SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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 Registrant as Specified in Its Charter)
FLORIDA 65-0670898
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1001 BRICKELL BAY DRIVE, SUITE 2502, MIAMI, FLORIDA 33131
(Address of Principal Executive Offices, Zip Code)
Registrant's Telephone Number, Including Area Code: (305) 577-3464
Indicate whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
CLASS OUTSTANDING AT APRIL 30, 1997
----- -----------------------------
Common Stock, par value $.01 per share 14,772,500
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
<S> <C>
Consolidated Balance Sheets as of March 31, 1997 and
June 30, 1996.................................................................... 2
Consolidated Statements of Operations for the three months
and nine months ended March 31, 1997 and 1996
for the period from July 1, 1988 (inception ) to March 31, 1997.................. 3
Consolidated Statements of Shareholders' Equity (Deficit)........................ 4
Consolidated Statements of Cash Flows for the nine months
ended March 31, 1997 and 1996
for the period from July 1, 1988 (inception ) to March 31, 1997. ................ 5
Notes to Consolidated Financial Statements....................................... 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................... 9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings...................................................................... 12
Item 6 - Exhibits and Reports on Form 8-K....................................................... 12
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1997 JUNE 30, 1996
-------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 64,155,648 $ 193,484
Prepaid expenses and other current assets 991,576 165,392
Raw material inventories 95,216 --
------------- -------------
Total current assets 65,242,440 358,876
Fixed Assets, net 2,876,445 1,921,943
------------- -------------
Total assets $ 68,118,885 $ 2,280,819
============= =============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities:
Accounts payable $ 277,583 $ 195,299
Accrued expenses 2,809,098 171,371
Loan from Kos Investments, Inc. 13,395,000 --
------------- -------------
Total current liabilities 16,481,681 366,670
------------- -------------
Shareholders' Equity:
Common stock, $.01 par value, 50,000,000
shares authorized, 14,772,500 and 10,000,000 shares issued and
outstanding as of March 31, 1997 and June 30, 1996,
respectively 147,725 100,000
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued
and outstanding -- --
Additional paid-in capital 124,620,649 58,472,323
Deficit accumulated in the development stage (73,131,170) (56,658,174)
------------- -------------
Total shareholders' equity 51,637,204 1,914,149
------------- -------------
Total liabilities and shareholders' equity $ 68,118,885 $ 2,280,819
============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2
<PAGE>
<TABLE>
<CAPTION>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS NINE MONTHS JULY 1, 1988
ENDED ENDED (INCEPTION) TO
MARCH 31, MARCH 31, MARCH 31
------------------------- -------------------------- ----------
1997 1996 1997 1996 1997
--------- --------- ---------- --------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ -- $ 36,761
--------- --------- ---------- --------- ----------
Expenses:
Research and development 6,973,597 2,845,065 13,030,274 9,271,137 51,735,784
General, selling and administrative 1,318,615 421,101 3,255,226 1,209,943 12,126,584
Expense recognized on modification of
stock option grants -- -- -- -- 5,436,000
--------- --------- ---------- ---------- ----------
8,292,212 3,266,166 16,285,500 10,481,080 69,298,368
--------- --------- ---------- ---------- ----------
Other (Income) Expense:
Other income -- -- -- -- (10,103)
Interest (income) expense, net (172,384) (2,598) (177,566) (10,316) 3,236,431
Interest expense-related parties 228,780 -- 365,062 -- 495,545
--------- --------- ---------- ---------- ----------
Total other (income) expense 56,396 (2,598) 187,496 (10,316) 3,721,873
--------- --------- ---------- ---------- ----------
Loss before minority interest (8,348,608) (3,263,568) (16,472,996) (10,470,764) (72,983,480)
Minority Interest -- 7,873 -- 8,711 (147,690)
--------- ----------- ---------- ----------- ----------
Net loss $(8,348,608) $(3,255,695) $(16,472,996) $(10,462,053) $(73,131,170)
========= ========= ========== ========== ==========
Net loss per Share $ (0.67) $ (0.29) $ (1.41) $ (0.92) $ (6.26)
========= ========= ========== ========== ==========
Weighted Average Shares of Common
Stock Outstanding 12,409,015 11,340,000 11,689,762 11,340,000 11,689,762
========== ========== ========== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL IN THE
COMMON PAID-IN DEVELOPMENT
STOCK CAPITAL STAGE TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
Cost of stock options issued to non-employees 310,943 -- 310,943
Net loss -- -- (16,472,996) (16,472,996)
------------ ------------ ------------ ------------
Balance at March 31, 1997 (unaudited) $ 147,725 $124,620,649 $(73,131,170) $ 51,637,204
============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JULY 1, 1988
MARCH 31, (INCEPTION) TO
------------------------------ MARCH 31,
1997 1996 1997
------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (16,472,996) $ (10,462,053) $ (73,131,170)
Adjustments to reconcile net loss to net cash used
in operating activities -
Depreciation and amortization 455,047 390,947 2,044,794
Minority interest -- (8,711) 147,690
Compensation recognized on modification of
stock option grants -- -- 5,436,000
Cost of stock options issued to non-employees 310,943 -- 310,943
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (826,184) (41,560) (991,576)
Raw material inventories (95,216) (71,820) (95,216)
Accounts payable 82,284 414,488 277,583
Accrued expenses 2,637,727 (801,789) 2,809,098
------------ ------------ -------------
Net cash used in operating activities (13,908,395) (10,580,498) (63,191,854)
------------ ------------ -------------
Cash Flows from Investing Activities:
Capital expenditures (1,409,549) (128,074) (4,921,239)
------------ ------------ -------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock 65,885,108 -- 66,375,108
Capital contributions received from Parent -- 10,676,633 22,126,633
Borrowings under note payable -- -- 30,372,000
Borrowings under loan from Kos Investments, Inc. 13,395,000 -- 13,395,000
------------ ------------ -------------
Net cash provided by financing activities 79,280,108 10,676,633 132,268,741
------------ ------------ -------------
Net increase (decrease) in cash and
cash equivalents 63,962,164 (31,939) 64,155,648
Cash and Cash Equivalents, beginning of period 193,484 40,973 --
------------ ------------ -------------
Cash and Cash Equivalents, end of period $ 64,155,648 $ 9,034 $ 64,155,648
============ ============ =============
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ -- $ -- $ 3,476,267
============ ============ =============
Supplemental Disclosure of Non-cash Information:
Transfer of note payable to Parent $ -- $ -- $ 30,372,000
============ ============ =============
Contribution of minority interest to paid-in capital $ -- $ -- $ 147,690
============ ============ =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In management's opinion, the accompanying unaudited consolidated
financial statements of Kos Pharmaceuticals, Inc. and subsidiary (the
"Company") contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position of the
Company as of March 31, 1997 and the results of its operations for the
three and nine months ended March 31, 1997 and 1996. The results of
operations and cash flows for the nine months ended March 31, 1997 are not
necessarily indicative of the results of operations or cash flows that may
be reported for the remainder of the fiscal year ending June 30, 1997.
The accompanying unaudited interim consolidated financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission for reporting on Form 10-Q. Pursuant to
such rules and regulations, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
These consolidated financial statements should be read in
conjunction with the Consolidated Financial Statements and the Notes to
Consolidated Financial Statements for the year ended June 30, 1996,
included in the Company's Registration Statement on Form S-1 (File No.
333-17991), as amended (the "Registration Statement"), filed with the
Securities and Exchange Commission. The accounting policies followed for
interim financial reporting are the same as those disclosed in Note 2 of
the Notes to Consolidated Financial Statements for the year ended June 30,
1996 included in the Company's Registration Statement.
2. LOSS PER SHARE
Loss per share is determined by dividing the net loss
attributable to holders of the Company's common stock, par value $.01 (the
"Common Stock"), by the weighted average number of shares of Common Stock
and dilutive Common Stock equivalents outstanding after applying the
treasury stock method. Common Stock equivalents include the potential
impact 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.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share". SFAS No. 128 supersedes the previous standard, Accounting
Principles Board Opinion ("APB") No. 15, modifies the methodology for
calculating earnings per share, and is effective for annual periods ending
after December 15, 1997; early adoption is not permitted. Upon adoption of
SFAS 128 in the Company's financial statements subsequent to June 30,
1997, the Company will be required to restate previously reported earnings
per share data to conform with the requirements of SFAS No. 128. Had the
provisions of SFAS No. 128 been applicable to the accompanying
consolidated financial statements, basic and diluted earnings per share,
as calculated in accordance with the provisions of SFAS No. 128, would not
have been different than the historical loss per share amounts reported
herein.
6
<PAGE>
3. LICENSE AGREEMENT
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 three months ended March 31, 1997. As further
consideration for entering into this 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.
4. STOCK OPTION PLAN
During 1996, the Board of Directors, the "Board" of the Company
adopted the Kos Pharmaceuticals, Inc. 1996 Stock Option Plan (the "Plan").
As of March 31, 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, and employees and certain consultants
designated by the Board are eligible to receive options under the Plan.
Each outside director of the Company was granted an option to purchase
5,000 shares of common stock and automatically will receive an option to
purchase an additional 3,000 shares effective on the anniversary date of
each director's election to the Board.
The exercise price of options issued under the Plan is not less
than the fair market value on the date the option is granted. Options
granted under the Plan vest over four years, and all such options expire
in 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 Company's Board.
The Company has granted options to purchase an aggregate of
2,328,000 shares to directors, officers, employees and consultants,
including options granted prior to the adoption of the Plan, as shown in
the following table. No options outstanding under the Plan had been
exercised as of March 31, 1997.
OPTIONS GRANTED DATE OF GRANT DATE OF EXPIRATION EXERCISE PRICE
--------------- ------------- ------------------ --------------
750,000 August 1988 June 2006 $ 0.60
35,000 January 1989 July 2001 1.90
75,000 February 1990 June 2006 0.90
275,000 December 1992 December 2002 0.75
50,000 July 1994 July 2003 3.33
940,500 June 1996 June 2006 7.00
137,500 December 1996 December 2006 15.00
10,000 February 1997 February 2007 15.00
20,000 March 1997 March 2007 24.69
35,000 March 1997 March 2007 20.25
7
<PAGE>
4. STOCK OPTION PLAN (CONTINUED)
Detail of option activity under this plan for the nine months
ended March 31, 1997 is as follows:
EXERCISE PRICES
-------------------------
NUMBER OF WEIGHTED
SHARES RANGE AVERAGE
---------- -------------- -------
Outstanding, June 30, 1996 2,158,000 $0.60 - $7.00 $ 3.60
Granted 202,500 15.00 - 24.69 16.86
Canceled (32,500) 7.00 7.00
---------
Outstanding, March 31, 1997 2,328,000
=========
For purposes of calculating the cost of stock options under
SFAS 123 "Accounting For Stock-based Compensation", the "fair value" of
each option grant is estimated as of the date of grant using the
Black-Scholes option pricing model, with the following assumptions used
for grants: risk-free rates of 6.25%; expected dividend yield of 0%;
expected term of 5 years; and expected volatility of 57.6%.
As permitted by SFAS No. 123, however, the Company accounts for
options issued to employees under APB Opinion No. 25. Consequently, except
for options issued to non-employees, no compensation cost has been
recognized on options issued to employees because the exercise price of
such options was not less than the market value of the Common Stock on the
date of grant. Had compensation cost for options issued to employees been
determined consistent with SFAS No. 123, the Company's net loss and net
loss per share would have been the "Pro Forma" amounts shown in the
following table:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
------------------------------- -----------------------------------
1997 1996 1997 1996
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss:
As reported $(8,348,608) $(3,255,695) $(16,472,996) $(10,462,053)
Pro Forma $(8,818,048) $(3,255,695) $(16,942,436) $(10,462,053)
Net loss per share
As reported $ (0.67) $ (0.29) $ (1.41) $ (0.92)
Pro Forma $ (0.71) $ (0.29) $ (1.45) $ (0.92)
</TABLE>
5. INITIAL PUBLIC OFFERING
On March 12, 1997, the Company completed an initial public
offering ("IPO") of the Common Stock by selling 4,772,500 shares,
resulting in net proceeds to the Company of approximately $65,900,000,
after deducting expenses of the offering.
8
<PAGE>
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
On June 25, 1996, the Company was incorporated in Florida as the successor
to the business of Kos Holdings, Inc. ("Holdings"), which was incorporated in
Florida on July 1, 1988. The Company is engaged primarily in the development of
proprietary prescription pharmaceutical products for the treatment of certain
chronic cardiovascular and respiratory diseases. The Company intends to
manufacture its products and to market such products in the United States
directly through its own specialty sales force.
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1996 AND 1997
The Company's research and development expenses increased from $9.3 million
for the nine months ended March 31, 1996 to $13.0 million for the nine months
ended March 31, 1997. Of the total increase in research and development
expenses, $3.0 million was attributable to the cost of entering into an
agreement, during the quarter ended March 31, 1997, with an unaffiliated generic
drug manufacturer to resolve the effects of a potential patent interference
proceeding. Increases in personnel 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 nine
months ended March 31, 1997. These increases in research and development
expenses were partially offset by the absence in the nine months ended March 31,
1997 of the expenses for the clinical trials completed during the nine months
ended March 31, 1996. Such trials were in support of the filing of a NDA during
May 1996 for the Company's first product, NIASPAN. 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 conducting of additional clinical trials.
General and administrative expenses increased from $1.2 million for the
nine months ended March 31, 1996 to $3.3 million for the nine months ended March
31, 1997. The increase was attributable primarily 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 and administrative
expenses will continue to increase in support of its marketing efforts and
development programs.
From July 1, 1996 to the completion of its IPO on March 12, 1997, the
Company funded its operations from the proceeds of a loan from Kos Investments,
Inc. (the "Investments Loan"), the sole shareholder of Holdings. As of March 31,
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 $365,000 of interest expense for the nine months ended March 31,
1997, compared with no such expense for the nine months ended March 31, 1996.
The Company received $65.9 million in net proceeds from its IPO. Of these
proceeds, $63.7 million had not been utilized by the Company as of March 31,
1997 and are invested in short-term U.S. Treasury and highly-rated corporate
9
<PAGE>
securities. As a result of this investment in marketable securities, the Company
recorded approximately $170,000 of interest income for the nine months ended
March 31, 1997, compared with no such income for the nine months ended March 31,
1996.
The Company incurred a net loss of $10.5 million for the nine months ended
March 31, 1996, compared with a net loss of $16.5 million for the nine months
ended March 31, 1997. The Company expects to incur substantial losses for at
least the next twelve months.
THREE MONTHS ENDED MARCH 31, 1996 AND 1997
The Company's research and development expenses increased from $2.8 million
for the three months ended March 31, 1996 to $7.0 million for the three months
ended March 31, 1997. This increase was attributable primarily to the cost
incurred, during the quarter ended March 31, 1997, of entering into an agreement
with an unaffiliated generic drug manufacturer to resolve the effects of a
potential patent interference proceeding, increases in personnel costs,
principally in connection with manufacturing scale-up, and by an increase in
development costs associated with various third-party agreements. These
increases in research and development activities were partially offset by the
absence, during the three months ended March 31, 1997, of the clinical trial
expenses incurred during the three months ended March 31, 1996 in support of the
filing of a NDA during May 1996 for the Company's first product, NIASPAN.
General and administrative expenses increased from $400,000 for the three
months ended March 31, 1996 to $1.3 million for the three months ended March 31,
1997. The increase was attributable primarily to the commencement of the
Company's marketing activities, and to the hiring of additional personnel to
support such marketing activities and the Company's increased administrative
functions.
Interest expense under the Investments Loan, absent during the three months
ended March 31, 1996, totaled $229,000 during the three months ended March 31,
1997. This increase in interest expense was partially offset by approximately
$170,000 of interest income recorded on the Company's investment in short-term
U.S. Treasury and highly-rated corporate securities for the three months ended
March 31, 1997.
The Company incurred a net loss of $3.3 million for the three months ended
March 31, 1996, compared with a net loss of $8.3 million for the three months
ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
From July 1, 1996 until the completion of its IPO, the Company financed its
operations from the proceeds of the Investments Loan, which had an unpaid
balance of approximately $13.4 million at March 31, 1997. All or a portion of
the Investments Loan may be repaid using a portion of the net proceeds from the
Company's IPO. At March 31, 1997, the Company's working capital totaled
approximately $48.8 million and cash and cash equivalents totaled approximately
$64.2 million, of which $63.7 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 the commencement of its marketing activities.
10
<PAGE>
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 March 31, 1997, the Company's net
investment in equipment and leasehold improvements was $2.9 million. The Company
expects that additional equipment and facilities will be needed as it increases
its research and development activities. The Company had no material commitments
for capital expenditures as of March 31, 1997.
Although the Company anticipates that the net proceeds from its IPO,
together with available cash and cash equivalents, short-term investments and
expected interest income, will be sufficient to fund the Company's operations
for the next twelve 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; 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 financing 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 this "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and elsewhere in this Form
10-Q 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 dependence on regulatory approvals, its future cash
flows, sales, gross margins and operating costs, the effect of conditions in the
pharmaceutical industry and the economy in general, and legal proceedings.
Subsequent written and oral forward looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by cautionary statements in this paragraph and elsewhere in this Form
10-Q, 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.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There are no legal proceedings pending against the Company or its
properties or to which the Company is a party.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter ended March
31, 1997.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KOS PHARMACEUTICALS, INC.
Date: May 15 , 1997 By: /s/ DANIEL M. BELL
----------------------------------------
Daniel M. Bell, President
Date: May 15, 1997 By: /s/ JUAN F. RODRIGUEZ
----------------------------------------
Juan F. Rodriguez, Controller
(Chief Accounting Officer)
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM KOS
HARMACEUTICALS, INC.'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 64,156
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 95
<CURRENT-ASSETS> 65,242
<PP&E> 4,921
<DEPRECIATION> (2,045)
<TOTAL-ASSETS> 68,119
<CURRENT-LIABILITIES> 16,482
<BONDS> 0
0
0
<COMMON> 148
<OTHER-SE> 51,489
<TOTAL-LIABILITY-AND-EQUITY> 68,119
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 16,286
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 187
<INCOME-PRETAX> (16,473)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,473)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,473)
<EPS-PRIMARY> (1.41)
<EPS-DILUTED> (1.41)
</TABLE>
