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 June 30, 1998
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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1001 BRICKELL BAY DRIVE, 25th FLOOR, MIAMI, FLORIDA 33131
---------------------------------------------------------
(Address of Principal Executive Offices, Zip Code)
Registrant's Telephone Number, Including Area Code: (305) 577-3464
Indicate whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes __________ No __________
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
CLASS OUTSTANDING AT JULY 31, 1998
----- ----------------------------
Common Stock, par value $.01 per share 17,709,995
<PAGE>
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 June 30, 1998
and December 31, 1997........................................... 2
Condensed Consolidated Statements of Operations for the
three months and six months ended June 30, 1998 and 1997........ 3
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997......................... 4
Notes to Condensed Consolidated Financial Statements............ 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.................................................. 14
Item 6 - Exhibits and Reports on Form 8-K................................... 14
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................................................... $ 13,213 $ 39,502
Marketable securities............................................................. 17,665 30,894
Trade accounts receivable, net.................................................... 1,376 1,820
Prepaid expenses and other current assets......................................... 1,859 1,873
Inventories....................................................................... 2,534 3,383
------------ -------------
Total current assets.......................................................... 36,647 77,472
Fixed Assets, net................................................................... 11,113 6,900
Other Assets......................................................................... 18 31
------------ -------------
Total assets.................................................................. $ 47,778 $ 84,403
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................................. $ 4,187 $ 3,159
Accrued expenses.................................................................. 4,243 3,374
Capital lease obligation.......................................................... 71 -
------------ -------------
Total current liabilities..................................................... 8,501 6,533
Capital lease obligation, net of current portion..................................... 150 -
------------ -------------
Total liabilities............................................................. 8,651 6,533
------------ -------------
Shareholders' Equity:
Common stock, $.01 par value, 50,000,000 shares authorized,
17,709,995 and 17,165,695 shares issued and outstanding as
of June 30, 1998 and December 31, 1997, respectively............................ 177 172
Preferred stock, $.01 par value, 10,000,000 shares authorized,
none issued and outstanding..................................................... - -
Additional paid-in capital......................................................... 184,263 183,650
Accumulated deficit................................................................ (145,313) (105,952)
------------ -------------
Total shareholders' equity.................................................... 39,127 77,870
------------ -------------
Total liabilities and shareholders' equity.................................... $ 47,778 $ 84,403
============ =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1998 1997 1998 1997
-------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales....................................... $ 2,807 $ - $ 3,807 $ -
Cost of sales................................... 843 - 1,053 -
-------------- ------------- ------------- -------------
Gross profit................................. 1,964 - 2,754 -
-------------- ------------- ------------- -------------
Operating Expenses:
Research and development..................... 7,524 4,850 14,496 11,823
Selling, general and administrative.......... 17,105 2,267 29,017 3,586
-------------- ------------- ------------- -------------
Total operating expenses................. 24,629 7,117 43,513 15,409
-------------- ------------- ------------- -------------
Other (Income) Expense:
Interest income, net......................... (611) (747) (1,398) (919)
Interest expense-related parties............. - 278 - 507
-------------- ------------- ------------- -------------
Total other income....................... (611) (469) (1,398) (412)
-------------- ------------- ------------- -------------
Net loss................................. $(22,054) $(6,648) $(39,361) $(14,997)
============== ============= ============= =============
Net loss per share, basic and diluted........... $ (1.25) $ (0.45) $ (2.25) $ (1.12)
Weighted average shares of common
stock outstanding............................. 17,649 14,773 17,457 13,419
Common stock options outstanding
(not included in the calculation of diluted
loss per share as their impact would be
antidilutive)................................ 2,547 2,425 2,547 2,425
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1998 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss............................................................................ $(39,361) $(14,997)
Adjustments to reconcile net loss to net cash used
in operating activities -
Depreciation and amortization................................................... 942 370
Cost of stock options issued to non-employees................................... 143 311
Provision for inventory obsolescence............................................ 105 75
Changes in operating assets and liabilities:
Trade accounts receivable, net................................................ 444 -
Prepaid expenses and other current assets..................................... 14 (112)
Inventories................................................................... 744 (1,447)
Other assets.................................................................. 13 (1,753)
Accounts payable.............................................................. 1,028 1,914
Accrued expenses.............................................................. 869 3,732
------------ -------------
Net cash used in operating activities.................................. (35,059) (11,907)
------------ -------------
Cash Flows from Investing Activities:
Investment in marketable securities................................................. 13,230 (25,055)
Capital expenditures................................................................ (4,920) (1,037)
------------ -------------
Net cash provided by (used in) investing activities.................... 8,310 (26,092)
------------ -------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock.......................................... - 65,885
Stock options exercised............................................................. 475 -
Borrowings under loan from Kos Investments, Inc..................................... - 5,040
Payments under capital lease obligation............................................. (15) -
Borrowings under note payable....................................................... - 23
------------ -------------
Net cash provided by financing activities.............................. 460 70,948
------------ -------------
Net increase (decrease) in cash and
cash equivalents...................................................... (26,289) 32,949
Cash and cash equivalents, beginning of period........................................ 39,502 358
------------ -------------
Cash and cash equivalents, end of period.............................................. $ 13,213 $ 33,307
============ =============
Supplemental Disclosure of Non-cash Flow Information:
Acquisition of equipment under capital lease obligation............................ $ 232 $ -
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
<PAGE>
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The unaudited condensed consolidated financial statements included herein
have been prepared by Kos Pharmaceuticals, Inc. and subsidiary (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
results of operations and cash flows for the six month period ended June 30,
1998, are not necessarily indicative of the results of operations or cash flows
which may be reported for the year ending December 31, 1998. 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 Transition Report on Form 10-K for the period
ended December 31, 1997.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". Comprehensive income includes net income and several
other items that current accounting standards require to be recognized outside
of net income. The Company does not have any material comprehensive income items
reported outside its statement of operations for the six month periods ended
June 30, 1998 and 1997. Therefore, the Company's net income for the six month
periods ended June 30, 1998 and 1997, equals its comprehensive income for the
same time periods.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", was also issued by the FASB in June 1997. This statement
establishes standards for reporting information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company will adopt SFAS 131 effective
December 31, 1998.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", is effective for fiscal years ending after June 15, 1999. This
statement established accounting and reporting standards that require that every
derivative instrument be recorded in the balance sheet as either an asset or a
liability at its fair value. The Company has adopted SFAS 133 for the three
months ended June 30, 1998. The adoption of this statement did not have an
impact on the Company's consolidated financial position since the Company does
not presently have any derivative or hedging-type investment as defined by
SFAS 133.
5
<PAGE>
3. INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following:
JUNE 30, DECEMBER 31,
1998 1997
------------ -------------
(in thousands)
<S> <C> <C>
Raw materials........................................................... $ 191 $ 218
Work in process......................................................... 1,458 1,917
Finished goods.......................................................... 885 1,248
------------ -------------
Total.............................................................. $ 2,534 $ 3,383
============ =============
</TABLE>
4. STOCK OPTIONS
On February 19, 1998, the Company's Board of Directors authorized the
re-pricing of options to acquire shares of Common Stock granted to employees at
exercise prices ranging from $15.00 to $43.44 per share. As a result of the
re-pricing, the exercise price for these options was reduced to $11.16 per
share, the average of the high and low price of the Company's Common Stock on
February 19, 1998. No options granted to members of the Board of Directors were
re-priced.
As of June 30, 1998, the Company had issued and outstanding options to
purchase 2,546,615 shares of Common Stock, at exercise prices ranging from $0.60
to $27.25 per share, to employees, officers, directors, and consultants,
including options granted prior to the implementation of the Plan. Of these,
options to purchase 1,113,384 shares were exercisable. During the six month
period ended June 30, 1998, options to purchase 711,500 shares of Common Stock
were granted at exercise prices ranging from $7.75 to $15.19, and options to
purchase 541,400 shares were exercised at exercise prices ranging from $0.60 to
$7.00.
The Company considered the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation", 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 five 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, for options issued to employees, no
compensation cost has been recognized because the exercise price of such options
was not less than the market value of the Common Stock on the date of grant. On
options issued to non-employees, consisting of options issued to directors and
to consultants, the amortization of deferred compensation cost recorded for the
six month periods ended June 30, 1998 and 1997, was $142,644 and $310,943,
respectively.
6
<PAGE>
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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------- -----------------------------
1998 1997 1998 1997
-------------- ------------- ------------- ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net loss:
As reported...................... $ (22,054) $(6,648) $(39,361) $(14,997)
Pro Forma........................ (22,967) (7,068) (41,189) (15,938)
Net loss per share, basic and diluted:
As reported...................... $ (1.25) $ (0.45) $ (2.25) $ (1.12)
Pro Forma........................ (1.30) (0.48) (2.36) (1.19)
</TABLE>
5. SUBSEQUENT EVENTS
Effective as of July 1, 1998, the Company entered into a $30 million credit
facility with Michael Jaharis, the Company's Chairman of the Board of Directors.
The Company may draw against this credit facility during the period from July 1,
1998 to June 30, 1999. Borrowings will bear interest at the prime rate and will
be due December 31, 2000.
On July 17, 1998, the Company entered into a $3,000,000 letter of credit
agreement (the "Agreement") with First Union National Bank. Under the terms of
the Agreement, the Company must maintain as collateral, in its Money Management
Account with the Bank, an amount equal to 90% of the outstanding borrowings
under the Agreement. The Agreement expires July 18, 1999.
On August 5, 1998, a purported class action lawsuit was filed in the United
States District Court for the Northern District of Illinois, Eastern Division,
against the Company, the members of the Company's Board of Directors, certain
officers of the Company, and the underwriters of the Company's October 24, 1997
offering of shares of Common Stock. In its complaint, the plaintiff asserts, on
behalf of itself and a putative class of purchasers of the Company's Common
Stock during the period from July 29, 1997, through November 13, 1997, claims:
(i) under sections 11, 12(a)(2) and 15 of the Securities Act of 1933; (ii)
sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5
promulgated thereunder; and (iii) for common law fraud, negligent
misrepresentation and fiduciary duty. The claims in the lawsuit relate
principally to certain statements made by the Company, or certain of its
representatives, concerning the efficacy, safety, sales volume and commercial
viability of the Company's NIASPAN product. The complaint seeks unspecified
damages and costs, including attorneys' and experts' fees and other
disbursements. The outcome of the litigation cannot yet be determined.
7
<PAGE>
Accordingly, no provision for any liability that may result from these matters
has been recognized in the accompanying consolidated financial statements.
There can be no assurances, however, that the outcome of this litigation will
not have a material adverse effect on the Company's business, results of
operations, and financial condition.
8
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
A predecessor corporation to the Company was formed in July 1988 under the
name of Kos Pharmaceuticals, Inc., principally to conduct research and
development on new formulations of existing prescription pharmaceutical
products. In June 1993, Aeropharm Technologies, Inc. ("Aeropharm"), a then
majority-owned subsidiary of the Company, was formed to conduct research and
development activities on aerosolized 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. ("Holdings"); established the Company as a wholly-owned
subsidiary under the name of Kos Pharmaceuticals, Inc.; and, effective as of
June 30, 1996, transferred all of its existing assets, liabilities and
intellectual property, other than certain net operating loss carryforwards, to
the Company. Accordingly, all references in this Form 10-Q filing to the
Company's business include the business and operations of Holdings until June
30, 1996.
On March 12, 1997, the Company completed an initial public offering of its
Common Stock ("IPO"). From inception through the IPO, the Company had not
recorded any significant revenues, and the Company had funded its operations
exclusively through equity contributions and a loan from its majority
shareholder. Through June 30, 1998, the Company had accumulated a deficit from
operations of approximately $145.3 million. In connection with the transfer of
operations from Holdings to the Company during June 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 can only utilize net operating losses sustained subsequent to June 30,
1996, to offset future taxable net income, if any.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
The Company began sales of its NIASPAN* product during August 1997 and,
therefore, had no sales in the six month period ended June 30, 1997. Net sales
of the NIASPAN product totaled $3.8 million during the six months ended June 30,
1998. Cost of sales for the same period totaled $1.1 million.
The Company's research and development expenses increased to $14.5 million
for the six months ended June 30, 1998, from $11.8 million for the six months
ended June 30, 1997. This increase related primarily to recently established
medical education programs in support of NIASPAN, personnel costs in support of
the Company's expanded research and development activities, and in research and
development costs incurred during the June 1998 quarter in connection with the
Company's NICOSTATIN/registered trademark/ product. These increases were
partially offset by the
- --------
* NIASPAN is a registered trademark of Kos Pharmaceuticals, Inc.
9
<PAGE>
absence, during the six months ended June 30, 1998, of a $3.0 million charge
attributable to the cost of entering into an agreement, during February 1997,
with an unaffiliated generic drug manufacturer to resolve, as between
themselves, the effects of a potential patent interference proceeding and, by
the absence in the quarter ended June 30, 1998, of the clinical trial costs
incurred during the 1997 quarter associated with the completion of a NIASPAN
long-term safety and efficacy study.
Selling, general and administrative expenses increased to $29.0 million for
the six months ended June 30, 1998, from $3.6 million for the six months ended
June 30, 1997. The increase reflected primarily the full impact of the presence
of the Company's sales and marketing organization during the six months ended
June 30, 1998, including the continued recruitment of the Company's field sales
force and the initiation of a variety of promotional programs in connection with
the launching of the NIASPAN product. General and administrative costs also
increased during the six months ended June 30, 1998, as a result of higher
personnel costs and other expenses associated with the expanded activities of
the Company.
From July 1, 1996, to the completion of its IPO on March 12, 1997, the
Company funded its operations from the proceeds of a loan from Kos Investments,
Inc. (the "Convertible Note"), the sole shareholder of Holdings. The Convertible
Note and its accrued interest were convertible into shares of the Company's
Common Stock at a conversion price per share equal to the IPO price per share
($15.00). Interest expense under the Convertible Note totaled $507,000 during
the six months ended June 30, 1997. On October 25, 1997, the outstanding
principal and interest of the Convertible Note was converted into 960,069 shares
of Common Stock. At the time of conversion, the Convertible Note accrued
interest at a rate of 8.50% per year and had outstanding principal and interest
of $13.4 million and $1.0 million, respectively.
The Company received $65.9 million in net proceeds from its IPO, completed
in March 1997, and $43.3 million in net proceeds from a follow-on offering of
its Common Stock, completed in October 1997, after deducting expenses of both
offerings. The remaining net proceeds from the follow-on offering, along with
other cash balances, totaling $30.9 million as of June 30, 1998, were invested
primarily in U.S. Treasury and highly-rated, corporate debt securities. The
Company recorded $1.4 million of interest income for the six months ended June
30, 1998, compared with $919,000 for the six months ended June 30, 1997.
The Company incurred a net loss of $39.4 million for the six months ended
June 30, 1998, compared with a net loss of $15.0 million for the six months
ended June 30, 1997.
10
<PAGE>
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
The Company had no sales during the three month period ended June 30, 1997.
Net sales of the NIASPAN product totaled $2.8 million during the three months
ended June 30, 1998. Cost of sales for the same period totaled $0.8 million.
The Company's research and development expenses increased to $7.5 million
for the three months ended June 30, 1998, from $4.9 million for the three months
ended June 30, 1997. This increase related primarily to the continuation of
medical education programs in support of NIASPAN, personnel costs in support of
the Company's expanded research and development activities, and in research and
development costs associated with the Company's NICOSTATIN/registered trademark/
product. These increases were partially offset by the absence in the 1998
quarter of the clinical trials costs incurred in the 1997 quarter in connection
with the completion of a NIASPAN long-term safety and efficacy study.
Selling, general and administrative expenses increased to $17.1 million for
the three months ended June 30, 1998, from $2.3 million for the three months
ended June 30, 1997. This increase reflected primarily the full impact of the
presence of the Company's sales and marketing organization and marketing
programs during the three months ended June 30, 1998. General and administrative
costs also increased for the 1998 quarter as a result of higher personnel costs
and other expenses associated with the expanded activities of the Company.
Interest expense under the Convertible Note, absent during the three months
ended June 30, 1998, totaled $278,000 during the three months ended June 30,
1997. The Company, however, recorded $615,000 of interest income from its
investment in U.S. Treasury and highly-rated corporate debt securities during
the three months ended June 30, 1998, compared with $747,000 for the three
months ended June 30, 1997.
The Company incurred a net loss of $22.1 million for the three months ended
June 30, 1998, compared with a net loss of $6.6 million for the three months
ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company's working capital totaled approximately $28.1
million, and the Company had cash and cash equivalents and marketable securities
totaling $30.9 million. The Company's primary uses of cash to date have been in
operating activities to fund research and development, including clinical
trials, and selling, general and administrative expenses. As of June 30, 1998,
the Company's investment in equipment and leasehold improvements, net of
depreciation and amortization, was approximately $11.1 million. During the six
months ended June 30, 1998, the Company spent $4.9 million in capital
expenditures. The Company expects capital expenditures to decrease moderately
for the remainder of 1998.
11
<PAGE>
Effective as of July 1, 1998, the Company entered into a $30 million credit
facility with Michael Jaharis, the Company's Chairman of the Board of Directors.
The Company may draw against this credit facility during the period from July 1,
1998 to June 30, 1999. Borrowings will bear interest at the prime rate and will
be due December 31, 2000.
Although the Company currently anticipates that, including the capital
available to the Company under the credit facility mentioned in the preceding
paragraph, it has or has access to an amount of working capital that will be
sufficient to fund the Company's operations through mid-1999, the Company's cash
requirements during this period will be substantial and may exceed the amount of
working capital available to the Company. The Company's ability to fund its
operating requirements and maintain an adequate level of working capital through
mid-1999 will be dependent primarily on its ability to generate substantial
growth in sales of its NIASPAN product. Further, during this period, the
Company's ability to fund its operating requirements may be affected by its
ability to reduce its operating expenses and license or co-market NIASPAN and
other cardiovascular products. Following mid-1999, the Company's working capital
requirements will be substantial and will require the level of sales of the
NIASPAN product to be significantly higher than current levels. The Company's
ability to fund its operating requirements will also depend on the level of the
Company's operating expenses and, possibly, whether the Company has entered into
an agreement with a third party to license or co-market NIASPAN or other
cardiovascular products. The Company's failure to generate substantial growth in
the sales of NIASPAN, reduce operating expenses, or enter into a license or
co-marketing agreement, and other events -- including the progress of the
Company's research and development programs; the costs and timing of seeking
regulatory approvals of the Company's products under development; the Company's
ability to obtain regulatory approvals; the Company's ability to manufacture
products at an economically feasible cost; costs in filing, prosecuting,
defending, and enforcing patent claims and other intellectual property rights;
the extent and terms of any collaborative research, manufacturing, marketing,
joint venture, or other arrangements; and changes in economic, regulatory, or
competitive conditions or the Company's planned business -- could cause the
Company to require additional capital prior to or after mid-1999. In the event
that the Company must raise additional capital to fund its working capital
needs, it may seek to raise such capital through loans or the issuance of debt
securities that would require the consent of the Company's current lender, or
through the issuance of equity securities. To the extent the Company raises
additional capital by issuing equity securities or obtaining borrowings
convertible into equity, ownership dilution to existing shareholders will
result, and future investors may be granted rights superior to those of existing
shareholders. Moreover, there can be no assurance that any additional capital
will be available to the Company on acceptable terms, or at all.
NIASPAN SALES GROWTH
The Company's success, including its ability to fund its operating
requirements, currently depends primarily on its ability to market and sell
increasing quantities of its NIASPAN product. The Company's ability to
successfully market and sell its NIASPAN product depends significantly on the
acceptance of the NIASPAN product by physicians and their patients and on its
ability and willingness to devote the financial and employee resources to
adequately market NIASPAN. There can be no assurance, however, that the Company
will be able to devote sufficient resources to continue to increase the market
acceptance of NIASPAN. The failure of physicians to prescribe NIASPAN or the
failure of patients to continue taking NIASPAN would have a material adverse
effect on the Company. Among other factors, adverse side effects or unfavorable
publicity concerning the NIASPAN product or any other product incorporating
technology similar to that used in the NIASPAN product could have an adverse
effect on the Company's ability to obtain regulatory approvals, or to increase
the market acceptance of NIASPAN by prescribing physicians, managed care
providers, or patients; any of which would have a material adverse effect on the
Company.
CONTINGENCIES
The Company has performed an initial assessment of the impact of the "Year
2000 Issue" on its reporting systems and operations. The "Year 2000 Issue"
exists because many computer systems and applications currently use two-digit
fields to designate a year. As the century date occurs, date sensitive systems
will recognize the year 2000 as 1900, or not at all. Based on the Company's
initial assessment, it believes that its accounting systems and operations
substantially avoid the "Year 2000 Issue", thereby enabling it to properly
process critical financial and operational information. There can be no
assurance, however, that the systems of other companies on which the Company's
systems and operations rely will be timely converted to address the "Year 2000
Issue", or that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company's financial position and results of operations.
12
<PAGE>
FORWARD-LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS
Certain statements contained in this Form 10-Q, principally in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," that are not related to historical results, including statements
relating to anticipated sales or working capital, are forward-looking
statements. Actual results may differ materially from those projected or implied
in the forward-looking statements. Further, certain forward-looking statements
are based upon assumptions of future events that may not prove to be accurate.
These forward-looking statements involve risks and uncertainties, including but
not limited to physician and patient acceptance of the NIASPAN product; the
Company's future cash flows, sales, gross margins and operating costs; the
Company's ability to devote the resources required to adequately market the
NIASPAN product; the Company's ability to recruit qualified personnel; the
effect of conditions in the pharmaceutical industry and the economy in general;
regulatory developments; legal proceedings; and certain other risks.
Forward-looking statements contained in this report and in subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by cautionary
statements in this paragraph and elsewhere in this Form 10-Q, in other reports
filed by the Company with the Securities and Exchange Commission, and in the
Company's Transition Report on Form 10-K for the period ended December 31, 1997,
filed with the Securities and Exchange Commission on March 27, 1998 under the
caption "Forward-Looking Information: Certain Cautionary Statements".
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On August 5, 1998, a purported class action lawsuit was filed in the
United States District Court for the Northern District of Illinois, Eastern
Division, against the Company, the members of the Company's Board of Directors,
certain officers of the Company, and the underwriters of the Company's October
24, 1997 offering of shares of Common Stock. In its complaint, the plaintiff
asserts, on behalf of itself and a putative class of purchasers of the Company's
Common Stock during the period from July 29, 1997, through November 13, 1997,
claims: (i) under sections 11, 12(a)(2) and 15 of the Securities Act of 1933;
(ii) sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule
10b-5 promulgated thereunder; and (iii) for common law fraud, negligent
misrepresentation and fiduciary duty. The claims in the lawsuit relate
principally to certain statements made by the Company, or certain of its
representatives, concerning the efficacy, safety, sales volume and commercial
viability of the Company's NIASPAN product. The complaint seeks unspecified
damages and costs, including attorneys' and experts' fees and other
disbursements. The outcome of the litigation cannot yet be determined.
Accordingly, no provision for any liability that may result from these matters
has been recognized in the accompanying consolidated financial statements. There
can be no assurances, however, that the outcome of this litigation will not have
a material adverse effect on the Company's business, results of operations, and
financial condition.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 * Amended and Restated Articles of Incorporation of the
Company
3.2 * Amended and Restated Bylaws of the Company
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended
and Restated Articles of Incorporation and Amended and
Restated Bylaws of the Company defining the rights of
holders of Common Stock of the Company
4.2 ** Form of Common Stock certificate of the Company
27 Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports filed by the Company on Form 8-K during the
three months ended June 30, 1998.
----------
* 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
14
<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.
<TABLE>
<CAPTION>
KOS PHARMACEUTICALS, INC.
<S> <C>
Date: August 14, 1998 By: /s/ Daniel M. Bell
-----------------------------
Daniel M. Bell, President and
Chief Executive Officer
Date: August 14, 1998 By: /s/ Duncan H. Cocroft
------------------------------
Duncan H. Cocroft,
Senior Vice President and
Chief Administrative Officer
(Principal Financial Officer)
Date: August 14, 1998 By: /s/ Juan F. Rodriguez
------------------------------
Juan F. Rodriguez,
Controller
(Principal Accounting Officer)
</TABLE>
15
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM KOS
PHARMACEUTICALS, INC'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 13,213
<SECURITIES> 17,665
<RECEIVABLES> 1,456
<ALLOWANCES> (80)
<INVENTORY> 2,534
<CURRENT-ASSETS> 36,647
<PP&E> 14,845
<DEPRECIATION> (3,732)
<TOTAL-ASSETS> 47,778
<CURRENT-LIABILITIES> 8,501
<BONDS> 0
0
0
<COMMON> 177
<OTHER-SE> 38,950
<TOTAL-LIABILITY-AND-EQUITY> 47,778
<SALES> 3,807
<TOTAL-REVENUES> 3,807
<CGS> 1,053
<TOTAL-COSTS> 1,053
<OTHER-EXPENSES> 43,513
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,398)
<INCOME-PRETAX> (39,361)
<INCOME-TAX> 0
<INCOME-CONTINUING> (39,361)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,361)
<EPS-PRIMARY> (2.25)
<EPS-DILUTED> (2.25)
</TABLE>
