UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-22171
KOS PHARMACEUTICALS, INC.
(Exact Name of Company as Specified in Its Charter)
FLORIDA 65-0670898
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1001 BRICKELL BAY DRIVE, 25TH FLOOR, MIAMI, FLORIDA 33131
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(Address of Principal Executive Offices, Zip Code)
Company's Telephone Number, Including Area Code: (305) 577-3464
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __[X]__ No _____
Indicate by check mark if disclosures of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Kos Pharmaceuticals, Inc. Common Stock, $.01
par value, held by non-affiliates, computed by reference to the price at which
the stock was sold as of February 25, 2000: $150,318,771.
Number of shares of Common Stock of Kos Pharmaceuticals, Inc. issued and
outstanding as of February 25, 2000: 18,162,217.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for the Company's 2000 Annual Meeting of Shareholders
(incorporated in Part III to the extent provided in Items 10, 11, 12 and 13
hereof).
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TABLE OF CONTENTS
PART I PAGE
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Item 1. Business.......................................................... 1
Item 2. Properties........................................................12
Item 3. Legal Proceedings.................................................12
Item 4. Submission of Matters to a Vote of Securities Holders.............12
PART II
Item 5. Market for the Company's Common Stock and Related Shareholder
Matters...........................................................13
Item 6. Selected Consolidated Financial Data..............................14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................15
Forward-Looking Information: Certain Cautionary Statements........20
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........29
Item 8. Consolidated Financial Statements and Supplementary Data..........29
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.............................................50
PART III ..................................................................51
PART IV
Item 14. Exhibits, Financial Schedules and Reports on Form 8-K.............52
Signatures ..................................................................55
NIASPAN/registered mark/ and NICOSTATIN/trademark/ are trademarks of Kos
Pharmaceuticals, Inc. HEART ALLIANCE/service mark/ is a service mark of Kos
Pharmaceuticals, Inc.
MAVIK/registered mark/ and TARKA/registered mark/ are trademarks of Knoll
Pharmaceutical Company.
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PART I
ITEM 1. BUSINESS
Kos Pharmaceuticals, Inc. ("Kos" or the "Company") is a fully-integrated
specialty pharmaceutical company engaged in the development of proprietary
prescription products for the treatment of chronic cardiovascular and
respiratory diseases. The Company manufactures its lead product,
NIASPAN/registered mark/, and markets such product directly through its own
specialty sales force. Additionally, the Company markets two complementary
anti-hypertensive products, MAVIK/registered mark/ AND TARKA/registered mark/,
through a co-promotion alliance with Knoll Pharmaceutical Company. The Company's
cardiovascular products under development consist of controlled-release,
once-a-day, oral dosage formulations. The Company's respiratory products under
development consist of aerosolized inhalation formulations to be used primarily
with the Company's proprietary inhalation devices.
The Company believes that substantial market opportunities exist for
developing drugs that are reformulations of existing approved prescription
pharmaceutical products, but which offer certain safety advantages (such as
reduced harmful side effects) or patient compliance advantages (such as
once-a-day rather than multiple daily dosing regimens) over such currently
existing products. Kos believes that developing proprietary products based on
currently approved drugs, rather than new chemical entities ("NCEs"), may reduce
regulatory and development risks and, in addition, may facilitate the marketing
of such products because physicians are generally familiar with the safety and
efficacy of such products. All of the Company's products currently under
development require new drug application ("NDA") filings with the U.S. Food and
Drug Administration ("FDA"). Although such NDA filings are more expensive and
time consuming, developing products that require NDA approval offers several
advantages compared with generic products, including the potential for higher
gross margins, limited competition resulting from significant clinical and
formulation development challenges, and a three-year statutory barrier to
generic competition.
The principal elements of the Company's business strategy are as follows:
(i) select products with unrealized commercial potential where safety or patient
compliance may be improved; (ii) focus on the large, rapidly growing
cardiovascular and respiratory markets, which include many chronic diseases
requiring long-term therapy; (iii) develop proprietary formulations of currently
approved pharmaceutical compounds; (iv) manage internally the clinical
development of its products; (v) manufacture its products internally; (vi)
market its products directly through the Company's specialty sales force; and
(vii) leverage its core competencies through corporate and academic alliances.
The Company's predecessor, Kos Holdings, Inc. ("Holdings"), which was
previously named Kos Pharmaceuticals, Inc., was incorporated in Florida on July
1, 1988. On June 25, 1996, Kos (named for the Greek island where Hippocrates
founded the science of medicine) was incorporated in Florida as the successor to
the business of Holdings. On June 30, 1996, all of the assets (except for
certain net operating loss carry-forwards) and all of the liabilities of
Holdings were transferred to the Company in exchange for shares of Common Stock
of the Company (the "Reorganization"). The Reorganization was accomplished in
order to transfer the assets and operations of Holdings to the Company while
preserving Holdings' net operating loss carry-forwards and related tax benefits
for Holdings. As a result, the Company had no tax assets or liabilities as of
June 30, 1996. Kos Investments, Inc. ("Investments") is the sole shareholder of
Holdings. Investments is controlled by, and serves as an investment vehicle for,
Michael Jaharis, one of the Company's founders and its Chairman. All references
in this 10-K to the Company include its wholly owned subsidiaries, Aeropharm
Technology, Inc. ("Aeropharm"), IEP Pharmaceutical Devices, Inc. ("IEP"), and
the business and operations of Holdings until June 30, 1996. The Company's
principal executive offices are located at 1001 Brickell Bay Drive, 25th Floor,
Miami, Florida 33131, and its telephone number is (305) 577-3464.
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NIASPAN
On July 28, 1997, the Company received clearance from the FDA to market
NIASPAN for the treatment of mixed lipid disorders. NIASPAN is the only
once-a-day and the first extended-release formulation of any type of niacin
product ever approved by the FDA for the treatment of mixed lipid disorders. The
Company began shipping NIASPAN to wholesalers in mid-August 1997 and began
detailing NIASPAN to physicians during September 1997.
Niacin, the active ingredient in NIASPAN, is a water soluble vitamin long
recognized by the National Institutes of Health ("NIH") and the American Heart
Association ("AHA") as an effective pharmacological agent for the treatment of
multiple lipid disorders, including elevated low-density lipoprotein ("LDL") or
"bad" cholesterol, total cholesterol, and triglycerides and depressed
high-density lipoprotein ("HDL") or "good" cholesterol. Based principally on the
results of Kos clinical studies evaluating NIASPAN, as well as other long-term
interventional studies evaluating niacin for the reduction of coronary events,
NIASPAN is indicated for the following: (i) reduce elevated total cholesterol,
LDL cholesterol, and apolipoprotein B, and increase low HDL cholesterol; (ii)
reduce very high serum triglycerides; (iii) reduce elevated total and LDL
cholesterol when used in combination with a bile-acid binding resin; (iv) reduce
recurrent nonfatal myocardial infarction; and (v) promote the regression or slow
the progression of atherosclerosis when combined with bile-binding resins. In
addition, NIASPAN'S prescribing information references NIASPAN'S ability to
significantly reduce lipoprotein (a) ["Lp(a)"], which is an independent risk
factor for coronary heart disease ("CHD").
During the past five years, researchers have established through several
long-term clinical outcome studies that reducing LDL cholesterol results in
about a 30% reduction in nonfatal heart attacks and cardiac death. Such studies,
however, also have revealed that despite the significant reduction in LDL
cholesterol levels, about 70% of cardiac events were not avoided when compared
with placebo -- suggesting that there may be other lipid risk factors that
contribute to morbidity and mortality in such patients. Additionally, a landmark
long-term clinical outcome study known as the HDL Intervention Trial ("HIT"),
which was published in the August 5 issue of THE NEW ENGLAND JOURNAL OF
MEDICINE, showed that raising HDL cholesterol reduced significantly the
incidence of morbidity and mortality. Specifically, the HIT results showed that
even a 6% increase in HDL resulted in a 26% reduction in the incidence of
CHD-death and nonfatal heart attacks and a 26% reduction in stroke in patients
with CHD who had depressed levels of HDL, but normal levels of LDL and
triglycerides.
The results from HIT are consistent with conclusions from previous
epidemiological studies demonstrating that for each 1% increase in HDL
cholesterol, the risk of developing CHD decreases by 2% to 3%, whereas a 1%
decrease in LDL cholesterol results in only a 1% decrease in CHD risk.
Consequently, agents that further increase HDL cholesterol could potentially
improve the benefits with respect to morbidity and mortality. NIASPAN is the
most potent new drug on the market for raising HDL cholesterol.
NIASPAN's potency for raising HDL cholesterol was observed in a
double-blinded, well-controlled clinical study was conducted comparing the
effects of NIASPAN with gemfibrozil, the drug tested in the HIT study, in
patients having low HDL as their only lipid abnormality. The results from this
study showed that NIASPAN was twice as effective as gemfibrozil in raising HDL
cholesterol and four times more effective in raising LP-AI, a subfraction of HDL
that is thought to be cardio-protective. Additionally, NIASPAN significantly
reduced triglycerides and also lowered LDL cholesterol, while gemfibrozil
reduced triglycerides somewhat more than NIAPAN but significantly raised LDL
cholesterol by 9%. The Company believes that NIASPAN generates the optimal blend
of improving the major lipid components that contribute to coronary heart
disease.
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The Company markets NIASPAN directly to specialist physicians within the
cardiovascular market who specialize in treating patients with CHD and who are
among the leading prescribers of lipid-altering medications. Such
"lipid-management specialists," consist principally of cardiologists,
endocrinologists, and internists. Of the 14 million Americans who are estimated
by the AHA to have CHD, about 40% have low levels of HDL cholesterol as their
primary lipid abnormality. About 60% of patients with CHD have two or more lipid
disorders. The Company believes that patients with low HDL or multiple lipid
disorders would benefit from NIASPAN therapy. Many such patients are candidates
for combination therapy using principally an HMG-CoA reductase inhibitor, or
"statin," to reduce LDL combined with NIASPAN to raise HDL, lower triglycerides,
and enhance the statin's LDL efficacy. Since the launch of NIASPAN, Kos has
found that many lipid specialists are receptive to using combination therapy to
treat their refractory patients in order to address all of the lipids that may
contribute to a coronary event. More than 80% of the 10,000 cardiologists who
have been detailed on NIASPAN since its launch have begun to prescribe NIASPAN,
and more than 50,000 physicians have prescribed NIASPAN at least once.
As a result of the stronger NIASPAN adoption rate by cardiologists and
other specialist physicians, in 1999, Kos refined its physician calling list to
include twice as many cardiologists and it increased the number of
endocrinologists, internists and generalists who specialize in cardiology. In
total, the list consists of about 27,000 physicians who treat patients who have
had a coronary event such as a myocardial infarction or angina. Such physicians
are receptive to prescribing NIASPAN because of NIASPAN's effectiveness in
modulating other critical lipid fractions in addition to LDL -- such as HDL,
triglycerides, and Lp(a) -- which typically afflict patients with CHD.
In connection with the more focused physician calling list, Kos increased
the call frequency to this physician universe to about once a month. As a
result, the Company believes that physicians who may not have been frequently
detailed prior to 1999 will begin to understand the features and benefits of
NIASPAN and increasingly prescribe the product. An analysis of prescribing
patterns reveals that physicians typically require at least 12 calls before they
begin to adopt NIASPAN broadly in their practice. Consequently, Kos expects
prescribing activity from the newly refined physician list to show dividends in
2000 and beyond.
In addition to the improved call plan, the Company implemented several
other marketing initiatives that are expected to contribute to steady growth of
NIASPAN. Specifically, during the first half of 1999, Kos implemented its
innovative HEART ALLIANCE/trademark/ patient compliance program. The program is
designed to educate patients about the importance of managing cholesterol levels
through NIASPAN therapy and ultimately improve patient compliance. The program
has yielded strong results not only for improving patient persistency, but also
for increasing prescribing frequency among physicians participating in Heart
Alliance. For example, initial data from a sample from the greater than 13,000
patients enrolled during 1999, show that 82% of the patients were still taking
NIASPAN after six months. These data compare favorably with other published
reports of patient persistency for chronic use medications treating asymptomatic
diseases, such as lipid disorders. Additionally, physicians who participate in
Heart Alliance prescribe 64% more frequently than non-participating physicians.
Based on these promising initial results, Kos is expanding the program in 2000
with the objective of enrolling more than 25,000 patients by year-end 2000.
The Company also began employing a streamlined dosing regimen that includes
a 3-day sample pack to initiate NIASPAN therapy. Such samples, which do not
require a prescription, were approved by the FDA during the fourth quarter of
1999 and offer a simplified titration schedule. The improved regimen enables
patients to continue to take a one-tablet dose for one month as their first
prescription dose, followed by two tablets taken for the following month.
Previously, three-week NIASPAN sample
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titration starter packs were given to physicians as a promotional item to
start their patients on NIASPAN, which required patients to titrate across three
doses during a three-week period. In addition to be being simpler, the 3-day
sample pack yields a prescription sooner and costs 67% less than the previously
used 21-day sample pack.
In addition to promoting NIASPAN as the drug of choice to treat low HDL
cholesterol and multiple lipid disorders, the Company informs physicians as to
the manner in which NIASPAN achieves its safety and efficacy profile. This
marketing program is implemented through direct office visits with selected
physicians, medical journal reprints, medical seminars, and clinical discussion
groups. The Company also educates patients on the benefits and proper use of
NIASPAN through brochures and the product sample pack. Information delivered by
the Company to physicians and patients includes a discussion about the flushing
side effects of NIASPAN, including the importance of proper dose titration and
adherence to the prescribed dosing regimen to reduce this side effect. Although
most patients taking NIASPAN will flush occasionally, the Company believes that
the combination of NIASPAN'S formulation, its dosing regimen, and proper dose
titration should result in an incidence of flushing episodes that are tolerable
for most patients. NIASPAN'S dosing regimen provides for the drug to be taken
once-a-day at night; therefore, any flushing episodes will normally occur while
the patient is sleeping. The Company believes that flushing during the night
will not cause the discomfort or embarrassment that often accompanies the
multiple daytime flushing episodes that occur with immediate-release niacin.
CO-PROMOTION OF MAVIK/REGISTERED MARK/ AND TARKA/REGISTERED MARK/
In the second half of 1999, Kos entered into an alliance with Knoll
Pharmaceutical Company, the U.S. pharmaceutical unit of BASF Corporation, to
co-promote Mavik and Tarka, two anti-hypertensive drugs originally launched by
Knoll in 1996. The two products complement NIASPAN because of the high degree of
physician overlap that exists for prescribers of cholesterol and
anti-hypertensive medications. In this manner, Kos is able leverage its sales
force to generate incremental revenue from two additional products without
compromising the growth of NIASPAN.
Under the terms of the arrangement, Kos contributes essentially all of the
sales calls and a portion of the promotional spending, while receiving an
increasing percentage of revenue based on sales thresholds. The Company began
co-promoting Mavik and Tarka in September and recorded $2.7 million of
co-promotion revenue in 1999, which was accretive for the year. Since Kos began
promoting Knoll's anti-hypertensive products, market share for new prescriptions
has increased 13%, reversing a trend of steady market share declines immediately
prior to Kos involvement. For the remainder of the five-year term of the
co-promotion agreement, Kos expects increasing contributions to operating
results as sales for the products continue to grow. Kos and Knoll may elect to
continue the arrangement following completion of the term in mid-2004. The
patents for Mavik and Tarka expire in 2007 and 2012, respectively.
PRODUCTS UNDER DEVELOPMENT
Although the Company has obtained clearance from the FDA to market NIASPAN,
each of its other products under development is at an earlier stage of
development. The drug development and approval process takes many years and
requires the expenditure of substantial resources. There can be no assurance
that the Company will be able to successfully formulate any of its products
under development as planned, or that the Company will be successful in
demonstrating the safety and efficacy of such products under development in
human clinical trials. These trials may be costly and time-consuming. The
Company may not be able to obtain the regulatory approvals necessary to continue
testing or to market any or all of the Company's products under development.
Thus, there can be no assurances that any of the Company's products under
development will be developed and commercialized in a timely manner, or in
accordance with the Company's plans or projections, or at all. The Company may
determine to discontinue the development of any or all of its products under
development at any time.
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NICOSTATIN
In addition to NIASPAN, Kos is developing NICOSTATIN, a product that
consists of a combination of NIASPAN and a currently marketed statin; it will be
used to treat mixed lipid disorders. The NICOSTATIN product will require an NDA.
The Company believes that a once-a-night tablet with the combined complementary
properties of its NIASPAN product and a statin represents an effective modality
for treating patients with mixed lipid disorders. The Company also believes that
such a once-a-night product should offer significant improvement in patient
compliance compared with taking each product independently under its recommended
dosing regimen. The target market for the NICOSTATIN product consists of
patients with mixed lipid disorders, including high total and LDL cholesterol
with high triglycerides or low HDL cholesterol or both. As of March 1, 2000, the
Company completed dosing for all patients enrolled in an open label safety study
and two pivotal dosing studies. Additionally, Kos had completed 5 out of 6
bioavailability studies that are required for the NDA submission for Nicostatin.
The Company plans to complete the one remaining bioavailability study and begin
preparing the NDA for NICOSTATIN during the first half 2000. Kos intends to file
the NDA for NICOSTATIN during the second half of 2000.
Initial results from the open label safety study reveal that NICOSTATIN was
well tolerated in patients with dyslipidemia and no cases of serious liver
enzyme elevations or myopathy were observed in over 800 patients dosed on the
drug. Additionally, for patients on therapy for 16 weeks, NICOSTATIN reduced, on
average, LDL cholesterol 47%, decreased triglycerides 42% and increased HDL
cholesterol 30%. Additional data for patients on therapy for one year will be
presented in March 2000 at the American College of Cardiology meeting in
Anaheim, California. The Company expects the one-year data to reveal similar
safety and efficacy results. The Company intends to submit several scientific
papers covering these and other data generated from its NICOSTATIN clinical
development program for publication before or around the time NICOSTATIN is
launched.
ISOSORBIDE-5-MONONITRATE
Kos, in collaboration with Fuisz Technologies, Ltd., which was subsequently
acquired by Bioavail Corporation International, has developed a once-a-day,
controlled-release, oral, generic version of isosorbide-5-mononitrate
("IS-5-MN") for the prophylactic treatment of angina pectoris. During the first
half of 1998, the Company submitted an abbreviated new drug application ("ANDA")
to the FDA, which has not yet been approved. Because of the entry of several
approved generic equivalents of IS-5-MN, the market opportunity for the
Company's IS-5-MN is significantly reduced and does not support selling the
product through the Kos sales force. The Company is currently evaluating
alternatives for commercializing this product, which may include licensing the
product through generic distribution channels.
SOLID-DOSE DRUG DELIVERY SYSTEMS
During 1999, the Company conducted research on novel solid-dose drug
delivery systems. Utilizing the Company's considerable knowledge obtained from
formulating both NIASPAN and NICOSTATIN, Kos made progress in developing three
innovative solid-dose delivery systems that could be used to formulate a variety
of compounds. Kos is currently negotiating to obtain the intellectual property
rights to this technology. If obtained, such delivery systems, for which
licenses to the patents are currently being negotiated, will enable Kos to
formulate both insoluble and soluble compounds for Kos to develop and market or
for other parties on a collaborative basis. The Company intends to further
refine the solid-dose platforms through formulating several candidate drugs
during 2000.
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TRIAMCINOLONE AND BUDESONIDE
Kos is developing a proprietary non-CFC, or environmentally friendly,
formulation of triamcinolone to be used with the Company's proprietary breath
coordinated inhaler ("BCI"). Triamcinolone is a corticosteroid that is used to
treat the underlying inflammation of asthma. This product will require the
submission of an NDA. The Company believes that its BCI may improve the
coordination of inhalation with actuation of medication, thereby offering
possible benefits in patient compliance and uniform dose administration. During
1999, the Company continued to accumulate stability data and intends to begin a
clinical development of the product upon the establishment of a suitable
development partner.
Kos is also developing a non-CFC formulation of budesonide to be used with
one of its two proprietary inhalation devices. Budesonide is a long-acting
inhaled steroid for the treatment of asthma. The Kos formulation of budesonide,
for which an NDA is required, is currently in development. The Company has
decided to pursue the development of budesonide because of its potency and
because of favorable market conditions. During 1999, Kos completed formulation
development of budesonide and commenced a long-term stability program. Kos
intends to complete the development of budesonide through a strategic alliance
with a development partner.
PROTEINS AND PEPTIDES
Leveraging its unique expertise in the area of pressurized metered-dose
inhalation ("MDI") devices, Kos has began a protein/peptide formulation
development program during 1999. The program consists of formulating several
unnamed proteins and delivering such compounds within Kos proprietary,
innovative MDI's. The Company expects to generate IN VITRO and IN VIVO
pre-clinical data demonstrating the performance and efficacy of delivering such
proteins via the lung through Kos MDI's. The Company expects to attract
development partners skilled in developing biotherapeutic compounds to complete
the clinical development of the products for certain diseases. The Company also
intends to offer to formulate other peptides for other partners on a contract
basis.
METERED-DOSE INHALATION DEVICES AND OTHER DEVICE PRODUCTS
Another of the Company's proprietary MDI devices, a breath actuated inhaler
("BAI"), operates automatically and is being developed principally to address
the difficulties often faced by children and the elderly in taking inhaled
medication. The Company also is developing a proprietary inhalation dose counter
designed to indicate when sufficient doses no longer remain in the aerosol
canister, thereby alerting the patient to obtain a refill prescription. At
present, the Company intends to use the inhalation dose counter on all of its
proprietary inhalation devices.
IEP PHARMACEUTICAL DEVICES, INC.
In November 1999, Kos acquired substantially all of the assets and
intellectual property of IEP Group, Inc. (the "IEP Acquisition") for total
consideration of $1.1 million. In connection with this transaction, the Company
established IEP Pharmaceutical Devices, Inc. ("IEP") as a wholly-owned
subsidiary of Aeropharm and contributed to IEP all of the assets obtained
through the IEP Acquisition. IEP is a provider of device engineering and
consultation services, principally for the medical device and pharmaceutical
industries. Prior to this acquisition, IEP Group, Inc. had contributed to the
development of several of Kos MDI devices. Kos completed the IEP acquisition to
solidify its position as a full-scale aerosol development source -- with
expertise in device engineering, development and device manufacturing. Kos
expects to leverage this full range of capabilities to establish future
licensing, contract development, or joint-venture opportunities.
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LICENSING AND OTHER ACTIVITIES
The Company is aggressively pursuing collaborative opportunities, including
acquiring or licensing the use of selected products and technologies from third
parties ("in-licensing"); product co-marketing arrangements; joint ventures; and
other strategic alliances. Many existing pharmaceutical products or products
currently under development, may be suitable candidates for specialty
promotional or co-marketing campaigns. Accordingly, Kos intends to attempt to
identify licensing, co-marketing and product acquisition opportunities that can
complement the Company's future product portfolio. In situations where
third-party drug delivery technologies are complementary to the Company's drug
development formulation capabilities, the Company may pursue licensing rights
for such technology.
The Company is also pursuing strategic alliances to license certain of its
products and technologies to third parties ("out-licensing"). Specifically, the
Company is seeking a suitable co-promotion partner for NIASPAN in the United
States and one or more licensees to market NIASPAN for international markets.
The Company is also willing to establish one or more corporate alliances to
co-promote NICOSTATIN for the U.S. and international markets. Lastly, Kos
currently intends to establish strategic alliances with corporate partners with
respect to its respiratory products. There can be no assurance, however, that
any of the collaborative opportunities can be established on terms acceptable to
the Company or at all. Further, the Company's inability to enter into any
strategic alliance or other collaborative opportunity may have a material
adverse effect on the Company's financial position.
PATENTS AND PROPRIETARY RIGHTS
The Company actively seeks, when appropriate and available, protection for
its products and proprietary information by means of United States and foreign
patents, trademarks, trade secrets and contractual arrangements. Patent
protection in the pharmaceutical field, however, can involve complex legal and
factual issues. Moreover, broad patent protection for new formulations or new
methods of use of existing chemical entities is sometimes difficult to obtain
and often of limited usefulness, primarily because the active ingredient and
many of the formulation techniques have been known for some time. Consequently,
some patents claiming new formulations or new methods of use for old drugs may
not provide meaningful protection against competition. Nevertheless, the Company
intends to seek patent protection when appropriate and available and otherwise
to rely on regulatory-related exclusivity and trade secrets to protect certain
of its products, technologies and other scientific information. There can be no
assurance, however, that any steps taken to protect such proprietary information
will be effective.
The Company has a patent application pending in the U.S. Patent and
Trademark Office ("PTO") with claims covering NIASPAN's method of use consistent
with its recommended once-a-day dosing regimen. The Company has been notified by
the PTO that certain of these claims have been allowed, but none of the claims
have yet been issued as a patent. The Company has paid the issue fees for those
claims that have been allowed and now awaits to receive from the PTO the
assigned patent numbers and dates on which the patents for those allowed claims
will issue. The patent examiner has also indicated that it may submit certain
claims to the PTO's Board of Interference to determine whether it should declare
an interference between such Kos application and a method-of-use patent issued
to a privately owned generic manufacturer allegedly claiming the same dosing
regimen invention.
On February 7, 1997, the Company and such generic manufacturer entered into
an agreement pursuant to which the parties agreed to resolve, as between
themselves, the effects of such potential interference by granting each other
licenses under their respective patent application and patent, regardless of
whether such licenses would be required. Accordingly, under the agreement, the
generic manufacturer granted the Company a license to sell products under the
generic manufacturer's above referenced patent, under a formulation patent owned
by such generic manufacturer, and under corresponding foreign patents owned by
such generic manufacturer, and the Company granted the generic manufacturer the
right to sell such
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generic manufacturer's products that are covered by the claims in the Company's
patent application and corresponding foreign applications owned by the Company.
As consideration for entering into the agreement, the Company agreed to pay the
generic manufacturer certain license fees and royalties on the net sales of
NIASPAN subject to a cap on such royalty payments in the United States and a
separate cap on such payments outside the United States. Neither the license
fees nor the royalty payments are material to the financial condition of the
Company. The Company may sublicense its rights under the agreement to third
parties to make, use, or sell products developed by or for the Company. The
generic manufacturer may not sublicense or transfer the license granted to it by
the Company, although the generic manufacturer may sublicense to third parties
the right to supply to the generic manufacturer or market with or on behalf of
the generic manufacturer, products that are covered by the generic
manufacturer's patents but which are not covered by the Company's patent
application. The Company may terminate the agreement after February 7, 2001.
Various inhalation devices, technologies, and methods of use licensed from,
or assigned to Kos by, researchers and engineers engaged in development projects
or sponsored research on behalf of Kos are the subject of issued or allowed U.S.
patents, as well as various foreign patents or patent applications. In addition,
patent applications on certain of the Company's products under development or
relating to certain sponsored research activities are pending at the PTO.
There can be no assurance that the patents owned and licensed by the
Company, or any future patents, will prevent other companies from developing
similar or therapeutically equivalent products or that others will not be issued
patents that may prevent the sale of Company products or require licensing and
the payment of significant fees or royalties by the Company. Furthermore, there
can be no assurance that any of the Company's future products or methods will be
patentable, that such products or methods will not infringe upon the patents of
third parties, or that the Company's patents or future patents will give the
Company an exclusive position in the subject matter claimed by those patents.
The Company is aware that certain European and U.S. patents have been
issued with claims covering products that contain certain propellant-driven
aerosol formulations. The European patents are currently subject to an
opposition proceeding in Europe, and certain claims in such patents have been
held invalid in the United Kingdom. In the event that the Company develops
aerosol products that use a formulation covered by such European or U.S.
patents, the Company may be prevented from making, using or selling such
products unless the Company obtains a license under such patents, which license
may not be available on commercially reasonable terms, or at all, or unless such
patents are determined to be invalid or unenforceable in Europe or the United
States, respectively. The Company's development of products that are covered by
such patents and its failure to obtain licenses under such patents in the event
such patents are determined to be valid and enforceable could have an adverse
effect on the Company's business.
NIASPAN and "Kos" are the Company's principal registered trademarks,
although other applications for registration of trademarks and service marks are
currently pending in the PTO and additional applications are in the process of
being filed.
8
<PAGE>
MARKETING
Kos intends to market its branded proprietary products through its own
specialty sales force. A fundamental element of the Company's product selection
strategy is to focus on products where a relatively concentrated group of
specialist physicians account for a significant portion of the prescriptions for
the therapeutic indication addressed by the Company's products. The Company
believes that such specialist physicians will be the most receptive to the
patient compliance, safety, or other therapeutic advantages that the Company's
products will seek to offer. Accordingly, the Company believes that significant
market gains can be achieved with such products through the use of a relatively
small, well-trained sales force concentrating its detailing efforts on informing
such specialist physicians about the scientific basis for the therapeutic
advantages of the Company's products.
As of February 11, 2000, the Company had a 242-person sales and marketing
organization, including in excess of 200 field sales personnel. The majority of
the sales and marketing personnel have considerable previous experience with
major pharmaceutical companies detailing products to cardiovascular physicians.
Kos began actively detailing NIASPAN during September 1997. During 1999, Kos
streamlined its sales force to increase the focus on high opportunity
territories. Additionally, the Company improved its field force management's
span of control. The Company intends to leverage its sales force by marketing
its future cardiovascular products, if and as they are approved, along with
Mavik and Tarka through the co-promotion with Knoll.
MANUFACTURING
In order to maximize the quality of developed products, assure compliance
with regulatory requirements, and minimize costs, the Company intends to
manufacture all of its Kos-developed products internally. The Company currently
produces NIASPAN at its Hollywood, Florida facility. The Company's Edison, New
Jersey, facility will be used to produce NICOSTATIN and is currently configured,
and largely equipped, to manufacture both solid-dose and aerosol inhalation
products. Although the Company believes that its Edison facility currently
operates using current good manufacturing practices as required by the FDA for
the manufacture of product to be used in clinical trials, the facility requires
inspection and approval by the FDA before the commercial sale of product
manufactured at Edison can commence. This approval for the Edison, New Jersey
site is expected in 2000. The Company believes that it has sufficient capacity,
with limited additional capital outlays, to accommodate sales volume for both
solid-dose and aerosol products for the foreseeable future.
The Company intends to continue to contract the packaging of its solid-dose
and anticipated aerosol products to third parties. The Company may begin
in-house packaging operations once product sales volumes justify the capital
expenditures required to establish such capabilities. Certain of the Company's
raw materials, including the active ingredients in NIASPAN and NICOSTATIN, are
currently obtained from single sources of supply. The Company does not have a
contractual supply arrangement with the sole supplier of the active ingredient
in Niaspan. The Company intends, to the extent possible, to identify multiple
sources for all of its key raw materials, including the active ingredient in
NIASPAN, although an alternate source for at least one such material will not be
available because of the supplier's patent rights.
In 1999, Kos steadily improved its efficiency in manufacturing NIASPAN.
Specifically, gross margins increased six percentage points, reaching 85% of net
sales by year-end 1999. The Company expects additional improvements in gross
margins for NIASPAN as sales volumes increase and more efficient higher yielding
manufacturing equipment becomes operational.
9
<PAGE>
COMPETITION
The Company's product competes with currently existing or future
prescription pharmaceuticals and vitamins in the United States, Europe and
elsewhere. The Company estimates that its existing NIASPAN prescriptions account
for less than 1.5% of the total prescriptions currently being written in the
United States for cholesterol-lowering pharmaceutical compounds. Competition
among these products is based on, among other things, efficacy, safety,
reliability, availability, price and patent position. In addition, academic
institutions, government agencies and other public and private organizations
conducting research may seek patent protection, discover new drugs or establish
collaborative arrangements for drug research. Most of the Company's competitors
have substantially greater financial, technical and human resources than the
Company, including combined field sales forces exceeding 12,000 representatives
compared with the Company's 200-person field sales force and may be better
equipped to develop, manufacture and market products.
The Company's cardiovascular and respiratory products, when developed and
marketed, will compete in most cases with well established products containing
the same active ingredient already being marketed by medium-sized and large
pharmaceutical companies in the United States. For example, the Company's
triamcinolone and budesonide formulations, if successfully commercialized, each
will compete with another triamcinolone and budesonide product, respectively,
already being marketed in the United States by much larger companies.
Moreover, there are numerous manufacturers of niacin preparations indicated
for use as vitamin supplements or, in immediate-release form, for treatment of
hyperlipidemia. The Company believes that a generic manufacturer has performed
at least one early-stage clinical study using niacin as a once-a-day treatment
for lipid-altering, and such manufacturer may be pursuing an NDA for such
product. Further, the Company's NIASPAN product will compete with many existing
lipid-altering medications, which currently account for more than 90% of the
lipid-altering market.
GOVERNMENT REGULATION
The development, manufacture and potential sales of prescription
pharmaceutical products are subject to extensive regulation by U.S. and foreign
governmental authorities. In particular, pharmaceutical products are subject to
rigorous pre-clinical and clinical testing and to other approval and
post-approval requirements by the FDA in the United States under the Federal
Food, Drug and Cosmetic Act and the Public Health Service Act and by comparable
agencies in most foreign countries. The FDA regulates all aspects of a product's
testing, labeling, promotion, and manufacture, and can impose substantial
restrictions on these activities before or after approval of such product.
Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of commercial sales of the product in such countries. The
requirements governing the conduct of clinical trials and product approvals vary
widely from country to country, and the time required for approval may be longer
or shorter than that required for FDA approval. Although there are some
procedures for unified filing for certain European countries, in general, each
country at this time has its own procedures and requirements. Further, the FDA
regulates the export of products produced in the United States and may prohibit
their export even if such products are approved for sale in other countries.
The Company's research and development involves the controlled use of
hazardous materials, chemicals, and various radioactive compounds. Although the
Company believes that its procedures for handling and disposing of those
materials comply with state and federal regulations, the risk of contamination
or injury from these materials cannot be eliminated. In the event of such
contamination or injury, the Company could be held liable for resulting damages,
which could be material to the Company's
10
<PAGE>
business, financial condition and results of operations. The Company is also
subject to numerous environmental, health and workplace safety laws and
regulations, including those governing laboratory procedures, exposure to
blood-borne pathogens, and the handling of biohazardous materials. Additional
federal, state and local laws and regulations affecting the Company may be
adopted in the future. Any violation of, and the cost of compliance with, these
laws and regulations could materially and adversely affect the Company.
Completing the multitude of steps necessary prior to the commencement of
marketing requires the expenditure of considerable resources and a lengthy
period of time. There can be no assurance of approval within any particular
period, if ever; or if approval is granted, of continued approval thereafter.
Delay or failure in obtaining, or the withdrawal of, the required approvals,
clearances, permits or inclusions by the Company or its future corporate
partners or licensees, if any, would have a material adverse effect on the
ability of the Company to generate sales or royalty revenue. Further, the
passage and implementation of new or changed laws or regulations or the
potential impact on the Company of such actions cannot be anticipated.
EMPLOYEES
As of February 11, 2000, the Company had 425 full-time employees. No
employee is represented by a union. The Company believes its employee relations
are good. The Company also regularly employs the services of outside consultants
with respect to regulatory, scientific, and certain administrative and
commercial matters. The Company expects to continue to require the services of
such outside consultants.
11
<PAGE>
ITEM 2. PROPERTIES
The Company leased the following properties as of December 31, 1999:
<TABLE>
<CAPTION>
LEASE EXPIRATION MINIMUM
(INCLUDING RENEWAL ANNUAL
LOCATION USE SQUARE FEET OPTIONS) RENT
-------- --- ----------- -------- ----
<S> <C> <C> <C> <C>
Miami, FL Corporate offices 15,000 December 2000 $336,000
Miami Lakes, FL Research and admin. offices 13,000 December 2000 246,000
Hollywood, FL Manufacturing, research and
admin. offices 23,500 November 2002 302,000
Edison, NJ Manufacturing, research, and
admin. offices 32,500 October 2003 193,000
Raleigh, NC Engineering offices 6,000 August 2002 47,000
</TABLE>
The Company believes that its existing facilities are adequate to meet its
current needs and that there is sufficient additional space at or in close
proximity to its present facilities to accommodate its near-term requirements.
ITEM 3. LEGAL PROCEEDINGS
On August 5, 1998, a purported class action lawsuit was filed in the United
States District Court for the Northern District of Illinois, Eastern Division,
against the Company, the members of the Company's Board of Directors, certain
officers of the Company, and the underwriters of the Company's October 1997
offering of shares of Common Stock. In its complaint, the plaintiff asserts, on
behalf of itself and a putative class of purchasers of the Company's Common
Stock during the period from July 29, 1997, through November 13, 1997, claims
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 relate
principally to certain statements made by the Company, or certain of its
representatives, concerning the efficacy, safety, sales volume and commercial
viability of the Company's NIASPAN product. The complaint 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. The outcome of the
litigation cannot yet be determined. Accordingly, no provision for any liability
that may result from these matters has been recognized in the accompanying
consolidated financial statements. There can be no assurance, however, that the
outcome of this litigation will not have a material adverse effect on the
Company's business, results of operations, and financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 1999.
12
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS.
The Company's Common Stock, par value $.01 per share, commenced trading on
March 7, 1997, on the Nasdaq National Market under the symbol "KOSP". As of
March 1, 2000, there were 401 registered shareholders of record of the Company's
Common Stock.
The following table sets forth, for the fiscal periods indicated, the range
of high and low prices for trades of the Company's Common Stock on the Nasdaq
National Market System.
YEAR ENDED DECEMBER 31, 1999 HIGH LOW
------------- -------------
First Quarter..................................... $ 7.00 $ 4.00
Second Quarter.................................... 5.75 4.13
Third Quarter..................................... 7.75 4.38
Fourth Quarter.................................... 6.38 4.38
YEAR ENDED DECEMBER 31, 1998
First Quarter..................................... $15.56 $7.50
Second Quarter.................................... 13.94 8.38
Third Quarter..................................... 12.69 4.31
Fourth Quarter.................................... 8.00 3.50
The Company has not declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain future earnings, if
any, to fund the development and growth of its business and does not intend to
pay dividends on its Common Stock in the foreseeable future.
13
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following consolidated selected financial data of the Company for the
five years ended December 31, 1999, should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes thereto.
See "Item 8. Consolidated Financial Statements and Supplementary Data".
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS:
<S> <C> <C> <C> <C> <C>
Revenues, net............................................ $ 36,340 $ 13,038 $ 2,892 $ - $ 3
Cost of sales............................................ 5,406 3,276 792 - -
----------- ----------- ----------- ----------- ------------
30,934 9,762 2,100 - 3
----------- ----------- ----------- ----------- ------------
OPERATING EXPENSES:
Research and development.............................. 25,619 29,144 24,130 13,679 11,681
Selling, general and administrative................... 56,843 61,519 20,509 2,881 1,655
Expense recognized on modification of stock
option grants(1)................................. - - - 5,436 -
----------- ----------- ----------- ----------- ------------
Total operating expenses.......................... 82,462 90,663 44,639 21,996 13,336
----------- ----------- ----------- ----------- ------------
Loss from operations..................................... (51,528) (80,901) (42,539) (21,996) (13,333)
Other:
Interest income, net.................................. 169 1,793 2,787 11 6
Interest expense-related parties...................... (3,207) (68) (868) (136) -
Other income (expense)................................ 14 15 (10) - -
----------- ----------- ----------- ----------- ------------
Loss before minority interest....................... (54,552) (79,161) (40,630) (22,121) (13,327)
Minority interest(2)..................................... - - - 15 4
----------- ----------- ----------- ----------- ------------
Net loss............................................ $ (54,552) $ (79,161) $ (40,630) $ (22,106) $ (13,323)
=========== =========== =========== =========== ============
Net loss per share, basic and diluted(3)................. $ (3.06) $ (4.50) $ (2.79) $ (1.95) $ (1.17)
Weighted average common shares in computing
net loss per share(3)................................ 17,842,879 17,589,767 14,569,474 11,340,000 11,340,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ------------
(IN THOUSANDS)
BALANCE SHEET:
<S> <C> <C> <C> <C> <C>
Cash and marketable securities........................... $ 4,336 $ 4,879 $ 70,396 $ 358 $ 229
Working capital (deficit)................................. (2,354) (3,136) 70,939 (9,355) (445)
Total assets............................................. 26,258 21,570 84,403 3,197 2,380
Total long-term debt...................................... 62,089 9,239 - 8,355 -
Accumulated deficit(4).................................... (239,666) (185,114) (105,952) (65,322) (43,217)
Shareholders' equity (deficit)(5)......................... (53,195) (338) 77,870 (6,750) 1,390
</TABLE>
- ----------
(1) Reflects a non-cash charge associated with an extension of the exercise
period for stock options granted during 1988 to 1990 to the Company's Chief
Executive Officer and two independent consultants; no other material
economic terms of these options were changed.
(2) Represents the minority shareholder's interest in Aeropharm Technology,
Inc., which interest was acquired by the Company in June 1996.
(3) See Note 2. of Notes to Consolidated Financial Statements for information
concerning the computation of net loss per share.
(4) In connection with the transfer on June 30, 1996, of assets and liabilities
from Kos Holdings, Inc. to the Company, net operating loss carryforwards
amounting to approximately $51.0 million and related tax benefits, were not
transferred to the Company. The Company can only utilize net operating loss
carryforwards sustained subsequent to June 30, 1996 (amounting to $190.7
million as of December 31, 1999), to offset future taxable income, if any.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
(5) In March 1995, Kos Investments, Inc. assumed repayment of a note payable to
a bank in the principal amount of $30,372,000. This assumption was
accounted for as a transfer to Kos Investments, Inc. and as an increase in
additional paid-in capital for the Company.
14
<PAGE>
ITEM 7. 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 Technology, Inc. ("Aeropharm"), a then
majority-owned subsidiary of the Company, was formed to conduct research and
development activities on aerosolized products for the treatment of respiratory
diseases. During June 1996, this predecessor corporation acquired the
outstanding minority interest in Aeropharm; changed its name to Kos Holdings,
Inc. ("Holdings"); established the Company as a wholly-owned subsidiary under
the name of Kos Pharmaceuticals, Inc.; and, effective as of June 30, 1996,
transferred all of its existing assets, liabilities and intellectual property,
other than certain net operating loss carryforwards, to the Company.
Accordingly, all references in this 10-K 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 ("IPO")
of its Common Stock. Through December 31, 1999, the Company had accumulated a
deficit from operations of approximately $239.7 million. In connection with the
transfer of operations from Holdings to the Company on June 30, 1996, net
operating loss carryforwards amounting to approximately $51.0 million and
related tax benefits were retained by Holdings and not transferred to the
Company. Consequently, the Company may utilize net operating losses sustained
subsequent to June 30, 1996, amounting to approximately $190.7 million as of
December 31, 1999, to offset future taxable net income, if any.
From inception through its June 30, 1997, reporting period, the Company was
a development stage company engaged primarily in the development of
cardiovascular and respiratory pharmaceutical products. On July 28, 1997, the
Company was granted clearance by the FDA to market its lead product, NIASPAN.
The Company began shipping NIASPAN to wholesalers in mid-August 1997 and began
detailing NIASPAN to physicians in September 1997. The Company's Board of
Directors changed the end of the Company's fiscal year from June 30 to December
31 effective with its December 31, 1997, reporting period. Fiscal years
presented and referred to in the Company's consolidated financial statements,
along with all other financial data, have been restated to conform with a
December 31 fiscal year basis.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
The Company's revenue increased to $36.3 million for the year ended
December 31, 1999, from $13.0 million for the year ended December 31, 1998. This
increase was attributable to a growth of $20.6 million in net sales of the
Company's NIASPAN product and to $2.7 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 and TARKA products within the United States (the
"Knoll Agreement"). Under the terms of the Knoll Agreement, the Company receives
an increasing percentage of revenue based on sales thresholds.
15
<PAGE>
During the fourth quarter of 1999, certain of the Company's customers
purchased abnormally high levels of the Company's NIASPAN product. The Company
believes that this higher than expected NIASPAN demand was primarily due to
these customers protecting themselves against complications associated with year
2000 date change issues. As a result, at December 31, 1999, the amount of the
Company's NIASPAN product being warehoused by these customers increased above
normal levels. The Company has deferred the recognition of $2.8 million in
revenues and related expenses associated with these sales until the first
quarter of 2000, when the level of the Company's NIASPAN product warehoused by
these customers is expected to return to normal levels.
Cost of sales was $5.4 million and $3.3 million for the year ended December
31, 1999 and 1998, respectively. The higher cost of sales in 1999 was
attributable to higher sales of the NIASPAN product during the period, partially
offset by efficiencies attained in the production of NIASPAN.
The Company's research and development expenses decreased to $25.6 million
for the year ended December 31, 1999, from $29.1 million for the year ended
December 31, 1998. The reduced expenses related primarily to decreases of $2.5
million in formulation development costs of the Company's NICOSTATIN product and
other products under development, of $2.1 million in medical education programs
in support of the NIASPAN product, and of $1.1 million in development costs paid
to other parties. These decreases were partially offset by increases of $2.3
million in the costs of clinical trials principally associated with the
Company's NICOSTATIN product.
Selling, general and administrative expenses decreased to $56.8 million for
the year ended December 31, 1999, from $61.5 million for the year ended December
31, 1998. Selling expenses decreased $5.7 million, primarily as a result of a
$7.8-million reduction in marketing program costs and other costs associated
with the NIASPAN product; the reduction principally reflects the absence of
launch expenses incurred in 1998. This reduction was partially offset by $2.0
million in MAVIK and TARKA marketing expenses, and by an increase of $0.3
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 to $11.5
million for the 1999 period, from $10.5 million during the preceding period,
primarily as a result of an increase of $1.2 million in royalty expenses
associated with the increase in net sales of the NIASPAN product.
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. During 1998, the remaining net proceeds from these
offerings, along with other cash balances, were invested primarily in U.S.
Treasury and highly-rated corporate debt securities. The Company recorded $1.8
million of interest income for the year ended December 31, 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 and $9
million as of December 31, 1999 and 1998, respectively, and bear interest at the
prime rate (8.5% as of December 31, 1999). On December 21, 1999, Mr. Jaharis
agreed to modify the terms of the Credit Facility by extending its due date from
December 31, 2000 to December 31, 2002.
16
<PAGE>
On September 1, 1999, the Company formally agreed to the terms of an
additional $50 million funding arrangement initially committed to by Mr. Jaharis
on October 7, 1998 (the "Supplemental Credit Facility"). Borrowings under the
Supplemental Credit Facility totaled $32 million as of December 31, 1999, bear
interest at the prime rate, 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 $3.2 million and $68,000 for the years ended December 31, 1999 and 1998,
respectively.
The Company incurred a net loss of $54.6 million for the year ended
December 31, 1999, compared with a net loss of $79.2 million for the year ended
December 31, 1998.
YEARS ENDED DECEMBER 31, 1998 AND 1997
The Company's revenue increased to $13.0 million for the year ended
December 31, 1998, from $2.9 million for the year ended December 31, 1997. The
Company began sales of its NIASPAN product to wholesalers during August 1997.
Cost of sales was $3.3 million and $0.8 million for the years ended December 31,
1998 and 1997, respectively. The higher cost of sales in 1998 was attributable
to higher sales of the NIASPAN product during the period.
The Company's research and development expenses increased to $29.1 million
for the year ended December 31, 1998, from $24.1 million for the same period in
1997. The change related primarily to increases of $5.4 million during the 1998
period in connection with formulation development of the Company's NICOSTATIN
product and other products under development, $4.6 million in medical education
programs in support of NIASPAN, and $2.1 million in personnel and
personnel related costs in support of the Company's expanded research and
development activities. These increases in research and development expenses
were partially offset by a $1 million fee received by the Company in 1998
related to the exchange of certain technology rights with another unaffiliated
company. The 1998 increases were also partially offset by the absence of a $3
million charge attributable to entering into an agreement, in February 1997,
with an unaffiliated generic drug manufacturer to resolve, as between
themselves, the effects of a potential patent interference proceeding, of $1.7
million of licensing fees associated with obtaining access to certain aerosol
safety and toxicology data, and of $1.2 million of development costs paid to
third parties in 1997.
Selling, general and administrative expenses increased to $61.5 million for
the year ended December 31, 1998, from $20.5 million for the year ended December
31, 1997. Selling expenses increased $36.0 million as a result of the continued
expansion of the Company's sales and marketing organization and the initiation
of a variety of marketing programs in connection with the NIASPAN product.
General and administrative costs also increased during the 1998 period, mostly
as a result of increases of $2.2 million in personnel and personnel related
costs, $0.6 million in royalty expenses for the Company's NIASPAN product, and
other expenses associated with the expanded activities of the Company.
17
<PAGE>
From July 1, 1996, to the completion of its IPO on March 12, 1997, the
Company funded its operations from the proceeds of a loan from Kos Investments,
Inc. (the "Convertible Note"), the sole shareholder of Holdings. The Convertible
Note and its accrued interest were convertible into shares of the Company's
Common Stock at a conversion price per share equal to the IPO price per share
($15.00). Interest expense under the Convertible Note totaled $0.9 million for
the year ended December 31, 1997. On October 25, 1997, the outstanding principal
and interest of the Convertible Note was converted into 960,069 shares of Common
Stock. At the time of conversion, the Convertible Note accrued interest at a
rate of 8.50% per year and had outstanding principal and interest of $13.4
million and $1.0 million, respectively.
The Company recorded $1.8 million and $2.8 million of interest income for
the years ended December 31, 1998 and 1997, respectively, as a result of its
investment in marketable securities from the net proceeds of the IPO and the
follow-on offering. The Company also recorded, mostly as a result of the Credit
Facility during the 1998 period and of the Convertible Note during the 1997
period, $68,000 and $0.9 million of interest expense for the years ended
December 31, 1998 and 1997, respectively.
The Company incurred a net loss of $79.2 million for the year ended
December 31, 1998, compared with a net loss of $40.6 million for the year ended
December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had cash and cash equivalents totaling
$4.3 million and negative working capital of $2.4 million. The Company's primary
uses of cash to date have been in operating activities to fund research and
development, including clinical trials, and selling, general and administrative
expenses. As of December 31, 1999, the Company's investment in equipment and
leasehold improvements, net of depreciation and amortization, was $10.4 million.
During the year ended December 31, 1999, the Company spent $1.1 million in
capital expenditures. The Company expects 2000 capital expenditures to be higher
than those incurred during the year ended 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 and $9
million as of December 31, 1999 and 1998, respectively, and bear interest at the
prime rate (8.5% as of December 31, 1999). On December 21, 1999, Mr. Jaharis
agreed to modify the terms of the Credit Facility by extending its due date from
December 31, 2000 to December 31, 2002.
On September 1, 1999, the Company formally agreed to the terms of an
additional $50 million funding arrangement initially committed to by Mr. Jaharis
on October 7, 1998 (the "Supplemental Credit Facility"). Borrowings under the
Supplemental Credit Facility totaled $32 million as of December 31, 1999, bear
interest at the prime rate, are convertible (at $4.91 per share) into shares of
the Company's Common Stock, and will be due December 31, 2003. As of December
31, 1999, the conversion of amounts borrowed from Mr. Jaharis under the
Supplemental Funding Arrangement into shares of the Company's Common Stock would
have resulted in the issuance of 6,517,312 additional shares of the Company's
Common Stock, thus causing material dilution to existing shareholders of the
Company.
On December 21, 1999, Mr. Jaharis agreed to extend another $50 million loan
to the Company (the "Standby Facility"). Borrowings made under the Standby
Facility will be due June 30, 2005, and are subject to most of the terms and
conditions of borrowings made under the Supplemental Credit Facility. Borrowings
made under the Standby Facility are not, however, convertible into shares of the
Company's Common Stock. In lieu of a conversion feature, the Company has granted
to Mr. Jaharis warrants to purchase 6,000,000 shares of the Company's Common
Stock at $5.00 per share, which approximates the market value of the Company's
Common Stock on the effective date of the Standby Facility. The warrants
18
<PAGE>
contain a non-detachable feature and are exercisable at any time until June 30,
2006. The Company had no borrowings outstanding under the Standby Facility as of
December 31, 1999. The exercise of a significant number of the warrants issued
under the Standby Facility will cause material dilution to existing shareholders
of the Company.
Although the Company currently anticipates that, including the capital
available to the Company under the Credit Facility, the Supplemental Funding
Arrangement and the Standby 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 until it achieves positive cash
flows will depend primarily on its ability to generate substantial growth in
sales of its NIASPAN product. Further, during this period, the Company's ability
to fund its operating requirements may, among other things, be affected by its
ability to reduce its operating expenses and license or co-market NIASPAN and
other cardiovascular products. The Company's failure to generate substantial
growth in the sales of NIASPAN, reduce operating expenses, enter into a license
or co-marketing agreement, or meet the conditions necessary for the Company to
obtain funding under the Supplemental Funding Arrangement and Standby 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 that would require the consent of the Company's current lender, or
through the issuance of equity securities. To the extent the Company raises
additional capital by issuing equity securities or obtaining borrowings
convertible into equity, ownership dilution to existing shareholders will
result, and future investors may be granted rights superior to those of existing
shareholders. Moreover, there can be no assurance that any additional capital
will be available to the Company on acceptable terms, or at all.
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FORWARD-LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this report that
are not related to historical results are forward-looking statements. Actual
results may differ materially from those projected or implied in the
forward-looking statements. Further, certain forward-looking statements are
based upon assumptions of future events, which may not prove to be accurate.
Subsequent written and oral forward looking-statements attributable to the
Company or to persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements set forth below and elsewhere in this
report and in other reports filed by the Company with the Securities and
Exchange Commission.
MARKET ACCEPTANCE AND SALES GROWTH OF NIASPAN
The Company's success currently depends primarily upon its ability to
successfully market and sell increasing quantities of its NIASPAN product. The
Company's ability to successfully sell increasing quantities of the Niaspan
product will depend significantly on the increasing acceptance of the NIASPAN
product by physicians and their patients. The Company believes that intolerable
flushing and potential liver toxicity associated with currently available
formulations of niacin are the principal reasons why physicians generally have
been reluctant to prescribe or recommend such currently available formulations.
Flushing episodes are often characterized by facial redness, tingling or rash.
Although most patients taking the NIASPAN product will sometimes flush, the
formulation and dosing regimen for NIASPAN have been designed to maximize
patient acceptance and minimize the occurrence of flushing. There can be no
assurance, however, that patients using the NIASPAN product will not suffer
episodes of flushing that they consider intolerable. The failure of physicians
to prescribe the NIASPAN product or the failure of patients to continue taking
NIASPAN due to intolerable flushing or to other side effects would have a
material adverse effect on the Company.
Unanticipated side effects or unfavorable publicity concerning the NIASPAN
product or any other product incorporating technology similar to that used in
the NIASPAN product also could have an adverse effect on the Company's ability
to obtain regulatory approvals, to achieve acceptance by prescribing physicians,
managed care providers, or patients; any of which would have a material adverse
effect on the Company.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
To date, the Company has dedicated most of its financial resources to the
development and commercialization of its NIASPAN product, the development of
other products, and general and administrative expenses. The Company expects to
incur significant operating losses for at least the next twelve months, due
primarily to continued manufacturing and marketing, sales and administrative
expenses associated with the commercial launch of the NIASPAN product and for
investments in its research and development programs. No assurance can be given
that additional significant losses will not continue thereafter. The Company's
ability to achieve and maintain profitability will depend, among other things,
on the commercial success of the NIASPAN product; on the Company's ability to
successfully exploit its manufacturing and sales and marketing capabilities; to
complete the development of, and obtain regulatory approvals for, and achieve
market acceptance for its products under development; and on its ability to
maintain sufficient funds to finance its activities. As of December 31, 1999,
the Company's accumulated deficit was $239.7 million. In connection with the
transfer of operations from Holdings to the Company on June 30, 1996, net
operating loss carryforwards amounting to approximately $51.0 million and
related tax benefits remained with Holdings and were not transferred to the
Company. Consequently, the Company may utilize net operating loss carryforwards
sustained subsequent to June 30, 1996, amounting to $190.7
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million as of December 31, 1999, to offset future taxable net income, if any.
There can be no assurance, however, that the Company will be able to achieve
profitability to utilize such carryforwards or that profitability, if any, can
be sustained.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company has experienced negative cash flows from operations since its
inception. The Company has spent and will continue to be required to spend
substantial funds to continue research and development, including clinical
trials of its products under development, and to commercialize the NIASPAN
product and its products under development if regulatory approvals are obtained
for such products under development. The Company believes that it has sufficient
resources, including funds available to the Company under certain funding
arrangements, to fund the operations of the Company until the Company achieves
positive cash flows. The Company, however, may need or elect to raise additional
capital prior to such date. The Company's capital requirements will depend on
many factors, primarily relating to the near-term commercial success of NIASPAN;
the Company's ability to meet the conditions necessary to obtain funding under
the Supplemental Funding Arrangement and the Standby Facility; the problems,
delays, expenses and complications frequently encountered by companies at this
stage of development; the progress of the Company's research, development, and
clinical trial programs; the costs and timing of seeking regulatory approvals of
the Company's products under development; the Company's ability to obtain such
regulatory approvals; costs in filing, prosecuting, defending, and enforcing
patent claims and other intellectual property rights; the extent and terms of
any collaborative research, manufacturing, marketing, or other arrangements; and
changes in economic, regulatory, or competitive conditions or the Company's
planned business. Estimates about the adequacy of funding for the Company's
activities are based on certain assumptions, including assumptions regarding the
marketing and sales success of the Company's NIASPAN product, and that testing
and regulatory procedures relating to the Company's products under development
can be conducted at projected costs and within projected time frames. There can
be no assurances that any of these assumptions will prove to be accurate.
To satisfy its capital requirements, the Company may seek to raise funds in
the public or private capital markets. The Company's ability to raise additional
funds in the public markets may be adversely affected if the Company's sales of
its NIASPAN product do not increase rapidly, if the results of the Company's
clinical trials for its products under development are not favorable, or if
regulatory approval for any of the Company's products under development is not
obtained. The Company may seek additional funding through corporate
collaborations and other financing vehicles. There can be no assurance that any
such funding will be available to the Company, or if available, that it will be
available on acceptable terms. If adequate funds are not available, the Company
may be required to curtail significantly one or more of its research or
development programs or it may be required to obtain funds through arrangements
with future collaborative partners or others that may require the Company to
relinquish rights to the NIASPAN product or to some or all of its technologies
or products under development or take significant cost-reducing actions or both.
If the Company is successful in obtaining additional financing, the terms of the
financing may have the effect of diluting or adversely affecting the holdings or
the rights of the holders of Common Stock.
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LIMITED SALES AND MARKETING EXPERIENCE AND RESOURCES
Although the Company markets its NIASPAN product and the MAVIK and TARKA
products and intends to market its other products under development through its
own specialty sales force, its current marketing resources are limited.
Substantial resources will continue to be required for the Company to promote
the sale of the NIASPAN, MAVIK and TARKA products and its products under
development. There can be no assurance that the Company will be able to devote
resources to the NIASPAN, MAVIK and TARKA products or to its other products
under development sufficient to achieve increasing market acceptance. The
Company's failure to expend the resources to adequately promote the NIASPAN,
MAVIK and TARKA products or its products under development would have a
material adverse effect on the Company.
Moreover, the Company has fewer sales persons than many of its competitors
and there can be no assurance that the Company's sales force will be able to
detail successfully physicians who prescribe lipid-altering medications. There
can be no assurance that the Company will be able to retain its current sales
representatives, that any additional representatives hired by the Company will
be immediately effective in promoting the sale of the NIASPAN, MAVIK and TARKA
products, or that the Company's sales representatives will be able to generate
significantly increased sales of the NIASPAN, MAVIK and TARKA products. The
failure of the Company's sales representatives to generate increased sales of
the NIASPAN product would have a material adverse effect on the Company.
CONTROL BY EXISTING SHAREHOLDER
Michael Jaharis, the Chairman of the Board of Directors of the Company and
one of its founders, owns, directly or indirectly, approximately 51.5% of the
Common Stock outstanding as of December 31, 1999. Accordingly, this shareholder
can control the outcome of certain shareholder votes, including votes concerning
the election of directors, the adoption or amendment of provisions in the
Company's Articles of Incorporation, and the approval of mergers and other
significant corporate transactions. This level of concentrated ownership by one
person, along with the factors described in a subsequent section, "Anti-Takeover
Provisions," may have the effect of delaying or preventing a change in the
management or voting control of the Company. In addition, the Supplemental
Funding Arrangement gives Mr. Jaharis the right to convert (at $4.91 per share)
amounts owed to Mr. Jaharis by the Company into shares of the Company's Common
Stock and the Standby Facility gives Mr. Jaharis the right to exercise warrants
to purchase 6 million shares of the Company's Common Stock. If this conversion
option or warrant exercise were to occur, Mr. Jaharis would own a significantly
greater percentage of the Company's outstanding Common Stock thus resulting in
substantial dilution to existing shareholders.
COMPETITION AND TECHNOLOGICAL CHANGE
Many products are commercially available for the treatment of elevated LDL
cholesterol, and the manufacturers of such products, individually and
collectively, have significantly greater financial resources and sales and
manufacturing capabilities than the Company, including a combined field sales
force exceeding 12,000 representatives compared with the Company's 200-person
field sales force. The Company estimates that its existing NIASPAN prescriptions
account for less than 1.5% of the total prescriptions currently being written in
the United States for cholesterol-lowering pharmaceutical compounds. There can
be no assurance that NIASPAN or any other product developed by the Company will
be able to compete successfully with any of those products or that the Company
will be able to overcome such competition and achieve increasing sales of its
NIASPAN product. Moreover, the active ingredient in NIASPAN, niacin, is
available in several other formulations, most of which do not require a
prescription. Although the Company believes that there are no other currently
available niacin formulations that have been approved by the FDA specifically
for once-a-day dosing, there can be no assurance that physicians will not
prescribe or recommend some of these unapproved niacin formulations, using the
NIASPAN
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product's dosing regimen, to try to achieve the same results as NIASPAN.
Substitution of other niacin formulations for the NIASPAN product could have a
material adverse effect on the Company. Moreover, manufacturers of other niacin
formulations could promote their products using the NIASPAN product's dosing
regimen and could promote the sale of their products to treat the indications
for which the Company has received clearance to market NIASPAN. Although such
promotion would be a violation of FDA regulations, the occurrence of such
practices would have a material adverse effect on the Company. Moreover, many
established pharmaceutical and biotechnology companies, universities, and other
research institutions with resources significantly greater than the Company's
may develop products that directly compete with the Company's products. Even if
the Company's products under development prove to be more effective than those
developed by other entities, such other entities may be more successful in
marketing their products than the Company because of greater financial
resources, stronger sales and marketing efforts, and other factors. These
entities may succeed in developing products that are safer, more effective or
less costly than the products developed by the Company. There can be no
assurance that any products developed by the Company will be able to compete
successfully with any of those products.
NO ASSURANCE OF ADEQUATE THIRD-PARTY REIMBURSEMENT
The Company's ability to commercialize successfully its products under
development is dependent in part on the extent to which appropriate levels of
reimbursement for the NIASPAN product or for the Company's products under
development are obtained from government authorities, private health insurers,
and managed care organizations such as health maintenance organizations
("HMOs"). Managed care organizations and other third-party payors are
increasingly challenging the pricing of pharmaceutical products. The trend
toward managed healthcare in the United States, the growth of organizations such
as HMOs, and legislative proposals to reform healthcare and government insurance
programs could significantly influence the purchase of pharmaceutical products,
resulting in lower prices and reduced demand for NIASPAN or the Company's
products under development. Such cost containment measures and potential
legislative reform could affect the Company's ability to sell Niaspan or its
products under development and may have a material adverse effect on the
Company. Significant uncertainty exists about the reimbursement status of newly
approved pharmaceutical products. Although the Company has obtained approvals
for reimbursement for the cost of NIASPAN from many third-party payers, there
can be no assurance that the Company will be able to maintain such approvals.
There can be no assurance that reimbursement in the United States or foreign
countries will be available for NIASPAN or any of the Company's products under
development, that any reimbursement granted will be maintained, or that limits
on reimbursement available from third-party payors will not reduce the demand
for, or negatively affect the price of, NIASPAN or the Company's products under
development. The unavailability or inadequacy of third-party reimbursement for
NIASPAN or the Company's products under development would have a material
adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent on its ability to attract and
retain highly qualified scientific, management and sales personnel. The Company
faces intense competition for personnel from other companies, academic
institutions, government entities, and other organizations. There can be no
assurance that the Company will be successful in attracting and retaining key
personnel. The loss of key personnel, or the inability to attract and retain the
additional, highly-skilled employees required for the expansion of the Company's
activities, could adversely affect the Company's results of operations and its
business.
PRODUCTS UNDER DEVELOPMENT
Although the Company obtained clearance from the FDA to market the NIASPAN
product, there can be
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no assurance that the Company will be able to successfully formulate any of its
other products as planned, or that the Company will be successful in
demonstrating the safety and efficacy of such products in human clinical trials.
These trials may be costly and time-consuming. The administration of any product
the Company develops may produce undesirable side effects that could result in
the interruption, delay or suspension of clinical trials, or the failure to
obtain FDA or other regulatory approval for any or all targeted indications.
Even if regulatory approval is secured, the Company's products under development
may later produce adverse effects that limit or prevent their widespread use or
that necessitate their withdrawal from the market. The Company may discontinue
the development of any of its products under development at any time.
PATENTS AND TRADEMARKS; INTERFERENCE
The Company's ability to commercialize any of its products under
development will depend, in part, on its or its licensors' ability to obtain
patents, enforce those patents, preserve trade secrets, and operate without
infringing on the proprietary rights of third parties. In addition, the patents
for which the Company has applied relating to NIASPAN and certain other of the
Company's products under development are based on, among other things, the timed
administration of NIASPAN. If the indications treated by NIASPAN and such other
products under development could be treated using drugs without such timed
administration, the Company's patents, if issued, would not prevent the use of
such drugs for the treatment of such indications, which would have a material
adverse effect on the Company. There can be no assurance that the patent
applications licensed to or owned by the Company will result in issued patents,
that patent protection will be secured for any particular technology, that any
patents that have been or may be issued to the Company or its licensors will be
valid or enforceable or that any patents will provide meaningful protection to
the Company.
In general, the U.S. patents and patent applications owned by or licensed
to the Company are method-of-use patents that cover the timed use of certain
compounds to treat specified conditions. Composition-of-matter protection is not
available for the active ingredient in NIASPAN. The active ingredient in
NIASPAN, niacin, is currently sold in the United States and other markets for
lipid altering and for other uses. Even in jurisdictions where the use of the
active ingredient in NIASPAN for lipid altering and other indications may be
covered by the claims of a use patent licensed to the Company, off-label sales
might occur, especially if another company markets the active ingredient at a
price that is less than the price of NIASPAN, thereby potentially reducing the
sales of NIASPAN.
The Company has patent applications pending in the U.S. Patent and
Trademark Office ("PTO") with claims covering NIASPAN's method-of-use consistent
with its recommended once-a-day dosing regimen. The Company has been notified by
the PTO that certain of these claims have been allowed, but none of the claims
have yet been issued as a patent. The Company has paid the issue fees for those
claims that have been allowed and now awaits to receive from the PTO the
assigned patent numbers and dates on which the patents for those allowed claims
will issue. The patent examiner has also indicated that it may submit certain
claims to the PTO's Board of Interference to determine whether it should declare
an interference between such Kos application and a method-of-use patent issued
to a privately owned generic manufacturer allegedly claiming the same dosing
regimen invention. On February 7, 1997, the Company and such generic
manufacturer entered into a cross-licensing agreement (the "License Agreement")
pursuant to which the parties agreed to resolve, as between themselves, the
effects of such potential interference by granting licenses under their
respective patent application and patent.
The Company is aware that certain European and U.S. patents have been
issued with claims covering products that contain certain non-CFC
propellant-driven aerosol formulations. The European patents are currently
subject to an opposition proceeding in Europe, and certain claims in such
patents have been held
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invalid in the United Kingdom. Certain or all of the Company's aerosol products
under development may use a formulation covered by such European or U.S.
patents. In such event, the Company would be prevented from making, using or
selling such products unless the Company obtains a license under such patents,
which license may not be available on commercially reasonable terms, or at all,
or unless such patents are determined to be invalid or unenforceable in Europe
or the United States, respectively. The Company's development of products that
are covered by such patents and its failure to obtain licenses under such
patents in the event such patents are determined to be valid and enforceable
could have an adverse effect on the Company's business.
The patent positions of pharmaceutical and biotechnology companies are
highly uncertain and involve complex legal and factual questions. There can be
no assurance that the patents owned and licensed by the Company, or any future
patents, will prevent other companies from developing similar or therapeutically
equivalent products or that others will not be issued patents that may prevent
the sale of Company products or require licensing and the payment of significant
fees or royalties by the Company. Furthermore, there can be no assurance that
any of the Company's future products or methods will be patentable, that such
products or methods will not infringe upon the patents of third parties, or that
the Company's patents or future patents will give the Company an exclusive
position in the subject matter claimed by those patents. The Company may be
unable to avoid infringement of third party patents and may have to obtain a
license, defend an infringement action, or challenge the validity of the patents
in court. There can be no assurance that a license will be available to the
Company, if at all, on terms and conditions acceptable to the Company, or that
the Company will prevail in any patent litigation. Patent litigation is costly
and time consuming, and there can be no assurance that the Company will have or
will devote sufficient resources to pursue such litigation. If the Company does
not obtain a license under such patents, is found liable for infringement or is
not able to have such patents declared invalid, the Company may be liable for
significant money damages, may encounter significant delays in bringing products
to market, or may be precluded from participating in the manufacture, use, or
sale of products or methods of treatment requiring such licenses.
The Company also relies on trade secrets and other unpatented proprietary
information in its product development activities. To the extent that the
Company relies on trade secrets and unpatented know-how to maintain its
competitive technological position, there can be no assurance that others may
not independently develop the same or similar technologies. The Company seeks to
protect trade secrets and proprietary knowledge in part through confidentiality
agreements with its employees, consultants, advisors and collaborators.
Nevertheless, these agreements may not effectively prevent disclosure of the
Company's confidential information and may not provide the Company with an
adequate remedy in the event of unauthorized disclosure of such information. If
the Company's employees, scientific consultants or collaborators develop
inventions or processes independently that may be applicable to the Company's
products under development, disputes may arise about ownership of proprietary
rights to those inventions and processes. Such inventions and processes will not
necessarily become the Company's property, but may remain the property of those
persons or their employers. Protracted and costly litigation could be necessary
to enforce and determine the scope of the Company's proprietary rights. Failure
to obtain or maintain patent and trade secret protection, for any reason, would
have a material adverse effect on the Company.
The Company engages in collaborations, sponsored research agreements, and
other arrangements with academic researchers and institutions that have received
and may receive funding from U.S. government agencies. As a result of these
arrangements, the U.S. government or certain third parties may have rights in
certain inventions developed during the course of the performance of such
collaborations and agreements as required by law or such agreements. Several
legislative bills affecting patent rights have been introduced in the United
States Congress. These bills address various aspects of patent law, including
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publication, patent term, re-examination subject matter and enforceability. It
is not certain whether any of these bills will be enacted into law or what form
such new laws may take. Accordingly, the effect of such potential legislative
changes on the Company's intellectual property estate is uncertain.
GOVERNMENT REGULATION; NO ASSURANCES OF REGULATORY APPROVAL
The Company's research and development activities, preclinical studies,
clinical trials, and the manufacturing and marketing of its products are
currently subject to extensive regulation by the FDA and may in the future be
subject to foreign regulations. The drug approval process takes many years and
requires the expenditure of substantial resources. Data obtained from
preclinical and clinical activities are susceptible to varying interpretations
that could delay, limit, or prevent regulatory approval. Although the Company
may consult the FDA for guidance in developing protocols for clinical trials,
that consultation provides no assurance that the FDA will accept the clinical
trials as adequate or well-controlled or accept the results of those trials. In
addition, delays or rejections of applications for regulatory approval may
result from changes in or additions to FDA regulations concerning the drug
approval process. Similar delays may also be encountered in foreign countries.
There can be no assurance that any regulatory review will be conducted in a
timely manner or that regulatory approvals will be obtained for any products
developed by the Company. Even if regulatory approval of a product is obtained,
the approval may be limited as to the indicated uses for which it may be
promoted or marketed. In addition, a marketed drug, its bulk chemical supplier,
its manufacturer and its manufacturing facilities are subject to continual
regulatory review and periodic inspections, and later discovery of previously
unknown problems with a product, supplier, manufacturer or facility may result
in restrictions on such products or manufacturers, which may require a
withdrawal of the product from the market. Failure to comply with the applicable
regulatory requirements can, among other things, result in fines, suspensions of
regulatory approvals, product recalls, operating restrictions and criminal
prosecution, any of which could have a material adverse effect on the Company.
The Company's business is also subject to regulation under state, federal
and local laws, rules, regulations and policies relating to the protection of
the environment and health and safety, including those governing the use,
generation, manufacture, storage, air emission, effluent discharge, handling and
disposal of certain materials. The Company believes that it is in compliance in
all material respects with all such laws, rules, regulations and policies
applicable to the Company. There can be no assurance that the Company will not
be required to incur significant costs to comply with such environmental and
health and safety laws and regulations in the future. The Company's research and
development involves the controlled use of hazardous materials. Although the
Company believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by applicable state, federal and
local regulations, the risk of contamination or injury from these materials
cannot be completely eliminated. In the event of such contamination or injury,
the Company could be held liable for any damages that result and any such
liability could exceed the resources of the Company and materially adversely
affect the Company's business, financial condition and results of operations.
DEPENDENCE ON COLLABORATORS
The Company relies on various third parties for certain aspects of the
development of the Company's presently planned or future products. There can be
no assurance that the Company will be able to enter into future collaborative
arrangements on favorable terms, or at all. Even if the Company is successful in
entering into such collaborative agreements, there can be no assurance that any
such arrangement will be successful. The success of any such arrangement is
dependent on, among other things, the skills, experience and efforts of the
third party's employees responsible for the project, the third party's
commitment to the arrangement, and the financial condition of the third party,
all of which are beyond
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the control of the Company.
LIMITED MANUFACTURING EXPERIENCE; RISK OF SCALE-UP
The Company currently manufactures the NIASPAN product in one manufacturing
plant that has been inspected and approved by the FDA, and it manufactures
clinical materials for its products under development in another manufacturing
plant. The Company believes both plants operate in substantial compliance with
current Good Manufacturing Practices ("cGMP") regulations for the manufacture of
pharmaceutical products. The Company may need to further scale-up certain of its
current manufacturing processes to achieve production levels consistent with the
commercial sale of its products. Further, modifications to the facilities,
systems and procedures may be necessary to maintain capacity at a level
sufficient to meet market demand or to maintain compliance with cGMP regulations
and other regulations prescribed by various regulatory agencies including the
Occupational Safety and Health Administration and the Environmental Protection
Agency. Failure by the Company to successfully further scale-up, expand in
connection with manufacture for commercial sale, or modify its manufacturing
process or to comply with cGMP regulations and other regulations could delay the
approval of the Company's products under development or limit the Company's
ability to meet the demand for its products, either of which would have a
material adverse effect on the Company. Such occurrences may require the Company
to acquire alternative means of manufacturing its products, which may not be
available to the Company on a timely basis, on commercially practicable terms,
or at all.
DEPENDENCE ON SINGLE SOURCES OF SUPPLY
Some materials used in the Company's products, including niacin, the active
ingredient in NIASPAN, are currently sourced from a single qualified supplier.
The Company does not have a contractual arrangement with its sole supplier of
niacin. Although the Company has not experienced difficulty to date in acquiring
niacin, or other materials for product development, no assurance can be given
that supply interruptions will not occur in the future or that the Company will
not have to obtain substitute materials, which would require additional product
validations and regulatory submissions. Any such interruption of supply could
have a material adverse effect on the Company's ability to manufacture its
products or to obtain or maintain regulatory approval of such products.
RISK OF PRODUCT LIABILITY CLAIMS; NO ASSURANCE OF ADEQUATE INSURANCE
Manufacturing, marketing, selling, and testing NIASPAN and the Company's
products under development entails a risk of product liability. The Company
could be subject to product liability claims in the event the Company's products
or products under development fail to perform as intended. Even unsuccessful
claims could result in the expenditure of funds in litigation and the diversion
of management time and resources and could damage the Company's reputation and
impair the marketability of the Company's products. While the Company maintains
liability insurance, there can be no assurance that a successful claim could not
be made against the Company, that the amount of indemnification payments or
insurance would be adequate to cover the costs of defending against or paying
such a claim, or that damages payable by the Company would not have a material
adverse effect on the Company's business, financial condition, and results of
operations and on the price of the Company's Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
The Company has granted certain registration rights to the Company's
controlling shareholder and to Kos Investments, which entitle such entities to
cause the Company to effect three registrations under the Securities Act of
sales of shares of the Company's Common Stock owned by such entities. These
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registration rights generally would also permit the holders of such rights to
include shares in any registration statement otherwise filed by the Company. By
exercising these registration rights, these entities could cause a large number
of shares to be registered and become freely tradeable without restrictions
under the Securities Act (except for those purchased in the offering by
affiliates of the Company) immediately upon the effectiveness of such
registration. Such sales may have an adverse effect on the market price of the
Common Stock and could impair the Company's ability to raise additional capital.
POSSIBLE STOCK PRICE VOLATILITY
The stock market, including the Nasdaq National Market, on which the
Company's shares are listed, has from time to time experienced significant price
and volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market price of the Company's Common
Stock, like the stock prices of many publicly traded pharmaceutical and
biotechnology companies, has been and may continue to be highly volatile. The
sale by the Company's controlling shareholder or members of the Company's
management of shares of Common Stock, announcements of technological innovations
or new commercial products by the Company or its competitors, developments or
disputes concerning patent or proprietary rights, publicity regarding actual or
potential medical results relating to the NIASPAN product or to products under
development by the Company or its competitors, regulatory developments in either
the United States or foreign countries, public concern as to the safety of
pharmaceutical and biotechnology products and economic and other external
factors, as well as the trend of prescriptions for the NIASPAN product and the
period-to-period fluctuations in sales or other financial results, among other
factors, may have a significant impact on the market price of the Common Stock.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Articles of Incorporation and Bylaws,
as well as the Florida Business Corporation Act, could discourage a third party
from attempting to acquire, or make it more difficult for a third party to
acquire, control of the Company without approval of the Company's Board of
Directors. Such provisions could also limit the price that certain investors
might be willing to pay in the future for shares of the Common Stock. Certain of
such provisions allow the Board of Directors to authorize the issuance of
preferred stock with rights superior to those of the Common Stock. Moreover,
certain provisions of the Company's Articles of Incorporation or Bylaws
generally permit removal of directors only for cause by a 60% vote of the
shareholders of the Company, require a 60% vote of the shareholders to amend the
Company's Articles of Incorporation or Bylaws, require a demand of at least 50%
of the Company's shareholders to call a special meeting of shareholders, and
prohibit shareholder actions by written consent.
28
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's exposure to market risk is limited primarily to fluctuating
interest rates associated with variable rate indebtedness that is subject to
interest rate changes in the U.S. The Company does not use, nor has it
historically used, derivative financial instruments to manage or reduce market
risk. At December 31, 1999, the Company had $62 million of variable rate
indebtedness bearing interest at the prime rate (8.5% at December 31, 1999).
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated financial statements and supplementary data required by this
item can be found at the pages listed in the following index.
PAGE
----
FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants......................30
Consolidated Balance Sheets at December 31, 1999 and 1998...............31
Consolidated Statements of Operations for the year ended
December 31, 1999, 1998 and 1997....................................32
Consolidated Statements of Shareholders' Equity (Deficit) for
the period December 31, 1996 to December 31, 1999...................33
Consolidated Statements of Cash Flows for the year ended
December 31, 1999, 1998 and 1997....................................34
Notes to Consolidated Financial Statements..............................35
FINANCIAL STATEMENT SCHEDULE:*
Report of Independent Certified Public Accountants on Schedule II.......48
Schedule II. Valuation and Qualifying Accounts..........................49
-----
*All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore not included herein.
29
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Kos Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Kos
Pharmaceuticals, Inc. (a Florida corporation) and subsidiary as of December 31,
1999 and 1998, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kos Pharmaceuticals, Inc.
and subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 4, 2000.
30
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,336,326 $ 4,878,641
Trade accounts receivable, net 6,976,972 2,017,151
Inventories 1,085,849 1,312,556
Prepaid expenses and other current assets 2,610,412 1,325,689
------------- -------------
Total current assets 15,009,559 9,534,037
Fixed Assets, net 10,430,043 12,019,579
Goodwill and Other Intangible Assets, net 803,182 -
Other Assets 15,323 16,747
------------- -------------
Total assets $ 26,258,107 $ 21,570,363
============= =============
LIABILITIES AND SHAREHOLDERS'
DEFICIT
Current Liabilities:
Accounts payable $ 2,820,840 $ 4,333,003
Accrued expenses 12,450,035 8,195,586
Deferred revenue 1,980,000 -
Capital lease obligations 112,641 141,028
------------- -------------
Total current liabilities 17,363,516 12,669,617
------------- -------------
Notes Payable to Shareholder 62,000,000 9,000,000
Capital Lease Obligations, net of current portion 89,145 238,503
Commitments and Contingencies (Notes 12 and 14)
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,
18,026,024 and 17,720,270 shares issued and outstanding as of
December 31, 1999 and 1998, respectively 180,260 177,203
Additional paid-in capital 186,291,218 184,598,845
Accumulated deficit (239,666,032) (185,113,805)
------------- -------------
Total shareholders' deficit (53,194,554) (337,757)
------------- -------------
Total liabilities and shareholders' deficit $ 26,258,107 $ 21,570,363
============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
31
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues, net $ 36,339,514 $ 13,038,241 $ 2,892,065
Cost of sales 5,405,960 3,276,153 792,230
------------ ------------ ------------
30,933,554 9,762,088 2,099,835
------------ ------------ ------------
Operating expenses:
Research and development 25,618,870 29,143,527 24,130,216
Selling, general and administrative 56,843,187 61,519,514 20,508,654
------------ ------------ ------------
Total operating expenses 82,462,057 90,663,041 44,638,870
------------ ------------ ------------
Loss from operations (51,528,503) (80,900,953) (42,539,035)
------------ ------------ ------------
Other:
Interest income, net 169,326 1,792,796 2,786,946
Interest expense-related parties (3,206,521) (68,466) (867,652)
Other income (expense) 13,471 15,181 (10,240)
------------ ------------ ------------
Total other income (expense) (3,023,724) 1,739,511 1,909,054
------------ ------------ ------------
Net loss $(54,552,227) $(79,161,442) $(40,629,981)
============ ============ ============
Net loss per share, basic and diluted $ (3.06) $ (4.50) $ (2.79)
Weighted average shares of Common
Stock outstanding, basic and diluted 17,842,879 17,589,767 14,569,474
Common Stock options outstanding (not included in the calculation of
diluted loss per share as their impact would be antidilutive) 3,077,840 2,857,215 2,446,790
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
32
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 $ 100,000 $ 58,472,323 $ (65,322,382) $ (6,750,059)
Issuance of Common Stock 58,577 109,167,409 -- 109,225,986
Conversion of Convertible Note and accrued
interest to Common Stock 9,601 14,391,435 -- 14,401,036
Exercise of stock options 3,479 1,226,562 -- 1,230,041
Stock options issued to non-employees -- 392,835 -- 392,835
Net loss -- -- (40,629,981) (40,629,981)
------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 1997 171,657 183,650,564 (105,952,363) 77,869,858
Issuance of Common Stock 29 33,872 -- 33,901
Exercise of stock options 5,517 533,594 -- 539,111
Stock options issued to non-employees -- 380,815 -- 380,815
Net loss -- -- (79,161,442) (79,161,442)
------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 1998 177,203 184,598,845 (185,113,805) (337,757)
Common Stock granted to employees under
Kos Savings Plan 1,071 572,484 -- 573,555
Issuance of Common Stock in connection with
acquisition of assets of IEP Group, Inc. 750 392,250 -- 393,000
Issuance of Common Stock to employees under
Stock Purchase Plan 688 301,369 -- 302,057
Stock options issued to non-employees -- 300,000 -- 300,000
Exercise of stock options 548 126,270 -- 126,818
Net loss -- -- (54,552,227) (54,552,227)
------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 1999 $ 180,260 $ 186,291,218 $(239,666,032) $ (53,194,554)
============= ============= ============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
33
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (54,552,227) $ (79,161,442) $ (40,629,981)
Adjustments to reconcile net loss to net cash used
in operating activities -
Provision for doubtful accounts 160,100 20,000 80,000
Depreciation and amortization 3,010,462 2,202,251 921,271
Provision for inventory obsolescence 640,737 259,500 246,987
Gains from disposals of fixed assets (13,471) (15,181) --
Common stock issued to employees 573,555 33,901 --
Stock options issued to non-employees 300,000 380,815 392,835
Changes in operating assets and liabilities:
Trade accounts receivable (5,119,921) (217,140) (1,900,011)
Prepaid expenses and other current assets (1,284,723) 547,173 (1,639,021)
Inventories (414,030) 1,810,812 (3,629,855)
Other assets 1,424 14,289 (31,036)
Accounts payable (1,512,163) 1,173,318 2,104,270
Accrued expenses 4,254,449 4,821,699 3,843,514
Deferred revenue 1,980,000 -- --
------------- ------------- -------------
Net cash used in operating activities (51,975,808) (68,130,005) (40,241,027)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales (Purchases) of marketable securities -- 30,894,009 (30,894,009)
Acquisition of assets of IEP Group, Inc. (700,000) -- --
Capital expenditures (1,117,637) (6,876,341) (5,216,027)
------------- ------------- -------------
Net cash provided by (used in) investing activities (1,817,637) 24,017,668 (36,110,036)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Common Stock 302,057 -- 109,225,986
Net proceeds from exercise of stock options 126,818 539,111 1,230,041
Borrowings under Convertible Note -- -- 5,040,000
Borrowings under Notes Payable to Shareholder 53,000,000 9,000,000 --
Payments under capital lease obligations (177,745) (50,617) --
------------- ------------- -------------
Net cash provided by financing activities 53,251,130 9,488,494 115,496,027
------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents (542,315) (34,623,843) 39,144,964
Cash and Cash Equivalents, beginning of period 4,878,641 39,502,484 357,520
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,336,326 $ 4,878,641 $ 39,502,484
============= ============= =============
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 3,309,299 $ 14,819 $ --
Supplemental Disclosure of Non-cash Information:
Acquisition of equipment under capital lease obligations $ -- $ 430,148 $ --
Conversion of Convertible Note and accrued interest
payable to Common Stock $ -- $ -- $ 14,401,036
Common Stock issued in connection with acquisition of assets
of IEP Group, Inc. $ 393,000 $ -- $ --
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
34
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The predecessor to Kos Pharmaceuticals, Inc. (the "Company"), Kos Holdings,
Inc. ("Holdings"), was incorporated in Florida on July 1, 1988, to develop
prescription pharmaceutical products principally for the cardiovascular and
respiratory markets. On June 25, 1996, the Company was incorporated in Florida
as the successor to the business of Holdings. On June 30, 1996, all of the
assets and liabilities of Holdings, other than its net operating loss
carryforwards, were transferred to the Company in exchange for shares of Common
Stock of the Company (the "Reorganization"). The Reorganization was accomplished
in order to transfer the assets and operations of Holdings to the Company while
preserving Holdings' net operating losses and related federal tax benefits for
Holdings and its sole shareholder and one of its founders. Kos Investments, Inc.
("Investments") is the sole shareholder of Holdings. As this transaction was
between entities under common control, the transaction was accounted for on a
historical cost basis, in a manner similar to a pooling of interests.
On June 22, 1993, Holdings and Aeropharm Technology, Inc. ("Aeropharm")
entered into a letter of intent for Holdings' purchase of a controlling interest
in Aeropharm. On February 14, 1995, the transaction was completed through a
stock purchase agreement that gave control (80% ownership) of Aeropharm to
Holdings. Holdings accounted for its investment in Aeropharm as a consolidated
subsidiary from June 22, 1993. On June 20, 1996, Holdings acquired the minority
interest in Aeropharm, held by an employee of Aeropharm, in exchange for options
to purchase 50,000 shares of Holdings' common stock at $7.00 per share, the
estimated fair value of the underlying shares at the date of grant. The
acquisition of the minority interest in Aeropharm was accounted for under the
purchase method and the fair value of the options granted approximated the
carrying value ($147,690) of the minority interest.
On July 28, 1997, the Company obtained clearance from the U.S. Food and
Drug Administration to market Niaspan, its first product (NIASPAN/registered
mark/ is a registered trademark of the Company). The Company began sales of the
NIASPAN product during August 1997. NIASPAN is a once-a-day, oral, solid dose
extended-release formulation of niacin for the treatment of hyperlipidemia, a
multiple lipid disorder that is a primary risk factor for coronary heart
disease. Niacin is a water soluble vitamin that has long been recognized as an
effective pharmacological agent for the treatment of multiple lipid disorders
including elevated LDL and low HDL cholesterol.
The Company expects to incur additional losses in the near-term due
primarily to its sales and marketing efforts associated with NIASPAN and to
research and development activities in connection with its products under
development. No assurance can be given that the Company's products can be
successfully marketed, that products under development can be successfully
formulated or manufactured at acceptable cost and with appropriate quality, or
that required regulatory approvals will be obtained. The Company is subject to a
number of other risks including, but not limited to, uncertainties related to
market acceptance, future capital needs and uncertainty of additional funding,
uncertainties related to limited sales and marketing experience, uncertainties
related to patents and trademarks, interference and risk of infringement,
uncertainties related to competition and technological changes, government
regulation, dependence on product development collaborators, limited
manufacturing experience and risk of scale-up, dependence on single sources of
supply, and no assurances of adequate third party reimbursement. The likelihood
of the success of the Company must be considered in light of the uncertainty
caused by problems, expenses, complications and delays frequently encountered in
connection with the development of new business ventures.
35
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the results of Holdings
(prior to July 1, 1996), the Company and its subsidiary, Aeropharm. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of 90 days or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method. Components of inventory cost include
materials, labor, and manufacturing overhead. The Company considers factors such
as the amount of inventory on hand, estimated time required to sell such
inventories, remaining shelf life, and current market conditions to determine
whether inventories are stated at the lower of cost or market. Reserves are
provided as appropriate.
LONG-LIVED ASSETS
The Company evaluates the recoverability of long-lived assets not held for
sale by measuring the carrying amount of the assets against the estimated
undiscounted future cash flows associated with them. At the time such
evaluations indicate that the future undiscounted cash flows of certain
long-lived assets are not sufficient to recover the carrying value of such
assets, the assets are adjusted to their fair values. Based on these
evaluations, there were no adjustments to the carrying value of long-lived
assets in 1999, 1998 or 1997.
The Company evaluates the recoverability of long-lived assets held for sale
by comparing the asset's carrying amount with its fair value less cost to sell.
No assets were held for sale as of December 31, 1999 or 1998.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consists of the excess of cost over
the fair value of the net assets acquired. The Company amortizes goodwill on a
straight-line basis over ten years. The Company continually evaluates the
carrying value of goodwill and other intangible assets. Any impairment would be
recognized when the expected future operating cash flows derived from such
intangible assets is less than their carrying value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 1999 and 1998, the carrying amount of cash and cash
equivalents, trade accounts receivable, and accounts payable approximates fair
value due to the short term nature of these accounts. The fair value of notes
payable is determined using interest rates in effect as of the balance sheet
date and, because interest expense is payable utilizing variable rates that
re-price frequently, the carrying value approximates fair value.
36
<PAGE>
CONCENTRATION OF CREDIT RISK
The Company has no significant off-balance-sheet concentrations of credit
risk.
REVENUE RECOGNITION
Sales and the related cost of sales are recognized at the time product is
shipped. The Company's customers are distributors who warehouse product and, in
turn, sell that product to retailers and others. Net sales consist of gross
sales to the Company's customers less provisions for expected rebates and
chargebacks, discounts, and customer returns. These provisions totaled
$6,626,243 and $1,347,000 in the years ended December 31, 1999 and 1998,
respectively. Included in "Accrued expenses" in the accompanying consolidated
balance sheets are $3,235,576 and $722,000 at December 31, 1999 and 1998,
respectively, related to these provisions.
CO-PROMOTION REVENUE
The Company has a co-promotion collaboration agreement with Knoll
Pharmaceutical Company ("Knoll"), for the promotion and marketing of Knoll's
MAVIK and TARKA (MAVIK/registered mark/ and TARKA/registered mark/ are
registered trademarks of Knoll Pharmaceutical Company) 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 and TARKA sales levels. The Company recorded $2.7 million of
co-promotion revenue as a result of the Knoll Agreement for the year ended
December 31, 1999.
DEFERRED REVENUE
During the fourth quarter of 1999, certain of the Company's customers
purchased abnormally high levels of the Company's NIASPAN product. The Company
believes that this higher than expected NIASPAN demand was primarily due to
these customers protecting themselves against complications associated with year
2000 date change issues. As a result, at December 31, 1999, the level of the
Company's NIASPAN product warehoused by these customers increased above normal
levels. The Company has deferred the recognition of $2,800,000 in revenues and
related expenses associated with these sales until the first quarter of 2000,
when the level of the Company's NIASPAN product warehoused by these customers is
expected to return returns to normal levels. Included in "Deferred revenue" in
the accompanying consolidated balance sheets is $1,980,000 representing payments
received by the Company in excess of revenue recognized during the year ended
December 31, 1999.
DEPRECIATION AND AMORTIZATION
Fixed assets are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the assets or lease term as follows:
YEARS
Furniture and equipment.................................. 3-7
Computer software and hardware........................... 3-5
Laboratory and manufacturing equipment................... 3-5
Leasehold improvements................................... Life of lease
37
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
All research and development expenses are reflected in the Company's
consolidated statements of operations as incurred.
NET LOSS PER SHARE
Basic loss per share is determined by dividing the Company's net loss by
the weighted average number of shares of Common Stock outstanding. Diluted loss
per share also includes dilutive Common Stock equivalents outstanding after
applying the "treasury stock" method.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". SFAS No. 128 simplifies the methodology of computing earnings per share
and requires the presentation of basic and diluted earnings per share. The
Company's basic and diluted earnings per share are the same, because the
Company's Common Stock equivalents are antidilutive.
INCOME TAXES
The Company follows SFAS No. 109, "Accounting for Income Taxes", which
requires, among other things, recognition of future tax benefits measured at
enacted rates attributable to deductible temporary differences between financial
statement and income tax bases of assets and liabilities and to tax net
operating loss carryforwards to the extent that realization of said benefits is
more likely than not. The net operating loss carryforwards as of the
Reorganization, amounting to approximately $51 million, were not transferred to
the Company. As of December 31, 1999, the Company had available approximately
$190.7 million of net operating loss carryforwards. Due to the uncertainty of
the Company's ability to generate sufficient taxable income in the future to
utilize such loss carryforwards, the net deferred tax asset has been fully
reserved.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", was issued by FASB in June 1997. This statement establishes
standards for reporting information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company believes that it operates
within one segment. See Note 10. for information regarding major customers.
38
<PAGE>
3. TRADE ACCOUNTS RECEIVABLE, NET
Trade accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Trade accounts receivable ......................................... $ 7,215,072 $ 2,117,151
Less allowance for doubtful accounts .............................. (238,100) (100,000)
------------ ------------
Trade accounts receivable, net ................................. $ 6,976,972 $ 2,017,151
============ ============
</TABLE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Raw materials ..................................................... $ 205,533 $ 251,039
Work in process ................................................... 269,379 847,024
Finished goods .................................................... 610,937 214,493
------------ ------------
Total inventories ............................................... $ 1,085,849 $ 1,312,556
============ ============
</TABLE>
5. FIXED ASSETS, NET
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Furniture and equipment ........................................... $ 1,628,011 $ 1,581,573
Computer software and hardware .................................... 2,665,213 2,596,069
Laboratory and manufacturing equipment ............................ 8,549,958 7,674,443
Leasehold improvements ............................................ 5,283,291 5,160,043
------------ ------------
Fixed assets, gross ............................................. 18,126,473 17,012,128
Less accumulated depreciation and amortization .................... (7,696,430) (4,992,549)
------------ ------------
Fixed assets, net ............................................... $ 10,430,043 $ 12,019,579
============ ============
</TABLE>
6. GOODWILL AND OTHER INTANGIBLE ASSETS
On November 24, 1999, the Company acquired, for total consideration of $1.1
million, substantially all of the assets and intellectual property of IEP Group,
Inc. (the "IEP Acquisition"). In connection with this transaction, the Company
established IEP Pharmaceutical Devices, Inc. ("IEP") as a wholly-owned
subsidiary of Aeropharm and contributed to IEP all of the assets obtained
through the IEP Acquisition. The Company has recorded goodwill of $803,182
representing the excess of the cost of the assets acquired through the IEP
Acquisition in excess of their estimated fair value.
39
<PAGE>
7. ACCRUED EXPENSES
Major components of accrued expenses were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Employee commissions and bonuses............................................ $ 2,169,912 $ 1,956,986
Employee vacations ......................................................... 1,126,105 1,094,609
Clinical studies ........................................................... 1,226,878 646,118
Managed care rebates ....................................................... 3,044,246 623,585
All other .................................................................. 4,882,894 3,874,288
----------- -----------
Total accrued expenses ................................................... $12,450,035 $ 8,195,586
=========== ===========
</TABLE>
8. CONVERSION OF NOTE PAYABLE
On October 25, 1997, the outstanding principal and interest of a
convertible note payable to Michael Jaharis (the "Convertible Note"), Chairman
of the Company's Board of Directors, were converted into 960,069 shares of
Common Stock. At the time of conversion, the Convertible Note accrued interest
at a rate of 8.50% per year and had outstanding principal and interest of
$13,395,000 and $1,006,036, respectively.
9. NOTES PAYABLE TO SHAREHOLDER
On July 1, 1998, the Company entered into a $30 million credit facility
(the "Credit Facility") with Michael Jaharis. Borrowings under the Credit
Facility, which totaled $30 million at December 31, 1999, bear interest at the
prime rate (8.5% as of December 31, 1999). On December 21, 1999, Mr. Jaharis
agreed to extend the maturity date of the Credit Facility from December 31, 2000
to December 31, 2002. The Company incurred $2,181,000 and $68,000 of interest
expense under the Credit Facility for the years ended December 31, 1999 and
1998, respectively.
On September 1, 1999, the Company formally agreed to the terms of an
additional $50 million funding arrangement initially committed to by Mr. Jaharis
on October 7, 1998 (the "Supplemental Credit Facility"). Borrowings under the
Supplemental Credit Facility totaled $32 million as of December 31, 1999, bear
interest at the prime rate, are convertible (at $4.91 per share) into shares of
the Company's Common Stock, and will be due December 31, 2003. The Company
incurred $1,025,000 of interest expense under the Supplemental Credit Facility
for the year ended December 31, 1999.
On December 21, 1999, Mr. Jaharis agreed to extend another $50 million loan
to the Company (the "Standby Facility"). Borrowings made under the Standby
Facility will be due June 30, 2005 and are subject to most of the terms and
conditions of borrowings made under the Supplemental Credit Facility. Borrowings
made under the Standby Facility are not, however, convertible into shares of the
Company's Common Stock. In lieu of a conversion feature, the Company has granted
to Mr. Jaharis warrants to purchase 6,000,000 shares of the Company's Common
Stock at $5.00 per share, which approximates the market value of the Company's
Common Stock on the effective date of the Standby Facility. The warrants contain
a non-detachable feature and are exercisable at any time until June 30, 2006.
The Company had no borrowings outstanding under the Standby Facility as of
December 31, 1999.
40
<PAGE>
10. MAJOR CUSTOMERS
Sales to customers that were at least 10% of the Company's gross sales are
as follows:
CUSTOMER NAME DECEMBER 31,
-----------------------------------
1999 1998 1997
----------- ---------- ----------
McKesson Drug Co. .................... $12,376,801 $4,186,863 $ 649,611
Bergen Brunswig Corp. ................ 7,781,733 2,610,655 233,297
Cardinal Health, Inc. ................ 7,233,560 1,860,512 412,929
----------- ---------- ----------
Total ................................ $27,392,094 $8,658,030 $1,295,837
=========== ========== ==========
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table summarizes selected quarterly financial data of the
Company for the year ended December 31, 1999 and 1998 (IN THOUSANDS, EXCEPT PER
SHARE DATA):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
1999
----
Revenues, net $ 5,469 $ 7,288 $ 10,249 $ 13,334 $ 36,340
Cost of sales 1,039 1,202 1,386 1,779 5,406
Operating expenses 19,359 21,550 20,807 20,746 82,462
Loss from operations (14,929) (15,464) (11,944) (9,191) (51,528)
Net Loss (15,214) (16,097) (12,862) (10,379) (54,552)
Basic and diluted loss per share $ (0.86) $ (0.90) $ (0.72) $ (0.58) $ (3.06)
Market prices per common
share:
High $ 7.00 $ 5.75 $ 7.75 $ 6.38 $ 7.75
Low $ 4.00 $ 4.13 $ 4.38 $ 4.38 $ 4.00
1998
----
Revenues, net $ 1,000 $ 2,807 $ 4,266 $ 4,965 $ 13,038
Cost of sales 210 843 1,172 1,051 3,276
Operating expenses 18,884 24,629 22,731 24,419 90,663
Loss from operations (18,094) (22,665) (19,637) (20,505) (80,901)
Net Loss (17,307) (22,054) (19,309) (20,491) (79,161)
Basic and diluted loss per share $ (1.00) $ (1.25) $ (1.09) $ (1.16) $ (4.50)
Market prices per common
share:
High $ 15.56 $ 13.94 $ 12.69 $ 8.00 $ 15.56
Low $ 7.50 $ 8.38 $ 4.31 $ 3.50 $ 3.50
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
LETTER OF CREDIT FACILITY
On September 17, 1998, the Company entered into a $3 million letter of
credit facility with a bank (the "Letter of Credit Facility"). Under the terms
of the Letter of Credit Facility, letters of credit outstanding must not exceed
90% of the Company's cash balance kept at such bank. As of December 31, 1999 and
December 31, 1998, letters of credit outstanding totaled $1,492,000 and
$1,528,000, respectively.
41
<PAGE>
PURCHASE COMMITMENTS
The Company enters, during the normal course of its business, into short
term purchase commitments for the acquisition of goods and services needed to
run its operations. As of December 31, 1999, the Company had open purchase
commitments totaling $6,200,000.
EMPLOYMENT AND ROYALTY AGREEMENTS
As of December 31, 1999, the Company had employment and/or royalty
agreements with three of its officers. Salary and benefits expense recorded
under the employment agreements totaled $698,000, $833,000 and $708,000 during
the years ended December 31, 1999, 1998 and 1997, respectively. The royalty
agreements entitle two of these officers to royalties on sales of the Company's
products, the aggregate amounts of which may not exceed $5,500,000. Royalty
expense from these agreements during the years ended December 31, 1999, 1998 and
1997 was approximately $336,000, $65,000 and $29,000, respectively. Future
minimum payments under the employment agreements are as follows:
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ---------------
2000.................................................. $ 525,000
2001.................................................. 525,000
2002.................................................. 175,000
---------------
$1,225,000
===============
LEASE COMMITMENTS
The Company has various operating leases that expire through 2002 for the
rental of office space, laboratory facilities, and sales force vehicles. Future
minimum commitments under these agreements are as follows:
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ---------------
2000.................................................. $2,441,000
2001.................................................. 1,300,000
2002.................................................. 501,000
---------------
$4,242,000
===============
As of December 31, 1999 and 1998, standby letters of credit of
approximately $1,200,000 and $1,236,000, respectively, were outstanding under
the Letter of Credit Facility in favor of the lessors as collateral for these
leases provided to the Company.
Rent and other expenses incurred under the operating leases were
$3,493,964, $3,061,000 and $823,000, during the years ended December 31, 1999,
1998 and 1997, respectively.
LICENSING AGREEMENTS
The Company has certain license agreements (the "License Agreements") with
third parties (the "Licensees") for the development of future products. Under
the License Agreements, the Company is required to make payments to the
Licensees in order to secure exclusive rights to develop, manufacture, sell
and/or sublicense future products developed through the License Agreements. In
connection with the License Agreements, the Company recorded licensing expense
of approximately $135,000, $490,000 and $5,638,000 for the years ended December
31, 1999, 1998 and 1997 respectively, which is reflected in "Research and
development" in the accompanying consolidated statements of operations.
42
<PAGE>
In order to maintain its rights under the License Agreements, the Company
is required to pay certain future milestone payments and licensing fees. In the
event that no milestone event occurs, the Company generally would not be
required to make any milestone payment. The Company anticipates, based on the
development efforts that have been conducted to date, that it will be required
to make future milestone payments of $125,000 during 2000.
On February 7, 1997, the Company entered into an agreement with an
unaffiliated generic drug manufacturer pursuant to which the parties agreed to
resolve the effects, as between themselves, of a potential interference
proceeding by the United States Patent and Trademark Office by granting cross
licenses under their respective patent applications and patents, regardless of
whether such licenses would be required. In connection with this licensing
agreement, the Company recognized $3,000,000 as a licensing expense; such
expense is included in "Research and development" in the accompanying
consolidated statement of operations for the year ended December 31, 1997. As
further consideration for entering into the agreement, the Company agreed to pay
the generic manufacturer certain royalties on the net sales of NIASPAN subject
to a cap on such royalty payments in the United States and a separate cap on
such payments for sales outside the United States. The Company recorded
$1,682,000, $652,000 and $148,000 of royalty expense from this agreement for the
years ended December 31, 1999, 1998 and 1997, respectively, and are included in
"Selling, general and administrative" in the accompanying consolidated
statements of operations.
SPONSORED RESEARCH
The Company has on-going research agreements with two universities and a
research center. The Company is primarily responsible for funding the projects,
and the university or research center is responsible for providing personnel,
equipment, and facilities to conduct the research activities. The Company
anticipates that it will be required to make minimum future payments of $330,000
during 2000 under these research agreements.
The Company also funds, from time to time and at its sole discretion, other
research programs conducted at other universities and research centers. Expenses
recorded under the Company's sponsored research programs totaled approximately
$408,000, $383,000 and $380,000 during the years ended December 31, 1999, 1998
and 1997, respectively, and are reflected in "Research and development" in the
accompanying consolidated statements of operations.
DEVELOPMENT AGREEMENTS
The Company has development agreements with various third parties (the
"Development Agreements"). As dictated by the Development Agreements, the
Company is responsible for funding all required development activities. In order
to maintain its rights under the Development Agreements, the Company is required
to pay certain future milestone payments and development fees. In the event that
no milestone event occurs, the Company generally would not be required to make
any milestone payment.
Expenses recorded under these and other development agreements totaled
approximately $380,000, $1,470,000 and $2,688,000 during the years ended
December 31, 1999, 1998 and 1997, respectively, and are reflected in "Research
and development" in the accompanying consolidated statements of operations.
43
<PAGE>
EMPLOYEE BENEFIT PLANS
The Company's Internal Revenue Code Section 401(k) Plan, known as the Kos
Savings Plan, became effective on January 1, 1994. Each employee who has
completed at least 90 days of service with the Company and has attained age 21
is eligible to make pre-tax elective deferral contributions each year not
exceeding the lesser of a specified statutory amount or 15% of the employee's
compensation for the year. Beginning on January 1, 1999, the Company began
matching employee contributions to the Kos Savings Plan. The Company's matching
contribution to the Kos Savings Plan is made in the form of previously unissued
Common Stock. The Company matches employee contributions up to 50% of an
employee's 401(k) contribution, and not to exceed 3% of such employee's
compensation or $5,000 per employee for any given year. An employee is always
100% percent vested in the employee's elective deferral contributions to the Kos
Savings Plan and is vested up to 100% in the Company matching contribution
portion of such plan at 25% vesting per year of employment. The Company recorded
$574,000 in expense related to its match of employee contributions to the Kos
Savings Plan for the year ended December 31, 1999, and is included in "Selling,
general and administrative" in the accompanying consolidated statements of
operations.
On February 15, 1999, the Company implemented the Kos Pharmaceuticals, Inc.
1999 Employee Stock Purchase Plan (the "Stock Purchase Plan"). Under the Stock
Purchase Plan, an eligible employee may purchase Common Stock at a 15% discount
by contributing to the Stock Purchase Plan, through payroll deductions, up to
10% of such employee's annual compensation. Each employee's total contributions
are limited to $25,000 per year. Employee payroll deductions are accumulated for
six-month periods at the end of which shares of the Company's Common Stock are
purchased under the Stock Purchase Plan. All employees of the Company with at
least 90 days of continuous service at the beginning of each six-month offering
period are eligible to participate in that offering period. The Company has
reserved 1,000,000 shares of Common Stock for future purchase by employees under
the Stock Purchase Plan.
13. SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
In March 1997, the Company completed an initial public offering of
4,772,500 shares of Common Stock. Net proceeds to the Company were approximately
$65,900,000 after deducting expenses of the offering.
In October 1997, the Company completed a follow-on public offering of
1,085,000 shares of Common Stock. Net proceeds to the Company were approximately
$43,330,000 after deducting expenses of the offering.
PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of undesignated
preferred stock. Such shares of preferred stock may be issued by the Company in
the future, without shareholder approval, upon such terms as the Company's Board
of Directors may determine.
44
<PAGE>
STOCK OPTION PLAN
During 1996, the Board of Directors of the Company adopted the Kos
Pharmaceuticals, Inc. 1996 Stock Option Plan (the "Plan"). As of December 31,
1999, a maximum of 4,000,000 shares of Common Stock may be issued pursuant to
stock options granted or to be granted under the Plan. All directors, officers,
employees and certain related parties of the Company designated by the Board are
eligible to receive options under the Plan. The maximum term of any option is
ten years from the date of grant. All options expire within 30 days of
termination of employment. The Plan is administered by a committee appointed by
the Board of Directors of the Company.
On February 19, 1998, the Company's Board of Directors authorized the
re-pricing of options to acquire shares of Common Stock granted to employees at
exercise prices ranging from $15.00 to $43.44 per share (the "February
Re-Pricing"). As a result of the February Re-Pricing, the exercise price for
these options was reduced to $11.16 per share, the average of the high and low
price of the Company's Common Stock on February 19, 1998. No options granted to
members of the Board of Directors were re-priced under the February Re-Pricing.
Effective October 1, 1998, the Board of Directors authorized a second
re-pricing of options to acquire shares of Common Stock granted to employees at
exercise prices ranging from $7.00 to $13.28 (the "October Re-Pricing"). As a
result of the October Re-Pricing, the exercise price of certain options was
reduced to $5.06 per share, the closing price of the Company's Common Stock on
October 1, 1998. No options granted to members of the Board of Directors or to
the Company's officers were re-priced under the October Re-Pricing. Each outside
director of the Company is granted an option to purchase 15,000 shares of Common
Stock upon election to the Board, receives options to purchase 15,000 shares
effective on each director's anniversary date and 3,000 shares effective on the
date of the Company's Annual Shareholders' Meeting. The exercise price of such
options will be the fair market value of the underlying Common Stock on the date
the option is granted. The Company considered the provisions of SFAS No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123") using the Black Scholes
method to approximate the related charge to expense. Assumptions for the
calculation of charges associated with SFAS 123 include:
RISK-FREE EXPECTED
GRANT VOLATILITY INTEREST EXPECTED TERM
DATE RATE RATE DIVIDENDS (YEARS)
------------------ ------------- ------------- ------------- -----------
1996 and prior 0% 6.63% $ - 5
1997 57.6 6.25 - 5
1998 66.4 4.77 - 5
1999 60.0 5.03 - 5
45
<PAGE>
As of December 31, 1999, the Company had outstanding options to purchase
3,077,840 shares of Common Stock to employees, consultants, management and
directors, including options granted prior to the implementation of the Plan.
Detail of option activity is as follows:
<TABLE>
<CAPTION>
EXERCISE PRICES
---------------------------
NUMBER OF WEIGHTED
SHARES RANGE AVERAGE
----------- --------------- ---------
<S> <C> <C> <C>
Outstanding, December 31, 1995 1,185,000 $ 0.60 - $ 3.33 $ 0.81
Granted 1,110,500 7.00 - 15.00 7.99
-----------
Outstanding, December 31, 1996 2,295,500 0.60 - 15.00 4.28
Granted 539,700 15.00 - 43.44 33.14
Exercised (347,910) 0.60 - 15.00 3.52
Canceled (40,500) 7.00 - 38.69 11.11
-----------
Outstanding, December 31, 1997 2,446,790 0.60 - 43.44 10.64
Granted(*) 2,955,265 5.06 - 13.28 8.15
Exercised (551,675) 0.60 - 7.00 0.98
Canceled(*) (1,993,165) 5.06 - 43.44 16.67
-----------
Outstanding December 31, 1998 2,857,215 0.60 - 27.25 5.93
Granted 670,000 4.28 - 7.25 5.39
Exercised (56,375) 0.75 - 5.06 2.21
Canceled (393,000) 5.06 - 11.16 6.78
-----------
Outstanding December 31, 1999 3,077,840 $ 0.60 - $27.25 $ 5.76
===========
</TABLE>
- --------------------------------------------------------------------------------
(*)Includes effect of re-priced options (1,880,565 options, which had
original exercise prices ranging from $7.00 to $43.44, and an original
weighted average exercise price of $16.94, were re-priced in February
and October 1998).
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------------- ------------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AVERAGE
RANGE OF DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1999 CONTRACTUAL LIFE PRICE 1999 PRICE
------------------------- ----------------- ------------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
$ 0.60 to $ 0.75 390,000 5.5 years $0.63 390,000 $ 0.63
3.33 to 4.97 100,000 7.8 years 4.15 25,000 3.33
5.06 to 7.16 2,194,640 8.0 years 5.66 823,836 5.84
7.20 to 11.16 370,200 7.9 years 11.01 117,300 11.07
24.69 to 27.25 23,000 7.3 years 25.02 11,500 25.02
--------- ---------
3,077,840 1,367,636
========= =========
</TABLE>
At December 31, 1999, 291,200 shares remain authorized and unissued, and
options to purchase 1,367,636 shares of Common Stock were exercisable, including
options granted outside the Plan.
46
<PAGE>
As permitted by SFAS No. 123, the Company accounts for options issued to
employees under Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees". Consequently, except for options issued to non-employees,
no compensation cost has been recognized on options issued to employees because
the exercise price of such options was not less than the market value of the
Common Stock on the date of grant. Compensation costs of $300,000, $380,815 and
$392,835 were recorded for the years ended December 31, 1999, 1998 and 1997,
respectively, to reflect the cost associated with stock options granted to
non-employees.
Had compensation cost for options issued to employees been determined
consistent with SFAS No. 123, the Company's net loss and net loss per share
would have been the "Pro Forma" amounts shown in the following table:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
Net loss:
As reported................................ $(54,552,227) $(79,161,442) $(40,629,981)
Pro Forma.................................. (57,537,053) $(81,638,296) $(43,113,692)
Net loss per share, basic and diluted:
As reported................................ $ (3.06) $ (4.50) $ (2.79)
Pro Forma.................................. $ (3.22) $ (4.64) $ (2.96)
</TABLE>
14. LEGAL PROCEEDING
On August 5, 1998, a purported class action lawsuit was filed in the United
States District Court for the Northern District of Illinois, Eastern Division,
against the Company, the members of the Company's Board of Directors, certain
officers of the Company, and the underwriters of the Company's October 1997
offering of shares of Common Stock. In its complaint, the plaintiff asserts, on
behalf of itself and a putative class of purchasers of the Company's Common
Stock during the period from July 29, 1997, through November 13, 1997, claims
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 relate
principally to certain statements made by the Company, or certain of its
representatives, concerning the efficacy, safety, sales volume and commercial
viability of the Company's NIASPAN product. The complaint 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. The outcome of
the litigation cannot yet be determined. Accordingly, no provision for any
liability that may result from these matters has been recognized in the
accompanying consolidated financial statements. There can be no assurance,
however, that the outcome of this litigation will not have a material adverse
effect on the Company's business, results of operations, and financial
condition.
47
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE II
To the Board of Directors of
Kos Pharmaceuticals, Inc.:
We have audited in accordance with auditing standards generally accepted in
the United States, the financial statements included in this Form 10-K, and have
issued our report thereon dated February 4, 2000. Our audits were made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The accompanying Schedule II is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states, in
all material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 4, 2000.
48
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END
DESCRIPTION PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ------------------------------------------------------ -------------- -------------- ------------- --------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
<S> <C> <C> <C> <C>
Fiscal year ended December 31, 1998............... $ 80 $ 20 $ - $ 100
Fiscal year ended December 31, 1999............... 100 160 22 238
</TABLE>
49
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
50
<PAGE>
PART III
The information required in Item 10 (Directors and Executive Officers of
the Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership
of Certain Beneficial Owners and Management) and Item 13 (Certain Relationships
and Related Transactions) is incorporated by reference to the Company's
definitive proxy statement for the 2000 Annual Meeting of Shareholders filed
with the Securities and Exchange Commission on March 2, 2000.
51
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. The Financial Statements filed as part of this report are
listed separately in the index to Financial Statements
beginning on page 29 of this report.
2. The following Financial Statement Schedules are filed
herewith:
SCHEDULE DESCRIPTION
-------- -----------
II Valuation and Qualifying Accounts for the Year
Ended December 31, 1999.
3. The following exhibits are filed herewith:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
3.1(1) Amended and Restated Articles of Incorporation of
the Company.
3.2(1) 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(2) Form of Common Stock certificate of the Company.
10.1(1) Employment Agreement dated as of July 1, 1996,
between Daniel M. Bell and the Company.
10.2(1) Nonqualified Stock Option Agreement by and between
the Company and Daniel M. Bell dated as of June
20, 1996.
10.3(1) Employment Agreement dated as of June 15, 1996,
between David J. Bova and the Company.
10.4(1) Kos Pharmaceuticals, Inc. 1996 Stock Option Plan.
10.5(3) Kos Phamaceuticals, Inc. 1999 Employee Stock
Purchase Plan.
10.6(1)+ Development Agreement by and between the Company
and Fuisz Technologies, Ltd.
10.7(1)+ Option/Licensing Agreement by and between the
Company and Fuisz Technologies, Ltd.
10.8(1)+ Development Agreement by and between the Company
and Fuisz Technologies, Ltd.
10.9(1)+ Option/Licensing Agreement by and between the
Company and Fuisz Technologies, Ltd.
52
<PAGE>
10.10(1)+ License Agreement by and between the Company and
Upsher-Smith Laboratories, Inc., dated February 7,
1997.
10.11(4) Revolving Credit and Loan Agreement dated July 1,
1998, between Kos Pharmaceuticals, Inc. and
Michael Jaharis.
10.12(4) Promissory Note dated July 1, 1998, in favor of
Michael Jaharis.
10.13(5)+ Co-promotion Collaboration Agreement dated July
22, 1999, between the Company and Knoll
Pharmaceutical Company.
10.14(5) Revolving Credit and Loan Agreement dated
September 1, 1999, between the Company and Michael
Jaharis.
10.15 Promissory Note dated September 1, 1998, in favor
of Michael Jaharis.
10.16 Revolving Credit and Loan Agreement dated December
21, 1999, between the Company and Michael Jaharis.
10.17 Second Amended and Restated Registration Rights
Agreement effective as of December 21, 1999, by
and between the Company, Kos Holdings, Inc., Kos
Investments, Inc., and Michael Jaharis.
10.18 Amended and Restated Security Agreement dated
December 21, 1999, by and between the Company and
Michael Jaharis.
10.19 Promissory Note dated December 21, 1999, in favor
of Michael Jaharis.
10.20 Non-Detachable Common Stock Purchase Warrant.
21(1) Subsidiaries of the Company.
23 Consent of Arthur Andersen LLP.
24 Powers of Attorney (included on signature page
hereto).
27 Financial Data Schedule.
- ----------
(1) 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.
(2) 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.
(3) Filed with the Company's Registration Statement on Form S-8
(File No. 333-70317), filed with the Securities and Exchange
Commission on January 8, 1999 and incorporated herein by
reference.
53
<PAGE>
(4) Filed with the Company's Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission for the Company's
three-month period ended September 30, 1998, and incorporated
herein by reference.
(5) Filed with the Company's Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission for the Company's
three-month period ended September 30, 1999, and incorporated
herein by reference.
+ Certain confidential material contained in the document has been
omitted and filed separately with the Securities and Exchange
Commission pursuant to Rule 406 of the Securities Act of 1933,
as amended.
(b) The Company did not file any Reports on Form 8-K during its last fiscal
quarter.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
behalf of the undersigned, thereunto duly authorized.
KOS PHARMACEUTICALS, INC.
By: /s/ Daniel M. Bell
---------------------------
Daniel M. Bell
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Daniel M. Bell and Juan F. Rodriguez and each of
them, his true and lawful attorney-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments to this Report on Form 10-K,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that each of said attorneys-in-fact
or his substitute or substitutes, any lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ Michael Jaharis Chairman of the Board March 16, 2000
- --------------------------------------------
Michael Jaharis of Directors
/S/ Daniel M. Bell President, Chief Executive March 16, 2000
- --------------------------------------------
Daniel M. Bell Officer, and Director
(Principal Executive Officer)
/S/ Robert E. Baldini Vice Chairman of the Board and March 16, 2000
- --------------------------------------------
Robert E. Baldini Chief Sales and Marketing Officer
/S/ Juan F. Rodriguez Vice President, Controller March 16, 2000
- --------------------------------------------
Juan F. Rodriguez (Principal Accounting Officer)
/S/ John Brademas Director March 16, 2000
- --------------------------------------------
John Brademas
/S/ Steven Jaharis Director March 16, 2000
- --------------------------------------------
Steven Jaharis
/S/ Louis C. Lasagna Director March 16, 2000
- --------------------------------------------
Louis C. Lasagna
/S/ Mark Novitch Director March 16, 2000
- --------------------------------------------
Mark Novitch
/S/ Frederick B. Whittemore Director March 16, 2000
- --------------------------------------------
Frederick B. Whittemore
</TABLE>
55
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.15 Promissory Note dated September 1, 1999, in favor of Michael
Jaharis.
10.16 Revolving Credit and Loan Agreement dated December 21, 1999,
between the Company and Michael Jaharis.
10.17 Second Amended and Restated Registration Rights Agreement
effective as of December 21, 1999, by and between the Company,
Kos Holdings, Inc., Kos Investments, Inc., and Michael Jaharis.
10.18 Amended and Restated Security Agreement dated December 21, 1999,
by and between the Company and Michael Jaharis.
10.19 Promissory Note dated December 21, 1999, in favor of Michael
Jaharis.
10.20 Non-Detachable Common Stock Purchase Warrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
56
EXHIBIT 10.15
$ 50,000,000.00 New York, New York
September 1, 1999
1. OBLIGATION TO PAY
FOR VALUE RECEIVED, the undersigned Borrower promises to pay to the
order of MICHAEL JAHARIS, an individual residing in South Norwalk, Connecticut
(the "Lender"), the principal sum of Fifty Million Dollars ($50,000,000.00), on
December 31, 2003, or such amount thereof as shall be outstanding hereunder on
such date, plus interest payable at the rate and in the manner provided in
paragraph 3 of this Note, plus any costs and expenses incurred in the
enforcement of this Note as provided in paragraph 8 of this Note. This Note is
transferable by the holder hereof.
This Note is issued pursuant to the Loan Agreement (as hereinafter
defined), reference to which is hereby made for other terms applicable to this
Note.
2. DEFINITIONS
Except as otherwise defined herein, all capitalized terms used herein
which are defined in the Loan Agreement shall have the meaning ascribed to them
therein. In addition, the following terms as used herein shall be defined as
follows:
(a) "Adjusted Conversion Price" shall mean the price for conversion of
part or all of this Note into Common Stock after adjustment as provided in
Section 4.04 of the Loan Agreement.
(b) "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.
(c) "Conversion Date" for any particular conversion of part or all of
this Note into Common Stock shall mean the date set by the Lender for conversion
in the Conversion Notice.
(d) "Conversion Notice" shall mean the Conversion Notice set forth in
the Loan Agreement.
(e) "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 in The Wall Street Journal or, in the absence thereof, as
reported by another authoritative source
1
<PAGE>
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.
(f) "Event of Default" shall mean any of the events set forth in
Paragraph 8 hereof.
(g) "First Advance Date" shall mean the date of the first advance under
this Note and the Loan Agreement.
(h) "Interest Adjustment Date" shall mean the first day of each month
during the term of this Note.
(i) "Loan Agreement" shall mean a Revolving Credit and Loan Agreement
of even date herewith between Borrower and the Lender pursuant to which this
Note is issued, as the same may be amended and supplemented from time to time.
(j) "Loan Documents" shall mean this Note, the Loan Agreement, the
Registration Rights Agreement, the Security Agreement, the Patent Security
Agreement, the UCC-1 financing statements 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".
(k) "Prime Rate" shall mean the prime rate (or substantially equivalent
index, if such bank discontinues its prime rate) of First Union National Bank as
announced from time to time, or, if such bank shall cease to exist without any
successor-in-interest, then the prime rate (or substantially equivalent index,
if no prime rate exists at such bank at such time) of any national or regional
bank selected by Lender having a comparable or larger asset size.
3. INTEREST
The outstanding principal balance of this Note shall bear interest from
the date hereof until the earlier of maturity, imposition of the Default Rate
(as hereinafter defined) or payment in full, at a rate per annum equal to the
Prime Rate in effect on each Interest Adjustment Date (calculated on the basis
of a 360-day year for the actual number of days elapsed), on which date the
interest rate shall be increased or decreased to the extent of any increase or
decrease in the Prime Rate from the Prime Rate in effect on the immediately
preceding Interest Adjustment Date. After maturity, or upon the occurrence of
and during the continuance of an Event of Default, if earlier, the interest rate
hereunder shall be increased to a rate equal to six (6.0) percentage points in
excess of the rate which would otherwise be in effect hereunder.
Notwithstanding any provision of this Note to the contrary, in the
event that at any time the applicable rate of interest payable by Borrower to
Lender as stated in this Note (the "Contract
2
<PAGE>
Rate") exceeds the highest or maximum rate of interest permissible to be charged
by Lender under the laws of the State of Connecticut or under federal law, or is
determined by a tribunal or court of competent jurisdiction to be excessive and
unenforceable (in each case, the "Maximum Legal Rate"), then the interest rate
payable under this Note shall automatically be reduced to the Maximum Legal Rate
for such period as the Maximum Legal Rate is higher than the Contract Rate. If
subsequently the Contract Rate becomes less than the Maximum Legal Rate, then
the interest rate payable under this Note shall automatically be decreased to
the Contract Rate. Any amounts paid in excess of the Maximum Legal Rate shall be
considered to have been payments in reduction of principal, and the outstanding
principal balance shall be adjusted to reflect such prepayments of principal.
4. PAYMENTS
Accrued interest shall be due and payable monthly on the seventh day of
each month. Interest may, at the option of the holder hereof, be deducted from
the amount of the proceeds of any disbursements hereunder.
Upon maturity, the outstanding principal balance of this Note, together
with unpaid interest accrued thereon and any other sums payable hereunder, shall
be payable in full.
All sums received hereunder shall be applied first to the payment of
late charges, costs and expenses payable to Lender hereunder, then to interest
(in the order in which earliest earned) and the balance to principal. Borrower
shall have the right to prepay this Note in full or in part at any time without
penalty.
All payments shall be made in accordance with the terms of the Loan
Agreement and shall delivered to Lender at its address at Michael Jaharis, c/o
Steven K. Aronoff, P.C., 475 Park Avenue South, 23rd Floor, New York, New York
10016 or at such other address as shall be designated by Lender in a written
notice to the Borrower.
5. ADVANCES
Advances shall be made hereunder from time to time in accordance with
terms of the Loan Agreement, reference to which is hereby made for the
provisions regarding advances. At no time shall the aggregate of all advances
outstanding from time to time exceed $50,000,000.00.
6. LATE CHARGE
If any monthly payment of interest is not received by the Lender or any
holder hereof within 15 days after its due date, there shall be imposed on the
Borrower a late charge equal to five (5.0%) percent of such overdue payment.
3
<PAGE>
7. CONVERSION RIGHTS
Subject to the provisions of the Loan Agreement, the holder of this
Note is entitled, at his option, at any time after the First Advance Date and
while this Note is outstanding or any principal, interest or other sum owing
under this Note or any other Loan Document is unpaid, and from time to time, to
convert the principal amount of this 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
determined as provided in the Loan Agreement, delivery of the Conversion Notice
duly executed, together with a photocopy of the Note, to the Borrower at the
Borrower's office designated in Section 9.02 of the Loan Agreement. In each such
instance in which the Lender elects to convert, the Borrower shall deliver to
the holder hereof (i) 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, at
the holder's election, any portion of unpaid accrued interest owed under this
Note, by the Conversion Price or, if applicable, the Adjusted Conversion Price,
(ii) payment in New York Clearing House funds or other funds acceptable to the
holder hereof of an amount equal to any portion of unpaid accrued interest owed
under this Note which is not converted into Common Stock as provided above,
(iii) if the Note is not fully converted into Common Stock, a replacement Note
for the remainder of the outstanding principal balance, 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. Upon such delivery, 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. No adjustment is to be made on conversion for
dividends on shares of Common Stock issued on conversion. 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. The right to convert this Note into Common
Stock shall survive any Acquisition Transaction (as defined in the Loan
Agreement), in which case the Conversion Price or the Adjusted Conversion Price
then in effect shall be subject to adjustment as set forth in the Loan
Agreement.
In the event of any inconsistency between this paragraph 7 and any
provisions in the Loan Agreement, the provisions in the Loan Agreement shall
govern.
4
<PAGE>
8. ENFORCEMENT
Upon the occurrence of an Event of Default (as hereinafter defined),
the entire principal balance remaining unpaid plus accrued interest shall, at
the option of the holder hereof, become immediately due and payable, and the
Borrower shall have all of the rights and remedies provided in the Loan
Agreement and shall be entitled to be reimbursed for its costs and expenses as
set forth therein.
An Event of Default is defined as any one of the following: (I) default
in the payment of any principal, interest or other amounts within ten (10) days
after such payment is due hereunder; (II) breach of any provisions of this Note;
or (III) the occurrence of any Event of Default under the Loan Agreement.
No extension of time for payment, or delay in enforcement hereof, nor
any renewal of this Note with or without notice, shall release the obligation of
the Borrower to the Lender or holder hereof or shall operate as a waiver of any
of its rights.
Presentment, demand, protest and notice of dishonor are hereby waived
by the Borrower.
9. RIGHT OF SETOFF
Upon the occurrence of and during the continuance of any Event of
Default hereunder, the Lender is hereby authorized at any time and from time to
time, without notice to the Borrower (any such notice being expressly waived by
the Borrower) to set-off and apply any and all indebtedness at any time owing by
the Lender to or for the credit or the account of the Borrower against any and
all of the obligations of the Borrower now or hereafter existing under this Note
or the Loan Agreement, irrespective of whether or not the Lender shall have made
any demand under this Note or the Loan Agreement. The Lender agrees promptly to
notify the Borrower after any such setoff and application made by the Lender,
provided that the failure to give such notice shall not affect the validity of
such setoff and application. The rights of the Lender under this provision are
in addition to other rights and remedies (including, without limitation, any
common law right of setoff) which the Lender may have.
10. 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.
5
<PAGE>
11. SUBMISSION TO JURISDICTION; WAIVER OF BOND
THE BORROWER HEREBY CONSENTS TO THE JURISDICTION OF ANY LOCAL, STATE,
OR FEDERAL COURT LOCATED WITHIN THE STATE OF CONNECTICUT AND WAIVES ANY
OBJECTION WHICH BORROWER MAY HAVE, BASED ON IMPROPER VENUE OR FORUM NON
CONVENIENS, TO THE CONDUCT OF ANY PROCEEDING IN ANY SUCH COURT AND WAIVES
PERSONAL SERVICE OF ANY AND ALL PROCESS UPON BORROWER, AND CONSENTS THAT ALL
SUCH SERVICE OF PROCESS BE MADE BY MAIL OR MESSENGER DIRECTED TO BORROWER AT THE
ADDRESS SET FORTH BELOW AND THAT SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED
UPON THE EARLIER OF ACTUAL RECEIPT OR THREE (3) DAYS AFTER THE SAME SHALL HAVE
BEEN POSTED TO BORROWER'S ADDRESS. THE BORROWER WAIVES ANY BOND OR SURETY OR
SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF THE
LENDER. NOTHING CONTAINED IN THIS PARAGRAPH AFFECTS THE RIGHT OF THE LENDER TO
SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECTS THE RIGHT OF
THE LENDER TO BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR BORROWER'S
PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION.
12. WAIVER OF JURY TRIAL
THE BORROWER WAIVES ANY RIGHT TO TRIAL BY JURY WHICH BORROWER MAY HAVE
IN ANY PROCEEDING BETWEEN LENDER AND BORROWER.
13. WAIVER OF PLAINTIFF'S RIGHTS.
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.
14. GOVERNING LAW
This Note and its interpretation, construction, validity and
enforceability shall be governed by the laws of the State of Connecticut.
6
<PAGE>
KOS PHARMACEUTICALS, INC.
By: _______________________________
Name: Daniel M. Bell
Title: President
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:
7
EXHIBIT 10.16
REVOLVING CREDIT AND LOAN AGREEMENT
DATED AS OF DECEMBER 21, 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 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 1.02. ADVANCES shall mean the advances made under the Note and
pursuant to this Agreement.
SECTION 1.03. AMENDED AND RESTATED PATENT SECURITY AGREEMENT shall mean
the Amended and Restated Patent, Trademark and License Security Agreement of
even date herewith granted by Borrower to Lender as collateral security for the
Note and the
<PAGE>
September Note.
SECTION 1.04. AMENDED AND RESTATED SECURITY AGREEMENT shall mean the
Amended and Restated Security Agreement of even date herewith granted by
Borrower to Lender as collateral security for the Note and the September Note.
SECTION 1.05. AMENDED AND RESTATED STOCK PLEDGE AGREEMENT shall mean
the Amended and Restated Stock Pledge Agreement of even date herewith granted by
the Borrower to Lender as collateral security for the Note and the September
Note.
SECTION 1.06. AMENDED AND RESTATED SUBSIDIARY GUARANTY shall mean the
Amended and Restated Guaranty of even date herewith granted by ATI to Lender
guaranteeing repayment of the Note and the September Note.
SECTION 1.07. AMENDED AND RESTATED SUBSIDIARY SECURITY AGREEMENT shall
mean the Amended and Restated Subsidiary Security Agreement of even date
herewith granted by ATI to Lender as collateral security for the Amended and
Restated Subsidiary Guaranty.
SECTION 1.08. ATI shall mean Aeropharm Technology, Inc., a Delaware
corporation which is a wholly owned subsidiary of Borrower.
2
<PAGE>
SECTION 1.09. ATI STOCK PLEDGE AGREEMENT shall mean the Stock Pledge
Agreement of even date herewith granted by ATI to Lender as collateral security
for the Amended and Restated Subsidiary Guaranty.
SECTION 1.10. BUSINESS DAY shall mean any day other than a Saturday,
Sunday or other day on which the Borrower's business is closed.
SECTION 1.11. CLOSING DATE shall mean the date on which the closing for
this Loan is held.
SECTION 1.12. COMMON STOCK shall mean the capital common stock of the
Borrower, consisting of 50,000,000 authorized shares $.01 par value.
SECTION 1.13. 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 1.14. CREDIT FACILITY shall mean the $50,000,000.00
3
<PAGE>
revolving credit facility made available by the Lender pursuant to the Note.
SECTION 1.15. 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 1.16. ENVIRONMENTAL COMPLAINT shall mean any complaint, order,
citation or notice of violation of Environmental Laws with regard to air
emissions, water discharges, surface
4
<PAGE>
contamination, noise emissions or any other environmental, health or safety
matter affecting the Borrower or any of its real properties.
SECTION 1.17. 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 1.18. 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,
5
<PAGE>
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 1.19. EVENT OF DEFAULT shall mean an Event of Default under
Section 6.01.
SECTION 1.20. EXCHANGE ACT shall mean the Securities Exchange Act of
1934, as amended from time to time.
SECTION 1.21. 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 1.22. 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
6
<PAGE>
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 1.23. IEP shall mean IEP Pharmaceutical Devices, Inc., a
Florida corporation which is a wholly owned subsidiary of Borrower.
SECTION 1.24. IEP GUARANTY shall mean the Guaranty of even date
herewith granted by IEP to Lender guaranteeing repayment of the Note and the
September Note.
SECTION 1.25. IEP SECURITY AGREEMENT shall mean the IEP Security
Agreement of even date herewith granted by IEP to Lender as collateral security
for the IEP Guaranty.
SECTION 1.26. JULY CREDIT FACILITY shall mean the $30,000,000 revolving
credit facility made available by the Lender to the Borrower pursuant to that
certain Promissory Note by Borrower in favor of Lender dated as of July 1, 1998
and that certain Revolving Credit Facility and Loan Agreement between Borrower
and Lender dated as of July 1, 1998.
SECTION 1.27. LOAN shall mean the loan made pursuant to Section 2.01
and the Note.
SECTION 1.28. LOAN DOCUMENTS shall mean this Agreement, the
7
<PAGE>
Note, the Second Amended and Restated Registration Rights Agreement, the Amended
and Restated Security Agreement, the Amended and Restated Patent Security
Agreement, the Amended and Restated Stock Pledge Agreement, the Amended and
Restated Subsidiary Guaranty, the Amended and Restated Subsidiary Security
Agreement, the IEP Guaranty, the IEP Security Agreement, the UCC-1 financing
statements executed in connection with the security agreements, the Warrant
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 1.29. MATURITY DATE shall mean June 30, 2005.
SECTION 1.30. 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 1.31. 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
8
<PAGE>
or affiliated vendors made within a 30 day period for a group of similar or
interrelated items shall constitute one transaction.
SECTION 1.32. 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 1.33. 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.
SECTION 1.34. 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
9
<PAGE>
successors thereto.
SECTION 1.35. 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 1.36. 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 1.37. SECOND AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
shall mean the Second Amended and Restated 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 exercise of warrants issued to Lender pursuant to
the Warrant Agreement or upon conversion of the September Note pursuant to
Article IV of the September Credit Agreement.
SECTION 1.38. SECURITIES ACT shall mean the Securities Act of 1933, as
amended from time to time.
SECTION 1.39. SEPTEMBER CREDIT AGREEMENT shall mean that certain
Revolving Credit and Loan Agreement between Borrower and Lender dated as of
September 1, 1999.
SECTION 1.40. SEPTEMBER CREDIT FACILITY shall mean the $50,000,000
revolving credit facility made available by the Lender
10
<PAGE>
pursuant to the September Note and the September Credit Agreement.
SECTION 1.41. SEPTEMBER NOTE shall mean that certain Promissory Note by
Borrower in favor of Lender dated as of September 1, 1999 in the principal
amount of $50,000,000.
SECTION 1.42. SUBSIDIARIES shall mean ATI and IEP.
SECTION 1.43. 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 1.44. TERMINATION DATE shall mean June 30, 2002.
SECTION 1.45. WARRANT shall mean that certain warrant to purchase 6
million shares of Common Stock at a price of $5.00 per share.
11
<PAGE>
ARTICLE II
THE LOAN
SECTION 2.01. THE LOAN. The Lender agrees, on the terms and conditions
hereinafter set forth, to make a Loan to the Borrower in an amount not to exceed
Fifty Million Dollars ($50,000,000.00) on the terms and conditions set forth
herein and in the Note.
SECTION 2.02. MAKING ADVANCES. 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.
(a) Borrower may use loan proceeds for any business purpose of
Borrower.
(b) Nothing herein shall obligate the Lender to make any Advance in
excess of the maximum amount of the Credit Facility, the making of any or all
Advances in excess of the maximum amount
12
<PAGE>
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.
(c) 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.
(d) 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
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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
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.
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SECTION 2.05. INCREASE IN LOAN AMOUNT. The amount of the Loan may be
increased from time to time by the execution and delivery of an amendment to
this Agreement setting forth the amount of such increase, duly executed by the
Lender and the Borrower, and the execution and delivery by the Borrower of a
note in substantially the form of EXHIBIT I attached hereto in the principal
amount of such increase. Upon execution and delivery of any such note, any
reference to the term "Loan Documents" herein or in any Loan Document shall be
deemed to include reference to such note.
SECTION 2.06. PAYMENTS AND COMPUTATIONS. The Borrower shall make each
payment under any Loan Document not later than 3:00 p.m. (New York City time) on
the day when due in lawful money of the United States of America to the Lender
at its address referred to in Section 8.02 in immediately available funds. All
computations of interest under the Note shall be made by the Lender on the basis
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
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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;
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(b) The Second Amended and Restated Registration Rights Agreement, duly
executed by the Borrower;
(c) The Amended and Restated Security Agreement, duly executed by the
Borrower;
(d) The Amended and Restated Patent Security Agreement, duly executed
by the Borrower;
(e) The Amended and Restated Subsidiary Security Agreement, duly
executed by ATI;
(f) The Amended and Restated Subsidiary Guaranty, duly executed by ATI;
(g) The IEP Guaranty, duly executed by IEP;
(h) The IEP Security Agreement, duly executed by IEP;
(i) The ATI Stock Pledge Agreement, duly executed by ATI;
(j) UCC-1 financing statements with respect to the security interests
granted to Lender by IEP under the Loan Documents for such locations as the
Lender may deem necessary to perfect the Lender's security interests, duly
executed by IEP;
(k) The Warrant, duly executed by the Borrower.
(l) The Amended and Restated Stock Pledge Agreement, duly executed by
the Borrower;
(m) A conditional assignment of Borrower's lease(s) of real
17
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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 Amended and Restated Security Agreement, all in form and
substance satisfactory to Lender;
(n) 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 Amended and Restated 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;
(o) 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;
(p) A certified copy of the resolutions of the board of directors of
the Borrower approving this transaction in the form
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attached as EXHIBIT III;
(q) A certificate of the secretary or an assistant secretary of the
Borrower certifying the names and true signatures of the officers of the
Borrower authorized to sign each Loan Document to which it is a party and the
other documents to be delivered by it hereunder;
(r) Copies of consents of third parties necessary for the consummation
of this transaction;
(s) 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
(t) 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;
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(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;
(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, all loan proceeds
available under the September Credit Facility shall have been advanced to
Borrower and shall remain outstanding, except to the extent that any portion of
the outstanding balance under the September Credit Facility is converted
pursuant to the terms of the September Note and the September Credit Agreement.
(f) 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,
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governmental agency or arbitrator which is likely to have a materially adverse
effect on the financial condition or operations of the Borrower;
(g) 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;
(h) As of the date of such requested Advance, the death of Lender shall
not have occurred;
(i) 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
(j) Such approvals, opinions and documents as the Lender may reasonably
request.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. 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
18,020,752 shares are issued and outstanding as of December 20, 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
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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 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
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party or by which it or its properties may be bound or affected; or
(v) result in, or require, the creation or imposition of any
mortgage, deed of trust, pledge, lien, security interest or other
charge or encumbrance of any nature (other than arising under a Loan
Document) upon or with respect to any of the properties now owned or
hereafter acquired by the Borrower;
and the Borrower is not in default under any such law, rule, regulation, order,
writ, judgment, injunction, decree, determination or award or any such
indenture, agreement, lease or instrument.
(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,
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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, and the consolidated balance sheet of the Borrower as of
September 30, 1999, and the related consolidated statements of operations,
shareholders' equity and cash flows for the quarter then ended, 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 and September 30, 1999, there has been no
material adverse change in such condition or operations.
(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
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<PAGE>
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 5.02(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,
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licenses and other authorizations required under Environmental and
Safety Requirements, except for any licenses, permits or authorizations
the failure to obtain which would not reasonably be expected to have a
material adverse effect on the operations or financial condition of the
Company.
(ii) The Borrower is in material compliance with all material
terms and conditions of any required material permits, licenses, and
authorizations and with all other material limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in any Environmental and Safety
Requirements or any notice or demand letters issued, entered,
promulgated or approved thereunder, except where the failure 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
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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 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 V
COVENANTS OF THE BORROWER
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SECTION 5.01. AFFIRMATIVE COVENANTS. So long as the Note shall remain
unpaid, the Borrower will, unless the Lender shall otherwise consent in writing:
(a) COMPLIANCE WITH LAWS, ETC. Comply in all material respects with all
applicable laws, rules, regulations and orders, such compliance to include,
without limitation, paying before the same become delinquent all taxes,
assessments and governmental charges imposed upon it or upon its property except
to the extent contested in good faith.
(b) MAINTENANCE OF INSURANCE. Maintain insurance with responsible and
reputable insurance companies or associations in such amounts and covering such
risks as is usually carried by companies engaged in similar businesses and
owning similar properties in the same general areas in which the Borrower
operates.
(c) MAINTENANCE OF PROPERTIES, ETC. Maintain and preserve all of its
properties, necessary or useful in the proper conduct of its business, in good
working order and condition, ordinary wear and tear excepted.
(d) KEEPING OF RECORDS AND BOOKS OF ACCOUNT. Keep adequate
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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.
(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
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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
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:
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(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 Borrower as of the end of such fiscal year and the
related consolidated
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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
33
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of the type described in Section 4.01(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);
(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
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or operations, financial or otherwise, of the Borrower as the Lender
may from time to time reasonably request.
SECTION 5.02. NEGATIVE COVENANTS. So long as the Note shall remain
unpaid, the Borrower will not, without the written consent of the Lender:
(a) LIENS, ETC. Create or suffer to exist any lien, security interest
or other charge or encumbrance, or any other type of preferential arrangement,
upon or with respect to any of its properties, whether now owned or hereafter
acquired, or assign any right to receive income, in each case to secure any Debt
of any Person, except that the foregoing restrictions shall not apply to
mortgages, deeds of trust, pledges, liens, security interests or other charges
or encumbrances:
(i) existing as of the date hereof and listed in SCHEDULE A
attached hereto and made a part hereof;
(ii) for taxes, assessments or governmental charges or levies
on property of the Borrower if the same shall not at the time be
delinquent or thereafter can be paid without penalty, or are being
contested in good faith and by appropriate proceedings;
(iii) imposed by law, such as carriers, landlord's,
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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 1.32 above; and
(v) Debt authorized under subsection 5.02(c).
(c) ASSUMPTIONS, GUARANTIES, ETC. OF INDEBTEDNESS OF OTHER
36
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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
37
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Investors services Inc., or A-1 or better by Standard & Poor's
Corporation;
(iii) investments in certificates of deposit with a maturity
not in excess of ninety days from the date of acquisition thereof,
issued by any commercial bank organized and existing under the laws of
the United States of America or under any state of the United States of
America and having a combined capital and undivided surplus of not less
than $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
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$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.
(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.
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(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.
SECTION 5.03. FINANCIAL COVENANTS. So long as the Note shall remain
unpaid, the Borrower will not fail, without the prior
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written consent of the Lender, to comply with the financial covenants set forth
in SCHEDULE B.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.01. EVENTS OF DEFAULT. The occurrence of any of the following
events shall constitute an Event of Default hereunder:
(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,
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any such failure shall remain unremedied for thirty (30) days after written
notice thereof shall have been given to such Borrower by the Lender; provided,
however, that if by the end of such thirty day period the Borrower has
substantially cured the applicable failure, and such failure has not caused, and
is not expected to immediately cause, a material adverse effect on the Borrower
or its subsidiaries, the Borrower shall have an additional thirty (30) days to
remedy the failure; or
(d) The Borrower shall:
(i) fail to pay any Debt 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
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<PAGE>
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 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
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a receiver, trustee, or other similar official for it or for any substantial
part of its property, which proceeding is not dismissed within thirty (30) days
after being instituted; or the Borrower shall take any corporate action to
authorize any of the actions set forth above in this subsection (e); or
(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
(j) The occurrence of an Acquisition Transaction; or
(k) A Take-Over Attempt.
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SECTION 6.02. 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) exercise any or all of its rights or remedies permitted by
applicable law of a secured party under the Amended and Restated Security
Agreement or the Amended and Restated Patent Security Agreement;
(c) 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.
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ARTICLE VII
INDEMNIFICATION AND LIMITATION ON LIABILITY OF LENDER
SECTION 7.01. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on
demand all costs and expenses in connection with the preparation, execution,
delivery, filing, and recording of the Loan Documents, and the other documents
to be delivered under the Loan Documents, including, without limitation, the
reasonable fees and out-of-pocket expenses of legal counsel for the Lender and
fees and out-of-pocket expenses of Lender's advisors with respect thereto, and
all costs and expenses, if any, including, without limitation, the reasonable
fees and out-of-pocket expenses of legal counsel for the Lender, in connection
with the enforcement of the Loan Documents and the other documents to be
delivered under the Loan Documents, the filing or recording of financing
statements and other documents (including all taxes in connection therewith) in
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
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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 issuance of Common Stock pursuant to the exercise of
any Warrants 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 7.02. GENERAL INDEMNIFICATION. Except as otherwise provided in
the Second Amended and Restated 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
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execution of this Agreement or any other Loan Document, other than as such may
be caused by Lender's or such other Person's willful misconduct. All obligations
provided for in this Section 8.02 shall survive any termination of this
Agreement and any other Loan Document.
SECTION 7.03. ENVIRONMENTAL INDEMNIFICATION.
(a) Borrower hereby agrees to defend the Lender and its officers,
directors, agents, employees, and counsel from, and hold each of them harmless
against, any and all losses, liabilities, claims, damages, interests, judgments,
costs (including without limitation cleanup costs) and expenses incurred by any
of them, including without limitation reasonable attorneys fees and
disbursements, arising out of or in connection with (i) the presence on or under
or the escape, seepage, leakage, 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
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Section 4.01(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.
(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
49
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limitation, the United States Environmental Protection Agency, asserting the
existence of any Hazardous Discharge or Environmental Complaint on or pertaining
to any of the Borrower's real properties which, if true, could reasonably be
expected to result in an order, suit or other action against the Borrower
affecting any part of its real properties by any governmental agency or
otherwise and which could reasonably be expected to have a material adverse
effect on Borrower's operations or financial condition. All reasonable costs and
expenses incurred by the Lender in the exercise of any such rights herein shall
be payable by the Borrower upon demand, together with interest thereon at a rate
equal to the interest rate payable under the Note.
(d) The indemnity obligations of the Borrower under this Section 7.03
shall survive payment of the Note.
SECTION 7.04. LIMITATION ON LIABILITY OF LENDER. The Borrower hereby
waives any claim or defense arising out of or in any way related to the Loan
based upon the occurrence of any action or inaction of Lender on or prior to the
Closing Date which Borrower believes may (i) be actionable against Lender, or
(ii) give rise to a defense to payment hereunder or under the Note for any
reason, including without limitation, commission of a tort or
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violation of any contractual duty or duty implied at law. Lender shall not be
responsible for any lost profits of Borrower arising from any breach of
contract, tort or any other wrong arising from the establishment, administration
or collection of the Loan.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01. AMENDMENTS, ETC. No amendment or waiver of any provision
of any Loan Document, this Agreement or the Note, nor consent to any departure
by the Borrower therefrom, shall in any event be effective unless the same shall
be in writing and signed by the Lender, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
SECTION 8.02. NOTICES, ETC. All notices and other communications
provided for hereunder shall be in writing (including telegraphic communication)
and mailed certified, return receipt requested, or telegraphed or delivered, if
to the Borrower, at its address at 1001 Brickell Bay Drive, 25th Floor, Miami,
FL 33131, Attention: President; if to the Lender, at its
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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 8.03. NO WAIVER; REMEDIES. No failure on the part of the Lender
to exercise, and no delay in exercising, any right under any Loan Document shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right under any Loan Document preclude any other or further exercise thereof or
the exercise of any other right. The remedies provided in the Loan Documents are
cumulative and not exclusive of any remedies provided by law.
SECTION 8.04. ACCOUNTING TERMS. Except as otherwise stated herein, all
accounting terms not specifically defined herein or in any schedule or exhibit
hereto shall be construed in accordance with generally accepted accounting
principles, applied on a consistent basis 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.
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SECTION 8.05. RIGHT OF SET-OFF. Upon the occurrence and during the
continuance of any Event of Default, the Lender is hereby authorized at any time
and from time to time, without notice to the Borrower (any such notice being
expressly waived by the Borrower), to set-off and apply any and all indebtedness
at any time owing by the Lender to or for the credit or the account of the
Borrower against any and all of the obligations of the Borrower now or hereafter
existing under this Agreement and the Note, irrespective of whether or not the
Lender shall have made any demand under this Agreement or the Note. The Lender
agrees promptly to notify the Borrower after any such set-off and application
made by the Lender, provided that the failure to give such notice shall not
affect the validity of such set-off and application. The rights of the Lender
under this Section are in addition to other rights and remedies (including,
without limitation, other rights of set-off) which the Lender may have.
SECTION 8.06. BINDING EFFECT; GOVERNING LAW. This Agreement shall
become effective when it shall have been executed by the Borrower and the Lender
and shall be binding upon and inure to the benefit of the Borrower, the Lender
and their respective successors and assigns, except that the Borrower shall not
have
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the right to assign its rights hereunder or any interest herein without the
prior written consent of the Lender. This Agreement and the Note shall be
governed by, and construed in accordance with, the laws of the State of
Connecticut.
SECTION 8.07. EXECUTION IN COUNTERPARTS. This Agreement may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
agreement.
SECTION 8.08. PARTIAL INVALIDITY. If any provision of this Agreement is
held to be invalid or unenforceable, such invalidity or unenforceability shall
not invalidate this Agreement as a whole but this Agreement shall be construed
as though it did not contain the particular provision or provisions held to be
invalid or unenforceable and the rights and obligations of the parties shall be
construed and enforced only to such extent as shall be permitted by law.
SECTION 8.09. CONFLICTS. In the event that any provision of this
Agreement conflicts with any of the Loan Documents delivered in connection with
the transaction contemplated herein, the terms of this Agreement shall control,
notwithstanding any
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such conflicts.
SECTION 8.10. SURVIVAL. The representations and warranties contained
herein shall survive the execution of this Agreement by the parties herein.
SECTION 8.11. WAIVER OF RIGHTS. BORROWER ACKNOWLEDGES THAT THE
TRANSACTION OF WHICH THIS NOTE IS A PART IS A COMMERCIAL TRANSACTION. BORROWER
HEREBY WAIVES, TO THE EXTENT PERMITTED BY LAW, THE BENEFITS OF ALL VALUATION,
APPRAISEMENT, HOMESTEAD, EXEMPTION, STAY, REDEMPTION AND MORATORIUM LAWS, NOW IN
FORCE OR WHICH MAY HEREAFTER BECOME LAW.
SECTION 8.12. SUBMISSION TO JURISDICTION; WAIVER OF BOND. THE BORROWER
HEREBY CONSENTS TO THE JURISDICTION OF ANY LOCAL, STATE, OR FEDERAL COURT
LOCATED WITHIN THE STATE OF CONNECTICUT OR FLORIDA 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 8.02 ABOVE AND THAT SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON
THE EARLIER OF ACTUAL RECEIPT OR THREE (3) DAYS AFTER THE SAME SHALL HAVE BEEN
POSTED TO
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THE BORROWER'S ADDRESS. THE BORROWER WAIVES ANY BOND OR SURETY OR SECURITY UPON
SUCH BOND WHICH, MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF THE LENDER. NOTHING
CONTAINED IN THIS SECTION AFFECTS THE RIGHT OF THE LENDER TO SERVE LEGAL PROCESS
IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECTS THE RIGHT OF THE LENDER TO BRING
ANY ACTION OR PROCEEDING AGAINST THE BORROWER OR BORROWER'S PROPERTY IN THE
COURTS OF ANY OTHER JURISDICTION.
SECTION 8.13. WAIVER OF JURY TRIAL. THE BORROWER WAIVES, TO THE EXTENT
PERMITTED BY LAW, ANY RIGHT TO TRIAL BY JURY WHICH BORROWER MAY HAVE IN ANY
PROCEEDING BETWEEN LENDER AND BORROWER.
SECTION 8.14. WAIVER OF PLAINTIFF'S RIGHT. 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.
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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:____________________________
Name: Daniel M. Bell
Title: President
_______________________________
MICHAEL JAHARIS
<PAGE>
STATE OF )
) ss.:
COUNTY OF )
On the ______ day of ___________, _____, 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 )
) ss.:
COUNTY OF )
On the ____ day of _________, ____, 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:
<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
<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.
EXHIBIT 10.17
SECOND AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
This Second Amended and Restated Registration Rights Agreement (this
"Agreement") is made and entered into effective as of December 21, 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 Amended and Restated Registration Rights Agreement entered into by the
Company, Holdings and Investments dated as of September 1, 1999.
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 has issued a Promissory Note dated September 1,
1999 (the "September Jaharis Note") to Jaharis for an
aggregate principal amount of $50,000,000, which is
convertible to shares of Common Stock (the "Convertible Note
Shares"). Under the terms of the Jaharis Note, the Company has
granted Jaharis certain registration rights in accordance with
the terms of this Agreement.
D. The Company is issuing a Promissory Note of even date herewith
(the "January Jaharis Note") to Jaharis for an aggregate
principal amount of $50,000,000. In connection with the
January Jaharis Note, the Company
<PAGE>
is issuing a Warrant Agreement of even date herewith (the
"Warrant Agreement") pursuant to which Jaharis will receive
warrants to purchase shares of common stock (the "Warrant
Shares", and, together with the Holdings Shares, the
Investments Shares, the Convertible Note Shares, the "Shares")
Under the terms of the Warrant Agreement, 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 September Jaharis Note into the Convertible Note Shares as
provided in the September Loan Agreement and the September Jaharis Note.
c. "CUTBACK REGISTRATION" means any registration in connection
with an underwritten public offering in which the managing underwriter advises
the Company that 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. "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.
e. "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.
f. "REGISTRATION RIGHTS HOLDER" means either Holdings,
Investments, or Jaharis, individually (collectively referred to as the
"Registration Rights Holders").
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g. "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).
h. "REGISTRATION EXPENSES" means the expenses described in
Section 4.
i. "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.
j. "SEPTEMBER LOAN AGREEMENT" shall mean that certain Revolving
Credit and Loan Agreement dated as of September 1, 1999 between the Company and
Jaharis providing for an extension of credit by Jaharis to the Company in the
principal amount of $50,000,000.
3
<PAGE>
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 September Jaharis Note shall become convertible into Common Stock of
the Company, or whether before or after Jaharis shall exercise any warrants
pursuant to the Warrant Agreement, 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.
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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.
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.
5
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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 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.
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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
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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.
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
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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
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
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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.
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
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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.
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.
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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.
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:________________________________________
Daniel M. Bell, President
KOS HOLDINGS, INC.
By:________________________________________
KOS INVESTMENTS, INC.
By:________________________________________
_________________________________________
MICHAEL JAHARIS
12
EXHIBIT 10.18
AMENDED AND RESTATED SECURITY AGREEMENT
This Amended and Restated Security Agreement dated as of December 21,
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 "December Loan") as more fully described and set forth in a
loan agreement of even date herewith between the Lender and the Borrower (the
"December Loan Agreement"); and
WHEREAS, the Lender previously entered into a Revolving Credit and Loan
Agreement dated as of September 1, 1999 with Borrower (the "September Loan
Agreement") whereby Lender agreed to extend a line of credit to Borrower in the
maximum principal amount of $50,000,000 (the "September Loan"); and
WHEREAS, the Lender also previously entered into a Revolving Credit and
Loan Agreement dated as of July 1, 1998 with Borrower, as amended by amendment
of even date herewith (the "Unsecured Credit Agreement")(the December and
September Loan Agreements together with the Unsecured Credit Agreement shall
hereinafter be referred to as the "Loan Agreements") whereby Lender agreed to
extend an unsecured line of credit to Borrower in the maximum principal amount
of $30,000,000 (the "July Loan")(the December, September and July Loans shall
hereinafter be referred to collectively as the "Loans"), which amount is fully
advanced to Borrower as of the date hereof; and
WHEREAS, the December and September Loan Agreements provide, in part,
that the Loans shall be secured by a blanket lien upon all personal property
owned by Borrower;
WHEREAS, this Amended and Restated Security Agreement amends and
restates that Security Agreement dated September 1, 1999 by and between Borrower
and Lender (the "Original Security Agreement") granting a blanket lien security
interest to Lender to secure the September Loan;
<PAGE>
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein and in the Loan Agreements, 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, and hereby confirms and ratifies its grant to Lender pursuant to the
Original Security Agreement as of September 1, 1999 of, 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
September Loan, the September Loan Agreement and any and all documents
executed in connection therewith, as amended and/or restated
(collectively, the "September Loan Documentation"); and
(iii) Borrower's liabilities and obligations under the July
Loan, the Unsecured Credit Agreement and any and all documents executed
in connection therewith, as amended and/or restated (collectively, the
"July Loan Documentation"); and
(iv) 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:
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(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 Amended and Restated 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 purpose. Unless an Event of Default (as hereinafter defined)
has occurred and is continuing, the Borrower
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<PAGE>
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 Amended and Restated
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 December and
September Loan Agreements.
(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
5.01(f) of the December and September Loan Agreements.
(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 5.02(a)(ii) of the December and September Loan
Agreements.
(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
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<PAGE>
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 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 5.01(f) of the December
and September Loan Agreements 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
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<PAGE>
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 Amended and Restated Security Agreement or under the December and September
Loan Agreements, 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 Amended and Restated
Security Agreement, the December Loan Agreement, the note evidencing the
December Loan (the "December Note"), or any other Loan Document (as hereinafter
defined) or contained in the September Loan Documentation or the July 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 December or September Loans, at the
Lender's option. The total amount of additional payments so made by the Lender
and not otherwise reimbursed by the Borrower shall be secured by this Amended
and Restated Security Agreement in the same manner as this Amended and Restated
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 Amended and Restated Security Agreement, the December or
September Loan Agreement or any other Loan Documents or the September Loan
Documentation, and not inconsistent with any policy of insurance thereon.
5. DEFAULT. The Borrower shall be in default under this
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Amended and Restated 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 Amended and Restated 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 December Loan, which instruments include,
without limitation, the December Loan Agreement, the December Note, the Amended
and Restated Patent, Trademark and License Security Agreement of even date
herewith (the "Amended and Restated Patent Security Agreement"), the Second
Amended and Restated Registration Rights Agreement of even date herewith (the
"Second Amended and Restated Registration Rights Agreement") and such other
documentation as may be executed in connection with the December Loan together
with any subsequent amendments or modifications thereto (collectively, the "Loan
Documents"); or
(c) the occurrence of any event of default (and the expiration of
applicable cure periods, if any) by the Borrower under the September Note, the
September Loan Agreement and the September Loan Documentation, as amended and/or
restated.
6. RIGHTS OF LENDER UPON DEFAULT. (a) Without limiting the rights of
the Lender as contained in the December and September Loan Agreements and the
Amended and Restated 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
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<PAGE>
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 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
December Loan, the September Loan or the July Loan for any reason, Borrower
shall execute a mortgage and
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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 Amended and Restated
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 December Loan, the September Loan and the July Loan have
been terminated. Borrower acknowledges and 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, the September Loan
Documentation or the July Loan Documentation, 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 Amended and Restated Security Agreement may not
be modified or amended except by a writing signed by both the Borrower and the
Lender.
10. AMENDED AND RESTATED PATENT SECURITY AGREEMENT. This Agreement is
supplemental to the Amended and Restated Patent
9
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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 Amended and Restated Security
Agreement deemed invalid or unenforceable under any applicable law shall not
serve to invalidate the remainder of this Amended and Restated Security
Agreement.
12. CONSTRUCTION. This Amended and Restated 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 Amended and Restated Security Agreement.
15. BORROWER WAIVERS. THE BORROWER ACKNOWLEDGES THAT THE TRANSACTION OF
WHICH THIS AMENDED AND RESTATED 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 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 8.02 OF THE DECEMBER LOAN
10
<PAGE>
AGREEMENT AND SECTION 9.02 OF THE SEPTEMBER 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.
11
<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_______________________________________
Name: Daniel M. Bell
Title: President
LENDER:
________________________________
MICHAEL JAHARIS
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SCHEDULE A
DEBTOR/BORROWER: KOS PHARMACEUTICALS, INC.
SECURED PARTY/LENDER: MICHAEL JAHARIS
For purposes of this Amended and Restated 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:
1. 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.
2. 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.
3. 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
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<PAGE>
the rights of the Borrower under any manufacturer's warranties relating
to the foregoing.
4. 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 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
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<PAGE>
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(R)and Nicostatin(R), 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(R)
and Nicostatin(R), 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.
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
15
<PAGE>
to such property and all insurance therefor.
16
EXHIBIT 10.19
$ 50,000,000.00 New York, New York
December 21, 1999
1. OBLIGATION TO PAY
FOR VALUE RECEIVED, the undersigned Borrower promises to pay to the
order of MICHAEL JAHARIS, an individual residing in South Norwalk, Connecticut
(the "Lender"), the principal sum of Fifty Million Dollars ($50,000,000.00), on
June 30, 2005, or such amount thereof as shall be outstanding hereunder on such
date, plus interest payable at the rate and in the manner provided in paragraph
3 of this Note, plus any costs and expenses incurred in the enforcement of this
Note as provided in paragraph 7 of this Note. This Note is transferable by the
holder hereof.
This Note is issued pursuant to the Loan Agreement (as hereinafter defined),
reference to which is hereby made for other terms applicable to this Note.
2. DEFINITIONS
Except as otherwise defined herein, all capitalized terms used herein
which are defined in the Loan Agreement shall have the meaning ascribed to them
therein. In addition, the following terms as used herein shall be defined as
follows:
(a) "Common Stock" shall mean the capital common stock of the Borrower,
consisting of 50,000,000 authorized shares $.01 par value.
(b) "Event of Default" shall mean any of the events set forth in
Paragraph 7 hereof.
(c) "First Advance Date" shall mean the date of the first advance under
this Note and the Loan Agreement.
(d) "Interest Adjustment Date" shall mean the first day of each month
during the term of this Note.
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<PAGE>
(e) "Loan Agreement" shall mean a Revolving Credit and Loan Agreement
of even date herewith between Borrower and the Lender pursuant to which this
Note is issued, as the same may be amended and supplemented from time to time.
(f) "Loan Documents" shall mean this Note, the Loan Agreement, the
Second Amended and Restated Registration Rights Agreement, the Amended and
Restated Security Agreement, the Amended and Restated Patent Security Agreement,
the Amended and Restated Stock Pledge Agreement, the Amended and Restated
Subsidiary Guaranty, the Amended and Restated Subsidiary Security Agreement, the
IEP Guaranty, the IEP Security Agreement, the UCC-1 financing statements
executed in connection with the security agreements, the Warrant 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".
(g) "Prime Rate" shall mean the prime rate (or substantially equivalent
index, if such bank discontinues its prime rate) of First Union National Bank as
announced from time to time, or, if such bank shall cease to exist without any
successor-in-interest, then the prime rate (or substantially equivalent index,
if no prime rate exists at such bank at such time) of any national or regional
bank selected by Lender having a comparable or larger asset size.
(h) "Warrant" shall mean that certain warrant to purchase 6 million
shares of Common Stock at a price of $5.00 per share.
3. INTEREST
The outstanding principal balance of this Note shall bear interest from
the date hereof until the earlier of maturity, imposition of the Default Rate
(as hereinafter defined) or payment in full, at a rate per annum equal to the
Prime Rate in effect on each Interest Adjustment Date (calculated on the basis
of a 360-day year for the actual number of days elapsed), on which date the
interest rate shall be increased or decreased to the extent of any increase or
decrease in the Prime Rate from the Prime Rate in effect on the immediately
preceding Interest Adjustment Date. After maturity, or upon the occurrence of
and during the
2
<PAGE>
continuance of an Event of Default, if earlier, the interest rate hereunder
shall be increased to a rate equal to six (6.0) percentage points in excess of
the rate which would otherwise be in effect hereunder.
Notwithstanding any provision of this Note to the contrary, in the
event that at any time the applicable rate of interest payable by Borrower to
Lender as stated in this Note (the "Contract Rate") exceeds the highest or
maximum rate of interest permissible to be charged by Lender under the laws of
the State of Connecticut or under federal law, or is determined by a tribunal or
court of competent jurisdiction to be excessive and unenforceable (in each case,
the "Maximum Legal Rate"), then the interest rate payable under this Note shall
automatically be reduced to the Maximum Legal Rate for such period as the
Maximum Legal Rate is higher than the Contract Rate. If subsequently the
Contract Rate becomes less than the Maximum Legal Rate, then the interest rate
payable under this Note shall automatically be decreased to the Contract Rate.
Any amounts paid in excess of the Maximum Legal Rate shall be considered to have
been payments in reduction of principal, and the outstanding principal balance
shall be adjusted to reflect such prepayments of principal.
4. PAYMENTS
Accrued interest shall be due and payable monthly on the seventh day of
each month. Interest may, at the option of the holder hereof, be deducted from
the amount of the proceeds of any disbursements hereunder.
Upon maturity, the outstanding principal balance of this Note, together
with unpaid interest accrued thereon and any other sums payable hereunder, shall
be payable in full.
All sums received hereunder shall be applied first to the payment of
late charges, costs and expenses payable to Lender hereunder, then to interest
(in the order in which earliest earned) and the balance to principal. Borrower
shall have the right to prepay this Note in full or in part at any time without
penalty.
3
<PAGE>
All payments shall be made in accordance with the terms of the Loan
Agreement and shall delivered to Lender at its address at Michael Jaharis, c/o
Steven K. Aronoff, P.C., 475 Park Avenue South, 23rd Floor, New York, New York
10016 or at such other address as shall be designated by Lender in a written
notice to the Borrower.
This Note may also be prepaid in part or in full by the holder of this
Note exercising the Warrant in accordance with the terms of the Warrant. No
partial prepayment of this Note by exercise of the Warrant shall abate
Borrower's obligation to make monthly interest payments on the outstanding
amount under this Note, nor shall such partial prepayment extend the maturity
date of this Note.
5. ADVANCES
Advances shall be made hereunder from time to time in accordance with
terms of the Loan Agreement, reference to which is hereby made for the
provisions regarding advances. At no time shall the aggregate of all advances
outstanding from time to time exceed $50,000,000.00.
6. LATE CHARGE
If any monthly payment of interest is not received by the Lender or any
holder hereof within 15 days after its due date, there shall be imposed on the
Borrower a late charge equal to five (5.0%) percent of such overdue payment.
7. ENFORCEMENT
Upon the occurrence of an Event of Default (as hereinafter defined),
the entire principal balance remaining unpaid plus accrued interest shall, at
the option of the holder hereof, become immediately due and payable, and the
Borrower shall have all of the rights and remedies provided in the Loan
Agreement and shall be entitled to be reimbursed for its costs and expenses as
set forth therein.
4
<PAGE>
An Event of Default is defined as any one of the following: (i) default
in the payment of any principal, interest or other amounts within ten (10) days
after such payment is due hereunder; (ii) breach of any provisions of this Note;
or (iii) the occurrence of any Event of Default under the Loan Agreement.
No extension of time for payment, or delay in enforcement hereof, nor
any renewal of this Note with or without notice, shall release the obligation of
the Borrower to the Lender or holder hereof or shall operate as a waiver of any
of its rights.
Presentment, demand, protest and notice of dishonor are hereby waived
by the Borrower.
8. RIGHT OF SETOFF
Upon the occurrence of and during the continuance of any Event of
Default hereunder, the Lender is hereby authorized at any time and from time to
time, without notice to the Borrower (any such notice being expressly waived by
the Borrower) to set-off and apply any and all indebtedness at any time owing by
the Lender to or for the credit or the account of the Borrower against any and
all of the obligations of the Borrower now or hereafter existing under this Note
or the Loan Agreement, irrespective of whether or not the Lender shall have made
any demand under this Note or the Loan Agreement. The Lender agrees promptly to
notify the Borrower after any such setoff and application made by the Lender,
provided that the failure to give such notice shall not affect the validity of
such setoff and application. The rights of the Lender under this provision are
in addition to other rights and remedies (including, without limitation, any
common law right of setoff) which the Lender may have.
9. WAIVER OF RIGHTS
BORROWER ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS NOTE IS A PART IS A
COMMERCIAL TRANSACTION. BORROWER HEREBY WAIVES, TO THE EXTENT PERMITTED BY LAW,
THE BENEFITS OF ALL VALUATION, APPRAISEMENT, HOMESTEAD, EXEMPTION, STAY,
REDEMPTION AND MORATORIUM LAWS, NOW IN FORCE OR WHICH MAY HEREAFTER BECOME LAW.
10. SUBMISSION TO JURISDICTION; WAIVER OF BOND
5
<PAGE>
THE BORROWER HEREBY CONSENTS TO THE JURISDICTION OF ANY LOCAL, STATE,
OR FEDERAL COURT LOCATED WITHIN THE STATE OF CONNECTICUT AND WAIVES ANY
OBJECTION WHICH BORROWER MAY HAVE, BASED ON IMPROPER VENUE OR FORUM NON
CONVENIENS, TO THE CONDUCT OF ANY PROCEEDING IN ANY SUCH COURT AND WAIVES
PERSONAL SERVICE OF ANY AND ALL PROCESS UPON BORROWER, AND CONSENTS THAT ALL
SUCH SERVICE OF PROCESS BE MADE BY MAIL OR MESSENGER DIRECTED TO BORROWER AT THE
ADDRESS SET FORTH BELOW AND THAT SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED
UPON THE EARLIER OF ACTUAL RECEIPT OR THREE (3) DAYS AFTER THE SAME SHALL HAVE
BEEN POSTED TO BORROWER'S ADDRESS. THE BORROWER WAIVES ANY BOND OR SURETY OR
SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF THE
LENDER. NOTHING CONTAINED IN THIS PARAGRAPH AFFECTS THE RIGHT OF THE LENDER TO
SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECTS THE RIGHT OF
THE LENDER TO BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR BORROWER'S
PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION.
11. WAIVER OF JURY TRIAL
THE BORROWER WAIVES ANY RIGHT TO TRIAL BY JURY WHICH BORROWER MAY HAVE
IN ANY PROCEEDING BETWEEN LENDER AND BORROWER.
12. WAIVER OF PLAINTIFF'S RIGHTS
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.
13. GOVERNING LAW
This Note and its interpretation, construction, validity and
enforceability shall be governed by the laws of the State of Connecticut.
KOS PHARMACEUTICALS, INC.
6
<PAGE>
By: _______________________________
Name: Daniel M. Bell
Title: President
STATE OF )
) ss.:
COUNTY OF )
On the ______ day of __________ ___, ____, 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:
7
EXHIBIT 10.20
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAW. NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON
EXERCISE HEREOF NOR ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY
BE SOLD, ASSIGNED, PLEDGED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE
SECURITIES ACT OF 1933 AND ALL STATE SECURITIES LAWS AND THE TERMS AND
CONDITIONS HEREOF.
NON-DETACHABLE COMMON STOCK PURCHASE WARRANT
Void After June 30, 2006
This is to certify that, for value received, Michael Jaharis, or
registered assigns thereof (the "Holder"), is entitled to purchase from Kos
Pharmaceuticals, Inc., a Florida corporation (the "Corporation"), at a price of
$5.00 per share (the "Warrant Price") at any time on or before June 30, 2006,
all or any part of 6,000,000 shares of Common Stock, par value $.01 per share,
of the Corporation ("Common Stock"), on the terms and subject to the conditions
hereinafter set forth. This Warrant is being issued to the Holder in connection
with a loan to the Corporation by the Holder pursuant to that certain Promissory
Note dated December 21, 1999, from the Corporation, in favor of the Holder (the
"Note").
1. This Warrant will become void, and all rights of the Holder will
expire, at 5:00 P.M., Miami, Florida local time, on June 30, 2006.
2. This Warrant may be exercised by the Holder, upon surrender of the
Note (if the Note is outstanding), as to all or any portion of the shares of
Common Stock covered hereby, by surrender by the Holder or his agent of this
Warrant to the Corporation at its principal office, with the form of Election to
Purchase attached hereto duly executed. Upon any such exercise, the Warrant
Price for such shares shall be paid and satisfied only through the conversion of
principal or interest outstanding under the Note in an aggregate amount equal to
the Warrant Price for such shares. This Warrant shall be exercisable only for so
long as and to the extent of the aggregate amount of principal and interest
outstanding under the Note. The Election to Purchase shall state the name of the
person or entity exercising the Warrant (with address and such further
information as may be required by the Corporation) and the certificate or
certificates for shares of Common Stock shall be issued in this name. Thereupon
this Warrant shall be deemed to have been exercised and the person or entity
exercising the Warrant shall be deemed to have become a holder of record of
shares of Common Stock purchased hereunder for all purposes and thereafter the
Holder may exercise all rights and be entitled to all benefits of a shareholder
of record of the Corporation, and a certificate or certificates for such shares
so purchased shall be delivered to the person or entity exercising the Warrant
within a reasonable time after this Warrant shall have been exercised as set
forth hereinabove.
<PAGE>
3. The following adjustments shall be made:
a. In the event that, prior to the exercise of this Warrant and
issuance of the underlying shares, there shall be an increase or decrease in the
number of issued shares of Common Stock of the Corporation as a result of a
subdivision or consolidation of shares or other capital adjustment, or the
payment of a stock dividend or other increase or decrease in such shares,
effected without receipt of consideration by the Corporation, the remaining
number of shares shall be adjusted so that the adjusted number of shares subject
to this Warrant and the adjusted Warrant Price shall be the substantial
equivalent of the remaining number of shares still subject to the Warrant and
the Warrant Price thereof prior to such change.
b. If at any time while this Warrant is outstanding another
corporation merges into the Corporation, the Holder of this Warrant shall be
entitled, immediately after the merger becomes effective and upon exercise of
this Warrant, to obtain the same number of shares of Common Stock of the
Corporation (or shares into which the Common Stock has been changed as provided
in the paragraph of this Warrant covering changes) that the Holder would have
been entitled upon the exercise hereof to obtain immediately before the merger
became effective at the same Warrant Price. The Corporation shall take any and
all steps necessary in connection with the merger to assure that sufficient
shares of Common Stock to satisfy all conversion and purchase rights represented
by outstanding convertible securities, options and warrants, including this
Warrant, are available so that these convertible securities, options and
warrants, including this Warrant, may be exercised.
c. On the happening of an event requiring an alteration or
adjustment of the shares purchasable upon exercise of this Warrant, or an
alteration or adjustment of their number or designation, the Corporation shall
give written notice to the Holder of this Warrant stating the adjusted number,
designation and kind of securities or other property obtainable upon exercise of
this Warrant as a result of and following the event. The notice shall set forth
in reasonable detail the method of calculation determining the securities or
property obtainable after the event, and the facts upon which the calculation is
based. The Corporation's board of directors, acting in good faith, shall
determine the calculation.
4. This Warrant is exchangeable by the Holder, upon the surrender of
the Warrant at the principal office of the Corporation, for new Warrants of like
tenor and date representing in the aggregate the right to subscribe for and
purchase the number of shares of Common Stock which may be subscribed for and
purchased hereunder.
5. The Corporation covenants and agrees that all shares of Common Stock
which may be issued upon the exercise of the rights represented by this Warrant
will, upon issuance, be validly issued, fully paid and non-assessable and free
from all taxes, liens and charges with respect to the issue thereof except for
any taxes required in connection with the transfer thereof. The Corporation
further covenants and agrees that, during the period within which the rights
represented by this Warrant may be exercised, the Corporation will at all times
have
2
<PAGE>
authorized and reserved a sufficient number of shares of Common Stock to provide
for the exercise of the rights represented by this Warrant.
6. The Holder of this Warrant, by acceptance hereof, agrees that,
except as hereinafter stated, such holder will not sell, hypothecate or
otherwise transfer or dispose of this Warrant or the shares of Common Stock
issuable on the exercise hereof without giving prior written notice to the
Corporation of such holder's intention to do so, describing briefly the manner
of any such proposed transfer. Notwithstanding the foregoing, this Warrant is
transferable (i) to a trust in which a Holder or Holders is/are the settlor(s)
and either one or more Holders and/or direct family members of such Holder
is/are a primary beneficiary or beneficiaries, (ii) a corporation, partnership
or limited liability company in which one or more Holders and/or direct family
members of such Holders control at least 80 percent of the stockholder,
partnership or membership interests in such corporation, partnership or limited
liability company; or (iii) by descent upon death to direct family members of
such Holders. This Warrant and the rights evidenced hereby shall be transferable
only when attached to the Note. Upon the request of the Corporation, the Holder
proposing to transfer this Warrant shall be required to deliver to the
Corporation an opinion of counsel for the Holder stating that the proposed
transfer described in the notice given by the Holder may be effected without
registration of this Warrant or the shares of Common Stock issuable on the
exercise hereof under the Securities Act of 1933, as then in effect, or any
similar federal statute (the "Securities Act").
7. The restrictions in Section 6 hereof shall be binding upon any
transferee who has received this Warrant or shares of Common Stock issuable on
exercise hereof. A legend in substantially the following form shall be typed,
printed or stamped on the face and back of all certificates issued on exercise
of this Warrant and on the face and back of all certificates issued in
substitution or exchange thereof:
"This security has not been registered under the
Securities Act of 1933, as amended. It has been
acquired for investment and may not be sold or
transferred in the absence of an effective registration
statement with respect thereto under the Securities Act
of 1933, as amended, or an opinion of counsel
acceptable to the Company that registration is not
required under said Act."
8. The issue of any stock or other certificate upon the exercise of
this Warrant shall be made without charge to the registered holder hereof for
any tax in respect of the issue of such certificate.
9. This Warrant and all rights hereunder are transferable on the books
of the Corporation (subject, however, to the provisions of Sections 6 and 7
hereof), upon surrender of this Warrant, with the form of Transfer of Warrant
attached hereto duly executed by the registered holder hereof or by his attorney
duly authorized in writing, to the Corporation at its principal office, and
thereupon there shall be issued in the name of the transferee or transferees, in
exchange for this Warrant, a new Warrant or Warrants of like tenor and date,
3
<PAGE>
representing in the aggregate the right to subscribe for and purchase the number
of shares of Common Stock which may be subscribed for and purchased hereunder.
10. The Corporation may deem and treat the registered holder of this
Warrant as the absolute owner of this Warrant for all purposes and shall not be
affected by any notice to the contrary.
11. This Warrant shall not entitle the Holder to any rights of a
stockholder of the Corporation, either at law or in equity, including, without
limitation, the right to vote, to receive dividends and other distributions, to
exercise any preemptive rights or to receive any notice of meetings of
stockholders or of any other proceedings of the Corporation.
12. This Warrant shall be governed by the laws of the State of Florida.
Dated: December 21, 1999 KOS PHARMACEUTICALS, INC.
By
-----------------------------
Daniel M. Bell, President
4
<PAGE>
TRANSFER OF WARRANT
For value received ___________________ hereby sells, assigns and
transfers unto _______________________ the right to purchase ______ shares of
Common Stock, par value $.01 per share, of Kos Pharmaceuticals, Inc., which
rights are represented by the attached Warrant, and does hereby irrevocably
constitute and appoint ______________ attorney to transfer said rights on the
books of such Corporation. This transfer is effective only if the Warrant is
attached to the Note (as defined in the Warrant).
Dated: ______________, ____
In the Presence of
_____________________________
5
<PAGE>
ELECTION TO PURCHASE
Date: ____________, _____
TO:
The registered holder of the attached Warrant as named below (the
"Holder") hereby subscribes for ________ shares of the Common Stock of the
Corporation covered by the attached Warrant and tenders payment herewith by
converting the Note (as such term is defined in the Warrrant) or portion thereof
below designated.
Name of Holder: ____________________________________________
Principal amount to be converted: $_________________________
Unpaid accrued interest to be converted: $__________________
Principal amount of replacement Note, if any: $_____________
Issue Certificate(s) Deliver certificate(s)
for said stock to _________ by mail ____ against
counter receipt to
- ---------------------------- ------------------------------
(Name) (Name)
- ---------------------------- ------------------------------
(Street and Number) (Street and Number)
- ---------------------------- ------------------------------
City State City State
- ---------------------------- ------------------------------
Social Security or Tax Social Security or Tax
Identification Number Identification Number
The Holder hereby represents and warrants to and agrees with the
Company that, if the shares of Common Stock which the Holder hereby subscribes
for have not been effectively registered under the Securities Act of 1933, or
any similar Federal statute in effect at the date of this Election to Purchase,
the Holder is purchasing said shares of Common Stock for his or its own account
for investment, and not with a view to, or for sale in connection with, any
6
<PAGE>
distribution of such shares and without any present intention of distributing or
selling such shares and that a legend to such extent may be placed on all
certificates for shares of such Common Stock.
Very truly yours,
(Signature of Holder or duly authorized Agent)
7
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K, into the Company's
previously filed Form S-8 Registration Statement File Nos. 333-34121, 333-35533
and 333-70317.
ARTHUR ANDERSEN LLP
Miami, Florida
March 16, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM KOS
PHARMACEUTICALS, INC.'S FROM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,336
<SECURITIES> 0
<RECEIVABLES> 7,215
<ALLOWANCES> (238)
<INVENTORY> 1,086
<CURRENT-ASSETS> 15,010
<PP&E> 18,126
<DEPRECIATION> (7,696)
<TOTAL-ASSETS> 26,250
<CURRENT-LIABILITIES> 17,364
<BONDS> 0
0
0
<COMMON> 180
<OTHER-SE> (53,375)
<TOTAL-LIABILITY-AND-EQUITY> 26,258
<SALES> 36,340
<TOTAL-REVENUES> 36,340
<CGS> 5,406
<TOTAL-COSTS> 87,868
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,037
<INCOME-PRETAX> (54,552)
<INCOME-TAX> 0
<INCOME-CONTINUING> (54,552)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (54,552)
<EPS-BASIC> (3.06)
<EPS-DILUTED> (3.06)
</TABLE>
