SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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)
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FLORIDA 65-0670898
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
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1001 BRICKELL BAY DRIVE, 25th FLOOR, MIAMI, FLORIDA 33131
(Address of Principal Executive Offices, Zip Code)
Registrant's Telephone Number, Including Area Code: (305) 507-3600
Indicate whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
CLASS OUTSTANDING AT OCTOBER 31, 1997
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Common Stock, par value $.01 per share 17,163,695
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KOS PHARMACEUTICALS, INC.
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1997
and June 30, 1997.............................................................. 2
Condensed Consolidated Statements of Operations for the
three months ended September 30, 1997 and 1996................................. 3
Condensed Consolidated Statements of Cash Flows for the
three months ended September 30, 1997 and 1996................................. 4
Notes to Condensed Consolidated Financial Statements........................... 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................... 7
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings....................................................................... 10
Item 6 - Exhibits and Reports on Form 8-K........................................................ 10
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*NIASPAN is a registered trademark of Kos Pharmaceuticals, Inc.
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PART I - FINANCIAL INFORMATION
ITEM 1 - CONDENSED FINANCIAL STATEMENTS
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
SEPTEMBER JUNE 30,
30, 1997 1997
------------ -------------
(UNAUDITED)
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ASSETS
Current Assets:
Cash and cash equivalents......................................................... $ 16,327 $ 33,307
Marketable securities............................................................. 31,635 25,055
Trade accounts receivable, net.................................................... 1,476 -
Prepaid expenses and other current assets......................................... 323 346
Inventories....................................................................... 2,167 1,372
----------- -----------
Total current assets.......................................................... 51,928 60,080
Fixed Assets, net................................................................... 5,059 3,272
Other Assets......................................................................... 635 1,753
----------- -----------
Total assets.................................................................. 57,622 $ 65,105
=========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities:
Accounts payable.................................................................. $ 3,350 $ 2,430
Accrued expenses.................................................................. 6,005 4,268
Convertible note.................................................................. 13,395 13,395
----------- -----------
Total current liabilities..................................................... 22,750 20,093
----------- -----------
Note Payable......................................................................... - 23
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Shareholders' Equity:
Common stock, $.01 par value, 50,000,000 shares authorized, 149 148
14,883,625 and 14,772,500 shares issued and outstanding as
of September 30, 1997 and June 30, 1997, respectively..........................
Preferred stock, $.01 par value, 10,000,000 shares authorized, - -
none issued and outstanding.....................................................
Additional paid-in capital......................................................... 125,299 124,621
Accumulated deficit................................................................ (90,576) (79,780)
----------- -----------
Total shareholders' equity.................................................... 34,872 44,989
----------- -----------
Total liabilities and shareholders' equity.................................... $ 57,622 $ 65,105
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2
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KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
THREE MONTHS
ENDED
SEPTEMBER 30,
----------------------------
1997 1996
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(UNAUDITED)
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Net Sales............................................................................ $ 1,524 $ -
----------- -----------
Costs and Expenses:
Cost of sales..................................................................... 364 -
Research and development.......................................................... 5,150 2,784
Selling, general and administrative............................................... 7,261 760
----------- -----------
Total costs and expenses...................................................... 12,775 3,544
Other (Income) Expense:
Interest (income) expense, net.................................................... (743) (2)
Interest expense-related parties.................................................. 288 23
----------- -----------
Total other (income) expense.................................................. (455) 21
----------- -----------
Net loss...................................................................... $(10,796) $(3,565)
=========== ===========
Net loss per share................................................................... $ (0.73) $ (0.31)
Weighted average shares of common
stock outstanding.................................................................. 14,782 11,340
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
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KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1997 1996
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(UNAUDITED)
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Cash Flows from Operating Activities:
Net loss............................................................................ $(10,796) $(3,565)
Adjustments to reconcile net loss to net cash used
in operating activities -
Depreciation and amortization................................................... 258 134
Other........................................................................... 33 -
Changes in operating assets and liabilities:
Trade accounts receivable, net................................................ (1,476) -
Prepaid expenses and other current assets..................................... 23 51
Inventories................................................................... (795) -
Other assets.................................................................. 1,118 -
Accounts payable.............................................................. 920 68
Accrued expenses.............................................................. 1,737 171
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Net cash used in operating activities.................................. (8,978) (3,141)
---------- ----------
Cash Flows from Investing Activities:
Investment in marketable securities................................................. (6,580) -
Capital expenditures................................................................ (2,045) (253)
---------- ----------
Net cash used in investing activities.................................. (8,625) (253)
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Cash Flows from Financing Activities:
Stock options exercised............................................................. 646 -
Payment of long-term debt........................................................... (23) -
Borrowings under convertible note................................................... - 3,405
---------- ----------
Net cash provided by financing activities.............................. 623 3,405
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Net increase (decrease) in cash and (16,980) 11
cash equivalents......................................................
Cash and Cash Equivalents, beginning of period........................................ 33,307 194
---------- ----------
Cash and Cash Equivalents, end of period.............................................. $ 16,327 $ 205
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
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KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The condensed consolidated financial statements included herein have
been prepared by Kos Pharmaceuticals, Inc. (the "Company") without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the consolidated financial
position, results of operations, and cash flows of the Company. The unaudited
condensed consolidated financial statements included herein should be read in
conjunction with the audited consolidated financial statements and the notes
thereto included in the Company's Form 10-K, as amended, for the fiscal year
ended June 30, 1997.
The Company will adopt Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128") in the quarter ending December 31, 1997.
SFAS 128 requires the Company to change its method of computing, presenting, and
disclosing earnings per share information. Upon adoption, all prior period data
presented will be restated to conform to the provisions of SFAS 128. The
adoption of this statement is not expected to have a material effect on the
Company's consolidated financial statements.
The Company's Board of Directors has determined to change the end of
the Company's fiscal year from June 30 to December 31, effective with its
December 31, 1997 reporting period.
2. INVENTORIES
Inventories consist of the following:
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SEPTEMBER JUNE 30,
30, 1997 1997
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(in thousands)
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Raw materials........................................................... $ 166 $ 170
Work in process......................................................... 1,105 1,202
Finished goods.......................................................... 896 -
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Total.............................................................. $ 2,167 $ 1,372
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3. STOCK OPTIONS
As of September 30, 1997, the Company had issued options to purchase
2,434,300 shares of Common Stock, at exercise prices ranging from $0.60 to
$38.75 per share, to employees, officers, directors, and consultants under the
Plan. Of these, options to purchase 1,334,315 shares were exercisable. During
the three month period ended September 30, 1997, options to purchase 334,800
shares of common stock were granted at exercise prices ranging from $27.25 to
$38.75, and options to purchase 108,410 shares were exercised at exercise prices
ranging from $7.00 to $15.00.
Prior to the adoption of the Plan, the Company's Board of Directors
granted options to purchase 325,000 shares of Common Stock, at exercise prices
ranging from $0.75 to $3.33 per share, to an officer and to a consultant of the
Company, all of which options were exercisable. Of these, options to purchase
2,500 shares of Common Stock at a price of $3.33 per share were exercised during
the quarter ended September 30, 1997.
The Company considered the provisions of SFAS No. 123 using the Black
Scholes method to approximate an expense related to the issuance of stock
options. The Company's Black Scholes calculation included an expected stock
price volatility rate of 57.6%, a risk-free interest rate of 6.25%, no expected
dividends and an expected option term of 5 years. 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. On this basis, deferred compensation cost of $33,000 was recorded for
options issued to directors and consultants for the three month period ended
September 30, 1997.
Had compensation cost for options issued to employees been determined
consistent with SFAS No. 123, using the same factors described in the Company's
Form 10-K, as amended, the Company's Pro Forma net loss and net loss per share
for the three months ended September 30, 1997 would have been $11,454,000 and
$0.77, respectively.
4. SUBSEQUENT EVENTS
On October 24, 1997, the Company completed a public offering of
1,085,000 shares of its Common Stock, resulting in net proceeds to the Company
of $44.1 million after deducting underwriters' discounts and commissions and
before offering expenses.
Also on October 24, 1997, Kos Investments, Inc. exercised its right to
convert the Convertible Note and accrued interest, of $13,395,000 and
$1,006,032, respectively, into shares of the Company's Common Stock at a
conversion price per share of $15.00. As a result, 960,069 shares of the
Company's Common Stock were issued to Kos Investments, Inc.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company was incorporated in Florida on June 25, 1996, as a
successor to the business of Kos Holdings, Inc. ("Holdings"), which was
incorporated in Florida on July 1, 1988. The Company is engaged in developing
and commercializing proprietary prescription pharmaceutical products, primarily
for the treatment of certain chronic cardiovascular and respiratory diseases. On
July 28, 1997, the Company was granted clearance by the FDA to market its first
product, NIASPAN, for the treatment of multiple lipid disorders. The Company
currently markets its NIASPAN product in the United States through its own
specialty sales force.
On March 12, 1997, the Company completed an initial public offering of
its Common Stock ("IPO") resulting in net proceeds to the Company of $65.9
million, after deducting underwriters' discounts and commissions and before
offering expenses. On October 24, 1997, the Company completed a public offering
of additional shares of Common Stock, including 1,085,000 shares issued and sold
by the Company and 2,540,000 shares sold by certain selling shareholders. As a
result of this offering, the Company received net proceeds of $44.1 million,
after deducting underwriters' discounts and commissions and before offering
expenses. These proceeds will be utilized to fund certain operating
requirements, including sales and marketing and research and development
expenses, working capital, and other general corporate purposes, including
potential acquisitions.
The Company's Board of Directors has determined to change the end of
the Company's fiscal year from June 30 to December 31, effective with its
December 31, 1997 reporting period.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
On July 28, 1997, the Company was granted clearance by the U.S. Food
and Drug Administration to market its NIASPAN product. The Company began
shipping its NIASPAN product to wholesalers in mid-August 1997, and it began
detailing the product to physicians in September 1997. As a result, the Company
recorded its initial product sales of $1.5 million during the three months
ended September 30, 1997. The Company anticipates that such sales will increase
modestly during the quarter ending December 31, 1997.
The Company's research and development expenses increased to $5.2
million for the three month period ended September 30, 1997, from $2.8 million
for the comparable period during fiscal 1996. The increase was attributable
primarily to increases in licensing and development costs related to products
under development, increases in clinical trial costs associated with the
completion of a long-term safety study evaluating the NIASPAN product, and to
pharmacokinetic studies to support the Company's product development programs.
Increases in personnel and other costs, in connection with scale-up of the
Company's aerosol research and development program and with certain other
products under development, have also contributed to the higher research and
development expenses in the 1997 quarter. The Company expects research and
development
7
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expenses to continue 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.
Selling, general and administrative expenses increased to $7.3 million
for the three month period ended September 30, 1997, from $0.8 million for the
comparable period during fiscal 1996. The increase reflects principally the
commencement of the Company's sales and marketing activities, including the
recruitment of the Company's field sales organization and the launching of a
variety of promotional programs in connection with the introduction of the
NIASPAN product. Administrative costs also increased in the 1997 quarter because
of higher personnel costs and other expenses associated with the expanded
activities of the Company since the 1996 quarter. The Company expects that its
selling, general and administrative expenses will continue to increase in
support of its broadening marketing efforts and its research and development
programs. The Company intends to increase the size of its field sales force to
more than 200 representatives by early 1998.
From July 1, 1996, to the completion of the Company's IPO on March 12,
1997, the Company financed its operations from the proceeds of a convertible
note (the "Convertible Note") issued to Kos Investments, Inc., the sole
shareholder of Holdings. As of September 30, 1997, the Company had outstanding
borrowings of $13.4 million under the Convertible Note, and the Company recorded
$288,000 of interest expense for the three month period ended September 30,
1997, compared with $23,000 for the three month period ended September 30, 1996.
The Company received $65.9 million in net proceeds from its IPO. Of
these proceeds, $48.0 million were available as of September 30, 1997 and were
invested in U.S. Treasury and highly-rated corporate securities. The Company
recorded $717,000 of interest income for the three month period ended September
30, 1997.
The Company reported a net loss of $10.8 million for the three month
period ended September 30, 1997, compared with a net loss of $3.6 million for
the three month period ended September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had consolidated cash, cash
equivalents, and marketable securities aggregating $48.0 million, compared with
$58.0 million at June 30, 1997. Approximately $9.0 million of this reduction
resulted from cash used in operations of the Company during the quarter ending
September 30, 1997.
The Company recorded $2.0 million of capital expenditures during the
quarter, primarily in support of its research and development activities. As of
September 30, 1997, the Company's net investment in fixed assets was $5.1
million. The Company had no material commitments for capital expenditures as of
September 30, 1997.
On October 24, 1997, Kos Investments, Inc. exercised its right to
convert the Convertible Note of $13,395,000 principal amount and $1,006,032 of
accrued interest into 960,069 shares of the Company's Common Stock.
8
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Although the Company anticipates that the net proceeds from the public
offering completed October 24, 1997, along with cash, cash equivalents,
marketable securities and expected interest income thereon, will be sufficient
to fund the Company's operations for at least 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 companies
in connection with the commercial launch of its first product; the success of
the Company's sales and marketing programs; patient acceptance of the Company's
NIASPAN 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; 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. The Company may seek 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 to the Company 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 including statements
relating to anticipated sales and the anticipated increase in the size of the
Company's sales force, 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 physician and
patient acceptance of the NIASPAN product, the Company's ability to devote the
resources required to adequately market the NIASPAN product, the Company's
ability to recruit qualified personnel, the Company's future cash flows, sales,
gross margins and operating costs, the effect of conditions in the
pharmaceutical industry and the economy in general, regulatory developments,
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-Q, 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. 333-35395) filed with the
Securities and Exchange Commission on September 11, 1997, as amended, including
the risk factors section thereof.
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There are no material 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:
(i) 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.
(ii) The Company filed a report on Form 8-K on September 2,
1997, reporting in Item 8 therein a change in the date of
the Company's fiscal year end.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KOS PHARMACEUTICALS, INC.
Date: November 13, 1997 By: /S/ DANIEL M. BELL
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Daniel M. Bell, President
Date: November 13, 1997 By: /S/ JUAN F. RODRIGUEZ
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Juan F. Rodriguez, Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
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27 Financial Data Schedule
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THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM KOS
PHARMACEUTICALS, INC'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 16,327
<SECURITIES> 31,635
<RECEIVABLES> 1,556
<ALLOWANCES> (80)
<INVENTORY> 2,167
<CURRENT-ASSETS> 51,928
<PP&E> 7,556
<DEPRECIATION> (2,497)
<TOTAL-ASSETS> 57,622
<CURRENT-LIABILITIES> 22,750
<BONDS> 0
0
0
<COMMON> 149
<OTHER-SE> 34,723
<TOTAL-LIABILITY-AND-EQUITY> 57,622
<SALES> 1,524
<TOTAL-REVENUES> 1,524
<CGS> 364
<TOTAL-COSTS> 364
<OTHER-EXPENSES> 12,411
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 288
<INCOME-PRETAX> (10,796)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,796)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,796)
<EPS-PRIMARY> (0.73)
<EPS-DILUTED> (0.73)
</TABLE>
