlined in the agreement.

         The Company's obligations under the senior credit facility are
unconditionally guaranteed on a senior basis by each direct and indirect
majority owned U. S. subsidiary of the Company. In addition, the senior credit
facility is collateralized by substantially all of the real and personal
property of the Company.

         The senior credit facility contains a number of covenants that, among
other things restrict the ability of the Company and its subsidiaries to dispose
of assets, incur additional indebtedness or guaranty obligations, repurchase or
redeem capital stock or repay subordinated indebtedness except in accordance
with the subordination provisions, pay dividends or make capital distributions,
enter into sale and leaseback transactions, make investments, make acquisitions,
engage in mergers or consolidations, make capital expenditures, engage in
certain transactions with affiliates, make loans, change its fiscal year, change
its business and otherwise restrict corporate activities.

         The Company also financed a portion of the Altace Acquisition with
$75.0 million senior subordinated seller notes with interest payable monthly at
10%, due in December 2007. These notes were refinanced in March 1999 with 10 3/4
senior subordinated notes.

         On February 27, 1998, the Company entered into a $195.0 million credit
agreement, the proceeds of which were used to finance the Sterile Product
Acquisition and to pay off $40.0 million of term loans and other outstanding
borrowings. This facility was refinanced by the senior credit facility entered
into on December 22, 1998 described above.

         The Company believes that existing credit facilities and cash expected
to be generated from operations are sufficient to finance its current operations
and working capital requirements. However, in the event the Company makes
significant future acquisitions, it may be required to raise funds through
additional borrowings or the issuance of additional debt or equity securities.
At present, the Company is actively pursuing the acquisition of additional
branded pharmaceutical products that may require the use of substantial capital
resources. There are, however, no present agreements or commitments with respect
to any such acquisitions.

CAPITAL EXPENDITURES

         Capital expenditures, including capital lease obligations, were $81.1
million and $1.5 million for the years ended December 31, 1998 and 1997,
respectively. The principal capital expenditures included property and equipment
purchases in connection with the Sterile Products Acquisition. As a result of
the Sterile Products Acquisition, the Company expects that it may need to incur
additional capital expenditures over the next few years in connection with the
maintenance and operation of the Parkedale facility. In addition, the Company
expects to increase its capital expenditures over the next few years as a part
of its acquisition and growth strategy.

YEAR 2000 READINESS

         The Company has conducted an evaluation of its information technology
and non-information technology computer systems with respect to the "Year 2000"
issue. This issue arises because many electronic systems use two digits rather
than four to determine dates. This could cause information technology systems
such as software applications, hardware, network systems and embedded systems to
misread important dates beginning in the year 2000, which could cause system
failures and disruption of operations.

         Except for the Bristol facility which is currently being assessed, the
Company has completed a Year 2000 readiness assessment of its business critical
information technology and non-information technology systems. As a result of
the assessment, the Company is in the process of developing and implementing
corrective action plans designed to address Year 2000 issues. These plans
include modification, 


                                     - 22 -
<PAGE>   23

upgrade and replacement of the Company's critical administrative, production and
research and development computer systems to make them Year 2000 ready.
Implementation of corrective action plans has begun.

         Because the Company's operations depend on the uninterrupted flow of
materials and services from its contract manufacturers and other suppliers, the
Company's plans for Year 2000 readiness include receiving and analyzing
information from its suppliers with regard to their progress toward Year 2000
readiness. The Company intends to continue to monitor the progress of its key
suppliers toward Year 2000 readiness. The Company considers the most reasonably
likely worst case scenario is that one or more of the Company's suppliers
encounters a Year 2000 problem and is unable to supply materials. If this occurs
and the Company could not obtain the same materials from another vendor,
production could be interrupted which could result in lost sales and profits. In
addition, while the Company is taking action to correct deficiencies in its own
systems, it is possible that one or more of the Company's facilities or critical
business systems might not achieve Year 2000 readiness as anticipated. This
could also result in disruption of operations and lost sales and profits.

         The Company estimates that it will spend between $1.0 million and $1.5
million to become Year 2000 ready. The majority of this spending will constitute
replacement costs of non-compliant information technology systems and the
reprogramming of existing systems. It is possible that the actual cost of the
Company's Year 2000 readiness effort could exceed these estimates. Funds for
this project have come from the Company's cash flows and costs have been
expensed as incurred except for hardware, which has been capitalized. For the
years ended December 31, 1997 and 1998, the Company has incurred approximately
$88,000 and $38,500, respectively, to become Year 2000 ready.

IMPACT OF INFLATION

         The Company has experienced only moderate raw material and labor price
increases in recent years. While the Company has passed some price increases
along to its customers, the Company has primarily benefited from rapid sales
growth negating most inflationary pressures.

RECENT ACCOUNTING PRONOUNCEMENTS

         SFAS No. 130, Reporting Comprehensive Income, became effective in 1998.
SFAS No. 130 establishes standards for reporting of comprehensive income and its
components in the financial statements. In 1996 and 1997 the Company had other
comprehensive income of $16,000, net of tax, related to an unrealized loss on
securities. The Company had no other comprehensive income in 1998.

         SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, became effective in 1998. SFAS No. 131 requires public business
enterprises to adopt its provisions for periods beginning after December 15,
1997, and to report certain information about operating segments in complete
sets of financial statements of the enterprise and in condensed financial
statements of interim periods issued to shareholders. The adoption of SFAS 131
did not affect the Company's results of operations or financial condition.
However, prior year disclosures have been reclassified to conform with the
provision of this statement.

         On June 15, 1998, the Financial Accounting Standards Board issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 is effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999. SFAS No. 133 requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Management of the
Company is evaluating the provisions of SFAS No. 133, but the impact, if any of
its adoption, has not yet been determined.

FORWARD-LOOKING STATEMENTS

         This Annual Report on Form 10-K 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," "Business" and other sections of
this Annual Report on Form 10-K.

         Such forward-looking statements include, but are not limited to: (a)
anticipated developments and expansions of the Company's business; (b) increases
in sales of recently acquired products, especially Altace(R) as described in
"The Company"; (c) development of product line extensions; (d) the products
which the Company expects to offer; (e) the intent to market and distribute
certain of our products internationally; (f) the intent to manufacture certain
products in our own facilities which are currently manufactured for us by third
parties; (g) the intent, belief or current expectations of the Company, its
directors or its officers, primarily with respect to the future operating
performance of the Company; (h) expectations regarding sales growth, gross
margins, manufacturing productivity, capital expenditures and effective tax
rates; and (i) expectations regarding the Company's financial condition and
liquidity as well as future cash flows and earnings.

         Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. Such factors include, but are not limited to, the following: changes
in general economic and business conditions; dependence on continued acquisition
of products; management of growth of business and integration of product
acquisitions; changes in current pricing levels; development of new competitive
products; changes in economic conditions and federal and state regulations;
competition for acquisition of products; manufacturing capacity constraints; and
the availability, terms and deployment of capital. See "Risk Factors."

         We do not undertake to update our forward-looking statements or risk
factors to reflect future events or circumstances.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Certain of the Company's financial instruments are subject to market
risks, including interest rate risk. The Company's financial instruments are not
currently subject to foreign currency risk or commodity price risk. The Company
has no financial instruments held for trading purposes.

         The Company is exposed to market risk related to changes in interest
rates on borrowings under its senior credit facility. The senior credit
facility bears interest based on LIBOR. However, the Company has entered into an
aggregate notional principal amount of $100.0 million in interest rate swap
agreements to manage a portion of its exposure to interest rate changes. The
swaps involve the exchange of fixed and variable interest rate payments based on
contractual principal amount and time period. Payments or receipts on the
agreements are recorded as adjustments to interest expense. At December 31,
1998, the Company's swap agreements are effective through 2001. Under these




                                     - 23 -
<PAGE>   24

agreements, the Company pays a fixed weighted average interest rate of 5.5% and
receives a floating interest rate based on the one-month LIBOR.

         The fair value of the interest rate swap agreements represent the
estimated payments or receipts that would be made to terminate the agreements.
At December 31, 1998, the Company would have paid approximately $2.8 million to
terminate the agreements. The fair value is based on dealer quotes. The Company
has $444.0 million of debt remaining that bears interest at a variable rate.
Accordingly, an increase in interest rates would adversely affect interest
expense.

         The following table sets forth the Company's financial instruments that
are sensitive to interest rates as of December 31, 1998 (in thousands):





                                     - 24 -
<PAGE>   25


<TABLE>
<CAPTION>
                          Weighted
                           Average
                          Interest                                                                                       Estimated
                          Rate at                                                                                           Fair
                         Year-End                                    Maturities                                            Value
                        ---------   ----------------------------------------------------------------------------------   ----------
                                     1999        2000        2001        2002         2003      Thereafter     Total
                                    -------     -------     -------     -------     --------     --------     --------
<S>                                 <C>         <C>         <C>         <C>         <C>         <C>          <C>           <C> 
Debt:
  Fixed rate ........      7.2%     $ 2,700     $   971     $ 1,029     $ 1,091     $ 1,156     $ 75,000     $ 81,947     $ 83,500
  Variable rate .....      8.6%      10,250      17,750      25,250      32,750      40,250      317,750      444,000      444,000
Interest rate swaps..      5.5%          --          --          --          --          --           --           --       (2,787)
</TABLE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

ITEM 9.  CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

                  None.




                                     - 25 -
<PAGE>   26



                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The executive officers, directors and key employees of the Company as
of December 31, 1998 are as follows:

<TABLE>
<CAPTION>
NAME                            AGE                              POSITION HELD 
----                            ---                              ------------- 
<S>                             <C>        <C>
John M. Gregory                 45         Chairman of the Board of Directors and Chief Executive Officer
Jefferson J. Gregory            43         President of King Pharmaceuticals, Inc. and of Parkedale
                                           Pharmaceuticals, Inc.  and Director
Joseph R. Gregory               44         Vice Chairman of the Board of Directors of the Company, President of Monarch
                                           Pharmaceuticals, Inc.
Brian G. Shrader                30         Chief Financial Officer
James E. Gregory                47         Executive Vice President, General Manager (Bristol)
R. Henry Richards, M.D.         54         Executive Vice President, Medical Affairs
John P. McCoy                   50         Executive Vice President, Quality
Terri D. White-Gregory          36         Executive Vice President, Financial Analyst
John A. A. Bellamy              36         Executive Vice President, Legal Affairs and General Counsel
Ronald C. Siegfried             57         Executive Vice President, Development
Steven M. Samet                 49         Executive Vice President, General Manager (Parkedale)
Kyle P. Macione                 35         Executive Vice President, Investor Relations
Michael R. Hilton               51         Vice President, Sales and Marketing
Thomas K. Rogers, III           45         Vice President, Regulatory Affairs
Edward J. Reilly                46         Vice President, Brand Management
Moises Saporta                  61         Vice President, Manufacturing
Norman T. Miller                54         Senior Director, Regulatory Affairs (Compliance)
Ernest C. Bourne                57         Director
Lois A. Clarke                  53         Director
Frank W. De Friece,  Jr.        78         Director
D. Greg Rooker                  51         Director
Ted G. Wood                     61         Director
</TABLE>


         John M. Gregory has served as Chairman of the Board of Directors since
the Company's inception in 1993 and Chief Executive Officer since 1994. He
previously co-founded General Injectables and Vaccines, Inc. ("GIV") and served
as President of GIV from 1984 through 1994. Prior to co-founding GIV, he was the
owner and registered pharmacist of a pharmacy located in Bastian, Virginia. He
graduated from the University of Maryland School of Pharmacy with a B.S. in
Pharmacy in 1976.

         Jefferson J. Gregory has served as President of King Pharmaceuticals,
Inc., since 1993, and as President of Parkedale Pharmaceuticals, Inc., a wholly
owned subsidiary of the Company, since February 1998 and as a Director since
1995. He was formerly the Director of Regulatory Affairs and Product Information
for GIV from 1991 to 1993 and was a consultant to the pharmaceutical industry
from 1989 to 1991. He formerly served as a registered pharmacist in retail
pharmacies in the Washington D.C. and Baltimore, Maryland metropolitan areas. He
graduated from the University of Maryland School of Law with a Juris Doctor in
1985, University of Maryland School of Pharmacy with a B.S. in Pharmacy in 1979,
and Montgomery College with an Associate of Arts in 1976.

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






                                     - 26 -
<PAGE>   27



         Brian G. Shrader, CPA, has served as Chief Financial Officer since
1993. He was formerly the Manager of Accounting for GIV from 1990 to 1993. He is
a current member of the American Institute of Certified Public Accountants and
Virginia Society of CPA's. He graduated from the Virginia Polytechnic Institute
and State University with a B.S. in Accounting in 1990 and a Masters of
Accountancy in 1991.

         James E. Gregory has served as Executive Vice President, General
Manager (Bristol) and Production/Administration since February 1995. Previously,
he was the Deputy Executive Officer of the Washington D.C. Court system from
1990 through 1995 and a senior administrator with that court from 1987 to 1990.
He was responsible for managing all business affairs for another major urban
court system in Phoenix, Arizona from 1982 to 1985 and was the Deputy County
Recorder for Maricopa County (Phoenix) from 1985 to 1987. Through management
consulting firms, he provided administrative systems consulting services to
various state court systems from 1973 to 1982. He graduated from American
University with a Masters of Public Administration in 1979 and the University of
Maryland with a B.A. in History in 1973.

         R. Henry Richards, M.D. has served as Executive Vice President of
Medical Affairs since 1994. He also was the Medical Director/Director of Managed
Care for GIV during 1993. He served as the Vice President Medical Director for
Medical Dimensions, Inc. from 1991 to 1993, after having served as a M.D. in
private practice (Internal Medicine, Hypertension and Nephrology) since 1976. He
was also the Medical Director for the Hypertension Medical Clinic of San Jose
and Review Services Inc., Resource Consultant for Health Strategies in San Jose,
was associated with Samaritan Kidney Medical Associates, San Jose and Medical
Director, Hospital Private Review in Campbell, California. Dr. Richards
graduated from the University of Maryland with a M.D. in 1971, the Atlantic
Christian College with a B.S. in Biology in 1966, and Montgomery College with an
Associate of Arts in 1963.

         John P. McCoy has served as Executive Vice President of Quality since
1994. He previously served as the Director of Total Quality
Management/Marketing/Logistics, Material Management and Planning for Connaught
Laboratories in Swiftwater, Pennsylvania from 1986 to 1993. He was the Group
Manager, Logistics Services Manager and Manufacturing Planner for McNeil
Pharmaceuticals from 1982 to 1986; Distribution Planning Manager from 1979 to
1982; and Manager, Marketing/Sales Systems, Distribution Center Manager and
Traffic Manager from 1971 to 1979. He graduated from Pennsylvania State
University with a B.S. in Business in 1970, and he also completed graduate work
at the University of Pennsylvania from 1983 to 1986.

         Terri D. White-Gregory, CPA, has served as Executive Vice President,
Financial Analyst since 1996. She served as a financial analyst for Westinghouse
Electric in 1995 and as a consultant and sole proprietor in public accounting
from 1993 to 1996. From 1988 to 1993, she was an audit manager and supervisor in
the Emerging Business Services Group of Coopers & Lybrand L.L.P., in Washington
D.C. and Roanoke, Virginia and was a senior associate on the audit staff of
Ernst & Young LLP in Columbia, South Carolina from 1985 to 1988. She graduated
from The Ohio State University with a B.S. in Business Administration in 1985.

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

         Ronald C. Siegfried has served as Executive Vice President of
Development, Vice President of Development, Technical Services and Manufacturing
since December 1993. He previously served as Director of Manufacturing for RSR
Laboratories, Inc. ("RSR Laboratories"), from 1990 to 1993, was the Manager of
Manufacturing and a Product Development Chemist for Beecham Laboratories from
1972 to 1990, and was a Product Development Chemist for Bristol Laboratories, a
division of Bristol-Myers Squibb from 1964 to 1972. He graduated from the
Rochester Institute of Technology with a B.S. in Chemistry in 1964.

         Steven M. Samet has served as Executive Vice President, General Manager
(Parkedale Facility) since its acquisition by the Company February 28, 1998. For
the 12 years prior, he served as Vice President, General Manager of Parke-Davis
Sterile Products Operations, overseeing both Rochester, Michigan and Dublin,
Ireland operations. From 1973 to 1986, Mr. Samet held various operations
positions with both Elkins-Sinn, Inc. and Sterling Drugs. Mr. Samet received an
M.B.A. from the Michigan State Advanced Management Program in 1989 and a B. S.
in Biology from the State University of New York in 1972.

         Kyle P. Macione has served as Executive Vice President, Investor
Relations since January 1998 and as Corporate Counsel since March 1996. He was
formerly a corporate attorney with the law firm of Elliott Lawson & Pomrenke in
Bristol, Virginia from 1992 to 1996. He 



                                     - 27 -
<PAGE>   28

graduated from Washington & Lee University School of Law with a Juris Doctor in
1991, University of Alabama with a Masters of Accountancy in 1987, and
University of Mississippi with a Bachelor of Accountancy in 1986. He is a
Certified Public Accountant and licensed to practice law in Tennessee and
Virginia.

         Michael R. Hilton has served as Vice President of Sales and Marketing
and Director of Marketing since July 1995. From 1991 to 1995, he served in the
capacity of Vice President, Marketing and Business Development and marketing
director for Richwood Pharmaceuticals, KV Pharmaceuticals and RSR Laboratories.
From 1973 to 1990 he served in various sales and marketing and public relations
positions with Beecham Laboratories. He graduated from Ferris State University
with a B.S. in Marketing in 1970.

         Thomas K. Rogers, III has served as Vice President, Regulatory Affairs,
since April 1997. He previously served as Director of Regulatory Affairs from
1995 to 1997 and as Manager of Regulatory Affairs from 1994 to 1995. Prior to
joining the Company, he served RSR Laboratories as Manager of Scientific
Development from 1991 to 1993, and Manager of Quality Assurance from 1990 to
1991. He served Beecham Laboratories as Manager of Quality Assurance from 1988
to 1990 and as Microbiologist from 1979 to 1988. He graduated from East
Tennessee State University with a M.S. in Microbiology in 1977 and from Milligan
College with a B.S. in Biology in 1975.

         Edward J. Reilly has served as Vice President, Brand Management of
Monarch Pharmaceuticals, Inc., since January 1999. Previously, he was Product
Manager with Hoechst Marion Roussel, Inc., from 1990 to 1998. Since 1981 he
served in various sales and management and product management capacities with
Merrell Dow Pharmaceuticals and Marion Merrell Dow Pharmaceuticals. He graduated
from the State University of New York in 1976 with a B. S. in Biology.

         Moises Saporta has served as Vice President of Manufacturing of King
Pharmaceuticals, Inc. since 1998. He was formerly Senior Director of Technology
Development. He previously served as Vice President World Wide Manufacturing
Operations for Roberts Pharmaceutical Corporation from 1991 to 1997. From 1988
to 1991, he was Assistant Director, Manufacturing and Engineering, with
Whitehall International. He served as plant manager and area manager for
American Cyanamid Company from 1981 to 1988 in Argentina. From 1977 to 1981, he
was manager of Pharmaceutical Technology for E. R. Squibb & Sons International.
He served in a series of technical operations and planned management positions
for USV Pharmaceutical internationally and domestically from 1966 to 1977. From
1961 to 1966, he served as manager of technical operations for F.
Hoffman-LaRoche. He graduated from the University of Chile in 1960 as a
Pharmaceutical Chemist.

         Norman T. Miller has served as Senior Director, Regulatory Affairs
(Compliance), since December 1993. He previously served as a Research Compliance
Specialist and as acting Director of Compliance for Beecham Laboratories from
1988 to 1990. From 1990 to 1993 he served as Manager of Regulatory Affairs for
RSR Laboratories. Prior to 1988, he served as Resident-in-Charge, Senior
Investigator and Inspector for the FDA for 28 years. He graduated from South
Dakota State University with a M.S. in Animal Science-Biochemistry minor in 1960
and a B.S. in Animal Husbandry in 1958.

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

         Lois A. Clarke has served as a Director of the Company since April
1997. Presently she is Executive Vice President and Chief Financial Officer of
The United Company in Bristol, Virginia, one of the Company's principal
shareholders. She also serves as President of United Investment Corporation, a
registered investment advisor, and an affiliate of The United Company. Ms.
Clarke has been with The United Company since 1971 and has been responsible for
financial matters of the Company. She is a graduate of McClains College with a
degree in Accounting.

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



                                     - 28 -
<PAGE>   29



         D. Greg Rooker has served as a Director of the Company since October
1997. Mr. Rooker is the owner and President of Family Community Newspapers of
Southwest Virginia, Inc., Wytheville, Virginia ("FCN"). FCN consists of six
community newspapers and a national monthly motor sports magazine. Mr. Rooker is
a graduate of Northwestern University with a degree in Journalism.

         Ted G. Wood has served as a Director of the Company since April 1997.
Presently, President, United Operating Companies, affiliates of The United
Company in Bristol, Virginia, one of the Company's principal shareholders. From
1992 to 1993, he was President of Boehringer Mannheim Pharmaceutical Corporation
in Rockville, Maryland. From 1993 to 1994 he was President of KV Pharmaceuticals
in St. Louis, Missouri. From 1975 to 1991, he was employed by SmithKline where
he served as President of Beecham Laboratories from 1988 to 1989 and Executive
Vice President of SmithKline from 1990 to 1991. He served as account supervisor
at Frank J. Corbett, Inc. in Chicago, Illinois from 1972 to 1974. From 1962 to
1971, he held various sales and marketing management positions with The Dow
Chemical Company. He graduated from the University of Kentucky with a B.S. in
Commerce in 1960. In 1986 he completed the Advanced Management Program at
Harvard University.

         Messrs. John, Joseph, Jefferson, and James Gregory, and R. Henry
Richards, M.D., are brothers. Ms. Terri D. White-Gregory is the spouse of
Jefferson Gregory.

COMPENSATION OF DIRECTORS

         For the year ended December 31, 1998, directors of the Company received
no fees for serving in such capacity. However, the 1998 Non-Employee Director
Plan was adopted by the Board of Director in February 1998 and is subject to
approval of the shareholders at the next annual meeting. Currently options
exercisable for 50,000 shares of common stock have been issued, subject to such
approval, to non-employee directors.

MEETINGS OF DIRECTORS

         The Board of Directors held six meetings during 1998. No director
attended less than 75% of all meetings held.

CLASSIFICATION OF BOARD OF DIRECTORS

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

COMMITTEES OF THE BOARD OF DIRECTORS

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

         Audit Committee. The Audit Committee, which currently consists of
Joseph R. Gregory, D. Greg Rooker and Frank W. DeFriece, Jr., has the authority
and responsibility to hire one or more independent public accountants to audit
the Company's books, records and financial statements and to review the
Company's systems of accounting (including its systems of internal control); to
discuss with the independent accountants the results of the audit and review;
to conduct periodic independent reviews of the systems of accounting (including
systems of internal control); and to make reports periodically to the Board of
Directors with respect to its findings.

         Compensation Committee. The Compensation Committee, which currently
consists of John M. Gregory, Frank W. DeFriece, Jr. and D. Greg Rooker, is
responsible for reviewing and approving compensation for the executive officers.

         Stock Option Committee. The Stock Option Committee, which currently
consists of Lois A. Clarke, Frank W. DeFriece, Jr. and D. Greg Rooker, is
responsible for administering, and determining awards under, the Company's 1997
Incentive and Nonqualified Stock Option Plan for Employees.



                                     - 29 -
<PAGE>   30



ITEM 11. EXECUTIVE COMPENSATION

         The following table summarizes all compensation earned by the Company's
Chief Executive Officer and by each of the Company's four other most highly
compensated executive officers whose total annual salary and bonus exceeded
$100,000 for services rendered in all capacities to the Company for the year
ended December 31, 1998.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                       ANNUAL COMPENSATION
                                                              ----------------------------------
                                                                                                         ALL OTHER
NAME AND PRINCIPAL POSITION                                   YEAR      SALARY($)      BONUS($)      COMPENSATION($)(1)
---------------------------                                   ----       -------       --------      ------------------
<S>                                                           <C>        <C>           <C>           <C>  
John M. Gregory.............................................. 1998       361,566          -0-              4,800
 Chairman of the Board and Chief Executive Officer            1997       360,918          -0-              4,800
Jefferson J. Gregory......................................... 1998       282,881          -0-              4,800
   President and Chief Operating Officer, King                1997       265,854          -0-              4,800
    Pharmaceuticals, Inc. and Parkedale Pharmaceuticals
Joseph R. Gregory............................................ 1998       281,099          -0-              4,800
  Vice Chairman of the Board and President and Chief          1997       242,588          -0-              4,800
Operating Officer, Monarch Pharmaceuticals, Inc.
James E. Gregory............................................. 1998       228,795         10,000            2,250
  Executive Vice President, General Manager                   1997       201,569          4,000            4,800
R. Henry Richards, M.D....................................... 1998       217,832         10,000            4,800
  Executive Vice President, Medical Affairs                   1997       218,189          4,000            4,800
</TABLE>

----------

(1)      All Other Compensation reflects the Company's matching contributions to
         the Company's 401(k) plan.

         The following table discloses the grant of stock options in fiscal year
1998 to the executive officers.

<TABLE>
<CAPTION>
                                    OPTIONS/SARS GRANTED IN LAST FISCAL YEAR
----------------------------------------------------------------------------------------------------------------------
                                         INDIVIDUAL GRANTS                                        Potential realizable
                                                                                                    value at assumed
                                                                                                  annual rates of stock
                                                                                                 price appreciation for
                                                                                                      option term(1)
----------------------------------------------------------------------------------------------    --------------------
                                  Number of        Percent of                                                      
                                 securities       total options                                                    
                                 underlying        granted to        Exercise or                                   
                                   options        employees in       base price     Expiration                     
            Name                 granted (#)       fiscal year         ($/sh)          date       5%($)        10% ($)
            ----                 -----------       -----------         ------          ----       -----        -------

<S>                              <C>               <C>               <C>            <C>           <C>         <C>
Jefferson J. Gregory ........      25,000              11.3%           14.00           2008      764,775      1,425,092 
Joseph R. Gregory............      25,000              11.3%           14.00           2008      764,775      1,425,092 
James E. Gregory.............       7,500               3.4%           14.00           2008      229,432        427,528 
R. Henry Richards, M.D.......       7,500               3.4%           14.00           2008      229,432        427,528 
</TABLE>
---------- 
(1) Based on $27.375 per share, the average bid and asked prices of the common
    stock as quoted on the Nasdaq Stock Market at December 31, 1998.

         The following table discloses information regarding stock options held
at the end of or exercised in fiscal year 1998 for each of the executive
officers as of December 31, 1998.




                                     - 30 -
<PAGE>   31




<TABLE>
<CAPTION>
                                         AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                                                AND FISCAL YEAR-END OPTION/SAR VALUES 
------------------------------------------------------------------------------------------------------------------------------

                                Shares                             Securities underlying             Value of unexercised
                              acquired on       Value               unexercised options              in-the-money options
           NAME                exercise       realized              at December 31, 1998           at December 31, 1998 (1)
           ----                --------       --------         ------------------------------  -------------------------------
                                                               Exercisable      Unexercisable  Exercisable       Unexercisable
                                                               -----------      -------------  -----------       -------------
<S>                           <C>             <C>              <C>              <C>            <C>               <C>    
Jefferson J. Gregory .....        -0-            n/a              6,250            18,750        $171,093          $513,281
Joseph R. Gregory.........        -0-            n/a              6,250            18,750        $171,093          $513,281
James E. Gregory..........        -0-            n/a              1,875             5,625        $ 51,328          $153,984
R. Henry Richards, M.D....        -0-            n/a              1,875             5,625        $ 51,328          $153,984
</TABLE>
-----------------

(1)      Based on $27.375 per share, the average bid and asked prices of the
         common stock as quoted on the Nasdaq Stock Market at December 31, 1998.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         The Board of Directors appointed the Compensation Committee in October
1997. For the year ended December 31, 1998, Messrs. John M. Gregory, DeFriece
and Rooker participated in deliberations concerning executive officer
compensation.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information regarding the
ownership of the common stock as of March 1, 1999, for (i) each person who owns
more than 5% of the common stock, (ii) each director and executive officer of
the Company, and (iii) all executive officers and directors of the Company as a
group.

<TABLE>
<CAPTION>
                                                                                       BENEFICIAL
                                                                                      OWNERSHIP OF
                                                                                      COMMON STOCK
                                                                              ------------------------------
                                                                                                 PERCENTAGE
                      EXECUTIVE OFFICERS, DIRECTORS                           NUMBER OF          OUTSTANDING
                           AND 5% SHAREHOLDERS                                  SHARES            SHARES(1)
                           -------------------                                  ------            ---------
<S>                                                                           <C>                     <C>  
John M. Gregory(2)......................................................      8,023,807               25.0%
Joseph R. Gregory(3)....................................................      2,894,400                9.0
Jefferson J. Gregory(4).................................................      1,028,885                3.2
James E. Gregory(5).....................................................        147,923                *
R. Henry Richards, M.D.(6)..............................................        222,594                *
Brian G. Shrader(7).....................................................        510,010                1.6
John McCoy(8)...........................................................         27,701                *
Terri D. White-Gregory(4)...............................................          1,875                *
John A. A. Bellamy(9)...................................................         41,524                *
Steven M. Samet.........................................................         21,000                *
Kyle P. Macione(10).....................................................         11,108                *
Ernest C. Bourne(11)....................................................        138,478                *
Lois A. Clarke(12)(13)..................................................        105,200                *
Frank W. DeFriece, Jr. (14).............................................         10,000                *
D. Greg Rooker(15)......................................................         70,980                *
Ted G. Wood(13)(16).....................................................         38,000                *
All executive officers and directors as a group (16 persons)............     13,286,345               41.3
The United Company(17)                                                        5,172,594               16.1
</TABLE>

----------
*  Less than 1%.

(1)      Unless otherwise indicated, beneficial ownership consists of sole
         voting and investing power based on 32,104,730 shares issued and
         outstanding as of March 1, 1999. Options to purchase shares which are
         exercisable or become exercisable within 60 days of March 1, 1999 are
         deemed to be outstanding for the purpose of computing the percentage of
         outstanding shares owned by each person to whom a portion of such
         options relate but are not deemed to be outstanding for the purpose of
         computing the percentage owned by any other person.




                                     - 31 -
<PAGE>   32




(2)      Includes 6,116,228 shares jointly owned with Mr. Gregory's spouse;
         1,852,539 shares owned by S.J., LLC, a limited liability company, the
         primary members of which are Mr. Gregory's children; 47,900 shares
         registered in the name of The Lazarus Foundation, Inc., a private
         foundation controlled by John M. Gregory and 7,140 shares owned by The
         Jason Foundation, a private foundation controlled by Mr. Gregory and by
         D. Greg Rooker. Mr. Gregory's address is 501 Fifth Street, Bristol,
         Tennessee 37620.

(3)      Includes 966,000 shares owned through Kingsway L.L.C., a limited
         liability company, the primary members of which are Mr. Gregory, his
         spouse and his son and 6,250 shares issuable upon the exercise of
         options. Mr. Gregory's address is 501 Fifth Street, Bristol, Tennessee
         37620.

(4)      Includes 908,523 shares jointly beneficially owned by Ms. White-Gregory
         and Jefferson J. Gregory and 58,000 shares beneficially owned by
         Gregory Investments, L.P., the general partners of which are Mr.
         Gregory and Ms. White-Gregory and 6,250 and 1,875 shares issuable upon
         the exercise of options granted to Mr. Gregory and Ms. White-Gregory,
         respectively.

(5)      Includes 142,702 shares jointly owned with Mr. Gregory's spouse, 3,346
         shares owned by Mr. Gregory's children and 1,875 shares issuable upon
         the exercise of options.

(6)      Includes 203,132 shares jointly owned with Dr. Richards' spouse and
         1,875 shares issuable upon the exercise of options.

(7)      Includes 241,500 shares owned by C.B.B., L.L.C., a limited liability
         company, the primary members of which are Mr. Shrader and his parents;
         10,623 shares jointly owned with Mr. Shrader's mother; and 2,500 shares
         issuable upon the exercise of options.

(8)      Includes 25,826 shares jointly owned with Mr. McCoy's spouse and 1,875
         shares issuable upon the exercise of options.

(9)      Includes 1,875 shares issuable upon the exercise of options.

(10)     Includes 375 shares issuable upon the exercise of options.

(11)     Includes 10,000 shares issuable upon the exercise of options.

(12)     Includes 16,800 shares held in the name of Ms. Clarke as custodian for
         Donald Alan Clarke, a minor, and 10,000 shares issuable upon the
         exercise of options.

(13)     Ms. Clarke and Mr. Wood are affiliates of The United Company.

(14)     Includes 10,000 shares issuable upon the exercise of options.

(15)     Includes 20,000 shares held in trust for the benefit of Mr. Rooker's
         children; 2,850 shares owned by Mr. Rooker's spouse, 7,140 shares owned
         by Family Community Newspapers of Southwest Virginia, 7,140 shares
         owned by The Jason Foundation, a private foundation controlled by Mr.
         Rooker and by John M. Gregory and 10,000 shares issuable upon the
         exercise of options.

(16)     Includes 10,000 shares issuable upon the exercise of options.

(17)     The United Company along with certain of its affiliates beneficially
         own in the aggregate 7,001,658 shares representing approximately 21.8%
         of the outstanding shares of the Company. The address of The United
         Company is 1005 Glenway Avenue, Bristol, Virginia 24201.


         Messrs. John M. Gregory, Joseph R. Gregory, Jefferson J. Gregory, James
E. Gregory, Richards, Shrader, McCoy, Bellamy, Samet, Macione and Ms.
White-Gregory serve as executive officers of the Company. Messrs. John M.
Gregory, Joseph R. Gregory and Jefferson J. Gregory also serve as directors of
the Company. See "Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         King Pharmaceuticals Benevolent Fund, Inc. (the "Benevolent Fund") is a
nonprofit corporation organized under the laws of the Commonwealth of Virginia
and is exempt from taxation under ss.501(c)(3) of the Internal Revenue Code. The
Board of Directors of the Benevolent Fund includes John M. Gregory, Joseph R.
Gregory, Jefferson J. Gregory, James E. Gregory and R. Henry Richards, M.D. who
are also executive officers of the Company. Messrs. John M., Joseph R. and
Jefferson J. Gregory are also directors of the Company. The Company advanced
$1.0 million in 1997 to the Benevolent Fund which was used for general operating
purposes. At December 31, 1998, the Benevolent Fund was indebted to the Company
in the amount of approximately $596,000. The Benevolent Fund is independent of
the Company, maintains its own accounting records and its activities are not
directly related to the business of the Company.

         The United Company, a Virginia corporation, and certain of its
shareholders, officers, directors and employees are the beneficial owners of
approximately 21.8% of the common stock of the Company. Currently, two members
of the Company's Board of Directors, Lois A. Clarke and Ted G. Wood, are
affiliates of The United Company. As part of the sale of stock to The United
Company on March 17, 1997, the Company executed a Promissory Note in the amount
of $1.8 million payable to The United Company. The Promissory Note provides for
quarterly payments of interest, at a rate of 10.0% per annum, commencing on July
1, 1997, together with a single payment of principal and any accrued unpaid
interest on April 1, 1999. The Company is entitled to prepay the principal and
any accrued interest without penalty. Proceeds of the loan from The United
Company were used to fund, in part, the acquisition of the Cortisporin(R) and
Pediotic product lines from Glaxo Wellcome.

         For the year ended December 31, 1998, the Company had paid Bourne &
Co., Inc., an affiliate of Mr. Bourne (a director of the Company and since
January 1999, the president of the International Division) $2,475,000 for
consulting services. Additionally, in connection with the Altace(R) Acquisition
and the related financing, Bourne & Co., Inc., received $1,250,000 in January
1999. The Company also purchased office furniture, accessories and supplies for
its international division office in Charlotte, North Carolina from Bourne &
Co., Inc. for approximately $79,000. In addition for the year December 31, 1997,
the Company paid Bourne & Co., Inc., approximately $651,000 






                                     - 32 -
<PAGE>   33

for its advisory services in the acquisition of the Cortisporin(R) product line
and $62,000 for consulting services. Bourne & Co., Inc. provided consulting
services to the Company in areas such as corporate development, financing
alternatives and strategies, and general business planning.

         In September 1998, the Company purchased for approximately $350,000 the
primary residence of Jefferson J. Gregory in connection with his relocation to
the Parkedale facility. The Company believes the purchase price was at fair
market value and currently holds the property for resale.




                                     - 33 -
<PAGE>   34


                                     PART IV

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

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

<TABLE>
<S>                                                                                                                             <C>
(1)      FINANCIAL STATEMENTS

     Report of Independent Accountants...........................................................................................F-1

     Consolidated Balance Sheets as of  December 31, 1997 and 1998 ..............................................................F-2

     Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998 .................................F-3

     Consolidated Statements of Changes in Shareholders' Equity for the years ended
              December 31, 1996, 1997 and 1998 ..................................................................................F-4

     Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 .................................F-5

     Notes to Consolidated Financial Statements..................................................................................F-7

(2)  FINANCIAL STATEMENT SCHEDULE

     Report of Independent Accountant...........................................................................................S-1

     Valuation and Qualifying Accounts..........................................................................................S-2
</TABLE>

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

(b) REPORTS ON FORM 8-K.

     No Current Report on Form 8-K was filed during the quarter ended December
31, 1998.

(c)  EXHIBITS

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

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                 DESCRIPTION
------                 -----------
<S>                    <C>                                                                 
  *3.1        --       Second Amended and Restated Charter of King Pharmaceuticals, Inc.

  *3.2        --       Amended and Restated Bylaws of King Pharmaceuticals, Inc.

  *4.1        --       Specimen Common Stock Certificate.

  *4.2        --       Form of Rights Agreement by and between King Pharmaceuticals, Inc. and Union Planters National Bank.

  *10.1       --       Promissory Note between RSR Acquisition Corporation (predecessor to King Pharmaceuticals, Inc.) and RSR
                       Laboratories, Inc., dated December 28, 1993, in the amount of $3,500,000.

  *10.2       --       Promissory Note between King Pharmaceuticals, Inc., and General Injectables and Vaccines, Inc., dated
                       October 6, 1994, in the amount of $4,700,000.
</TABLE>




<PAGE>   35



<TABLE>
<S>                    <C>                                                                 
  *10.3       --       Promissory Note between King Pharmaceuticals, Inc., and The United Company, dated March 17, 1997, in the
                       amount of $1,750,000

  *10.4       --       Toll Manufacturing Agreement for APAP/Hydrocodone Bitartrate Tablets by and between Mallinckrodt
                       Chemical, Inc. and King Pharmaceuticals, Inc.

  *10.5       --       Agreement between King Pharmaceuticals, Inc. and Ernest C. Bourne dated July 30, 1997.

 **10.6       --       Credit Agreement, dated as of February 27, 1998, as amended and restated as of December 22, 1998 among
                       King Pharmaceuticals, Inc.,  and the Lenders therein, Credit Suisse First Boston, as Administrative Agent, as
                       Collateral Agent and as Swingline Lender, First Union National Bank, as Issuing Bank, and First Union
                       National Bank and NationsBank, N.A., as Syndication Agents.

  *10.7       --       Agreement for Purchase and Sale of Assets Relating to Cortisporin by and between Glaxo Wellcome Inc. and
                       Monarch Pharmaceuticals, Inc. dated March 21, 1997.

  *10.8       --       Agreement for Purchase and Sale of Assets Relating to Neosporin and Polysporin by and between Glaxo
                       Wellcome Inc. and Monarch Pharmaceuticals, Inc. dated November 14, 1997.

  *10.9       --       Agreement for Purchase and Sale of Assets Relating to Septra, Proloprim, Mantadil and Kemadrin by and
                       between Glaxo Wellcome Inc. and Monarch Pharmaceuticals, Inc. dated November 14, 1997.

  *10.10      --       Manufacture and Supply Agreement with Novartis (Ciba-Geigy Corporation) dated July 17, 1995.

  *10.11      --       Manufacture and Supply Agreement with Roberts Laboratories, Inc. dated October, 5 1995.

  *10.12      --       Supply Agreement with SmithKline Beecham Corporation dated July 16, 1996.

  *10.13      --       Trademark, Patent, Copyright and Know-How License Agreement between Warner-Lambert Company and
                       Glaxo Wellcome Inc. dated as of June 30, 1996

  *10.14      --       Asset Purchase Agreement by and among Parkedale (Pharmaceuticals, Inc., Warner-Lambert Company and
                       Parke, Davis & Company, dated February 27, 1998, for the acquisition of assets related to the Parkedale
                       Facility, Rochester, Michigan.

  *10.15      --       Product Asset Purchase Agreement between Parkedale Pharmaceuticals, Inc. and Warner-Lambert Company,
                       dated February 27, 1998, for the acquisition of Anusol-HC(R) and other products.

  *10.16      --       Product Manufacturing Agreement between Santen Incorporated and Warner-Lambert Company, dated June
                       26, 1997, for the manufacture of Ofloxacin Otic Ssolution 0.3%.

  *10.17      --       License Agreement by and among Warner-Lambert Company, Parke Davis & Company, and Parkedale
                       Pharmaceuticals, Inc., dated February 27, 1998, for the use of the Anusol Trademark, the Anusol Mold, and
                       Other Trademarks.

  *10.18      --       Distribution and Supply Agreement between Warner-Lambert Company and Fujisawa Pharmaceutical
                       Company, dated December 4, 1989, for the distribution and supply of Elase, Elase Ointment, and Elase-
                       Chloromycetin Ointment.

  *10.19      --       Processing Services Agreement between Amgen, Inc., and Parke-Davis Division of Warner-Lambert Company,
                       dated December 16, 1997, for the processing of Leptin, Epogen(R), Neupogen(R), Stemgen(R), and other
                       products.

***10.20      --       General Products Agreement dated as of December 17, 1998 by and among Hoechst Marion Roussel, Inc.,
                       Hoechst Marion Roussel, Deutschland GmbH, and King Pharmaceuticals, Inc.

  *10.21      --       1998 King Pharmaceuticals, Inc. Non-Employee Director Stock Option Plan.

  *10.22      --       1997 Incentive and Nonqualified Stock Option Plan for Employees of King Pharmaceuticals, Inc.

 **21.1       --       Subsidiaries of the Registrant

** 27.1       --       Financial Data Schedule (for SEC use only)
</TABLE>

*       Incorporated by reference to the Company's Registration Statement on
        Form S-1 (registration No. 333-38753) filed October 24, 1997.
**      Filed herewith.
***     Incorporated by reference to the Company's Current Report on 
        Form 8-K filed January 6, 1999.
    


<PAGE>   36
                                 C O N T E N T S

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
King Pharmaceuticals, Inc.
    Report of Independent Accountants                                       F-1

    Financial Statements:
        Consolidated Balance Sheets as of December 31, 1997 and 1998        F-2
        Consolidated Statements of Operations for the years ended
             December 31, 1996, 1997 and 1998                               F-3
        Consolidated Statements of Changes in Shareholders' Equity for the
             years ended December 31, 1996, 1997 and 1998                   F-4
        Consolidated Statements of Cash Flows for the years ended
             December 31, 1996, 1997 and 1998                               F-5
        Notes to Consolidated Financial Statements                          F-7
</TABLE>


<PAGE>   37




                        REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows present fairly, in all material respects, the financial position of King
Pharmaceuticals, Inc. and its subsidiaries at December 31, 1997 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for the opinion expressed above.



PricewaterhouseCoopers LLP



Greensboro, North Carolina
February 15, 1999, except  
Note 20 for which the 
date is March 3, 1999





                                      F-1
<PAGE>   38


                           KING PHARMACEUTICALS, INC.
                           CONSOLIDATED BALANCE SHEETS
                        as of December 31, 1997 and 1998
                        (in thousands, except share data)




<TABLE>
<CAPTION>
                                                                             1997                  1998
                                                                          ---------             ---------
<S>                                                                       <C>                   <C>      
ASSETS
Current assets:
      Cash and cash equivalents                                           $      69             $   1,159
      Accounts receivable, net of allowance
          for doubtful accounts $638 and $1,402, respectively                 8,561                39,666
      Inventories                                                            10,850                26,556
      Deferred income taxes                                                   2,013                 6,675
      Prepaid expenses and other assets                                       1,319                 1,554
                                                                          ---------             ---------
                    Total current assets                                     22,812                75,610

Property, plant and equipment, net                                           17,170                93,981
Intangible assets, net                                                       62,783               480,583
Other assets                                                                  2,098                17,997
                                                                          ---------             ---------
                    Total assets                                          $ 104,863             $ 668,171
                                                                          =========             =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
      Notes payable                                                       $     916             $      --
      Current portion of long-term debt                                       8,084                13,310
      Accounts payable                                                        5,871                12,594
      Accrued expenses                                                        6,503                15,095
      Income taxes payable                                                    1,862                 3,524
                                                                          ---------             ---------
                    Total current liabilities                                23,236                44,523

Long-term debt:
      Revolving Credit Facility                                               6,152                19,000
      Term loans                                                             40,000               414,750
      Senior Subordinated Seller Notes                                           --                75,000
      Other                                                                   2,137                 5,736
Deferred income taxes                                                         4,004                 7,726
                                                                          ---------             ---------
                    Total liabilities                                        75,529               566,735
                                                                          ---------             ---------

Commitments and contingencies

Shareholders' equity:
      Common shares no par value, 150,000,000 shares
          authorized, 28,000,000 and 32,104,730 shares
          issued and outstanding, respectively                               16,455                66,572
      Retained earnings                                                      14,550                35,460
      Due from related party                                                 (1,671)                 (596)
                                                                          ---------             ---------
                    Total shareholders' equity                               29,334               101,436
                                                                          ---------             ---------
                    Total liabilities and shareholders' equity            $ 104,863             $ 668,171
                                                                          =========             =========
</TABLE>



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



                                      F-2
<PAGE>   39



                           KING PHARMACEUTICALS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              for the years ended December 31, 1996, 1997 and 1998
                      (in thousands, except per share data)





<TABLE>
<CAPTION>
                                                         1996            1997             1998
                                                       --------        --------        ---------
<S>                                                    <C>             <C>             <C>      
REVENUES:
     Net sales                                         $ 15,457        $ 47,351        $ 158,180
     Development revenues                                 5,000             558            5,283
                                                       --------        --------        ---------
         Total revenues                                  20,457          47,909          163,463
                                                       --------        --------        ---------

OPERATING COSTS AND EXPENSES:
     Cost of sales                                        8,782          13,034           64,052
     Selling, general and administrative                 12,106          19,123           34,718
     Depreciation and amortization                          982           2,395            9,255
                                                       --------        --------        ---------
         Total operating costs and expenses, net         21,870          34,552          108,025
                                                       --------        --------        ---------
OPERATING INCOME (LOSS)                                  (1,413)         13,357           55,438
                                                       --------        --------        ---------

OTHER (EXPENSES) INCOME:
     Interest expense                                    (1,272)         (2,749)         (14,866)
     Gain on sale of investment in affiliate              1,760              --               --
     Other income, net                                      578             (28)             145
                                                       --------        --------        ---------
         Total other (expenses) income                    1,066          (2,777)         (14,721)
                                                       --------        --------        ---------

INCOME (LOSS) BEFORE INCOME TAXES AND
 EXTRAORDINARY ITEM                                        (347)         10,580           40,717
     Income tax expense (benefit)                          (107)          3,968           15,396
                                                       --------        --------        ---------

INCOME (LOSS) BEFORE EXTRAORDINARY
 ITEM                                                      (240)          6,612           25,321
     Extraordinary loss on early extinguishment
         of long-term debt, net of income taxes
         of $2,787                                           --              --           (4,411)
                                                       --------        --------        ---------
NET INCOME (LOSS)                                      $   (240)       $  6,612        $  20,910
                                                       ========        ========        =========
     Basic and diluted income (loss) per common share:
         Income (loss) before extraordinary item       $  (0.02)       $   0.25        $    0.84
         Extraordinary item                                  --              --            (0.15)
                                                       --------        --------        ---------
         Net income (loss)                             $  (0.02)       $   0.25        $    0.69
                                                       ========        ========        =========
</TABLE>



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



                                      F-3
<PAGE>   40



                           KING PHARMACEUTICALS, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
              for the years ended December 31, 1996, 1997 and 1998
                        (in thousands, except share data)


<TABLE>
<CAPTION>
                                                                                                       Due          Total
                                                                                        Unrealized    from         Share-
                                                    Common                   Retained    loss on     Related      holders'
                                                    Shares       Amount      Earnings   securities    Party        Equity
                                                  ----------     -------     --------   ----------   -------      ---------
<S>                                               <C>            <C>         <C>           <C>       <C>          <C>      
Balance, December 31, 1995                         4,400,000     $   926     $ 10,763      $ --      $  (678)     $  11,011
    Issuance of common shares                      1,386,230       4,159           --        --           --          4,159
    Issuance of common shares under
        employee stock purchase plan                 259,532         778           --        --           --            778
    15% Stock Dividend                               906,883       2,585       (2,585)       --           --             --
    Unrealized loss on securities, net of tax             --          --           --       (16)          --            (16)
    Payments from Benevolent Fund                         --          --           --        --            1              1
    Net loss                                              --          --         (240)       --           --           (240)
                                                  ----------     -------     --------      ----      -------      ---------

Balance, December 31, 1996                         6,952,645       8,448        7,938       (16)        (677)        15,693
    Issuance of common shares,
       net of $743 of expenses                     3,047,355       8,007           --        --           --          8,007
    Realized loss on securities                           --          --           --        16           --             16
    Advances to Benevolent Fund                           --          --           --        --         (994)          (994)
    2.8 to 1 common stock split (Note 17)         18,000,000          --           --        --           --             --
    Net income                                            --          --        6,612        --           --          6,612
                                                  ----------     -------     --------      ----      -------      ---------
Balance, December 31, 1997                        28,000,000      16,455       14,550        --       (1,671)        29,334
    Issuance of common shares,
        net of expenses                            4,104,730      50,117           --        --           --         50,117
    Payments from Benevolent Fund                         --          --           --        --        1,075          1,075
    Net income                                            --          --       20,910        --           --         20,910
                                                  ----------     -------     --------      ----      -------      ---------
Balance, December 31, 1998                        32,104,730     $66,572     $ 35,460      $ --      $  (596)     $ 101,436
                                                  ==========     =======     ========      ====      =======      =========
</TABLE>


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




                                      F-4
<PAGE>   41


                           KING PHARMACEUTICALS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              for the years ended December 31, 1996, 1997 and 1998
                                 (in thousands)



<TABLE>
<CAPTION>
                                                                                         1996          1997           1998
                                                                                       --------      --------      ---------
<S>                                                                                    <C>           <C>           <C>      
Cash flows from operating activities:
     Net income (loss)                                                                 $   (240)     $  6,612      $  20,910
     Adjustments to reconcile net income to net cash
          provided by (used in) operating activities:
               Depreciation and amortization                                                982         2,395          9,255
               Amortization of deferred financing costs                                      --            --            728
               Loss on sale of marketable securities                                          1            32             --
               Extraordinary loss                                                            --            --          7,198
               Loss on sale of property and equipment                                       (54)           --             22
               Gain on sale of investment in affiliate                                   (1,760)           --             --
               Deferred income taxes                                                        410          (980)          (940)
     Changes in operating assets and liabilities:
               Accounts receivable                                                          467        (6,256)       (31,105)
               Inventories                                                               (1,895)       (4,753)       (15,706)
               Prepaid expenses and other assets                                           (335)         (332)         1,405
               Accounts payable                                                             (83)        3,604          6,723
               Accrued expenses                                                            (138)        2,180          5,679
               Income taxes                                                              (3,624)        2,514          1,662
                                                                                       --------      --------      ---------
                               Net cash provided by (used in) operating activities       (6,269)        5,016          5,831
                                                                                       --------      --------      ---------
Cash flows from investing activities:
     Purchases of property, plant and equipment                                          (1,069)       (1,379)       (81,099)
     Purchases of intangible assets                                                      (2,974)      (52,428)      (344,906)
     Acquisition related costs                                                               --          (373)            --
     Purchases of marketable securities                                                    (307)           --             --
     Proceeds from sale of marketable securities                                             72           203             --
     Proceeds from sale of investment in affiliated company                               2,052            --             --
     Proceeds from sale of property and equipment                                           100            --             30
                                                                                       --------      --------      ---------
                               Net cash used in investing activities                     (2,126)      (53,977)      (425,975)
                                                                                       --------      --------      ---------
Cash flows from financing activities:
     Proceeds from revolving line of credit                                                  --        29,599             --
     Payments on revolving line of credit                                                (3,403)      (23,447)            --
     Proceeds from issuance of common shares,                                             
        net of expenses paid                                                              2,844         8,007         50,117
     Book overdraft                                                                          --         1,423             --
     Repayment on shareholder notes receivable                                               --         2,093             --
     Proceeds from long-term debt                                                         2,549        55,923        658,741
     Payments on long-term debt and capital lease obligations                            (2,772)      (23,798)      (262,318)
     Payments on notes payable                                                               --            --           (916)
     Due to affiliate                                                                         1          (994)         1,075
     Initial public offering costs                                                           --          (710)            --
     Debt issuance costs                                                                     --          (458)       (25,465)
                                                                                       --------      --------      ---------
                               Net cash provided by (used in) financing activities         (781)       47,638        421,234
                                                                                       --------      --------      ---------
Increase (decrease) in cash                                                              (9,176)       (1,323)         1,090
Cash and cash equivalents, beginning of period                                           10,568         1,392             69
                                                                                       --------      --------      ---------
Cash and cash equivalents, end of period                                               $  1,392      $     69      $   1,159
                                                                                       ========      ========      =========
Supplemental disclosure of cash paid for:

               Interest                                                                $  1,170      $  2,335      $  13,929
                                                                                       ========      ========      =========
               Taxes                                                                   $  3,078      $  2,445      $  10,662
                                                                                       ========      ========      =========

</TABLE>




                                      F-5
<PAGE>   42
                           KING PHARMACEUTICALS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOW
        for the years ended December 31, 1996, 1997 and 1998, Continued
                       (in thousands, except share data)



Supplemental schedule of non-cash investing and financing activities:

The Company purchased intangible assets financed by the seller of $5,500 and
$75,000 in 1996 and 1998, respectively.

For the years ended December 31, 1996, 1997 and 1998 the Company entered into
capital leases totaling $1,082, $85 and $1,004, respectively.

In connection with its purchases of intangible assets the Company assumed
estimated liabilities of $301, $3,062 and $2,913 for returns of products shipped
prior to acquisition date during 1996, 1997 and 1998, respectively.

During 1997, the Company entered into a financing arrangement to have certain
payments made for machinery and equipment. Deposits of $557 were outstanding on
behalf of the Company at December 31, 1997.

At December 31, 1997, the Company had prepaid insurance of $359 that was
financed with a note payable.

During 1996, the Company issued 699,711 common shares for $2,093 in notes
receivable from shareholders. These notes were paid in full in 1997.




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




                                      F-6
<PAGE>   43


                           KING PHARMACEUTICALS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        (in thousands, except share data)

1.      The Company:

        King Pharmaceuticals, Inc. ("King" or the "Company") is a vertically
        integrated pharmaceutical company that manufactures, markets and sells
        primarily branded prescription pharmaceutical products. Through a
        national sales force, King markets its branded pharmaceutical products
        to general/family practitioners, internal medicine physicians and
        hospitals across the country. The Company also provides contract
        manufacturing for a number of the world's leading pharmaceutical and
        biotechnology companies.

        These consolidated financial statements include the accounts of King and
        its wholly owned subsidiaries, Monarch Pharmaceuticals, Inc. (formerly a
        division of King), ParkeDale Pharmaceuticals, Inc. and King 
        Pharmaceuticals of Nevada, Inc. All intercompany transactions and 
        balances have been eliminated in consolidation.

2.      Summary of Significant Accounting Policies:

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

        REVENUE RECOGNITION - Sales are reported net of an estimate for returns
        and allowances and an estimate for chargebacks. Chargebacks and returns
        and allowances are included in sales when goods are shipped to the
        customer. Product sales and sales of manufactured products are
        recognized upon shipment. Development revenue is recognized upon
        approval of the product from the Food and Drug Administration.

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

        INVENTORIES - Inventories are stated at the lower of cost or market.
        Cost is determined using the first-in, first-out (FIFO) method.

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

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





                                      F-7
<PAGE>   44



                           KING PHARMACEUTICALS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                        (in thousands, except share data)

2.      Summary of Significant Accounting Policies, continued:

        PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated
        at cost. Maintenance and repairs are expensed as incurred. Depreciation
        is computed over the estimated useful lives of the related assets using
        the straight-line method for financial statement purposes and
        accelerated methods for income tax purposes. Retirements, sales and
        disposals of assets are recorded by removing the cost and accumulated
        depreciation with any resulting gain or loss reflected in income.

        In the event that facts and circumstances indicate that the cost of
        property, plant and equipment may be impaired, evaluation of
        recoverability is performed using the estimated future undiscounted cash
        flows associated with the asset compared to the asset's carrying amount
        to determine if a writedown is required.

        CAPITALIZED INTEREST - For the year ended December 31, 1998, the Company
        capitalized interest of approximately $239. The Company had no
        capitalized interest for the years ended December 31, 1996 and 1997.

        INTANGIBLE ASSETS - Intangible assets are stated at cost, net of
        accumulated amortization. Amortization is computed over the estimated
        useful lives of 10 to 30 years using the straight-line method.

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

        OTHER ASSETS - Other assets consist primarily of deferred financing
        costs which are being amortized over periods ranging from six to eight
        years. Amortization expense related to deferred financing costs was $0,
        $0 and $728 for the years ended December 31, 1996, 1997 and 1998,
        respectively, and has been included in interest expense.

        During 1998, the Company repaid certain debt prior to maturity. The
        repayment resulted in extraordinary charges of $4,411, net of related
        tax benefits of $2,787, associated with the write-off of deferred
        financing costs.



                                       F-8
<PAGE>   45


                           KING PHARMACEUTICALS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                        (in thousands, except share data)

2.      Summary of Significant Accounting Policies, continued:

        SELF-FUNDED HEALTH INSURANCE - The Company is self-insured with respect
        to its health care benefit program. The Company contributes estimated
        amounts to a third-party administrator on a monthly basis which are used
        to pay health care claims during the year. Under the plan, the Company
        pays a minimum amount annually and has an aggregate stop-loss limit
        based upon the number of participants and their insured status.
        Self-insured costs are accrued based upon reported claims and an
        estimated liability for claims incurred but not reported.

        RESEARCH AND DEVELOPMENT - The Company incurs research and development
        costs that are expensed as incurred. These costs were approximately
        $1,298, $890 and $401, for the years ended December 31, 1996, 1997 and
        1998, respectively.

        ADVERTISING AND PROMOTION - The Company expenses advertising and
        promotion costs as incurred and these costs are included as selling,
        general and administrative expenses. Advertising and promotion costs for
        the years ended December 31, 1996, 1997 and 1998 were $1,283, $1,583 and
        $10,744, respectively.

        STATEMENT OF ACCOUNTING STANDARDS NOT YET ADOPTED - In June 1998, the
        Board adopted Statement of Financial Accounting Standards ("SFAS") No. 
        133, "Accounting for Derivative Instruments and Hedging Activities", 
        which establishes accounting and reporting standards for derivative 
        instruments and hedging activities. SFAS 133 is effective for all fiscal
        quarters of fiscal years beginning after June 15, 1999. The Company 
        currently is evaluating the potential effect of SFAS 133 on its 
        financial statements.

        COMPREHENSIVE INCOME - In 1998, the Company adopted SFAS No. 130,
        "Reporting Comprehensive Income". In 1996 and 1997, the Company had
        other comprehensive income of $16, net of tax, related to an unrealized
        loss on securities. The Company had no other comprehensive income in
        1998.

        RECLASSIFICATIONS - Certain amounts from the prior consolidated
        financial statements have been reclassified to conform to the
        presentation adopted in 1998.

3.      Concentrations of Credit Risk:

        A significant portion of the Company's sales are to customers in the
        pharmaceuticals industry. Approximately 20% and 17% of accounts
        receivable at December 31, 1997 and 1998, respectively were due from one
        customer. At December 31, 1997 and 1998, an additional 22% and 25%,
        respectively, were due from two other customers. The Company monitors
        the extension of credit to customers and has not experienced significant
        credit losses. 



                                      F-9
<PAGE>   46
                           KING PHARMACEUTICALS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                        (in thousands, except share data)


3.      Concentrations of Credit Risk, continued:

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

<TABLE>
<CAPTION>
                                                         1996       1997       1998
                                                         ----       ----       ----
<S>                                                      <C>        <C>        <C>  
        McKesson Corporation                             n/a        16.7%      11.4%
        Cardinal Whitmire                                n/a        14.0%      10.8%
        Bergen Brunswig Corporation                      n/a        13.4%      12.6%
        Amerisource                                      n/a        10.6%      n/a
        SmithKline Beecham Corporation                   18.1%      n/a        n/a
        Mallinckrodt                                     36.7%      n/a        n/a
        Novartis Animal Health US, Inc.                  14.9%      n/a        n/a
        n/a - sales were less than 10% for the year 
</TABLE>

4.      Property, Plant and Equipment:

        Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>
                                             1997           1998
                                          ---------      ---------
<S>                                       <C>            <C>      
        Land                              $     319      $   3,949
        Buildings and improvements           13,563         55,990
        Machinery and equipment               4,046         32,522
        Equipment under capital lease         1,720          2,713
        Construction in progress                585          6,106
                                          ---------      ---------
                                             20,233        101,280
        Less accumulated depreciation        (3,063)        (7,299)
                                          ---------      ---------
                                          $  17,170      $  93,981
                                          =========      =========
</TABLE>



        Depreciation and amortization expense for the years ended December 31,
        1996, 1997 and 1998 was $853, $985 and $4,236, respectively.

5.      Inventory:

        Inventory consists of the following:

<TABLE>
<CAPTION>
                                        1997                  1998
                                      -------               -------
<S>                                   <C>                   <C>    
        Finished goods                $ 7,568               $13,772
        Work-in process                   494                 5,386
        Raw materials                   2,788                 7,398
                                      -------               -------
                                      $10,850               $26,556
                                      =======               =======
</TABLE>






                                      F-10
<PAGE>   47
                           KING PHARMACEUTICALS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                        (in thousands, except share data)


6.      Acquisitions/Intangible Assets:

        On December 22, 1998, the Company acquired three branded pharmaceutical
        products from Hoechst Marion Roussel, Inc. ("HMR" or "Seller") for a
        purchase price of $362,500, plus acquisition costs of approximately
        $450. The acquired products were: (a) the U.S. rights to the Altace
        product line with patents expiring through 2008, (b) worldwide rights to
        the Silvadene product line, and (c) worldwide rights to the AVC product
        line (collectively the "Altace Acquisition"). The purchase price was
        principally allocated to intangible assets and financed under the
        Company's Senior Credit Facility and a $75,000 note from the Seller
        (Note 9). Intangible assets are being amortized over 15 to 30 years.

        On June 30, 1998, the Company acquired the rights, title and interest to
        the Menest(R) product line for approximately $5,000. The entire purchase
        was allocated to intangible assets and is being amortized over its
        estimated useful life of 25 years. The acquisition was financed with
        proceeds resulting from the completion of the Company's June 25, 1998
        initial public offering (Note 17).

        On February 28, 1998, the Company acquired the rights, titles and
        interest to certain product lines, production facilities (the "Parkedale
        Facility"), and assumed contracts for manufacturing for third parties
        from Warner-Lambert Company (the "Sterile Products Acquisition"). The
        purchase price, including assumed liabilities of $2,913, of $127,913 was
        allocated to real estate and equipment based on fair values ($44,130 and
        $28,914, respectively) with the residual ($54,869) being allocated to
        intangibles and is being amortized over 5 to 40 years and 25 years,
        respectively. The purchase price was financed under the Company's Credit
        Agreement (Note 9).

        On November 14, 1997, the Company acquired the rights, titles and
        interests to the Septra(R), Proloprim(R), Mantadil(R), and Kemadrin(R)
        product lines, as well as, the exclusive licenses, free of royalty
        obligations, to manufacture and market the prescription formulations of
        Neosporin and Polysporin for $23,000 plus the assumption of an estimated
        liability of $2,084 of returns of products shipped prior to the
        acquisition. The entire purchase price was allocated to intangible
        assets and will be amortized over its estimated useful life of 25 years.
        The purchase price was financed under the Company's Senior Secured
        Revolving Credit Facility and Senior Secured Term Loan.

        On May 15, 1997, the Company acquired the rights, title and interest in
        the United States to the Viroptic(R) product line for $5,100, plus the
        assumption of an estimated liability of $129 of returns of products
        shipped prior to the acquisition. The entire purchase price was
        allocated to intangible assets and is being amortized over its estimated
        useful life of 25 years. The purchase price was financed from internally
        generated cash funds and borrowings under its revolving line of credit
        agreement.



                                      F-11
<PAGE>   48

                           KING PHARMACEUTICALS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                        (in thousands, except share data)


6.     Acquisitions/Intangible Assets, continued:

       On March 21, 1997, the Company acquired the rights, title and interest in
       the United States to the Cortisporin(R) product line for $22,845, plus
       the assumption of an estimated $849 of returns of products shipped prior
       to the acquisition. The entire purchase price was allocated to intangible
       assets and is being amortized over its estimated useful life of 25 years.
       The purchase price was financed principally through the raising of equity
       (Note 17), notes payable to certain banks and borrowings under the
       Company's revolving line of credit agreement.

       On January 22, 1997, the Company acquired the rights, title and interest
       in the United States to the Proctocort(TM) product line for approximately
       $1,500. The entire purchase was allocated to intangible assets and is
       being amortized over its estimated useful life of 20 years. The
       acquisition was financed with a note payable to a bank.

       The following unaudited pro forma summary presents the financial
       information as if the acquisitions had occurred on January 1, 1997 These
       pro forma results have been prepared for comparative purposes and do not
       purport to be indicative of what would have occurred had the acquisitions
       been made on January 1, 1997, nor is it indicative of future results.


<TABLE>
<CAPTION>
                                                           For the Year Ended
                                                  -----------------------------------------
                                                  December 31, 1997       December 31, 1998
                                                  -----------------       -----------------
<S>                                                   <C>                     <C>     
        Total revenues                                $ 213,441               $269,803
                                                      =========               ========
        Income before extraordinary item              $  11,273               $ 34,877
                                                      =========               ========
        Net income                                    $  11,273               $ 30,466
                                                      =========               ========
        Diluted income per common share:

          Income before extraordinary item            $    0.43               $   1.16
                                                      =========               ========
          Net income                                  $    0.43               $   1.01 
                                                      =========               ========
</TABLE>






                                      F-12
<PAGE>   49

                           KING PHARMACEUTICALS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                        (in thousands, except share data)


6.     Acquisitions/Intangible Assets, continued:

       Intangible assets at December 31 resulted from the following product 
       acquisitions:

<TABLE>
<CAPTION>
                                                               1997                     1998
                                                            ---------                ---------
<S>                                                         <C>                      <C>      
        Altace, Silvadene, AVC                              $      --                $ 362,950
        Sterile Products                                           --                   54,509
        Menest                                                     --                    5,000
        Septra, Proloprim, Mantadil, Kemadrin                  15,425                   15,425
        Cortisporin                                            23,694                   23,694
        Neosporin                                               5,876                    5,876
        Viroptic                                                5,229                    5,229
        Nucofed/Quibron                                         7,301                    7,301
        Polysporin                                              3,783                    3,783
        Other                                                   3,017                    3,377
                                                            ---------                ---------
                                                               64,325                  487,144
        Less accumulated amortization                          (1,542)                  (6,561)
                                                            ---------                ---------
                                                            $  62,783                $ 480,583
                                                            =========                =========
</TABLE>



        Amortization expense for the years ended December 31, 1996, 1997, and
        1998 was $129, $1,410, and $5,019, respectively.

7.      Lease Obligations:

        The Company leases certain office and manufacturing equipment and
        automobiles under noncancelable operating leases with terms from one to
        five years. Estimated future minimum lease payments, as of December 31,
        1998 for leases with initial or remaining terms in excess of one year
        are as follows:

<TABLE>
                    <S>                     <C>   
                    1999                    $1,419
                    2000                     1,311
                    2001                       795
                    2002                       741
                    2003                       262
</TABLE>

        Rent expense for the years ended December 31, 1996, 1997 and 1998 was
        approximately $196, $138, and $1,230, respectively.





                                      F-13
<PAGE>   50

                           KING PHARMACEUTICALS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                        (in thousands, except share data)


7.      Lease Obligations, continued:

        Additionally, the Company leases office space in its building to tenants
        under agreements ranging from one to twenty years. Such leases are
        accounted for as operating leases. Rental income for the years ended
        December 31, 1996, 1997 and 1998 was approximately $86, $44, and $40,
        respectively. As of December 31, 1998 estimated future minimum rental
        payments to be received each year from 1999 to 2003 is $40.

        Capital lease obligations for certain equipment as of December 31, 1998
        are as follows:


<TABLE>
        <S>                                                        <C>    
        1999                                                       $   620
        2000                                                           631
        2001                                                           485
        2002                                                           275
        2003                                                           160
                                                                   -------
        Total minimum lease payments                                 2,171
        Less imputed interest                                         (322)
                                                                   -------
        Present value of minimum lease payments                      1,849
        Less current maturities                                        374
                                                                   -------
                                                                   $ 1,475
                                                                   =======
</TABLE>



8.      Accrued Expenses:

        Accrued expenses at December 31, consist of the following:

<TABLE>
<CAPTION>
                                                             1997               1998
                                                            -------            -------
<S>                                                         <C>                <C>    
        Payroll and outside personnel services              $   555            $   675
        Returns and chargebacks                               4,207              9,397
        Accrued interest                                        478              1,176
        Franchise taxes                                         146                142
        Other                                                   803              3,257
        Incurred but not reported medical claims                314                448
                                                            -------            -------
                                                            $ 6,503            $15,095
                                                            =======            =======
</TABLE>




                                      F-14
<PAGE>   51
                           KING PHARMACEUTICALS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                        (in thousands, except share data)


9.      Long-term Debt:

        Long-term debt consisted of the following:

<TABLE>
<CAPTION>
                                                                                            1997           1998
                                                                                          --------       --------
<S>                                                                                       <C>            <C>     
        Senior Credit Facility:
           Revolving Credit Facility                                                      $     --       $ 19,000
           Tranche A Term Loan                                                                  --        150,000
           Tranche B Term Loan                                                                  --        275,000
        Senior Subordinated Seller Notes
             with interest at 10% payable monthly due December 2007                             --         75,000
        Senior Secured Revolving Credit
             Facility, paid in February 1998                                                 6,152             --
        Senior Secured Term Loan, paid
             in February 1998                                                               40,000             --
        Notes payable to former owners, due in equal
             annual installments of principal and interest (at a rate
             of 6%) of $1,226 through December 2003                                          6,027          5,163
        Note payable to shareholder with quarterly interest
             payments (interest rate of 10%) through January 1, 1999 with remaining
             principal due April 1, 1999, collateralized by real estate
             of the Company                                                                  1,750          1,750
        Various capital leases with interest rates ranging
             from 8.3% to 12.7% and maturing at various
             times through 2002                                                              1,206          1,849
        Other notes payable                                                                  1,238             34
                                                                                          --------       --------
                                                                                            56,373        527,796
             Less current portion                                                            8,084         13,310
                                                                                          --------       --------
                                                                                          $ 48,289       $514,486
                                                                                          ========       ========
</TABLE>



        On December 22, 1998, the Company amended and restated its Credit
        Agreement (as defined below) dated as of February 27, 1998 (the "Senior
        Credit Facility") to: (a) finance the Altace Acquisition; (b) refinance
        the Company's then existing indebtedness; and (c) provide for ongoing
        working capital and other financing requirements. The Senior Credit
        Facility provides for up to $500,000 of aggregate borrowing capacity,
        consisting of: a $150,000 tranche A term loan (the "Tranche A Term
        Loan"); a $275,000 tranche B term loan (the "Tranche B Term Loan"); and
        a revolving credit facility in an aggregate amount of $75,000 (the
        "Revolving Credit Facility"). The Revolving Credit Facility includes a
        $10,000 sublimit available for the issuance of letters of credit and a
        $5,000 sublimit available for swingline loans.

        As of December 31, 1998, the Company had $56,000 of available borrowings
        under its Revolving Credit Facility.






                                      F-15
<PAGE>   52
                           KING PHARMACEUTICALS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                        (in thousands, except share data)


9.      Long-term Debt, continued:

        The Tranche A Term Loan is subject to certain specified amortization
        payments required to be made in quarterly installments commencing on
        March 31, 1999 until December 22, 2004. The Tranche B Term Loan is
        subject to certain specified amortization payments required to be made
        in quarterly installments commencing on March 31, 1999 until December
        22, 2006. The Revolving Credit Facility is available until December 22,
        2004. In addition, the loans and the aggregate available commitments
        under the Senior Credit Facility will be reduced upon the occurrence of
        certain specified events as outlined in the agreement.

        The loans under the Senior Credit Facility bear interest, at the
        Company's option, at either (a) the base rate (which is based on the
        prime rate or the federal funds rate plus one-half of 1%) plus (i) in
        the case of the Tranche A Term Loan and borrowings under the Revolving
        Credit Facility, an applicable spread ranging from 1.25% to 2.25% (based
        on a leverage ratio) and (ii) in the case of the Tranche B Term Loan,
        2.75% or (b) the applicable LIBOR rate plus (i) in the case of the
        Tranche A Term Loan and borrowings under the Revolving Credit Facility,
        an applicable spread ranging from 2.25% to 3.25% (based on a leverage
        ratio) and (ii) in the case of the Tranche B Term Loan, 3.75%. In
        addition, the lenders under the Senior Credit Facility are entitled to
        customary facility fees based on (a) unused commitments under the
        Revolving Credit Facility and (b) letters of credit outstanding.

        The Company's obligations under the Senior Credit Facility are
        unconditionally guaranteed on a senior basis by each direct and indirect
        majority owned U.S. subsidiary of the Company (collectively, the
        "Subsidiaries"). In addition, the Senior Credit Facility is
        collateralized by substantially all of the real and personal property of
        the Company.

        The Senior Credit Facility contains a number of covenants that, among
        other things, restrict the ability of the Company and its subsidiaries
        to dispose of assets, incur additional indebtedness or guaranty
        obligations, repurchase or redeem capital stock or repay subordinated
        indebtedness (including the Notes), except in accordance with the
        subordination provisions, pay dividends or make capital distributions,
        enter into sale and leaseback transactions, make investments, make
        acquisitions, engage in mergers or consolidations, make capital
        expenditures, engage in certain transactions with affiliates, make
        loans, change its fiscal year, change its business and otherwise
        restrict corporate activities.

        On February 27, 1998, the Company entered into a $195,000 credit
        agreement ("Credit Agreement"). The Company used the proceeds from the
        Credit Agreement to finance the Warner Lambert Acquisition (Note 6), and
        pay off the $40,000 Term Loan and outstanding borrowings under the
        Revolver as of February 27, 1998. The Credit Agreement was paid in full
        on December 22, 1998 with proceeds from the Senior Credit Facility. 




                                      F-16
<PAGE>   53

                           KING PHARMACEUTICALS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                        (in thousands, except share data)


9.      Long-term Debt, continued:

        On November 26, 1997, the Company entered into a $12,000 Senior Secured
        Revolving Credit Facility (the "Revolver") and a $40,000 Senior Secured
        Term Loan ("Term Loan"), collectively referred to as the "Financing". As
        December 31, 1997, $40,000 was outstanding under the term loan and
        $6,152 was outstanding under the Revolver. The Financing was repaid in
        February 1998 with proceeds from the Credit Agreement.

        The Company has entered into two interest rate swap agreements
        designated as a partial hedge of the Company's variable rate debt. The
        purpose of these swaps is to fix interest rates on variable rate debt
        and reduce certain exposures to interest rate fluctuations. At December
        31, 1998, the Company had interest rate swaps with a notional amount of
        $100,000. Under these agreements the Company pays a weighted average
        fixed rate of 5.5% and receives a rate equivalent to the three-month and
        one-month LIBOR. The notional amounts do not represent in amounts
        exchanged by the parties. The agreements expire in the year 2001.

        The aggregate maturities of long-term debt (excluding capital lease
        obligations - Note 7) at December 31, 1998 are as follows:


<TABLE>
                    <S>                              <C>     
                    1999                             $ 12,936
                    2000                               18,735
                    2001                               26,279
                    2002                               33,841
                    2003                               41,406
                    Thereafter                        392,750
                                                     --------
                                                     $525,947
                                                     ========
</TABLE>




10.     Notes Payable:

        During 1997, the Company entered into a financing agreement to make
        certain payments for machinery and equipment. As of December 31, 1997,
        the Company had a demand note payable plus interest at prime plus .33%
        with $557 outstanding. The Note payable was paid in 1998.

        During December 1997, the Company entered into an agreement to finance
        certain insurance costs with a note payable. The balance of the note
        payable at December 31, 1997 was $359. The note payable has an interest
        rate of 7.8% and was paid in 1998.

11.     Financial Instruments:

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




                                      F-17
<PAGE>   54

                           KING PHARMACEUTICALS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                        (in thousands, except share data)


11.     Financial Instruments, continued:

        CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE -
        The carrying amounts of these items are a reasonable estimate of their
        fair values.

        LONG-TERM DEBT AND NOTES PAYABLE - The carrying amounts of the Company's
        long-term debt and notes payable approximate fair value. The fair value
        of the Company's long-term debt, including the current portion, at
        December 31, 1997 and 1998, is estimated to be approximately $56,000 and
        $572,500, respectively, using discounted cash flow analyses and based on
        the Company's incremental borrowing rates for similar types of borrowing
        arrangements.

        INTEREST RATE SWAPS - The estimated fair market value of the interest
        rate swap agreements at December 31, 1998, as determined by the issuing
        financial institution and based on the estimated termination values, was
        an unrealized loss of approximately $2,787.

12.     Income Taxes:

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


<TABLE>
<CAPTION>
                                             1996            1997              1998
                                             -----          -------          --------
<S>                                          <C>            <C>              <C>     
        Current                              $(635)         $ 4,948          $ 16,336
        Deferred                               528             (980)             (940)
                                             -----          -------          --------
             Total (benefit) expense         $(107)         $ 3,968          $ 15,396
                                             =====          =======          ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                            1996             1997           1998
                                                           ------           ------         ------
<S>                                                         <C>               <C>            <C>  
        Federal statutory tax rate                          (34.0)%           34.0%          35.0%
        State income taxes, net of federal benefit             --              3.0            3.3
        Permanent differences                                 2.3              0.4            0.1
        Other                                                 0.9              0.1           (0.6)
                                                           ------           ------         ------
                  Effective tax rate                        (30.8)%           37.5%          37.8%
                                                           ======           ======         ======
</TABLE>





                                      F-18
<PAGE>   55


                           KING PHARMACEUTICALS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                        (in thousands, except share data)


12.     Income Taxes, continued:

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


<TABLE>
<CAPTION>
                                                          1997             1998
                                                         -------          -------
<S>                                                      <C>              <C>    
        Allowance for doubtful accounts                  $   238          $   389
        Uniform cost capitalization                          117              228
        Accrued expenses                                     528              101
        State net operating loss carryforward                413              793
        Accrued liabilities                                1,239            5,164
                                                         -------          -------
                  Total deferred tax assets                2,535            6,675
                                                         -------          -------
        Property, plant and equipment                     (3,135)          (3,840)
        Intangible assets                                 (1,226)          (3,721)
        Miscellaneous                                       (165)            (165)
                                                         -------          -------
                  Total deferred tax liabilities          (4,526)          (7,726)
                                                         -------          -------
                  Net deferred tax liability             $(1,991)         $(1,051)
                                                         =======          =======
</TABLE>

        The Company's state net operating loss carryforward of approximately
        $24.0 million expires in 2013. Management has determined, based on both
        their ability to carryback earnings to prior years and existing deferred
        tax liabilities, it is more likely than not that the deferred tax assets
        will be realizable and no valuation allowance has been recorded.

13.     Benefit Plans:

        The Company maintains a defined contribution employee benefit plan which
        covers all employees over 21 years of age. The plan allows for
        employees' salary deferrals, which are matched by the Company up to a
        specific amount under provisions of the plan. Company contributions
        during the years ended December 31, 1996, 1997 and 1998, were $278, $307
        and $1,066, respectively. The plan also provides for discretionary
        profit-sharing contributions by the Company.





                                      F-19
<PAGE>   56

                           KING PHARMACEUTICALS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                        (in thousands, except share data)


14.     Commitments and Contingencies:

        In May 1998, the Company was named as a co-defendant in a wrongful death
        and survival action in the District Court of Gregg County, Texas. The
        action demands an unspecified amount. This action relates to the
        manufacture of the anorexigenic product for SmithKline.

        Many distributors, marketers and manufacturers of anorexigenic drugs
        have been subject to claims relating to the use of these drugs. The
        Company is a defendant in various lawsuits which claim damages for
        personal injury arising from the Company's production of the
        anorexigenic drug, phentermine, under contract for SmithKline.
        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 expects to be named in additional lawsuits related
        to the company's production of the anorexigenic drug under contract for
        SmithKline.

        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 SmithKline 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 SmithKline 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.

        The Parkedale Facility was one of six facilities owned by Warner-Lambert
        subject to a Consent Decree of Permanent Injunction issued August 1993
        in United States of America V. Warner-Lambert Company and Melvin R.
        Goodes and Lodewijk J.R. DeVink (U.S. Dist. Ct., Dist. of N.J.) (the
        "Consent Decree"). The Parkedale Facility is currently manufacturing
        pharmaceutical products subject to the Consent Decree which prohibits
        the manufacture and delivery of specified drug products unless, among
        other things, the products conform to current good manufacturing
        practices and are produced in accordance with an approved abbreviated
        new drug application or new drug application. The Company is in the
        process of petitioning for, and if appropriate, obtaining relief from
        the Consent Decree.

        The Company is involved in various routine legal proceedings incident to
        the ordinary course of its business. Management believes that the
        outcome of all pending legal proceedings in the aggregate will not have
        a material adverse effect on the Company's consolidated financial
        position, results of operation or cash flow.



                                      F-20
<PAGE>   57


                           KING PHARMACEUTICALS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                        (in thousands, except share data)


15.     Segment Information:

        Effective December 31, 1998 the Company adopted SFAS No. 131,
        "Disclosures About Segments of an Enterprise and Related Information".
        SFAS No. 131 establishes standards for the way public business
        enterprises report information about operating segments. SFAS No. 131
        also establishes standards for related disclosures about products and
        services, geographic areas, and major customers. The adoption of SFAS
        No. 131 did not affect the Company's results of operations or financial
        position. However, prior year disclosures have been reclassified to
        conform with the provisions of this statement.

        The Company's business is classified into two reportable segments;
        Branded Pharmaceuticals and Contract Manufacturing. Branded
        Pharmaceuticals include a variety of branded prescription products over
        four therapeutic areas, including cardiovascular, anti-infective,
        vaccines and biologicals and women's health products. These branded
        prescription products have been aggregated because of the similiarity in
        regulatory environment, manufacturing process, method of distribution,
        and type of customer. Contract Manufacturing represents contract
        manufacturing services provided for pharmaceutical and biotechnology
        companies. The classification all other primarily includes generic
        pharmaceutical, companion animal health products and development
        services.

        The Company primarily evaluates its segments based on gross profit.
        Reportable segments were separately identified based on revenues, gross
        profit and total assets.




                                      F-21
<PAGE>   58


                           KING PHARMACEUTICALS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                        (in thousands, except share data)


15.     Segment Information, continued:

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

<TABLE>
<CAPTION>
                                                          For the years ended December 31,
                                                       --------------------------------------
                                                         1996           1997           1998
                                                       --------      ---------      ---------
<S>                                                    <C>           <C>            <C>  
Total revenues:    
        Branded pharmaceuticals                        $  2,939      $  37,912      $ 125,399
        Contract manufacturing                           10,890          7,962         54,734
        All Other                                         7,128          3,015          6,453
        Eliminations                                       (500)          (980)       (23,123)
                                                       --------      ---------      ---------
              Consolidated total revenues              $ 20,457      $  47,909      $ 163,463
                                                       ========      =========      =========
Gross profit (loss):
        Branded pharmaceuticals                        $  2,659      $  33,165      $  94,452
        Contract manufacturing                            2,809           (187)          (531)
        All Other                                         6,207          1,897          5,490
                                                       --------      ---------      ---------
              Consolidated gross profit                $ 11,675      $  34,875      $  99,411
                                                       ========      =========      =========
<CAPTION>
                                                                        As of December 31,
                                                                     ------------------------
                                                                        1997           1998
                                                                     ---------      ---------
<S>                                                                  <C>            <C> 
Total assets:    
        Branded pharmaceuticals                                      $  73,640      $ 522,218
        Contract manufacturing                                          30,334        144,614
        All Other                                                          918          1,735
        Eliminations                                                       (29)          (396)
                                                                     ---------      ---------
              Consolidated total assets                              $ 104,863      $ 668,171
                                                                     =========      =========
</TABLE>

        Capital expenditures of $1,069, $1,379 and $8,099 for the years ended 
        December 31, 1996, 1997 and 1998, respectively, are substantially 
        utilized for contract manufacturing purposes. 

16.     Related Party Transactions:

        Affiliated Company

        The Company owned a 6% interest in a privately held, affiliated
        pharmaceutical company. In 1996, the Company sold its investment for
        $2,052, resulting in a gain of $1,760. The Company's share of earnings
        in this affiliated company was not material and was included in other
        income in the consolidated statement of operations.

        The United Company

        In connection with its purchase of Cortisporin in 1997, the Company
        received $8,750 from The United Company for 3,047,355 common shares.




                                      F-22
<PAGE>   59

                           KING PHARMACEUTICALS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                        (in thousands, except share data)


16.     Related Party Transactions, continued:

        Other

        Certain management and employees of the Company sit on the board of
        directors of a private foundation. The Company made contributions to
        this foundation and expensed approximately $245, $994 and $247 for the
        years ended December 31, 1996, 1997 and 1998, respectively. At December
        31, 1997 and 1998, the Company had receivables from this foundation of
        approximately $1,671 and $596, respectively, for expenses paid by the
        Company on their behalf. The receivables are collateralized by common
        shares of the Company held by the foundation and are included in
        shareholders' equity.

        For the year ended December 31, 1998, the Company had paid Bourne & Co.,
        Inc., an affiliate of a director and since January 1999, an officer of
        the Company, $2,475 for consulting services. In connection with the
        Altace Acquisition and related financing, Bourne & Co., Inc., received
        $1,250 in January 1999, which was recorded in accrued expenses as of
        December 31, 1998. For the years ended December 31, 1996 and 1997, the
        Company had paid Bourne & Co., Inc., approximately $92 and $651
        respectively, for its advisory services in the acquisition of the
        Cortisporin product line and $62 for consulting services for the year
        ended December 31, 1997.

        In September 1998, the Company purchased for approximately $350 the
        primary residence of an officer of the Company in connection with his
        relocation to the Parkedale Facility. The Company believes the purchase
        price was at fair market value and currently holds the property for
        sale.

        In October 1996, the Company issued 1,386,230 common shares to
        shareholders and members of management of which 699,711 common shares
        were financed by notes receivable of approximately $2,100.

        The Company paid a certain shareholder $160 for consulting fees during
        the year ended December 31, 1996.

17.     Stockholders' Equity:

        Stock Dividend:

        The Company paid a 15% stock dividend on all common shares issued and
        outstanding as of November 1, 1996. Common shares of 906,883 were
        distributed. The dividend was charged to retained earnings in the amount
        of $2,585, which was based on market value at the time of the
        transaction of $3 per share. The weighted average shares and all per
        share amounts included in the accompanying consolidated financial
        statements and notes are based on the increased number of shares giving
        retroactive effect to the stock dividend.



                                      F-23
<PAGE>   60

                           KING PHARMACEUTICALS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                        (in thousands, except share data)


17.    Stockholders' Equity, continued:

       Stock Split:

       On November 15, 1997, the shareholders approved a stock split of 2.8
       common shares for each share of the Company's common shares outstanding.
       The stock split has been reflected in the average shares outstanding,
       shares outstanding and income (loss) per share amounts in the balance
       sheets, statements of operations and changes in shareholders' equity.

       Stock Option Plans:

       The 1997 Incentive and Nonqualified Stock Option Plan for Employees (the
       "1997 Stock Option Plan") was adopted in 1997. In February 1998, the
       Company adopted the 1998 Non-employee Director Stock Option Plan (the
       "1998 Stock Option Plan"), The aggregate number of shares which may be
       issued under the 1997 and 1998 Stock Option Plans shall not exceed
       3,500,000, (3,200,000 and 300,000, respectively).

       During 1998, the Company granted 222,750 options of common stock to
       employees under the 1997 Stock Option Plan at an exercise price equal to
       fair market value at date of grant. As of December 31, 1998, the Company
       had 220,200 options outstanding of which 54,375 are vested and
       exercisable. Options under the 1997 Stock Option Plan vest at various 
       times over 24 months and expire 10 years from the date of grant.

       During 1998, the Company granted 50,000 options of common stock to its
       directors under the 1998 Stock Option Plan at an exercise price equal to
       the initial public offering price of $14.00 per share. The options vested
       immediately upon grant. As of December 31, 1998, the Company had 50,000
       options vested and outstanding. Options under the 1998 Stock Option Plan
       expire 10 years from the date of grant.

       The Company has adopted the disclosure only provision of SFAS No. 123,
       "Accounting for Stock Based Compensation." Accordingly, since options
       were granted at fair value, no compensation cost has been recognized for
       stock options granted to date. Had compensation cost for these plans been
       determined for options granted, consistent with SFAS No. 123, the
       Company's net income and diluted income per share would have decreased to
       the following pro forma amounts for the year ended December 31, 1998:

<TABLE>
<CAPTION>
                                                         1998
                                                     ----------
        <S>                                          <C>  

        Income before extraordinary item:
        
              As reported                            $   25,321
                                                     ==========
              Pro Forma                              $   24,520
                                                     ==========
        Net income:

              As reported                            $   20,910
                                                     ==========
              Pro Forma                              $   20,109
                                                     ==========
        Diluted income per share:

        Income before extraordinary item:

              As reported                            $     0.84
                                                     ==========
              Pro Forma                              $     0.81
                                                     ==========
        Net income:

              As reported                            $     0.69
                                                     ==========
              Pro Forma                              $     0.67
                                                     ==========
</TABLE>




                                      F-24
<PAGE>   61

                           KING PHARMACEUTICALS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                        (in thousands, except share data)


17.     Stockholders' Equity. Continued:

        The fair value of each option grant is estimated on the date of grant
        using the Black-Scholes option pricing model with the following
        weighted-average assumptions used for grants in 1998: expected lives of
        ranging from 3 years to 4 years; expected volatility of approximately
        72%; expected dividend yield of $0 and risk-free interest rates ranging
        from 4.91% to 5.46%.

        A summary of the status of the Company's Plans of December 31, 1998 and
        changes during the year ended December 31, 1998 is presented in the
        table below:

<TABLE>
<CAPTION>
                                                      1997 Stock Option Plan       1998 Stock Option Plan
                                                     ------------------------      ----------------------
                                                                     Weighted                    Weighted
                                                                      Average                     Average
                                                                     Exercise                    Exercise
                                                       Shares          Price         Shares        Price
                                                     ----------        ------       -------       ------
<S>                                                 <C>            <C>           <C>          <C>   
        Shares under option:
          Outstanding at January 1, 1998                     --        $   --            --       $   --
                 Granted                                222,750         14.02        50,000        14.00
                 Exercised                                   --            --            --           --
                 Forfeited                               (2,550)        14.00            --           --
                                                     ----------        ------       -------       ------
          Outstanding at December 31, 1998              220,200        $14.02        50,000       $14.00
                                                     ==========        ======       =======       ======
          Weighted average fair value           
            of options granted                              N/A        $ 8.10           N/A       $ 7.14
                                                     ==========        ======       =======       ======
          Options available for grant           
            at December 31, 1998                      2,979,800           N/A       250,000          N/A
                                                     ==========        ======       =======       ======
</TABLE>




        Options outstanding at December 31, 1998 have exercise prices between
        $14.00 and $15.25, with a weighted average exercise price of $14.02 and
        a remaining contractual life of approximately 9.5 years.

        Other Equity Transactions:

        On November 14, 1997, the Company's shareholders approved:

        A new class of preferred shares, with preference terms and rights to be
        determined by the Board of Directors. The Company is authorized to issue
        up to 15 million shares.

        An amendment to the Company's Articles of Incorporation to increase the
        number of authorized common shares from 10 million shares of no par
        value to 150 million shares of no par value.

        A dividend of one preferred share purchase right (a "Right") for each
        common share outstanding. Such rights entitle the registered holder
        under certain circumstances to purchase from the Company one-thousandth
        of a share of a newly created series of the Company's preferred shares,
        at a price of $60 per one-thousandth shares of Preferred Stock, subject
        to adjustment.





                                      F-25
<PAGE>   62

                           KING PHARMACEUTICALS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                        (in thousands, except share data)


17.     Stockholders' Equity, continued:

        The Company closed the sale of 4,104,730 shares of common stock at
        $14.00 per share on June 30, 1998. The net proceeds to the Company from
        the sale of stock in the initial public offering after deducting
        underwriting discounts and commissions and offering expenses were
        approximately $50,117.

        The following table sets forth a reconciliation of the gross IPO
        proceeds to the net IPO proceeds.

<TABLE>
<S>                                                                                 <C>    
                    Gross IPO proceeds                                              $57,466
                    Underwriters discounts and commissions                            4,118
                    IPO expenses paid in 1998                                         2,521
                    IPO expenses paid in 1997                                           710
                                                                                    -------
                    Net equity provided from IPO                                    $50,117
                                                                                    =======
</TABLE>

18.     Income (Loss) Per Share:

        The basic and diluted income (loss) before extraordinary item per share
        was determined as follows:

<TABLE>
<CAPTION>
                                                               1996              1997              1998
                                                            ----------        ----------       -----------
<S>                                                         <C>               <C>              <C>        
        Income (loss) before extraordinary
                item available to common shareholders       $     (240)       $    6,612       $    25,321
                                                            ==========        ==========       ===========
        Basic income (loss) per share:

             Weighted average common shares                 15,440,465        26,270,103        30,127,527
                                                            ----------        ----------       -----------
             Basic (loss) income per common share           $    (0.02)       $     0.26       $      0.84
                                                            ==========        ==========       ===========
        Diluted income (loss) per share
             Weighted average common shares                 15,440,465        26,270,103        30,127,527
             Effect of stock options                                --                --            29,891
                                                            ----------        ----------       -----------
             Weighted average common shares
                  plus assumed conversions                  15,440,465        26,270,103        30,157,418
                                                            ----------        ----------       -----------
             Diluted income (loss) per share                $    (0.02)       $     0.26       $      0.84
                                                            ==========        ==========       ===========
</TABLE>







                                      F-26
<PAGE>   63
                           KING PHARMACEUTICALS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                        (in thousands, except share data)


19.     Quarterly Financial Information (Unaudited):

        The following table sets forth summary quarterly financial information
        for the years ended December 31, 1997 and 1998:

<TABLE>
<CAPTION>
1997 By Quarter                                              First        Second         Third        Fourth
---------------                                             -------       -------       -------       -------
<S>                                                         <C>           <C>           <C>           <C>    
        Total revenues                                      $ 8,786       $12,066       $12,735       $14,322
        Gross profit                                          6,723         8,913         8,978        10,261
        Operating income                                      1,906         3,911         3,297         4,243
        Net income                                              921         1,984         1,650         2,057
        Basic and diluted income per common share (1)          0.04          0.07          0.06          0.07

<CAPTION>
1998 By Quarter                                              First        Second         Third        Fourth
---------------                                             -------       -------       -------       -------
<S>                                                         <C>           <C>           <C>           <C>    
        Total revenues                                      $24,977       $40,264       $48,089       $50,133
        Gross profit                                         17,613        26,216        27,568        28,014
        Operating income                                      9,690        14,812        15,349        15,587
        Income before extraordinary item                      4,361         6,388         7,310         7,262
        Net income                                            4,075         6,388         7,310         3,137
        Basic and diluted income per common share:
               Income before extraordinary item                0.15          0.23          0.23          0.23
               Net income                                      0.15          0.23          0.23          0.08
</TABLE>
        (1)     Quarterly amounts do not add to annual amounts due to the effect
                of rounding on a quarterly basis.

20.     Subsequent Events

        On March 3, 1999, the Company issued $150,000 of 10.75% of Senior
        Subordinated Notes due 2009. Net proceeds of approximately $144,000 were
        used to repay outstanding indebtedness under the Senior Credit Facility
        ($69,000) and the Seller Note ($75,000). The debt is guaranteed by the
        Company's wholly-owned subsidiaries Monarch Pharmaceuticals, Inc.,
        Parkedale Pharmaceuticals, Inc. and King Pharmaceuticals of Nevada, Inc.
        In addition, the Company increased its borrowing capacity under its
        Revolving Credit Facility to $100,000.




                                      F-27
<PAGE>   64




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

                                           KING PHARMACEUTICALS, INC.

                                           By: /s/ John M. Gregory
                                               ---------------------------------
                                               Chairman of the Board

                                           Date: March 26, 1999

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

<TABLE>
<CAPTION>
Signature                           Capacity                                                  Date
---------                           --------                                                  ----
<S>                                 <C>                                                      <C> 
 /s/ John M. Gregory                Chairman of the Board (principal executive officer)       March 26, 1999

 /s/ Brian G. Shrader               Chief Financial Officer (principal financial and          March 26, 1999
                                    accounting officer)

 /s/ Jefferson J. Gregory           Director                                                  March 26, 1999


 /s/ Joseph R. Gregory              Director                                                  March 26, 1999


 /s/ Ernest C. Bourne               Director                                                  March 26, 1999


     Lois A. Clarke                 Director                                                  March __, 1999


 /s/ Frank W. De Friece, Jr.        Director                                                  March 26, 1999


 /s/ D. Greg Rooker                 Director                                                  March 26, 1999


 /s/ Ted G. Wood                    Director                                                  March 26, 1999
</TABLE>




<PAGE>   65
                       REPORT OF INDEPENDENT ACCOUNTANTS


     Our report on the financial statements of King Pharmaceuticals, Inc. is 
included on page F-1 of this Form 10-K. In connection with our audits of such 
financial statements, we have also audited the related financial statement 
schedule listed under Item 14 of this Form 10-K.

     In our opinion, the financial statement schedule referred to above, when 
considered in relation to the basic financial statements taken as a whole, 
presents fairly, in all material respects, the information required to be 
included therein.



                                       PRICEWATERHOUSECOOPERS LLP


Greensboro, North Carolina
February 15, 1999




                                      S-1
<PAGE>   66



                           KING PHARMACEUTICALS, INC.

                 Schedule II. Valuation and Qualifying Accounts

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                  Column C
                                                         ----------------------------
        Column A                        Column B                  Additions                   Column D          Column E
 ---------------------------           ----------        ----------------------------        ----------        ----------
                                                                            Charged 
                                       Balances at       Charged to        (Credited)                           Balance at
                                        Beginning        Costs and          to Other                              End of 
                                        of Period         Expenses           Accounts       Deductions(1)         Period
                                        ---------         --------           --------       -------------         ------
<S>                                     <C>               <C>               <C>               <C>               <C>
Allowance for doubtful
accounts, deducted from
accounts receivable in the
balance sheets:
Year ended December 31, 1998               $638             $1,169             $ --               $405              $1,402
Year ended December 31, 1997               $ 93                565               --                 20              $  638
Year ended December 31, 1996               $ 93                --                --                --               $   93
</TABLE>

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(1) Amounts represent write-offs of accounts.



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