SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q/A
(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, 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 August 4, 2000
----- -----------------------------
Common Stock, par value $.01 per share 19,828,615
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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 June 30, 2000
(unaudited) and December 31, 1999...................................... 2
Condensed Consolidated Statements of Operations for the three
months and six months ended June 30, 2000 (unaudited)
and 1999 (unaudited)................................................... 3
Condensed Consolidated Statements of Cash Flows for
the six months ended June 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 4 - Submission of Matters to a Vote of Security Holders............................ 18
Item 6 - Exhibits and Reports on Form 8-K............................................... 20
</TABLE>
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Niaspan(R)and Nicostatin(TM)are trademarks 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)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents .................................... $ 3,929 $ 4,336
Trade accounts receivable, net ............................... 5,514 6,977
Inventories .................................................. 1,591 1,086
Prepaid expenses and other current assets .................... 2,928 2,611
--------- ---------
Total current assets ..................................... 13,962 15,010
Fixed Assets, net ............................................... 9,257 10,430
Goodwill and Other Intangible Assets, net ....................... 763 803
Other Assets .................................................... 63 15
--------- ---------
Total assets ............................................. $ 24,045 $ 26,258
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable ............................................. $ 3,465 $ 2,821
Accrued expenses ............................................. 11,849 12,450
Deferred revenue ............................................. -- 1,980
Capital lease obligations .................................... 101 113
--------- ---------
Total current liabilities ................................ 15,415 17,364
--------- ---------
Notes Payable to Shareholder .................................... 63,000 62,000
Capital Lease Obligations, net of current portion ............... 25 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,
19,729,795 and 18,026,024 shares issued and outstanding as
of June 30, 2000 and December 31, 1999, respectively ....... 197 180
Additional paid-in capital ................................... 208,551 186,291
Accumulated deficit .......................................... (263,143) (239,666)
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Total shareholders' deficit .............................. (54,395) (53,195)
--------- ---------
Total liabilities and shareholders' deficit .............. $ 24,045 $ 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 Six Months
Ended Ended
June 30, June 30,
-------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
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Revenues, net................................................. $ 10,159 $ 7,288 $ 23,525 $ 12,757
Cost of sales................................................. 1,131 1,202 2,692 2,241
------------ ------------- ------------ ------------
Gross profit............................................... 9,028 6,086 20,833 10,516
------------ ------------- ------------ ------------
Operating Expenses:
Research and development................................... 6,125 7,328 13,300 13,561
Selling, general and administrative........................ 13,502 14,222 28,008 27,348
------------ ------------- ------------ ------------
Total operating expenses............................... 19,627 21,550 41,308 40,909
------------ ------------- ------------ ------------
Loss from operations.......................................... (10,599) (15,464) (20,475) (30,393)
------------ ------------- ------------ ------------
Other Expense (Income):
Interest income, net....................................... (40) (46) (156) (101)
Interest expense-related parties........................... 1,711 679 3,158 1,019
------------ ------------- ------------ ------------
Total other expense.................................... 1,671 633 3,002 918
------------ ------------- ------------ ------------
Net loss............................................... $ (12,270) $(16,097) $(23,477) $ (31,311)
============ ============= ============ ============
Net loss per share, basic and diluted......................... $ (0.65) $ (0.90) $ (1.27) $ (1.76)
Weighted average shares of Common
Stock outstanding........................................... 18,849 17,801 18,517 17,769
Common Stock options outstanding (not included
in the calculation of diluted loss per share
as their impact would be antidilutive)...................... 3,823 3,174 3,823 3,174
</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)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
2000 1999
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(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss............................................................................ $(23,477) $(31,311)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for doubtful accounts................................................. 50 -
Depreciation and amortization................................................... 1,650 1,477
Provision for inventory obsolescence............................................ 210 385
Gain from sale of fixed assets.................................................. - (6)
Common Stock issued to employees................................................ 238 301
Stock options issued to non-employees........................................... - 300
Changes in operating assets and liabilities:
Trade accounts receivable, net................................................ 1,414 (1,155)
Prepaid expenses and other current assets..................................... (317) 310
Inventories................................................................... (716) (713)
Other assets.................................................................. (48) -
Accounts payable.............................................................. 644 (1,398)
Accrued expenses.............................................................. (601) 900
Deferred revenue.............................................................. (1,980) -
------------ ------------
Net cash used in operating activities.................................. (22,933) (30,910)
------------ ------------
Cash Flows from Investing Activities:
Capital expenditures................................................................ (436) (747)
------------ ------------
Net cash used in investing activities.................................. (436) (747)
------------ ------------
Cash Flows from Financing Activities:
Net proceeds from issuance of Common Stock.......................................... 20,297 -
Net proceeds from exercise of stock options......................................... 1,742 79
Payments under capital lease obligations............................................ (77) (72)
Borrowings under Notes Payable to Shareholder....................................... 21,000 32,000
Payment of Notes Payable to Shareholder............................................. (20,000) -
------------ ------------
Net cash provided by financing activities.............................. 22,962 32,007
------------ ------------
Net increase (decrease) in cash and
cash equivalents...................................................... (407) 350
Cash and cash equivalents, beginning of period........................................ 4,336 4,879
------------ ------------
Cash and cash equivalents, end of period.............................................. $ 3,929 $ 5,229
============ ============
</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
("SEC"). 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,
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.
5
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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. EITF Issue No. 00-14 will be effective for the Company
during the quarter ending September 30, 2000. Sales incentives within the scope
of this issue include offers that can be used by a customer to receive a
reduction in the price of a product or service at the point of sale. The
consensus states that the cost of the sales incentive should be recognized at
the latter of the date at which the related revenue is recorded or the date at
which the sales incentive is offered. The consensus also states that when
recognized the reduction in or refund of the selling price should be classified
as a reduction of revenue. However, if the sales incentive is a free product or
service delivered at the time of sale the cost should be classified as an
expense. The adoption of EITF Issue No. 00-14 is not expected to have a material
effect on the financial statements of the Company.
3. Inventories
Inventories consist of the following:
June 30, December
2000 31, 1999
------------ ------------
(in thousands)
Raw materials........................... $ 302 $ 206
Work in process......................... 1,034 269
Finished goods.......................... 255 611
------------ ------------
Total.............................. $ 1,591 $ 1,086
============ ============
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 excess sales. Of this amount, $1,980,000, representing payments received
by the Company in excess of
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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 Company has recognized as revenue, during the six months ended June 30,
2000, the Niaspan shipments recorded as "Deferred revenue" as of December 31,
1999. Included in "Revenues, net" in the accompanying 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. 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 June
30, 2000, bear interest at the prime rate (9.5% as of June 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 June 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 $3 million as of June 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 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.
Interest expense under the Credit Facility, Supplemental Credit Facility,
and Standby Facility totaled approximately $3.2 million for the six months ended
June 30, 2000.
7
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6. 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
Nicostatin 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 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. Accordingly, on May 31, 2000, DuPont made a $20-million
equity investment in the Company. This equity investment resulted in the
issuance of 1,250,000 shares of the Company's Common Stock to DuPont.
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 June 30, 2000, the Company had accumulated a deficit from
operations of $263.1 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
Six Months Ended June 30, 2000 and 1999
The Company's revenues increased to $23.5 million for the six months ended
June 30, 2000, from $12.8 million for the same period in 1999. This increase was
attributable to a growth of $6.1 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
$1.8 million in co-promotion revenue resulting from the Company's co-promotion
agreement with
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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.
Cost of sales was $2.7 million and $2.2 million for the six months ended
June 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 $13.3 million
for the six months ended June 30, 2000, from $13.6 million for the six months
ended June 30, 1999. The decreased expenses related primarily to decreases of
$0.9 million in the costs of clinical trials resulting from the completion of
most of the clinical trial activities associated with the projected submission
of a New Drug Application ("NDA") to the U.S. Food and Drug Administration for
the Company's Nicostatin product later this year, and to a decrease of $0.3
million in the cost of medical education programs in support of Niaspan. These
decreases were partially offset by increases of $0.3 million in formulation
development costs for products under development, of $0.3 million in personnel
and personnel related costs, of $0.2 million in consulting fees principally
associated with the projected NDA submission for the Nicostatin product, and of
$0.1 million in patent-related expenses.
Selling, general and administrative expenses increased to $28.0 million for
the six months ended June 30, 2000, from $27.3 million for the six months ended
June 30, 1999. Overall 2000 selling expenses remained at approximately the same
level as those incurred during 1999. Within selling expenses, marketing expenses
grew by $1.7 million in 2000 primarily as result of marketing costs associated
with Mavik and Tarka, but these increments were offset by a decrease of $1.7
million in sales force operating expenses. General and administrative expenses
increased to $6.7 million for the 2000 period, from $6.0 million for the
preceding period, primarily as a result of an increase of $0.5 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"), 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 a significant shareholder.
Borrowings under these credit facilities totaled $63 million as of June 30,
2000. The Credit Facility and the Supplemental Credit Facility bear interest at
the prime rate (9.5% as of June 30, 2000). Interest expense under the Credit
Facility and Supplemental Credit Facility totaled approximately $3.2 million and
$1.0 million for the six months ended June 30, 2000 and 1999, respectively.
10
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The Company incurred a net loss of $23.5 million for the six months ended
June 30, 2000, compared with a net loss of $31.3 million for the six months
ended June 30, 1999.
Three Months Ended June 30, 2000 and 1999
The Company's revenues increased to $10.2 million for the three months
ended June 30, 2000, from $7.3 million for the same period in 1999. This
increase was attributable to a growth of $1.9 million in net sales of the
Company's Niaspan product, and to $1.0 million in co-promotion revenue resulting
from the Company's co-promotion collaboration agreement with Knoll for the
promotion of Knoll's Mavik and Tarka products within the United States.
Cost of sales was $1.1 million and $1.2 million for the three months ended
June 30, 2000 and 1999, respectively. The lower cost of sales in 2000 was
attributable to higher efficiencies obtained in the production of the Niaspan
product, offset by the cost of higher volume during the period.
The Company's research and development expenses decreased to $6.1 million
for the three months ended June 30, 2000, from $7.3 million for the three months
ended June 30, 1999. The reduced expenses related primarily to decreases of $1.2
million in clinical trials costs resulting from the completion of clinical trial
activities associated with the projected NDA submission for the Nicostatin
product, and to a decrease of $0.2 million in the cost of medical education
programs in support of Niaspan. These decreases were partially offset by $0.2
million in consulting fees principally associated with the NDA submission for
the Nicostatin product.
Selling, general and administrative expenses decreased to $13.5 million for
the three months ended June 30, 2000, from $14.2 million for the three months
ended June 30, 1999. Selling expenses decreased $0.9 million, primarily as a
result of a decrease of $1.4 million in personnel and personnel related costs
mostly as a result of reduced sales force operating expenses. These decreases
were partially offset by a net increase of $0.5 million in marketing costs,
mostly as a result of an increase of $1.3 million in Mavik and Tarka marketing
expenses. General and administrative expenses increased to $3.3 million for the
2000 period, from $3.1 million for the preceding period, primarily as a result
of an increase of $0.1 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 $1.7 million and $0.7 million for the three months ended
June 30, 2000 and 1999, respectively.
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The Company incurred a net loss of $12.3 million for the three months ended
June 30, 2000, compared with a net loss of $16.1 million for the three months
ended June 30, 1999.
Liquidity and Capital Resources
At June 30, 2000, the Company had cash and cash equivalents totaling $3.9
million and had a working capital deficiency of $1.5 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, 2000, the Company's investment in
equipment and leasehold improvements, net of depreciation and amortization, was
$9.3 million. During the six months ended June 30, 2000, the Company spent $0.4
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. 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 June 30, 2000, bear interest at the prime
rate (9.5% as of June 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 June 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
June 30, 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 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 $3 million as of June 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
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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 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 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 and to file and receive approval of the NDA for the
Company's Nicostatin 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 Nicostatin product, or meet the
conditions necessary for the Company to obtain funding under the Credit Facility
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 file and obtain approval from the Food and Drug
Administration ("FDA") on a timely basis 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
14
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also could have an adverse effect on the Company's ability to obtain regulatory
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 an NDA 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 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 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.
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 filed an appeal, on June 7, 1999, with
the United States Circuit Court of Appeals for the 11th Circuit.
17
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Item 4. Submission of Matters to a Vote of Security Holders
On April 11, 2000, the Company held its 2000 Annual Meeting of Shareholders
in Miami, Florida. Only holders of record of Common Stock on March 1, 2000 (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 18,251,529 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 2001
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 17,914,504 6,160 None
Daniel M. Bell 17,914,403 6,261 None
Robert E. Baldini 17,914,489 6,175 None
John Brademas 17,914,789 5,875 None
Steven Jaharis 17,914,904 5,760 None
Louis C. Lasagna 17,914,804 5,860 None
Mark Novitch 17,914,889 5,775 None
Frederick B. Whittemore 17,914,904 5,760 None
Proposal 2: To amend the Kos Pharmaceuticals, Inc. 1996 Stock Option Plan to
increase from 4,000,000 to 7,000,000 the number of shares of the
Company's Common Stock that may be issued thereunder.
Set forth below is information regarding the shares of Common Stock voted
to amend the Kos Pharmaceuticals, Inc. 1996 Stock Option Plan.
Votes FOR 11,800,849
Votes AGAINST 1,889,327
Votes WITHHELD 40,490
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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, 2000.
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 17,905,132
Votes AGAINST 7,347
Votes WITHHELD 8,185
19
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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.
10.1+ Copromotion and Future Development Agreement dated
May 3, 2000, between the Company and DuPont
Pharmaceuticals Company.
10.2 Stock Purchase Agreement dated May 3, 2000, between
the Company and DuPont Pharmaceuticals 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, 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.
+ Certain confidential material contained in the document has been
omitted and filed separately with the Securities and Exchange
Commission pursuant to rule 24b-2 of the Securities Exchange Act
of 1934.
20
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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: August 10, 2000 By: /s/ Daniel M. Bell
---------------------
Daniel M. Bell, President and
Chief Executive Officer
Date: August 10, 2000 By: /s/ Juan F. Rodriguez
---------------------
Juan F. Rodriguez, Vice
President, Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit Description
------- -----------
10.1+ Copromotion and Future Development Agreement
dated May 3, 2000, between the Company and
DuPont Pharmaceuticals Company.
10.2 Stock Purchase Agreement dated May 3, 2000,
between the Company and DuPont
Pharmaceuticals Company.
27 Financial Data Schedule
-----
+ Certain confidential material contained in the document has been omitted
and filed separately with the Securities and Exchange Commission pursuant
to rule 24b-2 of the Securities Exchange Act of 1934.
22
