SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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, 1999
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
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(State or Other Jurisdiction of
Incorporation or Organization) (I.R.S. Employer Identification No.)
1001 BRICKELL BAY DRIVE, 25th FLOOR, MIAMI, FLORIDA 33131 (Address
of Principal Executive Offices, Zip Code)
Registrant's Telephone Number, Including Area Code: (305) 577-3464
Indicate whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes__X__ No____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ______ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding at October 29, 1999
----- -------------------------------
Common Stock, par value $.01 per share 17,928,945
<PAGE>
KOS PHARMACEUTICALS, INC.
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998........................... 2
Condensed Consolidated Statements of Operations for the three
months and nine months ended September 30, 1999 (unaudited)
and 1998 (unaudited)........................................ 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 (unaudited) and 1998
(unaudited)................................................. 4
Notes to Condensed Consolidated Financial Statements
(unaudited)................................................. 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 7
Item 3 - Quantitative and Qualitative Disclosures about Market Risk.. 16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.......................................... 17
Item 6 - Exhibits and Reports on Form 8-K.......................... 18
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Niaspan/registered mark/ and Nicostatin/registered trademark/ are trademarks of
Kos Pharmaceuticals, Inc. Mavik/registered mark/ and Tarka/registered mark/ are
trademarks of Knoll Pharmaceutical Company.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .................................... $ 5,302 $ 4,879
Trade accounts receivable, net ............................... 3,751 2,017
Inventories .................................................. 1,482 1,312
Prepaid expenses and other current assets .................... 3,485 1,326
--------- ---------
Total current assets ..................................... 14,020 9,534
Fixed Assets, net ............................................... 10,764 12,019
Other Assets .................................................... 17 17
--------- ---------
Total assets ............................................. $ 24,801 $ 21,570
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable ............................................. $ 3,597 $ 4,333
Accrued expenses ............................................. 11,309 8,196
Capital lease obligations .................................... 146 141
--------- ---------
Total current liabilities ................................ 15,052 12,670
--------- ---------
Notes Payable to Shareholder .................................... 53,000 9,000
Capital Lease Obligations, net of current portion ............... 128 238
Shareholders' Deficit:
Preferred stock, $.01 par value, 10,000,000 shares authorized, -- --
none issued and outstanding
Common stock, $.01 par value, 50,000,000 shares authorized,
17,918,884 and 17,720,270 shares issued and outstanding as
of September 30, 1999 (unaudited) and December 31, 1998,
respectively ............................................... 179 177
Additional paid-in capital ................................... 185,730 184,599
Accumulated deficit .......................................... (229,288) (185,114)
--------- ---------
Total shareholders' deficit .............................. (43,379) (338)
--------- ---------
Total liabilities and shareholders' deficit .............. $ 24,801 $ 21,570
========= =========
</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,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues...................................... $ 10,249 $ 4,266 $ 23,005 $ 8,073
Cost of sales ................................ 1,386 1,172 3,627 2,225
-------- -------- -------- --------
8,863 3,094 19,378 5,848
-------- -------- -------- --------
Operating Expenses:
Research and development .................. 6,513 6,840 20,073 21,335
Selling, general and administrative ....... 14,294 15,891 41,643 44,909
-------- -------- -------- --------
Total operating expenses .............. 20,807 22,731 61,716 66,244
-------- -------- -------- --------
Loss from operations ......................... (11,944) (19,637) (42,338) (60,396)
-------- -------- -------- --------
Other Expense (Income):
Other income .............................. (8) (13) (13) (12)
Interest income, net ...................... (50) (315) (145) (1,714)
Interest expense-related parties .......... 976 -- 1,994 --
-------- -------- -------- --------
Total other expense (income) .......... 918 (328) 1,836 (1,726)
-------- -------- -------- --------
Net loss .............................. $(12,862) $(19,309) $(44,174) $(58,670)
======== ======== ======== ========
Net loss per share, basic and diluted ........ $ (0.72) $ (1.09) $ (2.48) $ (3.34)
Weighted average shares of Common
Stock outstanding .......................... 17,889 17,713 17,809 17,547
Common Stock options outstanding (not included
in the calculation of diluted loss per share
as their impact would be antidilutive) ..... 2,967 2,549 2,967 2,549
</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,
-----------------------
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss .................................................................. $(44,174) $(58,670)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ......................................... 2,238 1,614
Loss (Gain) from disposal of fixed assets ............................. (13) (12)
Common Stock contributed to employee benefits plan .................... 442 --
Cost of stock options issued to non-employees ......................... 300 206
Provision for inventory obsolescence .................................. 843 210
Changes in operating assets and liabilities:
Trade accounts receivable, net ...................................... (1,734) 37
Inventories ......................................................... (1,013) 1,834
Prepaid expenses and other current assets ........................... (2,159) 879
Other assets ........................................................ -- 15
Accounts payable .................................................... (736) (395)
Accrued expenses .................................................... 3,113 1,418
-------- --------
Net cash used in operating activities ........................ (42,893) (52,864)
-------- --------
Cash Flows from Investing Activities:
Sales of marketable securities ............................................ -- 30,854
Capital expenditures ...................................................... (970) (6,144)
-------- --------
Net cash (used in) provided by investing activities .......... (970) 24,710
-------- --------
Cash Flows from Financing Activities:
Proceeds from Common Stock issued under employee stock purchase plan....... 272 --
Net proceeds from exercise of stock options ............................... 119 520
Payments under capital lease obligations .................................. (105) (28)
Borrowings under Notes Payable to Shareholder ............................. 44,000 --
-------- --------
Net cash provided by financing activities .................... 44,286 492
-------- --------
Net increase (decrease) in cash and .......................... 423 (27,662)
cash equivalents
Cash and cash equivalents, beginning of period .............................. 4,879 39,502
-------- --------
Cash and cash equivalents, end of period .................................... $ 5,302 $ 11,840
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The condensed consolidated financial statements included herein have
been prepared by Kos Pharmaceuticals, Inc. (the "Company" or "Kos") 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, 1999, are not necessarily indicative of the results of operations or cash
flows that may be reported for the year ended December 31, 1999. The unaudited
condensed consolidated financial statements included herein should be read in
conjunction with the audited consolidated financial statements and the notes
thereto included in the Company's Form 10-K for the year ended December 31,
1998.
2. Recent Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", is effective for fiscal years ended after June 15, 1999. The
Company adopted SFAS 133 effective June 30, 1998, however, the Company does not
presently have any derivative or hedging-type investment as defined by SFAS 133.
3. Inventories
Inventories consist of the following:
September December
30, 1999 31, 1998
------ -------
(in thousands)
Raw materials ............... $ 216 $ 251
Work in process.............. 805 847
Finished goods............... 461 214
------ -------
Total............ $1,482 $1,312
====== ======
5
<PAGE>
4. Notes Payable to Shareholder
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. Borrowings under the Credit Facility totaled $30 million as of
September 30, 1999, bear interest at the prime rate (8.25% as of September 30,
1999), and will be due December 31, 2000.
On September 1, 1999, the Company formally agreed to the terms of an
additional $50 million funding arrangement initially entered into with Michael
Jaharis on October 7, 1998 (the "Supplemental Credit Facility"). Borrowings
under the Supplemental Credit Facility totaled $23 million as of September 30,
1999. Under the terms of the Supplemental Credit Facility, the Company has
pledged all of its assets to Mr. Jaharis as collateral for borrowings under the
Credit Facility and the Supplemental Credit Facility, and will pay interest at
the prime rate (8.25% as of September 30, 1999) on a monthly basis. Borrowings
under the Supplemental Credit Facility are convertible into shares of the
Company's Common Stock at $4.91, the average closing market price of the
Company's Common Stock for the 30 business days preceding the date of the first
funding request made under the Supplemental Credit Facility. The conversion of
amounts borrowed from Mr. Jaharis under the Supplemental Credit Facility into
shares of the Company's Common Stock will result in dilution to existing
shareholders of the Company. The Company's ability to borrow funds under the
Supplemental Credit Facility is subject to certain conditions, including that at
any time during the term of the Supplemental Credit Facility (i) the death of
the lender shall not have occurred; (ii) no material adverse change in the
business or financial operations or condition of the Company or in its senior
management will occur; and (iii) the lender's ownership percentage of the
Company remains greater than 40%. There can be no assurance, however, that the
Company will be able to satisfy all of the conditions of the Supplemental Credit
Facility at the time that any funding request is made. Amounts owed under the
Supplemental Credit Facility will mature on December 31, 2003.
Interest expense under the Credit Facility and Supplemental Credit
Facility totaled approximately $1 million for the three months ended September
30, 1999. Accrued interest payable under these facilities totaled $0.3 million
as of September 30, 1999.
6
<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 products, dispensed in metered-dosed
inhalers, 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, 1999, the Company had accumulated a deficit
from operations of $229 million. In connection with the transfer of operations
from Holdings to the Company during June 1996, net operating loss carryforwards
amounting to approximately $51 million and related tax benefits were retained by
Holdings and not transferred to the Company. Consequently, the Company can only
utilize net operating losses sustained subsequent to June 30, 1996, to offset
future taxable net income, if any.
Results of Operations
Nine Months Ended September 30, 1999 and 1998
The Company's revenues increased to $23 million for the nine months
ended September 30, 1999, from $8.1 million for the same period in 1998. This
increase was attributable to a growth of $13.2 million in net sales of the
Company's Niaspan product and to the presence of $1.7 million in co-promotion
revenue resulting from the Company's July 22, 1999, co-promotion collaboration
agreement with Knoll Pharmaceutical Company (hereinafter "Knoll"), for the
promotion and marketing of Knoll's Mavik/registered mark/ and Tarka/registered
mark/ products within the United States (the "Knoll Agreement"). Under the terms
of the Knoll Agreement, the Company receives co-promotion revenue from Knoll
upon the achievement of specific Mavik/registered mark/ and Tarka/registered
mark/ sales levels.
7
<PAGE>
Cost of sales was $3.6 million and $2.2 million for the nine months
ended September 30, 1999 and 1998, respectively. The higher cost of sales in
1999 was attributable to higher Niaspan sales during the period.
The Company's research and development expenses decreased to $20.1
million for the nine months ended September 30, 1999, from $21.3 million for the
nine months ended September 30, 1998. The reduced expenses related primarily to
decreases of $1.6 million in medical education programs in support of Niaspan,
of $1.4 million in formulation development costs of the Company's Nicostatin
product and other products under development, and of $1.1 million in development
costs paid to third parties. These decreases were partially offset by increases
of $3.6 million in the costs of clinical trials principally associated with the
Company's Nicostatin product.
Selling, general and administrative expenses decreased to $41.6 million
for the nine months ended September 30, 1999, from $44.9 million for the nine
months ended September 30, 1998. Selling expenses decreased $4.6 million
primarily as a result of the absence of $6.6 million in marketing program costs
incurred during the 1998 period directly associated with the launch of Niaspan.
This decrease was partially offset by the presence of $1.6 million in
Mavik/registered mark/ and Tarka/registered mark/ marketing expenses, and by an
increase of $1 million in personnel and personnel related costs as a result of
the full impact of the presence, during the 1999 period, of the Company's
expanded sales and marketing organization. General and administrative costs
increased $1.3 million during the 1999 period primarily as a result of increases
of $0.8 million in royalty expenses for the Company's Niaspan product and of
other expenses associated with the expanded activities of the Company.
During 1997, the Company received $65.9 million in net proceeds from
its March IPO and $43.3 million in net proceeds from an October follow-on
offering of its Common Stock. As of September 30, 1998, the remaining net
proceeds from these offerings totaled $11.9 million and, along with other cash
balances, were invested primarily in U.S. Treasury and highly-rated corporate
debt securities. The Company recorded $1.7 million of interest income for the
nine months ended September 30, 1998, as a result of these investments.
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. Borrowings under the Credit Facility totaled $30 million as of
September 30, 1999, bear interest at the prime rate (8.25% as of September 30,
1999), and will be due December 31, 2000.
On September 1, 1999, the Company formally agreed to the terms of an
additional $50 million funding arrangement initially entered into with Michael
Jaharis on October 7, 1998 (the "Supplemental Credit Facility"). Borrowings
under the Supplemental Credit Facility totaled
8
<PAGE>
$23 million as of September 30, 1999. Borrowings made under the
Supplemental Credit Facility bear interest at the prime rate (8.25% as of
September 30, 1999), are convertible (at $4.91 per share) into shares of the
Company's Common Stock, and will be due December 31, 2003.
Interest expense under the Credit Facility and Supplemental Credit
Facility totaled approximately $2 million for the nine months ended September
30, 1999.
The Company incurred a net loss of $44.2 million for the nine months
ended September 30, 1999, compared with a net loss of $58.7 million for the nine
months ended September 30, 1998.
9
<PAGE>
Three Months Ended September 30, 1999 and 1998
The Company's revenues increased to $10.2 million for the three months
ended September 30, 1999, from $4.3 million for the three months ended September
30, 1998. This increase was attributable to a growth of $4.2 million in net
sales of the Company's Niaspan product and to the presence of $1.7 million in
co-promotion revenue as a result of the Knoll Agreement.
Cost of sales was $1.4 million and $1.2 million for the three months
ended September 30, 1999 and 1998, respectively. The higher cost of sales in
1999 was attributable to higher Niaspan sales during the period.
The Company's research and development expenses decreased slightly to
$6.5 million for the three months ended September 30, 1999, from $6.8 million
for the three months ended September 30, 1998. The reduced expenses related
primarily to decreases of $0.8 million in formulation development costs of the
Company's Nicostatin product and other products under development, of $0.4
million in medical educational programs in support of Niaspan, and $0.6 million
in various other research and development expenses. These decreases were
partially offset by increases of $1.5 million in the costs of clinical trials
principally associated with the Company's Nicostatin product.
Selling, general and administrative expenses decreased to $14.3 million
for the three months ended September 30, 1999, from $15.9 million for the three
months ended September 30, 1998. Selling expenses decreased $1.8 million,
primarily as a result of the absence of $1.9 million in marketing program costs
incurred during the 1998 period directly associated with the launch of Niaspan,
and of $1.2 million in employee and employee related costs incurred during the
1998 period in connection with the expansion of the Company's sales force. This
decrease was partially offset by the presence during the 1999 period of $1.6
million in Mavik/registered mark/ and Tarka/registered mark/ marketing expenses.
General and administrative costs increased $0.3 million during the 1999 period,
primarily as a result of an increase of $0.3 million in royalty expenses for the
Company's Niaspan product.
Interest income from investments in U.S. Treasury and highly-rated
corporate debt securities totaled $0.3 million for the three months ended
September 30, 1998. Interest expense under the Credit Facility and the
Supplemental Credit Facility, absent during the three months ended September 30,
1998, totaled approximately $1 million during the three months ended September
30, 1999.
The Company incurred a net loss of $12.9 million for the three months
ended September 30, 1999, compared with a net loss of $19.3 million for the
three months ended September 30, 1998.
10
<PAGE>
Liquidity and Capital Resources
At September 30, 1999, the Company had cash and cash equivalents
totaling $5.3 million and had a working capital deficiency of $1 million. The
Company's primary uses of cash to date have been in operating activities to fund
selling, general and administrative expenses, and research and development
expenses, including clinical trials. As of September 30, 1999, the Company's
investment in equipment and leasehold improvements, net of depreciation and
amortization, was $10.8 million. During the nine months ended September 30,
1999, the Company spent $1 million in capital expenditures. The Company expects
to spend no more than $1 million in capital expenditures during the remainder of
the year ending December 31, 1999.
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. Borrowings under the Credit Facility totaled $30 million as of
September 30, 1999, bear interest at the prime rate (8.25% as of September 30,
1999), and will be due December 31, 2000.
On September 1, 1999, the Company formally agreed to the terms of an
additional $50 million funding arrangement initially entered into with Michael
Jaharis on October 7, 1998 (the "Supplemental Credit Facility"). Borrowings
under the Supplemental Credit Facility totaled $23 million as of September 30,
1999. Under the terms of the Supplemental Credit Facility, the Company has
pledged all of its assets to Mr. Jaharis as collateral for borrowings under the
Credit Facility and the Supplemental Credit Facility, and will pay interest at
the prime rate (8.25% as of September 30, 1999) on a monthly basis. Borrowings
under the Supplemental Credit Facility are convertible into shares of the
Company's Common Stock at $4.91, the average closing market price of the
Company's Common Stock for the 30 business days preceding the date of the first
funding request made under the Supplemental Credit Facility. The conversion of
amounts borrowed from Mr. Jaharis under the Supplemental Credit facility into
shares of the Company's Common Stock will result in dilution to existing
shareholders of the Company. The Company's ability to borrow funds under the
Supplemental Credit Facility is subject to certain conditions, including that at
any time during the term of the Supplemental Credit Facility (i) the death of
the lender shall not have occurred; (ii) no material adverse change in the
business or financial operations or condition of the Company or in its senior
management will occur; and (iii) the lender's ownership percentage of the
Company remains greater than 40%. There can be no assurance, however, that the
Company will be able to satisfy all of the conditions of the Supplemental Credit
Facility at the time that any funding request is made. The Supplemental Credit
Facility will mature on December 31, 2003.
Although the Company currently anticipates that, including the capital
available to the Company under the Credit Facility and the Supplemental Credit
Facility, 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
11
<PAGE>
until it achieves positive cash flows will depend primarily on its ability to
generate substantial growth in sales of its Niaspan product, and by its ability
to reduce 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 Credit Facility, 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, each of which 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.
Contingencies
The Company has performed an 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, some date sensitive systems may
recognize the year 2000 as 1900, or not at all. To date, the Company has
incurred minimal costs related to its assessment of the "Year 2000 Issue" and
with the modification of affected internal systems. Based on the Company's
assessment, it believes that its accounting and other critical operational
systems substantially avoid the "Year 2000 Issue", thereby enabling it to
properly process vital financial and operational information.
The Company has implemented a Year 2000 readiness program with the
objective of having all of the Company's systems functioning properly with
respect to the "Year 2000 Issue". The first component of the Company's readiness
program was to identify the internal systems of the Company that are susceptible
to system failures or processing errors as a result of the "Year 2000 Issue".
This effort has been completed. The Company believes that it has identified the
systems that may require remediation or replacement. Those systems considered
most critical to continuing operations have been remediated.
12
<PAGE>
The second component of the Company's Year 2000 readiness program
involves the actual remediation and replacement of affected systems. The Company
has used both internal and external resources for this process. Systems ranked
highest in priority, such as the Company's corporate accounting software, have
been remediated or replaced. Other systems identified by the Company as being
susceptible to failure as a result of the "Year 2000 Issue" have been either
remediated or replaced or are scheduled for remediation or replacement.
The "Year 2000 Issue" concerns not only systems used solely by the
Company, but also concerns third parties, such as customers, suppliers, vendors,
distributors, research partners and other entities, using systems that may
interact with or affect the Company's operations. Accordingly, the Company has
identified its significant customers, vendors and creditors that are believed,
at this time, to be critical to the Company's business operations subsequent to
January 1, 2000. The Company has attempted to ascertain the Year 2000 readiness
of such significant third parties through the use of questionnaires, interviews,
and on-site visits. The Company has taken and will continue to take appropriate
action based on responses that it receives to ensure that Year 2000 issues
experienced by third parties with whom the Company conducts business will not
have a material impact on the Company. There can be no assurance, however, that
the systems provided by or utilized by third parties will be timely converted in
such a way as to allow them to continue normal business operations or furnish
products, services or data to the Company without disruption.
Consequently, despite the Company's continuing focus on solutions for
Year 2000 issues and its current expectations that it will be Year 2000
compliant in a timely manner, there can be no assurance that the Company will
not experience material disruptions in its business operations resulting from
the "Year 2000 Issue". Accordingly, the Company has established, concurrently
with the Year 2000 readiness measures described above, an internal Year 2000
project team whose mission is to develop contingency plans intended to mitigate
the possible disruption in business operations that may result from the "Year
2000 Issue". The Company's Year 2000 project team has developed such contingency
plans, which focus primarily on resolving Year 2000 issues encountered in the
Company's business dealings with customers and significant vendors. In the event
the Company's suppliers or customers experience system failures due to the "Year
2000 Issue", the Company may, if necessary, attempt to resource its materials
and redirect its sales to Year 2000 compliant third parties.
Notwithstanding the Company's efforts to mitigate the impact of
potential Year 2000 issues, including the development of contingency plans,
there can be no assurance that the Company will be able to successfully identify
and remedy all such issues and, further, that its contingency plans, once
developed, will be able to materially diminish the impact of such possible
disruption of the Company's business operations. If needed remediations and
conversions to the Company's systems are not made on a timely basis by the
Company or its significant customers or vendors, the Company could experience
business disruption, operational difficulties, financial loss, legal liability
to third parties and similar risks, any of
13
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which could have a material adverse effect on the Company's operations,
liquidity or financial condition. Although the Company cannot determine the
severity with which the "Year 2000 Issue" will affect, either directly or
indirectly, the Company's operations and financial condition, the Company
believes the most reasonably likely worst case scenario in the event the Company
or its significant customers or vendors fail to resolve the "Year 2000 Issue"
would be an inability on the part of the Company to adequately distribute its
Niaspan product and receive revenues from the sale of such product for some
period of time following the commencement of the year 2000. Factors that could
cause material differences in results, many of which are outside the control of
the Company, include, but are not limited to, the Company's ability to identify
and correct all relevant computer software, the accuracy of representations by
manufacturers of the Company's systems that their products are Year 2000
compliant, the ability of the Company's customers and vendors to identify and
resolve their own Year 2000 issues and the Company's ability to respond to and
dedicate adequate resources to resolve unforeseen complications arising as a
result of the "Year 2000 Issue".
The total cost to the Company of its Year 2000 compliance activities
has not been and is not presently anticipated to be material to the Company's
business, results of operations or financial condition. The Company has
capitalized and will continue to capitalize the costs of purchasing and
developing new Year 2000 compliant systems.
14
<PAGE>
FORWARD-LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS
Certain statements contained in this Form 10-Q, principally in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", that are not related to historical results, including statements
relating to anticipated working capital, are forward-looking statements. Actual
results may differ materially from those projected or implied in the
forward-looking statements. Further, certain forward-looking statements are
based upon assumptions of future events that may not prove to be accurate. These
forward-looking statements involve risks and uncertainties, including but not
limited to, physician and patient acceptance of the Niaspan product; the
Company's future cash flows, sales, gross margins and operating costs; the
Company's ability to devote the resources required to adequately market the
Niaspan product; the Company's ability to recruit qualified personnel; the
effect of conditions in the pharmaceutical industry and the economy in general;
regulatory developments; legal proceedings; and certain other risks.
Forward-looking statements contained in this report and in subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by cautionary
statements in this paragraph and elsewhere in this Form 10-Q, in other reports
filed by the Company with the Securities and Exchange Commission and in the
Company's Form 10-K for the year ended December 31, 1998, filed with the
Securities and Exchange Commission, under the caption "Forward-Looking
Information: Certain Cautionary Statements".
Niaspan Sales Growth
The Company's success, including its ability to fund its operating
requirements, currently depends primarily on its ability to sell increasing
quantities of its Niaspan product. The Company's ability to successfully market
and sell increasing quantities of 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.
15
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company owns no derivative financial instruments or derivative
commodity instruments. The Company does not derive a significant amount of
revenues from international operations and does not believe that it is exposed
to material risks related to foreign currency exchange rates.
16
<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
asserted, 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 under: (i) 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
related 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 sought unspecified
damages and costs, including attorneys' fees and costs and expenses. Upon motion
by the Company, the case was transferred to the United States District Court for
the Southern District of Florida. The Company and the individual Kos defendants
filed a motion to dismiss the complaint on January 7, 1999. On May 24, 1999, the
United States District Court for the Southern District of Florida dismissed the
lawsuit with prejudice. The plaintiffs filed an appeal, on June 7, 1999, with
the United States Circuit Court of Appeals for the 11th Circuit.
17
<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/dagger/ Co-promotion Collaboration Agreement dated July 22, 1999,
between the Company and Knoll Pharmaceutical Company.
10.2 Supplemental Credit Facility dated September 1, 1999, between
the Company and Michael Jaharis.
10.3 Amended and Restated Registration Rights Agreement effective
as of September 1, 1999, by and between the Company, Kos
Holdings, Inc., Kos Investments, Inc., and Michael Jaharis.
10.4 Security Agreement dated September 1, 1999, by and between
the Company and Michael Jaharis.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K during the quarter ended
September 30, 1999.
-----
* 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.
/Dagger/ Certain confidential material contained in the document has been
omitted and filed separately with the Securities and Exchange
Commission pursuant to Rule 24b-2 of the Securities Exchange Act of
1934.
18
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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, 1999 By: /s/ Daniel M. Bell
-----------------------------
Daniel M. Bell, President and
Chief Executive Officer
Date: November 12, 1999 By: /s/ Juan F. Rodriguez
-----------------------------
Juan F. Rodriguez, Controller
(Principal Accounting Officer)
19
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.1 Co-promotion Collaboration Agreement dated July 22, 1999, between
the Company and Knoll Pharmaceutical Company.
10.2 Revolving Credit and Loan Agreement dated September 1, 1999,
between the Company and Michael Jaharis.
10.3 Amended and Restated Registration Rights Agreement effective as
of September 1, 1999, by and between the Company, Kos Holdings,
Inc., Kos Investments, Inc., and Michael Jaharis.
10.4 Security Agreement dated September 1, 1999, by and between the
Company and Michael Jaharis.
27 Financial Data Schedule
CONFIDENTIAL MATERIAL OMMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMMISSIONS.
July 22,1999
Mr. Daniel M. Bell
President and Chief Executive Officer
Kos Pharmaceuticals, Inc.
1001 Brickell Bay Drive, 25th Floor
Miami, FL 33131
Re: CO-PROMOTION COLLABORATION
--------------------------
Dear Mr. Bell:
This letter sets forth terms and conditions by which Kos
Pharmaceuticals, Inc. ("Kos"), and Knoll Pharmaceutical Company ("Knoll") shall
participate in a Co-Promotion Collaboration (the "Agreement") for the promotion
and marketing of Knoll's Mavik/registered mark/ (trandolapril) and
Tarka/registered mark/ (trandolapril/verapamil hydrochloride ER) tablets
(collectively, the "Products").
1. PURPOSE, DESIGNATION AND TERRITORY
a. Purpose
Knoll and Kos desire to enter this Agreement to work
cooperatively in the United States, its territories and its
possessions (hereinafter the "Territory") to (i) develop
marketing and sales strategies for the Products, (ii) prepare
promotional and sales materials for the Products, (iii) market
and promote the Products, (iv) educate healthcare providers
regarding the Products, (v) furnish physician support with
respect to the use of the Products, (vi) represent the
Products at conventions and conferences, (vii) maintain
relationships with key thought leaders to maximize Product
awareness, (viii) provide administrative support for the
marketing and distribution of the Products, and (ix) conduct
any other activities necessary or appropriate for the
promotion of the Products (collectively, the "Collaboration
Objectives"). By leveraging their respective organizational
strengths, the parties intend to build a creative, synergistic
and cost-effective program for the successful promotion and
sale of the Products. The parties shall seek to achieve the
Collaboration Objectives in accordance with a marketing plan
for the Products which shall include the objectives,
strategies, and financial targets and the tactics
1
<PAGE>
necessary for the parties to achieve such financial targets
(collectively, the "Marketing Plan").
b. Designation
Knoll hereby designates Kos, and Kos hereby accepts such
designation, as Knoll's exclusive co-promoter for the
marketing and sale of the Products and
****************************************************** within
the Territory. Kos' designation as co-promoter shall not
restrict Knoll's right to promote and sell the Products in the
Territory
during the term of this Agreement.
2. COLLABORATION MANAGEMENT
a. Marketing Committee
Kos and Knoll shall form a marketing committee (the "Marketing
Committee"), which shall be responsible for the ongoing
management of the collaboration and achievement of the
Collaboration Objectives. The Marketing Committee shall be
chaired by *******************. The Marketing Committee shall
consist of a core membership of three to four representatives
from Kos and Knoll respectively, including the Marketing or
Product Manager from each company. The attendance of AD HOC
representatives or invitees may be necessary on a regular or
temporary basis. The parties shall bear their own expenses in
connection with attending Marketing Committee meetings.
The Marketing Committee shall meet periodically, but no less
than three (3) times per calendar year, at dates, times and
locations mutually agreeable to the parties. Meetings of the
Marketing Committee may be conducted in person, or by video-
or tele-conference.
It is the intention of the Parties that the Marketing
Committee shall seek to reach consensus on major issues
related to the Marketing Plan and its execution. All marketing
disputes shall be resolved by the ******** chairperson.
The Marketing Committee shall be responsible for (i) approving
the Marketing Plan and financial targets for the Products;
(ii) establishing and implementing policies, programs, and
procedures; (iii) developing and monitoring the performance
metrics related to the Marketing Plan, including without
limitation, sales, prescriptions, pricing, expenses, call
plan, professional education programs, etc.; and (iv)
accounting for all expenses by each party and reporting such
information pursuant to the terms of the Agreement.
The Marketing Committee shall work diligently to manage all
expenses, including the cost of samples, in a cost-effective
manner.
2
<PAGE>
b. Product Rights
Except for the co-promotion rights provided to Kos hereunder,
all patent, intellectual, brand, distribution and other rights
relating to the Products shall be and are hereby retained by
Knoll.
3. KNOLL DUTIES AND RESPONSIBILITIES
a. General
Knoll shall be responsible for activities necessary to
commercialize the Products, including without limitation,
maintaining all regulatory approvals, manufacturing the
Products in accordance with FDA approved specifications,
managing the Products' order fulfillment process, handling all
post-sale compliance and reporting obligations, and receiving
and addressing all medical inquiries.
b. Promotion and Marketing
In accordance with the Marketing Plan, Knoll shall devote its
resources to promote and market the Products in the Territory.
As part of this effort and in accordance with the Marketing
Plan, Knoll, *****************, shall not do less than the
following:
(1) Maintain a Marketing Manager for the Products who shall
serve as a member of the Marketing Committee, be responsible
for and dedicated to the promotional and marketing activities
of the Products at the direction of the Marketing Committee,
develop the Marketing Plan, and act as the primary contact for
Knoll's product marketing group. The Marketing Manager shall
assure the development of the Marketing Plan in sufficient
time as to permit its review and approval by the Marketing
Committee by ******************** of each calendar year during
any part of which the Agreement shall be in effect (an
"Agreement Year"). For the 1999 Agreement Year, Knoll will
develop and submit to Kos a launch plan by July 23, 1999.
(2) Develop and co-ordinate professional education
initiatives, including development of strategy, identifying
and training faculty, providing logistical support, sponsoring
symposia and publications, and other related duties and
responsibilities set out in the Marketing Plan.
(3) As part of Knoll's responsibility to seek reimbursement
for the Products, continue to include the Products in the
promotional efforts of its Account Executives, and to develop
and implement contracting strategies to encourage formulary
acceptance.
3
<PAGE>
(4) Appoint such other persons as may be necessary to fulfill
Knoll's obligations under the Marketing Plan.
(5) Pursuant to the direction of the Marketing Committee, fund
and manage the identified promotional and educational programs
and agencies utilized to execute marketing programs,
educational programs, and other tactical sales and marketing
initiatives agreed upon in the Marketing Plan. Funding by
Knoll for such programs and initiatives shall be, on an annual
basis, ******************************************************.
(6) Actively and fully participate, as specified in the
Marketing Plan, in the promotion, marketing, education,
advertising, planning and sales activities necessary to
distribute and sell the Products.
(7) Provide initial Product training, including personnel and
materials, to Kos at its national sales training meeting, and
thereafter provide training materials and technical support as
such relates to the promotion of the Products to enable Kos to
maintain the ongoing training of its personnel.
c. Product Support
As part of Knoll's commercialization and promotional duties,
Knoll shall be responsible for the following:
(1) Packaging, labeling, warehousing and distributing the
Products.
(2) Using reasonable commercial efforts to maintain inventory
at sufficient levels to assure timely delivery of Products.
(3) Accepting orders, invoicing distributors or customers,
handling reimbursement matters and supervising collection
activities.
(4) Providing customer service activities, furnishing medical
information services, and satisfying all regulatory filing
requirements.
(5) Seeking reimbursement for the Products.
d. Product Pricing and Terms
Kos and Knoll will collaborate on the pricing and terms of
sale for the Products. Knoll shall give due consideration to
Kos' input; but Knoll shall retain, in all instances, sole
discretion in establishing the Products' price, and policies
with respect to sales terms.
4. KOS DUTIES AND RESPONSIBILITIES
4
<PAGE>
a. General
Kos shall establish the promotion and marketing of the
Products in the Territory as an important corporate priority,
and Kos shall devote its resources to promote and market the
Products in the Territory in accordance with the Marketing
Plan.
b. Promotion and Marketing
As part of Kos' promotion and marketing obligation, and in
accordance with the Marketing Plan, Kos,
*********************************, shall not do less than the
following:
(1) Appoint a Marketing Manager for the Products who shall
serve as a member of the Marketing Committee, be responsible
for and dedicated to the Products' promotional and marketing
activities at the direction of the Marketing Committee, and
act as the primary contact to Knoll's product marketing group.
(2) Appoint such other persons as may be necessary to fulfill
Kos' obligations under the Marketing Plan, including but not
limited to implementing, through the use of its personal
promotion efforts, the professional education and managed care
pull through initiatives developed and coordinated by Knoll,
as specified in the Marketing Plan.
(3) Maintain and train adequate sales representation in the
Territory to promote the Products and to execute the Sales
Call Plan established at paragraph 4(c) herein, and develop
and implement a sales compensation system, the elements of
which will be determined in ************ sole discretion. Such
sales compensation system shall be appropriately and
sufficiently weighted as to be consistent with and supportive
of Kos' obligations under the Agreement.
(4) Furnish sufficient training so that each Kos sales
representative which makes a Product Call is trained and
knowledgeable regarding the Products.
(5) Maintain a material presence and prominently promote the
Products at the conferences and meetings in the Territory
which Kos plans to attend in accordance with the Marketing
Plan. For those conferences and meetings which Kos will not
attend, to the extent determined by the Marketing Committee,
Kos shall provide personnel to assist Knoll.
c. Sales Call Plan
(1) During each Agreement Year, in addition to any sales calls
Knoll may make, Kos shall make a minimum of ***********
primary details, ************** of which shall be to
****************************************** as defined by
Knoll, and the
5
<PAGE>
remaining primary details shall be determined by applying the
"Methodology for Defining Targeted Prescribers" set forth in
Attachment B, which is attached hereto and incorporated
herein. In Agreement Years 1999 and 2004, the number of
primary details shall be prorated to reflect the number of
months in each such Agreement Year. By way of example, if Kos
commences promotion effective on August 1, 1999, Kos shall be
responsible to make 5/12th of **************** primary details
for the 1999 Agreement Year. In the 2004 Agreement Year, Kos
shall be responsible to make 6/12th of *****************
primary details.
A "primary detail" shall mean a completed sales presentation
(as generally understood throughout the Pharmaceutical
industry) of either Mavik or Tarka occupying at least ******of
the detail time and emphasis, and shall not include sample
drops.
(2) Kos shall be solely responsible for all costs associated
with the management of its sales representatives, including,
without limitation, all salaries, benefits, commissions,
bonuses and incentive compensation, travel and entertainment,
training and meeting costs, automobiles and related expenses,
and all other costs associated with maintaining a sales force
such as *****************************************************.
5. PAYMENTS AND COMMISSIONS
a. Compensation to Kos
(1) Knoll shall book all sales of the Products, and shall
compensate Kos based on the combined Commissionable Revenues
for each Product pursuant to the commission schedule
("Commission Schedule") set out in Attachment A, which is
attached hereto and incorporated herein. The Commissionable
Revenues for each Product shall be defined as:
******************************************************
Kos shall purchase ************************* data for each
Product. The Annual Multiplier shall be as follows:
AGREEMENT YEAR ANNUAL MULTIPLIER
1999 ****
2000 ****
2001 ****
2002 ****
2003 ****
2004 ****
6
<PAGE>
Knoll will track the performance of the Products at
the end of each quarter of each Agreement Year, and will
annualize Commissionable Revenues for the Agreement Year based
upon actual Commissionable Revenues year to date (the
"Projected Annualized Sales"). At the conclusion of, and
within thirty (30) days of the availability of the
******************* for, each of the first three (3) quarters
of an Agreement Year, Knoll shall determine the amount to be
paid to Kos (the "Compensation") by applying the Commission
Schedule to the Projected Annualized Sales. For the second and
third quarters of any Agreement Year, Knoll shall adjust the
Compensation to reflect any increase or decrease in Projected
Annualized Sales from the previous quarter. Attachment A sets
forth examples of the application of the Compensation Schedule
to Projected Annualized Sales. Within thirty (30) days of
receipt of the ********************* following the end of an
Agreement Year, Knoll shall pay to Kos, or Kos reimburse
Knoll, the difference between the compensation due on the
actual Commissionable Revenues for that Agreement Year and the
Compensation the Commission Schedule to the Projected
Annualized Sales that shall have been paid to Kos over the
previous three quarters of such Agreement Year.
(2) For the 1999 Agreement Year, Knoll shall compensate Kos at
the end of the third quarter based on Projected Annualized
Sales of the year and at the end of 1999 based on actual
Commissionable Revenues for the full Agreement Year.
(3) Notwithstanding anything to the contrary in Section
5.a.(1) hereinabove, for the Agreement Year 2004, Knoll shall
compensate Kos an amount determined by applying the
Compensation Schedule to the product of ****************** the
actual Commissionable Revenues for the Products through
***************** and dividing the resultant amount by *****
to reflect Kos' participation for 6/12th of the 2004 Agreement
Year. There shall be no further reconciliation of the amount
of compensation made to Kos.
(4) In the event that Knoll substantially increases its amount
of personal promotion or substantially decreases its managed
care initiatives beyond current levels, the parties shall
negotiate in good faith a revised compensation structure to
reflect the changes in promotional efforts by Knoll.
(5) Kos acknowledges and agrees that it shall be solely
responsible for paying the appropriate amount of any and all
federal, state, and local taxes with respect to all
compensation paid pursuant to this Agreement, and that Knoll
shall have no responsibility whatsoever for withholding or
paying any such taxes for or on behalf of Kos.
b. "Net Sales" shall mean the gross invoiced sales for the
Products sold or otherwise disposed of in an arm's length
transaction to a third party, minus the sum of
7
<PAGE>
**************************************************************
******.
c. Expenses
Each party shall bear its own expenses for performing its
obligations and conducting its activities as required under
the Agreement, subject to 5(d) hereinbelow.
d. Advertising & Promotion/Samples
Kos shall support the Advertising and Promotional (A&P) effort
by contributing to the purchase of product samples in the
following minimum amounts in each year of the Term of the
agreement:
1999 ******************
2000 ******************
2001 ******************
2002 ******************
2003 ******************
2004 ******************
Samples shall be ordered no less than ********* in advance. A
***** rolling forecast for samples shall be established, with
the first ******** forecast being firm, and the *************
being a good faith estimate by the Marketing Committee of its
anticipated needs. The price to be paid by Kos for samples of
the Products shall be ****************. Samples will be
shipped F.O.B. to a location of Kos' choice, and shall
*********************.
In the event Kos' contribution in any Agreement Year exceeds
the sample expenditure as determined by the Marketing
Committee, the excess dollars shall be applied to
************************* by the Marketing Committee. In the
event Kos' sample purchase in any Agreement Year exceeds the
A&P contribution amount designated hereinabove for such
Agreement Year, Kos shall be permitted to apply such excess
A&P contribution, up to a *********************** of the
following Agreement Year's designated A&P contribution amount,
to such following Agreement Year.
For the 1999 Agreement Year, Kos shall be permitted to apply
toward its required A&P contribution up to ************ of the
direct costs and expenses (including basic hotel room and
associated taxes and group meals, for Knoll attendees, but
excluding their incidental expenses) incurred to conduct a
national sales training meeting on the Products.
e. Right to Audit
8
<PAGE>
(1) During the Term of this Agreement and for one (1) year
thereafter, (a) Kos shall have the right, at its expense, to
have audited Knoll's records for the sole purpose of
confirming Knoll's A&P expenditures for the Products, and
Knoll's calculation of Commissionable Revenues and (b) Knoll
shall have the right, at its expense, to have audited Kos'
records for the sole purpose of confirming Kos' sales force
activity for the promotion of the Products, and Kos' A&P
expenditure for the Products, other than for samples.
(2) Such audits shall be limited to not more than once in any
calendar year and shall be further limited in scope to the
year immediately last past.
(3) Such audits shall be conducted by an independent auditing
or accounting firm chosen by the auditing party and agreed to
by the audited party, such agreement not to be unreasonably
withheld.
6. DISPUTE RESOLUTION
a. Internal Review
The ************ chairperson shall
****************************. Any other matter that can not be
resolved by the Marketing Committee, including any disputes or
claims arising out of the Agreement, shall be submitted for
resolution to the Presidents of Kos and Knoll respectively, or
their designees.
b. Judicial Recourse
If a matter or dispute can not be resolved by the Presidents
of Kos and Knoll within thirty (30) days, either party shall
have the right to seek any and all remedies available at law
or in equity.
7. TERM AND TERMINATION
a. Term
The initial term of the Agreement shall commence on the date
this Agreement shall have been signed by both parties and
shall expire on June 30, 2004, unless terminated earlier
pursuant to the Agreement (the "Term"). Promotion of the
Products by Kos shall commence during the first week of
August, 1999.
b. Renewal
With the mutual written consent of Knoll and Kos, the
Agreement may be extended for one or more additional years.
If, at the end of the initial Term, Knoll
9
<PAGE>
or Kos chose not to extend the Term, the Agreement shall
terminate automatically and without penalty.
c. Termination
(1) Kos or Knoll shall have the right to terminate the
Agreement upon the occurrence of any of the following events:
(i) the other party commits a material breach of the
Agreement, and such breach is not cured within thirty (30)
days following receipt of notice thereof; (ii) the bankruptcy
or insolvency, or the making or seeking to make or arrange an
assignment for the benefit of creditors of the other party; or
initiation of proceedings in voluntary or involuntary
bankruptcy, or the appointment of a receiver or trustee of
such party's property which is not discharged within ninety
(90) days, (iii) the FDA withdraws marketing approval for one
or both Products; (iv) any merger, or consolidation with, or
sale to a third party of the businesses to which this
Agreement relates by either party; or (v) pursuant to 7(d)
hereinbelow.
(2) Knoll shall have the right to terminate the Agreement if
unforeseen clinically significant safety and/or efficacy
issues materially affecting either of the Products' sales
become known.
d. Minimum Sales
The parties hereby establish that the combined Commissionable
Revenue target for the Products for the year 2000 is
*********** dollars ****************. If Kos promotes in good
faith the Products in accordance with the Marketing Plan
approved by the Marketing Committee, and the Commissionable
Revenue for calendar year 2000 shall be less than ************
of such Commissionable Revenue target, either party may
terminate the Agreement by written notice no later than
************. Upon the receipt of a notice of termination
under this Section 7(d), the non-terminating party shall by
notice to the terminating party be entitled to require the
terminating party to continue its performance under the
Agreement for a period not to exceed 90 days.
e. The parties agree that, in the event in any Agreement Year
after the year 2000, the combined Commissionable Revenue for
the Products does not exceed
*************************************, and provided Kos shall
have promoted the Products in good faith and in accordance
with the Marketing Plan approved by the Marketing Committee,
Kos shall be permitted to terminate the Agreement by written
notice to be delivered no later than ********* of the
following Agreement Year.
f. In the event of early termination other than for a material
breach of the Agreement by Kos, Kos shall be compensated in an
amount calculated by applying the rate of compensation set
forth in Attachment A to the prorated (up to the effective
date of
10
<PAGE>
termination) Projected Annualized Sales at the time of
termination. There shall be no further reconciliation of the
amount of compensation so made thereafter.
g. Upon termination of this Agreement, Kos shall return to Knoll
all product samples, sales and promotional and communication
materials, marketing plans and reports and other tangible
items provided to Kos by Knoll pursuant to the terms and
intent of this Agreement. In the event Kos terminates the
Agreement pursuant to Section 7.c(1)(i) hereinabove, or either
party terminates the Agreement pursuant to Section 7.c(1)(iii)
or Section 7.c(2) hereinabove, Knoll shall reimburse Kos the
actual cost paid to Knoll of all samples of the Product(s) in
Kos' possession as of the effective date of termination.
8. REGULATORY MATTERS
a. All regulatory matters in the Territory regarding the Products
shall remain under the exclusive control of Knoll.
b. Kos shall not without the consent of Knoll, unless so required
by law, correspond or communicate with the FDA or with any
other governmental authority, concerning the Products, or
otherwise take any action concerning any authorization or
permission under which any of the Products are sold. Kos shall
provide to Knoll, upon receipt, copies of any communication
from the FDA or other governmental authority related to the
Products. If Kos is advised in writing by its counsel that it
must communicate with the FDA or other governmental authority,
then Kos shall so advise Knoll and Kos shall if the law
permits comply with any and all reasonable direction of Knoll
concerning any meeting or communication with the FDA or other
governmental authority.
c. Contemporaneously with the execution of this Agreement, the
parties shall execute the Adverse Event Processing and
Exchange Agreement ("AE Agreement"), attached hereto and
incorporated herein as Attachment C.
d. In addition to the AE Agreement's requirements with respect to
the safety and efficacy of the Products, each party shall
inform the other party of any Product Quality complaint
received. A Product Quality Complaint shall be defined as any
complaint that questions the purity, identity, potency or
quality of the Products, or either one of them, their
packaging or labeling.
e. Each party further agrees to promptly notify the other party
of any and all events that could affect the marketing of the
Products, including, without limitation, any notification or
other information which it receives (directly or indirectly)
from the FDA or any other governmental authority, any
information on new or existing products competitive to the
Products, or any information which indicates or suggests
potential for liability arising from the marketing or sale of
the Products.
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f. Each party agrees to immediately notify the other party
telephonically, followed by a writing, of any order, request
or directive of a court or other governmental authority to
recall or withdraw the Products in any jurisdiction. Knoll
shall be responsible, at its sole cost and expense, for the
costs of any recall or withdrawal of the Products not caused
by the negligence or willful misconduct of Kos.
9. FORCE MAJEURE
Neither party shall be held liable or responsible to the other party
nor be deemed in default under this Agreement for failure or delay in
fulfilling or performing any term of this Agreement when such failure
or delay is caused by or results from causes beyond the reasonable
control of the affected party, including without limitation fire,
floods, embargoes, war, acts of war ( whether war is declared or not),
insurrections, riots, civil commotions, strikes, lockouts or other
labor disturbances, acts of God or acts, omissions or delays in acting
by any governmental authority, unless due to a violation by the
non-performing party hereto; provided, however, the party so affected
shall use commercially reasonable and diligent efforts to avoid or
remove such causes of non-performance, and shall continue performance
hereunder with reasonable dispatch whenever such causes are removed.
Each party shall provide the other party with prompt written notice of
any delay or failure to perform that occurs by reason of force majeure.
The parties shall mutually seek a resolution of the delay or the
failure to perform as noted above, provided that if no resolution is
achieved that is reasonably acceptable to the party not relying on this
provision within six months of delivery of the aforementioned written
notice, such party may terminate this Agreement upon written notice to
the other.
10. ASSIGNMENT
Neither party shall assign or transfer its rights or obligations under
this Agreement without the prior written consent of the other party,
except (i) to an affiliate, or (ii) in connection with a merger, or
consolidation with, or the sale to a third party of the businesses to
which the Agreement relates.
11. REPRESENTATIONS AND WARRANTIES
a. Knoll represents and warrants that, as of the Effective Date
of this Agreement:
(1) to the best of its knowledge, Kos' promotion or marketing
of the Product(s) under this Agreement shall not infringe the
patent, trade secret or other proprietary rights of any third
party;
(2) it owns or is the licensee in good standing of the
Product(s);
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(3) it has received no notice of infringement or
misappropriation of any alleged rights asserted by any third
party in relation to any technology used in connection with
the manufacture, use or sale of Product(s);
(4) it is not in default with respect to any license agreement
necessary for it to comply with the Agreement;
(5) it is not aware of any patent, know-how, trade secret, or
other right of any third party which could reasonably be
expected to materially adversely affect its ability to carry
out its responsibilities under this Agreement or the
manufacture, use or sale of Product(s), or Kos right to
exploit any right granted to it under this Agreement;
(6) it has the right and requisite authority, including
without limitation, all governmental, shareholder, and other
approvals, to enter into this Agreement;
(7) it is not aware of, and it has no reason to believe that
it will experience, any material unusual or other circumstance
out of the normal course of business that will adversely
affect, with respect to the Products, the (i) freight, transit
insurance and transportation cost, (ii) trade or cash
discounts, quantity discounts, rebates, chargebacks, and other
price reduction programs, (iii) sales returns and allowances,
bad debts or rejections, (iv) sales, value-added and other
direct taxes, (v) import and export duties or tariffs, or (vi)
sample cost. Further, Knoll accounts and will continue to
account for its provision for items (i) through (vi) above in
accordance with U.S. generally accepted accounting principles,
applied in a consistent manner from period to period; and
(8) there have not been in the years 1997, 1998, and up to May
1999 Provider Perspective prescriptions greater than
**************** for either of the Products.
b. Kos represents and warrants that, as of the Effective date of
the Agreement
(1) it has the right and requisite authority, including
without limitation, all governmental, shareholder, and other
approvals, to enter into this Agreement;
(2) it is not a party to any agreement nor is it aware of any
fact or any future event that shall prevent or limit in any
way Kos' ability to perform its duties and obligations under
the Agreement; and
(3) it neither has in development nor plans to develop any
product which shall compete with the Products.
c. Kos further represents and covenants that:
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(1) Kos shall be in compliance with all laws and regulations
applicable to the subject matter of this Agreement, including,
without limitation, the Federal Food, Drug, and Cosmetic Act
and the Prescription Drug Marketing Act;
(2) the services to be performed by Kos hereunder will be
performed only by individuals who are employees of Kos, and
such services will involve the promotion of the Products in a
manner consistent with their approved labeling and the
materials approved by the Marketing Committee;
(3) Kos has a written statement of policies and procedures for
adherence with federal and state statutes;
(4) each employee of Kos who will provide services hereunder
has access to the aforementioned written statement and
receives training with respect thereto including the
importance of strict adherence; and
(5) it shall not represent to any third party that it has any
proprietary or property right or interest in the Products, or
in any patent relating thereto, or in any trademark used in
connection therewith.
12. INDEMNIFICATION/INSURANCE
a. Knoll agrees to indemnify, defend, and hold Kos harmless from
and against any third party claims arising out of (i)
manufacturing or labeling of the Products, (ii) the use of the
Products, (iii) any FDA or other governmental requirements,
unless such claims arise from the negligence or willful act or
omission of Kos, (iv) any negligent act or omission, or any
willful wrongdoing by Knoll in the performance of the
Agreement, (v) the breach of any representation or warranty of
Knoll. Knoll further agrees to indemnify, defend and hold Kos
harmless from and against any claim of patent, copyright,
trademark, or trade secret infringement or misappropriation in
connection with Kos' marketing or promotion of the Products
under the terms of this Agreement, pursuant to the Marketing
Plan, and in conformity with the direction of the Marketing
Committee.
b. Kos agrees to indemnify, defend, and hold Knoll harmless from
and against third party claims arising out of (i) any
negligent act or omission, or willful wrongdoing by Kos in the
performance of the Agreement, (ii) the failure by Kos to
comply with any FDA or other governmental requirement, (iii)
the infringement or misappropriation by Kos of any patent,
copyright, trademark, or trade secret, wherein such claim is
based on Kos' marketing or promotion of the Products which is
not pursuant to the terms of this Agreement, the Marketing
Plan, or to the direction of the Marketing Committee, and (iv)
the breach of any representation or warranty of Kos.
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c. The obligations to indemnify, defend, and hold harmless set
forth in Paragraphs 12(a) and 12(b) shall be contingent upon
the party seeking indemnification (the "Indemnitee"): (1)
notifying the indemnifying party of a claim, demand or suit
within five (5) business days of receipt of same; provided,
however, that Indemnitee's failure or delay in providing such
notice shall not relieve the indemnifying party of its
indemnification obligation except to the extent the
indemnifying party is prejudiced thereby; (2) allowing the
indemnifying party and/or its insurers the right to assume
direction and control of the defense of any such claim, demand
or suit; (3) using its best efforts to co-operate with the
indemnifying party and/or its insurers in the defense of such
claim, demand or suit; and (4) agreeing not to settle or
compromise any claim, demand or suit without prior written
authorization of the indemnifying party.
d. During the term of this Agreement, Kos shall obtain and
maintain, at its sole expense, General Liability, including
Advertising Injury Liability, Insurance with a minimum limit
of liability of ******************* per occurrence naming
Knoll as an additional named insured. Evidence of coverage, in
the form of certificates of insurance, shall be provided at
the inception of this Agreement and as reasonably requested
thereafter. Such certificates shall provide for written notice
to Knoll thirty (30) days prior to any material change,
cancellation or non-renewal of the policy.
During the term of this Agreement, Knoll shall maintain
insurance policies of the types and minimum insurance coverage
indicated below. All such policies will be primary in the
event of a loss arising out of performance under this
Agreement and shall provide that where there is more than one
insured, the policy will operate, except for the limits of
liability, as if there were a separate policy covering each
insured. Within 30 days of the date hereof, Knoll will furnish
Kos certificates of insurance evidencing the minimum insurance
coverage and limits specified below. Such certificates shall
name Kos an additional insured, as it's interests may appear
hereunder, and provide that at least 30 days written notice
will endeavor to be given to Kos prior to cancellation,
material modification or non-renewal of any of the terms of
coverage of any policy.
Commercial General Liability Combined Single
Insurance (including Contractual, Limit of Liability-
Products, and Advertising ****************
Legal Liability) per occurrence
13. CONFIDENTIALITY
a. During the Term of the Agreement, each party may come into
possession of certain proprietary information, relating to the
subject matter of this Agreement, which is owned by the other
Party ("Confidential Information"). The Parties agree
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<PAGE>
that the receiving Party shall not disclose or use such
Confidential Information, except as expressly provided in this
Agreement and to exercise rights granted under this Agreement,
without the prior written consent of the disclosing Party at
any time during the Term of this Agreement and for a period of
seven (7) years thereafter. A receiving party shall be
permitted to disclose Confidential Information of the
disclosing Party to its employees, agents, or contractors who
need to know such information to perform the receiving Party's
obligations hereunder.
b. The following shall be exceptions to the mutual
confidentiality obligations set forth in 9(f)(1) above:
(1) The obligation to maintain in confidence all Confidential
Information shall survive the termination of the Agreement,
but a receiving Party shall be permitted to disclose
Confidential Information to the extent the receiving Party is
required by law to do so, provided notice of such disclosure
shall be given promptly to the disclosing Party and reasonable
actions shall be taken to avoid and/or minimize the extent of
such disclosure.
(2) Confidential Information shall not include any
information: (a) which was known to the receiving party at or
prior to the date of this Agreement or the previously executed
Confidentiality Agreements dated December 8, 1997 and January
11, 1999; (b) which becomes lawfully known to the receiving
Party without any obligation of confidentiality; or (c) which
becomes known to the general public through no fault of the
receiving Party.
c. Subject to any law or regulation to the contrary, the terms of
this Agreement shall be held in confidence for a period
of seven (7) years following termination or expiration of
this Agreement or any renewal thereof.
14. MISCELLANEOUS
a. Non-Compete
During the Term of the Agreement and for one (1) year
thereafter, Kos shall not promote, market or sell in the
Territory any
********************************************************during
the Term of the Agreement, unless pursuant to a business
arrangement with Knoll or with Knoll's prior written approval.
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b. Solicitation of Employees
During the Term of this Agreement, and for a period of
one (1) year following termination, neither party shall
solicit for employment nor hire any employee of the other
without such party's agreement thereto.
c. Severability
Should one or more provisions of this Agreement be or become
invalid, the parties hereto shall substitute, by mutual
consent, valid provisions which in their economic effect are
sufficiently similar to the invalid provisions that it can be
reasonably assumed that the parties would have entered into
this Agreement with such valid provisions. In case such valid
provisions cannot be agreed upon, the invalidity of one or
several provisions of this Agreement shall not affect the
validity of this Agreement as a whole, unless the invalid
provisions are of such essential importance to this Agreement
that it is to be reasonably assumed that the parties would not
have entered into this Agreement without the invalid
provisions.
d. Notices
Any consent, notice or report required or permitted to be
given or made under this Agreement by one of the parties
hereto to the other shall be in writing, delivered personally
or by facsimile (and promptly confirmed by personal delivery
or courier) or courier, postage prepaid (where applicable),
addressed to such other party at its address indicated below,
or to such other addresses as the addressee shall have last
furnished in writing to the addressor in accordance with this
paragraph and shall be effective upon receipt by the
addressee.
If to Knoll: Knoll Pharmaceutical Company
3000 Continental Drive North
Mount Olive, NJ 07828
Attention: President
Facsimile: (973) 426-5718
with a copy to: Knoll Pharmaceutical Company
3000 Continental Drive North
Mount Olive, NJ 07828
Attention: Group Counsel
Facsimile: (973) 426-3236
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If to Kos: Kos Pharmaceuticals, Inc.
1001 Brickell Bay Drive, 25th Floor
Miami, FL 33131
Attention: President
Facsimile: (305) 577-4596
with a copy to: Holland & Knight LLP
701 Brickell Avenue
Suite 3000
Miami, FL 33131
Attn: Steven Sonberg
Facsimile: (305) 789-7799
e. Applicable Law
This Agreement shall be governed by and construed in
accordance with the laws of the State of New Jersey.
f. Entire Agreement
This Agreement contains the entire understanding of the
parties with respect to the subject matter hereof. All express
or implied agreements and understandings, either oral or
written, heretofore made are expressly merged in and made a
part of this Agreement. This Agreement may be amended, or any
term hereof modified, only by a written instrument duly
executed by the parties. Each of the parties hereby
acknowledges that this Agreement is the result of mutual
negotiation and therefore any ambiguity in their respective
terms shall not be construed against the drafting party.
g. Headings
The captions to the several Articles and Paragraphs hereof are
not a part of this Agreement but are for convenience only.
h. Independent Contractors
It is expressly agreed that Kos and Knoll shall be independent
contractors and that the relationship between the two parties
shall not constitute a partnership, joint venture or agency.
Neither Kos nor Knoll shall have the authority to make any
statements, representations or commitments of any kind, or to
take any action, which shall be binding on the other, without
the prior consent of the other party to do so.
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i. Waivers
No delay on the part of any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof
nor shall any waiver on the part of any party of any such
right, power or privilege, nor any single or partial exercise
of any such right, power or privilege, preclude any further
exercise thereof or the exercise of any other such right,
power or privilege.
j. Counterparts
This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
k. Publicity
All public announcements, notices or other communications to
third parties regarding this agreement, its terms and
conditions, or the Products shall require the prior written
approval of both parties.
Please indicate Kos' acceptance and agreement to the above by signing
this letter in the space below.
Sincerely,
KNOLL PHARMACEUTICAL COMPANY
By: /s/ Carter H. Eckert
-------------------------
Carter H. Eckert
President
Agreed and accepted this
23 day of July, 1999.
KOS PHARMACEUTICALS, INC.
By: /s/ Daniel M. Bell
-------------------------
Daniel M. Bell
President and Chief Executive Officer
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ATTACHMENT A TO AGREEMENT: COMMISSION SCHEDULE
THIS PAGE CONSISTS OF CONFIDENTIAL MATERIAL WHICH HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
ATTACHMENT B TO CO-PROMOTION AGREEMENT: METHODOLOGY FOR DEFINING TARGETED
PRESCRIBERS
THIS PAGE CONSISTS OF CONFIDENTIAL MATERIAL WHICH HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
REVOLVING CREDIT AND LOAN AGREEMENT
DATED AS OF SEPTEMBER 1, 1999
KOS PHARMACEUTICALS, INC., a Florida corporation (the "Borrower"), and
MICHAEL JAHARIS, an individual residing in South Norwalk, Connecticut (the
"Lender"), agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. Acquisition Price shall have the meaning ascribed thereto
in subsection (c) of Section 4.04 below.
SECTION 1.02. Acquisition Transaction shall mean (i) a merger or
consolidation, or any similar transaction, of Borrower into or with another
corporation or other entity (other than into or with a Related Company), (ii) a
purchase or other acquisition (including by way of merger, consolidation, share
exchange or otherwise) of securities representing 20% or more of the voting
power of Borrower; (iii) the sale of all or substantially all of the assets of
the Borrower, or (iv) any substantially similar transaction.
SECTION 1.03. Adjusted Conversion Price shall mean the price for
conversion of part or all of the Note into Common Stock after adjustment as
provided in Section 4.04 of this Agreement.
SECTION 1.04. Advances shall mean the advances made under the Note and
pursuant to this Agreement, including without limitation any advances made prior
to the date hereof which were contemplated to be made pursuant to this
Agreement, which advances are deemed refinanced under the Note as of the Closing
Date.
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SECTION 1.05. Business Day shall mean any day other than a Saturday,
Sunday or other day on which the Borrower's business is closed.
SECTION 1.06. Closing Date shall mean the date on which the closing for
this Loan is held.
SECTION 1.07. Common Stock shall mean the capital common stock of the
Borrower, consisting of 50,000,000 authorized shares $.01 par value, of which
17,894,529 shares are issued and outstanding as of July 30, 1999.
SECTION 1.08. Compensation shall mean (i) any and all compensation,
including without limitation salaries, bonuses, commissions, fringe benefits,
deferred compensation, retirement benefit contributions and similar benefits,
paid to employees of the Borrower for services rendered, and (ii) any and all
compensation and payments, including without limitation payments reportable as
income to recipients on the various types of IRS Forms 1099, paid to recipients
for services rendered.
SECTION 1.09. Conversion Consideration shall have the meaning ascribed
thereto in Section 4.02 below.
SECTION 1.10. Conversion Date for any particular conversion of part or
all of the Note into Common Stock shall mean the date set by the Lender for
conversion in the Conversion Notice.
SECTION 1.09. Conversion Notice shall mean the Conversion Notice
described in Section 4.02.
SECTION 1.11. Conversion Price shall be $4.91 per share, determined as
the average of the closing prices of a share of Common Stock on the NASDAQ
National Market (as reported
2
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in The Wall Street Journal or, in the absence thereof, as reported by another
authoritative source mutually agreed upon by the Borrower and the holder hereof)
for the thirty (30) successive full trading days, ending on the full trading day
immediately prior to the First Advance Date, on which at least one share of
Common Stock is traded.
SECTION 1.12. Credit Facility shall mean the $50,000,000.00 revolving
credit facility made available by the Lender pursuant to the Note.
SECTION 1.13. Debt shall mean the debt of any Person at any date,
without duplication in calculating the amount thereof, 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 1.14. 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.
3
<PAGE>
SECTION 1.15. Environmental Laws means and includes the comprehensive
Environmental Response, Conservation and Liability Act of 1980, as amended, the
Resource Conservation and Recovery Act, the Superfund Amendments and
Reauthorization Act of 1986, as 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 1.16. 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 1.17. Event of Default shall mean an Event of Default under
Section 7.01.
SECTION 1.18. Exchange Act shall mean the Securities Exchange Act of
1934, as amended from time to time.
SECTION 1.19. First Advance Date shall mean the date of the first
Advance under the Note and this Agreement.
4
<PAGE>
SECTION 1.20. 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.
SECTION 1.21. Hazardous Material shall mean any pollutant, contaminant,
toxic substance, hazardous waste, hazardous material, hazardous substance,
petroleum or petroleum product, asbestos, polychlorinated biphenyls, 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, Conservation
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 1.22. Loan shall mean the loan made pursuant to Section 2.01
and the Note.
SECTION 1.23. Loan Documents shall mean this Agreement, the Note, the
Registration Rights Agreement, the Security Agreement, the Patent Security
Agreement, the UCC-1 financing statement executed in connection with the
Security Agreement, and each and every other document executed or delivered in
connection with the closing of this transaction, each such document being
referred to individually as a "Loan Document".
SECTION 1.24. Maturity Date shall mean December 31, 2003.
SECTION 1.25. New Securities shall have the meaning ascribed thereto in
subsection (b) of Section 4.04 below.
5
<PAGE>
SECTION 1.26. New Securities Issuance Price shall have the meaning
ascribed thereto in subsection (b) of Section 4.04 below.
SECTION 1.27. 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 1.28. Patent Security Agreement shall mean the Patent,
Trademark and License Security Agreement of even date herewith granted by
Borrower to Lender as collateral security for the Note.
SECTION 1.29. Permissible Equipment Financing Indebtedness shall mean
Debt incurred for equipment financing in the ordinary 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 one transaction.
SECTION 1.30. 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 $2,000,000 in the
aggregate for all transactions at any one time. 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 1.31. 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.
6
<PAGE>
SECTION 1.32. Registration Rights Agreement shall mean the Registration
Rights Agreement of even date herewith entered into by Borrower in favor of
Lender with respect to the Common Stock to be issued upon conversion of the Note
pursuant to Article IV of this Agreement.
SECTION 1.33. Related Company or Related Companies shall mean (i) any
direct or indirect subsidiary of Borrower; (ii) Kos Investments, Inc., a
Delaware corporation, and all successors thereto; (iii) Kos Holdings, Inc., a
Delaware corporation, and all successors thereto.
SECTION 1.34. Related Person or Related Persons shall mean any
stockholder of Kos Investments, Inc., a Delaware corporation, existing as of the
date of this Agreement.
SECTION 1.35. Request Notice shall mean a notice requesting an Advance
pursuant to Section 2.02 below, which notice shall be in the form and substance
attached hereto as Exhibit II hereto.
SECTION 1.36. Securities Act shall mean the Securities Act of 1933, as
amended from time to time.
SECTION 1.37. Security Agreement shall mean the Security Agreement of
even date herewith granted by Borrower to Lender as collateral security for the
Note.
SECTION 1.38. Stock Pledge Agreement shall mean the Stock Pledge
Agreement of even date herewith granted by the Borrower to Lender as collateral
security for the Note.
SECTION 1.39. Subsidiary shall mean Aeropharm Technology, Inc., a
Delaware corporation, which is a wholly owned subsidiary of Lender.
SECTION 1.40. Subsidiary Guaranty shall mean the Guaranty of even date
herewith granted by the Subsidiary to Lender guaranteeing repayment of the Note.
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<PAGE>
SECTION 1.41. Subsidiary Security Agreement shall mean the Subsidiary
Security Agreement of even date herewith granted by the Subsidiary to Lender as
collateral security for the Subsidiary Guaranty.
SECTION 1.42. Take-Over Attempt shall mean any of the following
occurrences:
(a) Any person (other than a Related Company or a Related Person) shall
have acquired beneficial ownership or the right to acquire beneficial ownership
of securities representing 20% or more of the aggregate voting power of Borrower
or any Related Company (the term "beneficial ownership" for purposes of this
Agreement having the meaning assigned thereto in Section 13(d) of the Exchange
Act, and the rules and regulations thereunder); or
(b) Any person shall have engaged in an Acquisition Transaction.
SECTION 1.43. Termination Date shall mean December 31, 2000.
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
Fifty Million Dollars ($50,000,000.00) 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) Borrower may use loan proceeds 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 exist for any reason
other than as specifically authorized by Lender, the Borrower
shall repay to the Lender forthwith, without notice or demand,
such amount as shall be necessary to eliminate such excess.
(d) The Borrower shall give the Lender written or telegraphic
notice of its request for an Advance by submitting a Request
Notice at least three (3) Business Days prior to the requested
date of the Advance. Each Request Notice shall specify the
date and the amount of the requested Advance. 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.
(e) The Lender shall not be obligated to make Advances aggregating
in excess of $12,000,000 during any fiscal quarter of
Borrower.
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 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
8
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exercise its rights and remedies under the Loan Documents upon the occurrence of
an Event of Default or otherwise, all of the 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.
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 9.02 in immediately available funds. All
computations of interest under the Note shall be
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made by the Lender on the basis 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) The Registration Rights Agreement, duly executed by the
Borrower;
(c) The Security Agreement, duly executed by the Borrower;
(d) The Patent Security Agreement, duly executed by the Borrower;
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(e) UCC-1 financing statements with respect to the security
interests granted to Lender under the Loan Documents for such
locations as the Lender may deem necessary to perfect the
Lender's security interests, duly executed by the Borrower;
(f) A conditional assignment of Borrower's lease(s) of real
property, together with a written consent to such assignment
from Borrower's landlord(s) and a written waiver by such
landlord(s) of certain rights of landlord under its lease(s)
in furtherance of the exercise by Lender of its rights under
the Security Agreement, all in form and substance satisfactory
to Lender;
(g) A binder of an endorsement to Borrower's fire, hazard and
extended coverage insurance policy (with a long form
endorsement) with respect to the assets given as collateral
pursuant to the Security Agreement showing the Lender as loss
payee in form satisfactory to the Lender and to Borrower's
comprehensive liability policy (with a long form endorsement)
and Borrower's product liability policy (with a long form
endorsement) with respect to Borrower's business showing the
Lender as an additional insured under such policy;
(h) A binder of an endorsement to business interruption coverage
insurance policy (with a long form endorsement) with respect
to Borrower's business showing the Lender as loss payee in
form satisfactory to the Lender;
(i) A certified copy of the resolutions of the board of directors
of the Borrower approving this transaction in the form
attached as Exhibit III;
(j) 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
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Document to which it is a party and the other documents to be
delivered by it hereunder;
(k) Copies of consents of third parties necessary for the
consummation of this transaction;
(l) The Subsidiary Guaranty, duly executed by the Subsidiary;
(m) The Subsidiary Security Agreement, duly executed by the
Subsidiary;
(n) The Stock Pledge Agreement, duly executed by the Borrower;
(o) A favorable opinion of counsel for the Borrower, in
substantially the form of Exhibit IV and as to such other
matters as the Lender may reasonably request; and
(p) 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) A Request Notice, the representations and warranties contained within
which shall be true and accurate as of the date of the Advance being
requested;
(b) The representations and warranties contained in Section 5.0l below
shall be true and correct on and as of the date of such requested
Advance as though made on and as of such date;
(c) As of the date of such requested Advance, no event shall have occurred
and be continuing, or would result from the Advance requested thereby,
which would constitute an Event of Default or would constitute an Event
of Default but for the requirement that notice be given or time elapse,
or both;
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(d) As of the date of such requested Advance, there shall not have occurred
any material adverse change in the business or financial operations or
condition of the Borrower or in its management;
(e) As of the date of such requested Advance, there shall not be any
pending, or to the best of its knowledge, threatened action or
proceeding affecting the Borrower before any court, governmental agency
or arbitrator which is likely to have a materially adverse effect on
the financial condition or operations of the Borrower;
(f) The Borrower shall waive any claim or defense based upon the occurrence
of any action or inaction of Lender on or prior to the date of such
requested Advance which Borrower believes at such time may (i) be
actionable against Lender, or (ii) give rise to a defense to payment
under the Loan Agreement or the Note for any reason, including without
limitation, commission of a tort or violation of any contractual duty
or duty implied at law;
(g) As of the date of such requested Advance, the death of Lender shall not
have occurred; (h) The Lender, together with Lender's spouse and
children and any entity of which Lender owns a majority interest, shall
continue to own directly and indirectly at least forty percent (40%) of
the outstanding shares of Common Stock of the Borrower; and
(i) Such approvals, opinions and documents as the Lender may reasonably
request.
ARTICLE IV
CONVERSION RIGHTS
SECTION 4.01. Right to Convert. The holder of the Note is entitled, at
his option, at any time and from time to time after the First Advance Date and
while the Note is outstanding or any principal, interest or other sum owing
under the Note or any other Loan Document is unpaid, to
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convert the principal amount of the Note (or any portion hereof which is
$100,000 or an integral multiple thereof) into shares of Common Stock, as said
shares shall be constituted on the Conversion Date, at the Conversion Price, or
if applicable, at the Adjusted Conversion Price in effect on the Conversion
Date. The right to convert the Note into Common Stock shall survive any
Acquisition Transaction, in which case the Conversion Price or the Adjusted
Conversion Price then in effect shall be subject to adjustment as set forth in
Section 4.04(c) below.
SECTION 4.02. Exercise of Conversion Rights. To exercise his right to
convert all or any portion of the Note into Common Stock, the holder of the Note
shall deliver the Conversion Notice and a photocopy of the Note to the Borrower
at its address designated in Section 9.02 below. The Conversion Notice shall be
in the form attached hereto as Exhibit V and shall set forth the Conversion
Date, the amount of principal owed under the Note to be converted into Common
Stock, whether any unpaid accrued interest is to be converted into Common Stock
and, if so, how much interest is to be converted, and the registered holder of
the Common Stock, if different from the holder of the Note. Within fifteen (15)
days after delivery of a fully completed Conversion Notice and a photocopy of
the Note by the holder of the Note or his designee, the Borrower shall deliver
to the holder of the Note or, if different, the designated registered holder of
the Common Stock, the following (which is hereinafter referred to collectively
as the "Conversion Consideration"): (i) the number of shares of Common Stock
determined in accordance with Section 4.03 hereof and the Note, (ii) payment in
New York Clearing House funds or other funds acceptable to the holder of the
Note of an amount equal to any portion of unpaid accrued interest owed under the
Note which is not converted into Common Stock as designated in the Conversion
Notice, (iii) if the Note is not fully converted into Common Stock, a
replacement Note for the remainder of the outstanding principal
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balance in the form of Exhibit I attached hereto, bearing interest at the same
rate as the original Note and maturing on the Maturity Date; and (iv) if the
Note is not fully converted into Common Stock, payment of cash in lieu of any
fractional shares of Common Stock, based on the then current market value of
Common Stock. No adjustment is to be made on conversion for dividends on shares
of Common Stock issued on conversion. Upon receipt of the Conversion
Consideration, the Lender shall promptly deliver to the Borrower at its address
designated in Section 9.02 below the Note, accompanied (if so required by the
Borrower) by instruments of transfer, in form satisfactory to the Borrower, duly
executed by the holder or by his duly authorized attorney in writing.
SECTION 4.03. Determination of Number of Shares. Upon exercise of his
conversion rights, the holder of the Note shall be entitled to the number of
shares of Common Stock determined by dividing the then outstanding principal
balance of this Note or such lesser amount of principal designated for
conversion in the Conversion Notice, plus the portion of unpaid accrued interest
designated for conversion in the Conversion Notice, by the Conversion Price or,
if applicable, the Adjusted Conversion Price. The Borrower is not required to
issue fractional shares upon any such conversion, but shall make adjustment
therefor in cash on the basis of the current market value of such fractional
interest unless only a portion of the Note is being converted, in which case the
amount of any fractional shares shall become part of outstanding principal under
the replacement Note.
SECTION 4.04. Adjusted Conversion Price. The Conversion Price shall be
adjusted as follows:
(a) In the event of any stock split, reverse stock split, stock
dividend or any other similar event, the Conversion Price or
any subsequent Adjusted Conversion Price then in
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effect shall be subject to an equitable adjustment to prevent
dilution or increment of the percentage entitlement of the
holder of the Note to convert to Common Stock. The Conversion
Price (or any subsequent Adjusted Conversion Price then in
effect) shall be adjusted so that the number of shares of
Common Stock issuable upon conversion of the Note shall
constitute the same proportionate percentage ownership of the
Borrower's Common Stock to which the holder of the Note would
have been entitled immediately prior to the occurrence of such
stock split, reverse stock split, stock dividend or other
similar event.
(b) The Conversion Price and any Adjusted Conversion Price after
adjustment pursuant to the terms of this subsection,
subsection (a) above or subsection (c) below shall be
decreased in the event of the issuance or sale (other than the
issuance or exercise of stock options pursuant to an officer,
director, employee or consultant stock option plan adopted by
the Borrower) of any Common Stock, or rights, options or
warrants to acquire Common Stock, or any other security
convertible to Common Stock (the "New Securities") which would
result in the holder of such New Securities in owning Common
Stock at a price per share less than the Conversion Price or
the Adjusted Conversion Price then in effect (the "New
Securities Issuance Price"). In this event, the Conversion
Price or the Adjusted Conversion Price then in effect shall be
reduced to the New Securities Issuance Price, which will then
become the Adjusted Conversion Price.
(c) In the event of an Acquisition Transaction in which holders of
Common Stock receive cash, property and/or securities with a
per share value (the "Acquisition Price") less
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than the Conversion Price or the Adjusted Conversion Price
then in effect, the Conversion Price or the Adjusted
Conversion Price then in effect shall be reduced to the
Acquisition Price, which will then become the Adjusted
Conversion Price in effect immediately after the Acquisition
Transaction.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
SECTION 5.01. Representations and Warranties of the Borrower. Except as
otherwise disclosed in a schedule or schedules attached hereto and made a part
hereof, the Borrower represents and warrants as follows:
(a) The Borrower is a corporation duly incorporated, validly
existing and its status is active under the laws of the 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 authorized capital stock of the Borrower consists
exclusively of (A) 50,000,000 shares of Common Stock, par
value $.01 per share, of which 17,894,529 shares are issued
and outstanding as of July 30, 1999, and (B) 10,000,000 shares
of preferred stock, par value $.01 per share, of which no
shares are issued and outstanding. All issued and outstanding
shares of the capital stock of the Borrower and of each of its
subsidiaries have been fully paid, were duly authorized and
validly issued, are nonasesssable and have been issued
pursuant to an effective registration statement under the
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Securities Act or an appropriate exemption from registration
under the Securities Act and were not issued in violation of
the preemptive rights of any shareholder.
(c) 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
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,
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writ, judgment, injunction, decree, determination or
award or any such indenture, agreement, lease or
instrument.
(d) 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.
(e) 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) 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.
(f) The consolidated balance sheet of the Borrower as of December
31, 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for the fiscal
year then ended, audited by Arthur Andersen, 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 December 31, 1998 there has been no
material adverse change in such condition or operations.
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(g) 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.
(h) 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.
(i) 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 6.02(a) hereof.
(j) 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.
(k) 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.
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(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 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.
(l) 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
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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.
ARTICLE VI
COVENANTS OF THE BORROWER
SECTION 6.01. 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 Borrower.
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(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 (unless
the Borrower is in default, in which case no notice shall be
necessary), permit the Lender or any agents or representatives
thereof during normal business hours to examine and at
Borrower's expense 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 prior to the occurrence of
an Event of Default no such actions by the Lender shall be
taken in a manner that would disrupt Borrower in the conduct
of its business. Until such time as Lender enforces its rights
and exercises it remedies upon or after an Event of Default,
Lender shall keep confidential any information which it
obtains in the course of such examination and investigation
and shall not disclose such information to anyone other than
agents, representatives and advisors of Lender, except that
this obligation to keep information confidential shall not
apply to information that (i) is already in Lender's
possession, provided that such information is not known by
Lender to be subject to another confidentiality agreement with
or other obligation of secrecy to the Borrower or
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another party, (ii) becomes generally available to the public
other than as a result of a disclosure by Lender or Lender's
agents, representatives or advisors or (iii) becomes available
to Lender on a nonconfidential basis from a source other than
the Borrower or its advisors, provided that such source is not
known by Lender to be bound by a confidentiality agreement
with or other obligation of secrecy to the Borrower or another
party.
(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 and
cash flows for the period 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 accounting
officer of the Borrower, together with a certificate
of such chief accounting 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
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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 accounting officer of the 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 of executive officers of the Borrower
(as defined in the rules and regulations of the
Securities and Exchange Commission);
(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 5.01(g) hereof;
(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);
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(vii) as soon as available, and in any event within five
(5) days thereafter, notification of (X) any bona
fide proposal to Borrower or its shareholders, by
public announcement or written communication that is
or becomes the subject of public disclosure, to
engage in an Acquisition Transaction, or (B) the
commencement (as such term is defined in Rule 14d-2
under the Exchange Act) of, or the filing of a
registration statement under the Securities Act with
respect to, a tender offer or exchange offer to
purchase any shares of Common Stock such that, upon
consummation of such offer, such person would own or
control securities representing 10% or more of the
aggregate voting power of Borrower or any Related
Company; and
(viii) such other information respecting the condition or
operations, financial or otherwise, of the Borrower
as the Lender may from time to time reasonably
request.
SECTION 6.02. 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:
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(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, 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
(iv) Permissible Letter of Credit Indebtedness, including
without limitation the $3,000,000 Letter of Credit
Agreement dated July 17, 1999 with First Union
National Bank; provided that the indebtedness
thereunder shall at no time exceed the $2,000,000
limitation set forth in Section 1.30 above; and
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(v) Debt authorized under subsection 6.02(c).
(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.
(d) Loans and Investments. Lend or advance money, credit or
property to any Person or invest (by capital contribution or
otherwise) in any Person, or purchase or repurchase 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
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<PAGE>
under any state of the United States of America and
having a combined capital and undivided surplus of
not less than $100,000,000, 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;
(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; commission advances and other
advances to officers and employees for travel and
other business-related expenses, each in the ordinary
course of business; and
(v) Loans and advances in each instance in an amount of
not more than $10,000 and in the aggregate with
respect to such loans and advances in an amount of
not more than $100,000.
(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 direct or indirect subsidiary of Borrower, to an
unaffiliated Person.
29
<PAGE>
(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) Issuance of Securities. 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 Borrower.
(k) 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.
(l) Charter Amendments. Amend its articles or certificate of
incorporation without the prior written consent of Lender.
30
<PAGE>
SECTION 6.03. Financial Covenants. So long as the Note shall remain
unpaid, the Borrower will not fail, without the prior written consent of the
Lender, to comply with the financial covenants set forth in Schedule B.
ARTICLE VII
EVENTS OF DEFAULT
SECTION 7.01. Events of Default. The occurrence of any of the following
events shall constitute an Event of Default hereunder:
(a) The Borrower shall, unless the Lender otherwise consents in
writing, 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, in the case of a term,
covenant or agreement other than one requiring payment of
funds to Lender, 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
31
<PAGE>
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 of such Borrower to the Lender
(excluding Debt evidenced by the Note), 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 instrument
relating to such Debt, or
(ii) fail to pay any other Debt in excess of $250,000.00
(excluding Debt owed to the Lender) 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 instrument
relating to such Debt, or
(iii) 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
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 (or, in the case of Debt
owed to Lender, is to entitle Lender to accelerate)
the maturity of such Debt; or any such Debt shall be
declared to
32
<PAGE>
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 (f); or
(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 constitute such a material
adverse change; or
(i) The dissolution or liquidation of the Borrower; or
33
<PAGE>
(j) The occurrence of an Acquisition Transaction; or
(k) A Take-Over Attempt.
SECTION 7.02. Remedies Upon Default. Upon the occurrence of an Event of
Default, the Lender may, at its option, either separately or cumulatively:
(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;
(b) convert the Note into common stock as provided in the Note and
this Agreement;
(c) exercise any or all of its rights or remedies permitted by
applicable law of a secured party under the Security Agreement
or the Patent Security Agreement;
(d) if such Event of Default occurs prior to the 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
(e) 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 8.01. 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
34
<PAGE>
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 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,
in connection with the making of Advances and in connection with the conversion
of the Note into common stock of the Borrower and the registration of such stock
under the securities laws, 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 8.02. General Indemnification. Except as otherwise provided in
the Registration Rights Agreement, 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
35
<PAGE>
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 8.02 shall survive any termination of this Agreement and any
other Loan Document.
SECTION 8.03. 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,
spillage, 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 5.01(k) 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.
36
<PAGE>
(c) Without limitation of its rights under this Agreement, 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
8.03 shall survive payment of the Note.
SECTION 8.04. Limitation on Liability of Lender. The Borrower hereby
waives any claim or defense arising out of or in any way related to the Loan
based upon the occurrence of any
37
<PAGE>
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.
38
<PAGE>
ARTICLE IX
MISCELLANEOUS
SECTION 9.01. 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 9.02. 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 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, with a copy to Steven K. Aronoff, Esq. at such address,
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 9.03. 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 9.04. Accounting Terms. Except as otherwise stated herein, all
accounting terms not specifically defined herein or in any schedule or exhibit
hereto shall be construed in accordance with generally accepted accounting
principles, applied on a consistent basis
39
<PAGE>
with those of the period ended December 31, 1998, 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 9.05. 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 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 9.06. 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 9.07. Execution in Counterparts. This Agreement may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which
40
<PAGE>
when so executed shall be deemed to be an original and all of which when taken
together shall constitute one and the same agreement.
SECTION 9.08. 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 9.09. 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 9.10. Survival. The representations and warranties contained
herein shall survive the execution of this Agreement by the parties herein.
SECTION 9.11. 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 9.12. 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 OR FLORIDA AND WAIVES ANY OBJECTION
WHICH THE BORROWER MAY
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<PAGE>
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 9.02 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 9.13. 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.
SECTION 9.14. WAIVER OF PLAINTIFF'S RIGHTS. THE BORROWER HEREBY AGREES
NOT TO COMMENCE ANY LEGAL PROCEEDING AGAINST THE LENDER IN THE JURISDICTION OF
ANY LOCAL, OR FEDERAL
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COURT LOCATED WITHIN THE STATE OF FLORIDA UNLESS THE LENDER EXPRESSLY
CONSENTS THERETO IN WRITING.
43
<PAGE>
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/Daniel M. Bell
-------------------------------
Name: Daniel M. Bell
Title: President and Chief Executive
Officer
/s/ Michael Jaharis
----------------------------------------
MICHAEL JAHARIS
STATE OF NEW YORK )
) ss.:
COUNTY OF )
On the ______ day of September, 1999, before me came Daniel M. Bell, to
me known, who, being by me duly sworn, did depose and say that he resides at
No.______________________________________________________________; that he is
the President of Kos Pharmaceuticals, Inc., the corporation described in and
which executed, the foregoing instrument; that the foregoing instrument was
executed without corporate seal by order of the Board of Directors of said
corporation; that he signed his name thereto by like order.
------------------------------
Notary Public
My commission expires:
STATE OF NEW YORK )
) ss.:
COUNTY OF )
On the ____ day of September, 1999, before me came Michael Jaharis, to
me known to be the individual described in, and who executed the foregoing
instrument, and acknowledged that he executed the same.
----------------------------
Notary Public
My Commission expires:
44
<PAGE>
LIST OF SCHEDULES AND EXHIBITS
------------------------------
SCHEDULES
- ---------
A - LIST OF DEBTS AND LIENS
B - FINANCIAL COVENANTS
EXHIBITS
- --------
I - NOTE
II - REQUEST NOTICE
III - CORPORATE RESOLUTIONS OF BORROWER
IV - OPINION LETTER OF BORROWER'S COUNSEL
V - CONVERSION NOTICE
45
<PAGE>
SCHEDULE A
EXISTING DEBTS AND LIENS
1. Debt under Master Equipment Lease No. E119 dated April 15, 1998 with
Essex Capital, Inc. (assigned to Gramercy Leasing Services, Inc.)
2. Debt under Equipment Lease Agreement with Vendor Lease Management Group
for lease of 238 Mobile Pro 750C H/PC, S1424-04A03
3. $3,000,000 Line of Credit dated July 17, 1999 with First Union National
Bank.
4. $30,000,000 Revolving Credit and Loan Agreement dated as of July 1,
1998 payable to Lender.
5. Leases with Copyco dated June 26, 1997, July 31, 1997, August 13, 1997,
September 30, 1997, December 10, 1997 and one undated lease for Toshiba
office equipment and LAN software equipment subsequently assigned to
AT&T Capital Leasing.
6. Leases with Copyco dated March 17, 1998, March 23, 1998 and March 24,
1998 for Toshiba office equipment subsequently assigned to AT&T Capital
Leasing.
7. Lease with Danka dated June 10, 1996 for Canon office equipment.
46
<PAGE>
SCHEDULE B
FINANCIAL COVENANTS
1. So long as the Note shall remain unpaid, the Borrower will not, without
the prior written consent of the Lender:
(a) Operating Expenses. Incur operating expenses in any fiscal year
(exclusive of license fee payments) in excess of the following amounts
(determined on a cumulative basis):
------------------------------------ ---------------------------------
At end of
------------------------------------ ---------------------------------
------------------------------------ ---------------------------------
1st Quarter $ 25,000,000
------------------------------------ ---------------------------------
2nd Quarter $ 48,000,000
------------------------------------ ---------------------------------
3rd Quarter $ 72,000,000
------------------------------------ ---------------------------------
4th Quarter $ 95,000,000
------------------------------------ ---------------------------------
(b) Current Liabilities. Permit the total of accounts payable and accrued
expenses to exceed $12,000,000 for a continuous period of more than 30
days or to exceed $14,000,000 at any one time.
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<PAGE>
EXHIBIT I
48
<PAGE>
EXHIBIT II
REQUEST NOTICE
To: _________________________ (the "Lender")
the undersigned hereby certifies that it has been prepared consistent with the
terms, conditions and definitions of the Revolving Credit and Loan Agreement
between the Borrower and the Lender, dated September 1, l999 (the "Loan
Agreement").
The undersigned in his or her capacity as an officer of the Company further
certifies that:
l. The representations and warranties contained in Section 5.0l of the
Loan Agreement are correct on and as of the date hereof as though made on and as
of this date; and
2. No event has occurred and is continuing, or would result from the
Advance requested hereby, which constitutes an Event of Default (as defined in
the Loan Agreement) or would constitute an Event of Default but for the
requirement that notice be given or time elapse, or both;
3. There has not occurred any material adverse change in the business
or financial operations or condition of the Borrower or in its management;
4. 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 is likely to have a materially adverse effect on the
financial condition or operations of the Borrower.
5. The Borrower hereby waives any claim or defense based upon the
occurrence of any action or inaction of Lender on or prior to the date hereof
which Borrower believes may (i) be actionable against Lender, or (ii) give rise
to a defense to payment under the Loan Agreement or the Note (as defined in the
Loan Agreement) for any reason, including without limitation, commission of a
tort or violation of any contractual duty or duty implied at law.
6. The above information is true and correct as of the date hereof.
Dated this_____day of_________,_________
-----------------------------------
By
Name:
Title:
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<PAGE>
EXHIBIT V
CONVERSION NOTICE
To Kos Pharmaceuticals, Inc. [or any successor corporation]:
The undersigned owner of that certain Note dated September 1, 1999 in
the original principal amount of $50,000,000.00 made payable by Kos
Pharmaceuticals, Inc. (the "Company") to Michael Jaharis (the "Note") hereby
irrevocably exercises the option to convert the Note, or portion thereof (which
is $100,000 or an integral multiple thereof) below designated, into shares of
Common Stock of the Company in accordance with the terms of the Loan Agreement
referred to in the Note, effective as of the Conversion Date designated below,
and directs that the shares issuable and deliverable upon the conversion,
together with any check in payment for unpaid accrued interest and/or for
fractional shares and any note representing any unconverted principal amount
hereof, be issued and delivered to the registered holder hereof unless a
different name has been indicated below.
Dated: ____________ ________________________________
---------------------------------
Signature
Conversion Date: _________________
Principal amount to be converted (in an integral multiple of $100,000, if less
than all): $______________
Unpaid accrued interest to be converted: $_____________
Principal amount of replacement Note, if any: $______________
Fill in for registration of shares of Common Stock and replacement Note (if
applicable) if to be issued otherwise than to the registered holder:
______________________________ Social Security or
(Name) Other Taxpayer
Identifying Number:
Address:
- ------------------------------- -------------------
- -------------------------------
- -------------------------------
50
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
This Amended and Restated Registration Rights Agreement (this
"Agreement") is made and entered into effective as of September 1, 1999, by and
between Kos Pharmaceuticals, Inc., a Florida corporation (the "Company"), Kos
Holdings, Inc., a Florida corporation ("Holdings"), Kos Investments, Inc., a
Florida corporation ("Investments"), and Michael Jaharis, an individual residing
in South Norwalk, Connecticut ("Jaharis") and effectively amends and restates
the Registration Rights Agreement entered into by the Company, Holdings and
Investments dated June 30, 1996.
Recitals
A. Holdings has acquired 10,000,000 shares (the "Holdings
Shares") of the Company's common stock, par value $.01 per
share (the "Common Stock"), under the terms of an Assignment
and Assumption Agreement dated as of June 30, 1996 between the
Company and Holdings (the "Assignment Agreement"). Pursuant to
the Assignment Agreement, the Company has agreed to grant
Holdings certain registration rights in accordance with the
terms of this Agreement.
B. The Company has issued a Promissory Note dated July 1, 1996
(the "Investments Note"), to Investments for an aggregate
principal amount of $15,000,000, which has been converted to
shares of Common Stock (the "Investments Shares"). The Company
has granted Investments certain registration rights in
accordance with the terms of this Agreement.
C. The Company is issuing a Promissory Note of even date herewith
(the "Jaharis Note") to Jaharis for an aggregate principal
amount of $50,000,000, which is convertible to shares of
Common Stock (the "Jaharis Shares", and, together with the
Holdings Shares and the Investments Shares, the "Shares").
Under the terms of the Jaharis Note, the Company will grant
Jaharis certain registration rights in accordance with the
terms of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the parties hereto agree as follows:
1. Definitions. The following terms shall have the meanings set forth
below:
a. "Commission" means the Securities and Exchange Commission, or any
other Federal agency at the time administering the Federal securities laws.
b. "Conversion" means Jaharis' right to convert indebtedness owing
under the Jaharis Note into the Jaharis Shares as provided in the
Loan Agreement and the Jaharis Note.
c. "Cutback Registration" means any registration in connection with
an underwritten public offering in which the managing underwriter advises the
Company that
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marketing factors require a limitation of the number of the Company's securities
to be underwritten in such public offering (including a limitation to zero).
d. "Loan Agreement" shall mean that certain Revolving Credit and Loan
Agreement of even date herewith between the Company and Jaharis providing for an
extension of credit by Jaharis to the Company in the original principal amount
of $50,000,000.
e. "1933 Act" means the Securities Act of 1933, as amended, or any
similar Federal statute, and the rules and regulations of the Commission issued
under such Act, as they each may, from time to time, be in effect.
f. "1934 Act" means the Securities Exchange Act of 1934 or any
similar Federal statute, and the rules and regulations of the Commission issued
under such Act, as they each may, from time to time, be in effect.
g. "Registration Rights Holder" means either Holdings, Investments,
or Jaharis, individually (collectively referred to as the "Registration Rights
Holders").
h. "Registration Statement" means a registration statement filed by
the Company with the Commission for a public offering and sale of securities of
the Company (other than any registration statement on Form S-4 or Form S-8, or
their successors, or any other form for a limited purpose, or any registration
statement covering only securities proposed to be issued in exchange for
securities or assets of another corporation or entity).
i. "Registration Expenses" means the expenses described in Section 4.
j. "Registrable Shares" means all of the Shares, and any other shares
of Common Stock or other securities of the Company or any other issuer issued or
issuable in respect of such Shares (because of stock splits, stock dividends,
reclassifications, recapitalizations, mergers, combinations or similar events,
if applicable); provided, however, that the Shares which are Registrable Shares
shall cease to be Registrable Shares upon any sale or transfer of such shares
pursuant to a Registration Statement, Section 4(1) of the 1933 Act, Rule 144
under the 1933 Act or otherwise, except that the Shares which are Registrable
Shares shall remain Registrable Shares notwithstanding any transfer of the
shares by Holdings or Investments to Jaharis or any of his affiliates or by
Jaharis or such affiliates to any member of Jaharis' immediate family or to a
trust established for the benefit of Jaharis or any family member of Jaharis or
to any corporation or other entity which is wholly owned by Jaharis, such
affiliates, such family members, or such trusts (Jaharis, such affiliates, such
family members such trusts and such entities referred to herein collectively as
"Permitted Transferees"). As a condition to effecting any registration pursuant
to this Agreement, the Company may require that Holdings, Investments, Jaharis,
or any Permitted Transferees, on whose behalf a registration hereunder is being
effected, execute an agreement further acknowledging their obligations under
Section 7 of this Agreement. All references in this Agreement to the term
"Holdings", "Investments" or "Jaharis" shall be read to include any Permitted
Transferee that owns or holds any Registrable Shares.
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2. Registration Rights.
a. Required Registrations.
i. Subject to the other provisions of this Agreement Holdings,
Investments, and Jaharis shall each have the right to require the Company, upon
demand, whether before or after any indebtedness evidenced by the Investments
Note or the Jaharis Note shall become convertible into Common Stock of the
Company, or whether before or after Investments or Jaharis shall have become a
holder of any Common Stock issued upon conversion without registration under the
1933 Act, to effect unlimited registrations with respect to the Registrable
Shares (each such registration being a " Required Registration"). To effect a
Required Registration, a Registration Rights Holder shall make a written request
(a "Request Notice") to the Company with respect to his or its Shares which
shall describe in detail the contemplated sale of Registerable Securities,
including the number of Registerable Securities to be registered. The Company
shall be entitled to include in any Required Registration shares of Common Stock
to be sold by holders of either Common Stock or rights to acquire Common Stock
to whom the Company has previously granted or in the future does grant any
registration rights and shares of Common Stock to be sold by the Company for its
own account, provided that such inclusion shall not limit the number of
Registrable Shares included in such Registration Statement.
ii. Each Registration Rights Holder may revoke its Request Notice
in the event of a Cutback Registration that would limit the total number of
Registrable Shares that can be sold pursuant to such Requested Registration to a
number that is less than 90% of the number of the Registrable Shares specified
to be sold in the Request Notice.
iii. The Company shall, as soon as practicable, but in no event
more than 120 days after receipt of a Request Notice, file a Registration
Statement covering the Registrable Shares to be included in the registration
requested by such Request Notice and cause such Registration Statement to become
effective as soon as practicable thereafter.
b. Piggyback Registration.
i. At any time and from time to time after the date of this
Agreement, whenever the Company proposes to file a Registration Statement, the
Company will prior to such filing give written notice to all Registration Rights
Holders of its intention to do so and, upon the written request of any
Registration Rights Holders given within fifteen (15) days after the Company
provides such notice, the Company shall use its good faith efforts to cause all
Registrable Shares of such Registration Rights Holder which the Company has been
requested by such Registration Rights Holder to register, to be registered under
the 1933 Act to the extent necessary to permit their sale or other disposition
in accordance with the intended methods of distribution specified in the request
of such Registration Rights Holder; provided that the Company shall have the
right to postpone or withdraw any registration effected pursuant to this Section
2.b. without obligation to any Registration Rights Holder.
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ii. In connection with any registration under Section 2.b.
involving an underwritten offering of the Company's securities, the Company
shall not be required to include any Registrable Shares of a Registration Rights
Holder in such underwriting unless such Registration Rights Holder accepts the
terms of the underwriting as agreed upon between the Company and the
underwriters selected by it, and then only in such quantity as will not, in the
sole discretion of the underwriters, jeopardize the success of the offering by
the Company. If in the sole discretion of the managing underwriter or
underwriters the registration of all, or part of, the Registrable Shares which a
Registration Rights Holder has requested to be included would adversely affect
such public offering, then the Company shall be required to include in the
underwriting only that number of Registrable Shares, if any, which the managing
underwriter or underwriters believe may be sold without causing such adverse
effect. If the number of Registrable Shares to be included in the underwriting
in accordance with the foregoing is less than the total number of shares which
such Registration Rights Holder has requested to be included, then such
Registration Rights Holder shall participate in the underwriting pro rata based
upon such Registration Rights Holder's total ownership of Registrable Shares
compared to the total number of shares held by any other Registration Rights
Holder or other affiliates of the Company for which registration has been
requested whether or not such shares are the subject of separate agreements with
the Company concerning registration rights.
3. Registration Procedures. When the Company is required by the
provisions of this Agreement to effect the registration of any of the
Registrable Shares under the 1933 Act, the Company shall:
a. file with the Commission a Registration Statement with respect to
such Registrable Shares and use its best efforts to cause that Registration
Statement to become and remain effective;
b. as expeditiously as possible prepare and file with the Commission
any amendments and supplements to the Registration Statement and the prospectus
included in the Registration Statement as may be necessary to keep the
Registration Statement effective until the earlier to occur of (i) such time as
all Registrable Shares included therein have been sold or (ii) the expiration of
two years;
c. as expeditiously as possible furnish to those Registration Rights
Holders whose Shares are being registered such reasonable numbers of copies of
the prospectus, including a preliminary prospectus and any amended or
supplemental prospectus, in conformity with the requirements of the 1933 Act,
and such other documents as such Registration Rights Holders may each reasonably
request in order to facilitate the public sale or other disposition of such
Registration Rights Holder's Registrable Shares; and
d. as expeditiously as possible use its best efforts to register or
qualify the Registrable Shares covered by the Registration Statement under the
securities or Blue Sky laws of such states as the Registration Rights Holders
shall reasonably request, and do any and all other acts
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and things that may be necessary or desirable to enable the Registration Rights
Holders to consummate the public sale or other disposition of the Registrable
Shares owned by the Registration Rights Holders in such jurisdiction; provided,
however, that the Company shall not be required in connection with this Section
3 to qualify as a foreign corporation in any jurisdiction nor register or
qualify the securities in any state which as a condition to such registration or
qualification would impose material restrictions or other material conditions on
the Company or any of its officers, directors or shareholders (including with
respect to any shares held by such persons or entities) unless such restrictions
or other conditions are approved by the party adversely affected.
If the Company advises a Registration Rights Holder that any
preliminary or final prospectus is no longer in compliance with the requirements
of the 1933 Act, or that at such time it is otherwise a violation of any
applicable securities laws to offer or sell securities pursuant to a preliminary
or final prospectus, such Registration Rights Holder shall immediately cease
offering or selling the Registrable Securities and, if requested, return all old
prospectus to the Company. Such Registration Rights Holder may recommence offers
and sales of Registrable Securities upon receipt from the Company of an amended
prospectus, if applicable, or receipt of ratification from the Company that the
offer and sale of Registrable Securities may resume.
4. Allocation of Expenses. The Company will pay all Registration
Expenses of all registrations under this Agreement. The term "Registration
Expenses" shall mean all expenses incurred by the Company in complying with this
Agreement, including, without limitation, all registration and filing fees,
exchange listing fees, printing expenses, fees and disbursements of counsel for
the Company, state Blue Sky fees and expenses, and the expense of any special
audits incident to or required by any such registration, but excluding
underwriting discounts and selling commissions attributable to the Registrable
Shares and the fees and expenses of each Registration Rights Holder's own
counsel and accountants, which shall be borne by such Registration Rights
Holder.
5. Information by Registration Rights Holders. Each Registration Rights
Holder shall promptly furnish to the Company such information regarding such
Registration Rights Holder and the distribution proposed by such Registration
Rights Holder as the Company may request in writing and as shall be required in
connection with any registration, qualification or compliance referred to in
this Agreement.
6. "Lock-up" Agreement. If requested by an underwriter in connection
with an underwritten offering of Common Stock or other securities of the
Company, each Registration Rights Holder shall agree not to sell or otherwise
transfer or dispose of any Registrable Shares or other securities of the Company
held by such Registration Rights Holder for a specified period of time before
and/or after the effective date of a Registration Statement, provided that the
same request shall have been made of other holders of the Company's Common Stock
or other securities (including affiliates of the Company) and such other holders
have complied with such request. Such agreement shall be in writing in a form
satisfactory to the Company and any such underwriter. The Company may impose
stop transfer instructions with respect to the Registrable Shares or other
securities subject to the foregoing restriction until the end of the lock-up
period.
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7. Indemnification.
a. By the Company. In the event of any registration of any of the
Registrable Shares under the 1933 Act pursuant to this Agreement, the Company
will indemnify and hold harmless the sellers of such Registrable Shares against
any losses, claims, damages or liabilities, joint or several, to which such
sellers may become subject under the 1933 Act, 1934 Act, state securities laws
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue statement of any
material fact contained in any Registration Statement under which such
Registrable Shares were registered under the 1933 Act, any preliminary
prospectus or final prospectus contained in the Registration Statement, or any
amendment or supplement to such Registration Statement, or arise out of or are
based upon the omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading; and the Company will
reimburse such sellers for any legal or any other expenses reasonably incurred
by such sellers in connection with investigating and defending any such loss,
claim, damage, liability or action; provided, however, that the Company will not
be liable in any such case to the extent that any such loss, claim, damage,
liability or expense arises out of or is based upon any untrue statement or
omission made in such Registration Statement, preliminary prospectus or
prospectus, or any such amendment or supplement, in reliance upon and in
conformity with information furnished to the Company by or on behalf of such
sellers, specifically for use in the preparation thereof, or as a result of the
failure of such sellers, or any agent of such sellers, to deliver any amendments
and supplements to any Registration Statement and the prospectus included in any
such Registration Statement (provided such amended or supplemental prospectus
has been delivered to sellers or their agent).
b. By Sellers of Registrable Shares. In the event of any
registration of any of the Registrable Shares under the 1933 Act pursuant to
this Agreement, each seller of Registrable Shares, severally and not jointly,
will indemnify and hold harmless the Company, each of its directors and officers
and each underwriter (if any) and each person, if any, who controls the Company
or any such underwriter within the meaning of the 1933 Act or the 1934 Act,
against any losses, claims, damages or liabilities, joint or several, to which
the Company, such directors and officers, underwriter or controlling person may
become subject under the 1933 Act, 1934 Act, state securities laws or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement of a material fact
contained in any Registration Statement under which such Registrable Shares were
registered under the 1933 Act, any preliminary prospectus or final prospectus
contained in the Registration Statement, or any amendment or supplement to the
Registration Statement, or arise out of or are based upon any omission or
alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and each seller of
Registrable Shares will reimburse the Company, each of its directors and
officers, each underwriter and each controlling person, severally and not
jointly, for any legal or other expenses reasonably incurred by the Company,
each director and officer, each underwriter and each controlling person in
connection with investigating and defending any such loss, claim, damage,
liability or action, if the statement or omission was made in reliance upon and
in conformity with information furnished to the Company by or on behalf of such
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<PAGE>
seller, specifically for use in connection with the preparation of such
Registration Statement, prospectus, amendment or supplement.
c. Claims. Each party entitled to indemnification under this Section
7 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; provided, that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld); and, provided, further, that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section 7. The Indemnified Party may participate in such
defense at such party's expense. No Indemnifying Party, in the defense of any
such claim or litigation, except with the consent of the Indemnified Party,
shall consent to entry of any judgment or enter into any settlement, which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
of such claim or litigation.
8. Mergers, Etc.
The Company shall not, directly or indirectly, enter into any merger,
consolidation or reorganization in which the Company shall not be the surviving
corporation unless the proposed surviving corporation shall, prior to such
merger, consolidation or reorganization, agree in writing to assume the
obligations of the Company under this Agreement, and for that purpose references
hereunder to "Registrable Shares" shall be deemed to be references to the
securities which either Registration Rights Holder would be entitled to receive
in exchange for Registrable Shares under any such merger, consolidation or
reorganization; provided, however, that the provisions of this Section 8 shall
not apply in the event of any merger, consolidation or reorganization in which
the Company is not the surviving corporation if all Registration Rights Holders
and all other holders of Common Stock of the Company are entitled to receive in
exchange for their Registrable Shares consideration consisting solely of (i)
cash, (ii) securities of the acquiring corporation which may be immediately sold
to the public without registration under the Securities Act, or (iii) securities
of the acquiring corporation which the acquiring corporation has agreed to
register within 90 days of completion of the transaction for resale to the
public pursuant to the Securities Act.
9. Miscellaneous.
a. Governing Law. This Agreement shall be governed in all respects
by the laws of the state of Connecticut.
b. Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
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c. Entire Agreement; Amendment; Waiver. This Agreement constitutes
the full and entire understanding and agreement between the parties with regard
to the subjects hereof. Neither this Agreement nor any term hereof may be
amended, waived, discharged or terminated, except by a written instrument signed
by the Company, and each Registration Rights Holder affected by such change. No
waivers of or exceptions to any term, condition or provision of this Agreement,
in any one or more instances, shall be deemed to be, or construed as, a further
or continuing waiver of any such term, condition or provision.
d. Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by United States
first-class certified or registered mail, return receipt requested, postage
prepaid, or delivered personally by hand or nationally recognized courier
addressed as follows:
If to Holdings:
C/o Steven J. Aronoff, P.C.,
475 Park Avenue South, 23rd Floor
New York, New York 10016
If to Investments:
C/o Steven J. Aronoff, P.C.,
475 Park Avenue South, 23rd Floor
New York, New York 10016
If to Jaharis:
Michael Jaharis
C/o Steven J. Aronoff, P.C.,
475 Park Avenue South, 23rd Floor
New York, New York 10016
If to the Company:
Kos Pharmaceuticals, Inc.
1001 Brickell Bay Drive
Suite 2502
Miami, Florida 33131
Facsimile No. (305) 577-4596
Attention: Daniel M. Bell, President
or at such other address as a party shall have furnished to the other party in
writing. All such notices and other written communications shall be effective on
the earlier of the date of mailing or delivery.
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e. Severability. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
f. Titles and Subtitles. The titles of the paragraphs and
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
g. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, and all of which together
shall constitute one instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the day and year first above written.
COMPANY
KOS PHARMACEUTICALS, INC.
By: /s/Daniel M. Bell
------------------------------------
Daniel M. Bell, President and Chief Executive
Officer
KOS HOLDINGS, INC.
By: /s/ Michael Jaharis
------------------------------------
KOS INVESTMENTS, INC.
By: /s/ Michael Jaharis
----------------------------------------
MICHAEL JAHARIS
10
SECURITY AGREEMENT
This Security Agreement dated September 1, 1999, by and between KOS
PHARMACEUTICALS, INC., a Florida corporation having a principal place of
business at 1001 Brickell Bay Drive, 25th Floor, Miami, FL 33131 (hereinafter
called the "Borrower") and MICHAEL JAHARIS, an individual residing in South
Norwalk, Connecticut(hereinafter called the "Lender").
W I T N E S S E T H:
WHEREAS, the Lender has agreed to make a loan in the amount of
$50,000,000.00 (the "$50,000,000 Loan") as more fully described and set forth in
a loan agreement of even date herewith between the Lender and the Borrower (the
"Loan Agreement"); and
WHEREAS, the Lender previously entered into a Revolving Credit and Loan
Agreement dated as of July 1, 1998 with Borrower (the "Unsecured Credit
Agreement") whereby Lender agreed to extend an unsecured line of credit to
Borrower in the maximum principal amount of $30,000,000 (the "$30,000,000
Loan"), which amount is fully advanced to Borrower as of the date hereof; and
WHEREAS, the Loan Agreement provides, in part, that the $50,000,000
Loan and the $30,000,000 Loan shall be secured by a blanket lien upon all
personal property owned by Borrower;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein and in the Loan Agreement, and One ($1.00) Dollar, the receipt
and sufficiency of which is hereby acknowledged, the Lender and the Borrower
hereby agree as follows:
1. Grant of Security Interest. (a) The Borrower hereby grants to Lender
a security interest (the "Security Interest") in all accounts, accounts
receivable and contract rights, inventory, equipment and machinery, trademarks,
trade names and service marks, patents, licenses, chattel paper, instruments,
documents, letters of credit and general intangibles, and all proceeds of any of
the foregoing, all as more particularly described on Schedule A attached hereto
and made a part hereof (the "Collateral"), to secure the performance of the
following obligations of the Borrower (hereinafter collectively referred to as
the "Indebtedness"):
(i) Borrower's liabilities and obligations under the Loan
Documents as defined in paragraph 5(b) below;
(ii) Borrower's liabilities and obligations under the
$30,000,000 Loan, the Unsecured Credit Agreement and
any and all documents executed in connection
therewith (collectively, the "$30,000,000 Loan
Documentation"); and
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(iii) Any other obligations of the Borrower in favor of
Lender which may now exist or which may hereinafter
arise pursuant to any future loan transaction between
the Borrower and the Lender.
(b) The Borrower is hereby deemed a "debtor" and the Lender is
hereby deemed a "secured party" as those terms are used in the
Connecticut Uniform Commercial Code.
2. Covenants and Warranties of the Borrower. The Borrower hereby
warrants and covenants:
(a) That except for the security interest granted hereby, and the
Security Interests shown on Schedule B attached hereto and made a part hereof,
the Borrower:
(i) is the owner of the Collateral, free and clear of any lien,
security interest, encumbrance or claim of right,
(ii) shall defend the Collateral against any and all claims and
demands of all persons at any time claiming the same or any interest therein,
and
(iii) shall execute and deliver to the Lender such financing
statements, or other documents as the Lender may at any time or from time to
time reasonably require or which may be necessary or appropriate to establish
and maintain a valid and enforceable security interest in the Collateral as
security for the Indebtedness, subject to no prior security interests or
encumbrances.
(b) That the Collateral shall be kept only at the Borrower's
principal place of business at 1001 Brickell Bay Drive, 25th Floor, Miami, FL
33131 and at the locations, if any, set forth on Schedule C, attached hereto and
made a part hereof (collectively, the "Premises") except as required in the
ordinary course of business; that the Borrower will promptly notify the Lender
of any change in the location of the Collateral, and that the Borrower will not
remove the Collateral from the Premises, except as hereinbefore or hereafter
permitted, without the written consent of the Lender.
(c) That the Borrower shall immediately notify the Lender in writing
of any change in or discontinuance of any of the Borrower's places of business
or other facilities listed in this Security Agreement, including any schedules
attached hereto.
(d) That the Borrower will not sell or offer to sell or otherwise
transfer the Collateral or any interest therein without written consent of the
Lender, except that the Borrower may, at the Borrower's own expense, in the
ordinary course of business, sell any of the inventory normally held by the
Borrower for such purpose, and use and consume, in the ordinary course of
business, any raw materials, supplies and materials normally held by the
Borrower for such
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purpose. Unless an Event of Default (as hereinafter defined) has occurred and is
continuing, the Borrower shall have the right, without the consent of the
Lender, to remove and dispose of, free from the Security Interest of this
Agreement, such Collateral as from time to time may become worn or obsolete or
no longer usable in the Borrower's business, provided that if any such
Collateral is replaced with other property, such other property shall be deemed
to be subject to this Security Agreement.
(e) That the Borrower shall have and maintain insurance at all times
with respect to all Collateral against risks of fire (including so-called
extended coverage), theft, and other risks as the Lender may require and, in the
case of motor vehicles, collision, and provide the Lender with a copy of such
policies containing such terms, in such form, for such periods and written by
such companies as may be satisfactory to the Lender, such insurance naming the
Lender as an additional insured or loss payee; that all policies of insurance
shall provide for thirty (30) days' written minimum cancellation notice to the
Lender and at the request of the Lender shall be delivered to and held by the
Lender; and that the Lender may act as attorney-in-fact for the Borrower in
obtaining, adjusting, settling and cancelling such insurance and endorsing any
drafts in accordance with the terms and conditions set forth in the Loan
Agreement.
(f) That the Borrower shall keep the Collateral free and clear of
any lien, security interest or encumbrance other than that granted herein and
those set forth in the attached Schedule B, and in good order and repair and
shall not waste or destroy the Collateral in violation of any statute or
ordinance; and that the Lender may examine and inspect the Collateral during
normal business hours at any time, wherever located, in accordance with Section
6.01(f) of the Loan Agreement.
(g) That the Borrower shall pay promptly when due all taxes and
assessments upon the Collateral or for its use or operation, except as otherwise
provided pursuant to Section 6.02(a)(ii) of the Loan Agreement.
(h) That the Borrower is a corporation duly organized and existing
under the laws of the State of Florida, that the execution, delivery and
performance hereof are within the Borrower's corporate powers, have been duly
authorized, are not in contravention of any law, the Borrower's charter, bylaws,
or any indenture or undertaking to which the Borrower is a party or by which it
is bound.
(i) That at the time any account receivable becomes subject to a
Security Interest in favor of the Lender: said account shall be a good and valid
account representing an undisputed, bona fide indebtedness incurred by the
account debtor named therein (the "Account Debtor") for merchandise held subject
to delivery instructions or theretofore shipped or delivered pursuant to a
contract of sale, or for services theretofore performed by the Borrower with or
for the Account Debtor; no agreement under which any extraordinary deduction or
discount may be claimed shall have been made with the Account Debtor of any such
account except as disclosed in writing to the Lender; and the Borrower shall be
the lawful owner of all such accounts and
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shall have good right to pledge, sell, assign and transfer the same and to
subject the same to a Security Interest in favor of the Lender. No such account
shall have been or shall thereafter be sold, assigned or transferred to any
person other than the Lender or in any way encumbered except to the Lender and
the Borrower shall defend the same against the lawful claims and demands of all
persons.
(j) That the Borrower shall immediately notify the Lender of all
cases involving the return, rejection, repossession, loss or damage of or to
merchandise covered by accounts receivable, except in the ordinary course of the
Borrower's business; of any request for credit or adjustment or replacement
merchandise or other dispute arising with respect to accounts receivable, except
in the ordinary course of the Borrower's business; and generally of all
extraordinary happenings and events affecting accounts receivable or the value
or amount thereof, if, within sixty (60) days after the extraordinary event, the
matter at issue has not been satisfactorily resolved.
(k) That the Borrower shall at all reasonable times and from time to
time allow the Lender, by or through any of its officers, agents or accountants,
to inspect the Collateral and to examine, inspect or make extracts from the
Borrower's books and records in accordance with Section 6.01(f) of the Loan
Agreement and to arrange for verification of accounts receivable, under
reasonable procedures, directly with account debtors or by other methods; shall
furnish to the Lender upon request additional statements of any accounts
receivable, together with all notes or other papers evidencing the same and any
guaranty, securities or other documents or information relating thereto; shall
furnish such reports, in form satisfactory to the Lender, as to its accounts
receivable as may be requested by the Lender under this Security Agreement or
under the Loan Agreement, and shall perform, execute or deliver all such
additional and further acts, deeds, assurances and instruments as may be
required to vest in and assure to the Lender its perfected rights hereunder and
in any Collateral.
3. Lender's Rights to Discharge Encumbrances, Etc. At its option,
either after an Event of Default has occurred and is continuing or after the
Borrower fails to take such action or make such payment or to contest such
action or payment in good faith as hereinafter stated within fifteen (15) days
after notice thereof given by the Lender to the Borrower, Lender may discharge
taxes, liens or security interests or other third party encumbrances at any
times levied or placed on the Collateral, and may pay for insurance and the
maintenance and preservation of the Collateral; provided that, if Borrower
contests such action or payment and Borrower reserves for any such potential
liability in accordance with standard accounting practices the Lender shall not
have the right to discharge such lien. The Lender shall have no obligation to
the Borrower to make any such expenditures nor shall the making thereof relieve
the Borrower of any default provision contained in this Security Agreement, the
Loan Agreement, the note evidencing the $50,000,000 Loan (the "Note"), or any
other Loan Document (as hereinafter defined) or contained in the $30,000,000
Loan Documentation. Any such payments made under this Paragraph 3 and not
reimbursed by the Borrower within ten (10) days of demand therefor shall be
added to the outstanding principal balance of the $50,000,000 Loan, at the
Lender's option. The total amount of additional payments so made by the Lender
and not otherwise reimbursed by
4
<PAGE>
the Borrower shall be secured by this Security Agreement in the same manner as
this Security Agreement secures the repayment of the Indebtedness.
4. Rights Prior to Default. Until an Event of Default, the Borrower may
have possession of the Collateral and use it in any lawful manner not
inconsistent with this Security Agreement, the Loan Agreement or any other Loan
Documents, and not inconsistent with any policy of insurance thereon.
5. Default. The Borrower shall be in default under this Security
Agreement upon the happening (an "Event of Default") of any of the following
events or conditions:
(a) failure to make any payments within ten (10) days after such
payment is due, or failure to perform any of the obligations required, or comply
with any covenant, under this Security Agreement within thirty (30) days after
notice thereof has been given by Lender to Borrower;
(b) the occurrence of any event of default (and the expiration of
applicable cure periods, if any) by the Borrower under any of the instruments
executed in connection with the $50,000,000 Loan, which instruments include,
without limitation, the Loan Agreement, the Note, the Patent, Trademark and
License Security Agreement of even date herewith (the "Patent Security
Agreement"), the Registration Rights Agreement of even date herewith and such
other documentation as may be executed in connection with the $50,000,000 Loan
together with any subsequent amendments or modifications thereto (collectively,
the "Loan Documents").
6. Rights of Lender Upon Default. (a) Without limiting the rights of
the Lender as contained in the Loan Agreement and the Patent Security Agreement,
upon an Event of Default and at any time thereafter (a "Post-Default Period")
the Lender shall have the remedies of a secured party under the Connecticut
Uniform Commercial Code, or the law of another jurisdiction if it shall be
applicable, including, without limitation, the right to take possession of the
Collateral, and for that purpose the Lender may, without legal process, so far
as the Borrower can give authority therefor, enter upon any premises on which
the Collateral or any part thereof may be situated and remove the same
therefrom, provided such entry shall be done lawfully. During a Post-Default
Period, the Borrower shall, at the request of the Lender, notify the Account
Debtors of the Security Interest of the Lender in any account, and will indicate
on all billings to the Account Debtors that the accounts are payable to the
Lender. Notwithstanding the foregoing sentence, the Lender may so notify the
Account Debtors during a Post-Default Period of the Security Interest of the
Lender in any account, and direct the Account Debtors to pay the accounts to the
Lender. Any proceeds of accounts thereafter received by the Borrower shall be
turned over to the Lender daily in the exact form in which they are received.
(b) The Lender may require the Borrower during a Post-Default Period
to assemble the Collateral and make it available to the Lender at a place to be
designated by the Lender which is reasonably convenient to both parties. Unless
the Collateral is perishable or threatens to decline rapidly in value or is of a
type customarily sold on a recognized market, the
5
<PAGE>
Lender will give the Borrower reasonable notice of the time and place of any
public sale thereof or of the time after which any private sale or any other
intended disposition thereof is to be made. The requirements of reasonable
notice shall be met if such notice is mailed, postage prepaid, to the address of
the Borrower shown in paragraph 2(b) hereof at least five days before the time
of the scheduled sale or disposition. The Borrower shall be and remain liable
for any deficiency remaining after applying the proceeds of disposition first to
the reasonable expenses of repossessing, holding, preparing for and executing
the sale, reasonable attorney's fees and legal expenses incurred by the Lender
in connection therewith, and then to the satisfaction of the indebtedness
secured hereunder.
7. Perfection.
(a) The Security Interest granted herein shall, to the extent
provided by applicable law, be perfected by the filing of a UCC-1 Financing
Statement, duly executed by the Borrower and the Lender, with the Secretary of
the State of Florida, and any other filing office which the Lender in its sole
discretion deems appropriate. The failure of Lender at any time to perfect its
Security Interest in any part of the Collateral shall not constitute a waiver of
its right to perfect such interest at a later date. Borrower shall cooperate in
all respects with Lender in the perfection of Lender's Security Interests
granted herein or in any other Loan Document, including without limitation
executing such other financing statements, notices and documents and furnishing
to Lender such other information as Lender shall request in order to perfect its
Security Interest in any of the Collateral.
(b) At the request of Lender made at any time during the term of the
$50,000,000 Loan or the $30,000,000 Loan for any reason, Borrower shall execute
a mortgage and conveyance of patents, trademarks, licenses and other proprietary
rights in favor of Lender, in form acceptable for filing with the U.S. Patent
and Trademark Office in accordance with 35 U.S.C. ss.261. Such mortgage and
conveyance shall be on substantially the same terms as the Patent Security
Agreement, except that such mortgage and conveyance shall provide for the
absolute mortgaging and conveyancing of such rights, subject to defeasance by
Borrower upon payment of the indebtedness and the satisfaction of the
obligations hereby secured. Lender is hereby authorized to file such mortgage
and conveyance with the U.S. Patent and Trademark Office.
(c) Borrower hereby irrevocably constitutes and appoints the Lender,
with full power of substitution, as its true and lawful attorney-in-fact, with
power, in the name of the attorney-in-fact or in the name of Borrower, to take
action on its behalf in carrying out the terms of this Section 7, including
without limitation to execute and record financing statements and to execute and
record with the U.S. Patent and Trademark Office a mortgage and conveyance of
patents, trademarks, licenses and other proprietary rights in favor of Lender as
provided herein. Lender hereby acknowledges that this grant of a
power-of-attorney is coupled with an interest and ratifies all that such
attorney shall lawfully do or cause to be done by virtue hereof. This power of
attorney shall be irrevocable until the Indebtedness secured hereby shall have
been paid in full and all financing arrangements between Borrower and Lender
with respect to the $50,000,000 Loan and the $30,000,000 Loan have been
terminated. Borrower acknowledges and
6
<PAGE>
agrees that the grant of this power of attorney is not intended to limit or
restrict in any way the rights and remedies of Lender under the other Loan
Documents, but rather is intended to facilitate the exercise of such rights and
remedies.
8. Forbearance Not a Waiver. No forbearance on the part of the Lender
to take action upon an Event of Default shall operate as a waiver of any other
Event of Default or of the same Event of Default on a future occasion.
9. Modification. This Security Agreement may not be modified or amended
except by a writing signed by both the Borrower and the Lender.
10. Patent Security Agreement. This Agreement is supplemental to the
Patent Security Agreement, and the Lender may exercise its rights under both
agreements collectively or under each agreement independent of the other.
11. Severability. A provision of this Security Agreement deemed invalid
or unenforceable under any applicable law shall not serve to invalidate the
remainder of this Security Agreement.
12. Construction. This Security Agreement and all rights and
obligations hereunder, including matters of construction, validity and
performance, shall be governed by the laws of the State of Connecticut.
13. Binding Effect. All rights of the Lender hereunder shall inure to
the benefit of its successors and assigns, and all obligations of the Borrower
shall bind its heirs, personal representatives, successors and assigns.
14. Headings. Headings are for convenience only and shall not be deemed
part of this Security Agreement.
15. Borrower Waivers. THE BORROWER ACKNOWLEDGES THAT THE TRANSACTION OF
WHICH THIS SECURITY AGREEMENT IS A PART IS A COMMERCIAL TRANSACTION AND MAKES
THE FOLLOWING WAIVERS:
A. THE BORROWER HEREBY WAIVES, TO THE FULLEST 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 LAWS.
B. THE BORROWER HEREBY WAIVES THE RIGHT TO A JURY TRIAL.
C. THE BORROWER HEREBY CONSENTS TO THE JURISDICTION OF ANY LOCAL,
STATE, OR FEDERAL COURT LOCATED
7
<PAGE>
WITHIN THE STATE OF FLORIDA OR CONNECTICUT AND 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 9.02 OF THE
LOAN AGREEMENT 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.
D. THE BORROWER HEREBY AGREES NOT TO COMMENCE ANY LEGAL
PROCEEDING AGAINST THE LENDER IN THE JURISDICTION OF ANY
LOCAL, STATE, OR FEDERAL COURT LOCATED WITHIN THE STATE OF
FLORIDA UNLESS THE LENDER EXPRESSLY CONSENTS THERETO IN
WRITING.
8
<PAGE>
IN WITNESS WHEREOF, the parties have signed and delivered this
agreement on the day and year first above written.
BORROWER:
KOS PHARMACEUTICALS, INC.
By: /s/ Daniel M. Bell
-------------------------------------------
Name: Daniel M. Bell
Title: President and Chief Executive Officer
LENDER:
/s/ Michael Jaharis
---------------------------
MICHAEL JAHARIS
9
<PAGE>
SCHEDULE A
DEBTOR/BORROWER: KOS PHARMACEUTICALS, INC.
SECURED PARTY/LENDER: MICHAEL JAHARIS
For purposes of this Security Agreement, the term "Collateral" shall mean all
right, title and interest in and to any and all tangible property (other than
real property), accounts, accounts receivable and contract rights, inventory,
equipment and machinery, trademarks, trade names and service marks, patents,
licenses, chattel paper, instruments, documents, letters of credit and general
intangibles, and whether now owned or hereafter acquired by the Borrower (to be
used interchangeably with the term "Debtor" as that term is defined or
understood under the Connecticut Uniform Commercial Code) wherever located, and
any additions and accessions thereto and replacements and renewals thereof, and
all proceeds of any of the foregoing, including, without limitation:
8. ACCOUNTS - All presently owned and hereafter acquired accounts,
accounts receivable, contract rights, bills, acceptances, and other
forms of obligations arising out of the sale, lease or consignment of
goods or the rendition of services by the Borrower; together with any
property evidencing or relating to the Accounts (such as guaranties,
credit insurance, Letters of Credit), any security for the Accounts,
all books and records relating thereto, and all Proceeds of any of the
foregoing, including returned or reclaimed inventory.
9. INVENTORY - All presently owned and hereafter acquired inventory of
every nature, kind, and description, wherever located, including,
without limitation, raw materials, goods, work in process, finished
goods, parts or supplies; all goods and property held for sale or lease
or to be furnished under contracts of service; and all goods and
inventory returned, reclaimed or repossessed, together with all
Proceeds of any of the foregoing.
10. EQUIPMENT - All presently owned and hereafter acquired equipment,
whether or not affixed to realty, including, without limitation,
trucks, trailers, motors, tools, dies, parts, jigs, goods, accessories,
handling and delivery equipment, fixtures, improvements, office
machines and furniture, together with all Proceeds of any of the
foregoing, and all accessions, accessories, replacements and the rights
of the Borrower under any manufacturer's warranties relating to the
foregoing.
11. CHATTEL PAPER - All presently owned and hereafter acquired chattel
paper, including, but not limited to, any writing or writings which
evidence both a monetary obligation and a security interest in or a
lease of specific goods, together with all Proceeds of any of the
foregoing.
5. INSTRUMENTS - All presently owned and hereafter acquired instruments,
including, without limitation, bills of exchange, notes, and all
negotiable instruments, all certificated securities, all certificates
of deposit and any other writing which evidences a right to the payment
of money and is not itself a security agreement or lease and is of a
type which is
10
<PAGE>
in the ordinary course of business transferred by delivery with any
necessary endorsement or assignment, together with all Proceeds of any
of the foregoing.
6. DOCUMENTS - All presently owned and hereafter acquired documents,
including, but not limited to, documents of title (as that term is
defined in the Uniform Commercial Code) and any and all receipts,
including, but not limited to, receipts of the kind described in
Article 7 of the Connecticut Uniform Commercial Code, together with all
Proceeds of any of the foregoing.
7. LETTERS OF CREDIT - All letters of credit under which Borrower is or
hereafter will be the customer or the beneficiary, including, but not
limited to, any written undertaking to pay money conditioned upon
presentation of specified documents, and advices of letters of credit,
together with all Proceeds of any of the foregoing.
8. GENERAL INTANGIBLES - All presently owned and hereafter acquired
general intangibles, including, without limitation, any personal
property, choses in action, causes of action, designs, plans, Goodwill,
tax refunds, Licenses, franchises, Patents, Trademarks, trade secrets,
know-how, rights of Borrower to and interests of Borrower in research
and development of the Borrower, copyrights, and customer lists, and
all rights under license agreements for use of the same, together with
all Proceeds of any of the foregoing.
9. PATENTS - All presently owned and hereafter acquired patents and patent
applications, including, without limitation, the inventions and
improvements described and claimed therein, those patents listed on
Schedule A-1 attached hereto and made a part hereof, and any and all
patents, patent applications and other rights and interests in and to
the Borrower's products Niaspan/registered mark/and
Nicostatin/registered mark/, and (a) the reissues, divisions,
continuations, renewals, extensions and continuations-in-part thereof,
(b) all income, royalties, damages and payments now and hereafter due
and/or payable under and with respect thereto, including, without
limitation, damages and payments for past or future infringements
thereof, (c) the right to sue for past, present and future
infringements thereof, and (d) all rights corresponding thereto
throughout the world.
10. TRADEMARKS - trademarks, service marks, trademark registrations,
service mark registrations, trade names and trademark registrations,
including, without limitation, the trademarks/service marks
Niaspan/registered mark/ and Nicostatin/registered mark/, and (a)
renewals or extensions, thereof, (b) all income, royalties, damages and
payments now and hereafter due and/or payable with respect thereto,
including, without limitation, damages and payments for past or future
infringements thereof, (c) the right to sue for past, present and
future infringements thereof, and (d) all rights corresponding thereto
throughout the world.
11. LICENSES - license agreements with any other party, whether Borrower is
a licensor or licensee under any such license agreement, and the right
to prepare for sale, sell and advertise for sale, all Inventory now or
hereafter owned by Borrower and now or hereafter covered by such
licenses.
11
<PAGE>
12. GOODWILL - the goodwill of Borrower's business connected with and
symbolized by the Trademarks.
13. PROCEEDS - All presently owned and hereafter acquired proceeds, as that
term is defined in the Connecticut Uniform Commercial Code, including,
without limitation, whatever is received upon the use, lease, sale,
exchange, collection, any other utilization or any disposition of any
of the Collateral described on this Schedule A, whether cash or
non-cash, all rental or lease payments, accounts, chattel paper,
instruments, documents, contract rights, general intangibles,
equipment, inventory, substitutions, additions, accessions,
replacements, products, and renewals of, for, or to such property and
all insurance therefor.
12
<PAGE>
SCHEDULE B
Exceptions to Title
1. Debt under Master Equipment Lease No. E119 dated April 15, 1998 with
Essex Capital, Inc. (assigned to Gramercy Leasing Services, Inc.)
2. Debt under Equipment Lease Agreement with Vendor Lease Management Group
for lease of 238 Mobile Pro 750C H/PC, S1424-04A03
3. $3,000,000 Letter of Credit Agreement dated July 17, 1999 with First
Union National Bank.
4. $30,000,000 Revolving Credit and Loan Agreement dated as of July 1,
1998 payable to Lender.
5. Leases with Copyco dated June 26, 1997, July 31, 1997, August 13, 1997,
September 30, 1997, December 10, 1997 and one undated lease for Toshiba
office equipment and LAN software equipment subsequently assigned to
AT&T Capital Leasing.
6. Leases with Copyco dated March 17, 1998, March 23, 1998 and March 24,
1998 for Toshiba office equipment subsequently assigned to AT&T Capital
Leasing.
7. Lease with Danka dated June 10, 1996 for Canon office equipment.
13
<PAGE>
SCHEDULE C
Additional Locations of Collateral
I. Facilities Leased by KOS Pharmaceuticals, Inc.
Location Facility Use
-------- ------------
1. 14875 N.W. 77 Avenue Offices for Research and
Miami Lakes, FL 33016 Development Admin.
2. 18 Mayfield Avenue Aerosol Research and
Campus Plaza 9 Development, Production,
Raritan Center and Admin. Offices
Edison, NJ 08837
3. 2 Oakwood Blvd. Research and Development
Suites 140 and 150 Production, and Admin.
Hollywood, FL 33020 Offices
4. 200 Oakwood Lane Research and Development
Suite 100 Production, and Admin.
Hollywood, FL 33020 Offices
II. Other Facilities Where Company Assets Are Held
1. DDN/Obergfel, LLC Storage, Distribution of
4580 Mendenhall Road Niaspan
Suite 101
Memphis, TN 38141
2. International Laboratories, Inc. Bulk Niaspan Tablets,
2350 31st Street South Finished Niaspan Bottles
St. Petersburg, FL 33712
3. J. Knipper and Company, Inc. Niaspan samples
150 Oberline Avenue South
Lakewood, NJ 08701
4. Packaging Coordinators, Inc. Raw materials, Packaging
3001 Red Lion Road Components, Bulk Niaspan
Philadelphia, PA 19114 Tablets
14
<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,
1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,302
<SECURITIES> 0
<RECEIVABLES> 3,844
<ALLOWANCES> (93)
<INVENTORY> 1,482
<CURRENT-ASSETS> 14,020
<PP&E> 17,954
<DEPRECIATION> (7,190)
<TOTAL-ASSETS> 24,801
<CURRENT-LIABILITIES> 15,052
<BONDS> 0
0
0
<COMMON> 179
<OTHER-SE> (43,200)
<TOTAL-LIABILITY-AND-EQUITY> 24,801
<SALES> 10,249
<TOTAL-REVENUES> 10,249
<CGS> 1,386
<TOTAL-COSTS> 20,807
<OTHER-EXPENSES> (8)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 926
<INCOME-PRETAX> (12,862)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,862)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,862)
<EPS-BASIC> (0.72)
<EPS-DILUTED> (0.72)
</TABLE>
