<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 20, 1997
REGISTRATION NO. 333-35395
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
KOS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
---------------------
<TABLE>
<S> <C> <C>
FLORIDA 2834 65-0670898
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
DANIEL M. BELL
1001 BRICKELL BAY DRIVE 1001 BRICKELL BAY DRIVE
25TH FLOOR 25TH FLOOR
MIAMI, FL 33131 MIAMI, FL 33131
305-577-3464 305-577-3464
(Address, including zip code, (Address, including zip code,
and telephone number, including area code and telephone number, including
of registrant's principal executive area code, of agent for service)
offices)
</TABLE>
---------------------
COPIES TO:
<TABLE>
<S> <C>
STEVEN SONBERG, ESQ. BRUCE K. DALLAS, ESQ.
HOLLAND & KNIGHT LLP DAVIS POLK & WARDWELL
701 BRICKELL AVENUE, SUITE 3000 450 LEXINGTON AVENUE
MIAMI, FL 33131 NEW YORK, NY 10017
305-374-8500 212-450-4000
TELECOPIER NO. 305-789-7799 TELECOPIER NO. 212-450-4800
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PROSPECTUS (Subject to Completion)
Dated October 20, 1997
3,200,000 Shares
LOGO
KOS PHARMACEUTICALS, INC.
Common Stock
------------------------
Of the 3,200,000 shares (the "Shares") of Common Stock, par value $.01 per
share ("Common Stock"), of Kos Pharmaceuticals, Inc. ("Kos" or the "Company")
offered hereby (the "Offering"), 1,000,000 shares are being offered by the
Company and 2,200,000 shares are being offered by certain shareholders of the
Company (the "Selling Shareholders"). The Company will not receive any proceeds
from the sale of shares of Common Stock by the Selling Shareholders. See
"Principal and Selling Shareholders" and "Underwriting."
The Common Stock is quoted on the Nasdaq National Market under the symbol
"KOSP." On October 17, 1997, the last reported sale price of the Common Stock on
the Nasdaq National Market was $43.25 per share. See "Price Range of Common
Stock".
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=========================================================================================================================
Underwriting
Price Discounts and Proceeds to Proceeds to Selling
to Public Commissions(1) Company(2) Shareholders
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................ $ $ $ $
Total(3)................. $ $ $ $
==================================================================================================================
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act").
See "Underwriting."
(2) Before deducting expenses of the offering of approximately $375,000.
(3) The Company and the Selling Shareholders have granted to the Underwriters an
option, exercisable within 30 days of the date hereof, to purchase 140,000
and 340,000 additional shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If all such shares are
purchased, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company, and Proceeds to Selling Shareholders will
be $ , $ , $ and $ , respectively.
------------------------
The Common Stock is offered by the several Underwriters named herein when,
as and if received and accepted by them, and subject to their right to reject
orders in whole or in part and subject to certain other conditions. It is
expected that delivery of certificates for the shares will be made at the
offices of Cowen & Company, New York, New York on or about , 1997.
------------------------
COWEN & COMPANY
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SALOMON BROTHERS INC
SBC WARBURG DILLON READ INC.
, 1997
<PAGE> 3
[Picture of Niaspan titration Starter Pack, to include bottle and creative
trademark/artwork.]
Niaspan(R) is a registered trademark of the Company.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements appearing elsewhere in this
Prospectus, including "risk factors" herein. Except as otherwise noted, all
information in this Prospectus assumes conversion of the Convertible Note (as
defined below) and no exercise of the Underwriters' over-allotment option.
THE COMPANY
Kos Pharmaceuticals, Inc. ("Kos", pronounced Kos, or the "Company") is a
fully integrated specialty pharmaceutical company engaged in developing and
commercializing proprietary prescription pharmaceutical products, primarily for
the treatment of certain chronic cardiovascular and respiratory diseases. The
Company developed and is currently manufacturing and marketing its lead product,
Niaspan. The Company intends also to manufacture its products under development
and to market such products directly through its own specialty sales force. The
Company's cardiovascular products under development consist of
controlled-release, once-a-day, oral dosage formulations. The Company's
respiratory products under development consist of aerosolized inhalation
formulations to be used primarily with the Company's proprietary inhalation
devices.
On July 28, 1997, Kos received clearance from the U.S. Food and Drug
Administration ("FDA") to market Niaspan. Niaspan is the first once-a-day
formulation of niacin approved by the FDA for the treatment of mixed lipid
disorders, which are primary risk factors for coronary heart disease ("CHD"). In
addition, Niaspan is the only patient-friendly lipid-altering product that moves
all of the major lipid components in the proper direction. Niaspan has been
approved for the following indications: (i) to reduce elevated total
cholesterol, low-density lipoprotein ("LDL") cholesterol, and apolipoprotein B;
(ii) to reduce elevated total and LDL cholesterol when used in combination with
a bile-acid binding resin; (iii) to reduce elevated serum triglycerides; (iv) to
reduce the risk of recurrent nonfatal myocardial infarction; (v) to promote the
regression or slow the progression of atherosclerosis when used in combination
with a bile-acid binding resin. The Company began shipping Niaspan to
wholesalers in mid-August 1997, and it began detailing Niaspan to physicians in
September 1997.
Since the mid-1980's, clinical research has revealed that abnormal levels
of several lipids are atherogenic risk factors for CHD. Such lipid disorders
afflict approximately 56 million adults in the United States. Niacin, the active
ingredient in Niaspan, is a water soluble vitamin long recognized by the
National Institutes of Health ("NIH") and the American Heart Association ("AHA")
as an effective pharmacological agent for the treatment of mixed lipid
disorders, including elevated LDL cholesterol, total cholesterol, and
triglycerides and depressed high-density lipoprotein ("HDL") cholesterol. The
Company's NDA for Niaspan was based principally on three double-blinded,
placebo-controlled pivotal clinical trials and one long-term, open label safety
study involving an aggregate of 633 Niaspan-treated subjects at 17 sites
throughout the United States. The results of these trials produced statistically
significant changes in all major lipid components without serious
treatment-related adverse events. Treatment with Niaspan demonstrated a 14% to
18% reduction in LDL cholesterol, a 24% to 35% reduction in triglycerides, a 22%
to 32% increase in HDL cholesterol, and a 24% to 36% reduction in lipoprotein
(a) ("Lp(a)"). Moreover, Niaspan's controlled-release formulation and
Once-A-Night(TM) dosing regimen reduced the liver toxicity and intolerable side
effects generally associated with currently available formulations of niacin.
As of September 2, 1997, the Company's field sales force consisted of 94
experienced pharmaceutical sales representatives. These representatives have
begun marketing Niaspan to the approximately 18,000 physicians who account for
approximately 40% of the prescriptions for lipid-altering medications in the
United States. Kos intends to expand its field sales force to more than 125
representatives and to use this sales force to inform the physicians as to
Niaspan's safety and efficacy profile and the manner in which Niaspan achieves
such profile. In 1996, the market for cholesterol reducing drugs was nearly $3.0
billion in the United States and was one of the fastest growing sectors of the
cardiovascular market. The Company is seeking licensors to market Niaspan
outside the United States, where sales of cholesterol reducing drugs
approximated $3.0 billion in 1996.
3
<PAGE> 5
The Company was founded in 1988 by the former Chief Executive Officer,
Chief Operating Officer, and Director of Product Development of Key
Pharmaceuticals, Inc., which was acquired by Schering-Plough Corporation in June
1986. The Company believes that substantial market opportunities exist for
developing drugs that are reformulations of existing approved prescription
pharmaceutical products but which offer certain safety advantages (such as
reduced harmful side effects) or patient compliance advantages (such as
once-a-day rather than multiple daily dosing regimens) over such products. Kos
believes that developing proprietary products based on currently approved drugs,
rather than new chemical entities ("NCEs"), may reduce regulatory and
development risks and, in addition, may facilitate the marketing of such
products because physicians are generally familiar with the safety and efficacy
of such products. Six of the Company's seven products under development require
new drug application ("NDA") filings with the FDA. Although such NDA filings are
more expensive and time consuming, developing products that require NDA approval
offers several advantages compared with generic products, including potential
for higher gross margins, limited competition resulting from significant
clinical and formulation development challenges, and a three-year statutory
barrier to generic competition.
The Company's management has significant experience in implementing the
principal elements of the Company's business strategy. These elements consist of
the following: (i) select products with unrealized commercial potential where
safety or patient compliance may be improved; (ii) focus initially on the large,
rapidly growing cardiovascular and respiratory markets, which include many
chronic diseases requiring long-term therapy; (iii) develop proprietary
formulations of currently approved pharmaceutical compounds, which can reduce
regulatory and development risks typically associated with the development of
new chemical entities; (iv) manage directly the clinical development of its
products; (v) manufacture its products internally; (vi) market its products
directly through the Company's specialty sales force; and (vii) leverage its
core competencies through corporate and academic alliances.
Kos has three other once-a-day, controlled-release cardiovascular products
that are currently under development: (i) Nicostatin(TM), a combination of
Niaspan and a currently approved HMG CoA reductase inhibitor (or "statin") for
the treatment of mixed lipid disorders; (ii) a branded generic form of
isosorbide-5-mononitrate ("IS-5-MN"), a nitrate for angina; and (iii) a
formulation of captopril, an angiotensin converting enzyme ("ACE") inhibitor for
hypertension. In 1996, the disease segments of the cardiovascular market for
which the Company is developing its products achieved aggregate sales in the
United States of approximately $11.5 billion.
Kos also is developing four respiratory products, dispensed in aerosolized
metered-dose inhalation ("MDI") devices for the treatment of asthma. All four
aerosol products use non-CFC propellants, which are generally regarded as
environmentally safe, and all four require NDA filings. The Company's aerosol
products consist of two inhaled steroids, triamcinolone and flunisolide,
dispensed in a proprietary breath coordinated inhaler being developed by the
Company; a beta-agonist, albuterol, dispensed in a generic MDI; and either
albuterol or triamcinolone dispensed in a proprietary breath actuated inhaler
being developed by the Company, principally for pediatric and geriatric uses.
The market for asthma products in 1996 was $2.5 billion in the United States.
The Company currently collaborates with third parties in the development of
certain products and sponsors basic research at universities. Kos also intends
to pursue the acquisition of products or drug-delivery technologies for
development by Kos, particularly acquisitions or licenses for currently marketed
or late-development-stage cardiovascular products that complement Niaspan for
detailing by the Company's sales force.
The Company completed an initial public offering of its Common Stock on
March 12, 1997 (the "IPO"). Prior to the IPO, the Company's operations were
funded entirely by Kos Investments, Inc. ("Kos Investments"), which is
controlled by Michael Jaharis, one of the Company's founders and its Chairman.
At September 2, 1997, the Company employed 249 people, of whom 111 were in
marketing and sales, 76 were in product development, 39 were in manufacturing,
and 23 were in administration.
4
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock being offered by:
The Company..................................... 1,000,000 shares
The Selling Shareholders........................ 2,200,000 shares
Common Stock to be outstanding after this
offering........................................ 16,974,793(1)
Use of proceeds................................... For certain operating requirements, including
sales and marketing and research and development
expenses, working capital, and other general
corporate purposes, including potential
acquisitions.
Nasdaq National Market symbol..................... KOSP
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except share data)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues.................................................... $ 14 $ -- $ --
Operating expenses:
Research and development.................................. 8,387 13,816 17,881
General, selling and administrative....................... 1,614 1,772 5,522
Expense recognized on modification of stock option
grants(2)............................................... -- 5,436 --
---------- ---------- ----------
Total operating expenses.................................... 10,001 21,024 23,403
Interest (income) expense, net.............................. 1,052 (14) (282)
Minority interest(3)........................................ 1 16 --
---------- ---------- ----------
Net loss.................................................... $ (11,038) $ (20,994) $ (23,121)
========== ========== ==========
Net loss per share(4)....................................... $ (0.97) $ (1.85) $ (1.87)
Weighted average common shares in computing net loss per
share(4).................................................. 11,340,000 11,340,000 12,341,146
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------
ACTUAL AS ADJUSTED(6)
-------- ---------------
<S> <C> <C>
BALANCE SHEET(5):
Cash and marketable securities.............................. $ 58,362 $ 99,105
Working capital............................................. 39,987 95,147
Total assets................................................ 65,106 105,849
Convertible Note............................................ 13,395 --
Deficit accumulated during the development stage(7)......... (79,780) (79,780)
Shareholders' equity........................................ 44,989 100,149
</TABLE>
- ---------------
(1) Excludes 3,784,090 shares of Common Stock authorized for issuance under the
Company's 1996 Stock Option Plan and 300,000 shares of Common Stock reserved
for issuance upon exercise of other outstanding options. Options to acquire
an aggregate of 2,749,300 shares of Common Stock at a weighted average
exercise price of $9.36 per share were issued and outstanding as of
September 2, 1997. Includes 961,168 shares of Common Stock issuable to Kos
Investments upon the conversion of a note representing a loan made to the
Company by Kos Investments (the "Convertible Note"), assuming a conversion
date of October 31, 1997, and including accrued interest of $1,022,524. See
"Management -- Stock Option Plan" and "Certain Relationships and Related
Transactions."
(2) Reflects a non-cash charge associated with an extension of the exercise
period for stock options granted during 1988 to 1990 to the Company's Chief
Executive Officer and two independent consultants; no other material
economic terms of these options were changed.
(3) Represents the minority shareholder's interest in Aeropharm Technology, Inc.
("Aeropharm"), the Company's aerosol subsidiary, which interest was acquired
by the Company in June 1996.
(4) See Note 2 of Notes to Consolidated Financial Statements for information
concerning the computation of net loss per share.
(5) The Company funded its operations from July 1, 1996, to the completion of
the Company's IPO using the proceeds of the Convertible Note issued to Kos
Investments, a company that is controlled by, and serves as an investment
vehicle for, Michael Jaharis, the Company's Chairman and one of its
founders. As of June 30, 1997, the Company had outstanding borrowings of
$13,395,000 and $643,000 of interest under such loan. See "Use of Proceeds."
(6) Adjusted to reflect the sale of 1,000,000 shares of Common Stock offered by
the Company hereby and receipt by the Company of the estimated net proceeds
therefrom, the exercise of certain stock options, and conversion of the
Convertible Note. See "Use of Proceeds" and "Capitalization."
(7) In connection with the transfer on June 30, 1996, of assets and liabilities
from Holdings to the Company, net operating loss carry-forwards amounting to
approximately $51.0 million and related tax benefits were not transferred to
the Company. The Company can only utilize net operating loss carryforwards
subsequent to June 30, 1996 (amounting to $22.3 million as of June 30,
1997), to offset future taxable net income, if any. See "The Company" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
5
<PAGE> 7
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should consider the following factors in evaluating the Company and
its business before purchasing any of the Common Stock offered hereby.
Prospective investors are cautioned that the statements in this Prospectus that
are not descriptions of historical facts may be forward-looking statements that
are subject to risks and uncertainties. Actual results could differ materially
from those currently anticipated due to a number of factors, including those
identified under "Risk Factors" and elsewhere in this Prospectus.
The Company's success depends to a significant extent on whether its lead
product, Niaspan, is successfully commercialized. There can be no assurance as
to the successful commercialization of Niaspan. The successful commercialization
of Niaspan may be affected by various factors, certain of which are set forth
below.
EARLY STAGE OF DEVELOPMENT; HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE
PROFITABILITY
Through the end of the Company's fiscal year ended June 30, 1997, the
Company was a development stage company. To date, the Company has dedicated most
of its financial resources to the development and commercialization of Niaspan,
the development of other products, and general and administrative expenses. The
Company expects to incur significant operating losses for at least the next six
months, primarily due to continued investments in its research and development
programs and for manufacturing and marketing, sales and administrative expenses
associated with the launch of Niaspan. No assurance can be given that additional
significant losses will not continue thereafter. The Company's ability to
achieve and maintain profitability will depend, among other things, on the
commercial success of Niaspan and on the Company's ability to successfully
complete the development of its products, obtain regulatory approvals, establish
manufacturing and sales and marketing capabilities, achieve market acceptance
for its products, and maintain sufficient funds to finance its activities. As of
June 30, 1997, the Company's accumulated deficit was $79.8 million. In
connection with the transfer of operations from Holdings to the Company on June
30, 1996, net operating loss carryforwards amounting to approximately $51.0
million and related tax benefits remained with Holdings and were not transferred
to the Company. Consequently, the Company had no tax assets or liabilities as of
June 30, 1996, and can only utilize net operating loss carryforwards sustained
subsequent to June 30, 1996 (amounting to $22.3 million as of June 30, 1997), to
offset future taxable net income, if any. There can be no assurance that the
Company will be able to achieve profitability or that profitability, if
achieved, can be sustained.
UNCERTAINTIES RELATED TO MARKET ACCEPTANCE OF NIASPAN AND PRODUCTS UNDER
DEVELOPMENT
The Company's ability to successfully commercialize Niaspan will depend
significantly on the acceptance of Niaspan by physicians and their patients. The
Company believes that intolerable flushing is a principal reason why physicians
generally have been reluctant to prescribe or recommend currently available
formulations of niacin. Flushing episodes are often characterized by facial
redness, tingling or rash. Although most patients taking Niaspan will sometimes
flush, the formulation and dosing regimen for Niaspan have been designed to
maximize patient acceptance and minimize the occurrence of flushing. There can
be no assurance, however, that patients using Niaspan will not suffer episodes
of flushing that they consider intolerable. The failure of physicians to
prescribe Niaspan or the failure of patients to continue taking Niaspan due to
intolerable flushing or to other side effects would have a material adverse
effect on the Company. The Company believes that physicians have also been
reluctant to prescribe or recommend certain currently available formulations of
niacin because of potential liver toxicity associated with these formulations.
Although clinical trials conducted using Niaspan demonstrated that fewer than 1%
of patients experienced clinically significant elevations in liver enzyme
levels, there can be no assurance that patients using Niaspan in actual practice
will not experience clinically significant elevations of liver enzymes or other
side effects at a rate higher than those experienced in the Company's clinical
trials.
Unanticipated side effects or unfavorable publicity concerning Niaspan, any
of the Company's products under development, or any other product incorporating
technology similar to that used in Niaspan or the
6
<PAGE> 8
Company's products under development could have an adverse effect on the
Company's ability to obtain regulatory approvals; to achieve acceptance by
prescribing physicians, managed care providers, or patients; and to
commercialize its products, any of which could have a material adverse effect on
the Company.
UNCERTAINTIES RELATED TO PRODUCT DEVELOPMENT
Although the Company recently obtained clearance from the FDA to market
Niaspan, there can be no assurance that the Company will be able to successfully
formulate any of its other products as planned, or that the Company will be
successful in demonstrating the safety and efficacy of such products in human
clinical trials. These trials may be costly and time-consuming. The
administration of any product the Company develops may produce undesirable side
effects that could result in the interruption, delay or suspension of clinical
trials, or the failure to obtain FDA or other regulatory approval for any or all
targeted indications. Even if regulatory approval is secured, the Company's
products under development may later produce adverse effects that limit or
prevent their widespread use or that necessitate their withdrawal from the
market. The Company may discontinue the development of any of its products under
development at any time.
PATENTS AND TRADEMARKS; INTERFERENCE
The Company's ability to commercialize any of its products under
development will depend, in part, on its or its licensors' ability to obtain
patents, enforce those patents, preserve trade secrets, and operate without
infringing on the proprietary rights of third parties. In addition, the patents
for which the Company has applied relating to Niaspan and certain other of the
Company's products under development are based on, among other things, the timed
administration of Niaspan. If the indications treated by Niaspan and such other
products under development could be treated using drugs without such timed
administration, the Company's patents, if issued, would not prevent the use of
such drugs for the treatment of such indications, which would have a material
adverse effect on the Company. There can be no assurance that the patent
applications licensed to or owned by the Company will result in issued patents,
that patent protection will be secured for any particular technology, that any
patents that have been or may be issued to the Company or its licensors will be
valid or enforceable or that any patents will provide meaningful protection to
the Company.
In general, the U.S. patents and patent applications owned by or licensed
to the Company are method-of-use patents that cover the timed use of certain
compounds to treat specified conditions. Composition-of-matter protection is not
available for the active ingredient in Niaspan. The active ingredient in
Niaspan, niacin, is currently sold in the United States and other markets for
lipid altering and for other uses. Even in jurisdictions where the use of the
active ingredient in Niaspan for lipid altering and other indications may be
covered by the claims of a use patent licensed to the Company, off-label sales
might occur, especially if another company markets the active ingredient at a
price that is less than the price of Niaspan, thereby potentially reducing the
sales of Niaspan.
The Company has a patent application pending in the U.S. Patent and
Trademark Office ("PTO") with claims covering Niaspan's method-of-use consistent
with its recommended once-a-day dosing regimen. The Company has been advised by
the patent examiner that certain of these claims are allowable, but none of the
claims have yet been issued as a patent. The patent examiner has, however,
indicated that the PTO's Board of Appeals may declare an interference between
such Kos application and a method-of-use patent issued to a generic manufacturer
allegedly claiming the same dosing regimen invention. On February 7, 1997, the
Company and such generic manufacturer entered into a cross-licensing agreement
(the "License Agreement") pursuant to which the parties agreed to resolve, as
between themselves, the effects of such potential interference by granting
licenses under their respective patent application and patent.
The Company is aware that certain European and U.S. patents have been
issued with claims covering products that contain certain non-CFC
propellant-driven aerosol formulations. The European patents are currently
subject to an opposition proceeding in Europe, and certain claims in such
patents have been held invalid in the United Kingdom. Certain or all of the
Company's aerosol products under development may use a formulation covered by
such European or U.S. patents. In such event, the Company would be prevented
from making, using or selling such products unless the Company obtains a license
under such patents, which license may not be available on commercially
reasonable terms, or at all, or unless such patents are determined to be invalid
or unenforceable in Europe or the United States, respectively. The Company's
development of
7
<PAGE> 9
products that are covered by such patents and its failure to obtain licenses
under such patents in the event such patents are determined to be valid and
enforceable could have an adverse effect on the Company's business.
The patent positions of pharmaceutical and biotechnology companies are
highly uncertain and involve complex legal and factual questions. There can be
no assurance that the patents owned and licensed by the Company, or any future
patents, will prevent other companies from developing similar or therapeutically
equivalent products or that others will not be issued patents that may prevent
the sale of Company products or require licensing and the payment of significant
fees or royalties by the Company. Furthermore, there can be no assurance that
any of the Company's future products or methods will be patentable, that such
products or methods will not infringe upon the patents of third parties, or that
the Company's patents or future patents will give the Company an exclusive
position in the subject matter claimed by those patents. The Company may be
unable to avoid infringement of third party patents and may have to obtain a
license, defend an infringement action, or challenge the validity of the patents
in court. There can be no assurance that a license will be available to the
Company, if at all, on terms and conditions acceptable to the Company, or that
the Company will prevail in any patent litigation. Patent litigation is costly
and time consuming, and there can be no assurance that the Company will have or
will devote sufficient resources to pursue such litigation. If the Company does
not obtain a license under such patents, is found liable for infringement or is
not able to have such patents declared invalid, the Company may be liable for
significant money damages, may encounter significant delays in bringing products
to market, or may be precluded from participating in the manufacture, use, or
sale of products or methods of treatment requiring such licenses.
The Company also relies on trade secrets and other unpatented proprietary
information in its product development activities. To the extent that the
Company relies on trade secrets and unpatented know-how to maintain its
competitive technological position, there can be no assurance that others may
not independently develop the same or similar technologies. The Company seeks to
protect trade secrets and proprietary knowledge in part through confidentiality
agreements with its employees, consultants, advisors and collaborators.
Nevertheless, these agreements may not effectively prevent disclosure of the
Company's confidential information and may not provide the Company with an
adequate remedy in the event of unauthorized disclosure of such information. If
the Company's employees, scientific consultants or collaborators develop
inventions or processes independently that may be applicable to the Company's
products under development, disputes may arise about ownership of proprietary
rights to those inventions and processes. Such inventions and processes will not
necessarily become the Company's property, but may remain the property of those
persons or their employers. Protracted and costly litigation could be necessary
to enforce and determine the scope of the Company's proprietary rights. Failure
to obtain or maintain patent and trade secret protection, for any reason, would
have a material adverse effect on the Company.
The Company engages in collaborations, sponsored research agreements, and
other arrangements with academic researchers and institutions that have received
and may receive funding from U.S. government agencies. As a result of these
arrangements, the U.S. government or certain third parties may have rights in
certain inventions developed during the course of the performance of such
collaborations and agreements as required by law or such agreements. Several
legislative bills affecting patent rights have been introduced in the United
States Congress. These bills address various aspects of patent law, including
publication, patent term, re-examination subject matter and enforceability. It
is not certain whether any of these bills will be enacted into law or what form
such new laws may take. Accordingly, the effect of such potential legislative
changes on the Company's intellectual property estate is uncertain.
The Company has been advised that, despite its federal trademark for the
name Niaspan, a third party may have prior common law rights to the name. If
such rights are asserted, the Company may be prohibited from using the Niaspan
name in connection with its products in certain jurisdictions, if any, where
such third party may have previously used that name. However, the Company does
not believe that, even if it is forced to develop another name for the marketing
of its Niaspan product, such an occurrence would have a material adverse effect
on its financial condition or results of operations.
LIMITED SALES AND MARKETING EXPERIENCE
Although the Company markets Niaspan and intends to market its other
products under development through its own specialty sales force, its marketing
experience to date is limited. Moreover, the Company has
8
<PAGE> 10
fewer sales persons than many of its competitors and there can be no assurance
that the Company's sales force will be able to detail successfully physicians
who prescribe lipid-altering medications. Substantial resources will continue to
be required for the Company to promote the sale of Niaspan and its products
under development. There can be no assurance that the Company will be able to
devote resources to Niaspan or its other products under development sufficient
to achieve market acceptance. The Company's failure to expend the resources to
adequately promote Niaspan would have a material adverse effect on the Company.
The Company's failure to expend the resources to adequately promote any of its
other products under development could have a material adverse effect on the
Company.
COMPETITION AND TECHNOLOGICAL CHANGE
The active ingredient in Niaspan, niacin, is available in several other
formulations, most of which do not require a prescription. Although the Company
believes that there are no other currently available niacin formulations that
have been approved by the FDA specifically for once-a-day dosing, there can be
no assurance that physicians will not prescribe or recommend some of these
unapproved niacin formulations, using the Niaspan dosing regimen, to try to
achieve the same results as Niaspan. Substitution of other niacin formulations
for Niaspan could have a material adverse effect on the Company. Moreover,
manufacturers of other niacin formulations could promote their products using
the Niaspan dosing regimen and could promote the sale of their products to treat
the indications for which the Company has received clearance to market Niaspan.
Although such promotion would be a violation of FDA regulations, the occurrence
of such practices would have a material adverse effect on the Company. Moreover,
many products are commercially available for the treatment of elevated LDL
cholesterol, and the manufacturers of such products have significantly greater
financial resources and sales and manufacturing capabilities than the Company.
There can be no assurance that Niaspan or any other product developed by the
Company will be able to compete successfully with any of those products.
Many established pharmaceutical and biotechnology companies, universities,
and other research institutions with resources significantly greater than the
Company's may develop products that directly compete with the Company's
products. Even if the Company's products under development prove to be more
effective than those developed by other entities, such other entities may be
more successful in marketing their products than the Company because of greater
financial resources, stronger sales and marketing efforts, and other factors.
These entities may succeed in developing products that are safer, more effective
or less costly than the products developed by the Company. There can be no
assurance that any products developed by the Company will be able to compete
successfully with any of those products.
GOVERNMENT REGULATION; NO ASSURANCES OF REGULATORY APPROVAL
The Company's research and development activities, preclinical studies,
clinical trials, and the manufacturing and marketing of its products are
currently subject to extensive regulation by the FDA and may in the future be
subject to foreign regulations. The drug approval process takes many years and
requires the expenditure of substantial resources. Data obtained from
preclinical and clinical activities are susceptible to varying interpretations
that could delay, limit, or prevent regulatory approval. Although the Company
may consult the FDA for guidance in developing protocols for clinical trials,
that consultation provides no assurance that the FDA will accept the clinical
trials as adequate or well-controlled or accept the results of those trials. In
addition, delays or rejections of applications for regulatory approval may
result from changes in or additions to FDA regulations concerning the drug
approval process. Similar delays may also be encountered in foreign countries.
There can be no assurance that any regulatory review will be conducted in a
timely manner or that regulatory approvals will be obtained for any products
developed by the Company. Even if regulatory approval of a product is obtained,
the approval may be limited as to the indicated uses for which it may be
promoted or marketed. In addition, a marketed drug, its bulk chemical supplier,
its manufacturer and its manufacturing facilities are subject to continual
regulatory review and periodic inspections, and later discovery of previously
unknown problems with a product, supplier, manufacturer or facility may result
in restrictions on such products or manufacturers, which may require a
withdrawal of the product from the market. Failure to comply with the applicable
regulatory requirements can, among other things, result in fines,
9
<PAGE> 11
suspensions of regulatory approvals, product recalls, operating restrictions and
criminal prosecution, any of which could have a material adverse effect on the
Company.
The Company's business is also subject to regulation under state, federal
and local laws, rules, regulations and policies relating to the protection of
the environment and health and safety, including those governing the use,
generation, manufacture, storage, air emission, effluent discharge, handling and
disposal of certain materials. The Company believes that it is in compliance in
all material respects with all such laws, rules, regulations and policies
applicable to the Company. There can be no assurance that the Company will not
be required to incur significant costs to comply with such environmental and
health and safety laws and regulations in the future. The Company's research and
development involves the controlled use of hazardous materials. Although the
Company believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by applicable state, federal and
local regulations, the risk of contamination or injury from these materials
cannot be completely eliminated. In the event of such contamination or injury,
the Company could be held liable for any damages that result and any such
liability could exceed the resources of the Company and materially adversely
affect the Company's business, financial condition and results of operations.
DEPENDENCE ON CERTAIN COLLABORATORS
The Company relies on third parties for certain aspects of the development
of certain of its products under development. The Company has entered into
agreements with Fuisz Technologies Ltd. ("Fuisz"), including a joint venture,
pursuant to which the Company and Fuisz have agreed to collaborate in the
development of three products. Under the terms of these agreements, Kos is
responsible for conducting pharmacokinetic studies and clinical trials and Fuisz
is responsible for the formulation of such products. The Company is not aware of
any FDA approved products that have successfully incorporated Fuisz' microsphere
technology, which is intended to be used in certain of the products being
developed under such agreements. The Company's ability to commercialize these
products may depend to a significant extent on the efforts of Fuisz, over which
the Company has no control. There can be no assurance that Fuisz will be
successful in developing any of the Company's products under development. The
Company also relies on other third parties for certain aspects of the
development of the Company's presently planned or future products. There can be
no assurance that the Company will be able to enter into future collaborative
arrangements on favorable terms, or at all. Even if the Company is successful in
entering into such collaborative agreements, there can be no assurance that any
such arrangement will be successful. The success of any such arrangement is
dependent on, among other things, the skills, experience and efforts of the
third party's employees responsible for the project, the third party's
commitment to the arrangement, and the financial condition of the third party,
all of which are beyond the control of the Company.
LIMITED MANUFACTURING EXPERIENCE; RISK OF SCALE-UP
The Company currently manufactures Niaspan in one manufacturing plant that
has been inspected and approved by the FDA, and it manufactures clinical
materials for its products under development in another manufacturing plant. The
Company believes both plants operate in substantial compliance with current Good
Manufacturing Practices ("cGMP") regulations for the manufacture of
pharmaceutical products. The Company may need to further scale-up certain of its
current manufacturing processes to achieve production levels consistent with the
commercial sale of its products. Further, modifications to the facilities,
systems and procedures may be necessary to maintain capacity at a level
sufficient to meet market demand or to maintain compliance with cGMP regulations
and other regulations prescribed by various regulatory agencies including the
Occupational Safety and Health Administration and the Environmental Protection
Agency. Failure by the Company to successfully further scale-up, expand in
connection with manufacture for commercial sale, or modify its manufacturing
process or to comply with cGMP regulations and other regulations could delay the
approval of the Company's products under development or limit the Company's
ability to meet the demand for its products, either of which would have a
material adverse effect on the Company. Such occurrences may require the Company
to acquire alternative means of manufacturing its products, which may not be
available to the Company on a timely basis, on commercially practicable terms,
or at all.
10
<PAGE> 12
NO ASSURANCE OF ADEQUATE THIRD-PARTY REIMBURSEMENT
The Company's ability to commercialize successfully its products under
development is dependent in part on the extent to which appropriate levels of
reimbursement for Niaspan or the Company's products under development are
obtained from government authorities, private health insurers, and managed care
organizations such as health maintenance organizations ("HMOs"). Managed care
organizations and other third-party payors are increasingly challenging the
pricing of pharmaceutical products. The trend toward managed healthcare in the
United States, the growth of organizations such as HMOs, and legislative
proposals to reform healthcare and government insurance programs could
significantly influence the purchase of pharmaceutical products, resulting in
lower prices and reduced demand for Niaspan or the Company's products under
development. Such cost containment measures and potential legislative reform
could affect the Company's ability to sell Niaspan or its products under
development and may have a material adverse effect on the Company. Significant
uncertainty exists about the reimbursement status of newly approved
pharmaceutical products. There can be no assurance that reimbursement in the
United States or foreign countries will be available for Niaspan or any of the
Company's products under development, that any reimbursement granted will be
maintained, or that limits on reimbursement available from third-party payors
will not reduce the demand for, or negatively affect the price of, Niaspan or
the Company's products under development. The unavailability or inadequacy of
third-party reimbursement for Niaspan or the Company's products under
development would have a material adverse effect on the Company.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company has experienced negative cash flows from operations since its
inception. The Company has spent and will continue to be required to spend
substantial funds to continue research and development, including clinical
trials of its products under development, and to commercialize Niaspan and its
products under development if regulatory approvals are obtained for such
products under development. After giving effect to the sale of shares of Common
Stock by the Company offered hereby, the Company believes that it has sufficient
resources to fund the operations of the Company for at least the next 12 months.
The Company, however, may need or elect to raise additional capital. The
Company's capital requirements will depend on many factors, primarily relating
to the near-term commercial success of Niaspan; the problems, delays, expenses
and complications frequently encountered by development stage companies; the
progress of the Company's research, development, and clinical trial programs;
the costs and timing of seeking regulatory approvals of the Company's products
under development; the Company's ability to obtain such regulatory approvals;
costs in filing, prosecuting, defending, and enforcing any patent claims and
other intellectual property rights; the extent and terms of any collaborative
research, manufacturing, marketing, or other arrangements; and changes in
economic, regulatory, or competitive conditions or the Company's planned
business. Estimates about the adequacy of funding for the Company's activities
are based on certain assumptions, including the assumption that the Company's
Niaspan product is successfully commercialized, and that testing and regulatory
procedures relating to the Company's products under development can be conducted
at projected costs and within projected time frames. There can be no assurances
that any of these assumptions will prove to be accurate.
To satisfy its capital requirements, the Company may seek to raise funds in
the public or private capital markets. The Company's ability to raise additional
funds in the public or private markets will be adversely affected if the initial
marketing efforts for Niaspan are not successful, if the results of the
Company's clinical trials for its products under development are not favorable,
or if regulatory approval for any of the Company's products under development is
not obtained. The Company may seek additional funding through corporate
collaborations and other financing vehicles. There can be no assurance that any
such funding will be available to the Company, or if available, that it will be
available on acceptable terms. If adequate funds are not available, the Company
may be required to curtail significantly one or more of its research or
development programs or it may be required to obtain funds through arrangements
with future collaborative partners or others that may require the Company to
relinquish rights to Niaspan or to some or all of its technologies or products
under development. If the Company is successful in obtaining additional
financing, the terms of the financing may have the effect of diluting or
adversely affecting the holdings or the rights of the holders of Common Stock.
11
<PAGE> 13
DEPENDENCE ON SINGLE SOURCES OF SUPPLY
Some materials used in the Company's products, including niacin, the active
ingredient in Niaspan, are currently sourced from a single qualified supplier.
The Company does not have a contractual arrangement with its sole supplier of
niacin. Although the Company has not experienced difficulty to date in acquiring
niacin, or other materials for product development, no assurance can be given
that supply interruptions will not occur in the future or that the Company will
not have to obtain substitute materials, which would require additional product
validations and regulatory submissions. Any such interruption of supply could
have a material adverse effect on the Company's ability to manufacture its
products or to obtain or maintain regulatory approval of such products.
RISK OF PRODUCT LIABILITY CLAIMS; NO ASSURANCE OF ADEQUATE INSURANCE
Manufacturing, marketing, selling, and testing Niaspan and the Company's
products under development entails a risk of product liability. The Company
could be subject to product liability claims in the event the Company's products
or products under development fail to perform as intended. Even unsuccessful
claims could result in the expenditure of funds in litigation and the diversion
of management time and resources and could damage the Company's reputation and
impair the marketability of the Company's products. While the Company maintains
liability insurance, there can be no assurance that a successful claim could not
be made against the Company, that the amount of indemnification payments or
insurance would be adequate to cover the costs of defending against or paying
such a claim or that damages payable by the Company would not have a material
adverse effect on the Company's business, financial condition, and results of
operations and on the price of the Company's Common Stock.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent on its ability to attract and
retain highly qualified scientific and management personnel. The Company faces
intense competition for personnel from other companies, academic institutions,
government entities, and other organizations. There can be no assurance that the
Company will be successful in attracting and retaining key personnel. The loss
of key personnel, or the inability to attract and retain the additional,
highly-skilled employees required for the expansion of the Company's activities,
could adversely affect the Company's results of operations and its business.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
The Company has granted certain registration rights to the Company's
controlling shareholder and to Kos Investments, the holder of the Convertible
Note, which entitle such entities to cause the Company to effect three
registrations under the Securities Act of sales of shares of the Company's
Common Stock owned by such entities. These registration rights generally would
also permit the holders of such rights to include shares in any registration
statement otherwise filed by the Company. By exercising these registration
rights, these entities could cause a large number of shares to be registered and
become freely tradeable without restrictions under the Securities Act (except
for those purchased in the offering by affiliates of the Company) immediately
upon the effectiveness of such registration. Such sales may have an adverse
effect on the market price of the Common Stock and could impair the Company's
ability to raise additional capital.
POSSIBLE STOCK PRICE VOLATILITY
The stock market, including the Nasdaq National Market, on which the
Company's shares are listed, has from time to time experienced significant price
and volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market price of the Common Stock, like
the stock prices of many publicly traded pharmaceutical and biotechnology
companies, has been and may continue to be highly volatile. The sale by the
Company's controlling shareholder or members of the Company's management of
shares of Common Stock, announcements of technological innovations or new
commercial products by the Company or its competitors, developments or disputes
concerning patent or proprietary rights, publicity regarding actual or potential
medical results relating to Niaspan or to products under development by the
12
<PAGE> 14
Company or its competitors, regulatory developments in either the United States
or foreign countries, public concern as to the safety of pharmaceutical and
biotechnology products and economic and other external factors, as well as
period-to-period fluctuations in financial results, among other factors, may
have a significant impact on the market price of the Common Stock. See "Price
Range of Common Stock."
CONTROL BY EXISTING SHAREHOLDER
Upon the completion of this offering, Michael Jaharis, the Chairman of the
Board of Directors of the Company and one of its founders, will beneficially own
approximately 51.9% of the outstanding Common Stock (approximately 49.1% if the
Underwriters exercise their over-allotment option in full), including 961,168
shares of Common Stock issuable to Kos Investments upon conversion of the
Convertible Note, assuming a conversion date of October 31, 1997. Accordingly,
this shareholder can control the outcome of certain shareholder votes, including
votes concerning the election of directors, the adoption or amendment of
provisions in the Company's Articles of Incorporation, and the approval of
mergers and other significant corporate transactions. This level of concentrated
ownership by one person, along with the factors described in "Risk
Factors -- Anti-Takeover Provisions," may have the effect of delaying or
preventing a change in the management or voting control of the Company.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Articles of Incorporation and Bylaws,
as well as the Florida Business Corporation Act, could discourage a third party
from attempting to acquire, or make it more difficult for a third party to
acquire, control of the Company without approval of the Company's Board of
Directors. Such provisions could also limit the price that certain investors
might be willing to pay in the future for shares of the Common Stock. Certain of
such provisions allow the Board of Directors to authorize the issuance of
preferred stock with rights superior to those of the Common Stock. Moreover,
certain provisions of the Company's Articles of Incorporation or Bylaws
generally permit removal of directors only for cause by a 60% vote of the
shareholders of the Company, require a 60% vote of the shareholders to amend the
Company's Articles of Incorporation or Bylaws, require a demand of at least 50%
of the Company's shareholders to call a special meeting of shareholders, and
prohibit shareholder actions by written consent.
DILUTION; ABSENCE OF DIVIDENDS
Purchasers of shares of Common Stock in this offering will experience
immediate and substantial dilution in net tangible book value per share.
Additional dilution is likely to occur upon exercise of outstanding stock
options. See "Dilution." The Company has not paid any cash dividends since
inception. The Company intends to retain earnings, if any, for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future.
13
<PAGE> 15
THE COMPANY
The Company's predecessor, Kos Holdings, Inc. ("Holdings"), which was
previously named Kos Pharmaceuticals, Inc., was incorporated in Florida on July
1, 1988. On June 25, 1996, Kos (named after the Greek island where Hippocrates
founded the science of medicine) was incorporated in Florida as the successor to
the business of Holdings. On June 30, 1996, all of the assets and all of the
liabilities of Holdings were transferred to the Company in exchange for shares
of common stock of the Company (the "Reorganization"). The Reorganization was
accomplished in order to transfer the assets and operations of Holdings to the
Company while preserving Holdings' net operating loss carryforwards and related
tax benefits for Holdings. As a result, the Company had no tax assets or
liabilities as of June 30, 1996. Kos Investments, is the sole shareholder of
Holdings. Kos Investments is controlled by, and serves as an investment vehicle
for, Michael Jaharis, one of the Company's founders and its Chairman. References
in this Prospectus to the Company include the operations of its predecessor,
Holdings, until June 30, 1996, and its wholly-owned subsidiary, Aeropharm. The
Company's principal executive offices are located at 1001 Brickell Bay Drive,
25th Floor, Miami, Florida 33131, and its telephone number is (305) 577-3464.
USE OF PROCEEDS
The principal purpose for this offering is to fund certain operating
requirements, including sales and marketing and research and development
expenses, to increase the Company's working capital, general corporate purposes
including possible acquisitions, and to effect an orderly disposition of a
portion of the shares of the Company's Common Stock owned by the Selling
Shareholders.
The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$40.7 million ($46.5 million if the Underwriters exercise their over-allotment
option in full), at an assumed public offering price of $43.25 (the last
reported sale price of the Common Stock on October 17, 1997), after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company. The Company intends to use approximately $10 million to fund
additional sales and marketing expenses associated with adding field sales
representatives and implementing promotional programs for Niaspan and
approximately $10 million to fund capital expenditures associated with
production of Niaspan and for research and development programs. The balance of
the net proceeds will be used for working capital and other general corporate
purposes. The Company also may use a portion of the net proceeds to acquire
businesses, technologies or products complementary to the Company's business,
although the Company does not currently have any material commitments for any
such acquisitions. Pending application of the proceeds as described above, the
Company intends to invest the net proceeds of this offering in short-term,
investment grade, interest-bearing securities.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "KOSP". The following table sets forth for the fiscal periods
indicated, the range of high and low closing bids for the Company's Common Stock
on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
FISCAL YEAR ENDED JUNE 30, 1997 ---- ---
<S> <C> <C>
Third Quarter (commencing March 7, 1997).................... $24.25 $19.25
Fourth Quarter.............................................. 30.00 22.00
FISCAL YEAR ENDED JUNE 30, 1998
First Quarter............................................... 40.00 27.00
Second Quarter (through October 17, 1997)................... 43.50 37.00
</TABLE>
The last sale price of the Common Stock on October 20, 1997 as reported on
the Nasdaq National Market was $ . As of September 2, 1997, there were 275
shareholders of record of the Company's Common Stock.
DIVIDEND POLICY
The Company intends to retain earnings, if any, for use in its business
and, therefore, does not anticipate paying any cash dividends in the foreseeable
future. Any future determination as to the payment of cash dividends will be
made at the discretion of the Board of Directors and will depend upon the
financial condition, capital requirements, and earnings of the Company, as well
as upon other factors that the Board of Directors may deem relevant. The Company
has not paid any cash dividends since inception.
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
June 30, 1997, and (ii) on an adjusted basis to reflect receipt and application
of the estimated net proceeds, after deducting underwriting discounts and
commissions and estimated expenses payable by the Company, from the sale of
1,000,000 shares of Common Stock pursuant to this offering, assuming a public
offering price of $43.25 per Share (the last reported sale price of the Common
Stock on October 17, 1997), and to reflect the conversion of the Convertible
Note. As of June 30, 1997, the Company's outstanding principal balance under the
Convertible Note was $13,395,000. See "Use of Proceeds" and "Certain
Transactions."
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Convertible Note............................................ $ 13,395 $ --
======== ========
Note payable................................................ $ 23 $ 23
-------- --------
Shareholders' equity:
Common stock, $.01 par value; 50,000,000 shares authorized;
14,772,500 shares issued and outstanding; and 16,783,668
issued and outstanding, as adjusted(1).................... 148 168
Additional paid-in capital.................................. 124,621 179,761
Deficit accumulated during the development stage............ (79,780) (79,780)
-------- --------
Total shareholders' equity.................................. 44,989 100,149
-------- --------
Total capitalization........................................ $ 45,012 $100,172
======== ========
</TABLE>
- ---------------
(1) Excludes 4,000,000 shares of Common Stock (3,950,000 as adjusted) authorized
to be issued under the Company's 1996 Stock Option Plan and 325,000 shares
of Common Stock reserved for issuance upon exercise of other outstanding
options. Options to acquire an aggregate of 2,749,300 shares of Common Stock
at a weighted average exercise price of $9.36 per share were issued and
outstanding as of September 2, 1997. As adjusted includes 961,168 shares of
Common Stock issuable to Kos Investments upon the conversion of the
Convertible Note, including accrued interest of $1,022,524, which will be
effective upon the consummation of this offering, and assuming such
conversion occurs on October 31, 1997.
15
<PAGE> 17
DILUTION
The net tangible book value of the Company at June 30, 1997, was
approximately $44,989,000, or $3.05 per share of Common Stock. Without taking
into account changes in net tangible book value after June 30, 1997, other than
to give effect to the conversion of the Convertible Note, the exercise of
certain stock options, and the sale of the 1,000,000 shares of Common Stock
offered by the Company hereby, at an assumed public offering price of $43.25 per
share (the last reported sale price of the Common Stock on October 17, 1997) and
after deducting the underwriting discounts and commissions and estimated
offering expenses payable by the Company, the Company's pro forma net tangible
book value at June 30, 1997, would have been approximately $100,149,000, or
$5.97 per share. This represents an immediate dilution in net tangible book
value of $37.28 per share to new investors purchasing shares in the offering and
an immediate increase in net tangible book value of $2.92 per share to existing
shareholders. The following table illustrates the per share dilution.
<TABLE>
<S> <C> <C>
Public offering price per share............................. $43.25
Net tangible book value before the offering............... $ 3.05
Increase in net tangible book value attributable to the
conversion of the Convertible Note and the exercise of
certain stock options.................................. .72
Increase in net tangible book value attributable to this
offering............................................... 2.20
------
Pro forma net tangible book value after the offering(1)..... 5.97
------
Dilution to new investors(2)................................ $37.28
======
</TABLE>
- ---------------
(1) Pro forma net tangible book value per share represents the amount of total
tangible assets of the Company less total liabilities, divided by 16,783,668
the number of shares of Common Stock outstanding as of June 30, 1997, after
giving effect to the sale of the 1,000,000 shares of Common Stock offered
hereby, 961,168 shares of Common Stock issuable to Kos Investments upon
conversion of the Convertible Note, assuming a conversion date of October
31, 1997, and the issuance of 50,000 shares in connection with the exercise
of certain options.
(2) Dilution is determined by subtracting pro forma net tangible book value per
share after the offering from the amount of cash paid by a new investor for
a share of Common Stock.
16
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data 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 Prospectus. The statement of
operations data for the five years ended June 30, 1997, and the balance sheet
data at June 30, 1993, 1994, 1995, 1996 and 1997 are derived from the financial
statements and the notes thereto of the Company audited by Arthur Andersen LLP.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, JULY 1, 1988
------------------------------------------------------------------- (INCEPTION) TO
1993 1994 1995 1996 1997 JUNE 30, 1997
----------- ----------- ----------- ----------- ----------- --------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues............................... $ -- $ 22 $ 14 $ -- $ -- $ 37
Operating Expenses:
Research and development............. 4,930 6,663 8,387 13,816 17,881 56,586
General, selling and
administrative..................... 1,232 1,619 1,614 1,772 5,522 14,394
Expense recognized on modification of
stock option grants(1)............. -- -- -- 5,436 -- 5,436
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses....... 6,162 8,282 10,001 21,024 23,403 76,416
Other income........................... (1) (2) -- -- -- (10)
Interest (income) expense, net......... 556 1,058 1,026 (14) (925) 2,489
Interest expense-related parties....... 29 50 26 -- 643 774
----------- ----------- ----------- ----------- ----------- -----------
Loss before minority interest.......... (6,746) (9,366) (11,039) (21,010) (23,121) (79,632)
Minority interest(2)................... -- (164) 1 16 -- (148)
----------- ----------- ----------- ----------- ----------- -----------
Net loss............................... $ (6,746) $ (9,530) $ (11,038) $ (20,994) $ (23,121) $ (79,780)
=========== =========== =========== =========== =========== ===========
Net loss per share(3).................. $ (0.59) $ (0.84) $ (0.97) $ (1.85) $ (1.87) $ (6.97)
Weighted average common shares in
computing net loss per share(3)...... 11,340,000 11,340,000 11,340,000 11,340,000 12,341,146 11,451,238
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET:
Cash and marketable securities......... $ 13 $ 18 $ 41 $ 193 $ 58,362
Working capital (deficit)(4)........... (15,235) (25,394) (1,129) (8) 39,987
Total assets........................... 686 1,574 2,355 2,281 65,106
Total debt............................. 14,742 24,790 -- -- 13,418
Deficit accumulated during the
development stage(5)................. (15,096) (24,626) (35,664) (56,658) (79,780)
Shareholders' equity (deficit)(4)...... (14,606) (24,136) 943 1,914 44,989
</TABLE>
- ---------------
(1) Reflects a non-cash charge associated with an extension of the exercise
period for stock options granted during 1988 to 1990 to the Company's Chief
Executive Officer and two independent consultants; no other material
economic terms of these options were changed.
(2) Represents the minority shareholder's interest in Aeropharm, which interest
was acquired by the Company in June 1996.
(3) See Note 2 of Notes to Consolidated Financial Statements for information
concerning the computation of net loss per share.
(4) In March 1995, Kos Investments assumed repayment of a note payable to a bank
in the principal amount of $30,372,000. This assumption was accounted for as
a transfer to Kos Investments and as an increase in additional paid-in
capital for the Company. See Note 6 of Notes to Consolidated Financial
Statements.
(5) In connection with the transfer on June 30, 1996, of assets and liabilities
from Holdings to the Company, net operating loss carry-
forwards, amounting to approximately $51.0 million and related tax benefits,
were not transferred to the Company. The Company can only utilize net
operating loss carryforwards sustained subsequent to June 30, 1996
(amounting to $22.3 million as of June 30, 1997), to offset future taxable
net income, if any. See "The Company" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
17
<PAGE> 19
MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
A predecessor corporation to the Company was formed in July 1988 under the
name of Kos Pharmaceuticals, Inc., principally to conduct research and
development on new formulations of existing prescription pharmaceutical
products. In June 1993, Aeropharm, a then majority-owned subsidiary of the
Company, was formed to conduct research and development activities on
aerosolized MDI products for the treatment of respiratory diseases. During June
1996, this predecessor corporation acquired the outstanding minority interest in
Aeropharm; changed its name to Holdings; established the Company as a
wholly-owned subsidiary under the name of Kos Pharmaceuticals, Inc.; and,
effective as of June 30, 1996, transferred all of its existing assets,
liabilities and intellectual property, other than certain net operating loss
carryforwards, to the Company. Accordingly, all references to the Company's
business in this Prospectus include the business and operations of Holdings
until June 30, 1996.
Since inception, the Company has been a development stage company engaged
primarily in the development of cardiovascular and respiratory pharmaceutical
products. On March 12, 1997, the Company completed its IPO. From inception
through the IPO, the Company had not recorded any significant revenues, and Kos
had funded its operations exclusively through equity contributions and a loan
from its majority shareholder. Through June 30, 1997, the Company had
accumulated a deficit from operations of approximately $79.8 million. In
connection with the transfer of operations from Holdings to the Company on June
30, 1996, net operating loss carryforwards amounting to approximately $51.0
million and related tax benefits were retained by Holdings and not transferred
to the Company. Consequently, the Company had no deferred tax assets as of June
30, 1996, and can only utilize net operating loss carryforwards sustained
subsequent to June 30, 1996 (amounting to $22.3 million as of June 30, 1997), to
offset future taxable net income, if any.
On July 28, 1997, the Company was granted clearance by the FDA to market
its lead product, Niaspan. The Company began shipping Niaspan to wholesalers in
mid-August 1997, and it began detailing Niaspan to physicians in September 1997.
Accordingly, effective with its September 30, 1997 reporting period, Kos will no
longer be classified as a development stage company. Based on preliminary,
unaudited financial information, the Company estimates that during its fiscal
quarter ended September 30, 1997 it had revenues of approximately $1.5 million
and it incurred a net loss that is significantly higher than in previous
quarters primarily due to increased expenses in connection with the launch of
Niaspan. The Company's Board of Directors has determined to change the end of
the Company's fiscal year from June 30 to December 31, effective with its
December 31, 1997 reporting period.
RESULTS OF OPERATIONS
Years Ended June 30, 1996 and 1997
The Company's research and development expenses increased from $13.8
million for the year ended June 30, 1996, to $17.9 million for the year ended
June 30, 1997. Of the total increase in research and development expenses, $3.0
million was attributable to the cost of entering into an agreement during
February 1997 with an unaffiliated generic drug manufacturer to resolve the
effects of a potential patent interference proceeding. Increases in personnel
costs and other costs, principally in connection with scale-up and validation of
the Company's Niaspan manufacturing facility, and in development costs
associated with various third-party agreements also contributed to the increased
research and development expenses for the year ended June 30, 1997. These
increases in research and development expenses were partially offset by the
absence in the year ended June 30, 1997, of the expenses for the clinical trials
completed during the year ended June 30, 1996, in support of the filing of a NDA
during May 1996 for Niaspan, and by the absence of a $1.0 million payment made
to Fuisz, during June 1996, to form a joint venture for the development of a
future product. This future product continues to be in the very early stages of
development and the Company cannot estimate when or if a commercially viable
product will be developed. The Company expects research and development
activities to increase as personnel are added and research activities are
expanded to support the development of additional products and the conduct of
additional clinical trials.
18
<PAGE> 20
General, selling and administrative expenses increased from $1.8 million
for the year ended June 30, 1996, to $5.5 million for the year ended June 30,
1997. This increase was due primarily to the commencement of the Company's
marketing activities, the hiring of additional personnel to support such
marketing activities and the Company's increased administrative functions and
professional fees. The Company expects that its general, selling and
administrative expenses will continue to increase in support of its marketing
efforts and development programs. During the year ended June 30, 1996, a $5.4
million non-cash charge was recorded for compensation expense associated with an
adjustment of the exercise period on certain stock options granted during 1988
to 1990 to an officer and two independent consultants of the Company.
From July 1, 1996, to the completion of the Company's IPO on March 12,
1997, the Company funded its operations from the proceeds of the Convertible
Note issued to Kos Investments, the sole shareholder of Holdings. As of June 30,
1997, the Company had outstanding borrowings of approximately $13.4 million
under this loan. As a result of the Convertible Note, the Company had
approximately $643,000 of interest expense for the year ended June 30, 1997,
compared with no such expense for the year ended June 30, 1996.
The Company received approximately $65.9 million in net proceeds from its
IPO. Of these proceeds, $58.3 million had not been utilized by the Company as of
June 30, 1997, and were primarily invested in U.S. Treasury and highly-rated
corporate securities. As a result of this investment in marketable securities,
the Company recorded approximately $903,000 of interest income for the year
ended June 30, 1997, compared with no such income for the year ended June 30,
1996.
The Company incurred a net loss of $21.0 million for the year ended June
30, 1996, compared with a net loss of $23.1 million for the year ended June 30,
1997.
Years Ended June 30, 1995 and 1996
The Company's research and development expenses increased from $8.4 million
for the fiscal year ended June 30, 1995, to $13.8 million for the year ended
June 30, 1996. This increase was attributable primarily to licensing and
development programs, hiring of additional personnel and increased clinical
trials costs. Of the total increase in research and development expenses for the
fiscal year ended June 30, 1996, $1.0 million was attributable to a payment by
the Company in connection with the execution of an agreement with Fuisz to form
a joint venture for the development of a future product. The parties have
generally agreed to share the expenses of developing the product. Hiring of
additional personnel principally related to manufacturing scale-up of certain of
the Company's products under development and to support the filing of a NDA for
Niaspan.
General, selling and administrative expenses increased from $1.6 million
for the fiscal year ended June 30, 1995, to $1.8 million for the fiscal year
ended June 30, 1996. The increase resulted primarily from the hiring of
additional personnel to support the Company's administrative functions and to
the acquisition of market research data. During the year ended June 30, 1996, a
$5.4 million non-cash charge was recorded for compensation expense associated
with an adjustment of the exercise period on certain stock options granted
during 1988 to 1990 to an officer and two independent consultants of the
Company.
During December 1994, the Company transferred its existing line of credit
facility with a local bank and its accumulated borrowings to Kos Investments.
The effect of this transfer was to increase the Company's paid-in capital in the
amount of its accumulated borrowings of $30.4 million which were outstanding on
the date of transfer. As a result of this transfer, the Company had $1.1 million
of interest expense for the fiscal year ended June 30, 1995 compared with no
such expense for the fiscal year ended June 30, 1996.
The Company incurred a net loss of $11.0 million for the fiscal year ended
June 30, 1995, compared with $21.0 million for the fiscal year ended June 30,
1996.
LIQUIDITY AND CAPITAL RESOURCES
From July 1, 1996, until the completion of the Company's IPO, the Company
financed its operations from the proceeds of the Convertible Note, which had
unpaid principal and interest balances of $13,395,000 and $643,000,
respectively, as of June 30, 1997. The Convertible Note is to be repaid by its
conversion into Common Stock upon the consummation of this offering. At June 30,
1997, cash and cash equivalents totaled
19
<PAGE> 21
approximately $33.3 million, and available-for-sale securities totaled $25.1
million, substantially all of which were invested in short-term U.S. Treasury
and highly-rated corporate securities. The Company expects to continue to incur
significant costs in connection with the commercialization of Niaspan and its
ongoing research and development activities.
The Company's primary uses of cash to date have been in operating
activities to fund research and development, including clinical trials, and
general, selling, and administrative expenses. As of June 30, 1997, the
Company's net investment in fixed assets was approximately $3.3 million. The
Company expects that additional equipment will be acquired and leasehold
improvements will be made as the Company increases its research and development
activities and in order to support manufacturing requirements. The Company had
no material commitments for capital expenditures as of June 30, 1997.
Although the Company anticipates that the net proceeds from the sale of
shares of Common Stock offered by the Company hereby, along with cash, cash
equivalents, available-for-sale securities and expected interest income thereon,
will be sufficient to fund the Company's operations for at least the next 12
months, the Company's future cash requirements will be substantial and will
depend on many factors, some of which are outside the control of the Company.
Such factors include the problems, delays, expenses and complications frequently
encountered by development stage companies in connection with the commercial
launch of its first product; the progress of the Company's research,
development, and clinical trial programs; the costs and timing of seeking
regulatory approvals of the Company's products under development; the Company's
ability to obtain such regulatory approvals; the success of the Company's sales
and marketing programs; costs in filing, prosecuting, defending and enforcing
any patent claims and other intellectual property rights; the extent and terms
of any collaborative research, manufacturing, marketing, joint venture or other
arrangements; and changes in economic, regulatory, or competitive conditions or
the Company's planned business. The Company may seek additional funding through
public or private equity or debt financings or through collaborations. To the
extent the Company raises additional capital by issuing equity securities,
ownership dilution to existing shareholders will result and future investors may
be granted rights superior to those of existing shareholders. There can be no
assurance, however, that additional funding will be available to the Company on
acceptable terms, or at all.
FORWARD LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this Prospectus
that are not related to historical results are forward looking statements.
Actual results may differ materially from those projected or implied in the
forward looking statements. Further, certain forward looking statements are
based upon assumptions of future events, which may not prove to be accurate.
These forward looking statements involve risks and uncertainties including but
not limited to the Company's future cash flows, sales, gross margins, and
operating costs, the effect of conditions in the pharmaceutical industry and the
economy in general, regulatory developments, legal proceedings, as well as
certain other risks. Subsequent written and oral forward looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by cautionary statements in this paragraph and
elsewhere in this Prospectus, including the "Risk Factors" section hereof, and
in other filings by the Company with the Securities and Exchange Commission.
20
<PAGE> 22
BUSINESS
OVERVIEW
Kos Pharmaceuticals, Inc. is a fully integrated specialty pharmaceutical
company engaged in developing and commercializing proprietary prescription
pharmaceutical products, primarily for the treatment of certain chronic
cardiovascular and respiratory diseases. The Company developed and is currently
manufacturing and marketing its lead product, Niaspan. The Company intends also
to manufacture its products under development and to market such products
directly through its own specialty sales force. The Company's cardiovascular
products under development consist of controlled-release, once-a-day, oral
dosage formulations. The Company's respiratory products under development
consist of aerosolized inhalation formulations to be used primarily with the
Company's proprietary inhalation devices.
On July 28, 1997, Kos received clearance from the FDA to market Niaspan.
Niaspan is the first once-a-day formulation of niacin approved by the FDA for
the treatment of mixed lipid disorders, which are primary risk factors for
coronary heart disease. In addition, Niaspan is the only patient-friendly
lipid-altering product that moves all of the major lipid components in the
proper direction. Niaspan has been approved for the following indications: (i)
to reduce elevated total cholesterol, LDL cholesterol, and apolipoprotein B;
(ii) to reduce elevated total and LDL cholesterol when used in combination with
a bile-acid binding resin; (iii) to reduce elevated serum triglycerides; (iv) to
reduce the risk of recurrent nonfatal myocardial infarction; (v) to promote the
regression or slow the progression of atherosclerosis when used in combination
with a bile-acid binding resin. The Company began shipping Niaspan to
wholesalers in mid-August 1997, and it began detailing Niaspan to physicians in
September 1997.
The Company was founded in 1988 by the former Chief Executive Officer,
Chief Operating Officer, and Director of Product Development of Key
Pharmaceuticals, Inc., which was acquired by Schering-Plough Corporation in June
1986. The Company believes that substantial market opportunities exist for
developing drugs that are reformulations of existing approved prescription
pharmaceutical products but which offer certain safety advantages (such as
reduced harmful side effects) or patient compliance advantages (such as
once-a-day rather than multiple daily dosing regimens) over such products. Kos
believes that developing proprietary products based on currently approved drugs,
rather than new chemical entities, may reduce regulatory and development risks
and, in addition, may facilitate the marketing of such products because
physicians are generally familiar with the safety and efficacy of such products.
Six of the Company's seven products under development require NDA filings with
the FDA. Although such NDA filings are more expensive and time consuming,
developing products that require NDA approval offers several advantages compared
with generic products, including potential for higher gross margins, limited
competition resulting from significant clinical and formulation development
challenges, and a three-year statutory barrier to generic competition.
STRATEGY
The Company's business strategy includes the following fundamental
elements:
Select Products with Unrealized Commercial Potential. The Company develops
products that address unmet medical needs through formulation improvements
of existing drugs or distinctive marketing efforts. Kos believes that the
safety or patient compliance associated with certain currently marketed
drugs can be improved, thus providing substantial market opportunities with
the successful development of proprietary formulations. In addition, Kos
believes that substantial market opportunities exist that can be addressed
by marketing its products through a direct sales force that can focus on
specialist physicians and provide those physicians with specific
information regarding the therapeutic benefits of the Company's products.
Focus Initially on the Cardiovascular and Respiratory Markets. Kos has
initially concentrated its product development efforts on the
cardiovascular and respiratory markets because they are large and growing
rapidly and include many chronic diseases requiring long-term therapy.
Management believes that as a result of physician prescribing patterns in
these markets, a relatively small, direct sales force can effectively
market its products. The Company's management team has substantial
experience in identifying product opportunities and marketing products in
these two therapeutic categories.
21
<PAGE> 23
Develop Proprietary Formulations of Currently Approved Pharmaceutical
Compounds. Kos believes that by developing proprietary products based on
currently approved drugs, rather than NCEs, the Company can reduce
regulatory and development risks and shorten the product development cycle.
Further, developing products that require NDA approval offers several
advantages compared with generic products, including the potential for
higher gross margins, limited competition resulting from significant
clinical and formulation development challenges, and a three-year statutory
barrier to generic competition. The Company's management and scientific
personnel have significant experience in formulation technology using
controlled-release and aerosolized delivery methods.
Manage Clinical Development. The Company managed the extensive clinical
trials for Niaspan, and Kos intends to continue to manage directly the
clinical development of future products. The Company believes that its
commitment to this process helps to ensure the quality of clinical
development, allows the Company to better coordinate its regulatory
objectives and maximize the marketing utility of its clinical trials.
Manufacture Products Internally. In order to maximize the quality of
developed products, assure compliance with regulatory requirements, and
minimize costs, the Company manufactures Niaspan and intends to manufacture
internally all of its solid-dose (i.e., tablet) and aerosol products.
Moreover, the Company believes that certain manufacturing challenges
associated with aerosol formulations present a barrier to entry in the
aerosol pharmaceutical market. The Company's management has substantial
experience in manufacturing solid-dose and aerosol products. Kos estimates
that it has sufficient capacity, with limited additional capital
expenditures, to accommodate sales volume for such products through the
year 2000.
Market Directly Through Its Specialty Sales Force. The Company markets
Niaspan and intends to market its products under development through a
direct sales force focused on providing education-oriented product
information to selected specialist physicians. In areas outside the United
States, Kos intends initially to market certain of its products through
licensing arrangements with third parties, although it may establish direct
sales and marketing capabilities in selected areas.
Leverage Core Competencies Through Alliances with Corporate and Research
Partners. The Company intends to expand its product portfolio by licensing
or acquiring products or technologies that would be complementary to the
marketing efforts of its specialty sales force, or by entering into other
development collaborations with third parties. Additionally, the Company
has entered into certain development collaborations with third parties and
is sponsoring basic research at two universities. The Company intends to
enter into additional alliances in the future.
NIASPAN
Summary. On July 28, 1997, the Company received clearance from the FDA to
market Niaspan for the treatment of mixed lipid disorders. Niaspan is the first
once-a-day, controlled-release niacin product approved by the FDA for the
treatment of mixed lipid disorders. The Company began shipping Niaspan to
wholesalers in mid-August 1997, and began detailing the product to physicians
during September 1997.
Niaspan is indicated for the treatment of mixed lipid disorders, a
condition typically associated with elevated cholesterol involving multiple
lipids that are primary risk factors for coronary heart disease. The Company has
conducted three double-blinded, placebo-controlled clinical trials in which
Niaspan produced statistically and clinically significant changes in all of the
major lipid components without generating treatment-related serious adverse
events. Moreover, in a two-year safety study, there were no serious adverse
events that were conclusively treatment-related and fewer than 1% of patients
discontinued use of Niaspan because of clinically significant elevations in
liver enzyme levels.
Based principally on the results of the Niaspan clinical trials as well as
other long-term interventional studies evaluating niacin for the reduction of
certain coronary events, Niaspan has been approved for the following
indications: (i) to reduce elevated total cholesterol, LDL cholesterol, and
apolipoprotein B; (ii) to reduce elevated total and LDL cholesterol when used in
combination with a bile-acid binding resin; (iii) to reduce elevated serum
triglycerides; (iv) to reduce the risk of recurrent nonfatal myocardial
infarction; (v) to
22
<PAGE> 24
promote the regression or slow the progression of atherosclerosis when used in
combination with a bile-acid binding resin.
Lipid-Altering Market. Since the mid-1980's, clinical research has
revealed that an elevated level of LDL cholesterol, a condition referred to as
hyperlipidemia, is a critical atherogenic risk factor for CHD. Hyperlipidemia is
a lipid metabolism disorder that results in excess lipids in the blood, which
can block arteries and create adverse coronary events, such as acute angina and
myocardial infarction. In addition to elevated LDL cholesterol ("bad"
cholesterol), low levels of HDL cholesterol ("good" cholesterol) and high levels
of triglycerides are risk factors for CHD according to the National Institutes
of Health ("NIH") and the American Heart Association ("AHA"). HDL cholesterol is
considered to be protective against CHD because it removes harmful cholesterol
from blood vessels and peripheral tissues. Moreover, recent research has
indicated that an elevated level of lipoprotein (a) ("Lp(a)"), an LDL-like
cholesterol molecule, may be as important an independent risk factor for CHD as
elevated total cholesterol. As a result of the increased awareness and the
prevalence of mixed lipid disorders, lipid-altering drugs have emerged as one of
the largest and fastest growing pharmaceutical product segments. In 1996, the
market for cholesterol-reducing drugs approximated $3.0 billion in the United
States and $3.0 billion outside the United States.
While the risks of mixed lipid disorders are becoming well recognized, the
condition remains significantly untreated worldwide. To address this large unmet
medical need, the NIH convened a panel of cholesterol research experts, the
National Cholesterol Education Program ("NCEP"), to establish recommended
cholesterol levels, principally total and LDL cholesterol, and to establish
other risk factors for CHD. Based on extensive research conducted during the
last 20 years, the NCEP established guidelines consisting of recommended lipid
goals and intervention criteria, such as diet, exercise, and drug therapies, for
reducing the risk of heart disease and heart attack. According to the
guidelines, an estimated 56 million people in the United States have levels of
LDL cholesterol that exceed the levels recommended by the NCEP and,
approximately 14 million of these persons would require diet, exercise, and drug
therapies to achieve adequate reduction in cholesterol levels. The Company
estimates that more than half of these 14 million people have one or more other
lipid components that are outside the levels recommended by the NIH and the AHA.
Additionally, it is estimated that as many as 30% of the 11 million patients in
the United States with confirmed CHD do not have elevated LDL cholesterol, but
do have clinically deficient HDL cholesterol levels. Further, an elevated level
of Lp(a) is estimated to be present in 20% of the U.S. adult population or
nearly 40 million adults. The Company believes that the market for
lipid-altering drugs should grow as awareness and diagnosis of lipids,
particularly those other than LDL cholesterol, continue to increase.
When diet and exercise fail to adequately control cholesterol levels,
physicians typically prescribe lipid-altering medications. Physicians can choose
from the following four classes of medications when attempting to alter lipid
levels: HMG CoA reductase inhibitors, or "statins" (e.g., lovastatin); fibric
acid derivatives (e.g., gemfibrozil); bile-acid binding resins (e.g.,
cholestyramine); and niacin. The statins are the most widely prescribed
lipid-altering medication, accounting for about $2.6 billion in U.S sales in
1996 and 77% of the 42 million prescriptions for lipid-altering medication in
the United States in 1996. Generally, the statins are highly effective in
lowering total and LDL cholesterol but have limited impact in raising HDL
cholesterol or in substantially reducing triglycerides. Gemfibrozil, the major
fibric acid derivative sold in the U.S., accounted for approximately 17% of
total lipid-altering prescriptions in 1996. Gemfibrozil is most commonly
prescribed to reduce triglycerides and has limited efficacy on total, LDL, and
HDL cholesterol. The remaining product categories, including bile-acid binding
resins and existing preparations of niacin, represented approximately 6% of U.S.
lipid-altering prescriptions in 1996.
Overview of Niacin. Niacin is a water-soluble vitamin that has long been
recognized as an effective pharmacologic agent for the treatment of mixed lipid
disorders, including elevated LDL and low HDL cholesterol. In numerous
independent studies performed during the past 30 years, niacin has proven
effective in reducing total cholesterol, LDL cholesterol, and triglycerides as
well as in raising HDL cholesterol. Additional clinical studies have indicated
that long-term treatment with niacin reduces morbidity and mortality in patients
with CHD. The NIH recommends niacin as first-line drug therapy because of its
low cost and its efficacy in altering multiple lipid components.
23
<PAGE> 25
Although niacin has demonstrated favorable efficacy on most major lipid
components, adverse side effects associated with currently available
preparations of niacin have prevented it from becoming widely used to treat
hyperlipidemia. Immediate-release ("IR") preparations of niacin generally are
administered three times daily and can cause multiple flushing episodes,
characterized primarily by facial redness and tingling, often accompanied by
rash. Because at least two IR niacin doses are usually taken during the daytime,
frequent flushing episodes are often embarrassing as well as uncomfortable.
Consequently, in many patients, these flushing episodes, particularly in the
daytime, result in non-compliance with the recommended dosing regimen for the
product or complete discontinuation of its use. In order to remedy the side
effects associated with IR niacin, several manufacturers have developed
sustained-release ("SR") preparations of niacin, typically administered twice a
day. Such SR preparations have not been approved by the FDA for treatment of
lipid disorders, and their administration frequently has been associated with a
high incidence of liver toxicity. Consequently, despite its broad favorable
effect on multiple lipids and its position as the NIH's recommended first-line
drug therapy for treatment of hyperlipidemia, U.S. sales of niacin were
approximately $14 million in 1996. The Company believes that a significant
opportunity exists to expand the market for niacin with an improved formulation
that maintains the compound's favorable efficacy profile while reducing adverse
events.
Niaspan Product Development. Kos has developed a controlled-release
hydrogel matrix formulation of niacin, which is to be dosed once-a-day at
bedtime, that reduces the intolerable side effects and frequent safety problems
characteristic of currently available niacin formulations. Kos believes that it
is the unique controlled-release nature of its Niaspan formulation in
conjunction with Niaspan's Once-A-Night(TM) dosing regimen that minimizes
adverse events while maintaining niacin's positive effect on lipids. Kos also
believes the recommended dosing regimen for Niaspan contributes to the positive
effects on lipid levels because of the chronobiology of lipid metabolism.
Although niacin's efficacy on multiple lipid components has been well
documented for many years, relatively little has been published about niacin's
mechanism of action, its complete metabolic profile, or other elements of its
pharmacology. As a result, the Company's clinical development of Niaspan has
included extensive pharmacokinetics research, including 14 studies involving 350
healthy volunteers, as well as two pilot studies, three pivotal trials, and a
long-term open label safety study. The Company's clinical development program,
which has studied the effects of Niaspan in 1,212 persons, is summarized in the
table below.
NIASPAN CLINICAL DEVELOPMENT PROGRAM
<TABLE>
<CAPTION>
NIASPAN DOSING
SUBJECTS PERIOD
-------- -------------
<S> <C> <C>
14 PHARMACOKINETIC STUDIES.................................. 350 Up to 3 wks.
2 PILOT STUDIES............................................. 39 2 mos.
DOUBLE-BLINDED PLACEBO CONTROLLED PIVOTAL TRIALS:
Niaspan 1,500 mg.......................................... 76 4 mos.
Niaspan 1,000 mg and 2,000 mg............................. 82 4 mos.
Niaspan dose escalation to 3,000 mg....................... 87 6 mos.
LONG-TERM OPEN LABEL SAFETY STUDY........................... 723 22 mos.
Memo:
Subjects included in NDA.................................. 633
Total Niaspan Subjects.................................... 1,212
</TABLE>
The Company's NDA for Niaspan was based principally on three
double-blinded, placebo-controlled pivotal clinical trials and one long-term,
open label safety study involving an aggregate of 633 Niaspan-treated subjects
at 17 sites throughout the United States. In each of these studies, involving
males and females ages 21 to 75, subjects were evaluated for the percentage
change from baseline in LDL cholesterol, HDL cholesterol, total cholesterol,
triglycerides, apolipoprotein B, Lp(a) and apolipoprotein A-1. Safety endpoints
included objective measurements such as liver enzyme levels and levels of
fasting glucose and uric acid as well as subjective endpoints, such as flushing
and symptoms of gastrointestinal distress. Additionally, the Company
24
<PAGE> 26
is conducting a 22-month, open label safety study, in 723 patients; results from
133 patients were included in the Company's NDA submission for Niaspan in May
1996. Approximately 380 patients have completed the study, of whom 142 have been
dosed concomitantly with a statin or a bile-acid binding resin. Approximately 10
patients have yet to complete the twenty-two months of dosing; these patients
are expected to complete the study in 1997.
No clinically significant serious adverse safety trends arose during the
clinical trials of Niaspan. Of all patients treated with Niaspan in the pivotal
and long-term safety trials, only four patients with normal liver function tests
at baseline showed clinically significant elevations in liver function tests
(defined as elevations greater than three times the upper limit of normal)
during treatment with Niaspan and only two patients treated with Niaspan
discontinued the drug because of elevations in liver function tests. Niaspan is
generally well tolerated. Flushing occurred, on average, less than two times per
patient per month, and such episodes subsided over time. The Company believes
that such flushing episodes will be acceptable to most patients when they do
occur due to the combination of Niaspan's formulation, Niaspan's
Once-A-Night(TM) dosing regimen, and proper dose titration. See "Cardiovascular
Products -- Niaspan -- Marketing Strategy for Niaspan."
The following table sets forth results with respect to principal efficacy
endpoints of the Company's three double-blinded, placebo-controlled pivotal
trials and the one open label long-term safety study of Niaspan. In these
studies, Niaspan consistently showed clinically and statistically significant
changes (p<0.001 compared with baseline) in all of the major lipids measured,
including those considered to be most important in the development of CHD.
NIASPAN LIPID-ALTERING PROFILE(1)
<TABLE>
<CAPTION>
Percentage Change
from Baseline(2)
--------------------
<S> <C>
Total cholesterol........................................... Decreased 10% to 12%
LDL cholesterol............................................. Decreased 14% to 18%
HDL cholesterol............................................. Increased 22% to 32%
Triglycerides............................................... Decreased 24% to 35%
Lp(a)....................................................... Decreased 24% to 36%
</TABLE>
- ---------------
(1) Intent-to-treat population at 2,000 mg Once-A-Night(TM).
(2) Statistically significant for all indicated lipids at p<0.001.
In the clinical trials performed by the Company, Niaspan was shown to
decrease total and LDL cholesterol levels less than reported by statin
manufacturers in the 1997 Physician's Desk Reference (the "PDR"). These data
also indicate, however, that Niaspan is substantially more effective than the
statins in raising HDL cholesterol and lowering triglycerides. Numerous
independent clinical studies evaluating the effects of statins on Lp(a) indicate
that the statins have little or no effect on reducing Lp(a), whereas Niaspan
significantly reduces Lp(a).
Marketing Strategy for Niaspan. The Company intends to market Niaspan
directly to the specialist physicians within the cardiovascular market who are
among the leading prescribers of lipid-altering medications. Specifically, the
Company believes that there are approximately 18,000 such "lipid-management
specialists," consisting of cardiologists, endocrinologists, internists, and
general and family practitioners, who accounted for approximately 40% of the
total prescriptions for lipid-altering medications in the United States in 1996.
The Company began detailing Niaspan to physicians in September 1997.
As part of the Company's detailing effort, three-week Niaspan titration
starter packs are given to physicians as a promotional item to start their
patients on Niaspan. These titration packs generally are dispensed without a
prescription. Further, physicians being detailed by the Company may have had
unsatisfactory experiences with currently available generic formulations of
niacin, the active ingredient in Niaspan. The Company believes, therefore, that
during the initial months following the launch of Niaspan, many physicians may
start only a limited number of selected patients on Niaspan in order to confirm
its
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<PAGE> 27
efficacy, safety and tolerability. Consequently, the Company believes that
during this initial three-to-six-month period prescriptions for Niaspan are
likely to increase modestly.
As of September 2, 1997, the Company had a 111 person sales and marketing
organization including 94 field sales representatives. The majority of the sales
and marketing personnel have considerable previous experience with major
pharmaceutical companies detailing products to cardiovascular physicians. Kos
began actively detailing Niaspan during September 1997. The Company intends to
increase the size of its sales force to more than 125 representatives during
1998. The Company estimates that it will be able to detail each of the
specialist physicians up to six times a year with such a sales force. Kos
believes that the significant prior experience of members of its management team
in recruiting and managing specialty sales forces in this market, aided by an
attractive merit-based sales compensation plan, will allow the Company to
continue to grow its own specialty sales force following the launch of Niaspan.
Niaspan is the only FDA approved patient-friendly lipid-altering product
that can move all of the major lipid components in the proper direction,
consistent with the NIH recommendation for lipid management. The Company intends
to inform the specialist physicians as to Niaspan's potentially effective role
in lipid management for many patients and the manner in which Niaspan achieves
its safety and efficacy profile. The Company's marketing program will be
implemented through personal detailing to physicians where possible as well as
through non-personal promotion, including telemarketing, direct mail, medical
journal reprints, medical symposia, and clinical discussion groups.
The Company also intends to educate patients on the benefits and proper use
of Niaspan through brochures and product sample "starter packs" to encourage
proper dose titration. Such sample starter packs include increasing tablet
dosage strengths for the first three weeks of titration therapy. The sample
starter packs are given to physicians as a simple method for doctors to start
their patients on a proper Niaspan titration, at no cost to and with maximum
convenience for the patient. Accordingly, such starter packs will not be
recognized as prescriptions. Following the three-week titration phase, the
initial prescription strength will consist of a 1000 mg dose that the patient
maintains for at least the next four weeks of therapy. Following the
recommendations of their physicians, patients are expected to titrate to higher
dosing strengths of up to 2000 mg per day based on therapeutic response and
tolerability.
Information delivered by the Company to physicians and patients will
include a discussion about the flushing side effects of Niaspan, including the
importance of proper dose titration and adherence to the Once-A-Night(TM) dosing
regimen to reduce this side effect. Although most patients taking Niaspan will
flush occasionally, the Company believes that the combination of Niaspan's
formulation, its dosing regimen, and proper dose titration should result in an
incidence of flushing episodes that are tolerable for most patients. Niaspan's
dosing regimen provides for the drug to be taken once-a-day at bedtime;
therefore, any flushing episodes will normally occur while the patient is
sleeping. The Company believes that flushing during the night will not cause the
discomfort or embarrassment that often accompanies the multiple daytime flushing
episodes that occur with IR niacin.
The Company has priced Niaspan below the statins. The Company believes that
Niaspan's relatively low selling price combined with its favorable effects on
multiple lipid components should make it attractive to the managed care market.
The Company plans to expand the number of managed care sales specialists it has
hired to address this market segment. The Company plans to license marketing
rights to an established marketing partner in major international markets. To
date, the Company has had no material discussions concerning such possible
arrangements with other companies.
PRODUCTS UNDER DEVELOPMENT
Six of the Company's seven products under development require NDA filings.
Although NDA approvals are generally associated with products consisting of
NCEs, which require extensive preclinical studies and clinical trials, the
Company's products under development consist of new formulations of existing
drugs. For products currently under development, the Company typically will be
required to perform Phase I clinical pharmacology and Phase III safety and
efficacy pivotal trials; limited preclinical toxicology studies will also be
required on some products. Compared with the development of NCEs, the Company
believes that such a product development strategy generally reduces regulatory
risks and development costs and shortens overall
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<PAGE> 28
development time. In order to take advantage of a certain market opportunity,
the Company is developing one product that requires an ANDA filing. The Company
has retained worldwide marketing rights for all of the products set forth in the
table below.
PRODUCTS UNDER DEVELOPMENT
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION AND REGULATORY
PRODUCT THERAPEUTIC APPLICATION FILING DEVELOPMENT STATUS
------- ----------------------- ---------- ------------------
<S> <C> <C> <C>
CARDIOVASCULAR
Nicostatin(TM) Combination of Niaspan and a NDA Formulation; clinical
currently marketed statin pharmacology expected to
for lipid altering commence in 1998
Isosorbide-5-Mononitrate(1) Nitrate for angina ANDA Clinical pharmacology
completed in June 1997;
ANDA expected to be filed
in 1998
Captopril(1) ACE inhibitor for NDA Initial clinical pharmacology
hypertension completed in 1997;
formulation modification
likely to be required
RESPIRATORY (NON-CFC, METERED-DOSE INHALERS)
Triamcinolone(2) Inhaled steroid for asthma NDA Formulation; initial clinical
pharmacology expected to
commence in 1997
Albuterol Beta-agonist for asthma NDA Formulation; clinical
pharmacology expected to
commence in 1998
Flunisolide(2) Inhaled steroid for asthma NDA Formulation; clinical
pharmacology expected to
commence in 1999
Triamcinolone or Inhaled steroid or NDA Formulation; clinical
Albuterol(3) beta-agonist with novel pharmacology expected to
device for treating asthma, commence in 1999
primarily for the pediatric
and geriatric markets
</TABLE>
- ---------------
(1) Being developed in collaboration with Fuisz. See "Collaborations."
(2) Utilizing the Company's proprietary breath coordinated inhaler, currently
under development.
(3) Utilizing the Company's proprietary breath actuated inhaler, currently
under development.
Statements in the foregoing table and in the discussion that follows
concerning the development status and the Company's expectations regarding its
products under development are forward looking statements. These statements are
subject to significant risks and uncertainties that could cause such statements
to be inaccurate. Such risks and uncertainties include safety and efficacy
problems frequently encountered when formulating new drug compounds; delays and
expenses incurred during clinical testing; delays and expenses incurred during
the regulatory approval process; delays and expenses incurred when filing,
prosecuting, defending or enforcing patent claims or other intellectual property
rights; changes in the target markets for such products; changes in economic
conditions generally; and other risks and uncertainties. The Company may
determine to discontinue or delay the development of any or all of its products
under development at any time.
27
<PAGE> 29
OTHER CARDIOVASCULAR PRODUCTS
The Company is developing once-a-day, controlled-release prescription
products for the treatment of lipid disorders, ischemic heart disease (including
angina), and hypertension. In 1996, such disease segments of the cardiovascular
market achieved aggregate sales in the United States of approximately $11.5
billion.
Nicostatin(TM)
Kos is developing internally Nicostatin(TM), which is a combination of
Niaspan and a currently marketed statin for the treatment of mixed lipid
disorders. The combination product will require a NDA. The Company believes that
a Once-A-Night(TM) tablet combining such lipid-altering compounds represents an
effective modality for treating patients with mixed lipid disorders. The Company
also believes that this Once-A-Night(TM) product should offer significant
improvements in patient compliance compared with taking each product
independently under its recommended dosing regimen. The potential market for the
combination product consists of patients with mixed lipid disorders, including
high total and LDL cholesterol, high triglycerides, or low HDL cholesterol.
Nicostatin(TM) is currently in the formulation development stage, and the
Company expects that clinical pharmacology trials will commence in 1998. By or
near the time of completion of the development of the combination product, the
patent for the statin component of the compound will have expired, which will
enable the Company to market its combination product following FDA approval.
Although it is expected that generic versions of the statin component will be
marketed following patent expiration, the Company believes that the positive
effects of the combination product on multiple lipid components and the
convenience associated with taking a single dose should support a price premium
compared with taking Niaspan and a generic version of such statin separately.
The combination product will be marketed by the same Kos specialty sales
force that is marketing Niaspan to essentially the same group of physicians.
Isosorbide-5-Mononitrate
Kos is developing, in collaboration with Fuisz, a once-a-day,
controlled-release, oral, generic version of IS-5-MN for the prophylactic
treatment of angina pectoris. This product, which will be a branded generic
requiring an ANDA filing, is being developed in order to provide Kos with a
product for the anti-angina market and to expand its cardiovascular product
line. A formulation of IS-5-MN has been developed and the Company completed an
initial clinical pharmacology study during April 1997. The Company expects to
complete its development, scale-up, and clinical program and file an ANDA for
IS-5-MN during 1998. The Company intends to leverage its specialty sales force
by having its sales representatives market IS-5-MN during physician office
visits while detailing Niaspan.
Angina pectoris is a cardiovascular related disorder that is characterized
by thoracic pain and a feeling of suffocation, most often due to anoxia (lack of
oxygen supply) to the myocardium precipitated by physical exertion or
excitement. The treatment of angina pectoris includes several classes of
therapeutic compounds including nitrates, beta-blockers, and calcium channel
blockers. The beta-blockers and calcium channel blockers, as well as certain
long-acting forms of nitrates, are the preparations most commonly prescribed for
prophylaxis of chronic angina pectoris. In 1996, U.S. sales of nitrate products
approximated $626 million. The only currently marketed once-a-day mononitrate is
the fastest growing product within the nitrate segment; U.S. sales of this
product grew by 124% in 1996 from 1995. Kos is aware of at least two other
companies that are developing a once-a-day formulation of IS-5-MN.
Captopril
The Company is also developing, in collaboration with Fuisz, a once-a-day,
controlled-release captopril, an ACE inhibitor for the treatment of hypertension
for which a NDA is required. At present, captopril is dosed as an IR tablet to
be taken two or three times daily. The U.S. patent on the branded product
expired in 1996, and there currently exist many generic forms of this
immediate-release product. The Company believes
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<PAGE> 30
that a once-a-day formulation of captopril would provide a competitive advantage
compared with the generic versions of IR captopril.
The Company's IND application for captopril was accepted by the FDA during
the first half of 1997, and the Company subsequently completed an initial
clinical pharmacology study. Based on a preliminary analysis of the results, the
formulation likely will require modification. Currently, the Company, in
collaboration with Fuisz, is re-evaluating the development program for captopril
in consideration of the feasibility of such formulation modification. If the
formulation is modified, it would delay remaining clinical pharmacology studies
required for approval of the product. There can be no assurances that the
Company will elect to continue the development of captopril, or if it elects to
do so, that the Company, in collaboration with Fuisz, would be able to
successfully develop a once-a-day captopril.
Hypertension is a major health care problem in the United States that
accounted for approximately half of all cardiovascular related physician visits
in 1996. In 1996, U.S. sales of products addressing the antihypertensive disease
segment were estimated to be in excess of $5.9 billion. In 1996, the U.S. ACE
inhibitor market was approximately $2.7 billion in sales. In its existing
two-to-three times a day dosage forms, sales of captopril in the United States
were approximately $286 million in 1996. Kos is aware of one other company that
is developing a once-a-day formulation of captopril.
RESPIRATORY PRODUCTS
The Company is developing four respiratory products, dispensed in
aerosolized MDI devices, for the treatment of asthma. All of the MDI products
are being developed with non-CFC propellants, which are generally regarded as
environmentally safe, and all products require a NDA filing with the FDA. The
Company's management has considerable experience in formulating, manufacturing,
and marketing aerosolized products.
Currently, most MDI products use CFC propellants. Although, due to
environmental concerns, the use of CFC propellants has been banned or severely
restricted for most worldwide commercial uses, CFC's are still permitted in
limited amounts for MDI pharmaceutical products under an "essential use"
exemption available under the Montreal Protocol on Substances that Deplete the
Ozone Layer. It is expected, however, that such "essential use" exemptions will
grow more limited and will eventually expire. In anticipation of these future
restrictions, and in light of market conditions, the Company does not intend to
continue the development of a CFC-based generic albuterol product that the
Company is currently testing in a clinical pharmacology trial. Thus, all of the
Company's proposed MDI products are being developed with non-CFC propellants.
See "Government Regulations" and "Patents and Proprietary Rights."
Market Overview
The respiratory market consists of the asthma and allergy segments. In
1996, the U.S. market for respiratory prescription drugs was $3.4 billion, of
which the market for asthma products was $2.5 billion. Asthma is a complex
respiratory disorder that results in troubled breathing due to inflammation and
constriction of the bronchial airways, caused by factors including allergens,
such as dust and pollen, or vigorous exercise. Asthma is principally treated by
two classes of therapeutic compounds, bronchodilators and anti-inflammatory
agents. Bronchodilators, which are used to open constricted airways during
asthma, include beta-agonists (e.g., albuterol), xanthines (e.g., theophylline)
and anti-cholinergics (e.g., ipratropium). Anti-inflammatories, which include
cromolyns (e.g., cromolyn sodium) and corticosteroids (e.g., triamcinolone,
beclomethasone, and flunisolide) are used to diminish inflammation causing the
asthma. Each of these therapeutic compounds, except xanthines, is delivered
primarily through MDI devices. Drug delivery through such MDI devices is
believed to be the fastest growing form of drug delivery in the asthma market.
Kos has focused on this mode of delivery for the asthma market because of its
efficacy and because of management's experience with formulating and marketing
aerosolized inhalation products.
29
<PAGE> 31
Triamcinolone With Breath Coordinated Inhaler ("BCI")
Kos is developing a proprietary non-CFC formulation of triamcinolone to be
used with the Company's proprietary breath coordinated inhaler ("BCI"). The
Company believes that its BCI may improve the coordination of inhalation with
actuation of medication, thereby offering possible benefits in patient
compliance and uniform dose administration. Triamcinolone is a corticosteroid
that is used to treat the underlying inflammation of asthma. Triamcinolone is
currently in the formulation development stage and the Company expects clinical
pharmacology trials to commence in 1997.
Inhaled steroids are being widely prescribed because their efficacy for
prophylactic treatment is greater than that of other asthma products that can be
delivered through MDIs. Triamcinolone, marketed by only one U.S. producer, is
the largest selling of the metered-dose inhaled steroids. U.S. sales of inhaled
steroids were approximately $570 million in 1996, of which triamcinolone
accounted for $235 million.
Albuterol With Generic MDI
The Company is developing a non-CFC formulation of albuterol to be
dispensed in a generic MDI. Albuterol is a beta-agonist that is most commonly
used to treat acute asthma attacks. This product is presently in the formulation
development stage, and the Company expects that clinical pharmacology studies
will commence in 1998. Although several generic competitors distribute
CFC-containing products in the albuterol market, the Company believes market
opportunities will exist for its non-CFC albuterol product. Albuterol is the
most widely used MDI product approved for the treatment of asthma, with sales of
$590 million in the United States in 1996, and the impending restrictions on CFC
propellants could limit the use of currently marketed CFC albuterol products.
Flunisolide With BCI
Kos is developing a non-CFC formulation of flunisolide to be used with its
BCI. Flunisolide is a long-acting inhaled steroid for the treatment of asthma.
The Kos formulation of flunisolide is currently in development, and the Company
expects clinical pharmacology trials to commence in 1998. Flunisolide, also
marketed by only one U.S. producer, is the fastest growing inhaled steroid, with
U.S. sales of approximately $146 million in 1996, representing an increase of
22% from 1995.
Breath Actuated Inhaler With Either Albuterol or Triamcinolone and Other
Device Products
Kos is developing a second proprietary MDI device, a breath actuated
inhaler ("BAI"). The Company's BAI operates automatically and is being developed
principally to address the difficulties in taking inhaled medication often faced
by children and the elderly. The Company intends to develop the BAI with either
its albuterol or triamcinolone non-CFC formulation. Clinical pharmacology trials
with the BAI are expected to commence in 1999.
The Company also is developing a proprietary inhalation dose counter
designed to indicate when sufficient doses no longer remain in the aerosol
canister, thereby alerting the patient to obtain a refill prescription. At
present, the Company intends to use the inhalation dose counter on all of its
proprietary inhalation devices.
COLLABORATIONS
During fiscal year 1996, the Company entered into certain agreements with
Fuisz, a company engaged in the development and commercialization of drug
delivery and food applications. Pursuant to these agreements, one of which is a
joint venture, the Company agreed to collaborate with Fuisz in the development
of four products and reserve the right to commence collaboration on two other
products. Following a detailed assessment of the commercial viability of these
projects, Fuisz and Kos have agreed that, in addition to the joint venture, the
companies will continue to collaborate only on the development of captopril and
IS-5-MN.
Under the terms of such agreements, other than the joint venture, Fuisz is
responsible for formulating each product and Kos is responsible for the
remainder of each development program. Kos also has exclusive
30
<PAGE> 32
rights to manufacture the formulated products and retains exclusive worldwide
marketing rights upon exercising certain option rights. Under these agreements,
Kos is obligated to pay the development costs and pay license and development
fees based on milestone achievements. In addition, the Company will pay
royalties to Fuisz based on product sales by Kos.
The Company is collaborating with certain other firms in the development of
its proprietary inhalation devices.
SPONSORED RESEARCH
Boston University
Kos is sponsoring basic research at Boston University focused on the role
of apolipoproteins in cardiovascular and Alzheimer's diseases. The objective of
the research program is to identify molecular agents involved so that
pharmaceutical products can be developed for the cardiovascular and Alzheimer's
indications. Two patents have been filed related to this research, one of which
is owned by Boston University and licensed to the Company and one of which is
jointly owned by Boston University and Kos. Although no products have yet been
identified for development as a result of this research, the Company would pay
royalties upon the sale of such products. The research is being led by Vassilis
Zannis, Ph.D., Professor and Director of the Section of Molecular Genetics of
the Cardiovascular Institute at Boston University Medical Center. Dr. Zannis is
recognized as a leading expert in the research of apolipoproteins.
Tufts University
Since 1988, Kos has also been sponsoring research at Tufts University aimed
at identifying and characterizing the pathophysiological significance of mast
cell degranulation and mast cell-derived mediators in such diseases as migraine,
irritable bowel syndrome, interstitial cystitis, multiple sclerosis, and
recently, ischemic heart disease. This research has generated three issued U.S.
patents, licensed to Kos, covering the use of inhibitors of mast cell
degranulation for the treatment of migraines, as well as five other patent
applications claiming other therapeutic areas. Although no products have yet
been identified for development as a result of this research, the Company would
pay royalties upon the sale of such products. This research is being led by T.C.
Theoharides, Ph.D., M.D., Professor of Pharmacology and Medicine at Tufts
University School of Medicine and is being conducted at Tufts and the New
England Medical Center.
The Company's sponsorship of both research programs currently aggregates
approximately $500,000 annually. Kos intends to seek additional industry
development partners as research and development efforts increase. Kos has
exclusive worldwide rights to all compounds related to the research conducted at
both universities.
LICENSING AND OTHER ACTIVITIES
The Company intends to pursue collaborative opportunities, including
licensing the use of selected products and technologies from third parties
("in-licensing"); acquisition of complementary technologies, products, or
companies; product co-marketing arrangements; joint ventures; and strategic
alliances. Many existing pharmaceutical products, or products currently under
development, may be suitable candidates for specialty promotional or
co-marketing campaigns. Accordingly, Kos intends to identify licensing, co-
marketing, and product acquisition opportunities that can complement the
Company's future product portfolio. In situations where third-party drug
delivery technologies are complementary to the Company's drug development
formulation capabilities, the Company may pursue licensing rights for such
technology. The Company may also consider licensing certain of its products and
technologies to third parties ("out-licensing").
In particular, the Company intends to leverage its established specialty
sales force, expected to consist of more than 125 experienced pharmaceutical
field sales representatives in 1998, by pursuing acquisitions or licenses for
currently marketed or late-development-stage cardiovascular products to
complement its currently marketed Niaspan product. To date, the Company has had
no material discussions concerning such possible
31
<PAGE> 33
arrangements with other companies. There can be no assurance that the Company
will be able to identify any suitable product candidate or, if identified, that
a favorable agreement can be consummated.
The Company intends to license marketing rights to Niaspan for markets
outside the United States to one or more established international
pharmaceutical companies. To date, the Company has had no material discussions
concerning such possible arrangements with other companies. Ultimately, the
Company will consider establishing its own sales organization in selected
foreign markets.
MARKETING
Kos intends to market its branded proprietary products in the United States
through its own specialty sales force. A fundamental element of the Company's
product selection strategy is to focus on products where a relatively
concentrated group of specialist physicians account for a significant portion of
the prescriptions for the therapeutic indication addressed by the Company's
products. See "Business -- Niaspan -- Marketing Strategy for Niaspan."
The Company expects to increase its detailing efforts to a larger group of
cardiovascular specialists and other frequent prescribers of lipid-altering
medications through additional full-time field sales representatives and the
establishment of its own specialized flex-time (or part-time) sales force. The
Company will also consider co-promoting Niaspan in the United States with an
established pharmaceutical company to augment the Company's own detailing
efforts. During 1997, the Company has had limited discussions with several
pharmaceutical companies to co-promote Niaspan; however, there can be no
assurance that a favorable agreement can be consummated.
PATENTS AND PROPRIETARY RIGHTS
The Company actively seeks, when appropriate and available, protection for
its products and proprietary information by means of United States and foreign
patents, trademarks, trade secrets and contractual arrangements. Patent
protection in the pharmaceutical field, however, can involve complex legal and
factual issues. Moreover, broad patent protection for new formulations or new
methods of use of existing chemical entities is sometimes difficult to obtain
and often of limited usefulness, primarily because the active ingredient and
many of the formulation techniques have been known for some time. Consequently,
some patents claiming new formulations or new methods of use for old drugs may
not provide meaningful protection against competition. Nevertheless, the Company
intends to seek patent protection when appropriate and available and otherwise
to rely on regulatory-related exclusivity and trade secrets to protect certain
of its products, technologies and other scientific information. There can be no
assurance, however, that any steps taken to protect such proprietary information
will be effective.
The Company has a patent application pending in the U.S. Patent and
Trademark Office ("PTO") with claims covering Niaspan's method of use consistent
with its recommended once-a-day dosing regimen. The Company has been advised by
the patent examiner that certain of these claims are allowable, but none of
these claims have yet been issued as a patent by the PTO. The patent examiner
has, however, indicated that the PTO's Board of Interference may declare an
interference between such Kos application and a method-of-use patent issued to a
privately owned generic manufacturer allegedly claiming the same dosing regimen
invention.
On February 7, 1997, the Company and such generic manufacturer entered into
an agreement pursuant to which the parties agreed to resolve, as between
themselves, the effects of such potential interference by granting each other
licenses under their respective patent application and patent, regardless of
whether such licenses would be required. Accordingly, under the agreement, the
generic manufacturer granted the Company a license to sell products under the
generic manufacturer's above referenced patent, under a formulation patent owned
by such generic manufacturer, and under corresponding foreign patents owned by
such generic manufacturer, and the Company granted the generic manufacturer the
right to sell such generic manufacturer's products that are covered by the
claims in the Company's patent application and corresponding foreign
applications owned by the Company. As consideration for entering into the
agreement, the Company agreed to pay the generic manufacturer certain license
fees and royalties on the net sales of Niaspan subject to a cap on
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<PAGE> 34
such royalty payments in the United States and a separate cap on such payments
outside the United States. Neither the license fees nor the royalty payments are
material to the financial condition of the Company. The Company may sublicense
its rights under the agreement to third parties to make, use, or sell products
developed by or for the Company. The generic manufacturer may not sublicense or
transfer the license granted to it by the Company, although the generic
manufacturer may sublicense to third parties the right to supply to the generic
manufacturer or market with or on behalf of the generic manufacturer, products
that are covered by the generic manufacturer's patents but which are not covered
by the Company's patent application. The Company may terminate the agreement
after February 7, 2001.
The Company is aware that certain European and U.S. patents have been
issued with claims covering products that contain certain non-CFC propellant
aerosol formulations. The European patents are currently subject to an
opposition proceeding in Europe, and certain claims in such patents have been
held invalid in the United Kingdom. Certain or all of the Company's aerosol
products under development may use a formulation covered by such European or
U.S. patents. In such event the Company would be prevented from making, using or
selling such products unless the Company obtains a license under such patents,
which license may not be available on commercially reasonable terms, or at all,
or unless such patents are determined to be invalid or unenforceable in Europe
or the United States, respectively. The Company's development of products that
are covered by such patents and its failure to obtain licenses under such
patents in the event such patents are determined to be valid and enforceable
could have an adverse effect on the Company's business.
Various inhalation devices, technologies, and methods of use licensed from,
or assigned to Kos by, researchers and engineers engaged in development projects
or sponsored research on behalf of Kos are the subject of four issued and one
allowed U.S. patent, as well as various corresponding foreign patents. Similar
patents applied for in other foreign countries are pending and being pursued by
the Company. Six patent applications on certain of the Company's products under
development and pertaining to certain of the sponsored research activities are
pending at the PTO. The Company believes that most of the once-a-day oral
products in development under Kos' agreements with Fuisz are protected by
various technology patents in the name of Fuisz.
There can be no assurance that the patents owned and licensed by the
Company, or any future patents, will prevent other companies from developing
similar or therapeutically equivalent products or that others will not be issued
patents that may prevent the sale of Company products or require licensing and
the payment of significant fees or royalties by the Company. Furthermore, there
can be no assurance that any of the Company's future products or methods will be
patentable, that such products or methods will not infringe upon the patents of
third parties, or that the Company's patents or future patents will give the
Company an exclusive position in the subject matter claimed by those patents.
Niaspan and "Kos" are the Company's principal registered trademarks,
although other applications for registration of trademarks and service marks are
currently pending in the PTO and additional applications are in the process of
being filed. The Company has been advised that, despite its federal trademark
for the name Niaspan, a third party may have prior common law rights to the
name. If such rights are asserted, the Company may be prohibited from using the
Niaspan name in connection with its products in certain jurisdictions, if any,
where such third party may have previously used that name. However, the Company
does not believe that, even if it is forced to develop another name for the
marketing of its Niaspan product, such an occurrence would have a material
adverse effect on its financial condition or results of operations.
MANUFACTURING
In order to maximize the quality of developed products, assure compliance
with regulatory requirements, and minimize costs, the Company intends to
manufacture all of its products internally. The Company currently produces
Niaspan at its Hollywood, Florida facility, which has been inspected and
approved by the FDA, and intends to begin production of Niaspan at its Edison,
New Jersey facility in 1998. The Company's Edison facility is currently
configured, and largely equipped, to manufacture aerosol inhalation products as
well as solid-dose products. Although the Company believes that both its
Hollywood and Edison facilities currently operate using cGMP as required by the
FDA for the manufacture of product to be sold or used in
33
<PAGE> 35
clinical trials, the Edison facility requires inspection and approval by the FDA
before production for commercial sale can commence. The Company believes that it
has produced adequate inventory to support the launch of Niaspan. The Company
also believes that it has sufficient capacity, with limited additional capital
outlays, to accommodate sales volume for both solid-dose and aerosol products
through the year 2000.
The Company intends initially to contract the packaging of its solid-dose
and aerosol products to third parties. The Company intends to begin in-house
packaging operations once product sales volumes justify the capital expenditures
required to establish such capabilities. Certain of the Company's raw materials,
including the active ingredient in Niaspan, niacin, are currently obtained from
single sources of supply. The Company does not have a contractual arrangement
with its supplier of niacin. There are, however, other bulk chemical
manufacturers capable of supplying cGMP-grade niacin, and the Company is in the
process of qualifying such additional sources of supply. The Company intends, to
the extent possible, to identify multiple sources for all of its key raw
materials, although an alternate source for at least one such material will not
be available because of the supplier's patent rights.
COMPETITION
The Company's products will compete with existing or future prescription
pharmaceuticals and vitamins in the United States, Europe and elsewhere.
Competition among these products will be based on, among other things, efficacy,
safety, reliability, availability, price and patent position. In addition,
academic institutions, government agencies and other public and private
organizations conducting research may seek patent protection, discover new drugs
or establish collaborative arrangements for drug research. Many of the Company's
existing or potential competitors have substantially greater financial,
technical, and human resources than the Company and may be better equipped to
develop, manufacture and market competitive products.
The Company's cardiovascular and respiratory products, when developed and
marketed, will compete in most cases with well established products containing
the same active ingredient already being marketed by medium-sized and large
pharmaceutical companies in the United States. For example, the Company's
captopril formulation, if successfully commercialized, will compete with several
other ACE inhibitors that are currently available, all of which have approval
for treatment of certain indications using once-a-day administration. Kos is
aware of one other company that is developing a once-a-day formulation of
captopril. Further, the Company's triamcinolone and flunisolide formulations, if
successfully commercialized, each will compete with another triamcinolone and
flunisolide product, respectively, already being marketed in the United States.
Although such competing products are sold only in a CFC version, the Company
believes that the originators are developing non-CFC versions.
Moreover, there are numerous manufacturers of niacin preparations indicated
for use as vitamin supplements or, in IR form, for treatment of hyperlipidemia.
The Company is not aware that any such manufacturer is actively pursuing a NDA
for the once-a-day use of niacin as a lipid-altering agent. The Company
believes, however, that a generic manufacturer has performed an early-stage
clinical study using niacin as a once-a-day treatment for lipid-altering.
Further, the Company's Niaspan product will compete with many existing
lipid-altering medications, which currently account for more than 90% of the
lipid-altering market.
GOVERNMENT REGULATION
The development, manufacture and potential sales of prescription
pharmaceutical products is subject to extensive regulation by U.S. and foreign
governmental authorities. In particular, pharmaceutical products are subject to
rigorous preclinical and clinical testing and to other approval requirements by
the FDA in the United States under the Federal Food, Drug and Cosmetic Act
("FFDCA") and the Public Health Service Act and by comparable agencies in most
foreign countries.
Before testing of any agents with potential therapeutic value in healthy
human test subjects or patients may begin, stringent government requirements for
preclinical data must be satisfied. The data, obtained from studies in several
animal species, as well as from laboratory studies, are submitted in an IND
application, or its
34
<PAGE> 36
equivalent in countries outside the United States, where clinical trials are to
be conducted. The preclinical data must provide an adequate basis for evaluating
both the safety and the scientific rationale for the initiation of clinical
trials.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase I, which frequently begins with the
initial introduction of the compound into healthy human subjects prior to
introduction into patients, the product is tested for safety, adverse affects,
dosage, tolerance, absorption, metabolism, excretion and other elements of
clinical pharmacology. Phase II typically involves studies in a small sample of
the intended patient population to assess the efficacy of the compound for a
specific indication, to determine dose tolerance and the optimal dose range as
well as to gather additional information relating to safety and potential
adverse effects. Phase III trials are undertaken to further evaluate clinical
safety and efficacy in an expanded patient population at geographically
dispersed study sites, in order to determine the overall risk-benefit ratio of
the compound and to provide an adequate basis for product labeling. Each trial
is conducted in accordance with certain standards under protocols that detail
the objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as
part of the IND.
Data from preclinical and clinical trials are submitted to the FDA as a NDA
for marketing approval and to other health authorities as a marketing
authorization application. The process of completing clinical trials for a new
drug is likely to take a number of years and require the expenditure of
substantial resources. Preparing a NDA or marketing authorization application
involves considerable data collection, verification, analysis and expense, and
there can be no assurance that approval from the FDA or any other health
authority will be granted on a timely basis, if at all. The approval process is
affected by a number of factors, primarily the risks and benefits demonstrated
in clinical trials as well as the severity of the disease and the availability
of alternative treatments. The FDA or other health authorities may deny a NDA or
marketing authorization application if the regulatory criteria are not
satisfied, or such authorities may require additional testing or information.
Even after initial FDA or other health authority approval has been
obtained, further trials, including Phase IV post-marketing trials, may be
required to provide additional data on safety and will be required to gain
approval for the use of a product as a treatment for clinical indications other
than those for which the product was initially tested. Also, the FDA or other
regulatory authorities require post-marketing reporting to monitor the adverse
effects of the drug. Results of post-marketing programs may limit or expand the
further marketing of the products. Further, if there are any modifications to
the drug, including changes in indication, manufacturing process or labeling or
a change in manufacturing facility, an application seeking approval of such
changes must be submitted to the FDA or other regulatory authority.
The FFDCA also provides for NDA submissions that may rely in whole or in
part on preclinical and clinical safety and efficacy data that are publicly
available or are allowed to be referenced from another NDA. The Company may be
able to utilize existing publicly available safety and efficacy data in filing
NDAs for controlled-release products when such data exist for an approved
immediate-release version of the same chemical entity. The Company intends to
utilize all relevant available data for its products under development, where
appropriate, in order to reduce preclinical and clinical testing and overall
development time. There can be no assurance, however, that the FDA will accept
such data in the Company's applications, or that such existing data will be
available or useful.
Certain amendments to the FFDCA established abbreviated application
procedures for obtaining FDA approval for generic versions of brand name
prescription drugs that are off patent or whose marketing exclusivity has
expired. Approval to manufacture and market generic drugs is obtained by filing
ANDAs. As a substitute for clinical trials, the FDA requires, among other items,
data demonstrating that the ANDA drug formulation is bioequivalent to the
previously approved brand name formulation. The advantage of the ANDA approval
is that an ANDA applicant is not required to conduct preclinical studies and
clinical trials to demonstrate that the product is safe and effective for its
intended use.
Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of commercial sales of the product in such
35
<PAGE> 37
countries. The requirements governing the conduct of clinical trials and product
approvals vary widely from country to country, and the time required for
approval may be longer or shorter than that required for FDA approval. Although
there are some procedures for unified filings for certain European countries, in
general, each country at this time has its own procedures and requirements.
Further, the FDA regulates the export of products produced in the United States
and may prohibit the export even if such products are approved for sale in other
countries.
The Company's research and development involves the controlled use of
hazardous materials, chemicals, and various radioactive compounds. Although the
Company believes that its procedures for handling and disposing of those
materials comply with state and federal regulations, the risk of contamination
or injury from these materials cannot be eliminated. In the event of such
contamination or injury, the Company could be held liable for resulting damages,
which could be material to the Company's business, financial condition and
results of operations. The Company is also subject to numerous environmental,
health and workplace safety laws and regulations, including those governing
laboratory procedures, exposure to blood-borne pathogens, and the handling of
biohazardous materials. Additional federal, state and local laws and regulations
affecting the Company may be adopted in the future. Any violation of, and the
cost of compliance with, these laws and regulations could materially and
adversely affect the Company.
Completing the multitude of steps necessary prior to the commencement of
marketing requires the expenditure of considerable resources and a lengthy
period of time. Delay or failure in obtaining the required approvals,
clearances, permits or inclusions by the Company or its future corporate
partners or licensees, if any, would have a material adverse effect on the
ability of the Company to generate sales or royalty revenue. Further, the
passage and implementation of new or changed laws or regulations or the
potential impact on the Company of such actions cannot be anticipated.
EMPLOYEES
As of September 2, 1997, the Company had 249 permanent employees, of which
111 were engaged in marketing and sales, 76 were engaged in research and
development, 39 were in manufacturing, and 23 were in administration. No
employee is represented by a union. The Company regularly employs the services
of outside consultants with respect to regulatory, scientific, and certain
administrative and commercial matters. The Company expects to continue to
require the services of such outside consultants. The Company believes its
employee relations are good.
FACILITIES
The Company leases approximately 10,000 square feet for its executive
offices pursuant to a lease that expires in December 2000. The Company leases
approximately 23,500 square feet in adjacent buildings in Hollywood, Florida,
which are used for the research and development and solid-dose manufacturing
operations. These leases expire in November 2000, assuming the Company elects to
exercise certain renewal options. The Company leases approximately 13,000 square
feet in Miami Lakes, Florida, which are used for research and administrative
offices. This lease expires in December 2000, assuming the Company elects to
exercise certain renewal options. The Company also occupies approximately 21,500
square feet of space in Edison, New Jersey under a lease that expires in October
2003, assuming the Company elects to exercise a five-year renewal option. The
Edison, New Jersey facility is used for research and development, solid-dose
manufacturing, and aerosol manufacturing.
LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company or its
properties or to which the Company is a party.
36
<PAGE> 38
MANAGEMENT
The following table provides information regarding the directors, executive
officers, and other key employees of the Company as of September 2, 1997:
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Michael Jaharis...................... 69 Chairman of the Board
Daniel M. Bell....................... 55 President, Chief Executive Officer, and Director
Robert E. Baldini.................... 66 Vice Chairman of the Board
John Brademas, Ph.D. ................ 70 Director(1)
Steven Jaharis, M.D. ................ 37 Director(1)(2)
Louis C. Lasagna, M.D. .............. 74 Director(1)
Mark Novitch, M.D. .................. 65 Director(2)
Frederick B. Whittemore.............. 66 Director(1)(2)
David J. Bova........................ 51 Senior Vice President, Product Development
Duncan H. Cocroft.................... 54 Senior Vice President, Chief Administrative Officer
Anthony J. Cutie, Ph.D. ............. 53 Vice President, Aerosol Research & Development
David L. Heatherman.................. 50 Vice President, Sales & Marketing
Frederick A. Sexton.................. 38 Vice President, Technical Operations
</TABLE>
OTHER KEY EMPLOYEES
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
George A. Blews...................... 39 Vice President, Treasurer
Mark McGovern, M.D................... 44 Vice President, Medical Affairs
Marvin F. Blanford, Pharm.D.......... 49 Vice President, Compliance
Eugenio A. Cefali, Ph.D.............. 38 Vice President, Clinical Pharmacology
Arthur W. Brinkmann.................. 62 Director of Human Resources
Christopher P. Kiritsy............... 32 Director of Financial Analysis & Business Planning
Mukesh P. Patel...................... 40 Director of Licensing
Juan F. Rodriguez.................... 30 Controller
</TABLE>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation and Stock Option Committee
Michael Jaharis, a founder of the Company, has, since its inception and
until the IPO, funded the operations of the Company and served as Chairman of
the Board. In this position, Mr. Jaharis has been actively involved in the
development of the Company's business strategy and in critical implementation
decisions. From 1972 until its acquisition by Schering-Plough Corporation
("Schering-Plough") in 1986, Mr. Jaharis served as the President and Chief
Executive Officer of Key Pharmaceuticals, Inc. ("Key Pharmaceuticals"). Mr.
Jaharis also serves as Chairman of Kos Investments and Kos Holdings, as Trustee
of Tufts University, and as Chairman of the Board of Overseers of Tufts
University School of Medicine.
Daniel M. Bell, a founder of the Company, has served as a Director and as
the President and Chief Executive Officer of the Company since its inception.
Mr. Bell also serves as a director of Kos Investments and Kos Holdings and as a
director of two private companies in which Kos Investments or Michael Jaharis is
the largest shareholder. From 1983 to 1986, Mr. Bell was employed by Key
Pharmaceuticals and was serving as its Executive Vice President and Chief
Operating Officer at the time of its acquisition by Schering-Plough in June
1986.
Robert E. Baldini has served as Vice Chairman of the Board since July 1996
and as a senior marketing consultant to the Company since April 1996. In these
positions, Mr. Baldini serves as an executive officer of the Company. In
addition to performing services for the Company, Mr. Baldini serves as a
consultant to, and
37
<PAGE> 39
director of, several private pharmaceutical and medical device companies. Mr.
Baldini served Key Pharmaceuticals from 1982 to 1986 as Senior Vice President of
Sales and Marketing. Following its acquisition by Schering-Plough, he continued
with the Key Pharmaceuticals Division of Schering-Plough until 1995, last
serving as its President.
John Brademas, Ph.D. has served as a Director of the Company since the
completion of the Company's IPO. Dr. Brademas has been President Emeritus of New
York University since 1992. Prior to 1992, he was President of New York
University for eleven years and was the U.S. Representative in Congress for
Indiana's Third District for twenty-two years. Dr. Brademas serves as a director
of Texaco, Inc., Oxford University Press-USA, Scholastic, Inc., and Loews
Corporation. He is a former Chairman of the Federal Reserve Bank of New York and
a former director of the New York Stock Exchange.
Steven Jaharis, M.D. has served as a Director of the Company since its
inception. Dr. Jaharis has been a practicing physician since 1990 and currently
serves as a family practitioner at Rush Prudential H.M.O. Dr. Jaharis is the son
of Michael Jaharis.
Louis C. Lasagna, M.D. has served as a Director of the Company since the
completion of the Company's IPO. Dr. Lasagna has served as the Dean of the
Sackler School of Graduate Biomedical Sciences at Tufts University since 1984.
Dr. Lasagna serves as a director of Astra U.S.A. Inc., a subsidiary of Astra AB,
R. P. Scherer Corp., and serves on the scientific advisory board of BioSpecifics
Technologies Corporation.
Mark Novitch, M.D. has served as a Director of the Company since the
completion of the Company's IPO. Dr. Novitch has served as Professor of Health
Care Sciences at George Washington University since 1994. Dr. Novitch was with
The Upjohn Company from 1985 to 1993, last serving as its Vice Chairman. From
1971 to 1985, Dr. Novitch was with the FDA, serving as Deputy Commissioner from
1981 to 1985. Dr. Novitch serves as a director of Alteon, Inc., Guidant
Corporation, Neurogen Corporation, and Calypte Biomedical, Inc.
Frederick B. Whittemore has served as a Director of the Company since the
completion of the Company's IPO. Mr. Whittemore has been with Morgan Stanley
Group since 1958 and presently serves as Advisory Director. Mr. Whittemore is a
director of various mutual funds organized under Morgan Stanley Asset
Management, Inc. Mr. Whittemore also serves as a director of Chesapeake Energy
Corporation, PartnerRe Holdings, Ltd., and Integon, Inc.
David J. Bova, a founder of the Company, has directed the Company's product
development efforts since inception and now serves as Senior Vice President,
Product Development. Prior to the founding of Kos, Mr. Bova was at Key
Pharmaceuticals from 1981 until its acquisition by Schering-Plough; he continued
with Schering-Plough until the founding of Kos in 1988. At Key Pharmaceuticals,
he last served as the Director of Product Development. Prior to 1981, Mr. Bova
was employed by the USV pharmaceutical operation of Revlon Healthcare.
Duncan H. Cocroft, joined the Company in September 1997 and serves as
Senior Vice President, Chief Administrative Officer. Mr. Cocroft most recently
served as Vice President and Chief Financial Officer of International Multifoods
Corporation from 1990 to 1997. He previously served as Vice President and
Treasurer for SmithKline Beecham plc., from 1987 to 1990. Mr. Cocroft also
served as Vice President and Treasurer of PHH Group, Inc., from 1979 to 1987.
Anthony J. Cutie, Ph.D. serves as Vice President, Aerosol Research and
Development; he has been the Chief Scientific Officer of the Company's aerosol
subsidiary since its founding in 1993. For more than 25 years, Dr. Cutie has
been an industry consultant in pharmaceutical aerosols and he has worked with
over 50 pharmaceutical companies ranging from large multinationals to small
generic companies. He has served as a consultant for the FDA, and he has been an
active member of various United States Pharmacopia committees and two aerosol
committees of the American Association of Pharmaceutical Scientists. Dr. Cutie
also serves as Professor of Industrial Pharmacy at Long Island University.
38
<PAGE> 40
David L. Heatherman has served as Vice President, Sales and Marketing since
July 1996. Mr. Heatherman worked for Schering-Plough from 1972 to 1996 in
several capacities including Senior Product Promotion Director, Regional Sales
Director, and last serving as Managed Care Director.
Frederick A. Sexton joined the Company in January 1996 and serves as Vice
President, Technical Operations. Prior to joining the Company, Mr. Sexton was
employed by Boehringer Ingelheim Pharmaceuticals from 1984 through 1995 in
various production and quality assurance positions involving solid-dose and
aerosol products. Prior to 1984, Mr. Sexton was employed by Ayerst Laboratories
in research and production positions.
George A. Blews joined Kos in May 1997 and serves as Vice President,
Treasurer. Before joining Kos, Mr. Blews served as Vice President, Controller at
FLA Orthopedics, Inc. since 1995. Mr. Blews served in various positions in
finance and operations of Ares Serono, Inc. from 1991 to 1994. Mr. Blews worked
for Baxter International, Inc. from 1982 to 1991 in various accounting and
finance positions.
Mark E. McGovern, M.D. joined the Company in March 1997 and serves as Vice
President, Medical Affairs. Prior to joining the Company, Dr. McGovern was
employed by Bristol-Myers Squibb Co. from 1986 to 1997 in various clinical
research and development capacities, last serving as Executive Director, Heart
Failure/Arteriosclerosis Clinical Research. Prior to 1986, Dr. McGovern was a
Fellow at Georgetown University Medical Center. Dr. McGovern is board certified
in Internal Medicine and Cardiology.
Marvin F. Blanford, Pharm. D. joined Kos in 1996 and serves as Vice
President, Compliance. Dr. Blanford was the Director of Clinical Research for
Noven Pharmaceuticals, Inc. from 1992 to 1995. Prior to joining Noven, Dr.
Blanford was vice president of a major independent clinical research
organization. Dr. Blanford also worked for Key Pharmaceuticals as a research
manager from 1981 through 1984.
Eugenio A. Cefali, Ph.D. joined the Company in January 1994 and serves as
Vice President, Clinical Pharmacology. Dr. Cefali was responsible for clinical
pharmacology and Phase IV clinical research at Whitby Pharmaceuticals from 1991
to 1994. Prior to 1991, Dr. Cefali was at Key Pharmaceuticals and Schering-
Plough where he was responsible for in-vivo evaluation of certain oral sustained
release and transdermal dosage forms.
Arthur W. Brinkmann has served as Director, Human Resources since September
1991. Mr. Brinkmann was Director of Human Resources at Key Pharmaceuticals and
Schering-Plough from 1984 to 1989. Prior to Key Pharmaceuticals, Mr. Brinkmann
worked in human resources at Johnson & Johnson for twenty-one years.
Christopher P. Kiritsy joined the Company in June 1995 and serves as
Director, Financial Analysis and Business Planning. Prior to joining the
Company, Mr. Kiritsy was with Institute of Molecular Biology, Inc., a
development stage biotechnology concern, from 1988 to 1995, where he last served
as Associate Director of Product Development.
Mukesh P. Patel has served as Director, Licensing since July 1991. Mr.
Patel was employed by Glaxo in London, England for eleven years prior to joining
the Company, last serving as an International Licensing Executive for Glaxo
Holdings.
Juan F. Rodriguez, a certified public accountant, joined the Company in
November 1995 and serves as Controller. Prior to joining Kos, Mr. Rodriguez was
employed by the accounting firms of Rosen and Co. from 1994 to 1995 and Arthur
Andersen LLP from 1991 to 1994.
39
<PAGE> 41
EXECUTIVE COMPENSATION
The following table summarizes the compensation during the fiscal years
ended June 30, 1997, 1996 and 1995, paid to or earned by the Company's Chief
Executive Officer and the four other highest paid executive officers of the
Company (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------- ------------------------- -------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)(1)
- --------------------------- ---- ------- ------- ------------- ---------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Daniel M. Bell 1997 262,500 150,000 -- -- -- -- 4,329
President and Chief Executive 1996 246,000 -- -- -- 750,000(2) -- 4,928
Officer 1995 246,000 10,000 -- -- -- -- 1,814
David J. Bova 1997 201,250 25,000 -- -- -- -- 1,295
Senior Vice President, 1996 185,000 25,000 -- -- -- -- 1,091
Research and Development 1995 185,000 -- -- -- -- -- 726
Frederick A. Sexton 1997 157,500 7,500 -- -- -- -- 103
Vice President, 1996 72,500 28,000 -- -- 40,000 -- 21,431
Technical Operations 1995 -- -- -- -- -- -- --
Anthony J. Cutie 1997 150,000 -- -- -- -- -- 7,289
Vice President, 1996 137,500 -- -- -- 50,000 -- 6,547
Aerosol Research & Development 1995 106,250 5,208 -- -- -- -- 4,715
David L. Heatherman 1997 143,950 10,000 -- -- 40,000 -- 392
Vice President, 1996 -- -- -- -- -- -- --
Sales & Marketing 1995 -- -- -- -- -- -- --
</TABLE>
- ---------------
(1) Consists of life insurance premiums and, in 1996 for Mr. Sexton only,
$21,431 of relocation expenses paid by the Company.
(2) The options were originally granted to Mr. Bell in August 1988. The option
terms were amended on June 20, 1996, to extend the expiration date of the
options from December 1996 to June 20, 2006. Other material terms of
options, including the exercise price, were not changed. The options are
currently exercisable.
The following table contains information about stock option grants to the
Named Executive Officers during the fiscal year ended June 30, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATE OF
SECURITIES % OF TOTAL STOCK PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE OR FOR OPTION TERM(1)
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION ------------------------
GRANTED(#) IN FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
---------- ----------------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Daniel M. Bell.......... -- -- -- -- -- --
David J. Bova........... -- -- -- -- -- --
Frederick A. Sexton..... -- -- -- -- -- --
Anthony J. Cutie........ -- -- -- -- -- --
David L. Heatherman..... 40,000 14.1% $15.00 12/20/06 $377,337 $956,246
</TABLE>
- ---------------
(1) Amounts reflect hypothetical gains that could be achieved for the options if
they are exercised at the end of the option term. Those gains are based on
assumed rates of stock appreciation of 5% and 10% compounded annually from
the date the option was granted through the expiration date.
40
<PAGE> 42
The following table provides information about the number and value of
options held by the Named Executive Officers at June 30, 1997:
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT FY-END(#) MONEY OPTIONS AT FY-END($)(1)
---------------------------- ------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Daniel M. Bell................... 750,000 -- $20,362,500 $ --
David J. Bova.................... 275,000 -- 7,425,000 --
Frederick A. Sexton.............. 10,000 30,000 207,500 622,500
Anthony J. Cutie................. 37,500 12,500 778,125 259,375
David L. Heatherman.............. -- 40,000 -- 510,000
</TABLE>
- ---------------
(1) The option value is based on the difference between the fair market value of
the shares on June 30, 1997, which was $27.75 per share, and the option
exercise price per share, multiplied by the number of shares of Common Stock
subject to the option.
Election, Committees, and Compensation of Directors
The Board of Directors has established two committees, a Compensation and
Stock Option Committee (the "Compensation Committee") and an Audit Committee.
The Compensation Committee administers the Company's 1996 Stock Option Plan (the
"Option Plan") including, among other things, determining the amount, exercise
price and vesting schedule of stock options awarded under the Option Plan. The
Compensation Committee administers the Company's other compensation programs and
performs such other duties as may from time to time be determined by the Board
of Directors. The Compensation Committee comprises Dr. Jaharis, Dr. Novitch, and
Mr. Whittemore.
The Audit Committee reviews the scope and results of the annual audit of
the Company's consolidated financial statements conducted by the Company's
independent accountants, the scope of other services provided by the Company's
independent accountants, proposed changes in the Company's financial and
accounting standards and principles, and the Company's policies and procedures
with respect to its internal accounting, auditing and financing controls. The
Audit Committee also examines and considers other matters relating to the
financial affairs and accounting methods of the Company, including selection and
retention of the Company's independent accountants. The Audit Committee
comprises Dr. Brademas, Dr. Jaharis, Dr. Lasagna, and Mr. Whittemore.
Each non-employee director of the Company, is entitled to receive a fee of
$1,000 for attendance at each meeting of the Board of Directors. In addition,
each non-employee director is entitled to receive $500 for attendance at each
meeting of a committee of the Board of Directors. All directors are reimbursed
for travel expenses incurred in connection with the performance of their duties
as directors.
Each non-employee director is entitled to receive an option to purchase
5,000 shares of Common Stock upon their appointment to the Board of Directors
and is entitled to receive an option to purchase 3,000 shares of Common Stock
annually thereafter, so long as they continue to serve on the Board of
Directors.
Michael Jaharis has elected not to receive fees or stock options in
connection with his serving as Chairman of the Board. Although Mr. Jaharis has
been actively involved in the development of the Company's business strategy and
in critical implementation decisions, he has never been paid compensation by the
Company for acting in such capacity. However, the Company leases an automobile
for Mr. Jaharis' use.
Compensation Committee Interlocks and Insider Participation
Prior to the Company's IPO, at which time the Board of Directors
established the Compensation Committee, Michael Jaharis, the Company's Chairman
of the Board, and Daniel M. Bell, the Company's President and Chief Executive
Officer, participated in deliberations of the Company's Board of Directors
41
<PAGE> 43
concerning executive officer compensation. Following March 12, 1997, all
decisions regarding compensation of the Company's executive officers have been
subject to the authority of the Compensation Committee.
Compensation Committee Report on Executive Compensation
The Compensation Committee is responsible for administering the Company's
executive compensation, including base salaries, bonuses and awards of stock
options. Dr. Jaharis, Dr. Novitch and Mr. Whittemore, each of whom is a
non-employee director of the Company, constitute the Compensation Committee.
In determining the compensation of the Company's executive officers, the
Compensation Committee takes into account all factors which it considers
relevant, including business conditions in general and the Company's performance
during the year in light of such conditions, the market compensation for
executives of similar background and experience, and the performance of the
specific executive officer under consideration and the business area of the
Company for which such executive officer is responsible. The structure of each
executive compensation package is weighted towards incentive forms of
compensation so that such executive's interests are aligned with the interests
of the stockholders of the Company. The Compensation Committee believes that
granting stock options provides an additional incentive to executive officers to
continue in the service of the Company and gives them an interest similar to
stockholders in the success of the Company. The compensation program for
executive officers in fiscal year 1997 consisted of grants of stock options, in
addition to base salaries, bonuses and reimbursement of certain costs and
expenses.
As indicated below, the Company entered into an employment agreement dated
as of July 1, 1996, with Mr. Bell, the Company's President and Chief Executive
Officer. As President and Chief Executive Officer, Mr. Bell's bonus and stock
option compensation is directly related to corporate performance. A portion of
Mr. Bell's compensation for the fiscal year ended June 30, 1997, was determined
by the Board of Directors prior to the establishment of the Compensation
Committee. The factors that both the Board of Directors and the Compensation
Committee considered in determining Mr. Bell's compensation were as follows. Mr.
Bell is a co-founder of the Company and has been primarily responsible, since
its inception, for managing the Company in its effort to develop and obtain
regulatory approval to market its first product, Niaspan. Mr. Bell has also been
primarily responsible for the successful hiring of the Company's management team
and the scale-up of its manufacturing and marketing operations to support the
commercial launch of Niaspan. Finally, Mr. Bell was instrumental in the success
of the Company's initial public offering of Common Stock in March 1997.
Confidentiality and Intellectual Property Agreements
Each employee of the Company has entered into a Confidentiality Agreement
that: (i) prohibits the employee from disclosing confidential information
relating to the Company; and (ii) provides that intellectual property conceived
by the employee during the term of employment and relating to the business of
the Company remains the exclusive property of the Company.
Employment Agreements
The Company entered into an employment agreement with Daniel M. Bell dated
as of July 1, 1996. Under the agreement, Mr. Bell serves as President and Chief
Executive Officer of the Company for a term expiring on June 30, 2002, unless
earlier terminated for cause, upon the death or disability of Mr. Bell, or, at
the election of Mr. Bell, upon a change in control of the Company. In the event
that Mr. Bell is terminated without cause or upon a change in control of the
Company, Mr. Bell is entitled to receive as severance compensation his base
salary, bonus compensation and annual stock options until the later to occur of
the date thirty-six months after such termination and June 30, 2002. The
agreement provides that Mr. Bell receive base annual compensation of $250,000
for each year during the term of the agreement, subject to an annual increase in
an amount to be determined by the Board of Directors. Under the agreement, Mr.
Bell also receives an annual bonus and an annual stock option grant in amounts
to be determined by the Board of Directors based upon Mr. Bell's and the
Company's performance. Mr. Bell was paid a bonus of $150,000 in December 1996.
The agreement also provides that the Company will provide Mr. Bell with the use
of an
42
<PAGE> 44
automobile. Mr. Bell is prohibited from competing with the Company during the
term of the agreement and for two years after termination thereof.
The Company entered into an employment agreement with David Bova dated as
of June 15, 1996, pursuant to which Mr. Bova serves as Senior Vice President of
the Company. This agreement constitutes an amendment and restatement of a
previous employment agreement with Mr. Bova, dated December 18, 1992. Under the
agreement, the term of Mr. Bova's employment terminates on December 31, 1997,
unless earlier terminated for cause, upon the death or disability of Mr. Bova,
or, at the election of Mr. Bova, upon a change in control of the Company.
Notwithstanding the foregoing, the Company may exercise an option to extend the
term of the agreement for up to twenty-four additional months. The agreement
provides that Mr. Bova receive a base salary of $195,000 per year, which amount
may be increased by the Company. In December 1996, the Company's Board of
Directors determined to award a $25,000 bonus to Mr. Bova, payable to Mr. Bova
in 1997. In the event that Mr. Bova is terminated without cause or upon a change
in control of the Company, Mr. Bova is entitled to receive as severance
compensation his base salary until December 31, 1997. In addition, the agreement
provides that Mr. Bova receive royalties in an amount equal to one percent of
the net sales of the Company's Niaspan product and its combination product
through December 31, 2003, up to a cap of $4,000,000. The agreement provides
that, under certain enumerated circumstances, the royalty amount may be reduced
to 0.5% of net sales. The agreement also provides that under certain specific
circumstances, the Company's obligation to pay royalties may cease upon Mr.
Bova's termination with the Company. The agreement prohibits Mr. Bova from
competing with the Company during the term of the agreement and for a period of
two years after the termination thereof.
The Company entered into an employment agreement with Anthony J. Cutie, Ph.
D. dated as of June 20, 1996, pursuant to which Dr. Cutie serves as Vice
President, Aerosol Research and Development. This agreement constitutes an
amendment and restatement of a previous employment agreement with Dr. Cutie,
dated September 1, 1993. Under the agreement, the term of Dr. Cutie's employment
terminates on December 31, 1997, unless earlier terminated for cause, upon the
death and disability of Dr. Cutie, or, at the election of Dr. Cutie upon a
change in control of the Company. Notwithstanding the foregoing, the Company may
exercise an option to extend the term of the agreement for up to forty-eight
additional months and Dr. Cutie may elect to extend the term of the agreement
for up to ten years, during which period Dr. Cutie may serve the Company as a
consultant. The agreement provides that Dr. Cutie receive a base salary of
$165,000 per year, commencing July 1, 1997, which amount may be increased by the
Company. In addition, the agreement provides that Dr. Cutie receive royalties in
an amount equal to one percent of the net sales of the Company's aerosol
products formulated by Dr. Cutie through December 31, 2005, up to a cap of
$1,500,000. The agreement provides that, under certain circumstances, the
royalty amount may be reduced to 0.5% of net sales. The agreement also provides
that under certain circumstances, the Company's obligation to pay royalties may
cease upon Dr. Cutie's termination. The agreement prohibits Dr. Cutie from
competing with the Company during the term of the agreement and for a period of
two years after the termination thereof.
Stock Option Plan
The Option Plan provides for the grant of both nonstatutory stock options
and stock options intended to be treated as incentive stock options within the
meaning of Section 422 of the Internal Revenue Code. The Option Plan is intended
to provide incentives to, and rewards for, certain eligible employees,
consultants and outside directors of the Company who have contributed and will
continue to contribute to the success of the Company. The Option Plan was
adopted by the Board of Directors and the shareholder of the Company in June
1996. An aggregate of 4,000,000 shares of Common Stock have been authorized for
issuance under the Option Plan. As of September 2, 1997, the Company has granted
options to purchase an aggregate of 2,749,300 shares of Common Stock under the
Option Plan to employees and consultants at exercise prices ranging from $0.60
to $38.75 per share, including stock options covering an aggregate of 1,155,000
shares of Common Stock granted to the Company's Named Executive Officers. The
Company also has granted options to purchase an aggregate of 325,000 shares of
Common Stock outside of the Option Plan to an employee and a consultant,
including stock options covering an aggregate of 275,000 shares of Common Stock
granted to one of the Company's Named Executive Officers.
43
<PAGE> 45
Under the Option Plan, the Compensation Committee of the Board of Directors
of the Company is authorized to administer the Option Plan, including the
selection of employees and consultants of the Company to whom options may be
granted. The Compensation Committee also determines the number of shares, the
exercise price, the term, any conditions on exercise and other terms of each
option granted to an employee or consultant. Options granted to employees or
consultants under the Option Plan become vested over a period of four years or
such shorter or longer period as may be determined by the Compensation Committee
at the time of grant. The duration of an option granted to an employee or
consultant under the Option Plan is ten years from the date of grant, or such
shorter or longer period as may be determined by the Compensation Committee at
the time of grant or as may result from the death, disability, or termination of
the employment of the employee or consultant to whom the option is granted.
The Option Plan prescribes a formula for determining the amount, price and
timing of awards of stock options to the eligible outside directors. Upon his or
her election to the Board of Directors of the Company, an eligible outside
director will receive an option to purchase 5,000 shares of the Company's common
stock. On each anniversary of his or her appointment to the Board of Directors
of the Company, an eligible outside director will receive an option to purchase
3,000 shares of the Company's common stock. The exercise price of each share
subject to an option granted to an outside director will be the fair market
value of the Company's common stock on the date the option is granted. Each
option granted to an outside director under the Option Plan becomes vested on
the first anniversary of its date of grant. The duration of an option granted to
an outside director under the Option Plan is the lesser of ten years from the
date of grant or one year from the date of the outside director's death.
The options are non-transferable other than by will or by the laws of
descent and distribution. The Option Plan may be amended at any time by the
Board of Directors, although certain amendments require shareholder approval.
The Option Plan terminates in June 2006.
401(k) Plan
The Company's Internal Revenue Code Section 401(k) Plan, known as the Kos
Savings Plan, became effective on January 1, 1994. Each employee who has
completed at least 90 days of service with the Company and has attained age 21
is eligible to make pre-tax elective deferral contributions each year not
exceeding the greater of a specified statutory amount or 15 percent of the
employee's compensation for the year. An employee is always 100 percent vested
in the employee's elective deferral contributions. The Company makes no
contributions under this plan.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers, and persons who
beneficially own more than ten percent of a registered class of the Company's
equity securities, to file with the Securities and Exchange Commission (the
"Commission") initial reports of beneficial ownership and reports of changes in
beneficial ownership of the Company's Common Stock. The rules promulgated by the
Commission under Section 16(a) of the Exchange Act require those persons to
furnish the Company with copies of all reports filed with the Commission
pursuant to Section 16(a).
Form 3 filings were not made on a timely basis for John Brademas, Louis
Lasagna, Mark Novitch and Frederick Whittemore, and a report received by the
Company indicates that David Bova failed to file on a timely basis a Form 4 with
respect to two transactions.
44
<PAGE> 46
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company issued the Convertible Note to Kos Investments on July 1, 1996,
the proceeds of which were used to fund the Company's operations until the
consummation of the IPO. Michael Jaharis, the Chairman of the Company's Board of
Directors, is the controlling shareholder of Kos Investments. Pursuant to the
Convertible Note, Kos Investments agreed to loan the Company the aggregate
principal amount of up to $15.0 million. Under the terms of the Convertible
Note, interest accrues on the outstanding principal amount at First Union
National Bank of Florida's prime rate commencing July 1, 1996, escalating to a
rate of 1% over such prime rate during calendar year 1997, 2% over such prime
rate during calendar year 1998, and 3% over such prime rate during calendar year
1999 until maturity. Principal and interest under the Convertible Note are due
on June 30, 1999. From time to time, at Kos Investments' option, principal and
interest outstanding under this note may be converted, in whole or in part, into
Common Stock at a conversion price per share equal to the per share offering
price in the Company's IPO of $15.00. As of June 30, 1997, the Company had
borrowed $13,395,000 under the Convertible Note and interest in the amount of
$643,000 had accrued under the Convertible Note. On September 8, 1997, Kos
Investments notified the Company that it intends to convert all amounts
outstanding under the Convertible Note to Shares of Common Stock, effective upon
the consummation of this offering. Assuming the conversion occurs on October 31,
1997, the accrued interest under the Convertible Note on such date would be
$1,022,524.
45
<PAGE> 47
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth, as of September 2, 1997, and as adjusted at
that date to reflect the sale of the Company's Common Stock offered hereby,
certain information with respect to beneficial ownership of the Common Stock by:
(i) each Selling Shareholder; (ii) each person known to the Company to
beneficially own more than 5% of the outstanding Common Stock; (iii) each member
of the Company's Board of Directors, (iv) each Named Executive Officer; and (v)
all directors and executive officers of the Company as a group. The calculation
of the Percentage of outstanding shares is based on 14,772,718 shares
outstanding before the offering and 16,783,886 shares outstanding after the
offering. Except as otherwise indicated, each shareholder named has sole voting
and investment power with respect to such shareholder's shares and has the same
address as the Company.
<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING
------------------------ NUMBER OF -----------------------
NUMBER OF SHARES NUMBER OF
NAME OF BENEFICIAL OWNER SHARES PERCENTAGE OFFERED SHARES PERCENTAGE
- ------------------------ ---------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Michael Jaharis(1)................ 10,961,169 69.7% 2,150,000 8,811,169 52.5%
Daniel M. Bell(2)................. 750,026 4.8% 50,000 700,026 4.0%
David J. Bova(3).................. 279,101 1.9% -- 279,101 1.6%
Anthony J. Cutie, Ph. D.(4)....... 50,201 * -- 50,201 *
David L. Heatherman(5)............ 10,001 * -- 10,001 *
Frederick A. Sexton(6)............ 10,173 * -- 10,173 *
Robert E. Baldini(7).............. 50,001 * -- 50,001 *
John Brademas..................... -- -- -- -- --
Steven Jaharis(8)................. 5,001 * -- 5,001 *
Louis C. Lasagna.................. -- -- -- -- --
Mark Novitch...................... -- -- -- -- --
Frederick B. Whittemore........... -- -- -- -- --
All Executive Officers and
Directors
as a group (13 persons)(9)...... 12,115,673 71.8% 2,200,000 9,915,673 55.4%
</TABLE>
- ---------------
* Less than 1 percent
(1) All shares are held by Holdings, which is wholly owned by Kos Investments,
of which Mr. Jaharis is the controlling shareholder. Includes 961,168 shares
of Common Stock issuable to Kos Investments upon the conversion of the
Convertible Note, assuming a conversion date of October 31, 1997. Number of
Shares Offered excludes 240,000 shares subject to the Underwriters'
overallotment option. See "Underwriting."
(2) Includes, before the offering, 750,000 shares of Common Stock that may be
purchased by Mr. Bell pursuant to an option, which is currently exercisable,
and, after the offering, 700,000 shares of Common Stock that may be
purchased by Mr. Bell pursuant to an option, which is currently exercisable.
Does not include any shares of Common Stock owned by Holdings, in which Mr.
Bell has an indirect ownership interest through Kos Investments of less than
ten percent. Number of Shares Offered excludes 100,000 shares subject to the
Underwriters' overallotment option. See "Underwriting."
(3) Includes 275,000 shares of Common Stock that may be purchased by Mr. Bova
pursuant to an option, which is currently exercisable.
(4) Includes 50,000 shares of Common Stock that may be purchased by Dr. Cutie
pursuant to an option, which is currently exercisable. Also includes 200
shares of Common Stock owned by Dr. Cutie's son, with respect to which Dr.
Cutie disclaims beneficial ownership.
(5) Includes 10,000 shares of Common Stock that may be purchased by Mr.
Heatherman pursuant to an option, which is currently exercisable.
(6) Includes 10,000 shares of Common Stock that may be purchased by Mr. Sexton
pursuant to an option, which is currently exercisable. Also includes 172
shares of Common Stock owned by Mr. Sexton's wife, with respect to which Mr.
Sexton disclaims beneficial ownership.
(7) Includes 50,000 shares of Common Stock that may be purchased by Mr. Baldini
pursuant to an option, which is currently exercisable.
(8) Includes 5,000 shares of Common Stock that may be purchased by Dr. Jaharis
pursuant to an option, which is currently exercisable. Does not include any
shares of Common Stock owned by Holdings, in which Dr. Jaharis has an
indirect ownership interest through Kos Investments of less than ten
percent.
(9) Includes, before the offering, 1,150,000 shares of Common Stock issuable
upon exercise of options that are currently exercisable or that may be
exercised within 60 days, and, after the offering, 1,100,000 shares of
Common Stock issuable upon exercise of options that are currently
exercisable or that may be exercised within 60 days. Also includes 961,168
shares of Common Stock that are issuable upon the conversion of the
Convertible Note, assuming a conversion date of October 31, 1997.
46
<PAGE> 48
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock having a par value of $.01 per share and 10,000,000 shares of
Preferred Stock having a par value of $.01 per share ("Preferred Stock"). As of
September 2, 1997, 14,772,718 shares of Common Stock and no shares of Preferred
Stock were outstanding. An additional 2,749,300 shares of Common Stock may be
issued upon the exercise of stock options outstanding on such date and an
additional 961,168 shares of Common Stock are issuable upon conversion of the
Convertible Note assuming a conversion date of October 31, 1997.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held.
Shareholders do not have the right to cumulate their votes in elections of
directors. Accordingly, holders of a majority of the issued and outstanding
Common Stock will have the right to elect all the Company's directors and
otherwise control the affairs of the Company.
Holders of Common Stock are entitled to dividends on a pro rata basis upon
declaration of dividends by the Board of Directors. Dividends are payable only
out of funds legally available for the payment of dividends. The Board of
Directors is not required to declare dividends, and it currently expects to
retain earnings to finance the development of the Company's business. See
"Dividend Policy."
Upon a liquidation of the Company, holders of the Common Stock will be
entitled to a pro rata distribution of the assets of the Company, after payment
of all amounts owed to the Company's creditors, and subject to any preferential
amount payable to holders of Preferred Stock of the Company, if any. Holders of
Common Stock have no preemptive, subscription, conversion, redemption or sinking
fund rights.
PREFERRED STOCK
The Articles permit the Company's Board of Directors to issue shares of
Preferred Stock in one or more series and to fix the relative rights,
preferences and limitations of each series. Among such rights, preferences and
limitations are dividend rates, provisions of redemption, rights upon
liquidation, conversion privileges and voting powers. Should the Board of
Directors elect to exercise this authority, the rights and privileges of holders
of Common Stock could be made subject to the rights and privileges of any such
series of Preferred Stock. The Board of Directors of the Company currently has
no plans to issue any shares of Preferred Stock. The issuance of Preferred Stock
could have the effect of making it more difficult for a third party to acquire,
or discouraging a third party from acquiring, a majority of the outstanding
voting stock of the Company.
CERTAIN ANTI-TAKEOVER PROVISIONS INCLUDED IN THE COMPANY'S ARTICLES OF
INCORPORATION AND BYLAWS
The Articles permit removal of directors only for cause by the shareholders
of the Company at a meeting by the affirmative vote of at least 60% of the
outstanding shares entitled to vote for the election of directors (the "Voting
Stock"). The Articles provide that any vacancy on the Board of Directors may be
filled only by the remaining directors then in office.
The Articles also contain provisions which require: (i) the affirmative
vote of 60% of the Voting Stock to amend the Articles of Incorporation or Bylaws
of the Company; and (ii) the demand of not less than 50% of all votes entitled
to be cast on any issue to be considered at a proposed special meeting to call a
special meeting of shareholders. In addition, the Articles require that all
shareholder action, including the election of directors, be taken by means of a
vote at a duly convened shareholders meeting and not by use of written consents.
The Company's Bylaws establish an advance notice procedure for the
nomination of candidates for election as directors by shareholders as well as
for shareholder proposals to be considered at shareholders' meetings.
The above-described provisions may have certain anti-takeover effects. Such
provisions, in addition to the provisions described below, may make it more
difficult for persons, without the approval of the Company's
47
<PAGE> 49
Board of Directors, to make a tender offer or acquire substantial amounts of the
Common Stock or launch other takeover attempts that a shareholder might consider
in such shareholder's best interests, including attempts that might result in
the payment of a premium over the market price for the Common Stock held by such
shareholder.
CERTAIN PROVISIONS OF FLORIDA LAW
The Company is subject to several anti-takeover provisions under Florida
law that apply to a public corporation organized under Florida law, unless the
corporation has elected to opt out of those provisions in its articles of
incorporation or bylaws. The Company has not elected to opt out of certain of
those provisions. The Florida Business Corporation Act (the "FBCA") prohibits
the voting of shares in a publicly-held Florida corporation that are acquired in
a "control share acquisition" unless the holders of a majority of the
corporation's voting shares (exclusive of shares held by officers of the
corporation, inside directors or the acquiring party) approve the granting of
voting rights as to the shares acquired in the control share acquisition or
unless the acquisition is approved by the corporation's board of directors. A
"control share acquisition" is defined as an acquisition that immediately
thereafter entitles the acquiring party to vote in the election of directors
within each of the following ranges of voting power: (i) one-fifth or more but
less than one-third of such voting power (ii) one-third or more but less than a
majority of such voting power; and (iii) more than a majority of such voting
power.
The FBCA also contains an "affiliated transaction" provision that prohibits
a publicly-held Florida corporation from engaging in a broad range of business
combinations or other extraordinary corporate transactions with an "interested
shareholder" unless (i) the transaction is approved by a majority of
disinterested directors before the person becomes an interested shareholder,
(ii) the interested shareholder has owned at least 80% of the corporation's
outstanding voting shares for at least five years or (iii) the transaction is
approved by the holders of two-thirds of the corporation's voting shares other
than those owned by the interested shareholder. An interested shareholder is
defined as a person who together with affiliates and associates beneficially
owns more than 10% of the corporation's outstanding voting shares. The Company's
Articles provide that the FBCA's affiliated transaction voting requirements will
not apply to the Company.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company has been appointed the transfer
agent and registrar for the Common Stock. Its address is 40 Wall Street, 46th
Floor, New York, New York 10005.
48
<PAGE> 50
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 16,974,793 shares
of Common Stock outstanding. Of these shares, 8,163,625 shares (including the
shares offered hereby) will be freely tradeable without restriction or further
registration under the Securities Act, except for any shares purchased by an
"affiliate" of the Company (in general, a person who has a control relationship
with the Company), which shares will be subject to the resale limitations,
described below, of Rule 144 promulgated under the Securities Act. The remaining
8,811,168 shares are deemed to be "restricted securities," as that term is
defined under Rule 144, in that such shares were issued and sold by the Company
in private transactions not involving a public offering and, as such, may only
be sold pursuant to an effective registration under the Securities Act, in
compliance with the exemption provisions of Rule 144 or pursuant to another
exemption under the Securities Act (the "Restricted Shares"). The Restricted
Shares are eligible for sale under Rule 144 (subject to certain recurring
three-month volume limitations prescribed therein). The Company has granted
certain registration rights to Holdings and to Kos Investments, the holder of
the Convertible Note. These entities have "piggyback" registration rights to
request that the Company register any of their shares in the event that the
Company proposes to register any of its securities under the Securities Act.
Additionally, these entities have "demand" registration rights to have the
Company prepare and file, on three occasions, a registration statement so as to
permit a public offering and sale of their shares of Common Stock.
The Company, for a period of 90 days, the Selling Shareholders (and related
persons), for a period of 365 days, and other directors and officers and certain
consultants holding, or holding vested options to purchase, (a) an aggregate of
117,000 shares of Common Stock, for a period of 30 days, and (b) an aggregate of
430,000 shares of Common Stock, until February 15, 1998, have agreed that they
will not, without the prior written consent of Cowen & Company, (i) directly or
indirectly, offer, sell, assign, transfer, encumber, pledge, contract to sell,
grant an option to purchase or otherwise dispose of, other than by operation of
law, any shares of Common Stock (other than the shares offered hereby), options,
rights or warrants to acquire shares of Common Stock, or securities convertible
into or exercisable or exchangeable for shares of Common Stock (whether such
shares or any such securities are now owned or hereafter acquired) or (ii) enter
into any swap or other arrangement that transfers to another, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is settled by delivery of
Common Stock or such other securities, in cash or otherwise. Such lock-up
periods commence on the date hereof. Notwithstanding the foregoing, the Company
may (i) issue options currently authorized under the Company's 1996 Stock Option
Plan and (ii) issue shares of Common Stock upon the conversion or exercise of
securities (including the Convertible Note) outstanding on the date hereof.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated with an affiliate), who has
owned restricted shares of Common Stock beneficially for at least one year is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class or, if the common stock is quoted on the Nasdaq National Market, the
average weekly trading volume during the four calendar weeks preceding the sale.
A person who has not been an affiliate of the Company for at least three months
immediately preceding the sale and who has beneficially owned shares of Common
Stock for at least two years is entitled to sell such shares under Rule 144
without regard to any of the limitations described above.
On September 12, 1997, the Company filed a registration statement under the
Securities Act to register shares of Common Stock authorized for issuance
pursuant to options awarded under the Option Plan or awarded outside the Option
Plan, thereby permitting the resale of such shares by non-affiliates in the
public market without restriction under the Securities Act. As of September 2,
1997, options to purchase 2,749,300 shares of Common Stock were outstanding.
49
<PAGE> 51
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), through their Representatives,
Cowen & Company, Donaldson, Lufkin & Jenrette Securities Corporation, Salomon
Brothers Inc, and SBC Warburg Dillon Read Inc., have severally agreed to
purchase from the Company and the Selling Shareholders the following respective
number of shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITER OF COMMON STOCK
- ----------- ----------------
<S> <C>
Cowen & Company.............................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Salomon Brothers Inc........................................
SBC Warburg Dillon Read Inc.................................
---------
Total............................................. 3,200,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not is excess
of $ per share. The Underwriters may allow and such dealers may
re-allow a concession not in excess of $ per share to certain other
dealers. The Underwriters have informed the Company and the Selling Shareholders
that they do not intend to confirm sales to any accounts over which they
exercise discretionary authority. After the public offering of the shares, the
offering price and other selling terms may from time to time be varied by the
Underwriters.
The Company and the Selling Shareholders have granted to the Underwriters
an option, exercisable no later than 30 days after the date of this Prospectus,
to purchase up to 140,000 and 340,000 additional shares of Common Stock,
respectively, at the public offering price, less the underwriting discount, set
forth on the cover page of this Prospectus, to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by each of them shown in the foregoing table bears to the total number
of shares of Common Stock offered hereby. The Underwriters may exercise such
option only to cover over-allotments made in connection with the sale of shares
of Common Stock offered hereby.
In connection with the offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot. In addition, the
Underwriters may bid for, and purchase, shares of Common Stock in the open
market to cover syndicate short
50
<PAGE> 52
positions created in connection with the offering or to stabilize the price of
the Common Stock. Finally, the underwriting syndicate may reclaim selling
concessions allowed for distributing the Common Stock in this offering, if the
syndicate repurchases previously distributed Common Stock in syndicate covering
transactions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in these
activities, and may end any of these activities at anytime.
The Company, for a period of 90 days, the Selling Shareholders (and related
persons), for a period of 365 days, and other directors and officers and certain
consultants holding, or holding vested options to purchase, (a) an aggregate of
117,000 shares of Common Stock, for a period of 30 days, and (b) an aggregate of
430,000 shares of Common Stock, until February 15, 1998, have agreed that they
will not, without the prior written consent of Cowen & Company, (i) directly or
indirectly, offer, sell, assign, transfer, encumber, pledge, contract to sell,
grant an option to purchase or otherwise dispose of, other than by operation of
law, any shares of Common Stock (other than the shares offered hereby), options,
rights or warrants to acquire shares of Common Stock, or securities convertible
into or exercisable or exchangeable for shares of Common Stock (whether such
shares or any such securities are now owned or hereafter acquired) or (ii) enter
into any swap or other arrangement that transfers to another, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is settled by delivery of
Common Stock or such other securities, in cash or otherwise. Such lock-up
periods commence on the date hereof. Notwithstanding the foregoing, the Company
may (i) issue options currently authorized under the Company's 1996 Stock Option
Plan and (ii) issue shares of Common Stock upon the conversion or exercise of
securities (including the Convertible Note) outstanding on the date hereof.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof. Cowen & Company renders investment banking and other
financial services to the Company from time to time.
LEGAL MATTERS
Certain legal matters in connection with the sale of the shares of Common
Stock offered hereby will be passed upon for the Company by Holland & Knight
LLP, 701 Brickell Avenue, Suite 3000, Miami, Florida 33131. Certain legal
matters with respect to intellectual property matters will be passed upon for
the Company by Jenkens & Gilchrist P.C., 1100 Louisiana, Suite 1800, Houston,
Texas 77002. Certain matters are being passed upon for the Underwriters by Davis
Polk & Wardwell, 450 Lexington Avenue, New York, New York 10017.
EXPERTS
The consolidated financial statements included in this prospectus and this
registration statement have been audited by Arthur Andersen LLP, independent
certified public accountants, as indicated in their report with respect thereto,
and are included herein in reliance upon the authority of said firm, as experts
in giving said report.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports and other information with the Securities and Exchange Commission (the
"Commission"). All reports, proxy statements, and other information filed by the
Company can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549 and at the regional offices of the Commission located at
7 World Trade Center, Suite 1300, New York, New York 10048, and the Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material can be obtained by mail at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549. The Commission maintains a web site that contains
reports, proxy and information statements, and other information regarding
registrants that file electronically with the Commission with a web site address
of http://www.sec.gov.
51
<PAGE> 53
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Financial Statements:
Consolidated Balance Sheets at June 30, 1996 and 1997..... F-3
Consolidated Statements of Operations for the year ended
June 30, 1995, 1996 and 1997 and the period July 1,
1988 (inception) to June 30, 1997...................... F-4
Consolidated Statements of Shareholders' Equity (Deficit)
for the period July 1, 1988 (inception) to June 30,
1997................................................... F-5
Consolidated Statements of Cash Flows for the year ended
June 30, 1995, 1996 and 1997 and for the period July 1,
1988 (inception) to June 30, 1997...................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 54
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Kos Pharmaceuticals, Inc.:
We have audited the accompanying balance sheets of Kos Pharmaceuticals,
Inc. (a development stage corporation) and subsidiary as of June 30, 1996 and
1997, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for each of the three years in the period ended
June 30, 1997, and for the cumulative period from inception (July 1, 1988) to
June 30, 1997. These consolidated 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Kos
Pharmaceuticals, Inc. and subsidiary as of June 30, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1997, and for the cumulative period from inception
(July 1, 1988) to June 30, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
July 25, 1997 (except with respect to the
matters discussed in Notes 1 and 9, as to
which the date is July 28, 1997).
F-2
<PAGE> 55
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1996 1997
----------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 193,484 $ 33,307,271
Available-for-sale securities............................. -- 25,054,937
Prepaid expenses and other current assets................. 165,392 346,148
Inventories............................................... -- 1,372,346
----------- ------------
Total current assets.............................. 358,876 60,080,702
Fixed Assets, net........................................... 1,921,943 3,272,120
Deposits.................................................... -- 1,753,021
----------- ------------
Total assets...................................... $ 2,280,819 $ 65,105,843
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 195,299 $ 2,430,267
Accrued expenses.......................................... 171,371 4,268,475
Loan from Kos Investments, Inc............................ -- 13,395,000
----------- ------------
Total current liabilities......................... 366,670 20,093,742
----------- ------------
Note Payable................................................ -- 23,271
----------- ------------
Commitments and Contingencies (Note 7)
Shareholders' Equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued and outstanding................ -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 10,000,000 and 14,772,500 shares issued and
outstanding as of June 30, 1996 and June 30, 1997,
respectively........................................... 100,000 147,725
Additional paid-in capital................................ 58,472,323 124,620,649
Deficit accumulated in the development stage.............. (56,658,174) (79,779,544)
----------- ------------
Total shareholders' equity........................ 1,914,149 44,988,830
----------- ------------
Total liabilities and shareholders' equity........ $ 2,280,819 $ 65,105,843
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 56
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
JULY 1, 1988
FOR THE YEAR ENDED JUNE 30, (INCEPTION)
------------------------------------------ TO JUNE 30,
1995 1996 1997 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues................................ $ 14,300 $ -- $ -- $ 36,761
Expenses:
Research and development.............. 8,386,872 13,815,776 17,880,533 56,586,043
General, selling and administrative... 1,613,832 1,772,060 5,522,265 14,393,623
Expense recognized on modification of
stock option grants................ -- 5,436,000 -- 5,436,000
------------ ------------ ------------ ------------
10,000,704 21,023,836 23,402,798 76,415,666
------------ ------------ ------------ ------------
Other (Income) Expense:
Other income.......................... -- -- -- (10,103)
Interest (income) expense, net........ 1,025,559 (13,860) (924,809) 2,489,188
Interest expense -- related parties... 26,898 -- 643,381 773,864
------------ ------------ ------------ ------------
Total other (income)
expense..................... 1,052,457 (13,860) (281,428) 3,252,949
------------ ------------ ------------ ------------
Loss before minority
interest.................... (11,038,861) (21,009,976) (23,121,370) (79,631,854)
Minority Interest....................... 532 16,179 -- (147,690)
------------ ------------ ------------ ------------
Net loss...................... $(11,038,329) $(20,993,797) $(23,121,370) $(79,779,544)
============ ============ ============ ============
Net loss per share...................... $ (0.97) $ (1.85) $ (1.87) $ (6.97)
Weighted Average Shares of Common Stock
Outstanding........................... 11,340,000 11,340,000 12,341,146 11,451,238
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 57
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL IN THE
COMMON PAID-IN DEVELOPMENT
STOCK CAPITAL STAGE TOTAL
-------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Issuance of common stock................... $100,000 $ -- $ -- $ 100,000
Capital contributions from Parent.......... -- 390,000 -- 390,000
Net loss................................... -- -- (621,814) (621,814)
-------- ------------ ------------ ------------
Balance at June 30, 1989................... 100,000 390,000 (621,814) (131,814)
Net loss................................... -- -- (1,389,932) (1,389,932)
-------- ------------ ------------ ------------
Balance at June 30, 1990................... 100,000 390,000 (2,011,746) (1,521,746)
Net loss................................... -- -- (2,445,506) (2,445,506)
-------- ------------ ------------ ------------
Balance at June 30, 1991................... 100,000 390,000 (4,457,252) (3,967,252)
Net loss................................... -- -- (3,893,185) (3,893,185)
-------- ------------ ------------ ------------
Balance at June 30, 1992................... 100,000 390,000 (8,350,437) (7,860,437)
Net loss................................... -- -- (6,745,655) (6,745,655)
-------- ------------ ------------ ------------
Balance at June 30, 1993................... 100,000 390,000 (15,096,092) (14,606,092)
Net loss................................... -- -- (9,529,956) (9,529,956)
-------- ------------ ------------ ------------
Balance at June 30, 1994................... 100,000 390,000 (24,626,048) (24,136,048)
Capital contributions from Parent.......... -- 5,745,000 -- 5,745,000
Assumption of note payable by Parent....... -- 30,372,000 -- 30,372,000
Net loss................................... -- -- (11,038,329) (11,038,329)
-------- ------------ ------------ ------------
Balance at June 30, 1995................... 100,000 36,507,000 (35,664,377) 942,623
Capital contributions from Parent.......... -- 16,381,633 -- 16,381,633
Modification of options.................... -- 5,436,000 -- 5,436,000
Contribution of minority interest.......... -- 147,690 -- 147,690
Net loss................................... -- -- (20,993,797) (20,993,797)
-------- ------------ ------------ ------------
Balance at June 30, 1996................... 100,000 58,472,323 (56,658,174) 1,914,149
Issuance of common stock................... 47,725 65,837,383 -- 65,885,108
Stock options issued to non-employees...... -- 310,943 -- 310,943
Net loss................................... -- -- (23,121,370) (23,121,370)
-------- ------------ ------------ ------------
Balance at June 30, 1997................... $147,725 $124,620,649 $(79,779,544) $ 44,988,830
======== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 58
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JULY 1, 1988
FOR THE YEAR ENDED JUNE 30, (INCEPTION)
------------------------------------------ TO JUNE 30,
1995 1996 1997 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss........................................ $(11,038,329) $(20,993,797) $(23,121,370) $(79,779,544)
Adjustments to reconcile net loss to net cash
used in operating activities --
Depreciation and amortization................. 409,528 522,288 649,038 2,238,785
Provision for inventory obsolescence.......... -- -- 75,000 75,000
Minority interest............................. (532) (16,179) -- 147,690
Compensation recognized on modification of
stock option grants......................... -- 5,436,000 -- 5,436,000
Stock options issued to non-employees......... -- -- 310,943 310,943
Changes in operating assets and liabilities:
Prepaid expenses and other current assets... 55,729 (87,187) (180,756) (346,148)
Inventories................................. -- -- (1,447,346) (1,447,346)
Deposits.................................... -- -- (1,753,021) (1,753,021)
Accounts payable............................ 130,011 (556,053) 2,234,968 2,430,267
Accrued expenses............................ 362,359 (325,419) 4,097,104 4,268,475
------------ ------------ ------------ ------------
Net cash used in operating activities....... (10,081,234) (16,020,347) (19,135,440) (68,418,899)
------------ ------------ ------------ ------------
Cash Flows from Investing Activities:
Investment purchases............................ -- -- (25,054,937) (25,054,937)
Capital expenditures............................ (1,223,221) (208,775) (1,999,215) (5,510,905)
------------ ------------ ------------ ------------
Net cash used in investing activities....... (1,223,221) (208,775) (27,054,152) (30,565,842)
------------ ------------ ------------ ------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock...... -- -- 65,885,108 66,375,108
Capital contributions received from Parent...... 5,745,000 16,381,633 -- 22,126,633
Borrowings under notes payable.................. 5,582,000 -- 23,271 30,395,271
Borrowings under loan from Kos Investments,
Inc........................................... -- -- 13,395,000 13,395,000
------------ ------------ ------------ ------------
Net cash provided by financing activities..... 11,327,000 16,381,633 79,303,379 132,292,012
------------ ------------ ------------ ------------
Net increase in cash and cash equivalents..... 22,545 152,511 33,113,787 33,307,271
Cash and Cash Equivalents, beginning of period.... 18,428 40,973 193,484 --
------------ ------------ ------------ ------------
Cash and Cash Equivalents, end of period.......... $ 40,973 $ 193,484 $ 33,307,271 $ 33,307,271
============ ============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Interest paid................................... $ 1,387,377 $ -- $ -- $ 3,476,267
============ ============ ============ ============
Supplemental Disclosure of Non-cash Information:
Transfer of note payable to Parent.............. $ 30,372,000 $ -- $ -- $ 30,372,000
============ ============ ============ ============
Contribution of minority interest to paid-in
capital....................................... $ -- $ 147,690 $ -- $ 147,690
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 59
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The predecessor to Kos Pharmaceuticals, Inc. (the "Company"), Kos Holdings,
Inc. ("Holdings") was incorporated in Florida on July 1, 1988 to develop
prescription pharmaceutical products principally for the cardiovascular and
respiratory markets. On June 25, 1996, the Company was incorporated in Florida
as the successor to the business of Holdings. On June 30, 1996, all of the
assets and all of the liabilities of Holdings, other than its net operating loss
carryforwards, were transferred to the Company in exchange for shares of common
stock of the Company (the "Reorganization"). The Reorganization was accomplished
in order to transfer the assets and operations of Holdings to the Company while
preserving Holdings' net operating losses and related federal tax benefits for
Holdings and its sole shareholder and one of its founders. Kos Investments, Inc.
("Investments") is the sole shareholder of Holdings. As this transaction was
between entities under common control, the transaction was accounted for on a
historical cost basis, in a manner similar to a pooling of interests.
On June 22, 1993, Holdings and Aeropharm Technology, Inc. ("Aeropharm")
entered into a letter of intent for the purchase of a controlling interest in
Aeropharm. On February 14, 1995, the transaction was completed through a stock
purchase agreement that gave control (80% ownership) of Aeropharm to Holdings.
Holdings accounted for its investment in Aeropharm as a consolidated subsidiary
from June 22, 1993. On June 20, 1996, Holdings acquired the minority interest in
Aeropharm, held by an employee of Aeropharm, in exchange for options to purchase
50,000 shares of common stock, at $7.00 per share, the estimated fair value of
the underlying shares at the date of grant. The acquisition of the minority
interest in Aeropharm was accounted for under the purchase method and the fair
value of the options granted approximated the carrying value ($147,690) of the
minority interest.
On May 6, 1996, the Company submitted a New Drug Application ("NDA") to the
U.S. Food and Drug Administration ("FDA") for Niaspan, its first product. On
July 28, 1997, the Company obtained clearance from the FDA to market Niaspan.
Niaspan is a once-a-day, oral, solid-dose controlled-release formulation of
niacin for the treatment of hyperlipidemia, a multiple lipid disorder that is a
primary risk factor for coronary heart disease. Niacin is a water soluble
vitamin that has long been recognized as an effective pharmacological agent for
the treatment of multiple lipid disorders including elevated LDL and low HDL.
The Company expects to incur additional losses in the near term primarily
due to research and development activities and the commencement of sales and
marketing efforts associated with Niaspan. To date, the Company has not marketed
any products. Future revenues, if any, are expected to be generated from sales
of products. No assurance can be given that products under development can be
successfully formulated or manufactured at acceptable cost and with appropriate
quality, that required regulatory approvals will be obtained, or that any
products can be successfully marketed. The Company is subject to a number of
other risks including, but not limited to, uncertainties related to market
acceptance, uncertainties related to patents and trademarks, interference and
risk of infringement, uncertainties related to limited sales and marketing
experience, uncertainties related to competition and technological changes,
government regulation, dependence on product development collaborators, limited
manufacturing experience and risk of scale-up, future capital needs and
uncertainty of additional funding, dependence on single sources of supply, and
no assurances of adequate third party reimbursement. The likelihood of the
success of the Company must be considered in light of the uncertainty caused by
problems, expenses, complications and delays frequently encountered in
connection with the development of new business ventures.
F-7
<PAGE> 60
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The consolidated financial statements include the results of Holdings
(prior to July 1, 1996), the Company and its subsidiary, Aeropharm. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with an
original maturity of 90 days or less to be cash equivalents. As of June 30,
1997, approximately $33,200,000 of the Company's cash and cash equivalents were
interest-bearing.
Available-for-sale Securities:
The Company accounts for available-for-sale securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Available-for-sale
securities represent debt securities that are stated at fair value.
Amortizations of premiums and accretion of discounts are recognized as
adjustments to interest income. Gains or losses on disposition are based on the
net proceeds and the adjusted carrying amount of the securities sold, using the
specific identification method.
Long-Lived Assets:
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles to be disposed of be recorded at the
lower of carrying amount or fair value less cost to sell. The Company adopted
the provisions of this statement, effective July 1, 1996. Such adoption did not
have a material effect on the Company's financial statements.
Minority Interest:
Minority interest represents the minority shareholder's interest in the
shareholders' equity and net loss of Aeropharm. As of June 30, 1996 and 1997,
the Company owned 100% of Aeropharm, therefore, no minority interest is
reflected.
Fair Value of Financial Instruments:
As of June 30, 1996 and 1997, the carrying amount of cash and cash
equivalents, prepaid expenses and other current assets, and notes payable
approximates fair value due to the short term nature of these accounts. See Note
3 for information regarding the fair value of available-for-sale securities.
Concentration of Credit Risk:
The Company has no significant off-balance-sheet concentrations of credit
risk.
F-8
<PAGE> 61
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation and Amortization:
Fixed assets are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the assets or lease term, if shorter,
as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and equipment..................................... 3-7
Computer software and hardware.............................. 3-5
Laboratory and manufacturing equipment...................... 3-5
Leasehold improvements...................................... Life of lease
</TABLE>
Research and Development Expenses:
All research and development expenses are reflected in the Company's
consolidated statements of operations as incurred.
Loss Per Share:
Loss per share is determined by dividing the net loss attributable to
holders of the Company's Common Stock by the weighted average number of shares
of Common Stock and dilutive common stock equivalents outstanding after applying
the treasury stock method. For periods prior to the Company's IPO on March 12,
1997, common stock equivalents include the impact of the issuance of options
issued within one year prior to the date of the Company's initial public
offering at exercise prices less than the initial offering price, whether or not
the effects are antidilutive. The impact of dilutive options and convertible
debt, subsequent to March 31, 1997, has not been considered in the loss per
share calculation as the effect would be antidilutive.
Income Taxes:
The Company follows the SFAS No. 109, "Accounting for Income Taxes," which
requires, among other things, recognition of future tax benefits measured at
enacted rates attributable to deductible temporary differences between financial
statement and income tax bases of assets and liabilities and to tax net
operating loss carryforwards to the extent that realization of said benefits is
more likely than not. As the net operating loss carryforwards, amounting to
approximately $51,000,000 as of the Reorganization were not transferred to the
Company, the Company had no deferred tax assets or liabilities as of June 30,
1996. As of June 30, 1997, the Company has approximately $7,800,000 of deferred
tax assets resulting from net operating loss carryforwards. However, due to the
uncertainty of the Company's ability to generate sufficient taxable income in
the future to utilize such loss carryforwards, the net deferred tax asset has
been fully reserved as of June 30, 1997.
Use Of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-9
<PAGE> 62
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Recent Accounting Pronouncements:
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share".
Earnings per share in fiscal 1997 was reflected under the provisions of APB
Opinion No. 15, "Earnings per Share". SFAS No. 128 will apply to the Company for
the quarter ended December 31, 1997. The Company does not believe that SFAS 128
will have a material effect on its reported earnings per share calculation.
3. AVAILABLE-FOR-SALE SECURITIES
The fair value of each available-for-sale security presented in the table
that follows approximates the unamortized cost at June 30, 1997. The contractual
maturities of these securities are less than one year. Fair values are based on
quoted market prices obtained from an independent broker.
<TABLE>
<CAPTION>
FAIR MARKET
VALUE
-----------
<S> <C>
U.S. government securities.................................. $ 4,951,900
Corporate debt.............................................. 20,103,037
-----------
Total............................................. $25,054,937
===========
</TABLE>
4. INVENTORIES
Inventories as of June 30, 1997 consist of:
<TABLE>
<S> <C>
Raw materials............................................... $ 170,227
Work in process............................................. 1,202,119
-----------
Total............................................. $ 1,372,346
===========
</TABLE>
5. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1996 1997
----------- -----------
<S> <C> <C>
Furniture and equipment..................................... $ 297,131 $ 408,845
Computer software and hardware.............................. 399,847 736,159
Laboratory and manufacturing equipment...................... 2,055,423 3,045,602
Leasehold improvements...................................... 759,289 1,320,299
----------- -----------
3,511,690 5,510,905
Less-Accumulated depreciation and amortization.............. (1,589,747) (2,238,785)
----------- -----------
Fixed assets, net......................................... $ 1,921,943 $ 3,272,120
=========== ===========
</TABLE>
6. NOTE PAYABLE
Michael Jaharis, the controlling shareholder of Investments, has personally
guaranteed the repayment of a loan to Investments from certain financial
institutions. Prior to March 21, 1995, the Company was the primary borrower
under this loan, and therefore received the benefit of the personal guaranty
extended by Mr. Jaharis. As consideration for Mr. Jaharis' personal guaranty,
the Company agreed to pay Mr. Jaharis an annual fee of 0.25% of the average
amount outstanding under the loan during the Company's fiscal year. In March
1995, the Company was released as a borrower under the loan. The assumption of
the note payable to
F-10
<PAGE> 63
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the bank has been accounted for as a transfer to Investments and is reflected as
an increase in "Additional paid-in capital" in the accompanying consolidated
statements of shareholders' equity.
On July 1, 1996, the Company executed a loan in favor of Kos Investments,
Inc. (the "Investments Loan") in the aggregate principal amount of up to
$15,000,000, the proceeds of which were used to fund the Company's operations
until the consummation of its IPO. Under the terms of the Investments Loan,
interest accrues on the outstanding principal amount at First Union National
Bank of Florida's prime rate commencing July 1, 1996, escalating to a rate of 1%
over such prime rate during calendar year 1997, 2% over such prime rate during
calendar year 1998, and 3% over such prime rate during calendar year 1999 until
maturity. As of June 30, 1997, the Investments Loan accrued interest at a rate
of 8.50% per year and had outstanding principal and interest of $13,395,000 and
$643,000, respectively. Principal and interest under the Investments Loan is due
on June 30, 1999, however, the Company may repay the Investments Loan in whole
or in part prior to such date. From time to time, at Investments' option,
principal and interest outstanding under the Investments Loan may be converted
into Common Stock at a conversion price per share equal to the initial public
offering price per share ($15.00).
7. COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company has three employment agreements that require future minimum
payments as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
-------------------- ----------
<S> <C>
1998........................................................ $ 492,500
1999........................................................ 300,000
2000........................................................ 300,000
2001........................................................ 300,000
2002........................................................ 300,000
----------
$1,692,500
==========
</TABLE>
Salary and benefits expense recorded under the agreements totaled
approximately $302,000, $355,000 and $808,000 during the years ended June 30,
1995, 1996 and 1997, respectively. In addition to the minimum salaries described
above, the employment agreements entitle certain officers to royalties on future
sales, the aggregate amounts of which may not exceed $5,500,000.
Lease Commitments
The Company has various operating leases for the rental of office space,
laboratory facilities and of its sales force's vehicles that expire through
fiscal 2001. Future minimum commitments under these agreements as of June 30,
1997, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
-------------------- ----------
<S> <C>
1998........................................................ $1,102,567
1999........................................................ 638,829
2000........................................................ 365,409
2001........................................................ 76,311
----------
$2,183,116
==========
</TABLE>
As of June 30, 1996 and 1997, standby letters of credit of approximately
$65,000 and $424,000, respectively, were issued by a bank on the Company's
behalf in favor of the lessors as collateral for the leases which the lessors
have agreed to provide to the Company.
F-11
<PAGE> 64
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense under operating leases during the years ended June 30, 1995,
1996 and 1997 was $450,890, $578,122 and $544,975, respectively.
Licensing and Joint Venture Agreements
The Company has several license agreements (the "License Agreements") with
third parties (the "Licensees") for the development of future products. Under
the License Agreements, the Company is required to make payments to the
Licensees upon completion of various milestones of each project in order to
secure exclusive rights to develop, manufacture, sell and/or sublicense future
products developed through the License Agreements. In connection with such
License Agreements, the Company recorded licensing expense of approximately
$449,000, $700,000 and $3,180,000 for the years ended June 30, 1995, 1996 and
1997, respectively, which are reflected in "Research and development" in the
accompanying consolidated statements of operations. In order to maintain its
rights under the License Agreements, the Company is required to pay certain
future milestone payments and licensing fees. In the event that no milestone
event occurs, the Company generally would not be required to make any milestone
payment. The Company anticipates, based on the development efforts that have
been conducted to date, that it will be required to make future milestone
payments and pay licensing fees under the License Agreements as follows:
<TABLE>
<CAPTION>
MINIMUM ADDITIONAL
YEAR ENDING JUNE 30, PAYMENT PAYMENTS
-------------------- -------- ----------
<S> <C> <C>
1998........................................................ $150,000 $375,000
1999........................................................ -- 125,000
2000........................................................ -- 375,000
-------- --------
$150,000 $875,000
======== ========
</TABLE>
Additionally, assuming FDA approval of a certain other licensed product,
the Company would be obligated to pay up to $1,400,000 in the aggregate, to a
licensee. Milestone payments are recorded when the milestone event occurs.
On February 7, 1997, the Company entered into an agreement with an
unaffiliated generic drug manufacturer pursuant to which the parties agreed to
resolve the effects, as between themselves, of a potential interference
proceeding by the United States Patent and Trademark Office by granting cross
licenses under their respective patent applications and patents, regardless of
whether such licenses would be required. In connection with this licensing
agreement, the Company recognized $3,000,000 as a licensing expense; such
expense is included in "Research and development" expenses in the accompanying
consolidated statements of operations for the fiscal year ended June 30, 1997.
As further consideration for entering into the agreement, the Company agreed to
pay the generic manufacturer certain royalties on the net sales of Niaspan
subject to a cap on such royalty payments in the United States and a separate
cap on such payments for sales outside the United States.
The Company has also entered into a binding letter of intent forming a
joint venture (the "Joint Venture") with a company related to the sale of a
certain product using technology provided by that company. The Company paid
$1,000,000 for the exclusive right to use the technology. Because of the
uncertainties surrounding the use of the technology, as well as the lack of an
existing technologically feasible product with commercial viability, such amount
has been expensed and is included in "Research and development" in the
accompanying 1996 consolidated statement of operations. Within 30 days following
the filing of a NDA to the FDA for a certain product developed by the Joint
Venture, or in the event management determines such NDA filing to be infeasible,
any party to the Joint Venture investing in excess of the other party shall be
entitled to consideration and a transfer to it from the Joint Venture of an
amount not to exceed $1,250,000.
F-12
<PAGE> 65
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Sponsored Research
The Company has research agreements with three universities and a research
center. The Company is primarily responsible for funding the projects, and the
university or research center is responsible for providing personnel, equipment
and facilities to conduct the research activities. Future minimum commitments
under these agreements as of June 30, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
-------------------- --------
<S> <C>
1998................................................... $160,000
1999................................................... 200,000
2000................................................... 200,000
--------
$560,000
========
</TABLE>
The Company also funds, from time to time and at its sole discretion,
research programs conducted at other universities and research centers. Expenses
recorded under the Company's sponsored research programs totaled approximately
$379,000, $373,000 and $409,000 during the years ended June 30, 1995, 1996 and
1997, respectively, and are reflected in "Research and development" in the
accompanying consolidated statements of operations.
Development Agreements
The Company has development agreements with various third parties (the
"Development Agreements"). As dictated by the Development Agreements, the
Company is responsible for funding all required development activities. In order
to maintain its rights under the Development Agreements, the Company is required
to pay certain future milestone payments and development fees. In the event that
no milestone event occurs, the Company generally would not be required to make
any milestone payment. The Company anticipates, based on the development efforts
that have been conducted to date, that it will be required to pay development
fees under the Development Agreements of approximately $814,000 during the year
ended June 30, 1998.
Expenses recorded under these and other development agreements totaled
approximately $665,000 and $1,615,000 during the years ended June 30, 1996 and
1997, respectively, and are reflected in "Research and development" in the
accompanying consolidated statements of operations.
401(k) Plan
The Company's Internal Revenue Code Section 401(k) Plan, known as the Kos
Savings Plan, became effective on January 1, 1994. Each employee who has
completed at least 90 days of service with the Company and has attained age 21
is eligible to make pre-tax elective deferral contributions each year not
exceeding the greater of a specified statutory amount or 15 percent of the
employee's compensation for the year. An employee is always 100 percent vested
in the employee's elective deferral contributions. The Company makes no
contributions under this plan.
8. SHAREHOLDERS' EQUITY
Common Stock
In March 1997, the Company completed an initial public offering of
4,772,500 shares of common stock. Net proceeds to the Company were approximately
$65,900,000 after deducting expenses of the offering.
F-13
<PAGE> 66
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Preferred Stock
The Company is authorized to issue 10,000,000 shares of undesignated
preferred stock. Such shares of preferred stock may be issued by the Company in
the future, without shareholder approval, upon such terms as the Company's Board
of Directors may determine.
Stock Option Plan
During 1996, the Board of Directors of the Company adopted the Kos
Pharmaceuticals, Inc. 1996 Stock Option Plan (the "Plan"). As of June 30, 1997,
a maximum of 4,000,000 shares of Common Stock may be issued pursuant to stock
options granted or to be granted under the Plan. All directors, officers,
employees and certain related parties of the Company designated by the Board are
eligible to receive options under the Plan. The maximum term of any option is
ten years from the date of grant. All options expire within 30 days of
termination of employment. The Plan is administered by a committee appointed by
the Board of Directors of the Company.
Each outside director of the Company is granted an option to purchase 5,000
shares of common stock upon election to the Board and automatically will receive
an option to purchase an additional 3,000 shares effective on each director's
anniversary date. The exercise price of such options will be the fair market
value of the underlying Common Stock on the date the option is granted. The
Company considered the provisions of SFAS No. 123 using the Black Scholes method
and an expected volatility rate of 57.6%, a risk-free interest rate of 6.25%,
expected dividends of $0 and an expected term of 5 years to approximate the
related charge to expense.
The Company has granted options to purchase 2,424,500 shares of Common
Stock to employees, consultants, management and directors, including options
granted prior to the issuance of the Plan. Detail of option activity is as
follows:
<TABLE>
<CAPTION>
EXERCISE PRICES
--------------------------
NUMBER OF WEIGHTED
SHARES RANGE AVERAGE
--------- --------------- --------
<S> <C> <C> <C>
Outstanding, June 30, 1995....................... 1,185,000 $ 0.60 - $3.33 $ 0.81
Granted.......................................... 973,000 7.00 7.00
---------
Outstanding, June 30, 1996....................... 2,158,000 0.60 - 7.00 3.60
Granted.......................................... 299,000 15.00 - 29.94 19.96
Canceled......................................... (32,500) 7.00 7.00
---------
Outstanding, June 30, 1997....................... 2,424,500 $ 0.60 -$29.94 $ 5.57
=========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------- ----------------------------------------------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AT AVERAGE WEIGHTED EXERCISABLE WEIGHTED
RANGE OF JUNE 30, REMAINING AVERAGE JUNE 30, AVERAGE
EXERCISE PRICES 1997 CONTRACTUAL LIFE EXERCISE PRICE 1997 EXERCISE PRICE
- ---------------- -------------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.75 to $ 3.33 360,000 5.4 years $ 1.22 360,000 $ 1.22
0.60 to 7.00 1,765,500 9.0 years 4.02 1,361,500 3.14
15.00 to 29.94 299,000 9.7 years 19.96 25,250 15.00
--------- ---------
$ 0.60 to $29.94 2,424,500 1,746,750
========= =========
</TABLE>
At June 30, 1997, 1,575,500 shares remain authorized and unissued and
options to purchase 1,746,750 shares of Common Stock are exercisable under the
Plan. During fiscal 1997, options to purchase 299,000 shares of common stock
were granted at exercise prices ranging from $15.00 to $29.94. There were no
options
F-14
<PAGE> 67
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exercised during the year ended June 30, 1997. Deferred compensation cost of
$310,943 was recorded for the year ended June 30, 1997.
As permitted by SFAS No. 123, however, the Company accounts for options
issued to employees under APB Opinion No. 25 "Accounting for Stock Issued to
Employees". Consequently, except for options issued to non-employees, no
deferred compensation cost has been recognized on options issued to employees
because the exercise price of such options was not less than the market value of
the Common Stock on the date of grant.
Had compensation cost for options issued to employees been determined
consistent with SFAS No. 123, the Company's net loss and net loss per share
would have been the "Pro Forma" amounts shown in the following table:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net loss:
As reported................................ $(11,038,329) $(20,993,797) $(23,121,370)
Pro Forma.................................. $(11,038,329) $(20,993,797) $(24,062,167)
Net loss per share:
As reported................................ $(0.97) $(1.85) $(1.87)
Pro Forma.................................. $(0.97) $(1.85) $(1.95)
</TABLE>
9. SUBSEQUENT EVENTS
On July 28, 1997, the Company obtained clearance from the FDA to market
Niaspan.
10. RELATED-PARTY TRANSACTION
During 1995 the Company acquired certain property including used computers,
laboratory equipment, laboratory supplies and certain other office equipment and
furnishings from the Institute of Molecular Biology, Inc. ("IMB"), a company
controlled by Investments. In the aggregate, such purchases totaled
approximately $83,500. Until June 1996, Daniel M. Bell, the Company's President
and Chief Executive Officer, also served as the Chairman of the Board of
Directors and Chief Executive Officer of IMB.
F-15
<PAGE> 68
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVE OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER, OR ANY OF THE
UNDERWRITERS OR BY ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY A SECURITY OTHER THAN THE
SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
The Company........................... 14
Use of Proceeds....................... 14
Price Range of Common Stock........... 14
Dividend Policy....................... 14
Capitalization........................ 15
Dilution.............................. 16
Selected Consolidated Financial
Data................................ 17
Management's Discussions and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 21
Management............................ 37
Certain Relationships and Related
Transactions........................ 45
Principal and Selling Shareholders.... 46
Description of Capital Stock.......... 47
Shares Eligible for Future Sale....... 49
Underwriting.......................... 50
Legal Matters......................... 51
Experts............................... 51
Available Information................. 51
Index to Financial Statements......... F-1
</TABLE>
================================================================================
================================================================================
3,200,000 Shares
LOGO
KOS PHARMACEUTICALS, INC.
Common Stock
---------------------------------
PROSPECTUS
---------------------------------
COWEN & COMPANY
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SALOMON BROTHERS INC
SBC WARBURG DILLON READ INC.
, 1997
================================================================================
<PAGE> 69
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following sets forth expenses and costs (other than underwriting
discounts and commissions) expected to be incurred in connection with the
issuance and distribution of the securities being registered and payable by the
Company. All amounts are estimated except for the SEC registration fee and the
NASD filing fee.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 40,843
NASD filing fee............................................. 13,978
Nasdaq fees................................................. 17,500
Transfer agent and registrar fees........................... 3,500
Legal fees and expenses..................................... 75,000
Accounting fees and expenses................................ 30,000
Printing and engraving expenses............................. 165,000
Miscellaneous............................................... 29,179
--------
Total....................................................... $375,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Florida Business Corporation Act ("FBCA") and the Company's Bylaws
provide that in certain cases, each officer and director of the Company shall be
indemnified by the Company against certain costs, expenses and liabilities which
he or she may incur in his or her capacity as such. The Company also intends to
purchase directors' and officers' liability insurance consistent with the
provisions of the Florida Business Corporation Act to protect directors and
officers from liabilities against various laws, including the Securities Act of
1933.
The Company's Bylaws provide:
Right to Indemnification. Any person, his heirs, or personal
representative, made, or threatened to be made a party to any threatened,
pending, or completed action or proceeding, whether civil, criminal,
administrative, regulatory, or investigative ("Proceeding") because he is
or was a director or officer of this Corporation or serves or served any
other corporation or other enterprise in any capacity at the request of
this Corporation, shall be indemnified by this Corporation, to the full
extent permitted by the Florida Business Corporation Act; provided,
however, that the Corporation shall indemnify any such person seeking
indemnity in connection with a Proceeding (or part thereof) initiated by
such person only if such Proceeding (or part thereof) was authorized by the
Board of Directors of the Corporation. In discharging his duty, any
director or officer, when acting in good faith, may rely upon information,
opinions, reports, or statements, including financial statements and other
financial data, in each case prepared or presented by (1) one or more
officers or employees of the Corporation whom the director or officer
reasonably believes to be reliable and competent in the matters presented,
(2) counsel, public accountants, or other persons as to matters that the
director or officer believes to be within that person's professional or
expert competence, or (3) in the case of a director, a committee of the
board of directors upon which he does not serve, duly designated according
to law, as to matters within its designated authority, if the director
reasonably believes that the committee is competent.
Advances. The rights set forth above in this Article VI shall include
the right to be paid by the Corporation expenses incurred in defending or
being represented in any such Proceeding in advance of its final
disposition; provided, however, that the payment of such expenses incurred
by a director or officer because he is or was a director of officer of this
Corporation or serves or served any other corporation or enterprise in any
capacity at the request of this Corporation (and not in any other capacity
in which service was or is rendered by such person while a director or
officer, including service to an employee
II-1
<PAGE> 70
benefit plan) in advance of the final disposition of such Proceeding, shall
be made only upon delivery to the Corporation of an undertaking, by or on
behalf of such director or officer, to repay all amounts so advanced if it
should be determined ultimately that such director or officer is not
entitled to be indemnified under this Article VI or otherwise.
Contract Right. All rights to indemnification, including advancement
of expenses, shall be deemed to be provided by a contract between the
Corporation and the director or officer who serves in such capacity at any
time while this Article VI and other relevant provisions of the Florida
Business Corporation Act and other applicable law, if any, are in effect,
such that any repeal or modification thereof shall not adversely affect any
right existing at the time of such repeal or modification.
Right to Bring Suit. If a claim under the preceding paragraphs of
this Article VI is not paid in full by the Corporation within 90 days after
a written claim therefor has been received by the Corporation, the claimant
may at any time thereafter bring suit against the Corporation to recover
the unpaid amount of the claim and, if successful in whole or in part, the
claimant shall be entitled to be paid also the expense, including
attorney's fees, of prosecuting such claim. It shall be a defense to any
such action (other than an action brought to enforce a claim for expenses
incurred in defending any Proceeding in advance of its final disposition
where the required undertaking has been tendered to the Corporation) that
the claimant has not met the applicable standard of conduct which makes it
permissible under the Florida Business Corporation Act for the Corporation
to indemnify the claimant for the amount claimed, but the burden of proving
such defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel,
or its shareholders) to have made a determination prior to the commencement
of such action that indemnification of the claimant is proper in the
circumstances because he has met the applicable standard of conduct set
forth in the Florida Business Corporation Act, nor an actual determination
by the Corporation (including its Board of Directors, independent legal
counsel, or its shareholders) that the claimant had not met such applicable
standard of conduct, shall be a defense to the action or create a
presumption that claimant had not met the applicable standard of conduct.
Non-Exclusivity of Rights. The rights conferred on any person by this
Article VI shall not be exclusive of any other right which such person may
have or hereafter acquire under any statute, provision of these Bylaws, the
Articles of Incorporation, agreement, vote of shareholders or disinterested
directors or otherwise.
Insurance. The Corporation may maintain insurance, at its expense,
for the purpose of indemnifying itself and any director, officer, employee
or agent of the Corporation or another corporation, partnership, trust or
other enterprise, whether or not the Corporation would have the power to
provide such indemnity under the Florida Business Corporation Act.
Section 607.0850 of the FBCA, "Indemnification of officers, directors,
employees and agents," provides:
(1) A corporation shall have power to indemnify any person who was or
is a party to any proceeding (other than an action by, or in the right of,
the corporation), by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise
against liability incurred in connection with such proceeding, including
any appeal thereof, if he acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interests of the corporation
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful. The termination of any
proceeding by judgment, order, settlement, or conviction or upon a plea of
nolo contendere or its equivalent shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which
he reasonably believed to be in, or not opposed to, the best interests of
the corporation or, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
(2) A corporation shall have power to indemnify any person, who was or
is a party to any proceeding by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or
II-2
<PAGE> 71
was a director, officer, employee, or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee,
or agent of another corporation, partnership, joint venture, trust, or
other enterprise, against expenses and amounts paid in settlement not
exceeding, in the judgment of the board of directors, the estimated expense
of litigating the proceeding to conclusion, actually and reasonably
incurred in connection with the defense or settlement of such proceeding,
including any appeal thereof. Such indemnification shall be authorized if
such person acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the corporation, except
that no indemnification shall be made under this subsection in respect of
any claim, issue, or matter as to which such person shall have been
adjudged to be liable unless, and only to the extent that, the court in
which such proceeding was brought, or any other court of competent
jurisdiction, shall determine upon application that, despite the
adjudication of liability but in view of all circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such
expenses which such court shall deem proper.
(3) To the extent that a director, officer, employee, or agent of a
corporation has been successful on the merits or otherwise in defense of
any proceeding referred to in subsection (1) or subsection (2), or in
defense of any claim, issue, or matter therein, he shall be indemnified
against expenses actually and reasonably incurred by him in connection
therewith.
(4) Any indemnification under subsection (1) or subsection (2), unless
pursuant to a determination by a court, shall be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee, or agent is proper in
the circumstances because he has met the applicable standard of conduct set
forth in subsection (1) or subsection (2). Such determination shall be
made:
(a) By the board of directors by a majority vote of a quorum
consisting of directors who were not parties to such proceeding;
(b) If such a quorum is not obtainable or, even if obtainable, by
majority vote of a committee duly designated by the board of directors
(in which directors who are parties may participate) consisting solely
of two or more directors not at the time parties to the proceeding;
(c) By independent legal counsel;
1. Selected by the board of directors prescribed in paragraph (a)
or the committee prescribed in paragraph (b); or
2. If a quorum of the directors cannot be obtained for paragraph
(1) and the committee cannot be designated under paragraph (b), selected
by majority vote of the full board of directors (in which directors who
are parties may participate); or
(d) By the shareholders by a majority vote of a quorum consisting
of shareholders who were not parties to such proceeding or, if no such
quorum is obtainable, by a majority vote of shareholders who were not
parties to such proceeding.
(5) Evaluation of the reasonableness of expenses and authorization of
indemnification shall be made in the same manner as the determination that
indemnification is permissible. However, if the determination of
permissibility is made by independent legal counsel, persons specified by
paragraph (4)(c) shall evaluate the reasonableness of expenses and may
authorize indemnification.
(6) Expenses incurred by an officer or director in defending a civil
or criminal proceeding may be paid by the corporation in advance of the
final disposition of such proceeding upon receipt of an undertaking by or
on behalf of such director or officer to repay such amount if he is
ultimately found not to be entitled to indemnification by the corporation
pursuant to this section. Expenses incurred by other employees and agents
may be paid in advance upon such terms or conditions that the board of
directors deems appropriate.
II-3
<PAGE> 72
(7) The indemnification and advancement of expenses provided pursuant
to this section are not exclusive, and a corporation may make any other or
further indemnification or advancement of expenses of any of its directors,
officers, employees, or agents, under any bylaw, agreement, vote of
shareholders or disinterested directors, or otherwise, both as to action in
his official capacity and as to action in another capacity while holding
such office. However, indemnification or advancement of expenses shall not
be made to or on behalf of any director, officer, employee, or agent if a
judgment or other final adjudication establishes that his actions, or
omissions to act, were material to the cause of action so adjudicated and
constitute:
(a) A violation of the criminal law, unless the director, officer,
employee, or agent had reasonable cause to believe his conduct was
lawful or had no reasonable cause to believe his conduct was unlawful;
(b) A transaction from which the director, officer, employee, or
agent derived an improper personal benefit;
(c) In the case of a director, a circumstance under which the
liability provisions of s. 607.0834 are applicable; or
(d) Willful misconduct or a conscious disregard for the best
interests of the corporation in a proceeding by or in the right of the
corporation to procure a judgment in its favor or in a proceeding by or
in the right of a shareholder.
(8) Indemnification and advancement of expenses as provided in this
section shall continue as, unless otherwise provided when authorized or
ratified, to a person who has ceased to be a director, officer, employee,
or agent and shall inure to the benefit of the heirs, executors, and
administrators of such a person, unless otherwise provided when authorized
or ratified.
(9) Unless the corporation's articles of incorporation provide
otherwise, notwithstanding the failure of a corporation to provide
indemnification, and despite any contrary determination of the board or of
the shareholders in the specific case, a director, officer, employee, or
agent of the corporation who is or was a party to a proceeding may apply
for indemnification or advancement of expenses, or both, to the court
conducting the proceeding, to the circuit court, or to another court of
competent jurisdiction. On receipt of an application, the court, after
giving any notice that it considers necessary, may order indemnification
and advancement of expenses, including expenses incurred in seeking
court-ordered indemnification or advancement of expenses, if it determines
that:
(a) The director, officer, employee, or agent is entitled to
mandatory indemnification under subsection (3), in which case the court
shall also order the corporation to pay the director reasonable expenses
incurred in obtaining court-ordered indemnification or advancement of
expenses;
(b) The director, officer, employee, or agent is entitled to
indemnification or advancement of expenses, or both, by virtue of the
exercise by the corporation of its power pursuant to subsection (7); or
(c) The director, officer, employee, or agent is fairly and
reasonably entitled to indemnification or advancement of expenses, or
both, in view of all the relevant circumstances, regardless of whether
such person met the standard of conduct set forth in subsection (1),
subsection (2), or subsection (7).
(10) For purposes of this section, the term "corporation" includes, in
addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger, so that any person who is or was a director, officer, employee, or
agent of a constituent corporation, or is or was serving at the request of
a constituent corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other
enterprise, is in the same position under this section with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
II-4
<PAGE> 73
(11) For purposes of this section;
(a) The term "other enterprises" includes employee benefit plans;
(b) The term "expenses" includes counsel fees, including those for
appeal;
(c) The term "liability" includes obligations to pay a judgment,
settlement, penalty, fine (including an excise tax assessed with respect
to any employee benefit plan), and expenses actually and reasonably
incurred with respect to a proceeding;
(d) The term "proceeding" includes any threatened, pending, or
completed action, suit, or other type of proceeding, whether civil,
criminal, administrative, or investigative and whether formal or
informal;
(e) The term "agent" includes a volunteer;
(f) The term "serving at the request of the corporation" includes
any service as a director, officer, employee, or agent of the
corporation that imposes duties on such persons, including duties
relating to an employee benefit plan and its participants or
beneficiaries; and
(g) The term "not opposed to the best interest of the corporation"
describes the actions of a person who acts in good faith and in a manner
he reasonably believes to be in the best interests of the participants
and beneficiaries of an employee benefit plan.
(12) A corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee, or
agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust or other enterprise against
any liability asserted against him and incurred by him in any such capacity
or arising out of his status as such, whether or not the corporation would
have the power to indemnify him against such liability under the provisions
of this section.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Within the last three years, the Company sold the following securities
without registration under the Securities Act:
On June 30, 1996, the Company issued 10,000,000 shares of Common
Stock, par value $.01 per share ("Common Stock"), to Kos Holdings, Inc.
("Holdings") in exchange for all of the assets and all of the liabilities
of Holdings. Such assets had a book value of $2,280,819 and such
liabilities amounted to $366,670 on such date. Effective July 1, 1996, the
Company issued the Convertible Note to Kos Investments. The shares of
Common Stock issued to Holdings and the Convertible Note were issued in
reliance on the exemption from registration provided in Section 4(2) of the
Securities Act of 1933, as amended.
No underwriter was engaged in connection with the foregoing sales of
securities. The sale of Common Stock, the issuances of options to employees
and consultants and the Convertible Note have been made in reliance upon
the exemption from the registration requirements afforded by Section 4(2)
of the Securities Act of 1933, as amended, as transactions not involving
any public offering. The Company has reason to believe that all of the
foregoing purchasers were familiar with or had access to information
concerning the operations and financial condition of the Company, and all
of those individuals acquired the securities for investment and not with a
view to the distribution thereof.
II-5
<PAGE> 74
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<C> <S> <C>
1 -- Underwriting Agreement among the Company, the Selling
Shareholders, and Cowen & Company, Donaldson, Lufkin &
Jenrette Securities Corporation, Salomon Brothers Inc, and
SBC Warburg Dillon Read Inc., as Representatives of the
Underwriters.
3.1* -- Amended and Restated Articles of Incorporation of the
Company
3.2* -- Amended and Restated Bylaws of the Company
4.1 -- See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and Amended and Restated
Bylaws of the Company defining the rights of holders of
Common Stock of the Company
4.2** -- Form of Common Stock certificate of the Company
5**** -- Opinion of Holland & Knight LLP
10.1* -- Employment Agreement dated as of July 1, 1996, between
Daniel M. Bell and the Company
10.2* -- Nonqualified Stock Option Agreement by and between the
Company and Daniel M. Bell dated as of June 20, 1996
10.3* -- Employment Agreement dated as of June 15, 1996, between
David Bova and the Company
10.4*** -- Employment Agreement dated June 20, 1996, by and between
Aeropharm Technology, Inc. and Anthony J. Cutie
10.5*** -- Option Agreement dated June 20, 1996 between Anthony J.
Cutie and the Company
10.6* -- Kos Pharmaceuticals, Inc. 1996 Stock Option Plan
10.7* -- Promissory Note in favor of Kos Investments, Inc. dated July
1, 1996
10.8* -- Registration Rights Agreement dated as of June 30, 1996 by
and between the Company, Kos Holdings, Inc. and Kos
Investments, Inc.
10.9*+ -- Development Agreement by and between the Company and Fuisz
Technologies Ltd.
10.10*+ -- Option/Licensing Agreement by and between the Company and
Fuisz Technologies Ltd.
10.11*+ -- Development Agreement by and between the Company and Fuisz
Technologies Ltd.
10.12*+ -- Option/Licensing Agreement by and between the Company and
Fuisz Technologies Ltd.
10.13*+ -- License Agreement by and between the Company and
Upsher-Smith Laboratories, Inc., dated February 7, 1997
10.14* -- Oakwood Business Center Lease, dated May 2, 1991, between
STS Buildings Associates, L.P. and the Company
10.15* -- Oakwood Business Center Lease, dated May 15, 1990, between
STS Buildings Associates, L.P. and the Company
10.16* -- Modification and Extension Agreement, dated June 6, 1996,
between STS Buildings Associates, L.P. and the Company
10.17* -- Assignment and Second Modification of Lease Agreement, dated
June 30, 1996, by and between Oakwood Business Center
Limited Partnership and the Company
10.18* -- Assignment and Second Modification of Loan Agreement, dated
June 30, 1996, by and between Oakwood Business Center
Limited Partnership and the Company
10.19* -- Lease between Center Realty, L.P. and the Company, dated May
1993
10.20* -- Third Modification of Lease Agreement, dated November 21,
1996, by and between Oakwood Business Center Limited
Partnership and the Company
21* -- Subsidiaries of the Company
23.1**** -- Consent of Holland & Knight LLP (included in Exhibit 5
above)
23.2 -- Consent of Arthur Andersen LLP
24 -- Power of Attorney (included on the signature page hereto)
27**** -- Financial Data Schedule
</TABLE>
II-6
<PAGE> 75
- ---------------
* Filed as an exhibit to the Company's Registration Statement on Form S-1
(File No. 333-17991), as amended, filed with the Securities and Exchange
Commission on December 17, 1996, and incorporated herein by reference.
** Filed as an exhibit to the Company's Registration Statement on Form 8-A
(File No. 000-22171) filed with the Securities and Exchange Commission on
February 25, 1997, and incorporated herein by reference.
*** Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended June 30, 1997 (File No. 000-22171) filed with the Securities and
Exchange Commission on September 2, 1997, and incorporated herein by
reference.
**** Previously filed.
+ Certain confidential material contained in the document has been omitted
and filed separately with the Securities and Exchange Commission pursuant
to Rule 406 of the Securities Act of 1933, as amended.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The undersigned registrant hereby undertakes that: (1) for purposes of
determining any liability under the Securities Act, the information omitted from
the form of prospectus filed as part of a Registration Statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be a part of this Registration Statement as of the time it was
declared effective.
(2) for the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-7
<PAGE> 76
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant,
Kos Pharmaceuticals, Inc., has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Miami, State of Florida, on the 20th day of October, 1997.
KOS PHARMACEUTICALS, INC.
By: /s/ DANIEL M. BELL
------------------------------------
Daniel M. Bell, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Daniel M. Bell and Duncan H. Cocroft and each of
them, his true and lawful attorney-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, including a Registration Statement
filed pursuant to Rule 462 of the Securities Act of 1933, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board October 20, 1997
- ---------------------------------------------
Michael Jaharis
/s/ DANIEL M. BELL President, Chief Executive Officer and October 20, 1997
- --------------------------------------------- Director (Principal Executive Officer)
Daniel M. Bell
/s/ DUNCAN H. COCROFT Senior Vice President, Chief October 20, 1997
- --------------------------------------------- Administrative Officer
Duncan H. Cocroft (Principal Financial Officer)
/s/ JUAN F. RODRIGUEZ Controller October 20, 1997
- --------------------------------------------- (Principal Accounting Officer)
Juan F. Rodriguez
/s/ ROBERT E. BALDINI Vice Chairman of the Board October 20, 1997
- ---------------------------------------------
Robert E. Baldini
* Director October 20, 1997
- ---------------------------------------------
John Brademas
* Director October 20, 1997
- ---------------------------------------------
Steven Jaharis
* Director October 20, 1997
- ---------------------------------------------
Louis C. Lasagna
* Director October 20, 1997
- ---------------------------------------------
Mark Novitch
* Director October 20, 1997
- ---------------------------------------------
Frederick B. Whittemore
*By: /s/ DANIEL M. BELL October 20, 1997
- ------------------------------------------
Daniel M. Bell
Attorney-in-Fact
</TABLE>
II-8
<PAGE> 77
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
1 -- Underwriting Agreement among the Company, the Selling
Shareholders, and Cowen & Company, Donaldson, Lufkin &
Jenrette Securities Corporation, Salomon Brothers Inc, and
SBC Warburg Dillon Read Inc., as Representatives of the
several Underwriters.
23.2 -- Consent of Arthur Andersen LLP
</TABLE>
<PAGE> 1
EXHIBIT 1
3,200,000 Shares
KOS PHARMACEUTICALS, INC.
Common Stock
UNDERWRITING AGREEMENT
October 20, 1997
COWEN & COMPANY
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
SALOMON BROTHERS INC
SBC WARBURG DILLON READ INC.
As Representatives of the several Underwriters
c/o Cowen & Company
Financial Square
New York, New York 10005
Dear Sirs:
1. INTRODUCTORY. Kos Pharmaceuticals, Inc., a Florida corporation (the
"Company") proposes to sell, pursuant to the terms of this Agreement, to the
several underwriters named in Schedule A hereto (the "Underwriters," or, each,
an "Underwriter"), and certain shareholders of the Company (the "Selling
Shareholders") named in Schedule B hereto (the "Selling Shareholders," and
collectively with the Company, the "Sellers") severally propose to sell to the
Underwriters, an aggregate of 3,200,000 shares of Common Stock, $.01 par value
(the "Common Stock") of the Company. The aggregate of 3,200,000 shares so
proposed to be sold, of which 1,000,000 shares are to be sold by the Company and
2,200,000 shares are to be sold by the Selling Shareholders (each Selling
Shareholder selling the amount set forth opposite such Selling Shareholder's
name under "Firm Stock" in Schedule B hereto) is hereinafter referred to as the
"Firm Stock".
The Selling Shareholders also severally propose to sell to the
Underwriters, upon the terms and conditions set forth in Section 3 hereof, up to
an additional 480,000 shares of Common Stock (the "Optional Stock"), the Company
selling up to 140,000 shares of Common Stock and each Selling Shareholder
selling up to the amount set forth opposite such Selling Shareholder's name
under "Optional Stock" in Schedule B hereto. The Firm Stock and the Optional
Stock are hereinafter collectively referred to as the "Stock". Cowen & Company
("Cowen"), Donaldson, Lufkin & Jenrette Securities Corporation, Salomon Brothers
Inc, and SBC Warburg Dillon Read Inc. are acting as representatives of the
several Underwriters and in such capacity are
<PAGE> 2
hereinafter referred to as the "Representatives". The Company and the Selling
Shareholders are hereinafter collectively referred to as the "Sellers."
2. (a) REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, the several Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-35395) in the
form in which it became or becomes effective and also in such form as it
may be when any post-effective amendment thereto shall become effective
with respect to the Stock, including any preeffective prospectuses included
as part of the registration statement as originally filed or as part of any
amendment or supplement thereto, or filed pursuant to Rule 424 under the
Securities Act of 1933, as amended (the "Securities Act"), and the rules
and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, copies of which have
heretofore been delivered to you, has been prepared by the Company in
conformity in all material respects with the requirements of the Securities
Act and the Rules and Regulations and has been filed with the Commission
under the Securities Act. The term Registration Statement as used in this
Agreement means the registration statement in the form in which it becomes
effective by the Commission. If it is contemplated, at the time this
Agreement is executed, that a post-effective amendment to the registration
statement will be filed and must be declared effective before the offering
of the Stock may commence, the term "Registration Statement" as used in
this Agreement means the registration statement as amended by said
post-effective amendment. The term "Registration Statement" as used in this
Agreement shall also include any registration statement relating to the
Stock that is filed and becomes effective pursuant to Rule 462(b) under the
Securities Act. The term "Prospectus" as used in this Agreement means the
prospectus in the form included in the Registration Statement, or, (A) if
the prospectus included in the Registration Statement omits information in
reliance on Rule 430A under the Securities Act and such information is
included in a prospectus filed with the Commission pursuant to Rule 424(b)
under the Securities Act, the term "Prospectus" as used in this Agreement
means the prospectus in the form included in the
2
<PAGE> 3
Registration Statement as supplemented by the addition of the Rule 430A
information contained in the prospectus filed with the Commission pursuant
to Rule 424(b) and (B) if prospectuses that meet the requirements of
Section 10(a) of the Securities Act are delivered pursuant to Rule 434
under the Securities Act, then (i) the term "Prospectus" as used in this
Agreement means the "prospectus subject to completion" (as such term is
defined in Rule 434(g) under the Securities Act) as supplemented by (a) the
addition of Rule 430A information or other information contained in the
form of prospectus delivered pursuant to Rule 434(b)(2) under the
Securities Act or (b) the information contained in the term sheets
described in Rule 434(b)(3) under the Securities Act, and (ii) the date of
such prospectuses shall be deemed to be the date of the term sheets. The
term "Preeffective Prospectus" as used in this Agreement means the
prospectus subject to completion in the form included in the Registration
Statement at the time of the initial filing of the Registration Statement
with the Commission, and as such prospectus shall have been amended from
time to time prior to the date of the Prospectus.
(ii) The Commission has not issued or threatened to issue any order
preventing or suspending the use of any Preeffective Prospectus, and, at
its date of issue, each Preeffective Prospectus conformed in all material
respects with the requirements of the Securities Act and did not include
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading; and, when the Registration Statement becomes effective and at
all times subsequent thereto up to and including the Closing Date (as
hereinafter defined), the Registration Statement and the Prospectus and any
amendments or supplements thereto conformed and will conform in all
material respects to the requirements of the Securities Act and neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, included or will include any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were
3
<PAGE> 4
made, not misleading; provided, however, that the foregoing
representations, warranties and agreements shall not apply to information
contained in or omitted from any Preeffective Prospectus or the
Registration Statement or the Prospectus or any such amendment or
supplement thereto in reliance upon, and in conformity with, written
information relating to any Underwriter (or relating to the distribution)
furnished to the Company by or on behalf of any Underwriter, directly or
through you, specifically for use in the preparation thereof; there is no
franchise, lease, contract, agreement or document required to be described
in the Registration Statement or Prospectus or to be filed as an exhibit to
the Registration Statement which is not described or filed therein as
required; and all descriptions of any such franchises, leases, contracts,
agreements or documents contained in the Registration Statement are
accurate and complete descriptions of such documents in all material
respects.
(iii) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as set forth
or contemplated in the Prospectus, neither the Company nor any of its
subsidiaries has incurred any material liabilities or obligations, direct
or contingent, nor entered into any material transactions not in the
ordinary course of business, and there has not been any material adverse
change in the condition (financial or otherwise), properties, business,
management, prospects, net worth or results of operations of the Company
and its subsidiaries considered as a whole, or any change in the capital
stock (except pursuant to the Company's stock option plans), or a material
change in the short-term or long-term debt of the Company and its
subsidiaries considered as a whole.
(iv) The financial statements, together with the related notes and
schedules, set forth in the Prospectus and elsewhere in the Registration
Statement fairly present, on the basis stated in the Registration
Statement, the financial position and the results of operations and changes
in financial position of the Company and its consolidated subsidiaries at
the respective dates or for the respective periods therein specified. Such
statements and related notes and schedules have been prepared in accordance
with generally
4
<PAGE> 5
accepted accounting principles applied on a consistent basis except as may
be set forth in the Prospectus. The other financial accounting information
and data of the Company set forth in the Prospectus and elsewhere in the
Registration Statement is accurately presented and has been prepared on a
basis consistent with such financial statements and the books and records
of the Company. All financial and statistical information and data set
forth in the Prospectus and elsewhere in the Registration Statement that
was obtained from third party source materials is, in all material
respects, an accurate presentation of the information or data as presented
in the source from which it was derived.
(v) To the best of the Company's knowledge, Arthur Andersen LLP, who
have expressed their opinions on the audited financial statements included
in the Registration Statement and the Prospectus, are independent public
accountants as required by the Securities Act and the Rules and
Regulations.
(vi) The Company and each of its subsidiaries has been duly organized
and is validly existing and in good standing as a corporation under the
laws of its jurisdiction of organization; and the Company is and each of
its subsidiaries is duly qualified to do business and in good standing as a
foreign corporation in all other jurisdictions where its ownership or
leasing of properties or the conduct of its business requires such
qualification. The Company and each of its subsidiaries has all requisite
corporate power and authority, and all necessary consents, approvals,
authorizations, orders, registrations, qualifications, licenses and permits
of and from all public regulatory or governmental agencies and bodies to
own, lease and operate its properties and conduct its business as now being
conducted and as described in the Registration Statement and the
Prospectus, and no such consent, approval, authorization, order,
registration, qualification, license or permit contains a materially
burdensome restriction not adequately disclosed in the Registration
Statement and the Prospectus. Aeropharm Technology, Inc., a Delaware
corporation, is owned and controlled by the Company. Except as described in
the Prospectus in the first and second paragraphs under the heading
"Business--Collaborations, the Company does not,
5
<PAGE> 6
directly or indirectly, own or control any other corporation, association
or entity.
(vii) The Company's authorized and outstanding capital stock is on the
date hereof, and will be on the Closing Date, as set forth under the
heading "Capitalization" in the Prospectus (without giving effect to the
exercise of stock options or the issuance of 215 shares of Common Stock to
employees of the Company); the outstanding shares of Common Stock of the
Company (including the shares of Common Stock to be sold by the Selling
Shareholders) conform to the description thereof in the Prospectus, have
been duly authorized and validly issued and are fully paid and
nonassessable and have been issued in compliance with all federal and state
securities laws and were not issued in violation of or subject to any
preemptive rights or similar rights to subscribe for or purchase securities
and conform to the description thereof contained in the Prospectus. Except
as disclosed in and or contemplated by the Prospectus and the financial
statements of the Company and related notes thereto included in the
Prospectus, the Company does not have outstanding any options or warrants
to purchase, or any preemptive rights or other rights to subscribe for or
to purchase any securities or obligations convertible into, or any
contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations, except for
options granted subsequent to the date of information provided in the
Prospectus pursuant to the Company's employee and stock option plans as
disclosed in the Prospectus. The description of the Company's stock option
and other stock plans or arrangements, and the options or other rights
granted or exercised thereunder, as set forth in the Prospectus, accurately
and fairly presents in all material respects the information required by
the Rules and Regulations to be shown with respect to such plans,
arrangements, options and rights. All outstanding shares of capital stock
of each of the subsidiaries of the Company have been duly authorized and
validly issued, and are fully paid and nonassessable and are owned directly
by the Company free and clear of any liens, encumbrances, equities or
claims.
(viii) Each of (a) the shares of Stock to be issued and sold by the
Company to the Underwriters hereunder and (b) the shares of Stock to be
issued by the Company to Daniel M. Bell and sold by Daniel M. Bell to the
Underwriters
6
<PAGE> 7
hereunder has been duly and validly authorized and, when issued and
delivered against payment therefor as provided herein, will be duly and
validly issued, fully paid and nonassessable and free of any preemptive or
similar rights and will conform to the description thereof in the
Prospectus.
(ix) Except as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property of the Company or any
subsidiary is subject, which, if determined adversely to the Company or any
such subsidiary, might individually or in the aggregate (i) prevent or
adversely affect the transactions contemplated by this Agreement, (ii)
suspend the effectiveness of the Registration Statement, (iii) prevent or
suspend the use of the Preeffective Prospectus in any jurisdiction or (iv)
result in a material adverse change in the condition (financial or
otherwise), properties, business, management, prospects, net worth or
results of operations of the Company and, to the Company's knowledge, there
is no valid basis for any such legal or governmental proceeding; and to the
best of the Company's knowledge no such proceedings are threatened or
contemplated against the Company or any subsidiary by governmental
authorities or others. The Company is not a party or subject to the
provisions of any material injunction, judgment, decree or order of any
court, regulatory body or other governmental agency or body. The
description of the Company's litigation under the heading "Business--Legal
Proceedings" in the Prospectus is true and correct and complies with the
Rules and Regulations.
(x) Neither the Company nor any subsidiary of the Company is in
violation of its respective articles or certificate of incorporation or
by-laws or in default in the performance of any obligation, agreement or
condition contained in any bond, debenture, note or any other evidence of
indebtedness or in any other agreement, indenture or instrument material to
the conduct of the business of the Company and its subsidiaries considered
as a whole, to which the Company or any of its subsidiaries or their
respective property is bound.
7
<PAGE> 8
(xi) The execution, delivery and performance of this Agreement and the
consummation of the transactions herein contemplated will not result in a
breach or violation of any of the terms or provisions of or constitute a
default under any indenture, mortgage, deed of trust, note agreement or
other agreement or instrument to which the Company or any of the
subsidiaries is a party or by which it or any of its properties is or may
be bound, the articles or certificate of incorporation, by-laws or other
organizational documents of the Company or any of its subsidiaries, or any
law, order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries or any of
their properties or result in the creation of a lien on any of the assets
of the Company or its subsidiaries.
(xii) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the Company
of the transactions contemplated by this Agreement, except such as may be
required by the National Association of Securities Dealers, Inc. (the
"NASD") or under the Securities Act or the securities or "Blue Sky" laws of
any jurisdiction in connection with the purchase and distribution of the
Stock by the Underwriters.
(xiii) The Company has the full corporate power and authority to enter
into this Agreement and to perform its obligations hereunder (including to
issue, sell and deliver the Stock to be sold by it hereunder), and this
Agreement has been duly and validly authorized, executed and delivered by
the Company and is a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except to the
extent that rights to indemnity and contribution hereunder may be limited
by federal or state securities laws or the public policy underlying such
laws.
(xiv) The Company and its subsidiaries are in all material respects in
compliance with, and conduct their businesses in conformity with, all
applicable federal, state, local and foreign laws, rules and regulations of
any court or governmental agency or body; to the knowledge of the Company,
otherwise than as set forth in the
8
<PAGE> 9
Registration Statement and the Prospectus, no prospective change in any of
such federal or state laws, rules or regulations has been adopted which,
when made effective, would have a material adverse effect on the operations
of the Company and its subsidiaries.
(xv) The Company and each of its subsidiaries (A) are in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (B) have received all permits,
licenses or other approvals required of them under applicable Environmental
Laws to conduct their respective businesses and (C) are in compliance with
all terms and conditions of any such permit, license or approval, except
where such noncompliance with Environmental Laws, failure to receive
required permits, licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals would not,
singly or in the aggregate, have a material adverse effect on the Company
and its subsidiaries considered as a whole.
(xvi) The Company and each of its subsidiaries have such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits"), including, without limitation, under any
applicable Environmental Laws, as are necessary to own, lease and operate
their respective properties and to conduct their businesses except where
such failure to receive required permits would not, singly or in the
aggregate, have a material adverse effect on the Company and its
subsidiaries considered as a whole; the Company and each of its
subsidiaries have fulfilled and performed all of their material obligations
with respect to such permits and no event has occurred which allows, or
after notice or lapse of time would allow, revocation or termination
thereof or results in any other material impairment of the rights of the
holder of any such permit; and, except as described in the Prospectus, such
permits contain no restrictions that are materially burdensome to the
Company or any of its subsidiaries.
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(xvii) The clinical trials and the animal studies conducted by or on
behalf of the Company or in which the Company has participated that are
described in the Prospectus were and, if still pending, are being conducted
in all material respects in accordance with standard medical and scientific
research procedures, and the Company has operated and currently is in
compliance in all material respects with all applicable FDA rules,
regulations and policies.
(xviii) The Company and its subsidiaries have filed all federal,
state, local and foreign income, payroll, franchise and other tax returns
which are required to be filed through the date hereof, or has received
extensions thereof, and have paid all taxes shown as due thereon or with
respect to any of their properties to the extent the same are material and
have become due, and there is no tax deficiency that has been, or to the
knowledge of the Company is likely to be, asserted against the Company or
any of its subsidiaries or any of their respective properties or assets
that would adversely affect the financial position, business or operations
of the Company and its subsidiaries.
(xix) Except as described in the Registration Statement, no person or
entity has the right to require registration of shares of Common Stock or
other securities of the Company because of the filing or effectiveness of
the Registration Statement or otherwise, except for persons and entities
who have expressly waived such right or who have been given proper notice
and have failed to exercise such right within the time or times required
under the terms and conditions of such right.
(xx) Neither the Company nor any of its officers, directors or
affiliates (as that term is defined in Rule 144, promulgated under the
Securities Act) has taken or will take, directly or indirectly, any action
designed or intended to stabilize or manipulate the price of any security
of the Company, or which caused or resulted in, or which might in the
future reasonably be expected to cause or result in, stabilization or
manipulation of the price of any security of the Company.
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(xxi) The Company has provided you with all annual, audited financial
statements since June 30, 1992 to the date hereof that are available to the
officers of the Company.
(xxii) Except as otherwise described in the Prospectus, the Company
and its subsidiaries own or possess the right to use (i) all patents,
trademarks, trademark registrations, service marks, service mark
registrations, trade names, copyrights, licenses, inventions, trade secrets
and rights described in the Prospectus as being owned by them and (ii) all
other material patents, trademarks, trademark registrations, trade names,
copyrights, licenses, inventions and trade secrets employed by them in the
operation of their respective businesses, and, except as described in the
Prospectus and except with respect to the Nicostatin trademark, the Company
is not aware of any claim to the contrary or any challenge by any other
person to the rights of the Company and its subsidiaries with respect to
the foregoing. To the Company's knowledge, except as described in the
Prospectus, its business as now conducted and as proposed to be conducted
does not and will not infringe or conflict with in any material respect
patents, trademarks, service marks, trade names, copyrights, trade secrets,
licenses or other intellectual property or franchise right of any person.
Except as described in the Prospectus, no claim has been made against the
Company alleging the infringement by the Company of any patent trademark,
service mark, trade name, copyright, trade secret, license in or other
intellectual property right or franchise right of any person.
(xxiii) The Company and its subsidiaries have performed all material
obligations required to be performed by them under all contracts required
by Item 601 (b)(10) of Regulation S-K under the Securities Act to be filed
as exhibits to the Registration Statement, and neither the Company nor any
of its subsidiaries nor, to the Company's knowledge, any other party to
such contract is in default under or in breach of any such obligations.
Neither the Company nor any of its subsidiaries has received any notice of
such default or breach.
(xxiv) The Company is not involved in any labor dispute nor, to the
Company's knowledge, is any such dispute threatened. The Company is
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not aware that (A) any executive, key employee or significant group of
employees of the Company or any subsidiary plans to terminate employment
with the Company or any such subsidiary or (B) any such executive or key
employee is subject to any noncompete, nondisclosure, confidentiality,
employment, consulting or similar agreement that would be violated by the
present or proposed business activities of the Company and its
subsidiaries. Neither the Company nor any subsidiary has or expects to have
any liability for any prohibited transaction or funding deficiency or any
complete or partial withdrawal liability with respect to any pension,
profit sharing or other plan which is subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA<168>), to which the Company
or any subsidiary makes or ever has made a contribution and in which any
employee of the Company or any subsidiary is or has ever been a
participant. With respect to such plans, the Company and each subsidiary is
in compliance in all material respects with all applicable provisions of
ERISA.
(xxv) The Company has obtained the written agreements described in
Section 3 of this Agreement from each person listed in Schedule C hereto.
(xxvi) The Company and its subsidiaries have, and the Company and its
subsidiaries as of the Closing Date will have, good and marketable title in
fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the
Company or of its subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or
such as would not have a material adverse effect on the Company and its
subsidiaries considered as a whole; and any real property and buildings
held under lease by the Company and its subsidiaries or proposed to be held
after giving effect to the transactions described in the Prospectus are, or
will be as of the Closing Date, held by them under valid, subsisting and
enforceable leases with such exceptions as would not have a material
adverse effect on the Company and its subsidiaries considered as a whole in
each case except as described in or contemplated by the Prospectus.
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(xxvii) The Company and its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in
such amounts as are customary in the businesses in which they are engaged
or propose to engage after giving effect to the transactions described in
the Prospectus; and neither the Company nor any subsidiary of the Company
has any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue their
business at a cost that would not materially and adversely affect the
condition, financial or otherwise, or the earnings, business or operations
of the Company and its subsidiaries considered as a whole, except as
described in or contemplated by the Prospectus.
(xxviii) Other than as contemplated by this Agreement, there is no
broker, finder or other party that is entitled to receive from the Company
any brokerage or finder's fee or other fee or commission as a result of any
of the transactions contemplated by this Agreement.
(xxix) The Company has complied with all provisions of Section 517.075
Florida Statutes (Chapter 92-198; Laws of Florida).
(xxx) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurances
that (A) transactions are executed in accordance with management's general
or specific authorization; (B) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets;
(C) access to assets is permitted only in accordance with management's
general or specific authorization; and (D) the recorded accountability for
assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xxxi) To the Company's knowledge, neither the Company nor any of its
subsidiaries nor any employee or agent of the Company or any of its
subsidiaries has made any payment of funds of the Company or any of its
subsidiaries or received
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or retained any funds in violation of any law, rule or regulation, which
payment, receipt or retention of funds is of a character required to be
disclosed in the Prospectus.
(xxxii) Neither the Company nor any of its subsidiaries is or, after
application of the net proceeds of this offering as described under the
caption "Use of Proceeds" in the Prospectus, will become an "investment
company" or an entity "controlled" by an " investment company" as such
terms are defined in the Investment Company Act of 1940, as amended.
(xxxiii) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters pursuant to
this Agreement shall be deemed to be a representation and warranty by the
Company as to the matters covered thereby.
(xxxiv) No executive officer of the Company has received or is aware
of any communication (written or oral) relating to the termination or
modification of any of the agreements described or referred to in the
Prospectus under the caption "Business", the termination or modification of
which would have a material adverse effect on the Company.
(xxxv) Except as disclosed in the Prospectus, there are no business
relationships or related party transactions required to be disclosed
therein by Item 404 of Regulation S-K of the Commission.
(b) REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS. Each of the
Selling Shareholders represents and warrants to, and agrees with, the several
Underwriters that:
(i) This Agreement has been duly authorized (if such Selling
Shareholder is a corporation), executed and delivered by or on behalf of
such Selling Shareholder, and is a valid and binding obligation of such
Selling Shareholder, enforceable against such Selling Shareholder in
accordance with its terms, except to the extent that rights to indemnity
and contribution hereunder may be limited by federal or state securities
laws or the public policy underlying such laws.
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(ii) The execution and delivery by such Selling Shareholder of, and
the performance by such Selling Shareholder of its obligations under this
Agreement and the Power of Attorney of such Selling Shareholder appointing
certain individuals as such Selling Shareholder's attorneys-in-fact to the
extent set forth therein, relating to the transactions contemplated hereby
and by the Registration Statement (the "Power of Attorney" of such Selling
Shareholder) will not contravene any provision of applicable law, or the
articles of incorporation or by-laws of such Selling Shareholder (if such
Selling Shareholder is a corporation), or any agreement or other instrument
binding upon such Selling Shareholder or any judgment, order or decree of
any governmental body, agency or court having jurisdiction over such
Selling Shareholder, and no consent, approval, authorization or order of,
or qualification with, any governmental body or agency is required for the
performance by such Selling Shareholder of its obligations under this
Agreement or the Power of Attorney of such Selling Shareholder, except such
as may be required by the securities or Blue Sky laws of the various states
in connection with the offer and sale of the shares of Stock.
(iii) Such Selling Shareholder has or has the right to acquire, and on
the Closing Date will have, valid title to the shares of Stock to be sold
by such Selling Shareholder and the legal right and power, and all
authorization and approval required by law, to enter into this Agreement
and the Power of Attorney of such Selling Shareholder and to sell, transfer
and deliver the shares of Stock to be sold by such Selling Shareholder.
(iv) The shares of Stock to be sold by such Selling Shareholder
pursuant to this Agreement have been duly authorized and are, or when
issued will be, validly issued, fully paid and non-assessable.
(v) The Power of Attorney of such Selling Shareholder has been duly
authorized, executed and delivered by such Selling Shareholder and is a
valid and binding agreement of such Selling Shareholder.
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<PAGE> 16
(vi) Delivery of the shares of Stock to be sold by such Selling
Shareholder pursuant to this Agreement will pass title to such shares of
Stock free and clear of any security interests, claims, liens, equities and
other encumbrances.
(vii) To the best of each Selling Shareholder's knowledge, at its date
of issue, each Preeffective Prospectus conformed in all material respects
with the requirements of the Securities Act and did not include any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, and when
the Registration Statement becomes effective and at all times subsequent
thereto up to and including the Closing Date (as hereinafter defined), the
Registration Statement and the Prospectus and any amendments or supplements
thereto conformed and will conform in all material respects to the
requirements of the Securities Act and neither the Registration Statement
nor the Prospectus, nor any amendment or supplement thereto, included or
will include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the foregoing
representations, warranties and agreements shall not apply to information
contained in or omitted from any Preeffective Prospectus or the
Registration Statement or the Prospectus or any such amendment or
supplement thereto in reliance upon, and in conformity with, written
information relating to any Underwriter (or relating to the distribution)
furnished to the Company by or on behalf of any Underwriter, directly or
through you, specifically for use in the preparation thereof.
3. PURCHASE BY, AND SALE AND DELIVERY TO, UNDERWRITERS--CLOSING DATES. Each
Seller, severally and not jointly, hereby agrees to sell to the Underwriters,
and each Underwriter, on the basis of the representations, warranties, covenants
and agreements herein contained, but subject to the terms and conditions herein
set forth, agrees, severally and not jointly, to purchase from such Seller the
number of shares of Firm Stock (subject to such adjustments to eliminate
fractional shares as you may determine) that bears the same proportion to the
number of
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<PAGE> 17
shares of Firm Stock to be sold by such Seller as the number of shares of Firm
Stock set forth in Schedule A hereto opposite the name of such Underwriter bears
to the total number of shares of Firm Stock, subject to adjustment in accordance
with Section 12 hereof.
The purchase price per share to be paid by the Underwriters to the Sellers
will be $ per share (the "Purchase Price").
Payment for the shares of Firm Stock to be sold by each Seller shall be
made to such Seller by wire of federal or other immediately available funds
against delivery of such shares of Firm Stock for the respective accounts of the
several Underwriters, at the offices of Davis Polk & Wardwell, 450 Lexington
Avenue, New York, New York 10017. Such shares of Firm Stock shall be in the form
of definitive certificates and registered in such names and in such
denominations as the Representatives may direct by notice in writing to the
Sellers given at or prior to 12:00 Noon, New York Time, on the second full
business day preceding the First Closing Date (as defined below) or, if no such
direction is received, in the names of the respective Underwriters or in such
other names as Cowen may designate (solely for the purpose of administrative
convenience) and in such denominations as Cowen may determine. The time and date
of the delivery and closing shall be at 9:00 A.M., New York Time, on October 23,
1997, in accordance with Rule 15c6-1 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The time and date of such payment and delivery are
herein referred to as the "First Closing Date". The Closing Date and the
location of delivery of, and the form of payment for, the Firm Stock may be
varied by agreement among the Sellers and Cowen. The Closing Date may be
postponed pursuant to the provisions of Section 12.
The Sellers shall make the certificates for the Stock available to the
Representatives for examination on behalf of the Underwriters not later than
10:00 A.M., New York Time, on the business day preceding the First Closing Date
at the offices of Cowen & Company, Financial Square, New York, New York 10005.
It is understood that Cowen, individually and not as Representative of the
several Underwriters, may (but shall not be obligated to) make payment to the
Sellers on behalf of any Underwriter or Underwriters for the Stock to be
purchased by such Underwriter or Underwriters. Any such payment by Cowen shall
not relieve such Underwriter or Underwriters from any of its or their other
obligations hereunder.
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The several Underwriters agree to make a public offering of the Firm Stock
at the public offering price as soon after the effectiveness of the Registration
Statement as in their judgment is advisable. The Representatives shall promptly
advise the Sellers of the making of the public offering.
For the purpose of covering any over-allotments in connection with the
distribution and sale of the Firm Stock as contemplated by the Prospectus, each
Seller, severally and not jointly, hereby grants to the Underwriters an option
to purchase, severally and not jointly, the number of shares of Optional Stock
(subject to such adjustments to eliminate fractional shares as you may
determine) that bears the same proportion to the number of shares of Optional
Stock to be sold by such Seller as the number of shares of Firm Stock set forth
in Schedule A hereto opposite the name of such Underwriter bears to the total
number of shares of Firm Stock, subject to adjustment in accordance with Section
12 hereof. The price per share to be paid for the Optional Stock shall be the
Purchase Price. The option granted hereby may be exercised as to all or any part
of the Optional Stock at any time, and from time to time, not more than thirty
(30) days subsequent to the effective date of this Agreement. No Optional Stock
shall be sold and delivered unless the Firm Stock previously has been, or
simultaneously is, sold and delivered. The right to purchase the Optional Stock
or any portion thereof may be surrendered and terminated at any time upon notice
by the Underwriters to the Sellers.
The option granted hereby may be exercised by the Underwriters by written
notice from Cowen to the Sellers setting forth the number of shares of the
Optional Stock to be purchased by them and the date and time for delivery of and
payment for the Optional Stock. Each date and time for delivery of and payment
for the Optional Stock (which may be the First Closing Date, but not earlier) is
herein called the "Option Closing Date" and shall in no event be earlier than
two (2) business days nor later than ten (10) business days after written notice
is given. (The First Closing Date and the Option Closing Dates, if any, are
herein called the "Closing Dates".) Optional Stock shall be purchased for the
account of each Underwriter in the same proportion as the number of shares of
Firm Stock set forth opposite such Underwriter's name in Schedule A hereto bears
to the total number of shares of Firm Stock (subject to adjustment by the
Underwriters to eliminate odd lots). Upon exercise of the option by the
Underwriters, the Sellers severally and not jointly agree to sell to the
Underwriters the number of shares of Optional Stock set forth in the written
notice of exercise, and the
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Underwriters, upon the basis of the representations herein contained, but
subject to the conditions herein set forth, agree, severally and not jointly, to
purchase the number of such shares determined as aforesaid.
Payment for any shares of Optional Stock to be sold by each Seller shall be
made to such Seller by wire of federal or other immediately available funds
against delivery of such shares of Optional Stock for the respective accounts of
the several Underwriters, at the offices of Davis Polk & Wardwell, 450 Lexington
Avenue, New York, New York 10017. Such shares of Optional Stock shall be in the
form of definitive certificates and registered in such names and in such
denominations as the Representatives may direct by notice given at or prior to
12:00 Noon, New York Time, on the second full business day preceding the Option
Closing Date or, if no such direction is received, in the names of the
respective Underwriters or in such other names as Cowen may designate (solely
for the purpose of administrative convenience) and in such denominations as
Cowen may determine. The Option Closing Date and the location of delivery of,
and the form of payment for, the Optional Stock may be varied by agreement among
the Sellers and Cowen. The Option Closing Date may be postponed pursuant to the
provisions of Section 12.
Each Selling Shareholder hereby agrees not to (A) directly or indirectly
offer, sell, assign, transfer, encumber, pledge, contract to sell, grant an
option to purchase or otherwise dispose of, other than by operation of law, any
shares of Common Stock, options, rights or warrants to acquire shares of Common
Stock, or any securities convertible into or exercisable or exchangeable for
shares of Common Stock (whether such shares or any such securities are now owned
or are hereafter acquired) or (B) enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of shares of Common Stock, whether any such transaction described in
clauses (A) or (B) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise for a period of 365 days after the date
of the Prospectus without the prior written consent of Cowen. The foregoing
sentence shall not apply to the Stock to be sold hereunder. In addition, each
Selling Shareholder agrees that, without the prior written consent of Cowen on
behalf of the Underwriters, it will not, during the period ending 365 days after
the date of the Prospectus, make any demand for, or exercise any right with
respect to, the registration of any shares of Common Stock or any security
convertible into or exercisable or exchangeable for Common Stock.
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<PAGE> 20
Notwithstanding the foregoing, (a) Daniel M. Bell may at any time transfer
any or all of his shares of Common Stock to one or more of the following: the
spouse or any sibling or lineal descendant of Daniel M. Bell, any corporation or
other entity in which 50% or more of the beneficial ownership of equity
interests and 50% or more of the voting securities is owned by Daniel M. Bell or
the spouse or any sibling or lineal descendant of Daniel M. Bell, or any trust
for the benefit of Daniel M. Bell or the spouse or any sibling or lineal
descendant of Daniel M. Bell (each of the foregoing, a "Bell Transferee"), and a
Bell Transferee may transfer any or all of its shares of Common Stock to another
Bell Transferee, in each case so long as such Bell Transferee shall have agreed
in a signed writing reasonably acceptable to Cowen to be bound by restrictions
substantially similar to those contained in the preceding paragraph for the
balance of the 365-day period after the date of the Prospectus; and (b) Kos
Holdings, Inc. may at any time transfer any or all of its shares of Common Stock
to one or more of the following: Michael Jaharis, the spouse or any sibling or
lineal descendant of Michael Jaharis, any corporation or other entity in which
50% or more of the beneficial ownership of equity interests and 50% or more of
the voting securities is owned by Michael Jaharis or the spouse or any sibling
or lineal descendant of Michael Jaharis, or any trust for the benefit of Michael
Jaharis or the spouse or any sibling or lineal descendant of Michael Jaharis
(each of the foregoing, a "Holdings Transferee"), and a Holdings Transferee may
transfer any or all of its shares of Common Stock to another Holdings
Transferee, in each case so long as such Holdings Transferee shall have agreed
in a signed writing reasonably acceptable to Cowen to be bound by restrictions
substantially similar to those contained in the preceding paragraph for the
balance of the 365-day period after the date of the Prospectus.
The Company shall, concurrently with the execution of this Agreement,
deliver agreements executed by each person listed on Schedule C hereto, pursuant
to which each such person agrees not to (A) directly or indirectly offer, sell,
assign, transfer, encumber, pledge, contract to sell, grant an option to
purchase or otherwise dispose of, other than by operation of law, any shares of
Common Stock, options, rights or warrants to acquire shares of Common Stock, or
any securities convertible into or exercisable or exchangeable for shares of
Common Stock (whether such shares or any such securities are now owned or are
hereafter acquired) or (B) enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of shares of Common Stock, whether any such transaction described in
clauses (A) or (B) above is to be settled by delivery of shares of
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<PAGE> 21
Common Stock or such other securities, in cash or otherwise, for the periods
listed on Schedule C, without the prior written consent of Cowen, PROVIDED that
the agreement executed by T.C. Theoharides shall allow him to sell up to 25,000
shares without restriction and PROVIDED FURTHER that the agreements executed by
Kos Investments, Inc., Michael Jaharis and Steven Aronoff may contain such
exceptions as Cowen in its sole discretion approves.
4. COVENANTS AND AGREEMENTS OF THE COMPANY. The Company covenants and
agrees with the several Underwriters that:
(a) The Company will (i) if the Company and the Representatives have
determined not to proceed pursuant to Rule 430A, use its best efforts to
cause the Registration Statement to become effective, (ii) if the Company
and the Representatives have determined to proceed pursuant to Rule 430A,
use its best efforts to comply with the provisions of and make all
requisite filings with the Commission pursuant to Rule 430A and Rule 424 of
the Rules and Regulations and (iii) if the Company and the Representatives
have determined to deliver Prospectuses pursuant to Rule 434 of the Rules
and Regulations, to use its best efforts to comply with all the applicable
provisions thereof. The Company will advise the Representatives promptly as
to the time at which the Registration Statement becomes effective, will
advise the Representatives promptly of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement
or of the institution of any proceedings for that purpose, and will use its
best efforts to prevent the issuance of any such stop order and to obtain
as soon as possible the lifting thereof, if issued. The Company will advise
the Representatives promptly of the receipt of any comments of the
Commission or any request by the Commission for any amendment of or
supplement to the Registration Statement or the Prospectus or for
additional information and will not at any time file any amendment to the
Registration Statement or supplement to the Prospectus which shall not
previously have been submitted to the Representatives a reasonable time
prior to the proposed filing thereof or to which the Representatives shall
reasonably object in writing or which is not in compliance with the
Securities Act and the Rules and Regulations.
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(b) The Company will prepare and file with the Commission, promptly
upon the request of the Representatives, any amendments or supplements to
the Registration Statement or the Prospectus which in the opinion of the
Representatives may be necessary to enable the several Underwriters to
continue the distribution of the Stock as contemplated herein and will use
its best efforts to cause the same to become effective as promptly as
possible.
(c) If at any time after the effective date of the Registration
Statement when a prospectus relating to the Stock is required to be
delivered under the Securities Act any event relating to or affecting the
Company or any of its subsidiaries occurs as a result of which the
Prospectus or any other prospectus as then in effect would include an
untrue statement of a material fact, or omit to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it is necessary at any
time to amend the Prospectus to comply with the Securities Act, the Company
will promptly notify the Representatives thereof and will prepare an
amended or supplemented prospectus which will correct such statement or
omission; and in case any Underwriter is required to deliver a prospectus
relating to the Stock nine (9) months or more after the effective date of
the Registration Statement, the Company upon the request of the
Representatives and at the expense of such Underwriter will prepare
promptly such prospectus or prospectuses as may be necessary to permit
compliance with the requirements of Section 10(a)(3) of the Securities Act.
(d) The Company will deliver to the Representatives, at or before the
Closing Date, three (3) copies of the Registration Statement (including
photocopies of the original signatures of the officers and directors who
signed the Registration Statement), as originally filed with the
Commission, and all amendments thereto including all financial statements
and exhibits thereto, and will deliver to the Representatives such number
of copies of the Registration Statement, including such financial
statements but without exhibits, and all amendments thereto, as the
Representatives may reasonably request. The Company will deliver or mail to
or upon the order
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of the Representatives, from time to time until the effective date of the
Registration Statement, as many copies of the Preeffective Prospectus as
the Representatives may reasonably request. The Company will deliver or
mail to or upon the order of the Representatives on the date of the initial
public offering, and thereafter from time to time during the period when
delivery of a prospectus relating to the Stock is required under the
Securities Act, as many copies of the Prospectus, in final form or as
thereafter amended or supplemented as the Representatives may reasonably
request; provided, however, that the expense of the preparation and
delivery of any prospectus required for use nine (9) months or more after
the effective date of the Registration Statement shall be borne by the
Underwriters required to deliver such prospectus.
(e) The Company will make generally available to its stockholders as
soon as practicable, but not later than fifteen (15) months after the
effective date of the Registration Statement, an earnings statement which
will be in reasonable detail (but which need not be audited) and which will
comply with Section 11(a) of the Securities Act, covering a period of at
least twelve (12) months beginning after the "effective date" (as defined
in Rule 158 under the Securities Act) of the Registration Statement.
(f) The Company will cooperate with the Representatives to enable the
Stock to be registered or qualified for offering and sale by the
Underwriters and by dealers under the securities laws of such jurisdictions
as the Representatives may designate and at the request of the
Representatives will make such applications and furnish such consents to
service of process or other documents as may be required of it as the
issuer of the Stock for that purpose; provided, however, that the Company
shall not be required to qualify to do business or to file a general
consent (other than that arising out of the offering or sale of the Stock)
to service of process in any such jurisdiction where it is not now so
subject. The Company will, from time to time, prepare and file such
statements and reports as are or may be required of it as the issuer of the
Stock to continue such qualifications in effect for so long a period as the
Representatives may reasonably request for the distribution of the
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<PAGE> 24
Stock. The Company will advise the Representatives promptly after the
Company becomes aware of the suspension of the qualifications or
registration of (or any such exception relating to) the Common Stock of the
Company for offering, sale or trading in any jurisdiction or of any
initiation or threat of any proceeding for any such purpose, and in the
event of the issuance of any orders suspending such qualifications,
registration or exception, the Company will, with the cooperation of the
Representatives, use its best efforts to obtain the withdrawal thereof.
(g) As and when required by the Rules and Regulations, the Company
will furnish to its stockholders annual reports containing financial
statements certified by independent public accountants. During the period
of five (5) years from the date hereof, the Company will deliver to the
Representatives and, upon request, to each of the other Underwriters, as
soon as they are available, copies of each annual report of the Company and
each other report furnished by the Company to its stockholders and will
deliver to the Representatives, (i) as soon as they are available, copies
of any other reports (financial or other) which the Company shall publish
or otherwise make available to any of its stockholders as such and (ii) as
soon as they are available, copies of any reports and financial statements
furnished to or filed with the Commission or any national securities
exchange or the NASD. So long as the Company has active subsidiaries, such
financial statements will be on a consolidated basis to the extent the
accounts of the Company and its subsidiaries are consolidated in reports
furnished to its stockholders generally. Separate financial statements
shall be furnished for all subsidiaries whose accounts are not consolidated
but which at the time are significant subsidiaries as defined in the Rules
and Regulations.
(h) The Company will use its best efforts to maintain the inclusion of
the Stock on the Nasdaq National Market (or on a national securities
exchange) for a period of five (5) years after the effective date of the
Registration Statement.
(i) The Company will maintain a transfer agent and registrar for its
Common Stock.
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<PAGE> 25
(j) Without the prior consent of Cowen, the Company will not (i)
directly or indirectly, offer, sell, assign, transfer, encumber, pledge,
contract to sell, grant an option to purchase or otherwise dispose of,
other than by operation of law, any shares of Common Stock or (ii) enter
into any swap or other arrangement that transfers to another, in whole or
in part, any of the economic consequences of ownership of the Common Stock,
whether any such transaction described in clauses (i) or (ii) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise during the 90 days following the date on which the price of the
Common Stock to be purchased by the Underwriters is set, other than (A) the
Company's sale of Common Stock hereunder, (B) the issuance by the Company
of shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof of which the
Underwriters have been advised in writing, and (C) the issuance by the
Company of any option to purchase any shares of Common Stock pursuant to
its Stock Option Plan described in the Prospectus; PROVIDED that the
Company may enter into an agreement to issue shares of Common Stock in
connection with a certain acquisition contemplated by a signed letter of
intent that has been delivered to the Underwriters prior to the date
hereof, but PROVIDED FURTHER that no such shares of Common Stock may be
issued until 90 days following the date on which the price of the Common
Stock to be purchased by the Underwriters is set.
(k) The Company will apply the net proceeds from the sale of the
shares of Stock to be sold by the Company hereunder as set forth in the
description under "Use of Proceeds" in the Prospectus, which description
complies in all respects with the requirements of Item 504 of Regulation
S-K.
(l) The Company will supply you with copies of all correspondence to
and from, and all documents issued to and by, the Commission in connection
with the registration of the Stock under the Securities Act.
(m) Prior to the Closing Date the Company will issue no press release
or other communications directly or indirectly and hold no
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<PAGE> 26
press conference with respect to the Company or any of its subsidiaries,
the financial condition, results of operation, business, prospects, assets
or liabilities of any of them, or the offering of the Stock, without your
prior written consent.
(n) During the period of five (5) years hereafter, the Company will
furnish to the Representatives and, upon request of the Representatives to
each of the Underwriters, as soon as available, copies of any report or
communication of the Company mailed generally to holders of its Common
Stock.
(o) The Company will use its best efforts to do and perform all things
required or necessary to be done and performed under this Agreement by the
Company prior to the Closing Date and to satisfy all conditions precedent
to the delivery of the Firm Stock.
5. PAYMENT OF EXPENSES. (a) The Sellers will pay (directly or by
reimbursement) the following costs, fees and expenses and all other costs, fees
and expenses incident to the performance of their obligations under this
Agreement: (i) all expenses and taxes incident to the issuance and delivery of
the Stock to the Representatives; (ii) all expenses incident to the registration
of the Stock under the Securities Act; (iii) the costs of preparing stock
certificates (including printing and engraving costs); (iv) all fees and
expenses of the registrar and transfer agent of the Stock; (v) all necessary
issue, transfer and other stamp taxes in connection with the issuance and sale
of the Stock to the Underwriters; (vi) fees and expenses of the Company's
counsel, the Company's independent accountants, and counsel for the Selling
Shareholders; (vii) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement, each Preeffective Prospectus and the Prospectus (including all
exhibits and financial statements) and all amendments and supplements provided
for herein and the Blue Sky memoranda and this Agreement; (viii) all filing
fees, attorneys' fees and expenses incurred by the Company or the Underwriters
in connection with exemptions from the qualifying or registering (or obtaining
qualification or registration of) all or any part of the Stock for offer and
sale under the Blue Sky or other securities laws of such jurisdictions as the
Representatives may designate; (ix) all fees and expenses paid or incurred in
connection with filings made with the NASD; and (x) all other costs and expenses
incident to the performance of the Company's
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<PAGE> 27
obligations hereunder which are not otherwise specifically provided for in this
Section.
The provisions of this Section shall not supersede or otherwise affect any
agreement that the Sellers may otherwise have for the allocation of such
expenses among themselves.
6. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify
and hold harmless each Underwriter and each person, if any, who controls such
Underwriter within the meaning of the Securities Act and the respective
officers, directors, partners, employees, representatives and agents of each of
such Underwriter (collectively, the "Underwriter Indemnified Parties" and, each,
an "Underwriter Indemnified Party"), against any losses, claims, damages,
liabilities or expenses (including (i) the reasonable cost of investigating and
(ii) defending against any claims therefor and counsel fees incurred in
connection therewith, unless the Company is entitled and elects to assume the
defense as contemplated in this subsection (a) and the Company has not
authorized the Underwriter Indemnified Party to retain additional counsel as
contemplated in this subsection (a)), joint or several, which may be based upon
the Securities Act, or any other statute or at common law, on the ground or
alleged ground that any Preeffective Prospectus, the Registration Statement or
the Prospectus (or any Preeffective Prospectus, the Registration Statement or
the Prospectus as from time to time amended or supplemented) includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading, unless
such statement or omission was made in reliance upon, and in conformity with,
written information furnished to the Company by any Underwriter, directly or
through the Representatives, specifically for use in the preparation thereof;
provided, that with respect to any untrue statement or omission or alleged
untrue statement or omission made in any Registration Statement, the indemnity
agreement contained in this subsection (a) shall not inure to the benefit of any
Underwriter Indemnified Party from whom the person asserting any such losses,
claims, damages or liabilities purchased the shares of Common Stock concerned to
the extent that any such loss, claim, damage or liability of such Underwriter
Indemnified Party results from the fact that a copy of the Prospectus was not
sent or given to such person at or prior to the written confirmation of the sale
of such shares of Common Stock to such person as required by the Securities Act
and if the untrue statement or omission concerned has been corrected in the
Prospectus; provided,
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<PAGE> 28
however, that in no case is the Company to be liable with respect to any claims
made against any Underwriter Indemnified Party against whom the action is
brought unless such Underwriter Indemnified Party shall have notified the
Company in writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall have been
served upon the Underwriter Indemnified Party, but failure to notify the Company
of such claim shall not relieve it from any liability which it may have to any
Underwriter Indemnified Party otherwise than on account of its indemnity
agreement contained in this subsection. The Company will be entitled to
participate at its own expense in the defense or, if it so elects, to assume the
defense of any suit brought to enforce any such liability, but if the Company
elects to assume the defense, such defense shall be conducted by counsel chosen
by it. In the event the Company elects to assume the defense of any such suit
and retain such counsel, any Underwriter Indemnified Parties, defendant or
defendants in the suit, may retain additional counsel but shall bear the fees
and expenses of such counsel unless (i) the Company shall have specifically
authorized the retaining of such counsel or (ii) the parties to such suit
include any such Underwriter Indemnified Parties and the Company and such
Underwriter Indemnified Parties at law or in equity have been advised by counsel
to the Underwriters that one or more legal defenses may be available to it or
them which may not be available to the Company, in which case the Company shall
not be entitled to assume the defense of such suit notwithstanding its
obligation to bear the fees and expenses of such counsel. It is understood that
the Company shall not, in respect of the legal expenses of any Underwriter
Indemnified Party in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the fees and expenses of more than one
separate firm (in addition to any local counsel) for all Underwriter Indemnified
Parties. Any such separate firm for the Underwriters and such control persons of
any Underwriters shall be designated in writing by Cowen. The Company shall not
be liable to indemnify any person for any settlement of any such claim effected
without its consent. This indemnity agreement is not exclusive and will be in
addition to any liability which the Company might otherwise have and shall not
limit any rights or remedies which may otherwise be available at law or in
equity to each Underwriter Indemnified Party.
(b) The Selling Shareholders, severally, agree to indemnify and hold
harmless each Underwriter Indemnified Party to the same extent as the Company
has agreed to indemnify and hold harmless each Underwriter Indemnified Party in
the preceding subsection
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<PAGE> 29
(a), PROVIDED that the indemnity contained in this subsection (b) shall only
apply to losses, claims, damages, liabilities or expenses relating to, arising
out of, or otherwise in respect of (i) statements or omissions made in reliance
upon, and in conformity with, written information furnished by or on behalf of
such Selling Shareholder specifically for use in any Preeffective Prospectus,
the Registration Statement or the Prospectus (or any Preeffective Prospectus,
the Registration Statement or the Prospectus as from time to time amended or
supplemented) or (ii) any inaccuracy in or breach of any of the representations
and warranties of such Selling Shareholder contained herein or any failure of
such Selling Shareholder to perform any of its obligations hereunder. It is
understood that the indemnification provided by each Selling Shareholder
pursuant to this subsection (b) shall not exceed an amount equal to the total
net proceeds from the Offering (before deducting expenses) received by such
Selling Shareholder. This indemnity agreement is not exclusive and will be in
addition to any liability which either Selling Shareholder might otherwise have
and shall not limit any rights or remedies which may otherwise be available at
law or in equity to each Underwriter Indemnified Party.
(c) The Selling Shareholders, jointly and severally, agree to indemnify and
hold harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement, each person, if any, who controls the Company
within the meaning of the Securities Act, (collectively, the "Company
Indemnified Parties"), against any losses, claims, damages, liabilities or
expenses (including (i) the reasonable cost of investigating and (ii) defending
against any claims therefor and counsel fees incurred in connection therewith,
unless the Selling Shareholders are entitled and elect to assume the defense as
contemplated in this subsection (c) and the Selling Shareholders have not
authorized the Company Indemnified Party to retain additional counsel as
contemplated in this subsection (c)), joint or several, which may be based upon
the Securities Act, or any other statute or at common law, on the ground or
alleged ground that any Preeffective Prospectus, the Registration Statement or
the Prospectus (or any Preeffective Prospectus, the Registration Statement or
the Prospectus as from time to time amended or supplemented) includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading, but only
with reference to statements or omissions made in reliance upon, and in
conformity with, written information furnished to the Company by or on behalf
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<PAGE> 30
of such Selling Shareholder specifically for use in the preparation thereof;
provided, however, that in no case is either Selling Shareholder to be liable
with respect to any claims made against any Company Indemnified Party against
whom the action is brought unless such Company Indemnified Party shall have
notified the Selling Shareholders in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
claim shall have been served upon the Company Indemnified Party, but failure to
notify the Selling Shareholders of such claim shall not relieve it from any
liability which it may have to any Company Indemnified Party otherwise than on
account of its indemnity agreement contained in this subsection. The Selling
Shareholders will be entitled to participate at their own expense in the defense
or, if they so elect, to assume the defense of any suit brought to enforce any
such liability, but if the Selling Shareholders elect to assume the defense,
such defense shall be conducted by counsel chosen by them. In the event the
Selling Shareholders elect to assume the defense of any such suit and retain
such counsel, any Company Indemnified Parties, defendant or defendants in the
suit, may retain additional counsel but shall bear the fees and expenses of such
counsel unless (i) the Selling Shareholders shall have specifically authorized
the retaining of such counsel or (ii) the parties to such suit include any such
Company Indemnified Parties and the Selling Shareholders and such Company
Indemnified Parties at law or in equity have been advised by counsel to the
Underwriters that one or more legal defenses may be available to it or them
which may not be available to the Selling Shareholders, in which case the
Selling Shareholders shall not be entitled to assume the defense of such suit
notwithstanding their obligation to bear the fees and expenses of such counsel.
It is understood that the Selling Shareholders shall not, in respect of the
legal expenses of any Company Indemnified Party in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for the
fees and expenses of more than one separate firm (in addition to any local
counsel) for all Company Indemnified Parties. Any such separate firm for the
Company Indemnified Parties shall be designated in writing by the Company. The
Selling Shareholders shall not be liable to indemnify any person for any
settlement of any such claim effected without their consent. It is further
understood that the indemnification provided by each Selling Shareholder
pursuant to this subsection (c) shall not exceed an amount equal to the total
net proceeds from the Offering (before deducting offering expenses) received by
such Selling Shareholder; PROVIDED that such indemnification shall apply only to
the extent such losses, claims, damages, liabilities or expenses are not covered
by applicable Company insurance. This indemnity agreement is not
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<PAGE> 31
exclusive and will be in addition to any liability which the Selling
Shareholders might otherwise have and shall not limit any rights or remedies
which may otherwise be available at law or in equity to each Company Indemnified
Party.
(d) Each Underwriter severally and not jointly agrees to indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement, each person, if any, who controls the Company
within the meaning of the Securities Act, each Selling Shareholder, each officer
and director of Kos Holdings, Inc., and each person, if any, who controls either
Selling Shareholder within the meaning of the Securities Act (collectively, the
"Indemnified Selling Parties") against any losses, claims, damages, liabilities
or expenses (including, unless the Underwriter or Underwriters elect to assume
the defense, the reasonable cost of investigating and defending against any
claims therefor and counsel fees incurred in connection therewith), joint or
several, which arise out of or are based in whole or in part upon the Securities
Act, the Exchange Act or any other federal, state, local or foreign statute or
regulation, or at common law, on the ground or alleged ground that any
Preeffective Prospectus, the Registration Statement or the Prospectus (or any
Preeffective Prospectus, the Registration Statement or the Prospectus, as from
time to time amended and supplemented) includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
in which they were made, not misleading, but only insofar as any such statement
or omission was made in reliance upon, and in conformity with, written
information furnished to the Company by such Underwriter, directly or through
the Representatives, specifically for use in the preparation thereof; provided,
however, that in no case is such Underwriter to be liable with respect to any
claims made against any Indemnified Selling Party against whom the action is
brought unless such Indemnified Selling Party shall have notified such
Underwriter in writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall have been
served upon the Indemnified Selling Party, but failure to notify such
Underwriter of such claim shall not relieve it from any liability which it may
have to any Indemnified Selling Party otherwise than on account of its indemnity
agreement contained in this subsection (d). Such Underwriter shall be entitled
to participate at its own expense in the defense, or, if it so elects, to assume
the defense of any suit brought to enforce any such liability, but, if such
Underwriter elects to assume the defense, such defense shall
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<PAGE> 32
be conducted by counsel chosen by it. In the event that any Underwriter elects
to assume the defense of any such suit and retain such counsel, the Indemnified
Selling Parties and any other Underwriter or Underwriters or controlling person
or persons, defendant or defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them, respectively, unless (i)
the Underwriter shall have specifically authorized in writing the retaining of
such counsel or (ii) the parties to such suit include the Indemnified Selling
Parties and the Underwriters and the Indemnified Selling Parties at law or in
equity have been advised by their counsel that one or more defenses may be
available to them which may not be available to the Underwriters, in which case
the Underwriters shall not be entitled to assume the defense of such suit
notwithstanding its obligation to bear fees and expenses of such counsel. It is
understood that the Underwriters shall not, in respect of the legal expenses of
any Indemnified Selling Party in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for (i) the fees and expenses of
more than one separate firm (in addition to any local counsel) for the Company,
its directors, its officers who sign the Registration Statement and each person,
if any, who controls the Company within the meaning of the Securities Act and
(ii) the fees and expenses of more than one separate firm (in addition to any
local counsel) for all Selling Shareholders and all persons, if any, who control
any Selling Shareholder within the meaning of the Securities Act. In the case of
any such separate firm for the Company, and such directors, officers and control
persons of the Company, such firm shall be designated in writing by the Company.
In the case of any such separate firm for the Selling Shareholders and such
control persons of any Selling Shareholders, such firm shall be designated in
writing by the Selling Shareholders, or, in their absence, the persons named as
attorneys-in-fact for the Selling Shareholders under the Power of Attorney of
each Selling Shareholder. The Underwriter against whom indemnity may be sought
pursuant to this subsection (d) shall not be liable to indemnify any person for
any settlement of any such claim effected without such Underwriter's consent.
This indemnity agreement is not exclusive and will be in addition to any
liability which such Underwriter might otherwise have and shall not limit any
rights or remedies which may otherwise be available at law or in equity to any
Indemnified Selling Party.
(e) If the indemnification provided for in this Section 6 is unavailable or
insufficient to hold harmless an indemnified party under subsection (a), (b),
(c), or (d) above in respect of any losses, claims, damages, liabilities or
expenses (or actions in respect thereof) referred to
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herein, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Sellers on the one
hand and the Underwriters on the other from the offering of the Stock. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Sellers on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses (or actions in respect thereof), as
well as any other relevant equitable considerations. The relative benefits
received by the Sellers on the one hand and the Underwriters on the other shall
be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Sellers bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Sellers
or the Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Sellers and the Underwriters agree that it would not be just and equitable
if contribution were determined by pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to above. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities or expenses (or actions in respect thereof)
referred to above shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating,
defending, settling or compromising any such claim. Notwithstanding the
provisions of this subsection (e), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the shares of the Stock underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission; and no Selling Shareholder shall be
required to contribute an amount in excess of the total net proceeds from the
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<PAGE> 34
offering (before deducting expenses) received by such Selling Shareholder. The
Underwriters' obligations to contribute are several in proportion to their
respective underwriting obligations and not joint. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
7. SURVIVAL OF INDEMNITIES, REPRESENTATIONS, WARRANTIES ETC. The respective
indemnities, covenants, agreements, representations, warranties and other
statements of the Sellers and the several Underwriters, as set forth in this
Agreement or made by them respectively, pursuant to this Agreement, shall remain
in full force and effect, regardless of any investigation made by or on behalf
of any Underwriter, the Sellers or any of their officers or directors or any
person controlling any Seller, and shall survive delivery of and payment for the
Stock.
8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The respective obligations of
the several Underwriters hereunder shall be subject to the satisfaction of each
of the following conditions:
(a) All the representations and warranties of the Company and each
Selling Shareholder shall be true and correct on the Closing Date with the
same force and effect as if made on and as of the Closing Date.
(b) The Registration Statement shall have become effective and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge
of the Company or the Representatives, shall be threatened by the
Commission, and any request for additional information on the part of the
Commission (to be included in the Registration Statement or the Prospectus
or otherwise) shall have been complied with to the reasonable satisfaction
of the Representatives. Any filings of the Prospectus, or any supplement
thereto, required pursuant to Rule 424(b) or Rule 434 of the Rules and
Regulations, shall have been made in the manner and within the time period
required by Rule 424(b) and Rule 434 of the Rules and Regulations, as the
case may be.
(c) The Representatives shall have been satisfied that there shall not
have occurred any
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change, or any development involving a prospective change, on a
consolidated basis, prior to the Closing Date in the condition (financial
or otherwise), properties, business, management, net worth or results of
operations of the Company and its subsidiaries considered as a whole, or
any change in the capital stock, short-term or long-term debt of the
Company and its subsidiaries considered as a whole, such that (i) the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, contains an untrue statement of fact which, in the opinion of the
Representatives, is material, or omits to state a fact which, in the
opinion of the Representatives, is required to be stated therein or is
necessary to make the statements therein not misleading, or (ii) it is
unpracticable in the reasonable judgment of the Representatives to proceed
with the public offering or purchase the Stock as contemplated hereby.
(d) The Representatives shall be satisfied that no legal or
governmental action, suit or proceeding affecting the Company which is
material and adverse to the Company or which affects or may affect the
Company's ability to perform its respective obligations under this
Agreement shall have been instituted or threatened and there shall have
occurred no material adverse development in any existing such action, suit
or proceeding.
(e) At the time of execution of this Agreement, the Representatives
shall have received from Arthur Andersen LLP, independent certified public
accountants, a letter, dated the date hereof, in form and substance
satisfactory to the Underwriters.
(f) The Representatives shall have received from Arthur Andersen LLP,
independent certified public accountants, a letter, dated the Closing Date,
to the effect that such accountants reaffirm, as of the Closing Date, and
as though made on the Closing Date, the statements made in the letter
furnished by such accountants pursuant to subsection (e) of this Section 8.
(g) The Representatives shall have received from Holland & Knight LLP,
counsel for the Company, an opinion, dated the Closing Date, to the effect
that:
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(i) the Company and each of its subsidiaries has been duly
incorporated and is validly existing and in active status under the
laws of the state of its incorporation, with power and authority
(corporate and other) to own or lease its properties and conduct its
business as described in the Prospectus;
(ii) the Company and each of its subsidiaries is duly qualified
to do business and in good standing as a foreign corporation in all
other jurisdictions where its ownership or leasing of properties or
the conduct of its business requires such qualification, except where
the failure to so register would not singly or in the aggregate, have
a material adverse effect on the Company's operations;
(iii) all of the outstanding shares of capital stock of, or other
ownership interests in each subsidiary of the Company have been duly
and validly authorized and issued and are fully paid and
nonassessable, and are owned by the Company, free and clear of any
security interest, claim, lien, encumbrance or adverse interest of any
nature;
(iv) the Company has authorized and outstanding capital stock as
set forth under the heading "Capitalization" in the Prospectus
(without giving effect to the exercise of stock options or the
issuance of 215 shares of Common Stock to employees of the Company);
the outstanding shares of Common Stock of the Company conform to the
description thereof in the Prospectus in all material respects; and
all of the shares of capital stock of the Company (including the
shares to be sold by the Selling Shareholders) outstanding prior to
the issuance of the Shares to be sold by the Company have been duly
authorized and validly issued and fully paid and nonassessable and not
subject to any preemptive or similar rights;
(v) the shares of Common Stock to be issued and sold by the
Company hereunder have been duly authorized, and when issued and
delivered to the Underwriters against payment therefor as provided by
this Agreement, will have been validly issued and
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<PAGE> 37
will be fully paid and nonassessable, and the issuance of such Common
Stock is not subject to any preemptive or similar rights;
(vi) this Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement of the
Company;
(vii) based solely on telephonic, verbal confirmation provided to
such counsel by the staff of the Commission, the Registration
Statement has become effective under the Securities Act, and, to such
counsel's knowledge, no stop order suspending its effectiveness has
been issued and no proceedings for this purpose are pending before or
contemplated by the Commission;
(viii) the statements under the captions "Risk Factors" (except
for the statements in the first, second and third paragraphs under the
heading "Risk Factors- Patents and Trademarks; Interference"),
"Business - Collaborations", "Business - Sponsored Research",
"Business - Government Regulation", "Management - Executive
Compensation - Confidentiality and Intellectual Property Agreements",
"Management - Executive Compensation Employee Agreements", "Management
- Employee Benefit Plans", "Certain Relationships and Related
Transactions", "Description of Capital Stock", "Shares Eligible for
Future Sale" in the Prospectus and Items 14 and 15 in the Registration
Statement in each case insofar as such statements constitute summaries
of the legal matters or documents referred to therein, fairly present
in all material respects the information called for with respect to
such legal matters;
(ix) the statements in the Prospectus in the fourth, fifth,
sixth, and seventh paragraphs under the heading "Risk Factors- Patents
and Trademarks; Interference" and in the first, fourth, and sixth
paragraphs under the heading "Business- Patents and Proprietary
Rights" constitute an accurate summary of the matters referred to
37
<PAGE> 38
therein and fairly present the information called for with respect to
such matters;
(x) the execution, delivery and performance of this Agreement by
the Company, compliance by the Company with all the provisions hereof
and the consummation of the transactions contemplated hereby will not
require any consent, approval, authorization or other order of any
court, regulatory body, administrative agency or other governmental
body (except such as may be required by the NASD or under the
Securities Act or other securities or Blue Sky laws) and will not
conflict with or constitute a breach of any of the terms or provisions
of, or a default under, the articles or certificate of incorporation
or by-laws of the Company or any of its subsidiaries or, to the best
of such counsel's knowledge, any agreement, indenture or other
instrument to which the Company or any of its subsidiaries or their
respective properties are bound, or violate or conflict with any laws,
administrative regulations or, to the best of such counsel's
knowledge, rulings or court decrees applicable to the Company or any
of its subsidiaries or their respective properties;
(xi) such counsel does not know of any legal or governmental
proceeding pending or threatened to which the Company or any of its
subsidiaries is a party or to which any of their respective property
is subject which is required to be described in the Registration
Statement or the Prospectus and is not so described, or of any
contract or other document which is required to be described in the
Registration Statement or the Prospectus or is required to be filed as
an exhibit to the Registration Statement which is not described or
filed as required;
(xii) neither the Company nor any of its subsidiaries is, nor
will be immediately after receiving the proceeds from the sale of the
shares of Stock sold by the Company, an "investment company" or an
entity "controlled" by an "investment company" as such terms are
defined in the Investment Company Act of 1940, as amended;
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<PAGE> 39
(xiii) such counsel does not know of any holder of any security
of the Company that has any right to require registration of shares of
Common Stock or any other security of the Company except as described
in the Registration Statement;
(xiv) the Registration Statement and the Prospectus and any
amendments or supplements (except for financial statements and
schedules and other financial and statistical data included therein as
to which such counsel does not express any opinion) thereto comply as
to form in all material respects with the requirements of the
Securities Act and the Rules and Regulations;
(xv) the Company has complied with all provisions of Section
517.075 of the Florida Statutes (Chapter 92-198; Laws of Florida);
In addition to the matters set forth above, such opinion shall also include
a statement to the effect that nothing has come to the attention of such
counsel which leads it to believe that the Registration Statement, as of
the time it becomes effective under the Securities Act, contained an untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading, or that the Prospectus or any amendment or supplement thereto,
on the date it was filed pursuant to Rule 424(b) and the Registration
Statement and the Prospectus, or any amendment or supplement thereto, as of
the First Closing Date, or any Option Closing Date, as the case may be,
contains an untrue statement of material fact or omits to state a material
fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they are made, not
misleading. With respect to such statement, counsel may state that their
belief is based upon procedures set forth therein, but is without
independent check and verification.
In rendering such opinion such counsel may assume that the laws of the
State of New York governing this Agreement are the same as the laws of the
State of Florida.
39
<PAGE> 40
(h) The Representatives shall have received from Holland & Knight LLP,
counsel for the Selling Shareholders, an opinion, dated the Closing Date,
to the effect that:
(i) this Agreement has been duly authorized (if such Selling
Shareholder is a corporation), executed and delivered by or on behalf
of, and is a valid and binding agreement of, each of the Selling
Shareholders;
(ii) the execution and delivery by each Selling Shareholder of,
and the performance by each Selling Shareholder of its obligations
under, this Agreement and the Power of Attorney of such Selling
Shareholder will not contravene any provision of applicable law, or
the certificate of incorporation or by-laws of such Selling
Shareholder (if such Selling Shareholder is a corporation), or, to the
best of such counsel's knowledge, any agreement or other instrument
binding upon such Selling Shareholder or, to the best of such
counsel's knowledge, any judgment, order or decree of any governmental
body, agency or court having jurisdiction over such Selling
Shareholder, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for
the performance by such Selling Shareholder of its obligations under
this Agreement or the Power of Attorney of such Selling Shareholder,
except such as may be required by the securities or Blue Sky laws of
the various states in connection with offer and sale of the shares of
Stock;
(iii) each of the Selling Shareholders has valid title to the
shares of Stock to be sold by such Selling Shareholder and the legal
right and power, and all authorization and approval required by law,
to enter into this Agreement and the Power of Attorney of such Selling
Shareholder and to sell, transfer and deliver the shares of Stock to
be sold by such Selling Shareholder;
40
<PAGE> 41
(iv) the Power of Attorney of each Selling Shareholder has been
duly authorized, executed and delivered by such Selling Shareholder
and is a valid and binding agreement of such Selling Shareholder;
(v) delivery of the shares of Stock to be sold by each Selling
Shareholder pursuant to this Agreement will pass title to such shares
of Stock free and clear of any security interests, claims, liens,
equities and other encumbrances.
In rendering such opinion such counsel may assume that the laws of the
State of New York governing this Agreement are the same as the laws of the
State of Florida.
(i) The Representatives shall have received from Davis Polk &
Wardwell, counsel for the Underwriters, their opinion dated the
Closing Date with respect to the incorporation of the Company, the
validity of the Stock, the Registration Statement and the Prospectus
and such other related matters as it may reasonably request, and the
Company shall have furnished to such counsel such documents as they
may request for the purpose of enabling them to pass upon such
matters.
(j) The Representatives shall have received on the Closing Date
an opinion of Jenkens & Gilchrist, P.C., patent counsel for the
Company, dated the Closing Date, to the effect that:
(i) the statements in the Prospectus in the first, second
and third paragraphs under the heading "Risk Factors- Patents and
Trademarks; Interference" and in the second and third paragraphs
under the heading "Business- Patents and Proprietary Rights"
constitute an accurate summary of the matters referred to therein
and fairly present the information called for with respect to
such matters;
(ii) other than as disclosed in the Prospectus, to the best
of such
41
<PAGE> 42
counsel's knowledge, there are no legal or governmental
proceedings pending relating to patents or proprietary
information rights relating to Niaspan to which the Company is a
party or to which any patents or proprietary information rights
of the Company is subject, and no such proceedings are threatened
or contemplated by governmental authorities or others;
(iii) other than as disclosed in the Prospectus, such
counsel is unaware of any basis for a finding that the Company
does not have clear title or valid license rights to the patents
or patent applications referenced in the Prospectus relating to
Niaspan, and such counsel has not identified any basis for a
finding of unenforceability or invalidity of any such patents or
proprietary information rights owned by the Company; and
(iv) other than as disclosed in the Prospectus and based
upon a review of the third party rights made known to such
counsel and discussions with Company scientific personnel, such
counsel is not aware of any valid United States or foreign patent
that is or would be infringed by the activities of the Company in
the manufacture, use or sale of Niaspan, as described in the
Prospectus.
(k) The Representatives shall have received a certificate, dated the
Closing Date, signed by Daniel M. Bell, in his capacity as the President
and Chief Executive Officer, to the effect that:
(i) No stop order suspending the effectiveness of the
Registration Statement has been issued, and, to the best of the
knowledge of the signers, no proceedings for that purpose have been
instituted or are pending or contemplated under the Securities Act;
(ii) Neither any Preeffective Prospectus, as of its date, nor the
Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, as of the time when the Registration
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<PAGE> 43
Statement became effective and at all times subsequent thereto up to
the delivery of such certificate, included any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading;
(iii) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, and except
as set forth or contemplated in the Prospectus, neither the Company
nor any of its subsidiaries has incurred any material liabilities or
obligations, direct or contingent, nor entered into any material
transactions not in the ordinary course of business and there has not
been any material adverse change in the condition (financial or
otherwise), properties, business, management, prospects, net worth or
results of operations of the Company and its subsidiaries considered
as a whole, or any change in the capital stock, short-term or
long-term debt of the Company and its subsidiaries considered as a
whole;
(iv) The representations and warranties of the Company in this
Agreement are true and correct at and as of the Closing Date, and the
Company has complied with all the agreements and performed or
satisfied all the conditions on its part to be performed or satisfied
at or prior to the Closing Date; and
(v) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, and except as
disclosed in or contemplated by the Prospectus, (i) there has not been
any material adverse change or a development involving a material
adverse change in the condition (financial or otherwise), properties,
business, management, prospects, net worth or results of operations of
the Company and its subsidiaries considered as a whole;
43
<PAGE> 44
(ii) the business and operations conducted by the Company and its
subsidiaries have not sustained a loss by strike, fire, flood,
accident or other calamity (whether or not insured) of such a
character as to interfere materially with the conduct of the business
and operations of the Company and its subsidiaries considered as a
whole; (iii) no legal or governmental action, suit or proceeding is
pending or threatened against the Company which is material to the
Company, whether or not arising from transactions in the ordinary
course of business, or which may materially and adversely affect the
transactions contemplated by this Agreement; (iv) since such dates and
except as so disclosed, the Company has not incurred any material
liability or obligation, direct, contingent or indirect, made any
change in its capital stock (except pursuant to its stock plans), made
any material change in its short-term or funded debt or repurchased or
otherwise acquired any of the Company's capital stock; and (v) the
Company has not declared or paid any dividend, or made any other
distribution, upon its outstanding capital stock payable to
stockholders of record on a date prior to the Closing Date.
(l) The Company shall have furnished to the Representatives such
additional certificates as the Representatives may have reasonably
requested as to the accuracy, at and as of the Closing Date, of the
representations and warranties made herein by it and as to compliance at
and as of the Closing Date by it with its covenants and agreements herein
contained and other provisions hereof to be satisfied at or prior to the
Closing Date, and as to satisfaction of the other conditions to the
obligations of the Underwriters hereunder.
(m) The "lock-up" agreements relating to sales and other dispositions
of shares of Common Stock or certain other securities, delivered to you
pursuant to Section 3 hereof on or before the date hereof, shall be in full
force and effect on the Closing Date.
44
<PAGE> 45
The several obligations of the Underwriters to purchase any Optional Stock
hereunder are subject to delivery to the Representatives on the Option Closing
Date of such documents as the Representatives may reasonably request with
respect to the good standing of the Company, the due authorization and issuance
of such Optional Stock and other matters related to the issuance of such
Optional Stock.
All opinions, certificates, letters and other documents will be in
compliance with the provisions hereunder only if they are satisfactory in form
and substance to the Representatives. The Company will furnish to the
Representatives conformed copies of such opinions, certificates, letters and
other documents as the Representatives shall reasonably request. If any of the
conditions hereinabove provided for in this Section shall not have been
satisfied when and as required by this Agreement, this Agreement may be
terminated by the Representatives by notifying the Company of such termination
in writing or by telegram at or prior to the Closing Date, but Cowen shall be
entitled to waive any of such conditions.
9. EFFECTIVE DATE. This Agreement shall become effective immediately as to
Sections 5, 6, 7, 9, 10, 11, 13, 14, 15, 16, and 17 and, as to all other
provisions, at 11:00 a.m. New York City time on the first full business day
following the effectiveness of the Registration Statement or at such earlier
time after the Registration Statement becomes effective as the Representatives
may determine on and by notice to the Company or by release of any of the Stock
for sale to the public. For the purposes of this Section 9, the Stock shall be
deemed to have been so released upon the release for publication of any
newspaper advertisement relating to the Stock or upon the release by you of
telegrams (i) advising Underwriters that the shares of Stock are released for
public offering or (ii) offering the Stock for sale to securities dealers,
whichever may occur first.
10. TERMINATION. This Agreement (except for the provisions of Section 5)
may be terminated by the Company at any time before it becomes effective in
accordance with Section 9 by notice to the Representatives and may be terminated
by the Representatives at any time before it becomes effective in accordance
with Section 9 by notice to the Company. In the event of any termination of this
Agreement under this or any other provision of this Agreement, there shall be no
liability of any party to this Agreement to any other party, other than as
provided in Sections 5, 6 and 11 and other than as provided in Section 12 as to
the liability of defaulting Underwriters.
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<PAGE> 46
This Agreement may be terminated after it becomes effective by the
Representatives by notice to the Company (i) if at or prior to the Closing Date
trading in securities on any of the New York Stock Exchange, American Stock
Exchange or the Nasdaq National Market shall have been suspended or minimum or
maximum prices shall have been established on any such exchange or market, or a
banking moratorium shall have been declared by New York or United States
authorities; (ii) trading of any securities of the Company shall have been
suspended on any exchange or in any over-the-counter market; (iii) if at or
prior to the Closing Date there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power or of any other
insurrection or armed conflict involving the United States or (B) any change in
financial markets or any calamity or crisis which, in the judgment of the
Representatives, makes it impractical or inadvisable to offer or sell the Stock
on the terms contemplated by the Prospectus; (iv) if there shall have been any
development or prospective development involving particularly the business or
properties or securities of the Company or any of its subsidiaries or the
transactions contemplated by this Agreement, which, in the judgment of the
Representatives, makes it impracticable or inadvisable to offer or deliver the
Stock on the terms contemplated by the Prospectus; (v) if there shall be any
litigation or proceeding, pending or threatened, which, in the judgment of the
Representatives, makes it impracticable or inadvisable to offer or deliver the
Stock on the terms contemplated by the Prospectus; or (vi) if there shall have
occurred any of the events specified in the immediately preceding clauses
(i)-(v) together with any other such event that makes it, in the judgment of the
Representatives, impractical or inadvisable to offer or deliver the Stock on the
terms contemplated by the Prospectus.
11. REIMBURSEMENT OF UNDERWRITERS. Notwith standing any other provisions
hereof, if this Agreement shall not become effective by reason of any election
of the Company pursuant to the first paragraph of Section 10 or shall be
terminated by the Representatives by reason of any failure or refusal on the
part of the Company to comply with the terms or to fulfill any of the conditions
of this Agreement, the Company will bear and pay the expenses specified in
Section 5 hereof and, in addition to the obligations of the Company pursuant to
Section 6 hereof, the Company will reimburse the reasonable out-of-pocket
expenses of the several Underwriters (including reasonable fees and
disbursements of counsel for the Underwriters) incurred in connection with this
Agreement and the proposed purchase of the Stock, and promptly upon demand the
Company will pay such amounts to you as Representatives.
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<PAGE> 47
12. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters shall
default in its or their obligations to purchase shares of Stock hereunder and
the aggregate number of shares which such defaulting Underwriter or Underwriters
agreed but failed to purchase does not exceed ten percent (10%) of the total
number of shares underwritten, the other Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the shares which such defaulting Underwriter or Underwriters agreed but failed
to purchase. If any Underwriter or Underwriters shall so default and the
aggregate number of shares with respect to which such default or defaults occur
is more than ten percent (10%) of the total number of shares underwritten and
arrangements satisfactory to the Representatives and the Company for the
purchase of such shares by other persons are not made within forty-eight (48)
hours after such default, this Agreement shall terminate.
If the remaining Underwriters or substituted Underwriters are required
hereby or agree to take up all or part of the shares of Stock of a defaulting
Underwriter or Underwriters as provided in this Section 12, (i) the Company
shall have the right to postpone the Closing Date for a period of not more than
five (5) full business days in order that the Company may effect whatever
changes may thereby be made necessary in the Registration Statement or the
Prospectus, or in any other documents or arrangements, and the Company agrees
promptly to file any amendments to the Registration Statement or supplements to
the Prospectus which may thereby be made necessary, and (ii) the respective
numbers of shares to be purchased by the remaining Underwriters or substituted
Underwriters shall be taken as the basis of their underwriting obligation for
all purposes of this Agreement. Nothing herein contained shall relieve any
defaulting Underwriter of its liability to the Company or the other Underwriters
for damages occasioned by its default hereunder. Any termination of this
Agreement pursuant to this Section 12 shall be without liability on the part of
any non-defaulting Underwriter or the Company, except for expenses to be paid or
reimbursed pursuant to Section 5 and except for the provisions of Section 6.
13. NOTICES. All communications hereunder shall be in writing and, if sent
to the Underwriters shall be mailed, delivered or telegraphed and confirmed to
you, as their Representatives, c/o Cowen & Company at Financial Square, New
York, New York 10005 except that notices given to an Underwriter pursuant to
Section 6 hereof shall be sent to such Underwriter at the address furnished by
the Representatives; if sent to the Company, shall be mailed, delivered or
telegraphed and confirmed to Kos
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<PAGE> 48
Pharmaceuticals, 1001 Brickell Bay Drive, 25th Floor, Miami, Florida 33131,
Attention: President, copy to: Holland & Knight LLP, 701 Brickell Avenue, Miami,
Florida 33131, Attn: Steven Sonberg, Esq.; if sent to Kos Holdings, Inc. shall
be mailed, delivered or telegraphed and confirmed to Kos Holdings, Inc. c/o Kos
Pharmaceuticals, Inc., 1001 Brickell Bay Drive, 25th Floor, Miami, Florida
33131, Attention: Corporate Secretary, copy to: Holland & Knight LLP, 701
Brickell Avenue, Miami, Florida 33131, Attn: Steven Sonberg, Esq.; and if sent
to Daniel M. Bell, shall be mailed, delivered or telegraphed and confirmed to
Daniel M. Bell, c/o Kos Pharmaceuticals, Inc., 1001 Brickell Bay Drive, 25th
Floor, Miami, Florida 33131, copy to: Holland & Knight LLP, 701 Brickell Avenue,
Miami, Florida 33131, Attn: Steven Sonberg, Esq.
14. SUCCESSORS. This Agreement shall inure to the benefit of and be binding
upon the several Underwriters, the Company, the Selling Shareholders and their
respective successors and legal representatives. Nothing expressed or mentioned
in this Agreement is intended or shall be construed to give any person other
than the persons mentioned in the preceding sentence any legal or equitable
right, remedy or claim under or in respect of this Agreement, or any provisions
herein contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person; except that the representations, warranties,
covenants, agreements and indemnities of the Sellers contained in this Agreement
shall also be for the benefit of the person or persons, if any, who control any
Underwriter or Underwriters within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act; the indemnities of the several
Underwriters shall also be for the benefit of each director of the Company, each
of its officers who has signed the Registration Statement, the person or
persons, if any, who control the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, the Selling Shareholders, and
the person or persons, if any, who control either Selling Shareholder within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act;
and the indemnities of the Selling Shareholders shall also be for the benefit of
each director of the Company, each of its officers who has signed the
Registration Statement, and the person or persons, if any, who control the
Company within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act.
15. APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
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<PAGE> 49
16. AUTHORITY OF THE REPRESENTATIVES. In connection with this Agreement,
you will act for and on behalf of the several Underwriters.
17. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability of any
Section, subsection, paragraph or provision of this Agreement shall not affect
the validity or enforceability of any other Section, subsection, paragraph or
provision hereof. If any Section, subsection, paragraph or provision of this
Agreement is for any reason determined to be invalid or unenforceable, there
shall be deemed to be made such minor changes (and only such minor changes) as
are necessary to make it valid and enforceable.
18. GENERAL. This Agreement constitutes the entire agreement of the parties
to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company.
19. COUNTERPARTS. This Agreement may be signed in several counterparts,
each of which shall be an original or facsimile, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
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<PAGE> 50
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter and your acceptance shall constitute a binding agreement between us.
Very truly yours,
KOS PHARMACEUTICALS, INC.
By:
--------------------------------
Name: Daniel M. Bell
Title: President and CEO
KOS HOLDINGS, INC.
By:
--------------------------------
Name: Michael Jaharis
Title: Chairman of Investment Committee
DANIEL M. BELL
-----------------------------------
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<PAGE> 51
Accepted and delivered in
New York, New York as of the
date first above written.
COWEN & COMPANY
DONALDSON LUFKIN & JENRETTE SECURITIES CORPORATION
SALOMON BROTHERS INC
SBC WARBURG DILLON READ, INC.
Acting on their own behalf
and as Representatives of the several
Underwriters referred to in the
foregoing Agreement.
By: COWEN & COMPANY
By: Cowen Incorporated,
its general partner
By:
-----------------------
Name:
Title: Managing Director
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<PAGE> 52
SCHEDULE A
NUMBER
OF FIRM
SHARES
TO BE
NAME PURCHASED
---- ---------
Cowen & Company 492,500
Donaldson, Lufkin & Jenrette Securities
Corporation 492,500
Salomon Brothers Inc 492,500
SBC Warburg Dillon Read Inc. 492,500
Bear Stearns & Company Inc. 75,000
Hambrecht & Quist, Inc. 75,000
Lehman Brothers 75,000
Merrill Lynch & Co. 75,000
Morgan Stanley & Co. Incorporated 75,000
Nationsbanc Montgomery Securities 75,000
Oppenheimer & Company, Inc. 75,000
Prudential Securities, Inc. 75,000
Schroder & Company, Inc. 75,000
UBS Securities 75,000
Allen & Company 30,000
J. C. Bradford & Company 30,000
Brean Murray & Company 30,000
Crowell, Weedon & Company 30,000
Equitable Securities 30,000
Friedman, Billings, Ramsay & Co., Inc. 30,000
Furman Selz L.L.C. 30,000
Gruntal & Company, Inc. 30,000
Edward Jones & Company, L.P. 30,000
Nesbitt Burns Securities, Inc. 30,000
Piper Jaffray, Inc. 30,000
Raymond James & Associates, Inc. 30,000
Scott & Stringfellow, Inc. 30,000
Tucker Anthony, Inc. 30,000
Vector Securities International, Inc. 30,000
Volpe Brown Whelan & Company 30,000
---------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,200,000
=========
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SCHEDULE B
FIRM STOCK
SELLING SHAREHOLDER NUMBER OF SHARES
- ------------------- ----------------
Kos Holdings, Inc. 2,150,000
Daniel M. Bell 50,000
OPTIONAL STOCK
Kos Holdings, Inc. 240,000
Daniel M. Bell 100,000
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<PAGE> 54
SCHEDULE C
REQUIRED LOCK-UPS
-----------------
PERSON PERIOD (beginning on the
date of the Prospectus and
ending on the date below)
Each Director and Officer 30 days after the date
of the Company of the Prospectus
Michael Jaharis 365 days after the
date of the Prospectus
Kos Investments, Inc. 365 days after the
date of the Prospectus
David J. Bova February 15
Robert E. Baldini February 15
Steven Aronoff February 15
T.C. Theoharides February 15
Steven Jaharis February 15
54
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of
our report (and to all references to our Firm) included in or made a part of
this Registration Statement No. 333-35395.
ARTHUR ANDERSEN LLP
Miami, Florida,
October 20, 1997.
