SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________________to______________________
Commission file number 000-22171
KOS PHARMACEUTICALS, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 65-0670898
- --------------------------------- ------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1001 BRICKELL BAY DRIVE, 25th FLOOR, MIAMI, FLORIDA 33131
---------------------------------------------------------
(Address of Principal Executive Offices, Zip Code)
Registrant's Telephone Number, Including Area Code: (305) 577-3464
Indicate whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- -------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes __________ No __________
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
CLASS OUTSTANDING AT MAY 1, 1998
----- --------------------------
Common Stock, par value $.01 per share 17,622,695
<PAGE>
KOS PHARMACEUTICALS, INC.
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997........................................... 2
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1998 and 1997...................... 3
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1997...................... 4
Notes to Condensed Consolidated Financial Statements............ 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 8
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.................................................. 12
Item 6 - Exhibits and Reports on Form 8-K................................... 12
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - CONDENSED FINANCIAL STATEMENTS
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................................. $ 17,860 $ 39,502
Marketable securities.................................................. 32,156 30,894
Trade accounts receivable, net......................................... 675 1,820
Prepaid expenses and other current assets.............................. 1,443 1,873
Inventories............................................................ 3,873 3,383
------------ -------------
Total current assets............................................... 56,007 77,472
Fixed Assets, net........................................................ 9,057 6,900
Other Assets.............................................................. 16 31
------------ -------------
Total assets....................................................... $ 65,080 $ 84,403
============ =============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities:
Accounts payable....................................................... $ 1,307 $ 3,159
Accrued expenses....................................................... 2,823 3,374
------------ -------------
Total current liabilities.......................................... 4,130 6,533
------------ -------------
Shareholders' Equity:
Common stock, $.01 par value, 50,000,000 shares authorized,
17,621,695 and 17,165,695 shares issued and outstanding as
of March 31, 1998 and December 31, 1997, respectively................ 176 172
Preferred stock, $.01 par value, 10,000,000 shares authorized,
none issued and outstanding.......................................... - -
Additional paid-in capital............................................. 184,033 183,650
Accumulated deficit.................................................... (123,259) (105,952)
------------ -------------
Total shareholders' equity......................................... 60,950 77,870
------------ -------------
Total liabilities and shareholders' equity......................... $ 65,080 $ 84,403
============ =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
----------------------------
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Net Sales................................................. $ 1,000 $ -
------------ ------------
Costs and Expenses:
Cost of sales.......................................... 210 -
Research and development............................... 6,972 6,973
Selling, general and administrative.................... 11,912 1,319
------------ ------------
Total costs and expenses........................... 19,094 8,292
------------ ------------
Other (Income) Expense:
Interest (income) expense, net......................... (787) (172)
Interest expense-related parties....................... - 229
------------ ------------
Total other (income) expense....................... (787) 57
------------ ------------
Net loss........................................... $(17,307) $(8,349)
============ ============
Net loss per share, basic and diluted..................... $ (1.00) $ (0.67)
Weighted average shares of common
stock outstanding, basic and diluted.................... 17,266 12,409
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1998 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss................................................................. $(17,307) $ (8,349)
Adjustments to reconcile net loss to net cash used
in operating activities -
Depreciation and amortization........................................ 393 176
Cost of stock options issued to non-employees........................ 44 311
Changes in operating assets and liabilities:
Trade accounts receivable, net..................................... 1,145 -
Prepaid expenses and other current assets.......................... 430 (758)
Inventories........................................................ (490) (95)
Other assets....................................................... 15 -
Accounts payable................................................... (1,852) (238)
Accrued expenses................................................... (551) 2,273
------------ -------------
Net cash used in operating activities....................... (18,173) (6,680)
------------ -------------
Cash Flows from Investing Activities:
Investment in marketable securities...................................... (1,262) -
Capital expenditures..................................................... (2,550) (447)
------------ -------------
Net cash used in investing activities....................... (3,812) (447)
------------ -------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock............................... - 65,885
Stock options exercised.................................................. 343 -
Borrowings under loan from Kos Investments, Inc.......................... - 5,040
------------ -------------
Net cash provided by financing activities................... 343 70,925
------------ -------------
Net increase (decrease) in cash and
cash equivalents........................................... (21,642) 63,798
Cash and cash equivalents, beginning of period............................. 39,502 358
------------ -------------
Cash and cash equivalents, end of period................................... $ 17,860 $64,156
============ =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The condensed consolidated financial statements included herein have been
prepared by Kos Pharmaceuticals, Inc. (the "Company") without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the consolidated financial position,
results of operations, and cash flows of the Company. The unaudited condensed
consolidated financial statements included herein should be read in conjunction
with the audited consolidated financial statements and the notes thereto
included in the Company's Form 10-K, for the year ended December 31, 1997.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". Comprehensive income includes net income and several other items that
current accounting standards require to be recognized outside of net income. The
Company does not have any material items that must be reported outside of its
statement of operations for the three-month periods ended March 31, 1998 and
1997. Therefore, the Company's net income for the three-month periods ended
March 31, 1998 and 1997, equal its comprehensive income for the same time
periods.
3. INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
1998 1997
------------ -------------
(in thousands)
Raw materials.............................. $ 265 $ 218
Work in process............................ 2,495 1,917
Finished goods............................. 1,113 1,248
------------ -------------
Total................................. $ 3,873 $ 3,383
============ =============
5
<PAGE>
4. STOCK OPTIONS
On February 19, 1998, the Company's Board of Directors authorized the
re-pricing of options to acquire shares of Common Stock granted to employees at
exercise prices ranging from $12.00 to $43.44 per share. As a result of the
re-pricing, the exercise price for these options was reduced to $11.16 per
share, the average of the high and low price of the Company's Common Stock on
February 19, 1998. No options granted to members of the Board of Directors were
re-priced.
As of March 31, 1998, the Company had issued and outstanding options to
purchase 2,569,390 shares of Common Stock, at exercise prices ranging from $0.60
to $27.25 per share, to employees, officers, directors, and consultants,
including options granted prior to the implementation of the Plan. Of these,
options to purchase 1,068,614 shares were exercisable. During the three month
period ended March 31, 1998, options to purchase 615,500 shares of Common Stock
were granted at exercise prices ranging from $9.31 to $11.16, and options to
purchase 455,500 shares were exercised at exercise prices ranging from $0.60 to
$7.00.
The Company considered the provisions of SFAS No. 123 using the Black
Scholes method to approximate an expense related to the issuance of stock
options. The Company's Black Scholes calculation included an expected stock
price volatility rate of 57.6%, a risk-free interest rate of 6.25%, no expected
dividends, and an expected option term of five years. 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, for
options issued to employees, no deferred compensation cost has been recognized
because the exercise price of such options was not less than the market value of
the Common Stock on the date of grant. On options issued to non-employees,
consisting of options issued to directors and to consultants, deferred
compensation cost of $44,250 was recorded for the three month period ended March
31, 1998.
6
<PAGE>
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>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1997
------------ ------------
(In thousands, except per
share data)
<S> <C> <C>
Net loss:
As reported...................................... $(17,307) $(8,349)
Pro Forma........................................ $(18,221) $(8,818)
Net loss per share, basic and diluted:
As reported...................................... $ (1.00) $ (0.67)
Pro Forma........................................ $ (1.06) $ (0.71)
</TABLE>
5. SUBSEQUENT EVENT
On April 27, 1998, the Company received a commitment from Michael Jaharis,
the Company's Chairman of the Board of Directors, to provide a $30 million
unsecured credit facility. The Company may draw against this credit facility
during the period from July 1, 1998 to June 30, 1999. Borrowings will bear
interest at the prime rate and will be due December 31, 2000.
7
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION 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 Technologies, Inc., 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 Kos Holdings,
Inc. ("Holdings"); established the Company as a wholly-owned subsidiary under
the name of Kos Pharmaceuticals, Inc.; and, effective as of June 30, 1996,
transferred all of its existing assets, liabilities and intellectual property,
other than certain net operating loss carryforwards, to the Company.
Accordingly, all references in this 10-Q filing to the Company's business
include the business and operations of Holdings until June 30, 1996.
On March 12, 1997, the Company completed an initial public offering of its
Common Stock ("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
March 31, 1998, the Company had accumulated a deficit from operations of
approximately $123 million. In connection with the transfer of operations from
Holdings to the Company during June 1996, net operating loss carryforwards
amounting to approximately $51 million and related tax benefits were retained by
Holdings and not transferred to the Company. Consequently, the Company can only
utilize net operating losses sustained subsequent to June 30, 1996 to offset
future taxable net income, if any.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
The Company, which began sales of its NIASPAN* product during August 1997,
had no sales in the three month period ended March 31, 1997. Net sales of the
NIASPAN product totaled $1.0 million during the three months ended March 31,
1998. Cost of sales for the same period totaled $0.2 million.
The Company's research and development expenses were $7.0 million for each
of the three-month periods ended March 31, 1998 and 1997. The Company, however,
experienced increases in certain research and development expenses during the
three months ended March 31, 1998, primarily relating to recently established
medical education programs in support of NIASPAN, clinical trial expenses, and
personnel costs. These 1998 increases,
- -----
* NIASPAN is a registered trademark of Kos Pharmaceuticals, Inc.
8
<PAGE>
however, were offset by the absence of a $3.0 million charge in the 1997 quarter
attributable to the cost of entering into an agreement with an unaffiliated
generic drug manufacturer to resolve the effects of a potential patent
interference proceeding. The Company expects future research and development
expenditures may increase as personnel are added and research activities are
expanded to support the continued development of products in the Company's
product pipeline, as well as for additional development of products that may be
identified.
Selling, general and administrative expenses increased to $11.9 million for
the three months ended March 31, 1998, from $1.3 million for the three months
ended March 31, 1997. The increase reflected primarily the expense associated
with the Company's sales and marketing organization during the three months
ended March 31, 1998, including the cost of the Company's field sales force and
physician awareness programs to support the Company's NIASPAN product.
Administrative costs also increased during the three month period ended March
31, 1998, as a result of added personnel costs and other expenses associated
with the expanded activities of the Company. The Company expects its selling,
general and administrative expenses to continue to increase, principally in
support of its marketing efforts.
From July 1, 1996, to the completion of its IPO on March 12, 1997, the
Company funded its operations from the proceeds of a loan from Kos Investments,
Inc. (the "Convertible Note"), the sole shareholder of Holdings. The Convertible
Note and its accrued interest were convertible into shares of the Company's
Common Stock at a conversion price per share equal to the IPO price per share
($15.00). Interest expense under the Convertible Note totaled $229,000 during
the three months ended March 31, 1997. On October 25, 1997, the outstanding
principal and interest under the Convertible Note were converted into 960,069
shares of Common Stock. At the time of conversion, the Convertible Note accrued
interest at a rate of 8.50% per year and had outstanding principal and interest
of $13.4 million and $1.0 million, respectively.
The Company received $65.9 million in net proceeds from its IPO, completed
in March 1997, and $43.3 million in net proceeds from a follow-on offering of
its Common Stock, completed in October 1997, after deducting expenses of both
offerings. The remaining net proceeds from its follow-on offering, along with
other cash balances, totaling $50.0 million as of March 31, 1998, were invested
primarily in U.S. Treasury and highly-rated corporate debt securities. The
Company recorded $787,000 of interest income for the three months ended March
31, 1998, compared with $172,000 for the three months ended March 31, 1997.
The Company incurred a net loss of $17.3 million for the three months ended
March 31, 1998, compared with a net loss of $8.3 million for the three months
ended March 31, 1997.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company's working capital totaled approximately
$51.9 million, including $50.0 million of cash and cash equivalents and
marketable securities. The Company's primary uses of cash during the last twelve
months have been in operating activities to fund selling, general and
administrative expenses, and research and development expenses, including
clinical trials. As of March 31, 1998, the Company's investment in equipment and
leasehold improvements, net of depreciation and amortization, was approximately
$9.1 million. During the three months ended March 31, 1998, the Company spent
$2.5 million in capital expenditures. The Company expects capital expenditures
to continue at least at this level for the remainder of 1998, primarily for
additional equipment and facilities related to its research and development, and
manufacturing requirements.
On April 27, 1998, the Company received a commitment from Michael Jaharis,
the Company's Chairman of the Board of Directors, to provide a $30 million
unsecured credit facility. The Company may draw against this credit facility
during the period from July 1, 1998 to June 30, 1999. Borrowings will bear
interest at the prime rate and will be due December 31, 2000.
Although the Company currently anticipates that, including the capital
available to the Company under the credit facility mentioned in the preceding
paragraph, it has or has access to an amount of working capital that will be
sufficient to fund the Company's operations for at least the next twelve months,
the Company's cash requirements during this period will be substantial and may
exceed the amount of the working capital available to the Company. The Company
must generate significant sales of its NIASPAN product during 1998 and 1999 in
order to fund its operating requirements and maintain an adequate level of
working capital through mid-1999. There can be no assurance, however, that such
sales can be achieved. The Company's failure to achieve such sales and other
events -- including 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
regulatory approvals; the Company's ability to manufacture products at an
economically feasible cost; costs in filing, prosecuting, defending, and
enforcing 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 -- could cause the Company to
require additional capital prior to the end of the next twelve month period. In
the event that the Company must raise additional capital to fund its working
capital needs, it may seek to raise such capital through loans, which may
include a bank line of credit, or through the issuance of debt or equity
securities. To the extent the Company raises additional capital by issuing
equity securities or obtaining borrowings convertible into equity, ownership
dilution to existing shareholders will result, and future investors may be
granted rights superior to those of existing shareholders. Moreover, there can
be no assurance that any additional capital will be available to the Company on
acceptable terms, or at all.
10
<PAGE>
CONTINGENCIES
The Company has performed an initial assessment of the impact of the "Year
2000 Issue" on its reporting systems and operations. The "Year 2000 Issue"
exists because many computer systems and applications currently use two-digit
fields to designate a year. As the century date occurs, date sensitive systems
will recognize the year 2000 as 1900, or not at all. Based on the Company's
initial assessment, it believes that its accounting systems and operations
substantially avoid the "Year 2000 Issue," thereby enabling it to properly
process critical financial and operational information. There can be no
assurance, however, that the systems of other companies on which the Company's
systems and operations rely will be timely converted to address the "Year 2000
Issue", or that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company's financial position and results of operations.
FORWARD-LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS
Certain statements contained in this Form 10-Q, principally in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," that are not related to historical results, including statements
relating to anticipated sales or working capital, 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 that may not prove to be accurate.
These forward-looking statements involve risks and uncertainties, including but
not limited to physician and patient acceptance of the NIASPAN product; the
Company's future cash flows, sales, gross margins and operating costs; the
Company's ability to devote the resources required to adequately market the
NIASPAN product; the Company's ability to recruit qualified personnel; the
effect of conditions in the pharmaceutical industry and the economy in general;
regulatory developments; legal proceedings; and certain other risks.
Forward-looking statements contained in this report and in subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by cautionary
statements in this paragraph and elsewhere in this Form 10-Q, in other reports
filed by the Company with the Securities and Exchange Commission and in the
Company's Form 10-K for the year ended December 31, 1997, filed with the
Securities and Exchange Commission on March 27, 1998 under the caption
"Forward-Looking Information: Certain Cautionary Statements".
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company or
its properties or to which the Company is a party.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(10) Commitment Letter dated April 27, 1998
(27) Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K during the quarter ended
March 31, 1998.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KOS PHARMACEUTICALS, INC.
Date: May 14, 1998 By: /s/ DANIEL M. BELL
--------------------------------
Daniel M. Bell, President and
Chief Executive Officer
Date: May 14, 1998 By: /s/ DUNCAN H. COCROFT
--------------------------------
Duncan H. Cocroft,
Senior Vice President and
Chief Administrative Officer
(Principal Financial Officer)
Date: May 14, 1998 By: /s/ JUAN F. RODRIGUEZ
--------------------------------
Juan F. Rodriguez, Controller
(Principal Accounting Officer)
13
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10 Commitment Letter dated April 27, 1998
27 Financial Data Schedule
April 27, 1998
COMMITMENT LETTER
Kos Pharmaceuticals, Inc.
1001 Brickell Bay Drive
25th Floor
Miami, Florida 33131
Attention: President
Re: $30,000,000 Credit Facility
Ladies and Gentlemen:
This letter constitutes the Commitment of the undersigned (the
"Lender") to make available the credit line (the "Loan") to Kos Pharmaceuticals,
Inc., a Florida corporation (the "Borrower"), subject to the terms and
conditions set forth in a Promissory Note, Loan Agreement, and such other
documents as Lender may reasonably require. The terms and conditions of this
Commitment are as follows:
1. LOAN. The Loan will be evidenced by a promissory note in the
principal amount of up to thirty million dollars ($30,000,000) (the
"Note").
2. TERM AND MATURITY. The Borrower may borrow amounts from time to time
under the Loan during the period commencing July 1, 1998 (the
"Commencement Date") and ending June 30, 1999 (the "Termination
Date"). All amounts outstanding under the Loan shall become due and
payable on December 31, 2000 (the "Maturity Date").
3. INTEREST RATE. Through the Maturity Date, so long as there is no
default under the Loan, the Note shall bear interest at a variable
rate equal to the prime rate established by a bank to be agreed upon
by Borrower and Lender (the "Prime Rate"), subject to adjustment on
the first banking day of each month through the Maturity Date, on the
principal balance outstanding. In no event shall said rate of
interest exceed the maximum annual rate of interest permitted under
Connecticut Law or Federal Law in the event Federal Law preempts
Connecticut Law or is otherwise applicable. Through the Maturity
Date, interest only, at the above-mentioned variable rate, shall be
due and payable monthly on the seventh business day of each month on
loan funds previously disbursed. In the event of a payment default or
after the Maturity Date, interest shall accrue from the due date of
such payment until such payment default is cured, or until full
payment is received by Lender, at an annual rate of the Prime Rate
plus 6%.
4. REPAYMENT OF LOAN. Through the Maturity Date, interest shall be
computed on the outstanding principal balance for the actual number
of days which have elapsed in an interest period, calculated on the
basis of a 360-day year.
<PAGE>
Kos Pharmaceuticals, Inc.
April 27, 1998
Page -2-
Principal amounts outstanding under the Loan from time to time shall
become due and payable on the Maturity Date and may be prepaid in
whole or in part from time to time without penalty.
5. TERMS AND CONDITIONS. This Commitment shall be supplemented by all of
the terms and conditions set forth in the Note, Loan Agreement and
other collateral Loan Documents (as hereinafter defined). The Note
and Loan Agreement shall contain substantially the following:
a. Default: In the event any payment, including any payment of
interest, is not made when due, and such payment is not
made by Borrower within ten (10) days of such due date,
the Loan may be declared in default and the entire
principal balance together with interest thereon may be
accelerated and declared to be immediately due and
payable. In addition, the documentation will provide for
customary events of default. In the case of non-monetary
defaults other than bankruptcy, insolvency and other
uncurable defaults, Lender shall provide Borrower with
prior notice of an event of default and allow Borrower a
thirty (30) day period in which to cure such default.
b. Right to Accelerate: In the event of a Change in Control
of the Borrower, the Lender shall have the right to
accelerate the entire principal balance of the Note
together with interest thereon and declare same to be
immediately due and payable. For purposes of this
condition, a Change in Control shall be deemed to occur
(i) when there is a sale or transfer of all or
substantially all of the assets of Borrower to an
unaffiliated third party, (ii) when Borrower is a party to
merger, consolidation, reorganization, or other
transaction in which the members of the Board of Directors
of Borrower immediately prior to such transaction fail to
constitute at least a majority of the Board of Directors
of the surviving entity following such transaction, or
(iii) upon the occurrence of such other events as Borrower
and Lender may agree.
c. Prepayment Penalty: There shall be no prepayment penalty
during the term of the Loan.
d. Other Borrower Financing: Except as provided herein or with
the consent of the Lender, Borrower shall not incur any
additional indebtedness secured by a pledge of Borrower's
assets as collateral or with repayment terms senior to those
of Lender under the terms of the Note; provided that
Borrower may incur equipment financing indebtedness and
letters of
<PAGE>
Kos Pharmaceuticals, Inc.
April 27, 1998
Page -3-
credit in the ordinary course of business in amounts not
exceeding $100,000 per transaction.
6. ADVANCES.
a. Proceeds from the Loan shall may be utilized by Borrower for
any purpose.
b. Requisitions for advances shall be made directly to the
Lender in writing on at least three business days prior
notice. Other requirements with respect to advances shall be
set forth in the Loan Documents.
c. Any and all costs of recording the Loan Documents,
including, but not limited to, documentary stamps,
intangible tax and recording fees (collectively "Costs")
shall be paid by Borrower at closing and at such other times
as advances are made and monies for the payment of said
Costs are required.
7. CLOSING DOCUMENTS. The following documents ("Loan Documents") shall
be executed and delivered at closing in form and content satisfactory
to Borrower and Lender:
a. Promissory Note in the amount of the Loan, executed by
Borrower, made payable to the Lender.
b. Loan Agreement, executed by Borrower and Lender.
c. Counter-signature of this Commitment by Borrower.
d. Such other documents as may be required by Lender.
This Loan shall be closed on or prior to June 30, 1998 ("Closing
Date"). This Commitment shall remain in full force and effect until
June 30, 1998.
8. COSTS. All costs of making and administering this Loan, including,
but not limited to, legal fees (including Lender's counsel), fees for
advisors in connection with the Loan (including a reasonable fee for
Lender's advisor), intangible taxes, documentary stamp taxes, and
sales taxes are to be paid by Borrower. All out-of-pocket costs
incurred by Lender will be reimbursed to Lender by Borrower in the
event this Loan is not closed for any reason other than the arbitrary
refusal of Lender.
<PAGE>
Kos Pharmaceuticals, Inc.
April 27, 1998
Page -4-
9. MATERIAL ADVERSE CHANGES. At the time of the closing of the Loan
contemplated by this Commitment, there shall be neither any material
adverse change in the operations, management or financial condition
of the Borrower nor any material litigation in effect, pending or
threatened, involving the Borrower.
10. ASSIGNMENT. This Commitment is not assignable and may only be
modified in writing, signed by the parties hereto.
11. GOVERNING LAW. This Commitment shall be governed in its enforcement,
construction and interpretation by the laws of the State of
Connecticut.
12. COMMITMENT LETTER. Any statements, agreements or representations,
oral or written, which may have been made by Lender or by any
employee, agent, or broker acting on Lender's behalf with respect to
this Commitment, and all prior agreements and representations with
respect to this Commitment and the Loan referred to herein are merged
herein so that this Commitment Letter shall contain the entire
agreement with respect to the Loan.
13. ADDITIONAL FINANCING BY LENDER. The Lender's obligation to fund this
Loan is limited to the principal amount set forth herein and the
Lender is not obligated to fund any additional amounts other than as
set forth herein.
14. BINDING. This Commitment shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and/or
assigns, heirs and legal representatives.
15. WAIVERS. Borrower's counsel in this matter shall be the law firm of
Holland & Knight LLP and both Borrower and Lender waive any potential
or actual conflict of interest with respect thereto.
Yours truly,
/s/ Michael Jaharis
- --------------------
Michael Jaharis
<PAGE>
Kos Pharmaceuticals, Inc.
April 27, 1998
Page -5-
Agreed to and Accepted:
KOS PHARMACEUTICALS, INC., a Florida corporation
By:
/s/ Duncan H. Cocroft
---------------------------------------
Duncan H.Cocroft, Senior Vice President
Dated: April 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM KOS
PHARMACEUTICALS, INC'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 17,860
<SECURITIES> 32,156
<RECEIVABLES> 755
<ALLOWANCES> (80)
<INVENTORY> 3,873
<CURRENT-ASSETS> 56,007
<PP&E> 12,240
<DEPRECIATION> (3,183)
<TOTAL-ASSETS> 65,080
<CURRENT-LIABILITIES> 4,130
<BONDS> 0
0
0
<COMMON> 176
<OTHER-SE> 60,774
<TOTAL-LIABILITY-AND-EQUITY> 65,080
<SALES> 1,000
<TOTAL-REVENUES> 1,000
<CGS> 210
<TOTAL-COSTS> 210
<OTHER-EXPENSES> 18,884
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (787)
<INCOME-PRETAX> (17,307)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,307)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,307)
<EPS-PRIMARY> (1.00)
<EPS-DILUTED> (1.00)
</TABLE>
