SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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 __/checkmark/__ 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 November 3, 2000
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Common Stock, par value $.01 per share 19,906,016
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KOS PHARMACEUTICALS, INC.
INDEX
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Page
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PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999.............................................. 2
Condensed Consolidated Statements of Operations for
the three months and nine months ended September 30, 2000 (unaudited)
and 1999 (unaudited)........................................................... 3
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 (unaudited) and
1999 (unaudited)............................................................... 4
Notes to Condensed Consolidated Financial Statements (unaudited)............... 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................... 9
Item 3 - Quantitative and Qualitative Disclosures about Market Risk............................. 16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings...................................................................... 17
Item 6 - Exhibits and Reports on Form 8-K....................................................... 18
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Niaspan(R) is a trademark of Kos Pharmaceuticals, Inc.
Mavik(R) and Tarka(R) are trademarks of Knoll Pharmaceutical Company.
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PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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September 30, December 31,
2000 1999
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(Unaudited)
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ASSETS
Current Assets:
Cash and cash equivalents......................................................... $ 5,333 $ 4,336
Trade accounts receivable, net.................................................... 8,922 6,977
Inventories....................................................................... 1,794 1,086
Prepaid expenses and other current assets......................................... 2,471 2,611
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Total current assets.......................................................... 18,520 15,010
Fixed Assets, net.................................................................... 8,589 10,430
Other Assets......................................................................... 888 818
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Total assets.................................................................. $ 27,997 $ 26,258
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LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable.................................................................. $ 3,010 $ 2,821
Accrued expenses.................................................................. 13,917 12,450
Deferred revenue collected........................................................ 140 1,980
Capital lease obligations......................................................... 80 113
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Total current liabilities..................................................... 17,147 17,364
Notes Payable to Shareholder......................................................... 72,000 62,000
Capital Lease Obligations, net of current portion.................................... 7 89
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Total liabilities............................................................. 89,154 79,453
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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,
19,903,294 and 18,026,024 shares issued and outstanding as
of September 30, 2000 and December 31, 1999, respectively....................... 199 180
Additional paid-in capital........................................................ 209,296 186,291
Accumulated deficit............................................................... (270,652) (239,666)
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Total shareholders' deficit................................................... (61,157) (53,195)
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Total liabilities and shareholders' deficit................................... $ 27,997 $ 26,258
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The accompanying notes are an integral part of these financial statements.
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KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
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Three Months Nine Months
Ended Ended
September 30, September 30,
-------------------------- ---------------------------
2000 1999 2000 1999
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(Unaudited) (Unaudited)
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Revenues, net................................................. $16,559 $10,249 $40,085 $23,005
Cost of sales................................................. 1,407 1,386 4,099 3,627
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Gross profit............................................... 15,152 8,863 35,986 19,378
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Operating Expenses:
Research and development................................... 6,230 6,513 19,530 20,073
Selling, general and administrative........................ 14,850 14,294 42,857 41,643
------------ ------------- ------------- ------------
Total operating expenses............................... 21,080 20,807 62,387 61,716
------------ ------------- ------------- ------------
Loss from operations.......................................... (5,928) (11,944) (26,401) (42,338)
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Other Expense (Income):
Other income............................................... - (8) - (13)
Interest income, net....................................... (67) (50) (222) (145)
Interest expense-related parties........................... 1,649 976 4,807 1,994
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Total other expense (income)........................... 1,582 918 4,585 1,836
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Net loss............................................... $ (7,510) $(12,862) $(30,986) $(44,174)
============ ============= ============= ============
Net loss per share, basic and diluted......................... $ (0.38) $ (0.72) $ (1.64) $ (2.48)
Weighted average shares of Common
Stock outstanding........................................... 19,849 17,889 18,965 17,809
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The accompanying notes are an integral part of these financial statements.
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KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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Nine Months Ended
September 30,
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2000 1999
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(Unaudited)
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Cash Flows from Operating Activities:
Net loss........................................................................... . $(30,986) $(44,174)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for doubtful accounts................................................. 50 -
Provision for inventory obsolescence............................................ 315 843
Depreciation and amortization................................................... 2,446 2,238
Gain from disposal of fixed assets.............................................. - (13)
Common Stock issued to employees................................................ 393 442
Common Stock options issued to non-employees.................................... - 300
Changes in operating assets and liabilities:
Trade accounts receivable, net................................................ (1,995) (1,734)
Prepaid expenses and other current assets..................................... 140 (2,159)
Inventories................................................................... (1,023) (1,013)
Other assets.................................................................. (130) -
Accounts payable.............................................................. 189 (736)
Accrued expenses.............................................................. 1,467 3,113
Deferred revenue.............................................................. (1,840) -
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Net cash used in operating activities.................................. (30,974) (42,893)
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Cash Flows from Investing Activities:
Capital expenditures................................................................ (545) (970)
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Net cash used in investing activities.................................. (545) (970)
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Cash Flows from Financing Activities:
Proceeds from common stock issued under Employee Stock Purchase Plan... 719 272
Net proceeds from issuance of common stock ......................................... 20,000 -
Net proceeds from exercise of stock options......................................... 1,911 119
Payments under capital lease obligations............................................ (114) (105)
Borrowings under Notes Payable to Shareholder....................................... 30,000 44,000
Payment of Notes Payable to Shareholder............................................. (20,000) -
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Net cash provided by financing activities.............................. 32,516 44,286
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Net increase in cash and cash equivalents.............................. 997 423
Cash and cash equivalents, beginning of period........................................ 4,336 4,879
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Cash and cash equivalents, end of period.............................................. $ 5,333 $5,302
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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 September 30, 2000,
are not necessarily indicative of the results of operations or cash flows that
may be reported for the year ending December 31, 2000. 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, 1999.
2. Recent Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), is effective for
fiscal years ended after June 15, 2000. The Company adopted SFAS 133 effective
June 30, 1998, however, the Company does not presently have any derivative or
hedging-type investment as defined by SFAS 133.
Revenue Recognition
On December 3, 1999, the staff of the SEC published Staff Accounting
Bulletin 101, "Topic 13: Revenue Recognition" ("SAB 101") to provide guidance on
the recognition, presentation and disclosure of revenue in financial statements.
SAB 101 will be effective for the Company during the quarter ended December 31,
2000. Specific items discussed in SAB 101 include up-front fees when the seller
has significant continuing involvement and the amount of revenue recognized when
the seller is acting as a sales agent or in a similar capacity. SAB 101 also
provides guidance on disclosures that should be made for revenue recognition
policies and the impact of events and trends on revenue. The adoption of SAB 101
is not expected to have a material effect on the financial statements of the
Company.
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Accounting for Sales Incentives
In May 2000, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus on Issue No. 00-14, "Accounting for Certain
Sales Incentives" ("EITF Issue No. 00-14"), which addresses the recognition,
measurement, and income statement classification for sales incentives offered by
vendors to customers. The Company adopted the provisions of EITF Issue No. 00-14
effective September 30, 2000. The adoption of EITF Issue No. 00-14 did not have
a material impact on Kos' financial condition or results of operations.
3. Loss per Share
The Company excludes the effect of common stock equivalents from its
calculation of basic and diluted loss per share because the impact of such items
is antidilutive. At September 30, the following common stock equivalents were
excluded from the calculation of weighted average shares of Common Stock
outstanding:
2000 1999
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(in thousands)
Stock options outstanding.............. 3,771 2,967
Convertible Note/Warrants.............. 12,583 4,684
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Total............................. 16,354 7,651
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4. Inventories
Inventories consist of the following:
September 30, December 31,
2000 1999
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(in thousands)
Raw materials.......................... $ 304 $ 206
Work in process........................ 708 269
Finished goods......................... 782 611
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Total............................. $ 1,794 $ 1,086
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5. Deferred Revenue Collected
The Company periodically evaluates the inventory position of its customers
to determine whether abnormally high inventory levels of the Niaspan product
exist throughout the product distribution channel. If any such inventory levels
are identified, the Company's policy is to defer recognition of the revenue and
related expenses associated with the excess inventory held by customers until
the amount of such inventories returns to normal levels. During the third
quarter of 2000 and the fourth quarter of 1999, certain of the Company's
customers purchased abnormally high levels of the Niaspan product. As a result,
as of September 30, 2000 and December 31, 1999, the level of the Niaspan product
warehoused by these customers was well above normal levels. Accordingly, the
Company deferred recognition of $2.0 million in gross revenues and related
expenses associated with third quarter 2000 product shipments, and the
recognition of $2.8 million in gross revenues and related expenses associated
with 1999 product shipments until such time as the level of the Niaspan product
warehoused by these customers returns to normal levels. Included in "Deferred
revenue collected" in the accompanying consolidated balance sheets are $140,000
and $1,980,000 as of September 30, 2000 and December 31, 1999, respectively,
representing payments received on Niaspan product shipments for which revenue
recognition has been deferred.
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6. Notes Payable to Shareholder
On July 1, 1998, the Company entered into a $30-million credit facility
(the "Credit Facility") with Michael Jaharis, the Company's Chairman and its
principal shareholder. On June 9, 2000, in order to reduce interest costs, the
Company utilized the proceeds of a $20-million equity contribution from DuPont
Pharmaceuticals Company ("DuPont") to pay-off borrowings made under the Credit
Facility. In connection with this loan repayment, Mr. Jaharis agreed to continue
to make available to the Company the full original borrowing capacity of the
Credit Facility, provided that future Company borrowings from Mr. Jaharis be
first made from the existing borrowing capacity of Mr. Jaharis' other credit
lines with Kos. All other terms of the Credit Facility remain in full force and
effect. Borrowings under the Credit Facility, which totaled $10 million at
September 30, 2000, bear interest at the prime rate (9.5% as of September 30,
2000), and are due December 31, 2002.
On September 1, 1999, the Company formally agreed to the terms of an
additional $50-million funding arrangement initially committed to by Mr. Jaharis
on October 7, 1998 (the "Supplemental Credit Facility"). Borrowings under the
Supplemental Credit Facility totaled $50 million as of September 30, 2000, bear
interest at the prime rate, are convertible (at $4.91 per share) into shares of
the Company's Common Stock, and will be due December 31, 2003.
On December 21, 1999, Mr. Jaharis agreed to extend another $50 million loan
to the Company (the "Standby Facility"). Borrowings made under the Standby
Facility totaled $12 million as of September 30, 2000, are due June 30, 2005,
and are also subject to most of the terms and conditions of borrowings made
under the Supplemental Credit Facility. Borrowings made under the Standby
Facility are not, however, convertible into shares of the Company's Common
Stock. In lieu of a conversion feature, the Company granted to Mr. Jaharis
non-detachable warrants to purchase 6,000,000 shares of the Company's Common
Stock at $5.00 per share, which approximates the market value of the Company's
Common Stock on the effective date of the Standby Facility. The warrants are
exercisable at any time until June 30, 2006.
Interest expense under the Credit Facility, Supplemental Credit Facility,
and Standby Facility totaled approximately $4.8 million for the nine months
ended September 30, 2000.
7. Strategic Alliance
The Company entered into an agreement, effective May 3, 2000, with DuPont
to form a strategic alliance for the purpose of co-promoting the Company's
single-tablet Niaspan/lovastatin combination product (the "Combination
Product"), now in development, in the United States and Canada (the "DuPont
Agreement"). Under the terms of the DuPont Agreement, the Company and DuPont
will share in the future development and commercialization of the Company's
Combination Product. Specifically, DuPont has agreed (i) to make equity
investments in the Company up to $30
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million through the date of Food and Drug Administration approval of the
Combination Product; (ii) to pay the Company $17.5 million in milestone payments
upon approval of the Combination Product; (iii) to fund up to $32.5 million for
future clinical development of the Combination Product; and (iv) to share
equally in the costs associated with promoting the Combination Product and share
equally in product profits after deducting a royalty to the Company. On May 31,
2000, DuPont made a $20-million equity investment in the Company in exchange for
1,250,000 shares of the Company's Common Stock.
8
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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 September 30, 2000, the Company had accumulated a deficit
from operations of $270.7 million. In connection with the transfer of operations
from Holdings to the Company during June 1996, net operating loss carryforwards
amounting to approximately $51 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
Nine Months Ended September 30, 2000 and 1999
The Company's revenues increased to $40.1 million for the nine months ended
September 30, 2000, from $23.0 million for the same period in 1999. This
increase was attributable to a growth of $13.1 million in net sales of the
Company's Niaspan product; to the recognition as revenue of $2.8 million in
Niaspan product sales for which revenue recognition had been deferred as of
December 31, 1999; and to an increase of $1.2 million in co-promotion revenue
resulting from the Company's co-promotion agreement with Knoll Pharmaceutical
Company (hereinafter "Knoll"), for the promotion of Knoll's Mavik and Tarka
products within the United States (the "Knoll Agreement"). Under the terms of
the Knoll Agreement, the Company receives an increasing percentage of revenue
based on sales thresholds.
During the quarter ended September 30, 2000, certain customers of the
Company purchased abnormally high levels of the Niaspan product. The Company
believes that
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this higher than expected Niaspan demand was primarily due to seasonal
fluctuations in customer purchasing patterns. As a result, at September 30,
2000, the amount of the Company's Niaspan product being warehoused by these
customers were well above normal levels. The Company has deferred the
recognition, during the 2000 period, of $2.0 million in revenues and related
expenses associated with these sales until the level of the Company's Niaspan
product warehoused by these customers returns to normal levels.
Cost of sales was $4.1 million and $3.6 million for the nine months ended
September 30, 2000 and 1999, respectively. The higher cost of sales in 2000 was
attributable to higher Niaspan volume during the period, partially offset by
efficiencies attained in the production of Niaspan.
The Company's research and development expenses decreased to $19.5 million
for the nine months ended September 30, 2000, from $20.1 million for the nine
months ended September 30, 1999. The decreased expenses related primarily to
decreases of $2.0 million in the costs of clinical trials resulting from the
completion of most of the clinical trial activities associated with the
submission of a New Drug Application ("NDA") to the U.S. Food and Drug
Administration for the Company's single-tablet Niaspan/lovastatin combination
product (the "Combination Product") during the 2000 quarter. These decreases
were partially offset by increases of $0.6 million in costs associated with NDA
submission expenses for the Combination Product, of $0.5 million in formulation
development costs for products under development, and of $0.5 million in
personnel and personnel-related costs.
Selling, general and administrative expenses increased to $42.9 million for
the nine months ended September 30, 2000, from $41.6 million for the nine months
ended September 30, 1999. Selling expenses decreased $0.5 million primarily as a
result of a decrease of $2.7 million in sales force operating expenses. This
decrease was partially offset by an increase of $1.8 million in marketing costs
associated with Mavik and Tarka promotional efforts. General and administrative
expenses increased to $10.3 million for the 2000 period, from $8.5 million for
the preceding period, primarily as a result of an increase of $1.5 million in
royalty expenses associated with the increase in net sales of the Niaspan
product, and of an increase of $0.5 million in personnel and personnel-related
costs.
The Company is subject to the terms of the July 1, 1998, $30-million credit
facility (the "Credit Facility"), the September 1, 1999, $50-million credit
facility (the "Supplemental Credit Facility"), and the December 21, 1999,
$50-million credit facility (the "Standby Facility"), with Michael Jaharis,
Chairman of the Company's Board of Directors and its principal shareholder.
Borrowings under these credit facilities totaled $72 million as of September 30,
2000, and bear interest at the prime rate (9.5% as of September 30, 2000).
Interest expense under these credit facilities totaled approximately $4.8
million and $2.0 million for the nine months ended September 30, 2000 and 1999,
respectively.
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The Company incurred a net loss of $31.0 million for the nine months ended
September 30, 2000, compared with a net loss of $44.2 million for the nine
months ended September 30, 1999.
Three Months Ended September 30, 2000 and 1999
The Company's revenues increased to $16.6 million for the three months
ended September 30, 2000, from $10.2 million for the same period in 1999. This
increase was attributable to a growth of $6.9 million in net sales of the
Company's Niaspan product, partially offset by a decrease of $0.5 million in
co-promotion revenue resulting from the Company's co-promotion collaboration
agreement with Knoll.
The Company is subject to seasonal fluctuations in customer purchasing
patterns. Because of this, the amount of the Company's Niaspan product being
warehoused by some of its customers were well above normal levels as of
September 30, 2000. Accordingly, the Company has deferred the recognition,
during the 2000 period, of $2.0 million in revenues and related expenses
associated with these sales until the level of the Company's Niaspan product
warehoused by these customers returns to normal levels.
Because of increased production volumes of its Niaspan product, Kos
continues to obtain improved efficiencies throughout its manufacturing process.
Accordingly, while the Company experienced an 82% increase in Niaspan revenues
during the 2000 period, cost of sales remained $1.4 million for both periods.
The Company's research and development expenses decreased to $6.2 million
for the three months ended September 30, 2000, from $6.5 million for the three
months ended September 30, 1999. The reduced expenses related primarily to
decreases of $1.1 million in the costs of clinical trials resulting from the
completion of clinical trial activities associated with the NDA submission for
the Combination Product. This decrease was partially offset by increases of $0.3
million in costs associated with NDA submission expenses for the Combination
Product, of $0.3 million in formulation development costs for products under
development, and of $0.2 million in personnel and personnel-related costs.
Selling, general and administrative expenses increased to $14.9 million for
the three months ended September 30, 2000, from $14.3 million for the three
months ended September 30, 1999. Selling expenses decreased $0.5 million,
primarily as a result of a decrease of $0.7 million in personnel and
personnel-related costs mostly as a result of reduced sales force operating
expenses. This decrease was partially offset by an increase of $0.2 million in
the cost of marketing programs associated with Mavik and Tarka. General and
administrative expenses increased to $3.6 million for the 2000 period, from $2.5
million for the preceding period, primarily as a result of an increase of $0.5
million in personnel and personnel-related costs, and of an increase of $0.4
million in royalty expenses associated with the increase in net sales of the
Niaspan product.
Interest expense under the Company's credit facilities with Michael Jaharis
totaled approximately $1.6 million and $1.0 million for the three months ended
September 30, 2000 and 1999, respectively.
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The Company incurred a net loss of $7.5 million for the three months ended
September 30, 2000, compared with a net loss of $12.9 million for the three
months ended September 30, 1999.
Liquidity and Capital Resources
At September 30, 2000, the Company had cash and cash equivalents totaling
$5.3 million and had a working capital of $1.4 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 September 30, 2000, the Company's investment in equipment
and leasehold improvements, net of depreciation and amortization, was $8.6
million. During the nine months ended September 30, 2000, the Company spent $0.5
million in capital expenditures.
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 and its principal shareholder. On June 9, 2000, in order to reduce
interest costs, the Company utilized the proceeds of a $20-million equity
contribution from DuPont Pharmaceuticals Company ("DuPont") to pay-off
borrowings made under the Credit Facility. In connection with this loan
repayment, Mr. Jaharis agreed to continue to make available to the Company the
full original borrowing capacity of the Credit Facility, provided that future
Company borrowings from Mr. Jaharis be first made from the existing borrowing
capacity of Mr. Jaharis' other credit lines with Kos. All other terms of the
Credit Facility remain in full force and effect. Borrowings under the Credit
Facility totaled $10 million as of September 30, 2000, bear interest at the
prime rate (9.5% as of September 30, 2000), and are due December 31, 2002.
On September 1, 1999, the Company formally agreed to the terms of an
additional $50-million funding arrangement initially entered into with Michael
Jaharis on October 7, 1998 (the "Supplemental Credit Facility"). Borrowings
under the Supplemental Credit Facility totaled $50 million as of September 30,
2000, bear interest at the prime rate, are convertible (at $4.91 per share) into
shares of the Company's Common Stock, and will be due December 31, 2003. As of
September 30, 2000, the conversion of amounts borrowed from Mr. Jaharis under
the Supplemental Credit Facility into shares of the Company's Common Stock would
have resulted in the issuance of 10,183,299 additional shares of the Company's
Common Stock, thus causing material dilution to existing shareholders of the
Company.
On December 21, 1999, Mr. Jaharis agreed to extend another $50 million loan
to the Company (the "Standby Facility"). Borrowings made under the Standby
Facility totaled $12 million as of September 30, 2000, are due June 30, 2005,
and are also subject to most of the terms and conditions of borrowings made
under the Supplemental Credit Facility. Borrowings made under the Standby
Facility are not, however, convertible into shares of the Company's Common
Stock. In lieu of a conversion feature, the Company has granted
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to Mr. Jaharis non-detachable warrants to purchase 6,000,000 shares of the
Company's Common Stock at $5.00 per share, which approximates the market value
of the Company's Common Stock on the effective date of the Standby Facility. The
warrants are exercisable at any time until June 30, 2006. The exercise of a
significant number of the warrants issued under the Standby Facility will cause
material dilution to existing shareholders of the Company.
Although the Company currently anticipates that, including the capital
available to the Company under the Credit Facility, the Supplemental Credit
Facility and the Standby Facility, 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 and to receive approval of the NDA for the Company's Combination
Product on a timely basis. Further, during this period, the Company's ability to
fund its operating requirements may, among other things, be affected by its
ability to reduce its operating expenses. The Company's failure to generate
substantial growth in the sales of Niaspan, reduce operating expenses, obtain
regulatory approval for its Combination Product, or meet the conditions
necessary for the Company to obtain funding under the Credit Facility, the
Supplemental Credit Facility and the Standby Facility, 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.
13
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FORWARD-LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS
Certain statements contained in this Form 10-Q, including statements 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 ability to obtain approval from the Food and Drug Administration
("FDA") on a timely basis for the New Drug Application ("NDA") for the
Combination 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, 1999,
filed with the Securities and Exchange Commission, under the caption
"Forward-Looking Information: Certain Cautionary Statements".
Market Acceptance and Sales Growth of Niaspan
The Company's success currently depends primarily upon its ability to
successfully market and sell increasing quantities of its Niaspan product. The
Company's ability to successfully sell increasing quantities of the Niaspan
product will depend significantly on the increasing acceptance of the Niaspan
product by physicians and their patients. The Company believes that intolerable
flushing and potential liver toxicity associated with currently available
formulations of niacin are the principal reasons why physicians generally have
been reluctant to prescribe or recommend such currently available formulations.
Flushing episodes are often characterized by facial redness, tingling or rash.
Although most patients taking the Niaspan product will sometimes flush, the
formulation and dosing regimen for Niaspan have been designed to maximize
patient acceptance and minimize the occurrence of flushing. There can be no
assurance, however, that patients using the Niaspan product will not suffer
episodes of flushing that they consider intolerable. The failure of physicians
to prescribe the Niaspan product or the failure of patients to continue taking
Niaspan due to intolerable flushing or to other side effects would have a
material adverse effect on the Company. Unanticipated side effects or
unfavorable publicity concerning the Niaspan product or any other product
incorporating technology similar to that used in the Niaspan product also could
have an adverse effect on the Company's ability to obtain regulatory approvals,
to achieve
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acceptance by prescribing physicians, managed care providers, or patients, any
of which would have a material adverse effect on the Company.
Uncertainties Related to FDA Approval of the Product
The Company has submitted an NDA to the FDA for the Combination Product. If
the FDA believes that the results of the pivotal clinical trials for the
Combination Product do not establish the safety and efficacy of the Combination
Product in the treatment of any or all of the referenced indications, the
Company will not receive the approvals necessary to market the Combination
Product. Failure to obtain FDA approval to market the Combination Product on a
timely basis would have a material adverse effect on the Company, including
delaying or terminating the Company's right to receive milestone payments under
the co-promotion agreement for the Combination Product. The Company may be
required to conduct additional clinical trials in order to demonstrate the
safety and efficacy of the Combination Product. Such trials, among other things,
could delay the approval of the NDA for the Combination Product, which could
have a material adverse effect on the Company. There can be no assurance that
the Company will obtain regulatory approval for the commercialization of the
Combination Product on a timely basis, or at all.
15
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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.
16
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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 have filed an appeal with the United
States Circuit Court of Appeals for the 11th Circuit.
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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
September 30, 2000.
-----
* 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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KOS PHARMACEUTICALS, INC.
Date: November 13, 2000 By: /s/ Daniel M. Bell
-------------------------------
Daniel M. Bell, President and
Chief Executive Officer
Date: November 13, 2000 By: /s/ Juan F. Rodriguez
-------------------------------
Juan F. Rodriguez, Vice President,
Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit Description
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27 Financial Data Schedule
