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 March 31, 1999
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
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(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) 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 APRIL 30, 1999
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Common Stock, par value $.01 per share 17,786,897
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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 March 31, 1999
(unaudited) and December 31, 1998............................. 2
Condensed Consolidated Statements of Operations for the three
months ended March 31, 1999 (unaudited) and 1998
(unaudited)................................................... 3
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 (unaudited) and 1998
(unaudited)................................................... 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................................................. 14
Item 6 - Exhibits and Reports on Form 8-K.................................. 14
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NIASPAN/registered trademark/ and NICOSTATIN/trademark/ are trademarks of Kos
Pharmaceuticals, Inc.
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PART I - FINANCIAL INFORMATION
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
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ASSETS
Current Assets:
Cash and cash equivalents......................................... $ 5,647 $ 4,879
Trade accounts receivable, net.................................... 2,665 2,017
Inventories....................................................... 1,583 1,312
Prepaid expenses and other current assets......................... 1,657 1,326
--------- ---------
Total current assets.......................................... 11,552 9,534
Fixed Assets, net.................................................... 11,652 12,019
Other Assets......................................................... 20 17
--------- ---------
Total assets.................................................. $ 23,224 $ 21,570
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable.................................................. $ 2,625 $ 4,333
Accrued expenses.................................................. 6,515 8,196
Capital lease obligations......................................... 140 141
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Total current liabilities..................................... 9,280 12,670
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Notes Payable to Shareholder......................................... 29,000 9,000
Capital Lease Obligations, net of current portion.................... 202 238
Shareholders' Equity (Deficit):
Common stock, $.01 par value, 50,000,000 shares authorized,
17,775,334 and 17,720,270 shares issued and outstanding as
of March 31, 1999 and December 31, 1998, respectively........... 178 177
Preferred stock, $.01 par value, 10,000,000 shares authorized,
none issued and outstanding..................................... -- --
Additional paid-in capital........................................ 184,892 184,599
Accumulated deficit............................................... (200,328) (185,114)
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Total shareholders' equity (deficit).......................... (15,258) (338)
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Total liabilities and shareholders' equity (deficit).......... $ 23,224 $ 21,570
========= =========
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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
MARCH 31,
----------------------
1999 1998
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(UNAUDITED)
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Net sales ...............................................................$ 5,469 $ 1,000
Cost of sales ........................................................... 1,039 210
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Gross profit ......................................................... 4,430 790
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Operating Expenses:
Research and development ............................................. 6,233 6,972
Selling, general and administrative .................................. 13,126 11,912
-------- --------
Total operating expenses ......................................... 19,359 18,884
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Loss from operations .................................................... (14,929) (18,094)
-------- --------
Other Expense (Income):
Other income ......................................................... (6) --
Interest income, net ................................................. (38) (787)
Interest expense-related parties ..................................... 329 --
-------- --------
Total other expense (income) ..................................... 285 (787)
-------- --------
Net loss .........................................................$(15,214) $(17,307)
======== ========
Net loss per share, basic and diluted ...................................$ (0.86) $ (1.00)
Weighted average shares of common
stock outstanding ..................................................... 17,735 17,266
Common stock options outstanding (not included in the calculation of
diluted loss per share as their impact would be antidilutive) ......... 3,067 2,569
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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
MARCH 31,
----------------------
1999 1998
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(UNAUDITED)
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Cash Flows from Operating Activities:
Net loss ...................................................................... $(15,214) $(17,307)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................. 730 393
Gains from disposal of fixed assets ....................................... (6) --
Common Stock issued to employees under 401(k) Plan ........................ 108 --
Cost of stock options issued to non-employees ............................. 150 44
Provision for inventory obsolescence ...................................... 120 20
Changes in operating assets and liabilities:
Trade accounts receivable, net .......................................... (648) 1,145
Prepaid expenses and other current assets ............................... (331) 430
Inventories ............................................................. (391) (510)
Other assets ............................................................ (3) 15
Accounts payable ........................................................ (1,708) (1,852)
Accrued expenses ........................................................ (1,681) (551)
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Net cash used in operating activities ............................ (18,874) (18,173)
-------- --------
Cash Flows from Investing Activities:
Investment purchases .......................................................... -- (1,262)
Capital expenditures .......................................................... (357) (2,550)
-------- --------
Net cash used in investing activities ............................ (357) (3,812)
-------- --------
Cash Flows from Financing Activities:
Net proceeds from exercise of stock options ................................... 36 343
Payments under capital lease obligations ...................................... (37) --
Borrowings under Notes Payable to Shareholder ................................. 20,000 --
-------- --------
Net cash provided by financing activities ........................ 19,999 343
-------- --------
Net increase (decrease) in cash and
cash equivalents ................................................ 768 (21,642)
Cash and cash equivalents, beginning of period .................................. 4,879 39,502
-------- --------
Cash and cash equivalents, end of period ........................................ $ 5,647 $ 17,860
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid ................................................................. $ 240 $ --
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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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" or "Kos") 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 three month period ended March 31,
1999, are not necessarily indicative of the results of operations or cash flows
that may be reported for the year ended December 31, 1999. 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 for the year ended December 31,
1998.
2. RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", is effective for fiscal years ended after June 15, 1999. The
Company adopted SFAS 133 effective June 30, 1998. The Company does not presently
have any derivative or hedging-type investment as defined by SFAS 133.
3. INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
1999 1998
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(in thousands)
Raw materials.................. $ 169 $ 251
Work in process................ 936 847
Finished goods................. 478 214
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Total..................... $ 1,583 $ 1,312
============ =============
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4. NOTES PAYABLE TO SHAREHOLDER
On July 1, 1998, the Company entered into a $30 million credit facility
(the "Credit Facility") with Michael Jaharis, Chairman of the Company's Board of
Directors. The Company may draw against the Credit Facility during the period
from July 1, 1998 to June 30, 1999. Borrowings under the Credit Facility totaled
$29 million as of March 31, 1999, bear interest at the prime rate (7.75% as of
March 31, 1999), and will be due December 31, 2000. Interest expense under the
Credit Facility totaled $0.3 million for the three months ended March 31, 1999.
Accrued interest payable under the Credit Facility totaled $0.2 million as of
March 31, 1999.
On October 7, 1998, the Company entered into an additional $25 million
funding arrangement with Michael Jaharis. Effective March 1, 1999, Mr. Jaharis
agreed to increase the amount available to the Company under the October 7,
1998, funding arrangement to an aggregate of $50 million (as amended, the
"Supplemental Funding Arrangement"). Kos expects that the terms of the
Supplemental Funding Arrangement will require the Company to pledge all of its
assets and pay interest at the prime rate. Kos also expects that borrowings
under the Supplemental Funding Arrangement will be convertible into shares of
the Company's Common Stock at the market price of such stock at the close of
business on the date of the first draw. The conversion of amounts borrowed from
Mr. Jaharis under the Supplemental Funding Arrangement into shares of the
Company's Common Stock will result in dilution to existing shareholders of the
Company. The Company's ability to borrow funds under the Supplemental Funding
Arrangement will be subject to certain conditions, including that at any time
during the term of the Supplemental Funding Arrangement no material adverse
change in the business or financial operations or condition of the Company or in
its management will occur. There can be no assurance, however, that the Company
will be able to satisfy all of the conditions of the Supplemental Funding
Arrangement at the time that any funding request is made. The Supplemental
Funding Arrangement will mature on December 31, 2003.
6
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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 products, dispensed in metered-dosed
inhalers, 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 March 31, 1999, the Company had accumulated a deficit from
operations of $200.3 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
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
The Company recorded net sales of $5.5 million for the three months
ended March 31, 1999, compared with $1 million for the same period in 1998. Cost
of sales was $1 million and $210,000 for the three months ended March 31, 1999
and 1998, respectively, resulting in 81% and 79% gross margins for the
respective periods. The higher gross margin in 1999 was attributable to lower
unabsorbed overhead costs resulting from higher NIASPAN production during that
period.
The Company's research and development expenses decreased to $6.2
million for the three months ended March 31, 1999, from $7 million for the three
months ended March 31, 1998. The reduced expenses related primarily to decreases
of $1.4 million in medical education programs in support of NIASPAN and $0.3
million in development costs paid to third parties. These reductions were
partially offset by increases of $0.4 million in clinical trials costs
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associated with NIASPAN and with the Company's NICOSTATIN product, of $0.3
million in formulation development costs of the Company's NICOSTATIN product and
other products under development, and of $0.2 million in personnel and
personnel-related costs.
Selling, general and administrative expenses increased to $13.1 million
for the three months ended March 31, 1999, from $11.9 million for the three
months ended March 31, 1998. Selling expenses increased $0.6 million as a result
of the full impact during the 1999 period of the Company's sales and marketing
organization which was being expanded during the first quarter of 1998,
including an increase of $2.7 million in personnel and personnel-related
expenses. This increase was largely offset by the absence of $2.2 million in
marketing program costs incurred during the 1998 period directly associated with
the launch of NIASPAN. General and administrative costs also increased $0.6
million during the 1999 period, primarily as a result of increases of $0.3
million in royalty expenses for the Company's NIASPAN product and other expenses
associated with the expanded activities of the Company.
The Company received $65.9 million in net proceeds from its IPO 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 $50.0 million as of March 31, 1998, were invested primarily
in U.S. Treasury and highly-rated corporate debt securities. As a result of
these investments, the Company recorded $0.8 million of interest income for the
three months ended March 31, 1998. The Company had no such investments during
the three month period ended March 31, 1999, and therefore, recorded no interest
income.
On July 1, 1998, the Company entered into a $30 million credit facility
(the "Credit Facility") with Michael Jaharis, Chairman of the Company's Board of
Directors. The Company drew $29 million against the Credit Facility during the
period from July 1, 1998, to March 31, 1999. Borrowings under the Credit
Facility bear interest at the prime rate (7.75% as of March 31, 1999) and will
be due December 31, 2000. Interest expense under the Credit Facility totaled
$0.3 million for the three months ended March 31, 1999.
The Company incurred a net loss of $15.2 million for the three months
ended March 31, 1999, compared with a net loss of $17.3 million for the three
months ended March 31, 1998.
8
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LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had cash and cash equivalents totaling
$5.6 million and working capital of $2.3 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 March 31, 1999, the Company's investment in equipment and leasehold
improvements, net of depreciation and amortization, was $11.7 million. During
the three months ended March 31, 1999, the Company spent $0.4 million in capital
expenditures. The Company expects to spend no more than $2.5 million in capital
expenditures during the remainder of the year ending December 31, 1999.
On July 1, 1998, the Company entered into a $30 million credit facility
(the "Credit Facility") with Michael Jaharis, Chairman of the Company's Board of
Directors. The Company drew $29 million against the Credit Facility during the
period from July 1, 1998, to March 31, 1999. Borrowings under the Credit
Facility bear interest at the prime rate (7.75% as of March 31, 1999) and will
be due December 31, 2000.
On October 7, 1998, the Company entered into an additional $25 million
funding arrangement with Michael Jaharis. Effective March 1, 1999, Mr. Jaharis
agreed to increase the amount available to the Company under the October 7,
1998, funding arrangement to an aggregate of $50 million (as amended, the
"Supplemental Funding Arrangement"). Kos expects that the terms of the
Supplemental Funding Arrangement will require the Company to pledge all of its
assets and pay interest at the prime rate. Kos also expects that borrowings
under the Supplemental Funding Arrangement will be convertible into shares of
the Company's Common Stock at the market price of such stock at the close of
business on the date of the first draw. The conversion of amounts borrowed from
Mr. Jaharis under the Supplemental Funding Arrangement into shares of the
Company's Common Stock will result in dilution to existing shareholders of the
Company. The Company's ability to borrow funds under the Supplemental Funding
Arrangement will be subject to certain conditions, including that at any time
during the term of the Supplemental Funding Arrangement no material adverse
change in the business or financial operations or condition of the Company or in
its management will occur. There can be no assurance, however, that the Company
will be able to satisfy all of the conditions of the Supplemental Funding
Arrangement at the time that any funding request is made. The Supplemental
Funding Arrangement will mature on December 31, 2003.
Although the Company currently anticipates that, including the capital
available to the Company under the Credit Facility and the Supplemental Funding
Arrangement, it has or has access to an amount of working capital that will be
sufficient to fund the Company's operations until it has positive cash flows,
the Company's cash requirements during this period will be substantial and may
exceed the amount of working capital available to the Company. The Company's
ability to fund its operating requirements and maintain an adequate level of
working capital until it achieves positive cash flows will depend primarily on
its ability to generate substantial growth in sales of its NIASPAN product.
Further, during this period, the Company's ability to fund its operating
requirements may be affected by its ability to reduce its operating expenses and
license or co-market NIASPAN and other cardiovascular products. The
9
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Company's failure to generate substantial growth in the sales of NIASPAN, reduce
operating expenses, enter into a license or co-marketing agreement, or meet the
conditions necessary for the Company to obtain funding under the Supplemental
Funding Arrangement, and other events -- including the progress of the Company's
research and development programs; the costs and timing of seeking regulatory
approvals of the Company's products under development; the Company's ability to
obtain regulatory approvals; the Company's ability to manufacture products at an
economically feasible cost; costs in filing, prosecuting, defending, and
enforcing patent claims and other intellectual property rights; the extent and
terms of any collaborative research, manufacturing, marketing, joint venture, or
other arrangements; and changes in economic, regulatory, or competitive
conditions or the Company's planned business -- could cause the Company to
require additional capital prior to achieving positive cash flows. In the event
that the Company must raise additional capital to fund its working capital
needs, it may seek to raise such capital through loans or the issuance of debt
securities that would require the consent of the Company's current lender, or
through the issuance of equity securities. To the extent the Company raises
additional capital by issuing equity securities or obtaining borrowings
convertible into equity, ownership dilution to existing shareholders will
result, and future investors may be granted rights superior to those of existing
shareholders. Moreover, there can be no assurance that any additional capital
will be available to the Company on acceptable terms, or at all.
CONTINGENCIES
The Company has performed an 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. To date, the Company has
incurred minimal costs related with its assessment of the "Year 2000 Issue" and
with the modification of affected internal systems. Based on the Company's
assessment, it believes that its accounting and other critical operational
systems substantially avoid the "Year 2000 Issue", thereby enabling it to
properly process vital financial and operational information.
The Company has implemented a Year 2000 readiness program with the
objective of having all of the Company's systems functioning properly with
respect to the "Year 2000 Issue" before September 30, 1999. The first component
of the Company's readiness program was to identify the internal systems of the
Company that are susceptible to system failures or processing errors as a result
of the "Year 2000 Issue". This effort has been completed. The Company believes
that it has identified the systems that may require remediation or replacement,
and it has established priorities for repair or replacement. Those systems
considered most critical to continuing operations are being given the highest
priority.
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The second component of the Company's Year 2000 readiness program
involves the actual remediation and replacement of affected systems. The Company
is using both internal and external resources to complete this process. Systems
ranked highest in priority, such as the Company's corporate accounting software,
have been remediated or replaced. Other systems identified by the Company as
being susceptible to failure as a result of the "Year 2000 Issue" have been
either remediated or replaced or scheduled for remediation or replacement.
The "Year 2000 Issue" concerns not only systems used solely by the
Company, but also concerns third parties, such as customers, suppliers, vendors,
distributors, research partners and other entities, using systems that may
interact with or affect the Company's operations. Accordingly, the Company has
identified its significant customers, vendors and creditors that are believed,
at this time, to be critical to the Company's business operations subsequent to
January 1, 2000. The Company has attempted to ascertain the Year 2000 readiness
of such significant third parties through the use of questionnaires, interviews,
and on-site visits. The Company has taken and will continue to take appropriate
action based on responses that it receives to ensure that Year 2000 issues
experienced by third parties with whom the Company conducts business will not
have a material impact on the Company. There can be no assurance, however, that
the systems provided by or utilized by third parties will be timely converted in
such a way as to allow them to continue normal business operations or furnish
products, services or data to the Company without disruption.
If needed remediations and conversions to the Company's systems are not
made on a timely basis by the Company or its significant customers or vendors,
the Company could experience business disruption, operational difficulties,
financial loss, legal liability to third parties and similar risks, any of which
could have a material adverse effect on the Company's operations, liquidity or
financial condition. Although the Company cannot determine the severity with
which the "Year 2000 Issue" will affect, either directly or indirectly, the
Company's operations and financial condition, the Company believes the most
reasonably likely worst case scenario in the event the Company or its
significant customers or vendors fail to resolve the "Year 2000 Issue" would be
an inability on the part of the Company to adequately distribute its NIASPAN
product and receive revenues from the sale of such product for some period of
time following the commencement of the year 2000. Factors that could cause
material differences in results, many of which are outside the control of the
Company, include, but are not limited to, the Company's ability to identify and
correct all relevant computer software, the accuracy of representations by
manufacturers of the Company's systems that their products are Year 2000
compliant, the ability of the Company's customers and vendors to identify and
resolve their own Year 2000 issues and the Company's ability to respond to and
dedicate adequate resources to resolve unforeseen complications arising as a
result of the "Year 2000 Issue".
Consequently, despite the Company's continuing focus on solutions for
Year 2000 issues and its current expectations that it will be Year 2000
compliant in a timely manner, there can be no assurance that the Company will
not experience material disruptions in its business operations resulting from
the "Year 2000 Issue". Accordingly, the Company has established, concurrently
with the Year 2000 readiness measures described above, an internal Year 2000
project team whose mission is to develop contingency plans intended to mitigate
the possible
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disruption in business operations that may result from the "Year 2000 Issue".
The Company's Year 2000 project team has developed contingency plans and the
cost estimates to implement them. The Company's Year 2000 contingency plans
focus primarily on resolving Year 2000 issues encountered in the Company's
business dealings with customers and significant vendors. In the event the
Company's suppliers or customers experience system failures due to the "Year
2000 Issue", the Company may, if necessary, attempt to resource its materials
and redirect its sales to Year 2000 compliant third parties. Notwithstanding the
Company's efforts to mitigate the impact of potential Year 2000 issues,
including the development of contingency plans, there can be no assurance that
the Company will be able to successfully identify and remedy all such issues
and, further, that its contingency plans, once developed, will be able to
materially diminish the impact of such possible disruption of the Company's
business operations.
The total cost to the Company of its Year 2000 compliance activities
has not been and is not presently anticipated to be material to the Company's
business, results of operations or financial condition. The Company has
capitalized and will continue to capitalize the costs of purchasing and
developing new Year 2000 compliant systems. The Company presently believes that
it will be required to spend less than an additional $500,000 in order to
remediate or replace its remaining systems susceptible to the "Year 2000 Issue".
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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 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 Form 10-K for the year ended December 31, 1998, filed with the
Securities and Exchange Commission on March 23, 1999, under the caption
"Forward-Looking Information: Certain Cautionary Statements".
NIASPAN SALES GROWTH
The Company's success, including its ability to fund its operating
requirements, currently depends primarily on its ability to sell increasing
quantities of its NIASPAN product. The Company's ability to successfully market
and sell increasing quantities of 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.
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
1997 offering of shares of Common Stock. In its complaint, the plaintiff
asserts, on behalf of itself and a putative class of purchasers of the Company's
Common Stock during the period from July 29, 1997, through November 13, 1997,
claims under: (i) sections 11, 12(a)(2) and 15 of the Securities Act of 1933;
(ii) sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule
10b-5 promulgated thereunder; and (iii) for common law fraud, negligent
misrepresentation and breach of fiduciary duty. The claims in the lawsuit relate
principally to certain statements made by the Company, or certain of its
representatives, concerning the efficacy, safety, sales volume and commercial
viability of the Company's NIASPAN product. The complaint seeks unspecified
damages and costs, including attorneys' fees and costs and expenses. Upon motion
by the Company, the case was transferred to the United States District Court for
the Southern District of Florida. The Company and the individual Kos defendants
filed a motion to dismiss the complaint on January 7, 1999. The outcome of the
litigation cannot yet be determined. Accordingly, no provision for any liability
that may result from these matters has been recognized in the accompanying
consolidated financial statements. There can be no assurance, however, that the
outcome of this litigation will not have a material adverse effect on the
Company's business, results of operations, and financial condition.
ITEM 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 on Form 8-K during the quarter ended
March 31, 1999.
- -----
* 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.
KOS PHARMACEUTICALS, INC.
Date: May 12, 1999 By: /s/ DANIEL M. BELL
---------------------------------------
Daniel M. Bell, President and
Chief Executive Officer
Date: May 12, 1999 By: /s/ DUNCAN H. COCROFT
---------------------------------------
Duncan H. Cocroft,
Senior Vice President and
Chief Administrative Officer
(Principal Financial Officer)
Date: May 12, 1999 By: /s/ JUAN F. RODRIGUEZ
----------------------------------------
Juan F. Rodriguez, Controller
(Principal Accounting Officer)
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 MARCH 31, 1999,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,647
<SECURITIES> 0
<RECEIVABLES> 2,765
<ALLOWANCES> (100)
<INVENTORY> 1,583
<CURRENT-ASSETS> 11,552
<PP&E> 17,338
<DEPRECIATION> (5,686)
<TOTAL-ASSETS> 23,224
<CURRENT-LIABILITIES> 9,280
<BONDS> 0
0
0
<COMMON> 178
<OTHER-SE> (15,436)
<TOTAL-LIABILITY-AND-EQUITY> 23,224
<SALES> 5,469
<TOTAL-REVENUES> 5,469
<CGS> 1,039
<TOTAL-COSTS> 20,398
<OTHER-EXPENSES> (6)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 291
<INCOME-PRETAX> (15,214)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,214)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,214)
<EPS-PRIMARY> (0.86)
<EPS-DILUTED> (0.86)
</TABLE>
