SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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)
FLORIDA 65-0670898
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(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
1001 BRICKELL BAY DRIVE, 25th FLOOR, MIAMI, FLORIDA 33131
(Address of Principal Executive Offices, Zip Code)
Registrant's Telephone Number, Including Area Code: (305) 577-3464
Indicate whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ____X____ No ________
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes __________ No __________
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
CLASS OUTSTANDING AT APRIL 28, 2000
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Common Stock, par value $.01 per share 18,401,814
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KOS PHARMACEUTICALS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
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PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
<S> <C> <C>
Condensed Consolidated Balance Sheets as of March 31, 2000
(unaudited) and December 31, 1999.............................................. 2
Condensed Consolidated Statements of Operations for
the three months ended March 31, 2000 (unaudited) and
1999 (unaudited)............................................................... 3
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 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.................................................... 8
Item 3 - Quantitative and Qualitative Disclosures about Market Risk............................. 14
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings...................................................................... 15
Item 6 - Exhibits and Reports on Form 8-K....................................................... 16
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NIASPAN/registered mark/and NICOSTATIN/trademark/ are trademarks of Kos
Pharmaceuticals, Inc. MAVIK/registered mark/and TARKA/registered mark/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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<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
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(UNAUDITED)
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ASSETS
Current Assets:
Cash and cash equivalents ......................................... $ 3,502 $ 4,336
Trade accounts receivable, net .................................... 6,012 6,977
Inventories ....................................................... 1,046 1,086
Prepaid expenses and other current assets ......................... 3,552 2,611
--------- ---------
Total current assets .......................................... 14,112 15,010
Fixed Assets, net .................................................... 9,705 10,430
Goodwill and Other Intangible Assets, net ............................ 783 803
Other Assets ......................................................... 94 15
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Total assets .................................................. $ 24,694 $ 26,258
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable .................................................. $ 4,362 $ 2,821
Accrued expenses .................................................. 11,666 12,450
Deferred revenue .................................................. -- 1,980
Capital lease obligations ......................................... 111 113
--------- ---------
Total current liabilities ..................................... 16,139 17,364
--------- ---------
Notes Payable to Shareholder ......................................... 71,000 62,000
Capital Lease Obligations, net of current portion .................... 63 89
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,
18,387,305 and 18,026,024 shares issued and outstanding as
of March 31, 2000 (unaudited) and December 31, 1999, respectively 184 180
Additional paid-in capital ........................................ 188,181 186,291
Accumulated deficit ............................................... (250,873) (239,666)
--------- ---------
Total shareholders' deficit ................................... (62,508) (53,195)
--------- ---------
Total liabilities and shareholders' deficit ................... $ 24,694 $ 26,258
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2
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KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
---------------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues, net .......................................... $ 13,366 $ 5,469
Cost of sales .......................................... 1,561 1,039
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11,805 4,430
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Operating Expenses:
Research and development ............................ 7,174 6,233
Selling, general and administrative ................. 14,505 13,126
-------- --------
Total operating expenses ........................ 21,679 19,359
-------- --------
Loss from operations ................................... (9,874) (14,929)
-------- --------
Other Expense (Income):
Other income ........................................ -- (6)
Interest income, net ................................ (116) (38)
Interest expense-related parties .................... 1,448 329
-------- --------
Total other expense (income) .................... 1,332 285
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Net loss ........................................ $(11,206) $(15,214)
======== ========
Net loss per share, basic and diluted .................. $ (0.62) $ (0.86)
Weighted average shares of Common
Stock outstanding .................................... 18,185 17,735
Common Stock options outstanding (not included
in the calculation of diluted loss per share
as their impact would be antidilutive) ............... 3,719 3,067
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
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KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
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(UNAUDITED)
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Cash Flows from Operating Activities:
Net loss .................................................................. $(11,206) $(15,214)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ......................................... 831 730
Gain from disposal of fixed assets .................................... -- (6)
Common Stock issued to employees ...................................... 111 108
Stock options issued to non-employees ................................. -- 150
Provision for inventory obsolescence .................................. 105 120
Changes in operating assets and liabilities:
Trade accounts receivable, net ...................................... 965 (648)
Prepaid expenses and other current assets ........................... (941) (331)
Inventories ......................................................... (65) (391)
Other assets ........................................................ (78) (3)
Accounts payable .................................................... 1,541 (1,708)
Accrued expenses .................................................... (784) (1,681)
Deferred revenue .................................................... (1,980) --
-------- --------
Net cash used in operating activities ........................ (11,501) (18,874)
-------- --------
Cash Flows from Investing Activities:
Capital expenditures ...................................................... (86) (357)
-------- --------
Net cash used in investing activities ........................ (86) (357)
-------- --------
Cash Flows from Financing Activities:
Net proceeds from issuance of Common Stock ................................ 297 --
Net proceeds from exercise of stock options ............................... 1,485 36
Payments under capital lease obligations .................................. (29) (37)
Borrowings under Notes Payable to Shareholder ............................. 9,000 20,000
-------- --------
Net cash provided by financing activities .................... 10,753 19,999
-------- --------
Net increase (decrease) in cash and
cash equivalents ............................................ (834) 768
Cash and cash equivalents, beginning of period .............................. 4,336 4,879
-------- --------
Cash and cash equivalents, end of period .................................... $ 3,502 $ 5,647
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
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KOS PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The condensed consolidated financial statements included herein have been
prepared by Kos Pharmaceuticals, Inc. (the "Company" or "Kos") without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the consolidated financial
position, results of operations, and cash flows of the Company. The results of
operations and cash flows for the three-month period ended March 31, 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
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", 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.
3. INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER
2000 31, 1999
------------ ------------
(in thousands)
Raw materials............................ $ 301 $ 206
Work in process.......................... 503 269
Finished goods........................... 242 611
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Total............................... $ 1,046 $ 1,086
============ ============
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4. DEFERRED REVENUE
During the fourth quarter of 1999, certain of the Company's customers
purchased abnormally high levels of the Company's NIASPAN product. The Company
believed that this higher-than-expected NIASPAN demand was primarily due to
these customers protecting themselves against potential complications associated
with year 2000 date change issues. Because the quantity of the Company's NIASPAN
product warehoused by these customers had increased well above normal levels as
of December 31, 1999, the Company deferred the recognition of $2,800,000 in
gross revenues and related expenses associated with the Company's estimate of
these sales. Of this amount, $1,980,000, representing payments received by the
Company in excess of revenue recognized during the year ended December 31, 1999,
was included as "Deferred revenue" as of that date in the accompanying condensed
consolidated balance sheet.
The quantities of the NIASPAN product warehoused by these customers
drastically decreased during the first quarter of 2000, and, therefore, the
Company has recognized as revenue, during the quarter ended March 31, 2000, the
NIASPAN shipments recorded as "Deferred revenue" as of December 31, 1999.
Included in "Revenues, net" in the accompanying condensed consolidated
statements of operations is $2,800,000 related to this 1999 revenue recognition
deferral.
5. 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. Borrowings under the Credit Facility, which totaled $30
million at March 31, 2000, bear interest at the prime rate (9% as of March 31,
2000). On December 21, 1999, Mr. Jaharis agreed to extend the maturity date of
the Credit Facility from December 31, 2000 to 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 $41 million as of March 31, 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 will be due June 30, 2005, and are 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
to Mr. Jaharis 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 contain
a non-detachable feature and are exercisable at any time until June 30, 2006.
The Company had no borrowings outstanding under the Standby Facility as of March
31, 2000.
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Interest expense under the Credit Facility and Supplemental Credit Facility
totaled approximately $1.4 million for the three months ended March 31, 2000.
6. SUBSEQUENT EVENT
On May 3, 2000, the Company entered into a definitive agreement with DuPont
Pharmaceuticals Company ("DuPont") to form a strategic alliance for the purpose
of co-promoting the Company's NICOSTATIN product, now in development, in the
U.S. 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 NICOSTATIN product. Specifically, DuPont has
agreed to (i) make equity investments in the Company up to $30 million through
Food and Drug Administration approval of the NICOSTATIN product; (ii) pay the
Company $17.5 million in milestone payments upon approval of the NICOSTATIN
product; (iii) fund up to $32.5 million for future clinical development of the
NICOSTATIN product; and (iv) share equally in the costs associated with
promoting the NICOSTATIN product and share equally in product profits after
deducting a royalty to the Company. The DuPont Agreement is subject to review
and approval by the Federal Trade Commission.
7
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
A predecessor corporation to the Company was formed in July 1988 under the
name of Kos Pharmaceuticals, Inc., principally to conduct research and
development on new formulations of existing prescription pharmaceutical
products. In June 1993, Aeropharm Technologies, Inc. ("Aeropharm"), a then
majority-owned subsidiary of the Company, was formed to conduct research and
development activities on aerosolized products, dispensed in metered-dosed
inhalers, for the treatment of respiratory diseases. During June 1996, this
predecessor corporation acquired the outstanding minority interest in Aeropharm;
changed its name to Kos Holdings, Inc. ("Holdings"); established the Company as
a wholly-owned subsidiary under the name of Kos Pharmaceuticals, Inc.; and,
effective as of June 30, 1996, transferred all of its existing assets,
liabilities and intellectual property, other than certain net operating loss
carryforwards, to the Company. Accordingly, all references in this Form 10-Q
filing to the Company's business include the business and operations of Holdings
until June 30, 1996.
On March 12, 1997, the Company completed an initial public offering of its
Common Stock ("IPO"). From inception through the IPO, the Company had not
recorded any significant revenues, and the Company had funded its operations
exclusively through equity contributions and a loan from its majority
shareholder. Through March 31, 2000, the Company had accumulated a deficit from
operations of $250.9 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
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
The Company's revenues increased to $13.4 million for the three months
ended March 31, 2000, from $5.5 million for the same period in 1999. This
increase was attributable to a growth of $4.3 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 $0.8 million in co-promotion revenue resulting from
the Company's co-promotion collaboration agreement with Knoll Pharmaceutical
Company (hereinafter "Knoll"), for the promotion and marketing of Knoll's MAVIK
and TARKA products within the United
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States (the "Knoll Agreement"). Under the terms of the Knoll Agreement, the
Company receives an increasing percentage of revenue based on sales thresholds.
Cost of sales was $1.6 million and $1 million for the three months ended
March 31, 2000 and 1999, respectively. The higher cost of sales in 1999 was
attributable to higher NIASPAN product revenues during the period, partially
offset by efficiencies attained in the production of NIASPAN.
The Company's research and development expenses increased to $7.2 million
for the three months ended March 31, 2000, from $6.2 million for the three
months ended March 31, 1999. The increased expenses related primarily to
increases of $0.4 million in formulation development costs of the Company's
NICOSTATIN product and other products under development, of $0.4 million in the
costs of clinical trials principally associated with the NICOSTATIN product, and
of $0.1 million in patent-related expenses.
Selling, general and administrative expenses increased to $14.5 million for
the three months ended March 31, 2000, from $13.1 million for the three months
ended March 31, 1999. Selling expenses increased $0.9 million, primarily as a
result of increases of $1.1 million in marketing costs and other costs
associated with the NIASPAN product, and of $0.2 million in MAVIK and TARKA
marketing expenses. These increments were partially offset by a decrease of $0.4
million in personnel and personnel related costs mostly as a result of reduced
sales force operating expenses. General and administrative expenses increased to
$3.4 million for the 2000 period, from $2.9 million for the preceding period,
primarily as a result of an increase of $0.4 million in royalty expenses
associated with the increase in net sales of the NIASPAN product.
The Company is subject to the terms of the July 1, 1998, $30-million credit
facility (the "Credit Facility"), and to the terms of the September 1, 1999,
$50-million credit facility (the "Supplemental Credit Facility"), with Michael
Jaharis, Chairman of the Company's Board of Directors and its principal
shareholder. Borrowings under the Credit Facility and under the Supplemental
Credit Facility totaled $71 million as of March 31, 2000. The Credit Facility
and the Supplemental Credit Facility bear interest at the prime rate (9% as of
March 31, 2000). Interest expense under the Credit Facility and Supplemental
Credit Facility totaled approximately $1.4 million and $0.3 million for the
three months ended March 31, 2000 and 1999, respectively.
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The Company incurred a net loss of $11.2 million for the three months ended
March 31, 2000, compared with a net loss of $15.2 million for the three months
ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had cash and cash equivalents totaling $3.5
million and had a working capital deficiency of $2.0 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 March 31, 2000, the Company's investment in
equipment and leasehold improvements, net of depreciation and amortization, was
$9.7 million. During the three months ended March 31, 2000, the Company spent
$0.1 million in capital expenditures. The Company expects to spend about $2
million in capital expenditures during the remainder of the year ending December
31, 2000.
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. Borrowings under the Credit Facility
totaled $30 million as of March 31, 2000, bear interest at the prime rate (9% as
of March 31, 2000), and will be 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 $41 million as of March 31, 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
March 31, 2000, the conversion of amounts borrowed from Mr. Jaharis under the
Supplemental Funding Arrangement into shares of the Company's Common Stock would
have resulted in the issuance of 8,350,305 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 will be due June 30, 2005, and are 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
to Mr. Jaharis 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 contain
a non-detachable feature and are exercisable at any time until June 30, 2006.
The Company had no borrowings outstanding under the Standby Facility as of March
31, 2000. The exercise of a
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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 Funding
Arrangement 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. 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 and by its ability to obtain regulatory
approval for its NICOSTATIN product. The Company's failure to generate
substantial growth in the sales of NIASPAN, reduce operating expenses, obtain
regulatory approval for its NICOSTATIN product, or meet the conditions necessary
for the Company to obtain funding under the Supplemental Funding Arrangement and
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.
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FORWARD-LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS
Certain statements contained in this Form 10-Q, principally in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", that are not related to historical results, including statements
relating to anticipated working capital, are forward-looking statements. Actual
results may differ materially from those projected or implied in the
forward-looking statements. Further, certain forward-looking statements are
based upon assumptions of future events that may not prove to be accurate. These
forward-looking statements involve risks and uncertainties, including but not
limited to, physician and patient acceptance of the NIASPAN product; the
Company's ability to obtain approval from the Food and Drug Administration
("FDA") for the New Drug Application ("NDA") for the NICOSTATIN 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
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approvals, to achieve 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 NICOSTATIN PRODUCT
The Company has not yet submitted a new drug application to the FDA for the
NICOSTATIN product. If the FDA believes that the results of the pivotal clinical
trials for NICOSTATIN do not establish the safety and efficacy of NICOSTATIN in
the treatment of any or all of the referenced indications, the Company will not
receive the approvals necessary to market NICOSTATIN. Failure to obtain FDA
approval to market NICOSTATIN would have a material adverse effect on the
Company, including receipt of milestone payments under the co-promotion
agreement for NICOSTATIN. The Company may be required to conduct additional
clinical trials in order to demonstrate the safety and efficacy of NICOSTATIN.
Such trials, among other things, could delay the filing and approval of the NDA
for NICOSTATIN, 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 NICOSTATIN on a timely basis, or at all.
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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.
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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 filed an appeal, on June 7, 1999, with
the United States Circuit Court of Appeals for the 11th Circuit.
15
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1* Amended and Restated Articles of Incorporation of the
Company.
3.2* Amended and Restated Bylaws of the Company.
4.1 See Exhibits 3.1 and 3.2 for provisions of the
Amended and Restated Articles of Incorporation and
Amended and Restated Bylaws of the Company defining
the rights of holders of Common Stock of the Company.
4.2** Form of Common Stock certificate of the Company.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K during the quarter ended
March 31, 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.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KOS PHARMACEUTICALS, INC.
Date: May 12, 2000 By: /S/ DANIEL M. BELL
-------------------------------
Daniel M. Bell, President and
Chief Executive Officer
Date: May 12, 2000 By: /S/ JUAN F. RODRIGUEZ
-------------------------------
Juan F. Rodriguez, Vice President,
Controller
(Principal Accounting Officer)
17
<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.' FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,502
<SECURITIES> 0
<RECEIVABLES> 6,238
<ALLOWANCES> (226)
<INVENTORY> 1,046
<CURRENT-ASSETS> 14,112
<PP&E> 18,164
<DEPRECIATION> (8,459)
<TOTAL-ASSETS> 24,694
<CURRENT-LIABILITIES> 16,139
<BONDS> 0
0
0
<COMMON> 184
<OTHER-SE> (62,692)
<TOTAL-LIABILITY-AND-EQUITY> 24,694
<SALES> 13,366
<TOTAL-REVENUES> 13,366
<CGS> 1,561
<TOTAL-COSTS> 23,240
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,332
<INCOME-PRETAX> (11,206)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,206)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,206)
<EPS-BASIC> (0.62)
<EPS-DILUTED> (0.62)
</TABLE>
