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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 June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-22171
KOS PHARMACEUTICALS, INC.
(Exact Name of Company as Specified in Its Charter)
FLORIDA 65-0670898
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1001 BRICKELL BAY DRIVE, 25TH FLOOR, MIAMI, FLORIDA 33131
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(Address of Principal Executive Offices, Zip Code)
Company's Telephone Number, Including Area Code: (305) 577-3464
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
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 July 31, 1997: $185,951,805
Number of shares of Common Stock of Kos Pharmaceuticals, Inc. issued and
outstanding as of August 6, 1997: 14,772,500
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
PART I PAGE
Item 1. Business.................................................... 1
Item 2. Properties................................................. 10
Item 3. Legal Proceedings.......................................... 10
Item 4. Submission of Matters to a Vote of Securities Holders...... 10
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters........................................ 11
Item 6. Selected Consolidated Financial Data....................... 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 16
Item 8. Consolidated Financial Statements and Supplementary Data... 16
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosures....................... 31
PART III
Item 10. Directors and Executive Officers of the Registrant......... 32
Item 11. Executive Compensation..................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 41
Item 13. Certain Relationships and Related Transactions............. 42
PART IV
Item 14. Exhibits, Financial Schedules And Reports On Form 8-K...... 42
Signatures ........................................................... 44
Exhibit Index ........................................................... 45
NIASPAN [Registered Trademark] is a registered trademark of Kos Pharmaceuticals,
Inc.
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 pharmaceuticals for the treatment of certain chronic cardiovascular
and respiratory diseases. The Company manufactures its lead product, NIASPAN,
and markets such product directly through its own specialty sales force. The
Company's cardiovascular products under development consist of
controlled-release, once-a-day, oral dosage formulations. The Company's
respiratory products under development consist of aerosolized inhalation
formulations to be used primarily with the Company's proprietary inhalation
devices.
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, facilitate the marketing of
such products because physicians are generally familiar with the safety and
efficacy of such products. In addition to NIASPAN, the Company's lead product,
six of the Company's eight products under development require new drug
application ("NDA") filings with the U.S. Food and Drug Administration ("FDA").
Although more expensive and time consuming, developing products that require NDA
approval offers several advantages compared with generic products, including
potential for higher gross margins, limited competition resulting from
significant clinical and formulation development challenges, and a three-year
statutory barrier to generic competition.
The principal elements of the Company's business strategy are as follows:
(i) select products with unrealized commercial potential where safety or patient
compliance may be improved; (ii) focus initially on the large, rapidly growing
cardiovascular and respiratory markets, which include many chronic diseases
requiring long-term therapy; (iii) develop proprietary formulations of currently
approved pharmaceutical compounds, which can reduce regulatory and development
risks typically associated with the development of new chemical entities; (iv)
manage internally the clinical development of its products; (v) manufacture its
products internally; (vi) market its products directly through the Company's
specialty sales force; and (vii) leverage its core competencies through
corporate and academic alliances.
The Company's predecessor, Kos Holdings, Inc. ("Holdings"), which was
previously named Kos Pharmaceuticals, Inc., was incorporated in Florida on July
1, 1988. On June 25, 1996, Kos (named after the Greek island where Hippocrates
founded the science of medicine) was incorporated in Florida as the successor to
the business of Holdings. On June 30, 1996, all of the assets and all of the
liabilities of Holdings were transferred to the Company in exchange for shares
of common stock of the Company (the "Reorganization"). The Reorganization was
accomplished in order to transfer the assets and operations of Holdings to the
Company while preserving Holdings' net operating loss carryforwards and related
tax benefits for Holdings. As a result, the Company had no tax assets or
liabilities as of June 30, 1996. Kos Investments, Inc. ("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
subsidiary, Aeropharm Technology, Inc. ("Aeropharm"), and the business and
operations of Holdings, its predecessor company, 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.
1
NIASPAN
On July 28, 1997, the Company received clearance from the FDA to market
NIASPAN for the treatment of mixed lipid disorders. NIASPAN is the first
once-a-day, controlled-release niacin product approved by the FDA for the
treatment of mixed lipid disorders, which are primary risk factors for coronary
heart disease.
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")
cholesterol, total cholesterol, and triglycerides and depressed high-density
lipoprotein ("HDL") cholesterol. The Company submitted its NDA for NIASPAN based
principally on data from an aggregate of 633 NIASPAN-treated subjects involved
in three double-blinded, placebo-controlled clinical trials and one long-term,
open-label safety study at 17 sites throughout the United States. The results of
these trials produced statistically significant changes in all major lipid
components without serious treatment-related adverse events. Treatment with
NIASPAN demonstrated a 14% to 19% reduction in LDL cholesterol, a 25% to 35%
reduction in triglycerides, an increase of 22% to 29% in HDL cholesterol, and a
reduction of 24% to 29% in Lp(a). Moreover, NIASPAN's controlled-release
formulation and dosing regimen reduced the liver toxicity and intolerable side
effects generally associated with currently available formulations of niacin.
Based principally on the results of the 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; (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. The
Company began shipping NIASPAN to wholesalers in mid-August, and it expects to
begin detailing NIASPAN during September, 1997.
The marketing of NIASPAN will focus on the NIH recommendation that niacin
be used as first-line drug therapy for the treatment of hyperlipidemia.
Additionally, the Company intends to inform physicians as to the manner in which
NIASPAN achieves its safety and efficacy profile. This marketing program will be
implemented through direct visits with selected physicians, medical journal
reprints, seminars, and clinical discussion groups. The Company also intends to
educate patients on the benefits and proper use of NIASPAN through brochures and
product sample "starter packs" to encourage proper dose titration. Information
delivered by the Company to physicians and patients will include a discussion
about the flushing side effects of NIASPAN, including the importance of proper
dose titration and adherence to the 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 ("IR") niacin.
PRODUCTS IN DEVELOPMENT
Although the Company recently 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
2
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.
NICOSTATIN/Trademark/
In addition to NIASPAN, Kos is developing internally NICOSTATIN/Trademark/,
which is a product that consists of a combination of NIASPAN and a currently
approved drug for the treatment of mixed lipid disorders. The combination
product will require a NDA. The Company believes that a Once-A-Night/Trademark/
tablet combining the complementary properties of its combination product
represents an effective modality for treating patients with mixed lipid
disorders. The Company also believes that this Once-A-Night/Trademark/ product
should offer significant improvements in patient compliance compared with taking
each product independently under their recommended dosing regimens. The
potential market for the combination product consists of patients with mixed
lipid disorders, including high total and LDL cholesterol, high triglycerides or
low HDL cholesterol. The product is currently in the formulation development
stage.
ISOSORBIDE-5-MONONITRATE
Kos, in collaboration with Fuisz Technologies, Ltd. ("Fuisz"), is
developing a once-a-day, controlled-release, oral, generic version of
Isosorbide-5-Mononitrate ("IS-5-MN") for the prophylactic treatment of angina
pectoris. This product will be a branded generic requiring an abbreviated new
drug application ("ANDA") filing. A formulation of IS-5-MN has been developed
and the Company completed an initial clinical pharmacology study in fiscal year
1997.
CAPTOPRIL
The Company, also in collaboration with Fuisz, is developing a once-a-day,
controlled-release version of captopril, an angiotensin converting enzyme
("ACE") inhibitor for the treatment of hypertension for which a NDA is required.
At present, captopril is dosed as an immediate-release tablet to be taken two or
three times daily. There exist many generic forms of this IR product. During the
second half of fiscal year 1997, the Company had an investigational new drug
("IND") application for captopril approved and commenced an initial clinical
pharmacology study.
ALBUTEROL (CFC)
The Company is developing a generic version of albuterol (CFC) to be
dispensed in a generic metered-dosed inhaler ("MDI"). The Company has completed
a human clinical validation study, and a pivotal clinical pharmacology trial is
currently underway. The Company is currently re-evaluating its development plans
for this product in view of current market conditions, and the expense and other
resources required to complete development and obtain regulatory approval for
such product.
TRIAMCINOLONE (NON-CFC) AND FLUNISOLIDE WITH BREATH COORDINATED INHALER ("BCI")
Kos is developing a proprietary non-CFC formulation of triamcinolone to be
used with the Company's proprietary breath coordinated inhaler ("BCI"). This
product will require the submission of a 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
3
administration. Triamcinolone is a corticosteroid that is used to treat the
underlying inflammation of asthma. Triamcinolone is currently in the formulation
development stage.
Kos is also developing a non-CFC proprietary formulation of flunisolide to
be used with its BCI. Flunisolide is a long-acting inhaled steroid for the
treatment of asthma. The Kos formulation of flunisolide, for which an ANDA is
required, is currently in development.
OTHER MDI AND DEVICE PRODUCTS
Kos is developing a non-CFC albuterol to address environmental regulations
that ultimately will require manufacturers to phase out the CFC-based MDIs,
including the Company's generic albuterol (CFC) product. Kos is also developing
a second proprietary MDI device, a breath actuated inhaler ("BAI"). The
Company's BAI operates automatically and is being developed principally to
address the difficulties in taking inhaled medication often faced by children
and the elderly. The Company intends to develop the BAI with one of its non-CFC
formulations. 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
inhalation products with the exception of albuterol (CFC).
COLLABORATION WITH FUISZ TECHNOLOGIES, LTD.
During fiscal year 1996, the Company entered into certain agreements with
Fuisz, a company engaged in the development and commercialization of drug
delivery and food applications. Pursuant to these agreements, one of which is a
joint venture, the Company agreed to collaborate with Fuisz in the development
of four products and Kos reserved the right to commence collaboration on two
other products. Following a detailed assessment of the commercial viability of
these projects, Fuisz and Kos have agreed that, in addition to the joint
venture, the companies will continue to collaborate only on the development of
captopril and IS-5-MN.
Under the terms of such agreements, other than the joint venture, Fuisz is
responsible for formulating each product, Kos is responsible for the remainder
of each development program and, Kos obtains exclusive rights to manufacture the
formulated products and retains exclusive worldwide marketing rights upon
exercising certain option rights. Under these agreements, Kos is obligated to
pay the development costs and pay license and development fees based on
milestone achievements. In addition, the Company will pay royalties to Fuisz
based on product sales by Kos.
LICENSING AND OTHER ACTIVITIES
The Company intends to pursue collaborative opportunities, including
licensing the use of selected products and technologies from third parties
("in-licensing"); acquisition of complementary technologies, products or
companies; product co-marketing arrangements; joint ventures; and strategic
alliances. Also, many existing pharmaceutical products, or products currently
under development, may be suitable candidates for specialty promotional or
co-marketing campaigns. Kos intends to attempt to identify licensing,
co-marketing and product acquisition opportunities that can complement the
Company's future product portfolio. In addition, in situations where third-party
drug delivery technologies are complementary to the Company's drug development
formulation capabilities, the Company may pursue licensing rights for such
technology. The Company may also consider licensing certain of its products and
technologies to third parties ("out-licensing").
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
4
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 advised by
the patent examiner that certain of these claims are allowable, but none of
these claims have yet been issued as a patent by the PTO. The patent examiner
has, however, indicated that the PTO's Board of Interference may declare an
interference between such Kos application and a method-of-use patent issued to a
privately owned generic manufacturer allegedly claiming the same dosing regimen
invention.
On February 7, 1997, the Company and such generic manufacturer entered into
an agreement pursuant to which the parties agreed to resolve, as between
themselves, the effects of such potential interference by granting each other
licenses under their respective patent application and patent, regardless of
whether such licenses would be required. Accordingly, under the agreement, the
generic manufacturer granted the Company a license to sell products under the
generic manufacturer's above referenced patent, under a formulation patent owned
by such generic manufacturer, and under corresponding foreign patents owned by
such generic manufacturer, and the Company granted the generic manufacturer the
right to sell such generic manufacturer's products that are covered by the
claims in the Company's patent application and corresponding foreign
applications owned by the Company. As consideration for entering into the
agreement, the Company agreed to pay the generic manufacturer certain license
fees and royalties on the net sales of NIASPAN subject to a cap on such royalty
payments in the United States and a separate cap on such payments outside the
United States. Neither the license fees nor the royalty payments are material to
the financial condition of the Company. The Company may sublicense its rights
under the agreement to third parties to make, use, or sell products developed by
or for the Company. The generic manufacturer may not sublicense or transfer the
license granted to it by the Company, although the generic manufacturer may
sublicense to third parties the right to supply to the generic manufacturer or
market with or on behalf of the generic manufacturer, products that are covered
by the generic manufacturer's patents but which are not covered by the Company's
patent application. The Company may terminate the agreement after February 7,
2001.
Various inhalation devices, technologies, and methods of use licensed from,
or assigned to Kos by, researchers and engineers engaged in development projects
or sponsored research on behalf of Kos are the subject of four issued and one
allowed U.S. patent, as well as various corresponding foreign patents. Similar
patents applied for in other foreign countries are pending and being pursued by
the Company. Six patent applications on certain of the Company's products under
development and pertaining to certain of the sponsored research activities are
pending at the PTO. The Company believes that most of the once-daily oral
products in development under Kos' agreements with Fuisz are protected by
various technology patents in the name of Fuisz.
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
5
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.
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 June 30, 1997, the Company had filled all 15 of its sales and
marketing management positions and as of August 4, 1997, the Company had 88
field sales representatives and managed care specialists on its payroll. The
majority of the sales and marketing personnel have considerable previous
experience from major pharmaceutical companies. The Company began shipping
NIASPAN to wholesalers in mid-August, and it expects its field sales force will
begin actively detailing NIASPAN during September, 1997. The Company intends to
leverage its initial NIASPAN sales force by marketing future cardiovascular
products, as they are approved, simultaneously with NIASPAN.
Following the introduction of NIASPAN, the Company expects to increase its
detailing efforts to a larger group of cardiovascular specialists and other
frequent prescribers of lipid-altering medications through the establishment of
its own specialized flex-time (or part-time) sales force. The Company will also
consider co-promoting NIASPAN with a major pharmaceutical company to augment the
Company's own detailing efforts. During 1997, the Company had limited
discussions with several pharmaceutical companies about the possibility of
co-promoting NIASPAN utilizing the Kos sales force. There can be no assurance,
however, that such discussions will continue or that, if continued, they will
lead to an agreement that will be consummated on terms acceptable to the
Company.
Following the launch of NIASPAN in the United States, the Company plans to
license marketing rights to an established marketing partner in major
international markets. Ultimately, the Company will consider establishing its
own sales organization in selected foreign markets. To date, the Company has
6
had no material discussions concerning such possible arrangements with other
companies. There can be no assurance that such an arrangement can be achieved on
terms acceptable to the Company.
MANUFACTURING
In order to maximize the quality of developed products, assure compliance
with regulatory requirements, and minimize costs, the Company intends to
manufacture all of its products internally. The Company currently produces
NIASPAN at its Hollywood, Florida facility and intends to begin production of
NIASPAN at its Edison, New Jersey facility in 1998. The Company's Edison
facility is currently configured, and largely equipped, to manufacture aerosol
inhalation products using both CFC and non-CFC propellants. Although the Company
believes that both of its facilities currently operate using current good
manufacturing practices as required by the FDA for the manufacture of product to
be used in clinical trials, the Edison, New Jersey facility requires inspection
and approval by the FDA before production for commercial sale can commence. The
Company believes that it has produced adequate inventory to support the launch
of NIASPAN. The Company also believes that it has sufficient capacity, with
limited additional capital outlays, to accommodate sales volume for both
solid-dose and aerosol products through the year 2000.
The Company intends initially to contract the packaging of its solid-dose
and aerosol products to third parties. The Company intends to begin in-house
packaging operations once product sales volumes justify the capital expenditures
required to establish such capabilities. Certain of the Company's raw materials,
including the active ingredient in NIASPAN, are currently obtained from single
sources of supply. The Company does not have a contractual arrangement with the
sole supplier of the active ingredient in NIASPAN pursuant to which the Company
obtains such ingredient. 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.
COMPETITION
The Company's products will be competing with currently existing or future
prescription pharmaceuticals and vitamins in the United States, Europe and
elsewhere. Competition among these products will be based on, among other
things, efficacy, safety, reliability, availability, price and patent position.
In addition, academic institutions, government agencies and other public and
private organizations conducting research may seek patent protection, discover
new drugs or establish collaborative arrangements for drug research. Many of the
Company's existing or potential competitors have substantially greater
financial, technical and human resources than the Company and may be better
equipped to develop, manufacture and market 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
captopril formulation, if successfully commercialized, will compete with several
other ACE inhibitors that are currently available, all of which have approval
for treatment of certain indications using once-a-day administration. Kos is
aware of one other company that is developing a once-a-day formulation of
captopril. Further, the Company's triamcinolone and flunisolide formulations, if
successfully commercialized, each will compete with another triamcinolone and
flunisolide product, respectively, already being marketed in the United States.
Although such competing products are sold only in a CFC version, the Company
believes that the originators are developing non-CFC versions.
7
Moreover, there are numerous manufacturers of niacin preparations indicated
for use as vitamin supplements or, in IR 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 is subject to extensive regulation by U.S. and foreign
governmental authorities. In particular, pharmaceutical products are subject to
rigorous preclinical and clinical testing and to other approval and
post-approval requirements by the FDA in the United States under the Federal
Food, Drug and Cosmetic Act ("FFDCA") and the Public Health Service Act and by
comparable agencies in most foreign countries. 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 filings for certain European countries, in general, each
country at this time has its own procedures and requirements. Further, the FDA
regulates the export of products produced in the United States and may prohibit
the export even if such products are approved for sale in other countries.
The Company's research and development involves the controlled use of
hazardous materials, chemicals, and various radioactive compounds. Although the
Company believes that its procedures for handling and disposing of those
materials comply with state and federal regulations, the risk of contamination
or injury from these materials cannot be eliminated. In the event of such
contamination or injury, the Company could be held liable for resulting damages,
which could be material to the Company's business, financial condition and
results of operations. The Company is also subject to numerous environmental,
health and workplace safety laws and regulations, including those governing
laboratory procedures, exposure to blood-borne pathogens, and the handling of
biohazardous materials. Additional federal, state and local laws and regulations
affecting the Company may be adopted in the 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, or 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.
One of the Company's products under development, albuterol (CFC), uses CFC
propellants. CFC propellants are ozone-depleting substances, the use of which is
restricted under the Federal Clean Air Act and the Montreal Protocol on
Substances that Deplete the Ozone Layer. The United Nations Technology and
Economic Assessment Panel ("TEAP") reviews requests for specific essential use
8
allocations of CFCs under the Montreal Protocol and makes recommendations to the
parties, who determine the yearly bulk allocations for each country. Recently,
the Company's Essential Use Application for the use of CFCs during 1997 and 1998
was approved by TEAP and the parties to the Montreal Protocol. Although the
Company has received its requested allocation for 1997 and 1998 there can be no
assurance that it will receive all or any part of its allocation for 1999, or
allocations for future years.
EMPLOYEES
As of August 7, 1997, the Company had approximately 237 permanent
employees, of which 105 were engaged in marketing and sales, 75 were engaged in
research and development, 38 were engaged in manufacturing, and 19 were engaged
in administration. No employee is represented by a union. The Company regularly
employs the services of outside consultants with respect to regulatory,
scientific, and certain administrative and commercial matters. The Company
expects to continue to require the services of such outside consultants. The
Company believes its employee relations are good.
9
ITEM 2. PROPERTIES
The Company leased the following properties as of June 30, 1997:
MINIMUM
LEASE EXPIRATION ANNUAL
LOCATION USE SQUARE FEET (INCLUDING RENEWALS) RENT
- --------------- ----------------------------- ----------- -------------------- --------
Miami, FL Corporate offices 10,000 December 2000 $168,000
Miami Lakes, FL Research admin. offices 13,000 December 2000 218,000
Hollywood, FL Manufacturing, research and
admin. offices 23,500 November 2000 272,000
Edison, NJ Manufacturing, research,
and admin. offices 21,500 October 2003 85,500
The Company believes that its existing facilities are adequate to meet its
current needs and that there is sufficient additional space at or in close
proximity to its present facilities to accommodate its near term requirements.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company or its
properties or to which the Company is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the Company's fiscal year ended June 30, 1997.
10
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock commenced trading on March 7, 1997, in the
Nasdaq National Market System under the symbol "KOSP". As of August 6, 1997,
there were 48 shareholders of record of the Company's Common Stock.
The following table sets forth for the fiscal periods indicated, the range
of high and low closing prices for the Company's Common Stock on the Nasdaq
National Market System.
FISCAL YEAR ENDED JUNE 30, 1997 HIGH LOW
- ------------------------------- ---------- ----------
Third Quarter (commencing March 7, 1997)........ $ 25.00 $ 19.25
Fourth Quarter.................................. 30.13 19.75
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain all future
earnings, if any, to fund the development and growth of its business and does
not anticipate paying any cash dividends on its Common Stock in the foreseeable
future.
11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following consolidated selected financial data of the Company for the
five years ended June 30, 1997, should be read in conjunction with "Management's
Discussions and Analysis of Financial Condition" and the consolidated financial
statements and related notes thereto. See "Item 8. Consolidated Financial
Statements and Supplementary Data."
JULY 1, 1988
(INCEPTION) TO
YEAR ENDED JUNE 30, JUNE 30,
------------------------------------------------------------- --------------
1993 1994 1995 1996 1997 1997
---------- ---------- ---------- --------- ---------- --------------
(IN THOUSANDS, EXCEPT SHARE DATA)
STATEMENT OF OPERATIONS:
Revenues $ -- $ 22 $ 14 $ -- $ -- $ 37
Operating Expenses:
Research and development 4,930 6,663 8,387 13,816 17,881 56,586
General, selling and administrative 1,232 1,619 1,614 1,772 5,522 14,394
Expense recognized on
modification of stock
option grants(1) -- -- -- 5,436 -- 5,436
---------- ---------- ---------- ---------- ---------- -------------
Total operating expenses 6,162 8,282 10,001 21,024 23,403 76,416
---------- ---------- ---------- --------- ---------- -------------
Other income (1) (2) -- -- -- (10)
Interest (income) expense, net 556 1,058 1,026 (14) (925) 2,489
Interest expense-related parties 29 50 26 -- 643 774
---------- ---------- ---------- ---------- ---------- -------------
Total other (income) expense 584 1,106 1,052 (14) (282) 3,253
---------- ---------- ---------- ---------- ---------- -------------
Loss before minority interest (6,746) (9,366) (11,039) (21,010) (23,121) (79,632)
Minority interest(2) -- (164) 1 16 -- (148)
---------- ---------- ---------- ---------- ---------- -------------
Net loss $ (6,746) $ (9,530) $(11,038) $ (20,994) $ (23,121) $(79,780)
========== ========== ========== ========== ========== ==============
Net loss per share(3) $ (0.59) $ (0.84) $ (0.97) $ (1.85) $ (1.87) $ (6.97)
========== ========== ========== ========== =========== ==============
Weighted average common shares
in computing net loss per share(3) 11,340,000 11,340,000 11,340,000 11,340,000 12,341,146 11,451,238
JUNE 30,
---------------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ------------- ------------- ------------- -------------
BALANCE SHEET:
Cash and cash equivalents $ 13 $ 18 $ 41 $ 193 $ 33,307
Available-for-sale securities -- -- -- -- 25,055
Working capital (deficit)(4) (15,235) (25,394) (1,129) (8) 39,987
Total assets 686 1,574 2,355 2,281 65,106
Total debt 14,742 24,790 -- -- 13,418
Deficit accumulated during the
development stage (15,096) (24,626) (35,664) (56,658) (79,780)
Shareholders' equity (deficit)(4) (14,606) (24,136) 943 1,914 44,989
- ----------
(1) Reflects a non-cash charge associated with an extension of the exercise
period for stock options granted during 1988 to 1990 to the Company's Chief
Executive Officer and two independent consultants; no other material
economic terms of these options were changed.
(2) Represents the minority shareholder's interest in Aeropharm, which interest
was acquired by the Company in June 1996.
(3) See Note 2 of Notes to Consolidated Financial Statements for information
concerning the computation of net loss per share.
(4) In March 1995, Kos Investments assumed repayment of a note payable to a
bank in the principal amount of $30,372,000. This assumption was accounted
for as a transfer to Kos Investments and as an increase in additional
paid-in capital for the Company. See Note 6 of Notes to Consolidated
Financial Statements.
12
ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
A predecessor corporation to the Company was formed in July 1988 under the
name of Kos Pharmaceuticals, Inc., principally to conduct research and
development on new formulations of existing prescription pharmaceutical
products. In June 1993, Aeropharm Technologies, Inc., a then majority-owned
subsidiary of the Company, was formed to conduct research and development
activities on aerosolized MDI products for the treatment of respiratory
diseases. During June 1996, this predecessor corporation acquired the
outstanding minority interest in Aeropharm; changed its name to Kos Holdings,
Inc.; 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 to
the Company's business in this report include the business and operations of
Holdings until June 30, 1996.
Since inception, the Company has been a development stage company engaged
primarily in the development of cardiovascular and respiratory pharmaceutical
products. On March 12, 1997, the Company completed its initial public offering
of Common Stock ("IPO"). From inception through the IPO, the Company had not
recorded any significant revenues and had funded its operations exclusively
through equity contributions and a loan from its majority shareholder. Through
June 30, 1997, the Company had accumulated a deficit from operations of
approximately $79.8 million. In connection with the transfer of operations from
Holdings to the Company on June 30, 1996, net operating loss carryforwards
amounting to approximately $51.0 million and related tax benefits were retained
by Holdings and not transferred to the Company. Consequently, the Company had no
deferred tax assets as of June 30, 1996 and can only utilize net operating
losses sustained subsequent to June 30, 1996 to offset future taxable net
income, if any.
On July 28, 1997, the Company was granted clearance by the U.S. Food and
Drug Administration to market its lead product, NIASPAN.
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996 AND 1997
The Company's research and development expenses increased from $13.8
million for the year ended June 30, 1996 to $17.9 million for the year ended
June 30, 1997. Of the total increase in research and development expenses, $3.0
million was attributable to the cost of entering into an agreement during
February 1997 with an unaffiliated generic drug manufacturer to resolve the
effects of a potential patent interference proceeding. Increases in personnel
costs and other costs, principally in connection with scale-up and validation of
the Company's NIASPAN manufacturing facility, and in development costs
associated with various third-party agreements also contributed to the increased
research and development expenses for the year ended June 30, 1997. These
increases in research and development expenses were partially offset by the
absence in the year ended June 30, 1997, of the expenses for the clinical trials
completed during the year ended June 30, 1996, in support of the filing of a NDA
during May 1996 for NIASPAN, and by the absence of a $1.0 million payment made
to Fuisz, during June 1996, to form a joint venture for the development of a
future product. This future product continues to be in the very early stages of
development and the Company cannot estimate when or if a commercially viable
product will be developed. The Company expects research and development
activities to increase as personnel are added and research activities are
expanded to support the development of additional products and the conduct of
additional clinical trials.
13
General, selling and administrative expenses decreased from $7.2 million
for the year ended June 30, 1996 to $5.5 million for the year ended June 30,
1997. This decrease was primarily attributable to the absence during the year
ended June 30, 1997 of a $5.4 million non-cash charge for compensation expense
associated with an adjustment of the exercise period on certain stock options
granted during 1988 to 1990 to an officer and to two independent consultants of
the Company. This decrease was offset by additional expenses primarily related
to the commencement of the Company's marketing activities, the hiring of
additional personnel to support such marketing activities and the Company's
increased administrative functions and professional fees. The Company expects
that its general, selling and administrative expenses will continue to increase
in support of its marketing efforts and development programs.
From July 1, 1996 to the completion of the Company's IPO on March 12, 1997,
the Company funded its operations from the proceeds of a loan from Kos
Investments, Inc. (the "Investments Loan"), the sole shareholder of Holdings. As
of June 30, 1997, the Company had outstanding borrowings of approximately $13.4
million under this loan. As a result of the Investments Loan, the Company had
approximately $643,000 of interest expense for the year ended June 30, 1997,
compared with no such expense for the year ended June 30, 1996.
The Company received approximately $65.9 million in net proceeds from its
IPO. Of these proceeds, $58.3 million had not been utilized by the Company as of
June 30, 1997, and are primarily invested in U.S. Treasury and highly-rated
corporate securities. As a result of this investment in marketable securities,
the Company recorded approximately $903,000 of interest income for the year
ended June 30, 1997, compared with no such income for the year ended June 30,
1996.
The Company incurred a net loss of $21.0 million for the year ended June
30, 1996 compared with a net loss of $23.1 million for the year ended June 30,
1997.
YEARS ENDED JUNE 30, 1995 AND 1996
The Company's research and development expenses increased from $8.4 million
for the fiscal year ended June 30, 1995 to $13.8 million for the year ended June
30, 1996. This increase was attributable primarily to licensing and development
programs, hiring of additional personnel and increased clinical trials costs. Of
the total increase in research and development expenses for the fiscal year
ended June 30, 1996, $1.0 million was attributable to a payment by the Company
in connection with the execution of an agreement with Fuisz to form a joint
venture for the development of a future product. The parties have generally
agreed to share the expenses of developing the product. Hiring of additional
personnel principally related to manufacturing scale-up of certain of the
Company's products under development and to support the filing of a NDA for
NIASPAN.
General, selling and administrative expenses increased from $1.6 million
for the fiscal year ended June 30, 1995 to $7.2 million for the fiscal year
ended June 30, 1996. This increase was primarily attributable to a non-cash
charge of $5.4 million for compensation expense associated with an adjustment of
the exercise period on certain stock options granted during 1988 to 1990 to an
officer and to two independent consultants of the Company. The increase also
resulted from the hiring of additional personnel to support the Company's
administrative functions, and to the acquisition of market research data.
During December 1994, the Company transferred its existing line of credit
facility with a local bank and its accumulated borrowings to Kos Investments.
The effect of this transfer was to increase the Company's paid-in capital in the
amount of its accumulated borrowings of $30.4 million which were outstanding on
the date of transfer. As a result of this transfer,
14
the Company had $1.1 million of interest expense for the fiscal year ended June
30, 1995 compared with no such expense for the fiscal year ended June 30, 1996.
The Company incurred a net loss of $11.0 million for the fiscal year ended
June 30, 1995 compared with $21.0 million for the fiscal year ended June 30,
1996.
LIQUIDITY AND CAPITAL RESOURCES
From July 1, 1996 until the completion of the Company's IPO, the Company
financed its operations from the proceeds of the Investments Loan, which had
unpaid principal and interest balances of $13,395,000 and $643,000,
respectively, as of June 30, 1997. All or a portion of the Investments Loan may
be repaid at any time. At June 30, 1997, the Company's working capital totaled
approximately $40.0 million, and cash and cash equivalents totaled approximately
$33.3 million, of which approximately $33.2 million were invested in short-term
U.S. Treasury and highly-rated corporate securities. The Company expects to
continue to incur significant costs in connection with its ongoing research and
development activities and with the establishment of its marketing capabilities.
The Company's primary uses of cash to date have been in operating
activities to fund research and development, including clinical trials, and
general and administrative expenses. As of June 30, 1997, the Company's net
investment in fixed assets was approximately $3.3 million. The Company expects
that additional equipment and leasehold improvements will be made as it
increases its research and development activities and to support manufacturing
requirements. The Company had no material commitments for capital expenditures
as of June 30, 1997.
Although the Company anticipates that the net proceeds from its IPO, along
with cash, cash equivalents, short-term investments and expected interest income
will be sufficient to fund the Company's operations for the next 12 months, the
Company's future cash requirements will be substantial and will depend on many
factors, some of which are outside the control of the Company. Such factors
include the problems, delays, expenses and complications frequently encountered
by development stage companies in connection with the commercial launch of the
first product; the progress of the Company's research, development and clinical
trial programs; the costs and timing of seeking regulatory approvals of the
Company's products under development; the Company's ability to obtain such
regulatory approvals; the success of the Company's sales and marketing programs;
costs in filing, prosecuting, defending and enforcing any patent claims and
other intellectual property rights; the extent and terms of any collaborative
research, manufacturing, marketing, joint venture or other arrangements; and
changes in economic, regulatory or competitive conditions or the Company's
planned business. As a result, the Company may need to raise substantial
additional capital to fund its operations before achieving anticipated positive
cash flows from operations in 1998, assuming the successful commercialization of
NIASPAN. The Company expects that it would seek such additional funding through
public or private equity or debt financings or through collaborations. To the
extent the Company raises additional capital by issuing equity securities,
ownership dilution to existing shareholders will result and future investors may
be granted rights superior to those of existing shareholders. There can be no
assurance, however, that additional funding will be available on acceptable
terms, or at all.
FORWARD LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this Form 10-K
that are not related to historical results are forward looking statements.
Actual results may differ materially from those projected or implied in the
forward looking statements. Further, certain forward looking statements are
based upon assumptions of future events, which may not prove to be accurate.
These forward looking statements involve risks and uncertainties including but
not limited to the Company's future cash flows, sales, gross margins and
15
operating costs, the effect of conditions in the pharmaceutical industry and the
economy in general, legal proceedings, as well as certain other risks.
Subsequent written and oral forward looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by cautionary statements in this paragraph and elsewhere in this Form
10-K, and in other reports filed by the Company with the Securities and Exchange
Commission, and in the Company's Registration Statement on Form S-1 (File No.
333-17991), as amended, filed with the Securities and Exchange Commission on
December 17, 1996 including the risk factors section thereof.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
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
----
Report of Independent Certified Public
Accountants.................................................... 17
Financial Statements:
Consolidated Balance Sheets at June 30, 1996 and
1997....................................................... 18
Consolidated Statements of Operations for the three years
ended June 30, 1995, 1996 and 1997 and for the period
from July 1, 1988 (inception) to June 30,1997.............. 19
Consolidated Statements of Shareholders' Equity (Deficit)
for the period from July 1, 1988 (inception) to June
30, 1997................................................... 20
Consolidated Statements of Cash Flows for the three
years ended June 30, 1995, 1996 and 1997 and for
the period from July 1, 1988 (inception) to June 30, 1997.. 21
Notes to Consolidated Financial Statements.................... 22
16
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Kos Pharmaceuticals, Inc.:
We have audited the accompanying balance sheets of Kos Pharmaceuticals,
Inc. (a development stage corporation) and subsidiary as of June 30, 1996 and
1997, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for each of the three years in the period ended
June 30, 1997, and for the cumulative period from inception (July 1, 1988) to
June 30, 1997. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Kos
Pharmaceuticals, Inc. and subsidiary as of June 30, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1997, and for the cumulative period from inception
(July 1, 1988) to June 30, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
July 25, 1997 (except with respect
to the matters discussed in Notes 1
and 9, as to which the date is
July 28, 1997).
17
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION)
CONSOLIDATED BALANCE SHEETS
JUNE 30,
----------------------------------
1996 1997
------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents ........................ $ 193,484 $ 33,307,271
Available-for-sale securities .................... -- 25,054,937
Prepaid expenses and other current assets ........ 165,392 346,148
Inventories ...................................... -- 1,372,346
------------- -------------
Total current assets ......................... 358,876 60,080,702
Fixed Assets, net ................................... 1,921,943 3,272,120
Deposits ............................................ -- 1,753,021
------------- -------------
Total assets ................................. $ 2,280,819 $ 65,105,843
============= =============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities:
Accounts payable ................................. $ 195,299 $ 2,430,267
Accrued expenses ................................. 171,371 4,268,475
Loan from Kos Investments, Inc. .................. -- 13,395,000
------------- -------------
Total current liabilities .................... 366,670 20,093,742
Note Payable ........................................ -- 23,271
------------- -------------
Commitments and Contingencies (Note 7)
Shareholders' Equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued and outstanding ...... -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 10,000,000 and 14,772,500 shares
issued and outstanding as of June 30, 1996 and
June 30, 1997, respectively ................. 100,000 147,725
Additional paid-in capital ....................... 58,472,323 124,620,649
Deficit accumulated in the development stage ..... (56,658,174) (79,779,544)
------------- -------------
Total shareholders' equity ................... 1,914,149 44,988,830
------------- -------------
Total liabilities and shareholders' equity ... $ 2,280,819 $ 65,105,843
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
18
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
JULY 1, 1988
FOR THE YEAR ENDED JUNE 30, (INCEPTION)
-------------------------------------------------- TO JUNE 30,
1995 1996 1997 1997
------------ ------------ ------------ -------------
Revenues ............................... $ 14,300 $ -- $ -- $ 36,761
------------ ------------ ------------ ------------
Expenses:
Research and development ............ 8,386,872 13,815,776 17,880,533 56,586,043
General, selling and administrative . 1,613,832 1,772,060 5,522,265 14,393,623
Expense recognized on modification of
stock option grants ............... -- 5,436,000 -- 5,436,000
------------ ------------ ------------ ------------
10,000,704 21,023,836 23,402,798 76,415,666
------------ ------------ ------------ ------------
Other (Income) Expense:
Other income ........................ -- -- -- (10,103)
Interest (income) expense, net ...... 1,025,559 (13,860) (924,809) 2,489,188
Interest expense-related parties .... 26,898 -- 643,381 773,864
------------ ------------ ------------ ------------
Total other (income) expense .... 1,052,457 (13,860) (281,428) 3,252,949
------------ ------------ ------------ ------------
Loss before minority interest ... (11,038,861) (21,009,976) (23,121,370) (79,631,854)
Minority Interest ..................... 532 16,179 -- (147,690)
------------ ------------ ------------ ------------
Net loss ........................ $(11,038,329) $(20,993,797) $(23,121,370) $(79,779,544)
============ ============ ============ ============
Net loss per Share ..................... $ (0.97) $ (1.85) $ (1.87) $ (6.97)
============ ============ ============ ============
Weighted Average Shares of Common
Stock Outstanding .................... 11,340,000 11,340,000 12,341,146 11,451,238
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
19
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
DEFICIT
ACCUMULATED
ADDITIONAL IN THE
COMMON PAID-IN DEVELOPMENT
STOCK CAPITAL STAGE TOTAL
-------- ------------ ------------- ------------
Issuance of common stock ............ $100,000 $ -- $ -- $ 100,000
Capital contributions from Parent ... -- 390,000 -- 390,000
Net loss ............................ -- -- (621,814) (621,814)
-------- ------------ ------------ ------------
Balance at June 30, 1989 ............ 100,000 390,000 (621,814) (131,814)
Net loss ............................ -- -- (1,389,932) (1,389,932)
-------- ------------ ------------ ------------
Balance at June 30, 1990 ............ 100,000 390,000 (2,011,746) (1,521,746)
Net loss ............................ -- -- (2,445,506) (2,445,506)
-------- ------------ ------------ ------------
Balance at June 30, 1991 ............ 100,000 390,000 (4,457,252) (3,967,252)
Net loss ............................ -- -- (3,893,185) (3,893,185)
-------- ------------ ------------ ------------
Balance at June 30, 1992 ............ 100,000 390,000 (8,350,437) (7,860,437)
Net loss ............................ -- -- (6,745,655) (6,745,655)
-------- ------------ ------------ ------------
Balance at June 30, 1993 ............ 100,000 390,000 (15,096,092) (14,606,092)
Net loss ............................ -- -- (9,529,956) (9,529,956)
-------- ------------ ------------ ------------
Balance at June 30, 1994 ............ 100,000 390,000 (24,626,048) (24,136,048)
Capital contributions from Parent ... -- 5,745,000 -- 5,745,000
Assumption of note payable by Parent -- 30,372,000 -- 30,372,000
Net loss ............................ -- -- (11,038,329) (11,038,329)
-------- ------------ ------------ ------------
Balance at June 30, 1995 ............ 100,000 36,507,000 (35,664,377) 942,623
Capital contributions from Parent ... -- 16,381,633 -- 16,381,633
Modification of options ............. -- 5,436,000 -- 5,436,000
Contribution of minority interest ... -- 147,690 -- 147,690
Net loss ............................ -- -- (20,993,797) (20,993,797)
-------- ------------ ------------ ------------
Balance at June 30, 1996 ............ 100,000 58,472,323 (56,658,174) 1,914,149
Issuance of common stock ............ 47,725 65,837,383 -- 65,885,108
Stock options issued to non-employees -- 310,943 -- 310,943
Net loss ............................ -- -- (23,121,370) (23,121,370)
-------- ------------ ------------ ------------
Balance at June 30, 1997 ............ $147,725 $124,620,649 $(79,779,544) $ 44,988,830
======== ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
20
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
JULY 1, 1988
FOR THE YEAR ENDED JUNE 30, (INCEPTION)
------------------------------------------------- TO JUNE 30,
1995 1996 1997 1997
------------- -------------- -------------- --------------
Cash Flows from Operating Activities:
Net loss ........................................... $(11,038,329) $ (20,993,797) $ (23,121,370) $ (79,779,544)
Adjustments to reconcile net loss to net cash used
in operating activities -
Depreciation and amortization .................... 409,528 522,288 649,038 2,238,785
Provision for inventory obsolescence ............. -- -- 75,000 75,000
Minority interest ................................ (532) (16,179) -- 147,690
Compensation recognized on modification of
stock option grants ............................ -- 5,436,000 -- 5,436,000
Stock options issued to non-employees ............ -- -- 310,943 310,943
Changes in operating assets and liabilities:
Prepaid expenses and other current assets ...... 55,729 (87,187) (180,756) (346,148)
Inventories .................................... -- -- (1,447,346) (1,447,346)
Deposits ....................................... -- -- (1,753,021) (1,753,021)
Accounts payable ............................... 130,011 (556,053) 2,234,968 2,430,267
Accrued expenses ............................... 362,359 (325,419) 4,097,104 4,268,475
----------- ------------- ------------- -------------
Net cash used in operating activities .......... (10,081,234) (16,020,347) (19,135,440) (68,418,899)
----------- ------------- ------------- -------------
Cash Flows from Investing Activities:
Investment purchases ............................... -- -- (25,054,937) (25,054,937)
Capital expenditures ............................... (1,223,221) (208,775) (1,999,215) (5,510,905)
----------- ------------- ------------- -------------
Net cash used in investing activities .......... (1,223,221) (208,775) (27,054,152) (30,565,842)
----------- ------------- ------------- -------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock ......... -- -- 65,885,108 66,375,108
Capital contributions received from Parent ......... 5,745,000 16,381,633 -- 22,126,633
Borrowings under notes payable ..................... 5,582,000 -- 23,271 30,395,271
Borrowings under loan from Kos Investments, Inc. ... -- -- 13,395,000 13,395,000
----------- ------------- ------------- -------------
Net cash provided by financing activities ...... 11,327,000 16,381,633 79,303,379 132,292,012
----------- ------------- ------------- -------------
Net increase in cash and cash equivalents ...... 22,545 152,511 33,113,787 33,307,271
Cash and Cash Equivalents, beginning of period ....... 18,428 40,973 193,484 --
----------- ------------- ------------- -------------
Cash and Cash Equivalents, end of period ............. $ 40,973 $ 193,484 $ 33,307,271 $ 33,307,271
=========== ============= ============= =============
Supplemental Disclosure of Cash Flow Information:
Interest paid ...................................... $ 1,387,377 $ -- $ -- $ 3,476,267
=========== ============= ============= =============
Supplemental Disclosure of Non-cash Information:
Transfer of note payable to Parent ................. $30,372,000 $ -- $ -- $ 30,372,000
=========== ============= ============= =============
Contribution of minority interest to paid-in capital $ -- $ 147,690 $ -- $ 147,690
=========== ============= ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
21
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The predecessor to Kos Pharmaceuticals, Inc. (the "Company"), Kos Holdings,
Inc. ("Holdings") was incorporated in Florida on July 1, 1988 to develop
prescription pharmaceutical products principally for the cardiovascular and
respiratory markets. On June 25, 1996, the Company was incorporated in Florida
as the successor to the business of Holdings. On June 30, 1996, all of the
assets and all of the liabilities of Holdings, other than its net operating loss
carryforwards, were transferred to the Company in exchange for shares of common
stock of the Company (the "Reorganization"). The Reorganization was accomplished
in order to transfer the assets and operations of Holdings to the Company while
preserving Holdings' net operating losses and related federal tax benefits for
Holdings and its sole shareholder and one of its founders. Kos Investments, Inc.
("Investments") is the sole shareholder of Holdings. As this transaction was
between entities under common control, the transaction was accounted for on a
historical cost basis, in a manner similar to a pooling of interests.
On June 22, 1993, Holdings and Aeropharm Technology, Inc. ("Aeropharm")
entered into a letter of intent for the purchase of a controlling interest in
Aeropharm. On February 14, 1995, the transaction was completed through a stock
purchase agreement that gave control (80% ownership) of Aeropharm to Holdings.
Holdings accounted for its investment in Aeropharm as a consolidated subsidiary
from June 22, 1993. On June 20, 1996, Holdings acquired the minority interest in
Aeropharm, held by an employee of Aeropharm, in exchange for options to purchase
50,000 shares of common stock, at $7.00 per share, the estimated fair value of
the underlying shares at the date of grant. The acquisition of the minority
interest in Aeropharm was accounted for under the purchase method and the fair
value of the options granted approximated the carrying value ($147,690) of the
minority interest.
On May 6, 1996, the Company submitted a New Drug Application ("NDA") to the
U.S. Food and Drug Administration ("FDA") for, NIASPAN, its first product. On
July 28, 1997, the Company obtained clearance from the FDA to market NIASPAN.
NIASPAN is a once-a-day, oral, solid dose controlled-release formulation of
niacin for the treatment of hyperlipidemia, a multiple lipid disorder that is a
primary risk factor for coronary heart disease. Niacin is a water soluble
vitamin that has long been recognized as an effective pharmacological agent for
the treatment of multiple lipid disorders including elevated LDL and low HDL.
The Company expects to incur additional losses in the near term primarily
due to research and development activities and the commencement of sales and
marketing efforts associated with NIASPAN. To date, the Company has not marketed
any products. Future revenues, if any, are expected to be generated from sales
of products. No assurance can be given that products under development can be
successfully formulated or manufactured at acceptable cost and with appropriate
quality, that required regulatory approvals will be obtained, or that any
products can be successfully marketed. The Company is subject to a number of
other risks including, but not limited to, uncertainties related to market
acceptance, uncertainties related to patents and trademarks, interference and
risk of infringement, uncertainties related to limited sales and marketing
experience, uncertainties related to competition and technological changes,
government regulation, dependence on product development
22
1. GENERAL - (CONTINUED)
collaborators, limited manufacturing experience and risk of scale-up, future
capital needs and uncertainty of additional funding, dependence on single
sources of supply, and no assurances of adequate third party reimbursement. The
likelihood of the success of the Company must be considered in light of the
uncertainty caused by problems, expenses, complications and delays frequently
encountered in connection with the development of new business ventures.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION:
The consolidated financial statements include the results of Holdings
(prior to July 1, 1996), the Company and its subsidiary, Aeropharm. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with an
original maturity of 90 days or less to be cash equivalents. As of June 30,
1997, approximately $33,200,000 of the Company's cash and cash equivalents were
interest-bearing.
AVAILABLE-FOR-SALE SECURITIES:
The Company accounts for available-for-sale securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Available-for-sale
securities represent debt securities that are stated at fair value.
Amortizations of premiums and accretion of discounts are recognized as
adjustments to interest income. Gains or losses on disposition are based on the
net proceeds and the adjusted carrying amount of the securities sold, using the
specific identification method.
LONG-LIVED ASSETS:
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles to be disposed of be recorded at the
lower of carrying amount or fair value less cost to sell. The Company adopted
the provisions of this statement, effective July 1, 1996. Such adoption did not
have a material effect on the Company's financial statements.
MINORITY INTEREST:
Minority interest represents the minority shareholder's interest in the
shareholders' equity and net loss of Aeropharm. As of June 30, 1996 and 1997,
the Company owned 100% of Aeropharm, therefore, no minority interest is
reflected.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
As of June 30, 1996 and 1997, the carrying amount of cash and cash
equivalents, prepaid expenses and other current assets, and notes payable
approximates fair value due to the short term nature of these accounts. See Note
3. for information regarding the fair value of available-for-sale securities.
23
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
CONCENTRATION OF CREDIT RISK:
The Company has no significant off-balance-sheet concentrations of credit
risk.
DEPRECIATION AND AMORTIZATION:
Fixed assets are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the assets or lease term, if shorter,
as follows:
YEARS
-----
Furniture and equipment.................................... 3-7
Computer software and hardware............................. 3-5
Laboratory and manufacturing equipment..................... 3-5
Leasehold improvements..................................... Life of lease
RESEARCH AND DEVELOPMENT EXPENSES:
All research and development expenses are reflected in the Company's
consolidated statements of operations as incurred.
LOSS PER SHARE:
Loss per share is determined by dividing the net loss attributable to
holders of the Company's common stock by the weighted average number of shares
of common stock and dilutive common stock equivalents outstanding after applying
the treasury stock method. For periods prior to the Company's IPO on March 12,
1997, common stock equivalents include the impact of the issuance of options
issued within one year prior to the date of the Company's initial public
offering at exercise prices less than the initial offering price, whether or not
the effects are antidilutive. The impact of dilutive options and convertible
debt, subsequent to March 31, 1997, has not been considered in the loss per
share calculation as the effect would be anti-dilutive.
INCOME TAXES:
The Company follows the SFAS No. 109, "Accounting for Income Taxes," which
requires, among other things, recognition of future tax benefits measured at
enacted rates attributable to deductible temporary differences between financial
statement and income tax bases of assets and liabilities and to tax net
operating loss carryforwards to the extent that realization of said benefits is
more likely than not. As the net operating loss carryforwards, amounting to
approximately $51,000,000, as of the Reorganization were not transferred to the
Company, the Company had no deferred tax assets or liabilities as of June 30,
1996. As of June 30, 1997, the Company has approximately $7.8 million of
deferred tax assets resulting from net operating loss carryforwards. However,
due to the uncertainty of the Company's ability to generate sufficient taxable
income in the future to utilize such loss carryforwards, the net deferred tax
asset has been fully reserved as of June 30, 1997.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
24
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS:
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share".
Earnings per share in fiscal 1997 was reflected under the provisions of APB
Opinion No. 15, "Earnings per Share". SFAS No. 128 will apply to the Company for
the quarter ended December 31, 1997. The Company does not believe that SFAS 128
will have a material effect on its reported earnings per share calculation.
3. AVAILABLE-FOR-SALE SECURITIES
The fair value of each available-for-sale security presented in the table
that follows approximates the unamortized cost at June 30, 1997. The contractual
maturities of these securities are less than one year. Fair values are based on
quoted market prices obtained from an independent broker.
FAIR MARKET
VALUE
------------
U.S. government securities.................................. $ 4,951,900
Corporate debt.............................................. 20,103,037
------------
Total............................................ $ 25,054,937
============
4. INVENTORIES
Inventories as of June 30, 1997 consist of:
Raw materials............................................... $ 170,227
Work in process............................................. 1,202,119
-----------
Total............................................ $ 1,372,346
===========
5. FIXED ASSETS
Fixed assets consist of the following:
JUNE 30,
-------------------------------
1996 1997
---------- -----------
Furniture and equipment................................. $ 297,131 $ 408,845
Computer software and hardware.......................... 399,847 736,159
Laboratory and manufacturing equipment.................. 2,055,423 3,045,602
Leasehold improvements.................................. 759,289 1,320,299
---------- -----------
3,511,690 5,510,905
Less-Accumulated depreciation and amortization.......... (1,589,747) (2,238,785)
---------- -----------
Fixed assets, net............................ $1,921,943 $ 3,272,120
========== ===========
25
6. NOTE PAYABLE
Michael Jaharis, the controlling shareholder of Investments, has personally
guaranteed the repayment of a loan to Investments from certain financial
institutions. Prior to March 21, 1995, the Company was the primary borrower
under this loan, and therefore received the benefit of the personal guaranty
extended by Mr. Jaharis. As consideration for Mr. Jaharis' personal guaranty,
the Company agreed to pay Mr. Jaharis an annual fee of 0.25% of the average
amount outstanding under the loan during the Company's fiscal year. In March
1995, the Company was released as a borrower under the loan. The assumption of
the note payable to bank has been accounted for as a transfer to Investments and
is reflected as an increase in "Additional paid-in capital" in the accompanying
consolidated statements of shareholders' equity.
On July 1, 1996, the Company executed a loan in favor of Kos Investments,
Inc. (the "Investments Loan") in the aggregate principal amount of up to $15.0
million, the proceeds of which were used to fund the Company's operations until
the consummation of its IPO. Under the terms of the Investments Loan, interest
accrues on the outstanding principal amount at First Union National Bank of
Florida's prime rate commencing July 1, 1996, escalating to a rate of 1% over
such prime rate during calendar year 1997, 2% over such prime rate during
calendar year 1998, and 3% over such prime rate during calendar year 1999 until
maturity. As of June 30, 1997, the Investments Loan accrued interest at a rate
of 8.50% per year and had outstanding principal and interest of $13,395,000 and
$643,000, respectively. Principal and interest under the Investments Loan is due
on June 30, 1999, however, the Company may repay the Investments Loan in whole
or in part prior to such date. From time to time, at Investments' option,
principal and interest outstanding under the Investments Loan may be converted
into Common Stock at a conversion price per share equal to the initial public
offering price per share ($15.00).
7. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company has three employment agreements that require future minimum
payments as follows:
YEAR ENDING JUNE 30, AMOUNT
-------------------- -----------
1998................................................. $ 492,500
1999................................................. 300,000
2000................................................. 300,000
2001................................................. 300,000
2002................................................. 300,000
-----------
$ 1,692,500
============
Salary and benefits expense recorded under the agreements totaled
approximately $302,000, $355,000 and $808,000 during the years ended June 30,
1995, 1996 and 1997, respectively. In addition to the minimum salaries described
above, the employment agreements entitle certain officers to royalties on future
sales, the aggregate amounts of which may not exceed $5,500,000.
26
7. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
LEASE COMMITMENTS
The Company has various operating leases for the rental of office space,
laboratory facilities and of its sales force's vehicles that expire through
fiscal 2001. Future minimum commitments under these agreements as of June 30,
1997, are as follows:
YEAR ENDING JUNE 30, AMOUNT
-------------------- ----------
1998............................................. $1,102,567
1999............................................. 638,829
2000............................................. 365,409
2001............................................. 76,311
----------
$2,183,116
==========
As of June 30, 1996 and 1997, standby letters of credit of approximately
$65,000 and $424,000, respectively, were issued by a bank on the Company's
behalf in favor of the lessors as collateral for the leases which the lessors
have agreed to provide to the Company.
Rent expense under operating leases during the years ended June 30, 1995,
1996 and 1997 was $450,890, $578,122 and $544,975, respectively.
LICENSING AND JOINT VENTURE AGREEMENTS
The Company has several license agreements (the "License Agreements") with
third parties (the "Licensees") for the development of future products. Under
the License Agreements, the Company is required to make payments to the
Licensees upon completion of various milestones of each project in order to
secure exclusive rights to develop, manufacture, sell and/or sublicense future
products developed through the License Agreements. In connection with such
License Agreements, the Company recorded licensing expense of approximately
$449,000, $700,000 and $3,180,000 for the years ended June 30, 1995, 1996 and
1997, respectively, which are reflected in "Research and development" in the
accompanying consolidated statements of operations. In order to maintain its
rights under the License Agreements, the Company is required to pay certain
future milestone payments and licensing fees. In the event that no milestone
event occurs, the Company generally would not be required to make any milestone
payment. The Company anticipates, based on the development efforts that have
been conducted to date, that it will be required to make future milestone
payments and pay licensing fees under the License Agreements as follows:
MINIMUM ADDITIONAL
YEAR ENDING JUNE 30, PAYMENT PAYMENTS
-------------------- --------- ----------
1998......................................... $ 150,000 $ 375,000
1999......................................... - 125,000
2000......................................... - 375,000
--------- ---------
$ 150,000 $ 875,000
========= =========
Additionally, assuming FDA approval of a certain other licensed product,
the Company would be obligated to pay up to $1,400,000 in the aggregate, to a
licensee. Milestone payments are recorded when the milestone event occurs.
27
7. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
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" expenses in the accompanying
consolidated statements of operations for the fiscal year ended June 30, 1997.
As further consideration for entering into the agreement, the Company agreed to
pay the generic manufacturer certain royalties on the net sales of NIASPAN
subject to a cap on such royalty payments in the United States and a separate
cap on such payments for sales outside the United States.
The Company has also entered into a letter of intent to form a joint
venture agreement (the "Joint Venture") with a company related to the sale of a
certain product using technology provided by that company. The Company paid
$1,000,000 for the exclusive right to use the technology. Because of the
uncertainties surrounding the use of the technology, as well as the lack of an
existing technologically feasible product with commercial viability, such amount
has been expensed and is included in "Research and development" in the
accompanying 1996 consolidated statement of operations. Within 30 days following
the filing of a NDA to the FDA for a certain product developed by the Joint
Venture, or in the event management determines such NDA filing to be infeasible,
any party to the Joint Venture investing in excess of the other party shall be
entitled to consideration and a transfer to it from the Joint Venture of an
amount not to exceed $1,250,000.
SPONSORED RESEARCH
The Company has research agreements with three universities and a research
center. The Company is primarily responsible for funding the projects, and the
university or research center is responsible for providing personnel, equipment
and facilities to conduct the research activities. Future minimum commitments
under these agreements as of June 30, 1997 are as follows:
YEAR ENDING JUNE 30, AMOUNT
-------------------- --------
1998 ...................................................... $160,000
1999 ...................................................... 200,000
2000 ...................................................... 200,000
--------
$560,000
========
The Company also funds, from time to time and at its sole discretion,
research programs conducted at other universities and research centers. Expenses
recorded under the Company's sponsored research programs totaled approximately
$379,000, $373,000 and $409,000 during the years ended June 30, 1995, 1996 and
1997, respectively, and are reflected in "Research and development" in the
accompanying consolidated statements of operations.
DEVELOPMENT AGREEMENTS
The Company has development agreements with various third parties (the
"Development Agreements"). As dictated by the Development Agreements, the
Company is responsible for funding all required development activities. In order
to maintain its rights under the Development Agreements, the Company is required
to pay certain future milestone payments and development fees. In the event
28
7. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
that no milestone event occurs, the Company generally would not be required to
make any milestone payment. The Company anticipates, based on the development
efforts that have been conducted to date, that it will be required to pay
development fees under the Development Agreements of approximately $814,000
during the year ended June 30, 1998.
Expenses recorded under these and other development agreements totaled
approximately $665,000 and $1,615,000 during the years ended June 30, 1996 and
1997, respectively, and are reflected in "Research and development" in the
accompanying consolidated statements of operations.
401(K) PLAN
The Company's Internal Revenue Code Section 401(k) Plan, known as the Kos
Savings Plan, became effective on January 1, 1994. Each employee who has
completed at least 90 days of service with the Company and has attained age 21
is eligible to make pre-tax elective deferral contributions each year not
exceeding the greater of a specified statutory amount or 15 percent of the
employee's compensation for the year. An employee is always 100 percent vested
in the employee's elective deferral contributions. The Company makes no
contributions under this plan.
8. SHAREHOLDERS' EQUITY
COMMON STOCK
In March 1997, the Company completed an initial public offering of
4,772,500 shares of common stock. Net proceeds to the Company were approximately
$65,900,000 after deducting expenses of the offering.
PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of undesignated
preferred stock. Such shares of preferred stock may be issued by the Company in
the future, without shareholder approval, upon such terms as the Company's Board
of Directors may determine.
STOCK OPTION PLAN
During 1996, the Board of Directors of the Company adopted the Kos
Pharmaceuticals, Inc. 1996 Stock Option Plan (the "Plan"). As of June 30, 1997,
a maximum of 4,000,000 shares of Common Stock may be issued pursuant to stock
options granted or to be granted under the Plan. All directors, officers,
employees and certain related parties of the Company designated by the Board are
eligible to receive options under the Plan. The maximum term of any option is
ten years from the date of grant. All options expire within 30 days of
termination of employment. The Plan is administered by a committee appointed by
the Board of Directors of the Company.
Each outside director of the Company is granted an option to purchase 5,000
shares of common stock upon election to the Board and automatically will receive
an option to purchase an additional 3,000 shares effective on each director's
anniversary date. The exercise price of such options will be the fair market
value of the underlying Common Stock on the date the option is granted. The
Company considered the provisions of SFAS No. 123 using the Black Scholes method
and an expected volatility rate of 57.6%, a risk-free interest rate of 6.25%,
expected dividends of $0 and an expected term of 5 years to approximate the
related charge to expense.
29
8. SHAREHOLDERS' EQUITY - (CONTINUED)
The Company has granted options to purchase 2,424,500 shares of Common
Stock to employees, consultants, management and directors, including options
granted prior to the issuance of the Plan. Detail of option activity is as
follows:
EXERCISE PRICES
-----------------------------
NUMBER OF WEIGHTED
SHARES RANGE AVERAGE
--------- --------------- ---------
Outstanding, June 30, 1995 ...... 1,185,000 $ 0.60 - $ 3.33 $ 0.81
Granted ......................... 973,000 $7.00 $ 7.00
---------
Outstanding, June 30, 1996 ...... 2,158,000 $ 0.60 - $7.00 $ 3.60
Granted ......................... 299,000 $15.00 - $29.94 $ 19.96
Canceled ........................ (32,500) $7.00 $ 7.00
---------
Outstanding, June 30, 1997 ...... 2,424,500 $0.60 - $29.94 $ 5.57
=========
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------- --------------------------------------------------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AT AVERAGE WEIGHTED EXERCISABLE WEIGHTED
RANGE OF JUNE 30, REMAINING AVERAGE JUNE 30, AVERAGE
EXERCISE PRICES 1997 CONTRACTUAL LIFE EXERCISE PRICE 1997 EXERCISE PRICE
- ---------------- -------------- ---------------- -------------- ----------- --------------
$0.75 to $3.33 360,000 5.4 years $ 1.22 360,000 $ 1.22
$0.60 to $7.00 1,765,500 9.0 years 4.02 1,361,500 3.14
$15.00 to $29.94 299,000 9.7 years 19.96 25,250 15.00
--------- ---------
$0.60 to $29.94 2,424,500 1,746,750
========= =========
At June 30, 1997, 1,575,500 shares remain authorized and unissued and
options to purchase 1,746,750 shares of Common Stock are exercisable under the
Plan. During fiscal 1997, options to purchase 299,000 shares of common stock
were granted at exercise prices ranging from $15.00 to $29.94. There were no
options exercised during the year ended June 30, 1997. Deferred compensation
cost of $310,943 was recorded for the year ended June 30, 1997.
As permitted by SFAS No. 123, however, the Company accounts for options
issued to employees under APB Opinion No. 25 "Accounting for Stock Issued to
Employees". Consequently, except for options issued to non-employees, no
deferred compensation cost has been recognized on options issued to employees
because the exercise price of such options was not less than the market value of
the Common Stock on the date of grant.
30
8. SHAREHOLDERS' EQUITY - (CONTINUED)
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:
JUNE 30,
------------------------------------------------------
1995 1996 1997
-------------- ---------------- -----------------
Net loss:
As reported.... $ (11,038,329) $ (20,993,797) $ (23,121,370)
Pro Forma...... $ (11,038,329) $ (20,993,797) $ (24,062,167)
Net loss per share
As reported... $ (0.97) $ (1.85) $ (1.87)
Pro Forma..... $ (0.97) $ (1.85) $ (1.95)
9. SUBSEQUENT EVENTS
On July 28, 1997, the Company obtained clearance from the FDA to market
NIASPAN.
10.RELATED-PARTY TRANSACTION
During 1995 the Company acquired certain property including used computers,
laboratory equipment, laboratory supplies and certain other office equipment and
furnishings from the Institute of Molecular Biology, Inc. ("IMB"), a company
controlled by Investments. In the aggregate, such purchases totaled
approximately $83,500. Until June 1996, Daniel M. Bell, the Company's President
and Chief Executive Officer, also served as the Chairman of the Board of
Directors and Chief Executive Officer of IMB.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table provides information regarding the directors and
executive officers of the Company as of August 6, 1997:
DIRECTORS AND EXECUTIVE OFFICERS
NAME AGE POSITION
---- --- --------
Michael Jaharis........ 69 Chairman of the Board of Directors
Daniel M. Bell......... 55 President, Chief Executive Officer and
Director
Robert E. Baldini...... 66 Vice Chairman of the Board of Directors
John Brademas, Ph.D.... 70 Director(1)
Steven Jaharis, M.D.... 37 Director(1)(2)
Louis C. Lasagna, M.D.. 74 Director(1)
Mark Novitch, M.D...... 65 Director(2)
Frederick B. Whittemore. 66 Director(1)(2)
George A. Blews......... 39 Vice President, Treasurer
David J. Bova........... 51 Senior Vice President, Product Development
Anthony J. Cutie, Ph.D.. 53 Vice President, Aerosol Research & Development
David L. Heatherman..... 50 Vice President, Sales & Marketing
Frederick A. Sexton..... 38 Vice President, Technical Operations
(1) Member of the Audit Committee
(2) Member of the Compensation and Stock Option Committee
MICHAEL JAHARIS, a founder of the Company, has, since its inception and
until the IPO, funded the operations of the Company and served as Chairman of
the Board. In this position, Mr. Jaharis has been actively involved in the
development of the Company's business strategy and in critical implementation
decisions. From 1972 until its acquisition by Schering-Plough Corporation
("Schering-Plough") in 1986, Mr. Jaharis served as the President and Chief
Executive Officer of Key Pharmaceuticals, Inc. ("Key Pharmaceuticals"). Mr.
Jaharis also serves as Chairman of Kos Investments and Kos Holdings, as Trustee
of Tufts University, and as Chairman of the Board of Overseers of Tufts
University School of Medicine.
DANIEL M. BELL, a founder of the Company, has served as a Director and as
the President and Chief Executive Officer of the Company since its inception.
Mr. Bell also serves as a director of Kos Investments and Kos Holdings and as a
director of two private companies in which Kos Investments or Michael Jaharis is
the largest shareholder. From 1983 to 1986, Mr. Bell was employed by Key
Pharmaceuticals and was serving as its Executive Vice President and Chief
Operating Officer at the time of its acquisition by Schering-Plough in June
1986.
ROBERT E. BALDINI has served as Vice Chairman of the Board since July 1996
and as a senior marketing consultant to the Company since April 1996. In these
positions, Mr. Baldini serves as an executive officer of the Company. In
addition to performing services for the Company, Mr. Baldini serves as a
consultant to, and director of, several private pharmaceutical and medical
device companies. Mr. Baldini served Key Pharmaceuticals from 1982 to 1986 as
Senior Vice President of Sales and Marketing. Following its acquisition by
Schering-Plough, he continued with the Key Pharmaceuticals Division of
Schering-Plough until 1995, last serving as its President.
32
JOHN BRADEMAS, Ph.D. has served as a Director of the Company since the
completion of the Company's initial public offering (IPO). Dr. Brademas has been
President Emeritus of New York University since 1992. Prior to 1992, he was
President of New York University for eleven years and was the U.S.
Representative in Congress for Indiana's Third District for twenty-two years.
Dr. Brademas serves as a director of Texaco, Inc., Oxford University Press-USA,
Scholastic, Inc., and Loews Corporation. He is a former Chairman of the Federal
Reserve Bank of New York and a former director of the New York Stock Exchange.
STEVEN JAHARIS, M.D. has served as a Director of the Company since its
inception. Dr. Jaharis has been a practicing physician since 1990 and currently
serves as a family practitioner at Rush Prudential H.M.O. Dr. Jaharis is the son
of Michael Jaharis.
LOUIS C. LASAGNA, M.D. has served as a Director of the Company since the
completion of the Company's IPO. Dr. Lasagna has served as the Dean of the
Sackler School of Graduate Biomedical Sciences at Tufts University since 1984.
Dr. Lasagna serves as a director of Astra U.S.A. Inc., a subsidiary of Astra AB,
R. P. Scherer Corp., and serves on the scientific advisory board of BioSpecifics
Technologies Corporation.
MARK NOVITCH, M.D. has served as a Director of the Company since the
completion of the Company's IPO. Dr. Novitch has served as Professor of Health
Care Sciences at George Washington University since 1994. Dr. Novitch was with
The Upjohn Company from 1985 to 1993, last serving as its Vice Chairman. From
1971 to 1985, Dr. Novitch was with the FDA, serving as Deputy Commissioner from
1981 to 1985. Dr. Novitch serves as a director of Alteon, Inc., Guidant
Corporation, Neurogen Corporation, and Calypte Biomedical, Inc.
FREDERICK B. WHITTEMORE has served as a Director of the Company since the
completion of the Company's IPO. Mr. Whittemore has been with Morgan Stanley
Group since 1958 and presently serves as Advisory Director. Mr. Whittemore is a
director of various mutual funds organized under Morgan Stanley Asset
Management, Inc. Mr. Whittemore also serves as a director of Chesapeake Energy
Corporation, PartnerRe Holdings, Ltd., and Integon, Inc.
GEORGE A. BLEWS, joined Kos in May 1997 and serves as Vice President,
Treasurer. Before joining Kos, Mr. Blews served as Vice President, Controller at
FLA Orthopedics, Inc. since 1995. Mr. Blews served in various positions in
finance and operations of Ares Serono, Inc. from 1991 to 1994. Mr. Blews worked
for Baxter International, Inc. from 1982 to 1991 in various accounting and
finance positions.
DAVID J. BOVA, a founder of the Company, has directed the Company's product
development efforts since inception and now serves as Senior Vice President,
Product Development. Prior to the founding of Kos, Mr. Bova was at Key
Pharmaceuticals from 1981 until its acquisition by Schering-Plough; he continued
with Schering-Plough until the founding of Kos in 1988. At Key Pharmaceuticals,
he last served as the Director of Product Development. Prior to 1981, Mr. Bova
was employed by the USV pharmaceutical operation of Revlon Healthcare.
ANTHONY J. CUTIE, PH.D. serves as Vice President, Aerosol Research and
Development; he has been the Chief Scientific Officer of the Company's aerosol
subsidiary since its founding in 1993. For more than 25 years, Dr. Cutie has
been an industry consultant in pharmaceutical aerosols and he has worked with
over 50 pharmaceutical companies ranging from large multinationals to small
generic companies. He has served as a consultant for the FDA, and he has been an
active member of various United States Pharmacopia committees and two aerosol
committees of the American Association of Pharmaceutical Scientists. Dr. Cutie
also serves as Professor of Industrial Pharmacy at Long Island University.
33
DAVID L. HEATHERMAN has served as Vice President, Sales and Marketing since
July 1996. Mr. Heatherman worked for Schering-Plough from 1972 to 1996 in
several capacities including Senior Product Promotion Director, Regional Sales
Director, and last serving as Managed Care Director.
FREDERICK A. SEXTON joined the Company in January 1996 and serves as Vice
President, Technical Operations. Prior to joining the Company, Mr. Sexton was
employed by Boehringer Ingelheim Pharmaceuticals from 1984 through 1995 in
various production and quality assurance positions involving solid-dose and
aerosol products. Prior to 1984, Mr. Sexton was employed by Ayerst Laboratories
in research and production positions.
34
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation during the fiscal years
ended June 30, 1997, 1996 and 1995, paid to or earned by the Company's Chief
Executive Officer and the four other highest paid executive officers of the
Company (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------------------------- ------------------------ -------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)(1)
- ------------------ ---- ------- -------- ------------- --------- ------------ ------- ------------
Daniel M. Bell 1997 262,500 150,000 -- -- -- -- 4,329
President and 1996 246,000 -- -- -- 750,000(2) -- 4,928
CEO 1995 246,000 10,000 -- -- -- -- 1,814
David J. Bova 1997 201,250 25,000 -- -- -- -- 1,295
Senior V. P., 1996 185,000 25,000 -- -- -- -- 1,091
Research and 1995 185,000 -- -- -- -- -- 726
Development
Frederick A. Sexton 1997 157,500 7,500 -- -- -- -- 103
Vice President, 1996 72,500 28,000 -- -- 40,000 -- 21,431
Technical Operations 1995 -- -- -- -- -- -- --
Anthony J. Cutie 1997 150,000 -- -- -- -- -- 7,289
Vice President, 1996 137,500 -- -- -- 50,000 -- 6,547
Aerosol R&D 1995 111,458 -- -- -- -- -- 4,715
David Heatherman 1997 143,950 10,000 -- -- 40,000 -- 392
Vice President, 1996 -- -- -- -- -- -- --
Sales & Marketing 1995 -- -- -- -- -- -- --
- -----
(1) Consists of life insurance premiums and, in 1996 for Mr. Sexton only,
$21,431 of relocation expenses paid by the Company.
(2) The options were originally granted to Mr. Bell in August 1988. The option
terms were amended on June 20, 1996, to extend the expiration date of the
options from December 1996 to June 20, 2006. Other material terms of
options, including the exercise price, were not changed. The options are
currently exercisable.
35
The following table contains information about stock option grants to the
Named Executive Officers during the fiscal year ended June 30, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
---------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATE OF
NUMBER OF % OF TOTAL OPTIONS STOCK PRICE APPRECIATION
SECURITIES GRANTED TO EXERCISE OR FOR OPTION TERM(1)
UNDERLYING OPTIONS EMPLOYEES IN FISCAL BASE PRICE EXPIRATION --------------------------
NAME GRANTED (#) YEAR ($/SHARE) DATE 5%($) 10%($)
- ---- ------------------- -------------------- ----------- ---------- ---------- ----------
Daniel M. Bell -- -- -- -- -- --
David J. Bova -- -- -- -- -- --
Frederick A. Sexton -- -- -- -- -- --
Anthony J. Cutie -- -- -- -- -- --
David Heatherman 40,000 13.38% $ 15.00 12/20/06 $377,337 $956,246
- -----
(1) Amounts reflect hypothetical gains that could be achieved for the options
if they are exercised at the end of the option term. Those gains are based
on assumed rates of stock appreciation of 5% and 10% compounded annually
from the date the option was granted through the expiration date.
The following table provides information about the number and value of
options held by the Named Executive Officers at June 30, 1997:
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT FY-END(#) MONEY OPTIONS AT FY-END($)(1)
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------ ------------ ------------- ------------ --------------
Daniel M. Bell 750,000 -- $20,362,500 $ --
David J. Bova 275,000 -- 7,425,000 --
Frederick A. Sexton 10,000 30,000 207,500 622,500
Anthony J. Cutie 37,500 12,500 778,125 259,375
David Heatherman -- 40,000 -- 830,000
- --------
(1) The option value is based on the difference between the fair market value
of the shares on June 30, 1997, which was $27.75 per share, and the option
exercise price per share, multiplied by the number of shares of Common
Stock subject to the option.
ELECTION, COMMITTEES AND COMPENSATION OF DIRECTORS
The Board of Directors has established two committees, a Compensation and
Stock Option Committee (the "Compensation Committee") and an Audit Committee.
The Compensation Committee administers the Company's 1996 Stock Option Plan (the
"Option Plan") including, among other things, determining the amount, exercise
price and vesting schedule of stock options awarded under the Option Plan. The
Compensation Committee administers the Company's other compensation programs and
performs such other duties as may from time to time be determined by the Board
of Directors. The Compensation Committee is comprised of Dr. Jaharis, Dr.
Novitch, and Mr. Whittemore.
36
The Audit Committee reviews the scope and results of the annual audit of
the Company's consolidated financial statements conducted by the Company's
independent accountants, the scope of other services provided by the Company's
independent accountants, proposed changes in the Company's financial and
accounting standards and principles, and the Company's policies and procedures
with respect to its internal accounting, auditing and financing controls. The
Audit Committee also examines and considers other matters relating to the
financial affairs and accounting methods of the Company, including selection and
retention of the Company's independent accountants. The Audit Committee is
comprised of Dr. Brademas, Dr. Jaharis, Dr. Lasagna, and Mr. Whittemore.
Each non-employee director of the Company, is entitled to receive a fee of
$1,000 for attendance at each meeting of the Board of Directors. In addition,
each non-employee director is entitled to receive $500 for attendance at each
meeting of a committee of the Board of Directors. All directors are reimbursed
for travel expenses incurred in connection with the performance of their duties
as directors.
Each non-employee director is entitled to receive an option to purchase
5,000 shares of Common Stock upon their appointment to the Board of Directors
and is entitled to receive an option to purchase 3,000 shares of Common Stock
annually thereafter, so long as they continue to serve on the Board of
Directors.
Michael Jaharis has elected not to receive fees or stock options in
connection with his serving as Chairman of the Board. Although Mr. Jaharis has
been actively involved in the development of the Company's business strategy and
in critical implementation decisions, he has never been paid compensation by the
Company for acting in such capacity. However, the Company leases an automobile
for Mr. Jaharis' use.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Company's initial public offering of its Common Stock on March
12, 1997, at which time the Board of Directors established the Compensation
Committee, Michael Jaharis, the Company's Chairman of the Board, and Daniel M.
Bell, the Company's President and Chief Executive Officer, participated in
deliberations of the Company's Board of Directors concerning executive officer
compensation. Following March 12, 1997, all decisions regarding compensation of
the Company's executive officers have been subject to the authority of the
Compensation Committee.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee is responsible for administering the Company's
executive compensation, including base salaries, bonuses and awards of stock
options. The Compensation Committee currently consists of Dr. Jaharis, Dr.
Novitch and Mr. Whittemore, each of whom is a non-employee director of the
Company.
In determining the compensation of the Company's executive officers, the
Compensation Committee takes into account all factors which it considers
relevant, including business conditions in general and the Company's performance
during the year in light of such conditions, the market compensation for
executives of similar background and experience, and the performance of the
specific executive officer under consideration and the business area of the
Company for which such executive officer is responsible. The structure of each
executive compensation package is weighted towards incentive forms of
compensation so that such executive's interests are aligned with the interests
of the stockholders of the Company. The Compensation Committee believes that
granting stock options provides an additional incentive to executive officers to
continue in the service of the Company and gives them an interest similar to
stockholders in the success of the Company. The compensation
37
program for executive officers in fiscal year 1997 consisted of grants of stock
options, in addition to base salaries, bonuses and reimbursement of certain
costs and expenses.
As indicated below, the Company entered into an employment agreement dated
as of July 1, 1996 with Mr. Bell, the Company's President and Chief Executive
Officer. As President and Chief Executive Officer, Mr. Bell's bonus and stock
option compensation is directly related to corporate performance. A portion of
Mr. Bell's compensation for the fiscal year ended June 30, 1997, was determined
by the Board of Directors prior to the establishment of the Compensation
Committee. The factors that both the Board of Directors and the Compensation
Committee considered in determining Mr. Bell's compensation were as follows. Mr.
Bell is a co-founder of the Company and has been primarily responsible, since
its inception, for managing the Company in its effort to develop and obtain
regulatory approval to market its first product, NIASPAN. Mr. Bell has also been
primarily responsible for the successful hiring of the Company's management team
and the scale-up of its manufacturing and marketing operations to support the
commercial launch of NIASPAN. Finally, Mr. Bell was instrumental in the success
of the Company's initial public offering of Common Stock in March 1997.
Compensation Committee:
Steven Jaharis
Mark Novitch
Frederick Whittemore
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Daniel M. Bell dated
as of July 1, 1996. Under the agreement, Mr. Bell serves as President and Chief
Executive Officer of the Company for a term expiring on June 30, 2002, unless
earlier terminated for cause, upon the death or disability of Mr. Bell, or, at
the election of Mr. Bell, upon a change in control of the Company. In the event
that Mr. Bell is terminated without cause or upon a change in control of the
Company, Mr. Bell is entitled to receive as severance compensation his base
salary, bonus compensation and annual stock options until the later to occur of
the date thirty-six months after such termination and June 30, 2002. The
agreement provides that Mr. Bell receive base annual compensation of $250,000
for each year during the term of the agreement, subject to an annual increase in
an amount to be determined by the Board of Directors. Under the agreement, Mr.
Bell also receives an annual bonus and an annual stock option grant in amounts
to be determined by the Board of Directors based upon Mr. Bell's and the
Company's performance. Mr. Bell was paid a bonus of $150,000 in December 1996.
The agreement also provides that the Company will provide Mr. Bell with the use
of an automobile. Mr. Bell is prohibited from competing with the Company during
the term of the agreement and for two years after termination thereof.
The Company entered into an employment agreement with David Bova dated as
of June 15, 1996, pursuant to which Mr. Bova serves as Senior Vice President of
the Company. This agreement constitutes an amendment and restatement of a
previous employment agreement with Mr. Bova, dated December 18, 1992. Under the
agreement, the term of Mr. Bova's employment terminates on December 31, 1997
unless earlier terminated for cause, upon the death or disability of Mr. Bova,
or, at the election of Mr. Bova, upon a change in control of the Company.
Notwithstanding the foregoing, the Company may exercise an option to extend the
term of the agreement for up to twenty-four additional months. The agreement
provides that Mr. Bova receive a base salary of $195,000 per year, which amount
may be increased by the Company. In December 1996, the Company's Board of
Directors determined to award a $25,000 bonus to Mr. Bova, payable to Mr. Bova
in 1997. In the event that Mr. Bova is terminated without cause or upon a change
in control of the Company, Mr. Bova is entitled to receive as severance
compensation his base salary until December 31, 1997. In
38
addition, the agreement provides that Mr. Bova receive royalties in an amount
equal to one percent of the net sales of the Company's NIASPAN product and its
combination product through December 31, 2003, up to a cap of $4,000,000. The
agreement provides that, under certain enumerated circumstances, the royalty
amount may be reduced to 0.5% of net sales. The agreement also provides that
under certain specific circumstances, the Company's obligation to pay royalties
may cease upon Mr. Bova's termination with the Company. The agreement prohibits
Mr. Bova from competing with the Company during the term of the agreement and
for a period of two years after the termination thereof.
The Company entered into an employment agreement with Anthony J. Cutie, Ph.
D. dated as of June 20, 1996 pursuant to which Dr. Cutie serves as Vice
President, Aerosol Research and Development. This agreement constitutes an
amendment and restatement of a previous employment agreement with Dr. Cutie,
dated September 1, 1993. Under the agreement, the term of Dr. Cutie's employment
terminates on December 31, 1997, unless earlier terminated for cause, upon the
death and disability of Dr. Cutie, or, at the election of Dr. Cutie upon a
change in control of the Company. Notwithstanding the foregoing, the Company may
exercise an option to extend the term of the agreement for up to forty-eight
additional months and Dr. Cutie may elect to extend the term of the agreement
for up to ten years, during which period Dr. Cutie may serve the Company as a
consultant. The agreement provides that Dr. Cutie receive a base salary of
$165,000 per year, commencing July 1, 1997, which amount may be increased by the
Company. In addition, the agreement provides that Dr. Cutie receive royalties in
an amount equal to one percent of the net sales of the Company's aerosol
products formulated by Dr. Cutie through December 31, 2005, up to a cap of
$1,500,000. The agreement provides that, under certain circumstances, the
royalty amount may be reduced to 0.5% of net sales. The agreement also provides
that under certain circumstances, the Company's obligation to pay royalties may
cease upon Dr. Cutie's termination. The agreement prohibits Dr. Cutie from
competing with the Company during the term of the agreement and for a period of
two years after the termination thereof.
STOCK OPTION PLAN
The Option Plan provides for the grant of both nonstatutory stock options
and stock options intended to be treated as incentive stock options within the
meaning of Section 422 of the Internal Revenue Code. The Option Plan is intended
to provide incentives to, and rewards for, certain eligible employees,
consultants and outside directors of the Company who have contributed and will
continue to contribute to the success of the Company. The Option Plan was
adopted by the Board of Directors and the shareholder of the Company in June
1996. An aggregate of 3,675,000 shares of Common Stock have been reserved for
issuance under the Option Plan. As of August 4, 1997, the Company has granted
options to purchase an aggregate of 2,651,300 shares of Common Stock under the
Option Plan to employees and consultants at exercise prices ranging from $0.60
to $38.75 per share, including stock options covering an aggregate of 1,155,000
shares of Common Stock granted to the Company's Named Executive Officers. The
Company also has granted options to purchase an aggregate of 325,000 shares of
Common Stock outside of the Option Plan to an employee and a consultant,
including stock options covering an aggregate of 275,000 shares of Common Stock
granted to one of the Company's Named Executive Officers.
Under the Option Plan, the Compensation Committee of the Board of Directors
of the Company is authorized to administer the Option Plan, including the
selection of employees and consultants of the Company to whom options may be
granted. The Compensation Committee also determines the number of shares, the
exercise price, the term, any conditions on exercise and other terms of each
option granted to an employee or consultant. Options granted to employees or
consultants under the Option Plan become vested over a period of four years or
such shorter or longer
39
period as may be determined by the Compensation Committee at the time of grant.
The duration of an option granted to an employee or consultant under the Option
Plan is ten years from the date of grant, or such shorter or longer period as
may be determined by the Compensation Committee at the time of grant or as may
result from the death, disability, or termination of the employment of the
employee or consultant to whom the option is granted.
The Option Plan prescribes a formula for determining the amount, price and
timing of awards of stock options to the eligible outside directors. Upon his or
her election to the Board of Directors of the Company, an eligible outside
director will receive an option to purchase 5,000 shares of the Company's common
stock. On each anniversary of his or her appointment to the Board of Directors
of the Company, an eligible outside director will receive an option to purchase
3,000 shares of the Company's common stock. The exercise price of each share
subject to an option granted to an outside director will be the fair market
value of the Company's common stock on the date the option is granted. Each
option granted to an outside director under the Option Plan becomes vested on
the first anniversary of its date of grant. The duration of an option granted to
an outside director under the Option Plan is the lesser of ten years from the
date of grant or one year from the date of the outside director's death.
The options are non-transferable other than by will or by the laws of
descent and distribution. The Option Plan may be amended at any time by the
Board of Directors, although certain amendments require shareholder approval.
The Option Plan terminates in June 2006.
401(K) PLAN
The Company's Internal Revenue Code Section 401(k) Plan, known as the Kos
Savings Plan, became effective on January 1, 1994. Each employee who has
completed at least 90 days of service with the Company and has attained age 21
is eligible to make pre-tax elective deferral contributions each year not
exceeding the greater of a specified statutory amount or 15 percent of the
employee's compensation for the year. An employee is always 100 percent vested
in the employee's elective deferral contributions. The Company makes no
contributions under this plan.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers, and persons who
beneficially own more than ten percent of a registered class of the Company's
equity securities, to file with the Securities and Exchange Commission (the
"Commission") initial reports of beneficial ownership and reports of changes in
beneficial ownership of the Company's Common Stock. The rules promulgated by the
Commission under Section 16(a) of the Exchange Act require those persons to
furnish the Company with copies of all reports filed with the Commission
pursuant to Section 16(a).
Form 3 filings were not made on a timely basis for John Brademas, Louis
Lasagna, Mark Novitch and Frederick Whittemore, and a report received by the
Company indicates that David Bova failed to file on a timely basis a Form 4 with
respect to two transactions.
40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of July 31, 1997 by: (i) each person
known to the Company to beneficially own more than 5% of the Common Stock; (ii)
each Named Executive Officer; and (iii) all directors and executive officers of
the Company as a group. The calculation of the Percentage of Outstanding Shares
is based on 14,772,500 Shares outstanding on July 31, 1997. Except as otherwise
indicated, each shareholder named has sole voting and investment power with
respect to such shareholder's shares.
AMOUNT OF BENEFICIAL
OWNERSHIP
OF COMMON STOCK
------------------------------
TOTAL SHARES PERCENTAGE OF
NAME OF BENEFICIALLY OUTSTANDING
BENEFICIAL OWNER OWNED SHARES
---------------------- ------------ -------------
Michael Jaharis(1) 10,942,359 69.63%
Daniel M. Bell(2) 750,026 4.83%
David J. Bova(3) 279,101 1.85%
Anthony J. Cutie, Ph. D. (4) 37,701 *
David L. Heatherman (5) 10,000 *
Frederick A. Sexton (6) 10,173 *
Robert E. Baldini(7) 50,001 *
John Brademas -- --
Steven Jaharis(8) 5,000 *
Louis C. Lasagna -- --
Mark Novitch -- --
Frederick B. Whittemore -- --
All Executive Officers and Directors (9)
as a group (13 persons) 12,084,361 71.69%
- -----
* Less than 1 percent
(1) All shares are held by Holdings, which is wholly owned by Kos Investments,
of which Mr. Jaharis is the controlling shareholder. Includes, at July 31,
1997, 942,358 shares of Common Stock issuable to Kos Investments upon the
conversion, if any, of the Investments Loan.
(2) Includes 750,000 shares of Common Stock that may be purchased by Mr. Bell
pursuant to an option, which is currently exercisable.
(3) Includes 275,000 shares of Common Stock that may be purchased by Mr. Bova
pursuant to an option, which is currently exercisable.
(4) Includes 37,500 shares of Common Stock that may be purchased by Dr. Cutie
pursuant to an option, which is currently exercisable. Also includes 200
shares of Common Stock owned by Dr. Cutie's son, with respect to which Dr.
Cutie disclaims beneficial ownership.
(5) Includes 10,000 shares of Common Stock that may be purchased by Mr.
Heatherman pursuant to an option, which will be exercisable within 60 days.
(6) Consist of 10,000 shares of Common Stock that may be purchased by Mr.
Sexton pursuant to an option, which is currently exercisable. Also includes
172 shares of Common Stock owned by Mr. Sexton's wife, with respect to
which Mr. Sexton disclaims beneficial ownership.
(7) Consist of 50,000 shares of Common Stock that may be purchased by Mr.
Baldini pursuant to an option, which is currently exercisable.
(8) Consist of 5,000 shares of Common Stock that may be purchased by Dr.
Jaharis pursuant to an option, which is currently exercisable.
(9) Includes 1,137,500 shares of Common Stock issuable upon exercise of options
which are currently exercisable or which may be exercised within 60 days,
and 942,358 shares of Common Stock which are issuable upon the conversion
of the Investments Loan.
41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company issued a promissory note, dated as of July 1, 1996, to Kos
Investments, Inc., (the "Investments Loan") the proceeds of which were used to
fund the Company's operations until the consummation of the Company's initial
public offering on March 12, 1997. Michael Jaharis, the Chairman of the
Company's Board of Directors, is the controlling shareholder of Kos Investments.
Pursuant to the Investments Loan, Kos Investments agreed to loan the Company the
aggregate principal amount of up to $15.0 million. Under the terms of the
Investments Loan, interest accrues on the outstanding principal amount at First
Union National Bank of Florida's prime rate commencing July 1, 1996, escalating
to a rate of 1% over such prime rate during calendar year 1997, 2% over such
prime rate during calendar year 1998, and 3% over such prime rate during
calendar year 1999 until maturity. Principal and interest under the Investments
Loan are due on June 30, 1999. From time to time, at Kos Investments' option,
principal and interest outstanding under this note may be converted, in whole or
in part, into Common Stock at a conversion price per share equal to the initial
public offering price per share of $15.00. As of June 30, 1997, the Company had
borrowed $13,395,000 under the Investments Loan and interest in the amount of
$643,000 had accrued under the Investments Loan.
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. & 2.
The Financial Statements filed as part of this report are
listed separately in the index to Financial Statements
beginning on page 17 of this report.
3. The following exhibits are filed herewith:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
3.1* Amended and Restated Articles of Incorporation
of the Company
3.2* Amended and Restated Bylaws of the Company
4.1 See Exhibits 3.1 and 3.2 for provisions of the
Amended and Restated Articles of Incorporation
and Amended and Restated Bylaws of the Company
defining the rights of holders of Common Stock
of the Company
4.2** Form of Common Stock certificate of the
Company
10.1* Employment Agreement dated as of July 1, 1996,
between Daniel M. Bell and the Company
10.2* Nonqualified Stock Option Agreement be and
between the Company and Daniel M. Bell dated
as of June 20, 1996.
10.3* Employment Agreement dated as of June 15, 1996,
between David Bova and the Company
10.4* Kos Pharmaceuticals, Inc. 1996 Stock Option
Plan
42
10.5 Employment Agreement dated June 20, 1996 by
and between Aeropham Technology, Inc. and
Anthony J. Cutie
10.6 Option Agreement dated June 20, 1996 between
Anthony J. Cutie and the Company.
10.7*+ Development Agreement by and between the
Company and Fuisz Technologies, Ltd.
10.8*+ Option/Licensing Agreement by and between the
Company and Fuisz Technologies, Ltd.
10.9*+ Development Agreement by and between the
Company and Fuisz Technologies, Ltd.
10.10*+ Option/Licensing Agreement by and between the
Company and Fuisz Technologies, Ltd.
10.11*+ License Agreement by and between the Company
and Upsher-Smith Laboratories, Inc., dated
February 7, 1997.
10.12* Promissory Note, dated July 1, 1996, in favor
of Kos Investments
10.13* Registration Rights Agreement dated as of
June 30, 1996 by and between the Company,
Kos Holdings, Inc., and Kos Investments, Inc.
21* Subsidiaries of the Company
27 Financial Data Schedule
* Filed with the Company's Registration
Statement on Form S-1 (File No. 333-17991),
as amended, filed with the Securities and
Exchange Commission on December 17, 1996, and
incorporated herein by reference.
** Filed with the Company's Registration
Statement on Form 8-A filed with the
Securities and Exchange Commission on
February 25, 1997, and incorporated herein by
reference.
+ 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 filed a report of Form 8-K on July 29, 1997, reporting in Item
5 therein the issuance of a press release by the Company on July 29, 1997.
43
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
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.
SIGNATURE TITLE DATE
- ------------------------ ------------------------- ---------------
/s/ MICHAEL JAHARIS Chairman of the Board August 29, 1997
- ------------------------ of Directors
Michael Jaharis
Vice Chairman of the Board
- ------------------------ of Directors
Robert E. Baldini
/s/ DANIEL M. BELL President, Chief Executive August 29, 1997
- ------------------------ Officer and Director
Daniel M. Bell (Principal Executive Officer)
/s/ GEORGE A. BLEWS Vice President & Treasurer August 29, 1997
- ------------------------ (Principal Financial Officer)
George A. Blews
/s/ JUAN F. RODRIGUEZ Controller August 29, 1997
- ------------------------ (Principal Accounting Officer)
Juan F. Rodriguez
/s/ JOHN BRADEMAS
- ------------------------ Director August 27, 1997
John Brademas
/s/ STEVEN JAHARIS
- ------------------------ Director August 29, 1997
Steven Jaharis
/s/ LOUIS C. LASAGNA
- ------------------------ Director August 29, 1997
Louis C. Lasagna
s/ MARK NOVITCH
- ------------------------ Director August 28, 1997
Mark Novitch
/s/ FREDERICK B. WHITTEMORE
- ------------------------ Director August 29, 1997
Frederick B. Whittemore
44
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.5 Employment Agreement dated June 20, 1996 by and
between Aeropharm Technology, Inc. and Anthony J.
Cutie
10.6 Option Agreement dated June 20, 1996 between
Anthony J. Cutie and the Company
27 Financial Data Schedule
45