SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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)
<TABLE>
<S> <C>
FLORIDA 65-0670898
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
</TABLE>
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 30, 1999
----- ----------------------------
Common Stock, par value $.01 per share 17,894,529
<PAGE>
KOS PHARMACEUTICALS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999
(unaudited) and December 31, 1998.............................................. 2
Condensed Consolidated Statements of Operations for the three
months and six months ended June 30, 1999 (unaudited) and 1998
(unaudited).................................................................... 3
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 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
Item 3 - Quantitative and Qualitative Disclosures about Market Risk.............................. 14
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings....................................................................... 15
Item 4 - Submission of Matters to a Vote of Security Holders..................................... 15
Item 6 - Exhibits and Reports on Form 8-K........................................................ 15
<FN>
- ----------
NIASPAN/Registered trademark/ and NICOSTATin/Trademark/ are trademarks of Kos Pharmaceuticals, Inc.
</FN>
</TABLE>
<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,
1999 1998
----------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................................................... $ 5,229 $ 4,879
Trade accounts receivable, net.................................................... 3,172 2,017
Inventories....................................................................... 1,640 1,312
Prepaid expenses and other current assets......................................... 1,016 1,326
--------- --------
Total current assets.......................................................... 11,057 9,534
Fixed Assets, net................................................................... 11,295 12,019
Other Assets......................................................................... 17 17
--------- ---------
Total assets.................................................................. $ 22,369 $ 21,570
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable.................................................................. $ 2,935 $ 4,333
Accrued expenses.................................................................. 9,096 8,196
Capital lease obligations......................................................... 142 141
--------- ---------
Total current liabilities..................................................... 12,173 12,670
--------- ---------
Notes Payable to Shareholder......................................................... 41,000 9,000
Capital Lease Obligations, net of current portion.................................... 165 238
Shareholders' Deficit:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
none issued and outstanding..................................................... - -
Common stock, $.01 par value, 50,000,000 shares authorized,
17,822,959 and 17,720,270 shares issued and outstanding as
of June 30, 1999 and December 31, 1998, respectively............................ 178 177
Additional paid-in capital........................................................ 185,278 184,599
Accumulated deficit............................................................... (216,425) (185,114)
--------- ---------
Total shareholders' deficit................................................... (30,969) (338)
--------- ---------
Total liabilities and shareholders' deficit................................... $ 22,369 $ 21,570
========= =========
</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,
------------------------- --------------------------
1999 1998 1999 1998
------------ ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales.................................................... $ 7,288 $ 2,807 $ 12,757 $ 3,807
Cost of sales................................................ 1,202 843 2,241 1,053
-------- -------- -------- --------
Gross profit.............................................. 6,086 1,964 10,516 2,754
-------- -------- -------- --------
Operating Expenses:
Research and development.................................. 7,328 7,524 13,561 14,496
Selling, general and administrative....................... 14,222 17,105 27,348 29,017
-------- -------- -------- --------
Total operating expenses.............................. 21,550 24,629 40,909 43,513
-------- -------- -------- --------
Loss from operations......................................... (15,464) (22,665) (30,393) (40,759)
-------- -------- -------- --------
Other Expense (Income):
Interest income, net...................................... (46) (611) (101) (1,398)
Interest expense-related parties.......................... 679 - 1,019 -
-------- -------- -------- --------
Total other expense (income).......................... 633 (611) 918 (1,398)
-------- -------- -------- --------
Net loss.............................................. $(16,097) $(22,054) $(31,311) $(39,361)
======== ======== ======== ========
Net loss per share, basic and diluted........................ $ (0.90) $ (1.25) $ (1.76) $ (2.25)
Weighted average shares of Common
Stock outstanding.......................................... 17,801 17,649 17,769 17,457
Common Stock options outstanding (not included
in the calculation of diluted loss per share
as their impact would be antidilutive)..................... 3,174 2,547 3,174 2,547
</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,
------------------------
1999 1998
-------- -----------
(UNAUDITED)
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss .................................................................. $(31,311) $(39,361)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ......................................... 1,477 942
Gains from disposal of fixed assets ................................... (6) -
Common Stock issued to employees ...................................... 301 -
Cost of stock options issued to non-employees ......................... 300 143
Provision for inventory obsolescence .................................. 385 105
Changes in operating assets and liabilities:
Trade accounts receivable, net ...................................... (1,155) 444
Prepaid expenses and other current assets ........................... 310 14
Inventories ......................................................... (713) 744
Other assets ........................................................ - 13
Accounts payable .................................................... (1,398) 1,028
Accrued expenses .................................................... 900 869
-------- --------
Net cash used in operating activities ........................ (30,910) (35,059)
-------- --------
Cash Flows from Investing Activities:
Sales of marketable securities ............................................ - 13,230
Capital expenditures ...................................................... (747) (4,920)
-------- --------
Net cash used in (provided by) investing activities .......... (747) 8,310
-------- --------
Cash Flows from Financing Activities:
Net proceeds from exercise of stock options ............................... 79 475
Payments under capital lease obligations .................................. (72) (15)
Borrowings under Notes Payable to Shareholder ............................. 32,000 -
-------- --------
Net cash provided by financing activities .................... 32,007 460
-------- --------
Net increase (decrease) in cash and
cash equivalents ............................................ 350 (26,289)
Cash and cash equivalents, beginning of period .............................. 4,879 39,502
-------- --------
Cash and cash equivalents, end of period .................................... $ 5,229 $ 13,213
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid ............................................................. $ 840 $ 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 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 six month period ended June 30, 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:
JUNE 30, DECEMBER 31,
1999 1998
-------- -------------
(in thousands)
Raw materials................... $ 208 $ 251
Work in process................. 981 847
Finished goods.................. 451 214
------- -------
Total...................... $ 1,640 $ 1,312
======= =======
5
<PAGE>
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. Borrowings under the Credit Facility totaled $30 million as of June
30, 1999, bear interest at the prime rate (7.75% as of June 30, 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"). Borrowings under the Supplemental Funding
Arrangement totaled $11 million as of June 30, 1999. 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 average closing market price of such
stock for the 30 business days preceding 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 (i) the death of the lender shall not have occurred; (ii) no
material adverse change in the business or financial operations or condition of
the Company or in its senior management will occur; and (iii) the lender's
ownership percentage of the Company remains greater than 40%. 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.
Interest expense under the Credit Facility and Supplemental Funding
Arrangement totaled $0.7 million for the three months ended June 30, 1999.
Accrued interest payable under the Supplemental Funding Arrangement totaled $0.2
million as of June 30, 1999.
6
<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 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 June 30, 1999, the Company had accumulated a deficit from
operations of $216.4 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, 1999 AND 1998
The Company recorded net sales of $12.8 million for the six months ended
June 30, 1999, compared with $3.8 million for the same period in 1998. Cost of
sales was $2.2 million and $1.1 million for the six months ended June 30, 1999
and 1998, respectively, resulting in 82% and 72% 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 $13.6 million
for the six months ended June 30, 1999, from $14.5 million for the six months
ended June 30, 1998. The reduced expenses related primarily to decreases of $1.7
million in medical education programs
7
<PAGE>
in support of NIASPAN, of $0.9 million in development costs paid to third
parties, and of $0.7 million in formulation development costs of the Company's
NICOSTATIN product and other products under development. These decreases were
partially offset by increases of $2.4 million in clinical trials costs
principally associated with the Company's NICOSTATIN product.
Selling, general and administrative expenses decreased to $27.3 million for
the six months ended June 30, 1999, from $29 million for the six months ended
June 30, 1998. Selling expenses decreased $2.7 million primarily as a result of
the absence of $5 million in marketing program costs incurred during the 1998
period directly associated with the launch of NIASPAN. This decrease was
partially offset by increases of $2.3 million in personnel and personnel related
costs as a result of the full impact of the presence, during the 1999 period, of
the Company's expanded sales and marketing organization. General and
administrative costs increased $1.1 million during the 1999 period, primarily as
a result of increases of $0.5 million in royalty expenses for the Company's
NIASPAN product and of 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
$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.
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. Borrowings under the Credit Facility totaled $30 million as of June
30, 1999, bear interest at the prime rate (7.75% as of June 30, 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"). Borrowings under the Supplemental Funding
Arrangement totaled $11 million as of June 30, 1999. The Company anticipates
that borrowings made under the Supplemental Funding Arrangement will bear
interest at the prime rate.
Interest expense under the Credit Facility and Supplemental Funding
Arrangement totaled $1 million for the six months ended June 30, 1999.
The Company incurred a net loss of $31.3 million for the six months ended
June 30, 1999, compared with a net loss of $39.4 million for the six months
ended June 30, 1998.
8
<PAGE>
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
The Company recorded net sales of $7.3 million for the three months ended
March 31, 1999, compared with $2.8 million for the same period in 1998. Cost of
sales was $1.2 million and $0.8 million for the three months ended June 30, 1999
and 1998, respectively, resulting in 84% and 70% 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 $7.3 million
for the three months ended June 30, 1999, from $7.5 million for the three months
ended June 30, 1998. The reduced expenses related primarily to decreases of $1
million in formulation development costs of the Company's NICOSTATIN product and
other products under development, of $0.7 million in development costs paid to
third parties, and of $0.2 million in medical education programs in support of
NIASPAN. These decreases were partially offset by increases of $1.8 million in
clinical trials costs principally associated with the Company's NICOSTATIN
product.
Selling, general and administrative expenses decreased to $14.2 million for
the three months ended June 30, 1999, from $17.1 million for the three months
ended June 30, 1998. Selling expenses decreased $3.3 million, primarily as a
result of the absence of $2.8 million in marketing program costs incurred during
the 1998 period directly associated with the launch of NIASPAN and of $0.4
million in recruiting costs incurred during the 1998 period in connection with
the expansion of the Company's sales force. General and administrative costs
increased $0.5 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 of other expenses associated with the expanded activities of the Company.
Interest income from investments in U.S. Treasury and highly-rated
corporate debt securities totaled $0.6 million for the three months ended June
30, 1998. Interest expense under the Credit Facility and the Supplemental
Funding Arrangement, absent during the three months ended June 30, 1998, totaled
$0.7 million during the three months ended June 30, 1999.
The Company incurred a net loss of $16.1 million for the three months ended
June 30, 1999, compared with a net loss of $22.1 million for the three months
ended June 30, 1998.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had cash and cash equivalents totaling $5.2
million and had a working capital deficiency of $1.1 million. The Company's
primary uses of cash to date have been in operating activities to fund selling,
general and administrative expenses, and research and development expenses,
including clinical trials. As of June 30, 1999, the Company's investment in
equipment and leasehold improvements, net of depreciation and amortization, was
$11.3 million. During the six months ended June 30, 1999, the Company spent $0.7
million in capital expenditures. The Company expects to spend no more than $2.2
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. Borrowings under the Credit Facility totaled $30 million as of June
30, 1999, bear interest at the prime rate (7.75% as of June 30, 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"). Borrowings under the Supplemental Funding
Arrangement totaled $11 million as of June 30, 1999. 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 average closing market price of such
stock for the 30 business days preceding 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 (i) the death of the lender shall not have occurred; (ii) no
material adverse change in the business or financial operations or condition of
the Company or in its senior management will occur; and (iii) the lender's
ownership percentage of the Company remains greater than 40%. 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
10
<PAGE>
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 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, each of which 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.
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
11
<PAGE>
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
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
12
<PAGE>
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".
13
<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 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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company owns no derivative financial instruments or derivative
commodity instruments. The Company does not derive a significant amount of
revenues from international operations and does not believe that it is exposed
to material risks related to foreign currency exchange rates.
14
<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 asserted, 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
related 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 sought 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. On May 24, 1999, the
United States District Court for the Southern District of Florida dismissed the
lawsuit with prejudice. The plaintiffs filed an appeal, on June 7, 1999, with
the United States Circuit Court of Appeals for the 11th Circuit.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 15, 1999, the Company held its 1999 Annual Meeting of Shareholders
in Coral Gables, Florida. Only holders of record of Common Stock on March 1,
1999 (the "Record Date") were entitled to vote at the Annual Meeting. Each
holder of record of Common Stock at the close of business on the Record Date was
entitled to one vote per share on each matter voted upon by the shareholders at
the Annual Meeting. As of the Record Date, there were 17,731,504 shares of
Common Stock outstanding.
The following matters were submitted for a vote by security holders:
PROPOSAL 1: To elect eight directors of the Company to serve until the
2000 Annual Meeting of Shareholders and until their successors
have been elected and qualified.
Set forth below is information regarding the shares of Common Stock voted
in the election of the eight directors.
NAME FOR AGAINST WITHHELD
---- --- ------- --------
Michael Jaharis 15,880,387 39,143 None
Daniel M. Bell 15,880,587 38,943 None
Robert E. Baldini 15,880,587 38,943 None
John Brademas 15,880,587 38,943 None
Steven Jaharis 15,880,386 39,144 None
Louis C. Lasagna 15,880,587 38,943 None
Mark Novitch 15,880,587 38,943 None
Frederick B. Whittemore 15,880,586 38,944 None
PROPOSAL 2: To approve the Company's 1999 Employee Stock Purchase Plan
Set forth below is information regarding the shares of Common Stock voted
to approve the Company's 1999 Employee Stock Purchase Plan.
Votes FOR 15,730,378
Votes AGAINST 164,643
Votes WITHHELD 24,509
PROPOSAL 3: To ratify the appointment of Arthur Andersen LLP as the
Company's independent certified public accountants for the
fiscal year ending December 31, 1999.
Set forth below is information regarding the shares of Common Stock voted
to ratify the appointment of Arthur Andersen LLP as independent certified public
accountants.
Votes FOR 15,881,855
Votes AGAINST 14,701
Votes WITHHELD 22,974
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 June
30, 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.
15
<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: August 12, 1999 By: /s/ DANIEL M. BELL
------------------------------
Daniel M. Bell, President and
Chief Executive Officer
Date: August 12, 1999 By: /s/ JUAN F. RODRIGUEZ
------------------------------
Juan F. Rodriguez, Controller
(Principal Accounting Officer)
16
<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, 1999,
AND IS QUALIFIED IN ITS ENTIREBY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,229
<SECURITIES> 0
<RECEIVABLES> 3,265
<ALLOWANCES> (93)
<INVENTORY> 1,640
<CURRENT-ASSETS> 11,057
<PP&E> 17,725
<DEPRECIATION> (6,430)
<TOTAL-ASSETS> 22,369
<CURRENT-LIABILITIES> 12,173
<BONDS> 0
0
0
<COMMON> 178
<OTHER-SE> (31,147)
<TOTAL-LIABILITY-AND-EQUITY> 22,369
<SALES> 7,288
<TOTAL-REVENUES> 7,288
<CGS> 1,202
<TOTAL-COSTS> 22,752
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 633
<INCOME-PRETAX> (16,097)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,097)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,097)
<EPS-BASIC> (0.90)
<EPS-DILUTED> (0.90)
</TABLE>
