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 September 30, 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 of (I.R.S. Employer
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 OUSTANDING AT OCTOBER 30, 1998
- ----- ------------------------------
Common Stock, par value $.01 per share 17,716,345
<PAGE>
KOS PHARMACEUTICALS, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997.............................. 2
Condensed Consolidated Statements of Operations for the three
months and nine months ended September 30, 1998 (unaudited)
and 1997 (unaudited)........................................... 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 (unaudited)
and 1997 (unaudited)........................................... 4
Notes to Condensed Consolidated Financial Statements........... 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 8
Forward Looking Information: Certain Cautionary Statements...... 14
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................... 25
Item 6 - Exhibits and Reports on Form 8-K................................ 26
NIASPAN is a registered trademark of Kos Pharmaceuticals, Inc.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................................... $ 11,840 $ 39,502
Marketable securities.............................................. 40 30,894
Trade accounts receivable, net..................................... 1,783 1,820
Prepaid expenses and other current assets.......................... 994 1,873
Inventories........................................................ 1,339 3,383
--------- ---------
Total current assets........................................... 15,996 77,472
Fixed Assets, net.................................................... 11,674 6,900
Other Assets.......................................................... 16 31
--------- ---------
Total assets................................................... $ 27,686 $ 84,403
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................... $ 2,764 $ 3,159
Accrued expenses................................................... 4,792 3,374
Capital lease obligation........................................... 73 -
--------- ---------
Total current liabilities...................................... 7,629 6,533
Capital lease obligation, net of current portion...................... -
131
--------- ---------
Total liabilities.............................................. 7,760 6,533
--------- ---------
Shareholders' Equity:
Common stock, $.01 par value, 50,000,000 shares authorized,
17,716,345 and 17,165,695 shares issued and outstanding as
of September 30, 1998 and December 31, 1997, respectively.......... 177 172
Preferred stock, $.01 par value, 10,000,000 shares authorized, - -
none issued and outstanding........................................
Additional paid-in capital......................................... 184,371 183,650
Accumulated deficit................................................ (164,622) (105,952)
--------- ---------
Total shareholders' equity..................................... 19,926 77,870
--------- ---------
Total liabilities and shareholders' equity..................... $ 27,686 $ 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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- --------------------
1998 1997 1998 1997
--------- --------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales...................................... $ 4,266 $ 1,524 $ 8,073 $ 1,524
Cost of sales.................................. 1,172 364 2,225 364
--------- -------- --------- --------
Gross profit............................ 3,094 1,160 5,848 1,160
--------- -------- --------- --------
Operating Expenses:
Research and development.................... 6,840 5,150 21,335 16,465
Selling, general and administrative......... 15,891 7,261 44,909 10,816
--------- -------- --------- --------
Total operating expenses................ 22,731 12,411 66,244 27,281
--------- -------- --------- --------
Other (Income) Expense:
Other income................................ (13) - (12) -
Interest income, net........................ (315) (743) (1,714) (1,663)
Interest expense-related parties............ - 288 - 795
--------- -------- --------- --------
Total other income...................... (328) (455) (1,726) (868)
--------- -------- --------- --------
Net loss............................... $(19,309) $(10,796) $(58,670) $(25,253)
========== ========= ========= ========
Net loss per share, basic and diluted.......... $ (1.09) $ (0.73) $ (3.34) $ (1.82)
Weighted average shares of common
stock outstanding............................ 17,713 14,782 17,547 13,883
Common stock options outstanding
(not included in the calculation of diluted
loss per share as their impact would be
antidilutive)................................ 2,549 2,648 2,549 2,648
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1997
-------- ---------
(UNAUDITED)
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss............................................................. $(58,670) $(25,253)
Adjustments to reconcile net loss to net cash used
in operating activities -
Depreciation and amortization.................................... 1,614 628
Cost of stock options issued to non-employees.................... 206 344
Provision for inventory obsolescence............................. 210 115
Gain on disposal of fixed assets................................. 12 -
Changes in operating assets and liabilities:
Trade accounts receivable, net................................. 37 (1,476)
Prepaid expenses and other current assets...................... 879 (90)
Inventories.................................................... 1,834 (2,282)
Other assets................................................... 15 (635)
Accounts payable............................................... (395) 2,294
Accrued expenses............................................... 1,418 5,469
-------- --------
Net cash used in operating activities................... (52,840) (20,886)
-------- --------
Cash Flows from Investing Activities:
Proceeds from (investments in) marketable securities................. 30,854 (31,635)
Capital expenditures................................................. (6,168) (3,082)
-------- --------
Net cash provided by (used in) investing activities..... 24,686 (34,717)
-------- --------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock........................... - 65,885
Stock options exercised.............................................. 520 647
Borrowings under loan from Kos Investments, Inc...................... - 5,040
Payments under capital lease obligation.............................. (28) -
-------- --------
Net cash provided by financing activities............... 492 71,572
-------- --------
Net increase (decrease) in cash and
cash equivalents........................................ (27,662) 15,969
Cash and cash equivalents, beginning of period......................... 39,502 358
-------- --------
Cash and cash equivalents, end of period............................... $ 11,840 $ 16,327
======== ========
Supplemental Disclosure of Non-cash Flow Information:
Acquisition of equipment under capital lease obligation............. $ 232 $ -
</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 unaudited condensed consolidated financial statements included herein
have been prepared by Kos Pharmaceuticals, Inc. and subsidiary (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
results of operations and cash flows for the nine month period ended September
30, 1998, are not necessarily indicative of the results of operations or cash
flows that may be reported for the year ending December 31, 1998. 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 Transition Report on Form 10-K, as amended,
for the period ended December 31, 1997.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") 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 comprehensive income items
reported outside of its statement of operations for the nine month periods ended
September 30, 1998 and 1997. Therefore, the Company's net income for the nine
month periods ended September 30, 1998 and 1997, equals its comprehensive income
for the same time periods.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", was also issued by the FASB in June 1997. This statement
establishes standards for reporting information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company will adopt SFAS 131 effective
December 31, 1998.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", is effective for fiscal years ending after June 15, 1999. This
statement establishes accounting and reporting standards that require that every
derivative instrument be recorded in the balance sheet as either an asset or a
liability at its fair value. The Company adopted SFAS 133 effective June 30,
1998. The adoption of
5
<PAGE>
this statement did not have an impact on the Company's consolidated
financial position because the Company does not presently have any derivative or
hedging-type investment as defined by SFAS 133.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
Raw materials.............................................. $ 192 $ 218
Work in process............................................ 837 1,917
Finished goods............................................. 310 1,248
---------- ----------
Total................................................. $ 1,339 $ 3,383
========== ==========
</TABLE>
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 $15.00 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 September 30, 1998, the Company had issued and outstanding options to
purchase 2,549,065 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 outstanding, options to purchase 1,186,728 shares were exercisable.
During the nine-month period ended September 30, 1998, options to purchase
751,500 shares of Common Stock were granted at exercise prices ranging from
$7.75 to $15.19, options to purchase 547,750 shares were exercised at exercise
prices ranging from $0.60 to $7.00, and options to purchase 101,475 shares at
exercise prices ranging from $7.00 to $17.00 were cancelled.
6
<PAGE>
5. SUBSEQUENT EVENTS
The Company's Board of Directors authorized, effective October 1, 1998, the
re-pricing of options to acquire shares of Common Stock granted to employees at
exercise prices ranging from $7.00 to $13.28 per share. As a result of the
re-pricing, the exercise price for these options was reduced to $5.06 per share,
the closing price of the Company's Common Stock on October 1, 1998. No options
granted to members of the Board of Directors or to the Company's officers were
re-priced.
Effective October 7, 1998, the Company entered into an additional $25
million funding arrangement (the "Supplemental Funding Arrangement") with
Michael Jaharis, the Company's Chairman of the Board of Directors. Under the
terms of the Supplemental Funding Arrangement, Mr. Jaharis will make available
to the Company, as requested, additional debt or equity capital in excess of the
capital available to the Company under the July 1, 1998, $30 million credit
facility previously provided by Mr. Jaharis. Funds will be provided to the
Company under the Supplemental Funding Arrangement at prevailing rates and on
prevailing terms for companies situated similar to the Company. The Supplemental
Funding Arrangement is subject to certain conditions, including (i) the parties'
entering into appropriate documentation containing standard terms and
conditions, (ii) at the time of funding, there shall not have been any material
adverse change in the business or financial operations or condition of the
Company or in its management, (iii) at the time of funding, the Company's then
current financial projections shall indicate that the Company shall have
sufficient funds, with the funding to be provided under the Supplemental Funding
Arrangement, to achieve positive cash flow no later than June 30, 2000, (iv) at
the time of funding, there shall not be any litigation pending or threatened
involving the Company that is likely to have a material adverse effect on the
Company, and (v) at the time of funding, Michael Jaharis or his affiliates shall
continue to hold a controlling interest in the Company's Common Stock. The
Supplemental Funding Arrangement will terminate on the earlier to occur of (x)
June 30, 2000, (y) the Company's receiving third party financing for an amount
in excess of 50% of the amount available under the Supplemental Funding
Arrangement and (z) a change in control, merger or sale of substantially all of
the assets of the Company.
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. ("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 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 Form 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 the Company had funded its operations
exclusively through equity contributions and a loan from its majority
shareholder. Through September 30, 1998, the Company had accumulated a deficit
from operations of approximately $164.6 million. In connection with the transfer
of operations from Holdings to the Company during June 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 can only utilize net operating losses sustained subsequent to June 30,
1996, to offset future taxable net income, if any.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The Company recorded net sales of $8.1 million for the nine months ended
September 30, 1998, compared with $1.5 million for the same period in 1997. The
Company began sales of its NIASPAN product during August 1997. Cost of sales was
$2.2 million and $364,000 for the nine months ended September 30, 1998 and 1997,
respectively, resulting in 72.4% and 76.1% gross margin for the respective
periods. The 1998 decrease in gross margin was attributable to higher overhead
absorption costs resulting from lower NIASPAN production during the 1998 period.
The Company's research and development expenses increased to $21.3 million
for the nine months ended September 30, 1998, from $16.5 million for the nine
months ended September 30, 1997. The change related primarily to increases of
$4.0 million during the 1998 period in connection with formulation development
of the
8
<PAGE>
Company's Nicostatin(TM) product and other products under development, $3.4
million in medical education programs in support of NIASPAN, and $1.4 million in
personnel and personnel-related costs in support of the Company's expanded
research and development activities. The increases were partially offset by the
absence, during 1998, of a $3.0 million charge attributable to the cost of
entering into an agreement, in February 1997, with an unaffiliated generic drug
manufacturer to resolve, as between themselves, the effects of a potential
patent interference proceeding, $0.8 million of development costs paid to third
parties in 1997 and, the absence of $0.5 million of clinical trial costs
incurred during the 1997 period associated with the completion of a NIASPAN
long-term study.
Selling, general and administrative expenses increased to $44.9 million for
the nine months ended September 30, 1998, from $10.8 million for the nine months
ended September 30, 1997. The change reflected primarily the full impact of the
presence of the Company's sales and marketing organization during the 1998
period, including the continued expansion of the Company's field sales force and
the initiation of a variety of promotional programs in connection with the
NIASPAN product. General and administrative costs also increased during the 1998
period, mostly as a result of a $1.4 million increase in personnel costs, $0.4
million in royalty expenses for the Company's NIASPAN product, and other
expenses associated with the expanded activities of the Company.
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 $0.8 million
during the nine months ended September 30, 1997. On October 25, 1997, the
outstanding principal and interest of the Convertible Note was 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 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 the follow-on offering, along with other cash balances, totaling
$11.9 million as of September 30, 1998, were invested primarily in U.S. Treasury
and highly-rated corporate debt securities. The Company recorded $1.7 million
of interest income for both the nine months ended September 30, 1998 and 1997.
The Company incurred a net loss of $58.7 million for the nine months ended
September 30, 1998, compared with a net loss of $25.3 million for the nine
months ended September 30, 1997.
9
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The Company recorded net sales of $4.3 million for the three months ended
September 30, 1998, compared with $1.5 million for the same period in 1997. The
Company began sales of its NIASPAN product during August 1997. Cost of sales was
$1.2 million and $0.4 million for the three months ended September 30, 1998 and
1997, respectively, resulting in 72.5% and 76.1% gross margin for the respective
periods. The 1998 decrease in gross margin was attributable to higher overhead
absorption costs resulting from lower NIASPAN production during the 1998 period.
The Company's research and development expenses increased to $6.8 million
for the three months ended September 30, 1998, from $5.2 million for the three
months ended September 30, 1997. The change related primarily to increases of
$1.5 million during the 1998 period in connection with formulation development
of the Company's Nicostatin(TM) product and other products under development,
$0.7 million in medical education programs in support of NIASPAN, and $0.5
million in personnel and personnel-related costs in support of the Company's
expanded research and development activities. The increases were partially
offset by the absence, in the 1998 quarter, of $1.2 million of development and
licensing costs paid to third parties in 1997.
Selling, general and administrative expenses increased to $15.9 million for
the three months ended September 30, 1998, from $7.3 million for the three
months ended September 30, 1997. The increase reflected primarily the full
impact of the presence of the Company's augmented sales and marketing
organization during the 1998 period, and the cost of a variety of promotional
programs, absent in the 1997 quarter, in connection with the NIASPAN product.
General and administrative costs also increased during the 1998 period, mostly
as a result of a $0.2 million increase in personnel costs, $0.2 million in
royalty expenses for the Company's NIASPAN product, and other expenses
associated with the expanded activities of the Company.
Interest expense under the Convertible Note, absent during the three months
ended September 30, 1998, totaled $0.3 million during the three months ended
September 30, 1997. The Company, however, recorded $0.3 million of interest
income from its investment in U.S. Treasury and highly-rated corporate debt
securities during the three months ended September 30, 1998, compared with $0.7
million for the three months ended September 30, 1997.
The Company incurred a net loss of $19.3 million for the three months ended
September 30, 1998, compared with a net loss of $10.8 million for the three
months ended September 30, 1997.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company's working capital totaled approximately
$8.4 million, and the Company had cash and cash equivalents and marketable
securities totaling $11.9 million. The Company's primary uses of cash to date
have been in operating activities to fund research and development, including
clinical trials, and selling, general and administrative expenses. As of
September 30, 1998, the Company's investment in equipment and leasehold
improvements, net of depreciation and amortization, was approximately $11.7
million. During the nine months ended September 30, 1998, the Company spent $6.2
million in capital expenditures. The Company expects capital expenditures to be
no more than $2.0 million for the remainder of 1998.
On July 1, 1998, the Company entered into a $30 million credit facility
(the "Credit Facility") with Michael Jaharis, Chairman of the Company's Board of
Directors. 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.
Effective October 7, 1998, the Company entered into an additional $25
million funding arrangement (the "Supplemental Funding Arrangement") with
Michael Jaharis, the Company's Chairman of the Board of Directors. Under the
terms of the Supplemental Funding Arrangement, Mr. Jaharis will make available
to the Company, as requested, additional debt or equity capital in excess of the
capital available to the Company under the July 1, 1998, $30 million credit
facility previously provided by Mr. Jaharis. Funds will be provided to the
Company under the Supplemental Funding Arrangement at prevailing rates and on
prevailing terms for companies situated similar to the Company. The Supplemental
Funding Arrangement is subject to certain conditions, including (i) the parties'
entering into appropriate documentation containing standard terms and
conditions, (ii) at the time of funding, there shall not have been any material
adverse change in the business or financial operations or condition of the
Company or in its management, (iii) at the time of funding, the Company's then
current financial projections shall indicate that the Company shall have
sufficient funds, with the funding to be provided under the Supplemental Funding
Arrangement, to achieve positive cash flow no later than June 30, 2000, (iv) at
the time of funding, there shall not be any litigation pending or threatened
involving the Company that is likely to have a material adverse effect on the
Company, and (v) at the time of funding, Michael Jaharis or his affiliates shall
continue to hold a controlling interest in the Company's Common Stock. The
Supplemental Funding Arrangement will terminate on the earlier to occur of (x)
June 30, 2000, (y) the Company's receiving third party financing for an amount
in excess of 50% of the amount available under the Supplemental Funding
Arrangement and (z) a change in control, merger or sale of substantially all of
the assets of the Company.
Although the Company currently anticipates that, including the capital
available to the Company under the Credit Facility and the Supplemental Funding
Arrangement, it has or has access to an amount of working capital that will be
sufficient to fund the Company's operations until it has positive cash flows,
the Company's cash requirements during this period will be substantial and may
exceed the amount of working capital available to the Company. The Company's
ability to fund its operating requirements and maintain an adequate level of
working capital until it achieves positive cash flows
11
<PAGE>
will depend primarily on its ability to generate substantial growth in sales of
its NIASPAN product. Further, during this period, the Company's ability to fund
its operating requirements may be affected by its ability to reduce its
operating expenses and license or co-market NIASPAN and other cardiovascular
products. The Company's failure to generate substantial growth in the sales of
NIASPAN, reduce operating expenses, enter into a license or co-marketing
agreement, or meet the conditions necessary for the Company to obtain funding
under the Supplemental Funding Arrangement, and other events -- including the
progress of the Company's research and development 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 achieving positive cash flows. 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 or the issuance of debt securities that would require the
consent of the Company's current lender, or through the issuance of 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.
NIASPAN SALES GROWTH
The Company's success, including its ability to fund its operating
requirements, currently depends primarily on its ability to market and sell
increasing quantities of its NIASPAN product. The Company's ability to
successfully market and sell its NIASPAN product depends significantly on the
acceptance of the NIASPAN product by physicians and their patients and on its
ability and willingness to devote the financial and employee resources to
adequately market NIASPAN. There can be no assurance, however, that the Company
will be able to devote sufficient resources to continue to increase the market
acceptance of NIASPAN. The failure of physicians to prescribe NIASPAN or the
failure of patients to continue taking NIASPAN would have a material adverse
effect on the Company. Among other factors, adverse side effects or unfavorable
publicity concerning the NIASPAN product or any other product incorporating
technology similar to that used in the NIASPAN product could have an adverse
effect on the Company's ability to obtain regulatory approvals, or to increase
the market acceptance of NIASPAN by prescribing physicians, managed care
providers, or patients; any of which would have a material adverse effect on the
Company.
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
12
<PAGE>
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.
13
<PAGE>
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. Subsequent
written and oral forward looking statements attributable to the Company or to
persons acting on its behalf are expressly qualified in their entirety by the
cautionary statements set forth below and elsewhere in this report and in other
reports filed by the Company with the Securities and Exchange Commission.
MARKET ACCEPTANCE OF NIASPAN
The Company's success currently depends primarily upon its ability to
successfully market and sell its NIASPAN product. The Company's ability to
successfully market and sell its NIASPAN product will depend significantly on
the acceptance of the NIASPAN product by physicians and their patients. The
Company believes that intolerable flushing and potential liver toxicity are the
principal reasons why physicians generally have been reluctant to prescribe or
recommend currently available formulations of niacin. Flushing episodes are
often characterized by facial redness, tingling or rash. Although most patients
taking NIASPAN will sometimes flush, the formulation and dosing regimen for
NIASPAN have been designed to maximize patient acceptance and minimize the
occurrence of flushing. There can be no assurance, however, that patients using
NIASPAN will not suffer episodes of flushing that they consider intolerable. The
failure of physicians to prescribe NIASPAN or the failure of patients to
continue taking NIASPAN due to intolerable flushing or to other side effects
would have a material adverse effect on the Company.
Physicians have also been reluctant to prescribe or recommend certain
currently available formulations of niacin because of potential liver toxicity
associated with these formulations. Although clinical trials conducted using
NIASPAN demonstrated that fewer than 1% of patients experienced clinically
significant elevations in liver enzyme levels, there can be no assurance that
patients using NIASPAN in actual practice will not experience clinically
significant elevations of liver enzymes or other side effects at a rate higher
than those experienced in the Company's clinical trials. The Company believes
that since the launch of its NIASPAN product, many physicians have started only
a limited number of selected patients on the NIASPAN product in order to confirm
the product's efficacy, safety, and tolerability. Consequently, the Company
believes that such "trial use" strategy has resulted in the modest growth of
NIASPAN prescriptions. The Company anticipates that physicians will continue to
employ a "trial use" strategy until they have confirmed the efficacy, safety,
and tolerability of the NIASPAN product. Until such time, the Company
anticipates that it will continue to experience modest growth in the sales of
its NIASPAN product. There can be no assurance, however, that physicians
employing such "trial use" will at any time adopt the NIASPAN product for broad
use in their prescribing pattern for treating lipid disorders. Their failure to
do so would have a material adverse effect on the NIASPAN product's sales
potential and on the Company's financial condition.
14
<PAGE>
Unanticipated side effects or unfavorable publicity concerning the NIASPAN
product or any other product incorporating technology similar to that used in
the NIASPAN product also could have an adverse effect on the Company's ability
to obtain regulatory approvals, to achieve acceptance by prescribing physicians,
managed care providers, or patients; any of which would have a material adverse
effect on the Company.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
To date, the Company has dedicated most of its financial resources to the
development and commercialization of its NIASPAN product, the development of
other products, and general and administrative expenses. The Company expects to
incur significant operating losses for at least the next twelve months, due
primarily to continued manufacturing and marketing, sales and administrative
expenses associated with the commercial launch of the NIASPAN product and for
investments in its research and development programs. No assurance can be given
that additional significant losses will not continue thereafter. The Company's
ability to achieve and maintain profitability will depend, among other things,
on the commercial success of the NIASPAN product; on the Company's ability to
successfully exploit its manufacturing and sales and marketing capabilities; to
complete the development of, and obtain regulatory approvals for, and achieve
market acceptance for its products under development; and on its ability to
maintain sufficient funds to finance its activities. As of September 30, 1998,
the Company's accumulated deficit was $164.6 million. In connection with the
transfer of operations from Holdings to the Company on June 30, 1996, net
operating loss carryforwards amounting to approximately $51.0 million and
related tax benefits remained with Holdings and were not transferred to the
Company. Consequently, the Company may utilize net operating loss carryforwards
sustained subsequent to June 30, 1996, to offset future taxable net income, if
any. There can be no assurance, however, that the Company will be able to
achieve profitability to utilize such carryforwards or that profitability, if
any, can be sustained.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company has experienced negative cash flows from operations since its
inception. The Company has spent and will continue to be required to spend
substantial funds to continue research and development, including clinical
trials of its products under development, and to commercialize NIASPAN and its
products under development if regulatory approvals are obtained for such
products under development. The Company believes that it has sufficient
resources, including funds available to the Company under certain financing
commitments, to fund the operations of the Company until the Company achieves
positive cash flows. The Company, however, may need or elect to raise additional
capital prior to such date. The Company's capital requirements will depend on
many factors, primarily relating to the near-term commercial success of NIASPAN;
the Company's ability to meet the conditions necessary to obtain funding under
the Supplemental Funding Arrangement; the problems, delays, expenses and
complications frequently encountered by companies at this stage of development;
the progress of the Company's research, development, and clinical trial
programs; the costs and timing of seeking regulatory approvals of the Company's
products under development; the Company's ability to obtain such regulatory
approvals; costs in filing, prosecuting, defending, and enforcing patent claims
and other intellectual property rights; the extent and terms of any
collaborative research, manufacturing, marketing, or other arrangements; and
changes in economic, regulatory, or competitive conditions or the Company's
planned business. Estimates about the adequacy of funding for the Company's
activities are based on certain assumptions, including assumptions regarding the
marketing and sales success of the Company's NIASPAN product, and that testing
and regulatory procedures relating to the Company's products under development
can be conducted at projected costs and within projected time frames. There can
be no assurances that any of these assumptions will prove to be accurate.
To satisfy its capital requirements, the Company may seek to raise funds in
the public or private capital markets. The Company's ability to raise additional
funds in the public markets may be adversely affected if the Company's sales of
its NIASPAN product do not increase, if the results of the Company's clinical
trials for its products under development are not favorable, or if regulatory
approval for any of the Company's products under development is not obtained.
The Company may seek additional funding through corporate collaborations and
other financing vehicles. There can be no assurance that any such funding will
be available to the Company, or if available, that it will be available on
acceptable terms. If adequate funds are not available, the Company may be
required to curtail significantly one or more of its research or development
programs or it may be required to obtain funds through arrangements with future
collaborative partners or others that may require the Company to relinquish
rights to NIASPAN or to some or all of its technologies or products under
development. If the Company is successful in obtaining additional financing, the
terms of the financing may have the effect of diluting or adversely affecting
the holdings or the rights of the holders of Common Stock.
LIMITED SALES AND MARKETING EXPERIENCE AND RESOURCES
Although the Company markets its NIASPAN product and intends to market its
other products under development through its own specialty sales force, its
marketing experience to date is limited. Substantial resources will continue to
be required for the Company to promote the sale of the NIASPAN product and its
products under development. There can be no assurance that the Company will be
able to devote resources to NIASPAN or its other products under development
sufficient to achieve market acceptance. The Company's failure to expend the
resources to adequately promote the NIASPAN product or its products under
development would have a material adverse effect on the Company.
Moreover, the Company has fewer sales persons than many of its competitors
and there can be no assurance that the Company's sales force will be able to
detail successfully physicians who prescribe lipid-altering medications. There
can be no assurance that the Company will be able to retain its current sales
representatives, that any additional representatives hired by the Company
15
<PAGE>
will be immediately effective in promoting the sale of the NIASPAN product,
or that the Company's sales representatives will be able to generate significant
sales of the NIASPAN product. The failure of the Company's sales representatives
to quickly generate sales of the NIASPAN product could have a material adverse
effect on the Company.
PRODUCTS UNDER DEVELOPMENT
Although the Company obtained clearance from the FDA to market NIASPAN,
there can be no assurance that the Company will be able to successfully
formulate any of its other products as planned, or that the Company will be
successful in demonstrating the safety and efficacy of such products in human
clinical trials. These trials may be costly and time-consuming. The
administration of any product the Company develops may produce undesirable side
effects that could result in the interruption, delay or suspension of clinical
trials, or the failure to obtain FDA or other regulatory approval for any or all
targeted indications. Even if regulatory approval is secured, the Company's
products under development may later produce adverse effects that limit or
prevent their widespread use or that necessitate their withdrawal from the
market. The Company may discontinue the development of any of its products under
development at any time.
16
<PAGE>
PATENTS AND TRADEMARKS; INTERFERENCE
The Company's ability to commercialize any of its products under
development will depend, in part, on its or its licensors' ability to obtain
patents, enforce those patents, preserve trade secrets, and operate without
infringing on the proprietary rights of third parties. In addition, the patents
for which the Company has applied relating to NIASPAN and certain other of the
Company's products under development are based on, among other things, the timed
administration of NIASPAN. If the indications treated by NIASPAN and such other
products under development could be treated using drugs without such timed
administration, the Company's patents, if issued, would not prevent the use of
such drugs for the treatment of such indications, which would have a material
adverse effect on the Company. There can be no assurance that the patent
applications licensed to or owned by the Company will result in issued patents,
that patent protection will be secured for any particular technology, that any
patents that have been or may be issued to the Company or its licensors will be
valid or enforceable or that any patents will provide meaningful protection to
the Company.
In general, the U.S. patents and patent applications owned by or licensed
to the Company are method-of-use patents that cover the timed use of certain
compounds to treat specified conditions. Composition-of-matter protection is not
available for the active ingredient in NIASPAN. The active ingredient in
NIASPAN, niacin, is currently sold in the United States and other markets for
lipid altering and for other uses. Even in jurisdictions where the use of the
active ingredient in NIASPAN for lipid altering and other indications may be
covered by the claims of a use patent licensed to the Company, off-label sales
might occur, especially if another company markets the active ingredient at a
price that is less than the price of Niaspan, thereby potentially reducing the
sales of NIASPAN.
The Company has a patent application pending in the U.S. Patent and
Trademark Office ("PTO") with claims covering NIASPAN's method-of-use consistent
with its recommended once-a-day dosing regimen. The Company has been advised by
the patent examiner that certain of these claims are allowable, but none of the
claims have yet been issued as a patent. The patent examiner has, however,
indicated that it may submit Kos' patent application to the PTO's Board of
Interference to determine whether it should declare an interference between such
Kos application and a method-of-use patent issued to a privately owned generic
manufacturer allegedly
17
<PAGE>
claiming the same dosing regimen invention. On February 7, 1997, the
Company and such generic manufacturer entered into a cross-licensing agreement
(the "License Agreement") pursuant to which the parties agreed to resolve, as
between themselves, the effects of such potential interference by granting
licenses under their respective patent application and patent.
The Company is aware that certain European and U.S. patents have been
issued with claims covering products that contain certain non-CFC
propellant-driven aerosol formulations. The European patents are currently
subject to an opposition proceeding in Europe, and certain claims in such
patents have been held invalid in the United Kingdom. Certain or all of the
Company's aerosol products under development may use a formulation covered by
such European or U.S. patents. In such event, the Company would be prevented
from making, using or selling such products unless the Company obtains a license
under such patents, which license may not be available on commercially
reasonable terms, or at all, or unless such patents are determined to be invalid
or unenforceable in Europe or the United States, respectively. The Company's
development of products that are covered by such patents and its failure to
obtain licenses under such patents in the event such patents are determined to
be valid and enforceable could have an adverse effect on the Company's business.
The patent positions of pharmaceutical and biotechnology companies are
highly uncertain and involve complex legal and factual questions. There can be
no assurance that the patents owned and licensed by the Company, or any future
patents, will prevent other companies from developing similar or therapeutically
equivalent products or that others will not be issued patents that may prevent
the sale of Company products or require licensing and the payment of significant
fees or royalties by the Company. Furthermore, there can be no assurance that
any of the Company's future products or methods will be patentable, that such
products or methods will not infringe upon the patents of third parties, or that
the Company's patents or future patents will give the Company an exclusive
position in the subject matter claimed by those patents. The Company may be
unable to avoid infringement of third party patents and may have to obtain a
license, defend an infringement action, or challenge the validity of the patents
in court. There can be no assurance that a license will be available to the
Company, if at all, on terms and conditions acceptable to the Company, or that
the Company will prevail in any patent litigation. Patent litigation is costly
and time consuming, and there can be no assurance that the Company will have or
will devote sufficient resources to pursue such litigation. If the Company does
not obtain a license under such patents, is found liable for infringement or is
not able to have such patents declared invalid, the Company may be liable for
significant money damages, may encounter significant delays in bringing products
to market, or may be precluded from participating in the manufacture, use, or
sale of products or methods of treatment requiring such licenses.
The Company also relies on trade secrets and other unpatented proprietary
information in its product development activities. To the extent that the
Company relies on trade secrets and unpatented know-how to maintain its
competitive technological position, there can be no assurance that others may
not independently develop the same or similar technologies. The Company seeks to
protect trade secrets and proprietary knowledge in part through confidentiality
agreements with its employees, consultants, advisors and collaborators.
Nevertheless, these agreements may not effectively prevent disclosure of the
Company's confidential information
18
<PAGE>
and may not provide the Company with an adequate remedy in the event of
unauthorized disclosure of such information. If the Company's employees,
scientific consultants or collaborators develop inventions or processes
independently that may be applicable to the Company's products under
development, disputes may arise about ownership of proprietary rights to those
inventions and processes. Such inventions and processes will not necessarily
become the Company's property, but may remain the property of those persons or
their employers. Protracted and costly litigation could be necessary to enforce
and determine the scope of the Company's proprietary rights. Failure to obtain
or maintain patent and trade secret protection, for any reason, would have a
material adverse effect on the Company.
The Company engages in collaborations, sponsored research agreements, and
other arrangements with academic researchers and institutions that have received
and may receive funding from U.S. government agencies. As a result of these
arrangements, the U.S. government or certain third parties may have rights in
certain inventions developed during the course of the performance of such
collaborations and agreements as required by law or such agreements. Several
legislative bills affecting patent rights have been introduced in the United
States Congress. These bills address various aspects of patent law, including
publication, patent term, re-examination subject matter and enforceability. It
is not certain whether any of these bills will be enacted into law or what form
such new laws may take. Accordingly, the effect of such potential legislative
changes on the Company's intellectual property estate is uncertain.
COMPETITION AND TECHNOLOGICAL CHANGE
The active ingredient in NIASPAN, niacin, is available in several other
formulations, most of which do not require a prescription. Although the Company
believes that there are no other currently available niacin formulations that
have been approved by the FDA specifically for once-a-day dosing, there can be
no assurance that physicians will not prescribe or recommend some of these
unapproved niacin formulations, using the NIASPAN dosing regimen, to try to
achieve the same results as NIASPAN. Substitution of other niacin formulations
for NIASPAN could have a material adverse effect on the Company. Moreover,
manufacturers of other niacin formulations could promote their products using
the NIASPAN dosing regimen and could promote the sale of their products to treat
the indications for which the Company has received clearance to market NIASPAN.
Although such promotion would be a violation of FDA regulations, the occurrence
of such practices would have a material adverse effect on the Company. Moreover,
many products are commercially available for the treatment of elevated LDL
cholesterol, and the manufacturers of such products have significantly greater
financial resources and sales and manufacturing capabilities than the Company.
There can be no assurance that NIASPAN or any other product developed by the
Company will be able to compete successfully with any of those products.
Many established pharmaceutical and biotechnology companies, universities,
and other research institutions with resources significantly greater than the
Company's may develop products that directly compete with the Company's
products. Even if the Company's products under development prove to be more
effective than those developed by other entities, such other entities may be
more successful in marketing their products than the Company because of greater
financial resources, stronger sales and marketing efforts, and other factors.
These entities may
19
<PAGE>
succeed in developing products that are safer, more effective or less
costly than the products developed by the Company. There can be no assurance
that any products developed by the Company will be able to compete successfully
with any of those products.
GOVERNMENT REGULATION; NO ASSURANCES OF REGULATORY APPROVAL
The Company's research and development activities, preclinical studies,
clinical trials, and the manufacturing and marketing of its products are
currently subject to extensive regulation by the FDA and may in the future be
subject to foreign regulations. The drug approval process takes many years and
requires the expenditure of substantial resources. Data obtained from
preclinical and clinical activities are susceptible to varying interpretations
that could delay, limit, or prevent regulatory approval. Although the Company
may consult the FDA for guidance in developing protocols for clinical trials,
that consultation provides no assurance that the FDA will accept the clinical
trials as adequate or well-controlled or accept the results of those trials. In
addition, delays or rejections of applications for regulatory approval may
result from changes in or additions to FDA regulations concerning the drug
approval process. Similar delays may also be encountered in foreign countries.
There can be no assurance that any regulatory review will be conducted in a
timely manner or that regulatory approvals will be obtained for any products
developed by the Company. Even if regulatory approval of a product is obtained,
the approval may be limited as to the indicated uses for which it may be
promoted or marketed. In addition, a marketed drug, its bulk chemical supplier,
its manufacturer and its manufacturing facilities are subject to continual
regulatory review and periodic inspections, and later discovery of previously
unknown problems with a product, supplier, manufacturer or facility may result
in restrictions on such products or manufacturers, which may require a
withdrawal of the product from the market. Failure to comply with the applicable
regulatory requirements can, among other things, result in fines, suspensions of
regulatory approvals, product recalls, operating restrictions and criminal
prosecution, any of which could have a material adverse effect on the Company.
The Company's business is also subject to regulation under state, federal
and local laws, rules, regulations and policies relating to the protection of
the environment and health and safety, including those governing the use,
generation, manufacture, storage, air emission, effluent discharge, handling and
disposal of certain materials. The Company believes that it is in compliance in
all material respects with all such laws, rules, regulations and policies
applicable to the Company. There can be no assurance that the Company will not
be required to incur significant costs to comply with such environmental and
health and safety laws and regulations in the future. The Company's research and
development involves the controlled use of hazardous materials. Although the
Company believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by applicable state, federal and
local regulations, the risk of contamination or injury from these materials
cannot be completely eliminated. In the event of such contamination or injury,
the Company could be held liable for any damages that result and any such
liability could exceed the resources of the Company and materially adversely
affect the Company's business, financial condition and results of operations.
20
<PAGE>
DEPENDENCE ON CERTAIN COLLABORATORS
The Company relies on third parties for certain aspects of the development
of certain of its products under development. The Company is collaborating with
Fuisz on the development of certain products. Pursuant to this collaboration,
Kos is responsible for conducting pharmacokinetic studies and clinical trials
and Fuisz is responsible for the formulation of such products. The Company is
not aware of any FDA approved products that have successfully incorporated
Fuisz' microsphere technology, which is intended to be used in one of the
products being developed under such collaborations. The Company's ability to
commercialize these products may depend to a significant extent on the efforts
of Fuisz, over which the Company has no control. There can be no assurance that
Fuisz will be successful in developing any of the Company's products under
development. The Company also relies on other third parties for certain aspects
of the development of the Company's presently planned or future products. There
can be no assurance that the Company will be able to enter into future
collaborative arrangements on favorable terms, or at all. Even if the Company is
successful in entering into such collaborative agreements, there can be no
assurance that any such arrangement will be successful. The success of any such
arrangement is dependent on, among other things, the skills, experience and
efforts of the third party's employees responsible for the project, the third
party's commitment to the arrangement, and the financial condition of the third
party, all of which are beyond the control of the Company.
LIMITED MANUFACTURING EXPERIENCE; RISK OF SCALE-UP
The Company currently manufactures NIASPAN in one manufacturing plant that
has been inspected and approved by the FDA, and it manufactures clinical
materials for its products under development in another manufacturing plant. The
Company believes both plants operate in substantial compliance with current Good
Manufacturing Practices ("cGMP") regulations for the manufacture of
pharmaceutical products. The Company may need to further scale-up certain of its
current manufacturing processes to achieve production levels consistent with the
commercial sale of its products. Further, modifications to the facilities,
systems and procedures may be necessary to maintain capacity at a level
sufficient to meet market demand or to maintain compliance with cGMP regulations
and other regulations prescribed by various regulatory agencies including the
Occupational Safety and Health Administration and the Environmental Protection
Agency. Failure by the Company to successfully further scale-up, expand in
connection with manufacture for commercial sale, or modify its manufacturing
process or to comply with cGMP regulations and other regulations could delay the
approval of the Company's products under development or limit the Company's
ability to meet the demand for its products, either of which would have a
material adverse effect on the Company. Such occurrences may require the Company
to acquire alternative means of manufacturing its products, which may not be
available to the Company on a timely basis, on commercially practicable terms,
or at all.
21
<PAGE>
NO ASSURANCE OF ADEQUATE THIRD-PARTY REIMBURSEMENT
The Company's ability to commercialize successfully its products under
development is dependent in part on the extent to which appropriate levels of
reimbursement for NIASPAN or the Company's products under development are
obtained from government authorities, private health insurers, and managed care
organizations such as health maintenance organizations ("HMOs"). Managed care
organizations and other third-party payors are increasingly challenging the
pricing of pharmaceutical products. The trend toward managed healthcare in the
United States, the growth of organizations such as HMOs, and legislative
proposals to reform healthcare and government insurance programs could
significantly influence the purchase of pharmaceutical products, resulting in
lower prices and reduced demand for NIASPAN or the Company's products under
development. Such cost containment measures and potential legislative reform
could affect the Company's ability to sell NIASPAN or its products under
development and may have a material adverse effect on the Company. Significant
uncertainty exists about the reimbursement status of newly approved
pharmaceutical products. There can be no assurance that reimbursement in the
United States or foreign countries will be available for NIASPAN or any of the
Company's products under development, that any reimbursement granted will be
maintained, or that limits on reimbursement available from third-party payors
will not reduce the demand for, or negatively affect the price of, NIASPAN or
the Company's products under development. The unavailability or inadequacy of
third-party reimbursement for NIASPAN or the Company's products under
development would have a material adverse effect on the Company.
DEPENDENCE ON SINGLE SOURCES OF SUPPLY
Some materials used in the Company's products, including niacin, the active
ingredient in NIASPAN, are currently sourced from a single qualified supplier.
The Company does not have a contractual arrangement with its sole supplier of
niacin. Although the Company has not experienced difficulty to date in acquiring
niacin, or other materials for product development, no assurance can be given
that supply interruptions will not occur in the future or that the Company will
not have to obtain substitute materials, which would require additional product
validations and regulatory submissions. Any such interruption of supply could
have a material adverse effect on the Company's ability to manufacture its
products or to obtain or maintain regulatory approval of such products.
RISK OF PRODUCT LIABILITY CLAIMS; NO ASSURANCE OF ADEQUATE INSURANCE
Manufacturing, marketing, selling, and testing NIASPAN and the Company's
products under development entails a risk of product liability. The Company
could be subject to product liability claims in the event the Company's products
or products under development fail to perform as intended. Even unsuccessful
claims could result in the expenditure of funds in litigation and the diversion
of management time and resources and could damage the Company's reputation and
impair the marketability of the Company's products. While the Company maintains
liability insurance, there can be no assurance that a successful claim could not
be made against the Company, that the amount of indemnification payments or
insurance would be adequate to cover
22
<PAGE>
the costs of defending against or paying such a claim, or that damages payable
by the Company would not have a material adverse effect on the Company's
business, financial condition, and results of operations and on the price of the
Company's Common Stock.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent on its ability to attract and
retain highly qualified scientific, management and sales personnel. The Company
faces intense competition for personnel from other companies, academic
institutions, government entities, and other organizations. There can be no
assurance that the Company will be successful in attracting and retaining key
personnel. The loss of key personnel, or the inability to attract and retain the
additional, highly-skilled employees required for the expansion of the Company's
activities, could adversely affect the Company's results of operations and its
business.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
The Company has granted certain registration rights to the Company's
controlling shareholder and to Kos Investments, which entitle such entities to
cause the Company to effect three registrations under the Securities Act of
sales of shares of the Company's Common Stock owned by such entities. These
registration rights generally would also permit the holders of such rights to
include shares in any registration statement otherwise filed by the Company. By
exercising these registration rights, these entities could cause a large number
of shares to be registered and become freely tradeable without restrictions
under the Securities Act (except for those purchased in the offering by
affiliates of the Company) immediately upon the effectiveness of such
registration. Such sales may have an adverse effect on the market price of the
Common Stock and could impair the Company's ability to raise additional capital.
POSSIBLE STOCK PRICE VOLATILITY
The stock market, including the Nasdaq National Market, on which the
Company's shares are listed, has from time to time experienced significant price
and volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market price of the Company's Common
Stock, like the stock prices of many publicly traded pharmaceutical and
biotechnology companies, has been and may continue to be highly volatile. The
sale by the Company's controlling shareholder or members of the Company's
management of shares of Common Stock, announcements of technological innovations
or new commercial products by the Company or its competitors, developments or
disputes concerning patent or proprietary rights, publicity regarding actual or
potential medical results relating to the NIASPAN product or to products under
development by the Company or its competitors, regulatory developments in either
the United States or foreign countries, public concern as to the safety of
pharmaceutical and biotechnology products and economic and other external
factors, as well as the trend of prescriptions for the NIASPAN product and the
period-to-period fluctuations in sales or other financial results, among other
factos, may have a significant impact on the market price of the Common Stock.
23
<PAGE>
CONTROL BY EXISTING SHAREHOLDER
Michael Jaharis, the Chairman of the Board of Directors of the Company and
one of its founders, beneficially owns approximately 49.5% of the outstanding
Common Stock. Accordingly, this shareholder can control the outcome of certain
shareholder votes, including votes concerning the election of directors, the
adoption or amendment of provisions in the Company's Articles of Incorporation,
and the approval of mergers and other significant corporate transactions. This
level of concentrated ownership by one person, along with the factors described
in the next paragraph, "Anti-Takeover Provisions," may have the effect of
delaying or preventing a change in the management or voting control of the
Company.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Articles of Incorporation and Bylaws,
as well as the Florida Business Corporation Act, could discourage a third party
from attempting to acquire, or make it more difficult for a third party to
acquire, control of the Company without approval of the Company's Board of
Directors. Such provisions could also limit the price that certain investors
might be willing to pay in the future for shares of the Common Stock. Certain of
such provisions allow the Board of Directors to authorize the issuance of
preferred stock with rights superior to those of the Common Stock. Moreover,
certain provisions of the Company's Articles of Incorporation or Bylaws
generally permit removal of directors only for cause by a 60% vote of the
shareholders of the Company, require a 60% vote of the shareholders to amend the
Company's Articles of Incorporation or Bylaws, require a demand of at least 50%
of the Company's shareholders to call a special meeting of shareholders, and
prohibit shareholder actions by written consent.
24
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On August 5, 1998, a purported class action lawsuit was filed in the United
States District Court for the Northern District of Illinois, Eastern Division,
against the Company, the members of the Company's Board of Directors, certain
officers of the Company, and the underwriters of the Company's October 1997
offering of shares of Common Stock. In its complaint, the plaintiff asserts, on
behalf of itself and a putative class of purchasers of the Company's Common
Stock during the period from July 29, 1997, through November 13, 1997, claims:
(i) under sections 11, 12(a)(2) and 15 of the Securities Act of 1933; (ii)
sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5
promulgated thereunder; and (iii) for common law fraud, negligent
misrepresentation and breach of fiduciary duty. The claims in the lawsuit relate
principally to certain statements made by the Company, or certain of its
representatives, concerning the efficacy, safety, sales volume and commercial
viability of the Company's NIASPAN product. The complaint seeks unspecified
damages and costs, including attorneys' fees and costs and expenses. The outcome
of the litigation cannot yet be determined. Accordingly, no provision for any
liability that may result from these matters has been recognized in the
accompanying consolidated financial statements. There can be no assurances,
however, that the outcome of this litigation will not have a material adverse
effect on the Company's business, results of operations, and financial
condition.
25
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
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 Revolving Credit and Loan Agreement dated as of July 1, 1998,
between the Company and Michael Jaharis
10.2 Promissory Note dated July 1, 1998, in favor of Michael
Jaharis
27 Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports filed by the Company on Form 8-K during the
three months ended September 30, 1998.
- -----
* 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
26
<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: November 12, 1998 By: /s/ DANIEL M. BELL
------------------------------------
Daniel M. Bell, President and
Chief Executive Officer
Date: November 12, 1998 By: /s/ DUNCAN H. COCROFT
------------------------------------
Duncan H. Cocroft,
Senior Vice President and
Chief Administrative Officer
(Principal Financial Officer)
Date: November 12, 1998 By: /s/ JUAN F. RODRIGUEZ
-------------------------------------
Juan F. Rodriguez,
Controller
(Principal Accounting Officer)
27
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------ ------------
10.1 Revolving Credit and Loan Agreement dated as of July 1, 1998,
between the Company and Michael Jaharis
10.2 Promissory Note dated July 1, 1998, in favor of Michael Jaharis
27 Financial Data Schedule
EXHIBIT 10.1
REVOLVING CREDIT AND LOAN AGREEMENT
DATED AS OF JULY 1, 1998
KOS PHARMACEUTICALS, INC., a Florida corporation (the "Borrower"), and
MICHAEL JAHARIS, an individual residing at Valley Road, Wilson Point, South
Norwalk, Connecticut (the "Lender"), agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. ADVANCE TERMINATION DATE shall mean July 1, 1999, or such
other date to which the Advance Termination Date is extended pursuant to the
terms of this Agreement.
SECTION 1.02. ADVANCES shall mean the advances made under the Note and
pursuant to this Agreement.
SECTION 1.03. BUSINESS DAY shall mean any day other than a Saturday,
Sunday or other day on which the Borrower's business is closed.
SECTION 1.04. CHANGE IN CONTROL shall mean the occurrence of any of the
events described in subsections (e), (f), (g) and (h) of Section 5.02.
SECTION 1.05. CLOSING DATE shall mean the date on which the closing for
this Loan is held.
SECTION 1.06. CREDIT FACILITY shall mean the $30,000,000.00 revolving
credit facility made available by the Lender pursuant to the Note.
SECTION 1.07. DEBT shall mean the debt of any Person at any date,
without duplication in calculating the amount thereof,
<PAGE>
arising from:
(i) all obligations of such Person for borrowed money;
(ii) all obligations of such Person evidenced by bonds (other
than performance bonds), debentures, notes or other similar
instruments;
(iii) all trade credit and other obligations of such Person to
pay the deferred purchase price of property or services;
(iv) all obligations of such Person as lessee under capital
leases;
(v) all debt of others secured by a lien on any asset of such
Person, whether or not such debt is assumed by such Person; and
(vi) all debt of others guaranteed by such Person.
SECTION 1.08. ENVIRONMENTAL COMPLAINT shall mean any complaint, order,
citation or notice of violation of Environmental Laws with regard to air
emissions, water discharges, surface contamination, noise emissions or any other
environmental, health or safety matter affecting the Borrower or any of its real
properties.
SECTION 1.09. ENVIRONMENTAL LAWS means and includes the comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, the
Resource Conservation and Recovery Act, the Superfund Amendments and
Reauthorization Act of 1986, as
2
<PAGE>
amended, the Toxic Substances Control Act, as amended, the Clean Air Act, as
amended, the Clean Water Act, as amended, any other "Superfund" or "Superlien"
law, or any other federal, state or local statute, law, ordinance, code, rule,
regulation, order or decree regulating, relating to, or imposing liability or
standards of conduct concerning any Hazardous Materials, as now or at any time
hereafter in effect.
SECTION 1.10. ENVIRONMENTAL AND SAFETY REQUIREMENTS shall mean any and
all Environmental Laws and any other federal, state and local laws relating to
public health and safety, worker health and safety, and pollution or protection
of the environment, including, without limitation, laws relating to emissions,
discharges, releases or threatened releases of toxic or otherwise hazardous
materials, substances, or wastes into ambient air, surface water, groundwater,
subsurface soil or lands or otherwise relating to generation, the manufacture,
processing, distribution, use, treatment, storage, disposal, transport, or
handling of toxic or otherwise hazardous materials, substances or wastes.
SECTION 1.11. EVENT OF DEFAULT shall mean an Event of Default under
Section 6.01.
SECTION 1.12. HAZARDOUS DISCHARGE shall mean the happening of any event
involving the generation, use, spill, discharge or storage, disposal or cleanup
of any Hazardous Materials not in compliance with Environmental Laws.
3
<PAGE>
SECTION 1.13. HAZARDOUS MATERIAL shall mean any pollutant, contaminant,
toxic substance, hazardous waste, hazardous material, hazardous substance,
petroleum or petroleum product, asbestos, polychlorinated biphenyles,
underground storage tanks and the contents thereof including, without
limitation, any such materials defined in or regulated pursuant to the Resource
Conservation and Recovery Act, as amended, the comprehensive Environmental
Response, Compensation and Liability Act, as amended, the Federal Clean Water
Act as amended, the Toxic Substances Control Act, as amended, the Hazardous
Materials Transportation Act, as amended, or any other Environmental Law,
whether existing as of the date hereof, previously enforced, or subsequently
enacted.
SECTION 1.14. LOAN shall mean the loan made pursuant to Section 2.01
and the Note.
SECTION 1.15. LOAN DOCUMENTS shall mean this Agreement and the Note,
each such document being referred to individually as a "Loan Document".
SECTION 1.16. MATURITY DATE shall mean December 31, 2000, or such other
date to which the Maturity Date is extended pursuant to the terms of this
Agreement.
SECTION 1.17. NOTE shall mean the promissory note referred to in
Section 2.01, substantially in the form of EXHIBIT I attached hereto and made a
part hereof.
SECTION 1.18. PERMISSIBLE EQUIPMENT FINANCING INDEBTEDNESS shall mean
Debt incurred for equipment financing in the ordinary
4
<PAGE>
course of business (i) in an amount not in excess of $250,000.00 in the
aggregate for any one transaction, or (ii) for the lease or purchase of
automobiles for use by employees. For the purpose of defining a transaction, all
equipment orders from the same vendor or affiliated vendors made within a 30 day
period for a group of similar or interrelated items shall constitute on
transaction.
SECTION 1.19. PERMISSIBLE LETTER OF CREDIT INDEBTEDNESS shall mean Debt
incurred for the procurement of letters of credit (standby or documentary) in
the ordinary course of business in an amount not in excess of $250,000.00 in the
aggregate for any one transaction. For the purpose of defining a transaction,
all letters of credit procured for the same underlying transaction or a
substantially related transaction shall constitute one transaction.
SECTION 1.20. PERSON means any individual, joint venture, corporation,
company, limited liability company, voluntary association, partnership, limited
partnership, limited liability partnership, trust, joint stock company,
unincorporated organization, association, government, or any agency,
instrumentality, or political subdivision thereof, or any other form of entity.
5
<PAGE>
ARTICLE II
THE LOAN
SECTION 2.01. THE LOAN. The Lender agrees, on the terms and conditions
hereinafter set forth, to make a Loan to the Borrower in an amount not to exceed
Thirty Million Dollars ($30,000,000.00) on the terms and conditions set forth
herein and in the Note.
SECTION 2.02. MAKING ADVANCES.
(a) Upon the terms and subject to the conditions herein set forth, the
Lender shall from time to time make Advances to the Borrower under the Loan up
to an aggregate principal amount at any one time outstanding not to exceed an
amount equal to the Credit Facility. Any sums advanced pursuant to this Section
and subsequently repaid may be re-borrowed from time to time, subject to the
requirements of Section 2.02.
(b) Loan proceeds may be used by Borrower for any business purpose of
Borrower.
(c) Nothing herein shall obligate the Lender to make any Advance in
excess of the maximum amount of the Credit Facility, nor prohibit the Lender
from lending in excess of the maximum amount of the Credit Facility, the making
of any or all Advances in excess of the maximum amount of the Credit Facility to
be in the sole and absolute discretion of the Lender. If at any time an excess
shall for any reason exist, the Borrower shall repay to the Lender forthwith,
without notice or demand, such amount as shall be
6
<PAGE>
necessary to eliminate such excess.
(d) The Borrower shall give the Lender at least three (3) Business
Days' prior written or telegraphic notice of its request for an Advance. Each
such notice shall specify the date and the amount of the requested Advance and
shall be in the form attached hereto as Exhibit II (a "Request Notice"). Each
Advance shall be in the minimum amount of $5,000.00 and in integral multiples of
$1,000.00. The Lender shall make each Advance in immediately available funds by
wire transfer to a deposit account designated by Borrower at its financial
institution, as soon as practicable, but in no event later than 3 business days
following the receipt by Lender of a Request Notice.
SECTION 2.03. TERMINATION. Except as otherwise provided in this
Agreement, the provisions of Section 2.02 relating to the making of Advances
under the Note shall remain in effect until the Advance Termination Date, and
shall be terminated at such time unless otherwise renewed or extended by the
Lender. Notwithstanding any such termination, and subject to Lender's right to
exercise its rights and remedies under the Loan Documents upon the occurrence of
an Event of Default or otherwise, all of th provisions of this Loan Agreement
shall remain in effect while any part of the Loan remains outstanding, such
termination affecting only those provisions relating to the making of Advances.
All obligations of the Borrower in respect of the Note shall become due and
payable on the Maturity Date, without notice or demand.
7
<PAGE>
SECTION 2.04. EXCESS ADVANCES. Any Advances made at any time during the
term of the Loan by the Lender to the Borrower in excess of the face amount of
the Note shall, while outstanding, be deemed part of the indebtedness of
Borrower owed to the Lender under the Note and shall be equally subject to all
of the terms and provisions of this Agreement and the Loan Documents. Any
reference in any Loan Documents to the indebtedness or amounts owed under this
Agreement and the Note is hereby deemed to include such excess Advances.
SECTION 2.05. INCREASE IN LOAN AMOUNT. The amount of the Loan may be
increased from time to time by the execution and delivery of an amendment to
this Agreement setting forth the amount of such increase, duly executed by the
Lender and the Borrower, and the execution and delivery by the Borrower of a
note in substantially the form of Exhibit I attached hereto in the principal
amount of such increase. Upon execution and delivery of any such note, any
reference to the term "Loan Documents" herein or in any Loan Document shall be
deemed to include reference to such note.
SECTION 2.06. PAYMENTS AND COMPUTATIONS. The Borrower shall make each
payment under any Loan Document not later than 3:00 p.m. (New York City time) on
the day when due in lawful money of the United States of America to the Lender
at its address referred to in Section 8.02 in immediately available funds. All
computations of interest under the Note shall be made by the Lender on the basis
8
<PAGE>
of a 360-day year, for the actual number of days (including the first day but
excluding the last day) elapsed.
SECTION 2.07. PAYMENT ON NON-BUSINESS DAYS. Whenever any payment to be
made hereunder or under the Note shall be stated to be due on a day which is not
a Business Day, such payment may be made on the next succeeding Business Day,
and such extension of time shall in such case be included in the computation of
payment of interest.
SECTION 2.08. TERMINATION OF FACILITY. The Lender's obligation to make
available to the Borrower the Credit Facility and to make Advances thereunder
shall terminate, at the Lender's option, upon the occurrence of any of the
following events:
(i) termination of the availability of the Credit Facility
pursuant to Section 2.03; or
(ii) an Event of Default.
ARTICLE III
CONDITIONS OF LENDING
SECTION 3.01. CONDITIONS PRECEDENT TO CLOSING. The obligation of the
Lender to close the Loan and make any Advances hereunder at closing shall be
subject to the condition precedent that the Lender shall have received on or
before the Closing Date the following, each dated the Closing Date, in form and
substance satisfactory to the Lender:
(a) The Note, duly executed by the Borrower;
(b) A certified copy of the resolutions of the board of
9
<PAGE>
directors of the Borrower approving this transaction in the form attached as
Exhibit II;
(c) A certificate of the secretary or an assistant secretary of the
Borrower certifying the names and true signatures of the officers of the
Borrower authorized to sign each Loan Document to which it is a party and the
other documents to be delivered by it hereunder;
(d) Copies of consents of third parties necessary for the consummation
of this transaction;
(e) A favorable opinion of counsel for the Borrower, in substantially
the form of Exhibit III and as to such other matters as the Lender may
reasonably request; and
(f) Such other documents and information as the Lender may reasonably
request.
SECTION 3.02. CONDITIONS PRECEDENT TO ADVANCES. The obligation of the
Lender to make any Advances under the Note is subject to the condition precedent
that the Lender shall have received at least three Business Days before the date
of such Advance, in form and substance satisfactory to the Lender, a Request
Notice and such approvals, opinions and documents as the Lender may reasonably
request.
10
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The
Borrower represents and warrants as follows:
(a) The Borrower is a corporation duly incorporated, validly existing
and in good standing under the laws of State of Florida, has the requisite power
and authority to own its properties and assets and to carry on its business as
now conducted, and is duly qualified to do business as a foreign corporation and
is in good standing in each jurisdiction in which failure to so qualify would
have a material adverse effect on the transaction contemplated hereby.
(b) The execution, delivery and performance by the Borrower of this
Agreement, the Note and each other Loan Document to which the Borrower is a
party have been duly authorized by all necessary corporate action and do not and
will not:
(i) require any consent or approval of the share-holders of
the Borrower not already obtained;
(ii) contravene the Borrower's governing documents;
(iii) violate any provision of any law, rule, regulation
(including, without limitation, Regulation X of the Board of Governors
of the Federal Reserve System), order, writ, judgment, injunction,
decree, determination or award presently in effect having applicability
to the Borrower;
(iv) result in a breach of or constitute a default under
11
<PAGE>
any indenture or loan or credit agreement or any other agreement, lease
or instrument to which the Borrower is a party or by which it or its
properties may be bound or affected; or
(v) result in, or require, the creation or imposition of any
mortgage, deed of trust, pledge, lien, security interest or other
charge or encumbrance of any nature (other than arising under a Loan
Document) upon or with respect to any of the properties now owned or
hereafter acquired by the Borrower;
and the Borrower is not in default under any such law, rule, regulation, order,
writ, judgment, injunction, decree, determination or award or any such
indenture, agreement, lease or instrument.
(c) No authorization or approval or other action by, and no notice to
or filing with, any governmental authority or regulatory body is required for
the due execution, delivery and performance by the Borrower of any Loan Document
to which it is or will be a party.
(d) This Agreement is, and each other Loan Document to which the
Borrower will be a party when delivered hereunder will be, legal, valid and
binding obligations of the Borrower enforceable against the Borrower in
accordance with their respective terms, and there has not occurred any action or
inaction of Lender which Borrower believes may (i) be actionable against Lender,
or (ii)
12
<PAGE>
give rise to a defense, to payment hereunder or under the Note for any reason,
including without limitation, commission of a tort or violation of any
contractual duty or duty implied at law.
(e) The consolidated balance sheet of the Borrower as of December 31,
1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for the fiscal year then ended, reviewed by Arthur
Andersen & Co., LLP, copies of which have been furnished to the Lender, fairly
present the financial condition of the Borrower as at such date and its results
of operations for the year then ended in accordance with generally accepted
accounting principles, consistently applied, and since March 31, 1998 there has
been no material adverse change in such condition or operations.
(f) There is no pending, or to the best of its knowledge, threatened
action or proceeding affecting the Borrower before any court, governmental
agency or arbitrator which may materially adversely affect the financial
condition or operations of the Borrower.
(g) The Borrower is not engaged in the business of extending credit for
the purpose of purchasing or carrying margin stock (within the meaning of
Regulation U issued by the Board of Governors of the Federal Reserve System),
and no proceeds of the Loan will be used to purchase or carry any margin stock
or to extend credit to others for the purpose of purchasing or carrying any
margin stock.
13
<PAGE>
(h) There are no recorded and/or perfected mortgages, deeds of trust,
liens, security interests or, to the best of its knowledge, other charges and
encumbrances (including liens or the retained titles of conditional vendors) of
any nature whatsoever on any properties of the Borrower other than those
permitted under Section 5.02(a) hereof.
(i) The Borrower has filed all tax returns (federal, state and local)
required to be filed and has paid all taxes shown thereon to be due, including
interest and penalties, or provided adequate reserves for payment thereof.
(j) ENVIRONMENTAL MATTERS.
(i) The Borrower has obtained all material permits, licenses
and other authorizations required under Environmental and Safety
Requirements, except for any licenses, permits or authorizations the
failure to obtain which would not reasonably be expected to have a
material adverse effect on the operations or financial condition of the
Company.
(ii) The Borrower is in material compliance with all material
terms and conditions of any required material permits, licenses, and
authorizations and with all other material limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in any Environmental and Safety
Requirements or any notice or demand letters issued, entered,
promulgated or approved thereunder, except where the failure
14
<PAGE>
to so comply would not reasonably be expected to have a material
adverse effect on the operations or financial condition of Borrower.
(iii) The Borrower has not received any material written
notice, demand, complaint, or order from any governmental authority or
private party relating to material environmental impairments or
liabilities with respect to the operation of its businesses or any of
its real properties or advising the Borrower that it is potentially
responsible for material response costs or remediation with respect to
a release or threatened release of Hazardous Materials, any of which,
if adversely resolved, would reasonably be expected to have a material
adverse effect on the operations or financial condition of the
Borrower.
(iv) None of the real property owned or leased by the Borrower
is subject to a private or governmental lien arising under
Environmental Laws.
(k) No information, exhibit or report furnished by the Borrower to the
Lender in connection with the negotiation of this Agreement or any other Loan
Document or any representations and warranties herein contains or contained any
material misstatement of fact or omitted to state a material fact necessary to
make the statements contained therein not misleading. Borrower acknowledges that
the Lender is relying upon these representations and warranties in making the
loan contemplated herein.
15
<PAGE>
ARTICLE V
COVENANTS OF THE BORROWER
SECTION 5.01. AFFIRMATIVE COVENANTS. So long as the Note shall remain
unpaid, the Borrower will, unless the Lender shall otherwise consent in writing:
(a) COMPLIANCE WITH LAWS, ETC. Comply in all material respects with all
applicable laws, rules, regulations and orders, such compliance to include,
without limitation, paying before the same become delinquent all taxes,
assessments and governmental charges imposed upon it or upon its property except
to the extent contested in good faith.
(b) MAINTENANCE OF INSURANCE. Maintain insurance with responsible and
reputable insurance companies or associations in such amounts and covering such
risks as is usually carried by companies engaged in similar businesses and
owning similar properties in the same general areas in which the Borrower
operates.
(c) MAINTENANCE OF PROPERTIES, ETC. Maintain and preserve all of its
properties, necessary or useful in the proper conduct of its business, in good
working order and condition, ordinary wear and tear excepted.
(d) KEEPING OF RECORDS AND BOOKS OF ACCOUNT. Keep adequate records and
books of account, in which complete entries will be made in accordance with
generally accepted accounting principles consistently applied, reflecting all
financial transactions of the
16
<PAGE>
Borrower.
(e) PRESERVATION OF CORPORATE EXISTENCE, ETC. Preserve and maintain its
corporate existence, rights, franchises and privileges in the jurisdiction of
its incorporation, and qualify and remain qualified as a foreign corporation in
each jurisdiction in which such qualification is necessary in view of its
business and operations or the ownership of its properties and in which the
failure to qualify would have a material adverse effect on Borrower's business
or prospects.
(f) ACCESS TO RECORDS. At any reasonable time and from time to time,
upon at least three days' oral or written notice, permit the Lender or any
agents or representatives thereof during normal business hours to examine and
make copies of and abstracts from the records and books of account of, and to
visit the properties of, the Borrower and to discuss the affairs, finances and
accounts of the Borrower with any of its officers or directors; provided,
however, that no such actions by the Lender shall be taken in a manner that
would disrupt Borrower in the conduct of its business.
(g) REPORTING REQUIREMENTS. Furnish to the Lender:
(i) as soon as available and in any event within forty-five
(45) days after the end of each quarter of each fiscal year of the
Borrower other than the fourth quarter, a consolidated balance sheet of
the Borrower as of the end of such quarter and the related consolidated
statements of operations, shareholders' equity and cash flows for the
period
17
<PAGE>
commencing at the end of the previous fiscal year and ending with the
end of such quarter, certified as to fairness of presentation,
generally accepted accounting principles and consistency by the chief
financial officer of the Borrower, together with a certificate of such
chief financial officer stating that as of the date of such certificate
there is no continuing Event of Default or event which, with notice or
lapse of time or both, would constitute an Event of Default, or, if an
Event of Default or such an event has occurred and is continuing, a
statement as to the nature thereof and the action which the Borrower
has taken or proposes to take with respect thereto;
(ii) as soon as available and in any event within ninety (90)
days after the end of each fiscal year of the Borrower, a consolidated
balance sheet of the Borrower as of the end of such fiscal year and the
related consolidated statements of operations, shareholders' equity and
cash flows for such fiscal year, certified without material
qualification by the Company's independent public accountants
acceptable to the Lender, which shall be one of the six largest
national public accounting firms;
(iii) as soon as possible and in any event within five (5)
days after the Borrower has knowledge of the occurrence of each Event
of Default, continuing on the date of such statement, the statement of
the chief financial officer of the
18
<PAGE>
Borrower setting forth details of such Event of Default or event and
the action which the Borrower has taken or proposes to take with
respect thereto;
(iv) as soon as available, and in any event within five (5)
days thereafter, notification of any proposed or pending change in the
senior management of the Borrower;
(v) promptly after the commencement thereof, notice of all
actions, suits and proceedings before any court or governmental
department, commission, board, bureau, agency or instrumentality,
domestic or foreign, affecting the Borrower of the type described in
Section 4.01(f) hereof; and
(vi) promptly after the furnishing thereof, copies of any
statement or report furnished to any financial institution or other
lender pursuant to the terms of any loan or credit or similar agreement
and not otherwise required to be furnished to the Lender pursuant to
any other clause of this subsection (g); and
(vii) such other information respecting the condition or
operations, financial or otherwise, of the Borrower as the Lender may
from time to time reasonably request.
(h) ISSUANCE OF SECURITIES. In the event that Borrower shall issue any
stock or other securities in addition to, in substitution for or in respect of
its currently outstanding capital stock, or raise capital or funds from the
capital markets in consideration for the present or future issuance of any form
of securities of the
19
<PAGE>
Borrower, Borrower shall give Lender notice of such occurrence within thirty
(30) days after such occurrence.
SECTION 5.02. NEGATIVE COVENANTS. So long as the Note shall remain
unpaid, the Borrower will not, without the written consent of the Lender:
(a) LIENS, ETC. Create or suffer to exist any lien, security interest
or other charge or encumbrance, or any other type of preferential arrangement,
upon or with respect to any of its properties, whether now owned or hereafter
acquired, or assign any right to receive income, in each case to secure any Debt
of any Person, except that the foregoing restrictions shall not apply to
mortgages, deeds of trust, pledges, liens, security interests or other charges
or encumbrances:
(i) existing as of the date hereof and listed in Schedule A
attached hereto and made a part hereof;
(ii) for taxes, assessments or governmental charges or levies
on property of the Borrower if the same shall not at the time be
delinquent or thereafter can be paid without penalty, or are being
contested in good faith and by appropriate proceedings;
(iii) imposed by law, such as carriers, landlord's,
warehousemen's and mechanics' liens and other similar liens arising in
the ordinary course of business;
(iv) arising out of pledges or deposits under workmen's
compensation laws, unemployment insurance, old age pensions,
20
<PAGE>
or other social security or retirement benefits, or similar
legislation; or
(v) securing Permissible Equipment Financing Indebtedness or
Permissible Letter of Credit Indebtedness.
(b) DEBT. Create or suffer to exist any Debt, except:
(i) Debt existing as of the date hereof and listed in Schedule
A attached hereto;
(ii) Debt under the Loan Documents;
(iii) Permissible Equipment Financing Indebtedness and
Permissible Letter of Credit Indebtedness;
(iv) Unsecured Debt with repayment terms PARI PASSU with or
inferior to the Debt under the Loan Documents;
(v) Debt authorized under subsection 5.02(c); and
(vi) Trade credit not in excess of $250,000.00 owing to
suppliers incurred in the ordinary course of Borrower's business and
paid within ninety (90) days after invoicing.
(c) ASSUMPTIONS, GUARANTIES, ETC. OF INDEBTEDNESS OF OTHER PERSONS.
Assume, guarantee, endorse or otherwise become directly or contingently liable
(including, without limitation, liable by way of agreement, contingent or
otherwise, to purchase, to provide funds for payment, to supply funds to or
otherwise invest in the debtor or otherwise to assure the creditor against loss)
in connection with any Debt or indebtedness, except guaranties by endorsement of
negotiable instruments for deposit or collection or similar transactions in the
ordinary course of business.
21
<PAGE>
(d) LOANS AND INVESTMENTS. Lend or advance money, credit or property to
any Person in excess of $250,000.00, or invest more than $250,000.00 in (by
capital contribution or otherwise) any Person, or purchase or repurchase ten
percent (10%) or more of the stock or indebtedness or all or a substantial part
of the assets or properties of any Person, or agree to do any of the foregoing,
except for:
(i) direct obligations of, or obligations the principal of and
interest on which are unconditionally guaranteed by, the United States
of America and which mature within one year from the date of
acquisition thereof;
(ii) investments in commercial paper of any corporation with a
maturity not in excess of thirty days from the date of acquisition
thereof and rated P-1 or better by Moody's Investors services Inc., or
A-1 or better by Standard & Poor's Corporation;
(iii) investments in certificates of deposit with a maturity
not in excess of ninety days from the date of acquisition thereof,
issued by any commercial bank organized and existing under the laws of
the United States of America or under any state of the United States of
America and having a combined capital and undivided surplus of not less
than $50,000,000, provided, however, that certificates of deposit at
any one bank shall at no time exceed ten percent (10%) of the undivided
capital and surplus of such bank;
22
<PAGE>
(iv) accounts receivable owing to the Borrower, if created or
acquired in the ordinary course of business in connection with the sale
by the Borrower of inventory and payable or dischargeable in accordance
with customary trade terms;
(v) commission advances and other advances to officers and
employees for travel and other business-related expenses, each in the
ordinary course of business; and
(vi) (vi) investments in any Person, acquisitions of ten
percent (10%) or more of the stock in any Person, and purchases of all
or a substantial part of the assets or properties of any Person,
provided that any such investment, acquisitions and purchases do not
exceed $4,000,000.00 for any particular transaction and $10,000,000.00
in the aggregate during the term of this Loan.
(e) MERGERS, ETC. Merge or consolidate with any Person in a transaction
after which the holders of voting shares of Borrower (or of any class of voting
shares of Borrower) immediately prior to such transaction fail to own at least a
majority of the voting shares of the surviving entity (or of the shares of such
class of voting shares of the surviving entity) following such transaction.
(f) SALES, ETC. OF ASSETS. Sell, assign, lease or otherwise dispose of
(whether in one transaction or in a series of transactions) substantially all of
its assets (whether now owned or hereafter acquired), or of substantially all of
the assets of any
23
<PAGE>
direct or indirect subsidiary of Borrower, to an unaffiliated Person.
(g) CHANGE IN BOARD CONTROL. Enter into a transaction after 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.
(h) CHANGE IN NATURE OF BUSINESS. Make any material change in the
nature of the business of the Borrower, taken as a whole, as carried on at the
date hereof.
(i) PURCHASE OF SECURITIES. Purchase, acquire, redeem or retire, or
make any commitment to purchase, acquire, redeem or retire, any of its capital
stock, whether now or hereafter outstanding.
(j) PROHIBITED TRANSFERS. Transfer, in any manner, either directly or
indirectly, any cash, property, or other assets to any parent or any of its
affiliates or subsidiaries, other than sales made in the ordinary course of
business and for fair consideration on terms no less favorable than if such sale
had been an arms-length transaction between the Borrower and an unaffiliated
entity.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.01. EVENTS OF DEFAULT. The occurrence of any of the following
events shall constitute an Event of Default hereunder:
24
<PAGE>
(a) The Borrower shall fail to pay any installment of principal of, or
interest on, the Note within ten (10) days after such payment is due; or
(b) Any representation or warranty made by the Borrower (or any of its
officers) under or in connection with any Loan Document or any other document
delivered in connection therewith shall prove to have been incorrect in any
material respect when made; or
(c) The Borrower shall fail to perform or observe any other term,
covenant or agreement contained in any Loan Document, or in any other document
delivered in connection therewith, on its part to be performed or observed and
any such failure shall remain unremedied for thirty (30) days after written
notice thereof shall have been given to such Borrower by the Lender; provided,
however, that if by the end of such thirty day period the Borrower has
substantially cured the applicable failure, and such failure has not caused, and
is not expected to immediately cause, a material adverse effect on the Borrower
or its subsidiaries, the Borrower shall have an additional thirty (30) days to
remedy the failure; or
(d) The Borrower shall:
(i) fail to pay any Debt in excess of $250,000.00 (excluding
Debt evidenced by the Note) of such Borrower, or any interest or
premium thereon, when due (whether by scheduled maturity, required
prepayment, acceleration, demand or otherwise) and such failure shall
continue after the applicable grace period, if any, specified in the
agreement or
25
<PAGE>
instrument relating to such Debt, or
(ii) fail to perform or observe any term, covenant or
condition on its part to be performed or observed under any agreement
or instrument relating to any such Debt, when required to be performed
or observed, and such failure shall continue after the applicable grace
period, if any, specified in such agreement or instrument, if the
effect of such failure to perform or observe is to accelerate the
maturity of such Debt; or any such Debt shall be declared to be due and
payable, or required to be prepaid (other than by a regularly scheduled
required prepayment) prior to the stated maturity thereof; or
(e) The Borrower shall admit in writing its inability to pay its debts,
or shall make a general assignment for the benefit of creditors; or any
proceeding shall be instituted by or against the Borrower seeking to adjudicate
it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
or composition of it or its debts under any law relating to bankruptcy,
insolvency or reorganization or relief of debtors, or seeking appointment of a
receiver, trustee, or other similar official for it or for any substantial part
of its property, which proceeding is not dismissed within thirty (30) days after
being instituted; or the Borrower shall take any corporate action to authorize
any of the actions set forth above in this subsection (e); or
26
<PAGE>
(f) A non-appealable final judgment or order for the payment of money
shall be rendered against the Borrower to the extent to which such judgment or
order exceeds $250,000.00 (or, in the case of insurance coverage for such
payment, exceeds such insurance payment by $250,000.00); or
(g) Any provision of any Loan Document after delivery thereof shall for
any reason cease to be valid and binding on the Borrower which is a party
thereto, or the Borrower shall so state in writing; or
(h) Any material adverse change in the financial condition or business
operations of the Borrower shall occur and be continuing; provided, however,
that in no event shall the lack of Borrower's working capital due to the lack of
growth of the Borrower or due to its inability to achieve its projections for
the number of prescriptions written for the Borrower's Niaspan(r) product
constitute such a material adverse change; or
(i) The dissolution or liquidation of the Borrower.
SECTION 6.02. REMEDIES UPON DEFAULT. Upon the occurrence of an Event of
Default, the Lender may, at its option:
(a) declare the Note, all interest thereon and all other amounts
payable under this Agreement to be forthwith due and payable, whereupon the
Note, all such interest and all such amounts shall become and be forthwith due
and payable, without presentment, demand, protest or further notice of any kind,
all of which are hereby expressly waived by the Borrower;
27
<PAGE>
(b) if such Event of Default occurs prior to the Advance Termination
Date, notify the Borrower in writing of the termination of the making of
Advances under Section 2.02, upon which notification the Borrower shall no
longer be entitled to Advances under the Note; and
(c) exercise any or all of its rights or remedies permitted by
applicable law in any capacity under the Loan Documents or applicable law.
ARTICLE VII
INDEMNIFICATION AND LIMITATION ON LIABILITY OF LENDER
SECTION 7.01. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on
demand all costs and expenses in connection with the preparation, execution,
delivery, filing, and recording of the Loan Documents, and the other documents
to be delivered under the Loan Documents, including, without limitation, the
reasonable fees and out-of-pocket expenses of legal counsel for the Lender and
fees and out-of-pocket expenses of Lender's advisors with respect thereto, and
all costs and expenses, if any, including, without limitation, the reasonable
fees and out-of-pocket expenses of legal counsel for the Lender, in connection
with the enforcement of the Loan Documents and the other documents to be
delivered under the Loan Documents, the filing or recording of financing
statements and other documents (including all taxes in connection therewith) in
28
<PAGE>
public offices, the payment or discharge of any taxes, insurance premiums or
encumbrances, or in defending or prosecuting any actions or proceedings arising
out of or related to this Agreement or any other Loan Document or any
obligations of Borrower to the Lender and the amount of all claims in connection
therewith. In addition, the Borrower shall pay any and all documentary or
similar taxes and fees payable or determined to be payable in connection with
the execution, delivery, filing and recording of the Loan Documents and the
other documents to be delivered under the Loan Documents and in connection with
the making of Advances, and agrees to save the Lender harmless from and against
any and all liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes and fees.
SECTION 7.02. GENERAL INDEMNIFICATION. Borrower hereby agrees to defend
the Lender and its officers, directors, agents, employees, and counsel from, and
hold each of them harmless against, any and all losses, liabilities, claims,
damages, interests, judgments, costs and expenses incurred by any of them,
including without limitation reasonable attorneys fees and disbursements,
arising out of or in connection with the making, administration, or enforcement
of the Loan or the execution of this Agreement or any other Loan Document, other
than as such may be caused by Lender's or such other Person's willful
misconduct. All obligations provided for in this Section 7.02 shall survive any
termination of this Agreement and any other Loan Document.
29
<PAGE>
SECTION 7.03. ENVIRONMENTAL INDEMNIFICATION.
(a) Borrower hereby agrees to defend the Lender and its officers,
directors, agents, employees, and counsel from, and hold each of them harmless
against, any and all losses, liabilities, claims, damages, interests, judgments,
costs (including without limitation cleanup costs) and expenses incurred by any
of them, including without limitation reasonable attorneys fees and
disbursements, arising out of or in connection with (i) the presence on or under
or the escape, seepage, leakage, spilla discharge, emission, discharging or
release from, any real property owned or leased by the Borrower of any Hazardous
Materials caused by, or within the control of, the Borrower or claims asserted
or arising under any Environmental Laws, which may require the remediation of
such Hazardous Materials by the Borrower or the Lender or any successors or
assigns thereof, or (ii) any representation or warranty by the Borrower
contained in Section 4.01(j) being false or untrue in any material respect.
(b) If the Borrower receives any written notice of (i) a Hazardous
Discharge affecting the Borrower or its real properties or (ii) an Environmental
Complaint from any Person, including, without limitation, the United States
Environmental Protection Agency or any agency, department or authority of the
State of Florida, then the Borrower will give, within ten (10) Business Days,
oral and written notice of same to the Lender.
(c) Without limitation of its rights under this Agreement,
30
<PAGE>
the Lender shall have the right, but not the obligation after providing written
notice to Borrower and a reasonable opportunity for Borrower to respond, to
enter onto any of Borrower's real properties or in the event Borrower fails to
act or respond, to take such other reasonable actions as it deems reasonably
necessary or advisable to cleanup, remove, resolve or minimize the impact of, or
otherwise comply with Environmental Laws, or participate in such actions, in
coordination with Borrower for so long as no Event of Default exists, with
respect to any such Hazardous Discharge or Environmental Complaint upon its
receipt of any formal written notice from any Person, including, without
limitation, the United States Environmental Protection Agency, asserting the
existence of any Hazardous Discharge or Environmental Complaint on or pertaining
to any of the Borrower's real properties which, if true, could reasonably be
expected to result in an order, suit or other action against the Borrower
affecting any part of its real properties by any governmental agency or
otherwise and which could reasonably be expected to have a material adverse
effect on Borrower's operations or financial condition. All reasonable costs and
expenses incurred by the Lender in the exercise of any such rights herein shall
be payable by the Borrower upon demand, together with interest thereon at a rate
equal to the interest rate payable under the Note.
(d) The indemnity obligations of the Borrower under this Section 7.03
shall survive payment of the Note.
SECTION 7.04. LIMITATION ON LIABILITY OF LENDER. The
31
<PAGE>
Borrower hereby waives any claim or defense arising out of or in any way related
to the Loan based upon the occurrence of any action or inaction of Lender on or
prior to the Closing Date which Borrower believes may (i) be actionable against
Lender, or (ii) give rise to a defense to payment hereunder or under the Note
for any reason, including without limitation, commission of a tort or violation
of any contractual duty or duty implied at law. Lender shall not be responsible
for any lost profits of Borrower arising from any breach of contract, tort or
any other wrong arising from the establishment, administration or collection of
the Loan.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01. AMENDMENTS, ETC. No amendment or waiver of any provision
of any Loan Document, this Agreement or the Note, nor consent to any departure
by the Borrower therefrom, shall in any event be effective unless the same shall
be in writing and signed by the Lender, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
SECTION 8.02. NOTICES, ETC. All notices and other communications
provided for hereunder shall be in writing (including telegraphic communication)
and mailed certified, return receipt requested, or telegraphed or delivered, if
to the Borrower, at its address at 1001 Brickell Bay Drive, 25th Floor, Miami,
FL
32
<PAGE>
33131, Attention: President; if to the Lender, at its address at Michael
Jaharis, c/o Steven K. Aronoff, P.C., 475 Park Avenue South, 23rd Floor, New
York, New York 10016 or, as to each party, at such other address as shall be
designated by such party in a written notice to the other parties.
SECTION 8.03. NO WAIVER; REMEDIES. No failure on the part of the Lender
to exercise, and no delay in exercising, any right under any Loan Document shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right under any Loan Document preclude any other or further exercise thereof or
the exercise of any other right. The remedies provided in the Loan Documents are
cumulative and not exclusive of any remedies provided by law.
SECTION 8.04. ACCOUNTING TERMS. Except as otherwise stated herein, all
accounting terms not specifically defined herein shall be construed in
accordance with generally accepted accounting principles, applied on a
consistent basis with those of the period ended December 31, 1997, modified to
reflect those changes in generally accepted accounting principles as may be
mutually accepted by Lender and Borrower for the purposes of this Agreement.
SECTION 8.05. RIGHT OF SET-OFF. Upon the occurrence and during the
continuance of any Event of Default, the Lender is hereby authorized at any time
and from time to time, without notice to the Borrower (any such notice being
expressly waived by the Borrower), to set-off and apply any and all indebtedness
at any
33
<PAGE>
time owing by the Lender to or for the credit or the account of the Borrower
against any and all of the obligations of the Borrower now or hereafter existing
under this Agreement and the Note, irrespective of whether or not the Lender
shall have made any demand under this Agreement or the Note. The Lender agrees
promptly to notify the Borrower after any such set-off and application made by
the Lender, provided that the failure to give such notice shall not affect the
validity of such set-off and application. The rights of the Lender under this
Section are in addition to other rights and remedies (including, without
limitation, other rights of set-off) which the Lender may have.
SECTION 8.06. BINDING EFFECT; GOVERNING LAW. This Agreement shall
become effective when it shall have been executed by the Borrower and the Lender
and shall be binding upon and inure to the benefit of the Borrower, the Lender
and their respective successors and assigns, except that the Borrower shall not
have the right to assign its rights hereunder or any interest herein without the
prior written consent of the Lender. This Agreement and the Note shall be
governed by, and construed in accordance with, the laws of the State of
Connecticut.
SECTION 8.07. EXECUTION IN COUNTERPARTS. This Agreement may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
agreement.
34
<PAGE>
SECTION 8.08. PARTIAL INVALIDITY. If any provision of this Agreement is
held to be invalid or unenforceable, such invalidity or unenforceability shall
not invalidate this Agreement as a whole but this Agreement shall be construed
as though it did not contain the particular provision or provisions held to be
invalid or unenforceable and the rights and obligations of the parties shall be
construed and enforced only to such extent as shall be permitted by law.
SECTION 8.09. CONFLICTS. In the event that any provision of this
Agreement conflicts with any of the Loan Documents delivered in connection with
the transaction contemplated herein, the terms of this Agreement shall control,
notwithstanding any such conflicts.
SECTION 8.10. SURVIVAL. The representations and warranties contained
herein shall survive the execution of this Agreement by the parties herein.
SECTION 8.11. WAIVER OF RIGHTS. BORROWER ACKNOWLEDGES THAT THE
TRANSACTION OF WHICH THIS NOTE IS A PART IS A COMMERCIAL TRANSACTION. BORROWER
HEREBY WAIVES, TO THE EXTENT PERMITTED BY LAW, THE BENEFITS OF ALL VALUATION,
APPRAISEMENT, HOMESTEAD, EXEMPTION, STAY, REDEMPTION AND MORATORIUM LAWS, NOW IN
FORCE OR WHICH MAY HEREAFTER BECOME LAW.
SECTION 8.12. SUBMISSION TO JURISDICTION; WAIVER OF BOND. THE BORROWER
HEREBY CONSENTS TO THE JURISDICTION OF ANY LOCAL, STATE, OR FEDERAL COURT
LOCATED WITHIN THE STATE OF CONNECTICUT AND
35
<PAGE>
WAIVES ANY OBJECTION WHICH THE BORROWER MAY HAVE BASED ON IMPROPER VENUE OR
FORUM NON CONVENIENS, TO THE CONDUCT OF ANY PROCEEDING IN ANY SUCH COURT AND
WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON BORROWER, AND CONSENTS THAT
ALL SUCH SERVICE OF PROCESS BE MADE BY MAIL OR MESSENGER DIRECTED TO BORROWER AT
THE ADDRESS SET FORTH IN SECTION 8.02 ABOVE AND THAT SERVICE SO MADE SHALL BE
DEEMED TO BE COMPLETED UPON THE EARLIER OF ACTUAL RECEIPT OR THREE (3) DAYS
AFTER THE SAME SHALL HAVE BEEN POSTED TO THE BORROWER'S ADDRESS. THE BORROWER
WAIVES ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH, MIGHT, BUT FOR THIS
WAIVER, BE REQUIRED OF THE LENDER. NOTHING CONTAINED IN THIS SECTION AFFECTS THE
RIGHT OF THE LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW
OR AFFECTS THE RIGHT OF THE LENDER TO BRING ANY ACTION OR PROCEEDING AGAINST THE
BORROWER OR BORROWER'S PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION.
SECTION 8.13. WAIVER OF JURY TRIAL. THE BORROWER WAIVES, TO THE EXTENT
PERMITTED BY LAW, ANY RIGHT TO TRIAL BY JURY WHICH BORROWER MAY HAVE IN ANY
PROCEEDING BETWEEN LENDER AND BORROWER.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above given.
KOS PHARMACEUTICALS, INC.
By: /s/ DUNCAN H. COCROFT
----------------------------
Name: Duncan H. Cocroft
Title: Senior Vice President and
Chief Administrative Officer
36
<PAGE>
/s/ MICHAEL JAHARIS
-------------------------------
MICHAEL JAHARIS
37
EXHIBIT 10.2
$ 30,000,000.00 New York, New York
July 1, 1998
1. OBLIGATION TO PAY
FOR VALUE RECEIVED, the undersigned Borrower promises to pay to the
order of MICHAEL JAHARIS, an individual residing in South Norwalk, Connecticut
(the "Lender"), the principal sum of Thirty Million Dollars ($30,000,000.00), on
December 31, 2000, or such amount thereof as shall be outstanding hereunder on
such date, plus interest payable at the rate and in the manner provided in
paragraph 3 of this Note, plus any costs and expenses incurred in the
enforcement of this Note as provided in paragraph 5 of this Note.
This Note is issued pursuant to the Loan Agreement (as hereinafter defined),
reference to which is hereby made for other terms applicable to this Note.
2. DEFINITIONS
Except as otherwise defined herein, all capitalized terms used herein
which are defined in the Loan Agreement shall have the meaning ascribed to them
therein. In addition, the following terms as used herein shall be defined as
follows:
(a) "Event of Default" shall mean any of the events set forth in
Paragraph 5 hereof.
(b) "Interest Adjustment Date" shall mean the first day of each month
during the term of this Note.
(c) "Loan Agreement" shall mean a Revolving Credit and Loan Agreement
of even date herewith between Borrower and the Lender pursuant to which this
Note is issued, as the same may be amended and supplemented from time to time.
(d) "Prime Rate" shall mean the prime rate (or substantially equivalent
index, if such bank discontinues its prime rate) of SunTrust Bank Miami, N.A. as
announced from time to time, or, if such bank shall cease to exist without any
successor-in-interest, then the prime rate (or substantially equivalent index,
if no prime
1
<PAGE>
rate exists at such bank at such time) of any national or regional bank selected
by Lender having a comparable or larger asset size.
3. INTEREST
The outstanding principal balance of this Note shall bear interest from
the date hereof until the earlier of maturity, imposition of the Default Rate
(as hereinafter defined) or payment in full, at a rate per annum equal to the
Prime Rate in effect on each Interest Adjustment Date (calculated on the basis
of a 360-day year for the actual number of days elapsed), on which date the
interest rate shall be increased or decreased to the extent of any increase or
decrease in the Prime Rate from the Prime Rate in effect on the immediately
preceding Interest Adjustment Date. After maturity, or upon the occurrence of
and during the continuance of an Event of Default, if earlier, the interest rate
hereunder shall be increased to a rate equal to six (6.0) percentage points in
excess of the rate which would otherwise be in effect hereunder.
Notwithstanding any provision of this Note to the contrary, in the
event that at any time the applicable rate of interest payable by Borrower to
Lender as stated in this Note (the "Contract Rate") exceeds the highest or
maximum rate of interest permissible to be charged by Lender under the laws of
the State of Connecticut or under federal law, or is determined by a tribunal or
court of competent jurisdiction to be excessive and unenforceable (in each case,
the "Maximum Legal Rate"), then the interest rate payable under this Note shall
automatically be reduced to the Maximum Legal Rate for such period as the
Maximum Legal Rate is higher than the Contract Rate. If subsequently the
Contract Rate becomes less than the Maximum Legal Rate, then the interest rate
payable under this Note shall automatically be decreased to the Contract Rate.
Any amounts paid in excess of the Maximum Legal Rate shall be considered to have
been payments in reduction of principal, and the outstanding principal balance
shall be adjusted to reflect such prepayments of principal.
4. PAYMENTS
Accrued interest shall be due and payable monthly on the seventh day of
each month. Interest may, at the option of the holder hereof, be deducted from
the amount of the proceeds of any disbursements hereunder.
2
<PAGE>
Upon maturity, the outstanding principal balance of this Note, together
with unpaid interest accrued thereon and any other sums payable hereunder, shall
be payable in full.
All sums received hereunder shall be applied first to the payment of
late charges, costs and expenses payable to Lender hereunder, then to interest
(in the order in which earliest earned) and the balance to principal. Borrower
shall have the right to prepay this Note in full or in part at any time without
penalty.
All payments shall be made in accordance with the terms of the Loan
Agreement and shall delivered to Lender at its address at Michael Jaharis, c/o
Steven K. Aronoff, P.C., 475 Park Avenue South, 23rd Floor, New York, New York
10016 or at such other address as shall be designated by Lender in a written
notice to the Borrower.
5. ADVANCES
Advances shall be made hereunder from time to time through and
including June 30, 1999 in accordance with terms of the Loan Agreement,
reference to which is hereby made for the provisions regarding Advances. At no
time shall the aggregate of all Advances outstanding from time to time exceed
$30,000,000.00.
6. LATE CHARGE
If any monthly payment of interest is not received by the Lender or any
holder hereof within 15 days after its due date, there shall be imposed on the
Borrower a late charge equal to five (5.0%) percent of such overdue payment.
7. ENFORCEMENT
Upon the occurrence of an Event of Default (as hereinafter defined),
the entire principal balance remaining unpaid plus accrued interest shall, at
the option of the holder hereof, become immediately due and payable, and the
Borrower shall have all of the rights and remedies provided in the Loan
Agreement and shall be entitled to be reimbursed for its costs and expenses as
set forth therein.
An Event of Default is defined as any one of the following: (i) default
in the payment of any principal, interest or other amounts due hereunder; (ii)
breach of any provisions of this Note; or (iii) the occurrence of any Event of
Default under the Loan Agreement.
3
<PAGE>
No extension of time for payment, or delay in enforcement hereof, nor
any renewal of this Note with or without notice, shall release the obligation of
the Borrower to the Lender or holder hereof or shall operate as a waiver of any
of its rights.
Presentment, demand, protest and notice of dishonor are hereby waived
by the Borrower.
8. RIGHT OF SETOFF
Upon the occurrence of and during the continuance of any Event of
Default hereunder, the Lender is hereby authorized at any time and from time to
time, without notice to the Borrower (any such notice being expressly waived by
the Borrower) to set-off and apply any and all indebtedness at any time owing by
the Lender to or for the credit or the account of the Borrower against any and
all of the obligations of the Borrower now or hereafter existing under this Note
or the Loan Agreement, irrespective of whether or not the Lender shall have made
any demand under this Note or the Loan Agreement. The Lender agrees promptly to
notify the Borrower after any such setoff and application made by the Lender,
provided that the failure to give such notice shall not affect the validity of
such setoff and application. The rights of the Lender under this provision are
in addition to other rights and remedies (including, without limitation, any
common law right of setoff) which the Lender may have.
9. WAIVER OF RIGHTS
BORROWER ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS NOTE IS A PART
IS A COMMERCIAL TRANSACTION. BORROWER HEREBY WAIVES, TO THE EXTENT PERMITTED BY
LAW, THE BENEFITS OF ALL VALUATION, APPRAISEMENT, HOMESTEAD, EXEMPTION, STAY,
REDEMPTION AND MORATORIUM LAWS, NOW IN FORCE OR WHICH MAY HEREAFTER BECOME LAW.
10. SUBMISSION TO JURISDICTION; WAIVER OF BOND
THE BORROWER HEREBY CONSENTS TO THE JURISDICTION OF ANY LOCAL, STATE,
OR FEDERAL COURT LOCATED WITHIN THE STATE OF CONNECTICUT AND WAIVES ANY
OBJECTION WHICH BORROWER MAY HAVE, BASED ON IMPROPER VENUE OR FORUM NON
CONVENIENS, TO THE CONDUCT OF ANY PROCEEDING IN ANY SUCH COURT AND WAIVES
PERSONAL SERVICE OF ANY AND ALL PROCESS UPON BORROWER, AND CONSENTS THAT ALL
SUCH SERVICE OF PROCESS BE MADE BY MAIL OR MESSENGER DIRECTED TO BORROWER AT THE
ADDRESS SET FORTH BELOW AND THAT SERVICE SO MADE SHALL BE DEEMED TO BE
4
<PAGE>
COMPLETED UPON THE EARLIER OF ACTUAL RECEIPT OR THREE (3) DAYS AFTER THE SAME
SHALL HAVE BEEN POSTED TO BORROWER'S ADDRESS. THE BORROWER WAIVES ANY BOND OR
SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED
OF THE LENDER. NOTHING CONTAINED IN THIS PARAGRAPH AFFECTS THE RIGHT OF THE
LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECTS
THE RIGHT OF THE LENDER TO BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR
BORROWER'S PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION.
11. WAIVER OF JURY TRIAL
THE BORROWER WAIVES, TO THE EXTENT PERMITTED BY LAW, ANY RIGHT TO TRIAL
BY JURY WHICH BORROWER MAY HAVE IN ANY PROCEEDING BETWEEN LENDER AND BORROWER.
12. GOVERNING LAW
This Note and its interpretation, construction, validity and
enforceability shall be governed by the laws of the State of Connecticut.
KOS PHARMACEUTICALS, INC.
By: /s/ DUNCAN H. COCROFT
----------------------------
Name: Duncan H. Cocroft
Title: Senior Vice President and
Chief Administrative Officer
<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 SEPTEMBER
30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 11,840
<SECURITIES> 40
<RECEIVABLES> 1,883
<ALLOWANCES> (100)
<INVENTORY> 1,339
<CURRENT-ASSETS> 15,996
<PP&E> 16,004
<DEPRECIATION> (4,330)
<TOTAL-ASSETS> 27,686
<CURRENT-LIABILITIES> 7,629
<BONDS> 0
0
0
<COMMON> 177
<OTHER-SE> 19,749
<TOTAL-LIABILITY-AND-EQUITY> 27,686
<SALES> 8,073
<TOTAL-REVENUES> 8,073
<CGS> 2,225
<TOTAL-COSTS> 2,225
<OTHER-EXPENSES> 66,244
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,714)
<INCOME-PRETAX> (58,670)
<INCOME-TAX> 0
<INCOME-CONTINUING> (58,670)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (58,670)
<EPS-PRIMARY> (3.34)
<EPS-DILUTED> (3.34)
</TABLE>
