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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K/A
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
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COMMISSION FILE NUMBER 000-22171
KOS PHARMACEUTICALS, INC.
(Exact Name of Company as Specified in Its Charter)
FLORIDA 65-0670898
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1001 Brickell Bay Drive, 25th Floor, Miami, Florida 33131
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(Address of Principal Executive Offices, Zip Code)
Company's Telephone Number, Including Area Code: (305) 577-3464
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosures of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Kos Pharmaceuticals, Inc. Common Stock, $.01
par value, held by non-affiliates, computed by reference to the price at which
the stock was sold as of August 31, 1997: $164,503,349
Number of shares of Common Stock of Kos Pharmaceuticals, Inc. issued and
outstanding as of September 2, 1997: 14,772,718
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
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PART I PAGE
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Item 1. Business.................................................................... 2
Item 2. Properties.................................................................. 16
Item 3. Legal Proceedings........................................................... 16
Item 4. Submission of Matters to a Vote of Securities Holders....................... 16
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters..................................................................... 17
Item 6. Selected Consolidated Financial Data........................................ 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................. 22
Item 8. Consolidated Financial Statements and Supplementary Data.................... 23
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures....................................................... 38
PART III
Item 10. Directors and Executive Officers of the Company............................. 39
Item 11. Executive Compensation...................................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 48
Item 13. Certain Relationships and Related Transactions.............................. 49
PART IV
Item 14. Exhibits, Financial Schedules And Reports On Form 8-K....................... 50
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NIASPAN(R) is a registered trademark of Kos Pharmaceuticals, Inc.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Kos Pharmaceuticals, Inc. ("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. 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.
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 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 principal elements of the Company's business strategy are as
follows: (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 internally the clinical
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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.
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, Inc. ("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 report to the Company include the operations of
its predecessor, Holdings, until June 30, 1996, and its wholly-owned subsidiary,
Aeropharm Technologies, Inc. ("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.
NIASPAN
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, which are primary risk factors for coronary
heart disease ("CHD"). The Company began shipping NIASPAN to wholesalers in
mid-August 1997, and began detailing the product to physicians during September
1997.
Niacin, the active ingredient in NIASPAN, 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 depressed
high-density lipoprotein ("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 National Institutes of Health ("NIH") recommends niacin as
first-line drug therapy because of its low cost and its efficacy in altering
multiple lipid components. 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.
The Company submitted its NDA for NIASPAN based principally on data
from an aggregate of 633 Niaspan-treated subjects involved in three
double-blinded, placebo-controlled clinical trials and one long-term, open-label
safety study at 17 sites throughout the United States. The results of these
trials produced statistically significant changes in all major lipid components
without generating conclusive treatment-related serious adverse events.
Treatment with NIASPAN demonstrated a 14% to 18% reduction in LDL cholesterol, a
24% to 35% reduction in triglycerides, an increase of 22% to 32% in HDL
cholesterol, and a reduction of 24% to 36% in lipoprotein (a) ("Lp(a)").
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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 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 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 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 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
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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.
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.
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
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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 new chemical entities ("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 development time. In order to take advantage of a certain
market opportunity, the Company is developing one product that requires an
abbreviated new drug application ("ANDA") filing. The Company has retained
worldwide marketing rights for all of the Company's products under development.
Although the Company recently obtained clearance from the FDA to market
NIASPAN, each of its products under development is at an earlier stage of
development. Statements in the following discussion regarding the Company's
expectations and projections regarding its products under development are
forwarding 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. There can be no assurance that the Company will
be able to successfully formulate, develop or commercialize any of its products
under development as planned. The Company may determine to discontinue the
development of any or all of its products under development at any time.
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
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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 ("IS-5-MN")
Kos is developing, in collaboration with Fuisz Technologies Ltd.
("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
immediate-release ("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 that a
once-a-day formulation of captopril would provide a competitive advantage
compared with the generic versions of IR captopril.
The Company's investigatory new drug ("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
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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.
angiotensin converting enzyme ("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 metered-dose inhalation ("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 chloroflourocarbon ("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.
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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.
9
<PAGE> 11
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 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
10
<PAGE> 12
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 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 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.
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<PAGE> 13
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 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.
12
<PAGE> 14
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.
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 current good
manufacturing practices ("cGMP") as required by the FDA for the manufacture of
product to be sold or used in 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
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<PAGE> 15
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 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
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<PAGE> 16
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 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
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<PAGE> 17
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.
ITEM 2. PROPERTIES
The Company leased the following properties as of June 30, 1997:
<TABLE>
<CAPTION>
MINIMUM
LEASE EXPIRATION ANNUAL
LOCATION USE SQUARE FEET (INCLUDING RENEWALS) RENT
- --------------- -------------------------------- ----------- -------------------- --------
<S> <C> <C> <C> <C>
Miami, FL Corporate offices 10,000 December 2000 $168,000
Miami Lakes, FL Research admin. offices 13,000 December 2000 218,000
Hollywood, FL Manufacturing, research and
admin. offices 23,500 November 2000 272,000
Edison, NJ Manufacturing, research, and
admin. offices 21,500 October 2003 85,500
</TABLE>
The Company believes that its existing facilities are adequate to meet
its current needs and that there is sufficient additional space at or in close
proximity to its present facilities to accommodate its near term requirements.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company or
its properties or to which the Company is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the Company's fiscal year ended June 30, 1997.
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<PAGE> 18
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock commenced trading on March 7, 1997, in the
Nasdaq National Market System under the symbol "KOSP". As of September 2, 1997,
there were 275 shareholders of record of the Company's Common Stock.
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 System.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1997 HIGH LOW
- ------------------------------- -------- ---------
<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 (through September 10, 1997)................................ 40.00 27.00
</TABLE>
The Company has never declared or paid any cash dividends on its
Common Stock. The Company currently anticipates that it will retain all future
earnings, if any, to fund the development and growth of its business and does
not anticipate paying any cash dividends on its Common Stock in the foreseeable
future.
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<PAGE> 19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following consolidated selected financial data of the Company for
the five years ended June 30, 1997, should be read in conjunction with
"Management's Discussions and Analysis of Financial Condition" and the
consolidated financial statements and related notes thereto. 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.
See "Item 8. Consolidated Financial Statements and Supplementary Data."
<TABLE>
<CAPTION>
JULY 1, 1988
(INCEPTION)
YEAR ENDED JUNE 30, TO
----------------------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 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>
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 carryforwards, 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 "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
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<PAGE> 20
ITEM 7. 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.
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 initial
public offering ("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. 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
19
<PAGE> 21
and research activities are expanded to support the development of additional
products and the conduct of additional clinical trials.
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 a Promissory Note
dated July 1, 1996, issued to Kos Investments (the "Convertible Note"), 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
20
<PAGE> 22
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. At June 30, 1997, cash and cash equivalents
totaled 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 its cash, cash equivalents,
available-for-sale securities and expected interest income thereon, will be
sufficient to fund the Company's operations for 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 report
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
21
<PAGE> 23
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 report, and in other reports filed by the
Company with the Securities and Exchange Commission, and in the Company's
Registration Statement on Form S-1 (File No. 333-35395) filed with the
Securities and Exchange Commission on September 11, 1997, including the risk
factors section thereof.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
22
<PAGE> 24
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.
Consolidated financial statements and supplementary data required by
this item can be found at the pages listed in the following index.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......................................... 24
Financial Statements:
Consolidated Balance Sheets at June 30, 1996 and 1997................................... 25
Consolidated Statements of Operations for the three years ended
June 30, 1995, 1996 and 1997 and for the period from
July 1, 1988 (inception) to June 30, 1997............................................ 26
Consolidated Statements of Shareholders' Equity (Deficit) for the period from
July 1, 1988 (inception) to June 30, 1997............................................ 27
Consolidated Statements of Cash Flows for the three years ended
June 30, 1995, 1996 and 1997 and for the period from
July 1, 1988 (inception) to June 30, 1997............................................ 28
Notes to Consolidated Financial Statements.................................................. 29
</TABLE>
23
<PAGE> 25
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).
24
<PAGE> 26
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.
25
<PAGE> 27
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.
26
<PAGE> 28
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.
27
<PAGE> 29
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.
28
<PAGE> 30
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,
29
<PAGE> 31
complications and delays frequently encountered in connection with the
development of new business ventures.
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.
30
<PAGE> 32
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:
YEARS
-----
Furniture and equipment..........................................3-7
Computer software and hardware...................................3-5
Laboratory and manufacturing equipment...........................3-5
Leasehold improvements......................................Life of lease
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.
31
<PAGE> 33
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.
FAIR MARKET
VALUE
-----------
U.S. government securities............................... $ 4,951,900
Corporate debt........................................... 20,103,037
-----------
Total.............................................. $25,054,937
===========
4. INVENTORIES
Inventories as of June 30, 1997 consist of:
Raw materials......................................... $ 170,227
Work in process....................................... 1,202,119
-----------
Total............................................ $ 1,372,346
===========
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>
32
<PAGE> 34
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 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:
YEAR ENDING JUNE 30, AMOUNT
-------------------- -----------
1998........................................ $ 492,500
1999........................................ 300,000
2000........................................ 300,000
2001........................................ 300,000
2002........................................ 300,000
-----------
$ 1,692,500
===========
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.
33
<PAGE> 35
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:
YEAR ENDING JUNE 30, AMOUNT
-------------------- ----------
1998................................................. $1,102,567
1999................................................. 638,829
2000................................................. 365,409
2001................................................. 76,311
----------
$2,183,116
==========
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.
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:
MINIMUM ADDITIONAL
YEAR ENDING JUNE 30, PAYMENT PAYMENTS
-------------------- ---------- ----------
1998............................. $ 150,000 $ 375,000
1999............................. - 125,000
2000............................. - 375,000
---------- ----------
$ 150,000 $ 875,000
========== ==========
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
34
<PAGE> 36
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.
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:
YEAR ENDING JUNE 30, AMOUNT
-------------------- --------
1998.................................................. $160,000
1999.................................................. 200,000
2000.................................................. 200,000
--------
$560,000
========
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.
35
<PAGE> 37
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.
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.
36
<PAGE> 38
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............... 1,885,000 $ 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 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.
37
<PAGE> 39
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES.
None.
38
<PAGE> 40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table provides information regarding the directors and
executive officers 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 of Directors
Daniel M. Bell...................... 55 President, Chief Executive Officer and Director
Robert E. Baldini................... 66 Vice Chairman of the Board of Directors
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>
(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 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.
39
<PAGE> 41
JOHN BRADEMAS, Ph.D. has served as a Director of the Company since the
completion of the 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 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, and
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 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 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 for 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
40
<PAGE> 42
Pharmaceutical Scientists. Dr. Cutie also serves as Professor of Industrial
Pharmacy at Long Island University.
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.
41
<PAGE> 43
ITEM 11. 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
NAME AND SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION
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 1996 246,000 - - - 750,000 (2) - 4,928
CEO 1995 246,000 10,000 - - - - 1,814
David J. Bova 1997 201,250 25,000 - - - - 1,295
Senior V. P., 1996 185,000 25,000 - - - - 1,091
Research and 1995 185,000 - - - - - 726
Development
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 R&D 1995 106,250 5,208 - - - - 4,715
David 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,
$21,431 of relocation expenses paid by the Company.
(2) The options were originally granted to Mr. Bell in August 1988. The option
terms were amended on June 20, 1996, to extend the expiration date of the
options from December 1996 to June 20, 2006. Other material terms of
options, including the exercise price, were not changed. The options are
currently exercisable.
42
<PAGE> 44
The following table contains information about stock option grants to
the Named Executive Officers during the fiscal year ended June 30, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATE OF
NUMBER OF % OF TOTAL OPTIONS STOCK PRICE APPRECIATION
SECURITIES GRANTED TO FOR OPTION TERM(1)
UNDERLYING EMPLOYEES IN EXERCISE OR ------------------------
OPTIONS FISCAL BASE PRICE EXPIRATION
NAME GRANTED (#) YEAR ($/SHARE) DATE 5%($) 10%($)
- ---- ------------------ ------------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Daniel M. Bell - - - - - -
David J. Bova - - - - - -
Frederick A. Sexton - - - - - -
Anthony J. Cutie - - - - - -
David 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.
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 VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT FY-END(#) OPTIONS AT FY-END($)(1)
NAME 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 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
43
<PAGE> 45
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 initial public offering of its Common Stock on
March 12, 1997, 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 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.
44
<PAGE> 46
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.
Compensation Committee:
Steven Jaharis
Mark Novitch
Frederick Whittemore
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 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
45
<PAGE> 47
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 had 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 has also 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.
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
46
<PAGE> 48
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.
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<PAGE> 49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of September 2, 1997 by: (i) each
person known to the Company to beneficially own more than 5% of the Common
Stock; (ii) each Named Executive Officer; and (iii) 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 on September 2,
1997. Except as otherwise indicated, each shareholder named has sole voting and
investment power with respect to such shareholder's shares.
AMOUNT OF BENEFICIAL
OWNERSHIP
OF COMMON STOCK
--------------------------------
TOTAL SHARES PERCENTAGE OF
NAME OF BENEFICIALLY OUTSTANDING
BENEFICIAL OWNER OWNED SHARES
----------------------------- --------------- ---------------
Michael Jaharis(1) 10,948,684 69.6%
Daniel M. Bell(2) 750,026 4.8%
David J. Bova(3) 279,101 1.8%
Anthony J. Cutie, Ph. D. (4) 50,201 *
David L. Heatherman (5) 10,001 *
Frederick A. Sexton (6) 10,173 *
Robert E. Baldini(7) 50,001 *
John Brademas - -
Steven Jaharis(8) 5,001 *
Louis C. Lasagna - -
Mark Novitch - -
Frederick B. Whittemore - -
All Executive Officers and Directors
as a group (13 persons) (9) 12,103,188 71.7%
- ---------------
* 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 948,683
shares of Common Stock issuable to Kos Investments upon the conversion of
the Convertible Note on August 31, 1997.
(2) Includes 750,000 shares of Common Stock that may be purchased by Mr. Bell
pursuant to an option, which is currently exercisable.
(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.
(9) Includes 1,150,000 shares of Common Stock issuable upon exercise of options
that are currently exercisable or that may be exercised within 60 days.
Also includes 948,683 shares of Common Stock that are issuable upon the
conversion of the Convertible Note as of August 31, 1997.
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<PAGE> 50
ITEM 13. 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 a proposed public offering registered with the Securities
and Exchange Commission including shares of Common Stock owned by Holdings, a
wholly-owned subsidiary of Kos Investments. Assuming the conversion occurs on
October 31, 1997, the accrued interest under the Convertible Note on such date
would be $1,022,524.
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<PAGE> 51
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. & 2.
The Financial Statements filed as part of this report are
listed separately in the index to Financial Statements
beginning on page 23 of this report.
3. The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------ -------------------
<S> <C>
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
10.1* Employment Agreement dated as of July 1, 1996, between Daniel M. Bell and
the Company
10.2* Nonqualified Stock Option Agreement be 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* Kos Pharmaceuticals, Inc. 1996 Stock Option Plan
10.5*** Employment Agreement dated June 20, 1996 by and between Aeropharm and
Anthony J. Cutie
10.6*** Option Agreement dated June 20, 1996 between Anthony J. Cutie and the
Company
10.7*+ Development Agreement by and between the Company and Fuisz Technologies
Ltd.
10.8*+ Option/Licensing Agreement by and between the Company and Fuisz
Technologies Ltd.
</TABLE>
50
<PAGE> 52
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------ -------------------
<S> <C>
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*+ License Agreement by and between the Company and Upsher-Smith
Laboratories, Inc., dated February 7, 1997
10.12* Promissory Note, dated July 1, 1996, in favor of Kos Investments
10.13* Registration Rights Agreement dated as of June 30, 1996 by and between
the Company, Kos Holdings, Inc., and Kos Investments, Inc.
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
27*** Financial Data Schedule
</TABLE>
----------------
* Filed with 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 with the Company's Registration Statement on
Form 8-A filed with the Securities and Exchange
Commission on February 25, 1997, and incorporated
herein by reference.
*** Previously filed as part of this Form 10-K.
+ 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.
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<PAGE> 53
(b) (i) The Company filed a report of Form 8-K on July 29, 1997,
reporting in Item 5 therein the issuance of a press release by
the Company on July 29, 1997.
(ii) The Company filed a report on Form 8-K on September 2,
1997, reporting in Item 8 therein a change in the date of the
Company's fiscal year end.
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<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of Miami,
State of Florida, on the 17th day of September, 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 to this report, 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 Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ MICHAEL JAHARIS
- -------------------------------
Michael Jaharis Chairman of the Board September 17, 1997
/s/ DANIEL M. BELL
- ------------------------------- President, Chief Executive September 17, 1997
Daniel M. Bell Officer and Director
(Principal Executive Officer)
/s/ DUNCAN H. COCROFT Senior Vice President, Chief September 17, 1997
- ------------------------------- Administrative Officer
Duncan H. Cocroft (Principal Financial Officer)
/s/ JUAN F. RODRIGUEZ Controller September 17, 1997
- ------------------------------- (Principal Accounting Officer)
Juan F. Rodriguez
- ------------------------------- Vice Chairman of the Board
Robert E. Baldini
- -------------------------------
John Brademas Director
/s/ STEVEN JAHARIS
- -------------------------------
Steven Jaharis Director September 17, 1997
/s/ LOUIS C. LASAGNA
- -------------------------------
Louis C. Lasagna Director September 17, 1997
/s/ MARK NOVITCH
- -------------------------------
Mark Novitch Director September 17, 1997
/s/ FREDERICK B. WHITTEMORE
- -------------------------------
Frederick B. Whittemore Director September 17, 1997
</TABLE>
