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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
__X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ________ to ________.
COMMISSION FILE NUMBER: 000-23501
SPIROS DEVELOPMENT CORPORATION II, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0774288
(State or other jurisdiction (I.R.S. Employer
or incorporation or organization) Identification No.)
7475 LUSK BLVD., SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (619) 457-2553
Indicate by check mark 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 ____
The number of shares of the Registrant's Callable Common Stock and Special
Common Stock outstanding as of October 30, 1998 were 6,325,000 and 1,000,
respectively.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
IN THOUSANDS, EXCEPT SHARE AMOUNTS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
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(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $139,035 $ 31,738
Short-term investments 31,471 103,494
Prepaid and other current assets 216
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Total current assets 170,506 135,448
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TOTAL $170,506 $135,448
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Payable to Dura Pharmaceuticals, Inc. $ 8,399 $ 4,949
Accrued liabilities 26 226
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Total current liabilities 8,425 5,175
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SHAREHOLDERS' EQUITY:
Special common stock, par value $1.00, 1,000 shares
authorized, issued, and outstanding 1 1
Callable common stock, par value $.001, 7,500,000 shares
authorized; 6,325,000 shares issued and outstanding 6 6
Additional paid-in capital 168,977 169,095
Accumulated other comprehensive income 21 376
Accumulated deficit (6,924) (39,205)
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Total shareholders' equity 162,081 130,273
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TOTAL $170,506 $135,448
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</TABLE>
See accompanying notes to financial statements.
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SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 23, 1997
THREE MONTHS NINE MONTHS (DATE OF
ENDED ENDED INCORPORATION)
SEPTEMBER 30, SEPTEMBER 30, THROUGH
1998 1998 SEPTEMBER 30, 1998
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<S> <C> <C> <C>
REVENUES:
Interest income $ 1,995 $ 6,434 $ 6,656
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EXPENSES:
Research and development 13,443 37,788 44,828
General and administrative 239 781 887
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Total expenses 13,682 38,569 45,715
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OPERATING LOSS BEFORE INCOME TAXES (11,687) (32,135) (39,059)
PROVISION FOR INCOME TAXES 60 146 146
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NET LOSS $(11,747) $(32,281) $(39,205)
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NET LOSS PER SHARE:
Basic and diluted $ (1.86) $ (5.10) $ (6.20)
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WEIGHTED AVERAGE NUMBER OF
COMMON SHARES:
Basic and diluted 6,325 6,325 6,325
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</TABLE>
See accompanying notes to financial statements.
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SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
IN THOUSANDS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 23, 1997
NINE MONTHS (DATE OF
ENDED INCORPORATION)
SEPTEMBER 30, THROUGH
1998 SEPTEMBER 30, 1998
-------------- ------------------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $ (34,340) $ (34,112)
-------------- ------------------
INVESTING ACTIVITIES:
Purchases of short-term investments (115,949) (147,399)
Sales and maturities of short-term investments 44,281 44,281
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Net cash used in investing activities (71,668) (103,118)
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FINANCING ACTIVITIES:
Net proceeds from issuance of special common and callable
common stock 93,968
Contribution from Dura Pharmaceuticals, Inc. for purchase option 75,000
Decrease in payable to Dura Pharmaceuticals, Inc. for
issuance costs (1,289)
-------------- ------------------
Net cash provided by (used in) financing activities (1,289) 168,968
-------------- ------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (107,297) 31,738
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 139,035
-------------- ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 31,738 $ 31,738
-------------- ------------------
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</TABLE>
See accompanying notes to financial statements.
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SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by Spiros
Development Corporation II, Inc. ("Spiros Corp. II" or the "Company") in
accordance with the instructions to Form 10-Q. The financial statements
reflect all adjustments, consisting of only normal recurring accruals which
are, in the opinion of management, necessary for a fair statement of the
results of the periods presented. For more complete financial information,
these financial statements and notes thereto should be read in conjunction
with the audited financial statements and notes thereto for the period
September 23, 1997 (date of incorporation) through December 31, 1997 included
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission. The results of operations for the interim periods are
not necessarily indicative of results to be expected for any other interim
period or for the year as a whole.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported in the financial statements and related notes.
Changes in those estimates may affect amounts reported in future periods.
2. ORGANIZATION
Spiros Corp. II was incorporated in the state of Delaware on September 23,
1997 for the purpose of continuing the development of Spiros-Registered
Trademark-, a dry powder pulmonary drug delivery system, and conducting
formulation work, clinical trials and commercialization for certain specified
leading asthma and chronic obstructive pulmonary disease ("COPD") drugs for
use with Spiros. The Company commenced operations on December 22, 1997,
completing an initial public offering (the "Offering") of 6,325,000 Units,
each Unit consisting of one share of callable common stock of the Company and
one warrant to purchase one-fourth of one share of Dura Pharmaceuticals, Inc.
("Dura") common stock. The offering resulted in net proceeds to the Company
of approximately $94 million. Concurrently, Dura contributed $75 million
to the Company. Substantially all funds from the Offering, the $75 million
contribution and interest earned thereon, are expected to be paid to Dura for
the development and commercialization of certain drugs for use with Spiros
pursuant to various agreements with Dura.
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3. NEW ACCOUNTING STANDARD
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 requires reporting and displaying comprehensive income (loss) and
its components which, for Spiros Corp. II, includes net loss and unrealized
income (loss) on investments. In accordance with SFAS 130, the accumulated
balance of other comprehensive income is disclosed as a separate component of
shareholders' equity.
For the three and nine months ended September 30, 1998, and the period
September 23, 1997 (date of incorporation) through September 30, 1998,
comprehensive loss consisted of (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 23, 1997
THREE MONTHS NINE MONTHS (DATE OF
ENDED ENDED INCORPORATION)
SEPTEMBER 30, SEPTEMBER 30, THROUGH
1998 1998 SEPTEMBER 30, 1998
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<S> <C> <C> <C>
Net Loss $(11,747) $(32,281) $(39,205)
Other Comprehensive Income:
Unrealized Income
on Investments 447 355 376
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Comprehensive Loss $(11,300) $(31,926) $(38,829)
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</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This information should be read in conjunction with the financial statements
and the notes thereto included in Item 1 of this Quarterly Report and the
audited financial statements and notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations for the period
September 23, 1997 (date of incorporation) through December 31, 1997 included
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission. This report on Form 10-Q may contain certain
forward-looking statements concerning the Company's business. See "Risks and
Uncertainties" for a discussion of factors known to the Company that could
cause reported financial information not to be necessarily indicative of
future results. The Company undertakes no obligation to
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release publicly the results of any revisions to these forward-looking
statements to reflect events and circumstances arising after the date hereof.
GENERAL
Spiros Corp. II was incorporated on September 23, 1997 for the purpose of
continuing the development of Spiros-Registered Trademark-, a dry powder
pulmonary drug delivery system, and to conduct formulation work, clinical trials
and commercialization for certain specified leading asthma and chronic
obstructive pulmonary disease ("COPD") drugs for use with Spiros ("Spiros
Products"). The Company commenced operations on December 22, 1997.
On December 22, 1997, the Company and Dura completed an initial public offering
of 6,325,000 Units (the "Units"), each Unit consisting of one share of Callable
Common Stock ("Common Stock") of the Company and one warrant (the "Warrant") to
purchase one-fourth of one share of Dura common stock at a price of $54.84 per
share. The Offering resulted in net proceeds to the Company of approximately
$94 million. Concurrently, Dura contributed $75 million to the Company.
Substantially all funds from the Offering and the $75 million contribution from
Dura and interest earned thereon, are expected to be paid to Dura for the
development and commercialization of certain drugs for use with Spiros pursuant
to various agreements with Dura. Through December 31, 1999, the Units will
trade publicly. Effective January 1, 2000, the Units will separate into the two
underlying securities.
Dura has an irrevocable option (the "Purchase Option") to purchase all, but
not less than all, of the issued and outstanding shares of the Company's
Common Stock at predetermined prices. Dura may exercise the Purchase Option
at any time through the earlier of (a) December 31, 2002, (b) the 90th day
after the date the Company provides Dura with quarterly financial statements
of the Company showing cash or cash equivalents of less than $5 million,
although Dura may extend such period by providing additional funding for the
continued development of Spiros, but in no event beyond December 31, 2002, or
(c) upon termination of the technology license, development, or the
manufacturing agreements between the Company and Dura. If the Purchase
Option is exercised, the per share price will be $24.01 before January 1,
2000, increasing on a quarterly basis to $45.95 per share through December
31, 2002. The purchase price may be paid, at Dura's discretion, in cash,
shares of Dura common stock, or any combination thereof.
On November 4, 1998, Spiros Corp. II and Dura announced the receipt of a
complete response letter from the U.S. Food and Drug Administration ("FDA")
indicating that the new drug application ("NDA") submitted by Dura on behalf
of Spiros Corp. II for the use of albuterol with the Spiros system
("Albuterol Spiros -TM-") is not approvable until and unless certain
deficiencies are addressed. The FDA has requested additional clinical trials
on the to-be-marketed Spiros inhaler in order to ensure inhaler reliability
and replicate clinical outcomes of the initial trials. The FDA has also
requested the resolution of a number of chemistry, manufacturing, and control
issues. The letter also raised certain issues regarding electromechanical
reliability. During the clinical trials, Dura made improvements to the Spiros
inhaler which it believes have addressed these issues. Representatives from
Dura, the
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Company, and the FDA are scheduled to meet to develop a mutually agreed upon
plan to resolve these issues.
RESULTS OF OPERATIONS
The Company incurred a net loss of $11,747,000, $32,281,000, and $39,205,000 for
the three months ended September 30, 1998, nine months ended September 30, 1998,
and for the period September 23, 1997 (date of incorporation) through September
30, 1998, respectively. For the three months and nine months ended September 30,
1998, research and development costs totaled $13,443,000 and $37,788,000,
respectively, and general and administrative expenses totaled $239,000 and
$781,000, respectively. The research and development expenses were for Spiros
related activities performed by Dura pursuant to a development agreement. The
Company's interest income for the three months and nine months ended September
30, 1998 totaled $1,995,000 and $6,434,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's initial capitalization totaled approximately $169 million,
consisting of net proceeds from the Offering of approximately $94 million and a
$75 million contribution from Dura. At September 30, 1998, the Company had cash,
cash equivalents, and short-term investments totaling $135.2 million. The
Company believes that its working capital and expected cash flows from its cash
and short-term investments will be sufficient to fund its cash requirements
through at least the next twelve months.
Spiros Corp. II relies on Dura for its operating and financial systems. The
Company has made inquiries of Dura and Dura has stated that it recognizes
the need to ensure its operations will not be adversely impacted by the
inability of Dura's systems to process data having dates on or after January
1, 2000 ("Year 2000"). Processing errors due to software failure arising
from calculations using the Year 2000 date are a recognized risk. Spiros
Corp. II is relying entirely on Dura to address the Year 2000 compliance
issues. Dura has indicated that it is currently addressing the risk, with
respect to the availability and integrity of its financial systems and the
reliability of its operating systems, and is in the process of communicating
with suppliers, customers, financial institutions and others with whom it
conducts business to assess whether they are Year 2000 compliant. While the
Company believes that Dura's planning efforts are adequate to address the
Year 2000 concerns, there can be no assurance that the systems of other
companies on which Dura's systems and operations rely will be converted on a
timely basis and will not have a material effect on the Company. In
addition, the potential impact of the Year 2000 on others with whom the
Company, through agreements with Dura, does business cannot be reasonably
estimated at this time. The cost of Dura's Year 2000 initiatives will be paid
entirely by Dura.
8
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RISKS AND UNCERTAINTIES
FORWARD-LOOKING STATEMENTS. The Company cautions readers that the statements in
this quarterly report that are not descriptions of historical facts may be
forward-looking statements that are subject to risks and uncertainties. Actual
results could differ from those currently anticipated due to a number of
factors, including those identified below.
DEVELOPMENT RISKS ASSOCIATED WITH SPIROS. Spiros will require significant
additional development efforts. There can be no assurance that development of
Spiros will be completed successfully, that Spiros will not encounter
problems in clinical trials that will cause the delay or suspension of such
trials, that current or future testing will show any Spiros Product to be
safe or efficacious, or that any Spiros Product will receive regulatory
approval in a timely manner, if at all. In addition, regulatory approvals
will have to be obtained for each drug to be delivered through the use of
Spiros prior to commercialization. Moreover, even if Spiros does receive
regulatory approval, there can be no assurance that Spiros will be
commercially successful, have all of the patent and other protections
necessary to prevent competitors from producing similar products and not
infringe on patent or other proprietary rights of third parties. The failure
of the Spiros Products being developed by the Company to receive timely
regulatory approval and achieve commercial success would have a material
adverse effect on the Company.
GOVERNMENT REGULATION; NO ASSURANCE OF FDA APPROVAL. Development, testing,
manufacturing and marketing of pharmaceutical products, including drug
delivery systems, are subject to extensive regulation by numerous
governmental authorities in the U.S. and other countries. The process of
obtaining FDA approval of pharmaceutical products and drug delivery systems
is costly and time consuming. Any new pharmaceutical product must undergo
rigorous preclinical and clinical testing and an extensive regulatory
approval process mandated by the FDA. Such regulatory review includes the
determination of manufacturing capability and product performance. Marketing
of drug delivery systems also requires FDA approval, which can be costly and
time consuming to obtain. A separate regulatory approval will need to be
obtained for each Spiros Product.
Dura, on the Company's behalf, has submitted an abbreviated NDA called a
505(b)(2) application for the Albuterol Spiros-TM- in November 1997. Dura, on
the Company's behalf, expects to submit an abbreviated NDA for the use of other
drugs with the Spiros system. No assurances can be given that all of the drugs
identified for development with Spiros will be suitable for, or approved under,
abbreviated application procedures. Certain abbreviated application procedures
have been the subject of petitions filed by brand name manufacturers which seek
changes in the FDA's approval process for such abbreviated applications. These
requested changes include, among other things, disallowance of the use by an
applicant of an abbreviated application with data considered proprietary by the
original manufacturer that was submitted to the FDA as part of an original NDA.
Neither the Company nor Dura is able to predict at this time whether the FDA
will make any changes to its abbreviated application procedures as a result of
such petitions or the effect that such changes or challenges may have on the
Company.
9
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On November 4, 1998, Spiros Corp. II and Dura announced the receipt of a
complete response letter from the FDA (the "FDA Letter") relating to the
Albuterol Spiros -TM- NDA filed by Dura on behalf of Spiros Corp. II in
November 1997. The FDA Letter indicated that the Albuterol Spiros -TM- NDA
was not approvable until and unless certain deficiencies are addressed, and
raised issues including but not limited to chemistry, manufacturing and
control, and electromechanical properties and reliability of the inhaler. The
FDA has indicated that an additional clinical trial or trials will be
necessary to address the issues raised in the FDA Letter. Such trial or
trials may be costly and time-consuming. There can be no assurance that such
trial or trials will be successful, and/or that regulatory approval of the
Albuterol Spiros -TM- product will be obtained. In any event, conduct of such
additional trials would result in a substantial delay in the marketing
approval and launch, if any, of the Albuterol Spiros -TM- product.
There can be no assurance that any of the Spiros Products currently in
development by the Company will be approved by the FDA. In addition, there
can be no assurance that all necessary approvals will be granted for future
products or that FDA review or actions will not involve delays caused by the
FDA's request for additional information or testing that could adversely
affect the time to market and sale of the products. Failure to comply with
applicable regulatory requirements can, among other things, result in the
suspension of regulatory approval, as well as possible civil and criminal
sanctions.
NO DEVELOPMENT, MANUFACTURING OR MARKETING CAPABILITY. Spiros Corp. II has no
development, manufacturing or marketing capabilities. Spiros Corp. II is
obligated to only utilize Dura's development capability during the term of the
Development Agreement between Dura and the Company and Dura's manufacturing
facilities for manufacturing during the term of the Manufacturing and Marketing
Agreement between Dura and the Company. Dura has the right under the
Manufacturing and Marketing Agreement to use contract manufacturers and
currently plans to rely on third parties to manufacture certain components of
Spiros. There can be no assurance that Dura's facilities or those of its
contract manufacturers will be satisfactory for the needs of Spiros Corp. II. In
addition, Dura or its contract manufacturers, as the case may be, may require
additional FDA approval prior to commencing manufacturing of Spiros Products.
There can be no assurance that the Spiros Products can be manufactured, whether
by Dura or a contract manufacturer, on a commercial scale at a commercially
reasonable cost or on a timely basis. In addition, Spiros Corp. II has no
experience in sales, marketing or distribution. Under the Manufacturing and
Marketing Agreement, Dura has been granted exclusive worldwide marketing rights
to the Spiros Products. There can be no assurance that Dura's sales and
marketing force will be able to establish commercially successful sales and
distribution capabilities for any of the Spiros Products.
DEPENDENCE ON DURA. Substantially all of the Company's available funds will be
paid to Dura under the Development Agreement. Payments under the Development
Agreement will be made for the full amount of all of Dura's research and
development expenses, general and administrative expenses, capital equipment
costs and all other costs and expenses incurred by Dura in performing the
activities, on behalf of Spiros Corp. II, up to the maximum amount of funds
available to Spiros Corp. II. In
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addition, Dura will be primarily responsible for the marketing and
manufacturing of the Spiros Products, if any are commercialized prior to the
expiration of the Purchase Option. Spiros Corp. II is not expected to have
its own research, development, clinical, licensing, administration,
manufacturing or marketing employees or facilities and thus will be entirely
dependent on Dura in these areas. Subject to their respective obligations
under the Development Agreement and consistent with commercially reasonable
practices, Dura will have sole discretion to determine the allocation of its
research, development, clinical, licensing, administration, manufacturing and
marketing employees and facilities. Although Dura believes that its personnel
and facilities currently are, or in the future will be, adequate for the
performance of its duties under the Development Agreement and the
Manufacturing and Marketing Agreement, Dura's proprietary and collaborative
development, licensing, manufacturing and marketing projects may compete for
time and resources with projects undertaken by Spiros Corp. II pursuant to
the Development Agreement and the Manufacturing and Marketing Agreement,
thereby delaying development, manufacture and marketing of the Spiros
Products. Any material adverse change in the business or financial condition
of Dura could have a material adverse effect upon Spiros Corp. II.
COMMON MANAGEMENT. The Company's agreements with Dura, consisting of the
Technology Agreement, the Development Agreement, the Manufacturing and Marketing
Agreement and the Albuterol and Product Option Agreement (collectively, the
"Major Agreements") were approved by Dura, as controlling shareholder of Spiros
Corp. II at the time the Major Agreements were executed, which, in such
capacity, may have influenced the Board of Directors of Spiros Corp. II to enter
into such agreements. Two of the current members of the Board of Directors of
Spiros Corp. II are persons who are directors and/or officers of Dura and each
of the three officers of the Company are officers of Dura.
ABSENCE OF OPERATING HISTORY; NO ASSURANCE OF PROFITABILITY; LACK OF DIVIDENDS.
Spiros Corp. II was recently formed and has no operating history upon which
investors may base an evaluation of its likely financial performance. Spiros
Corp. II anticipates that substantially all of its available funds may be
expended prior to the earliest receipt of any significant revenues by Spiros
Corp. II, resulting in significant losses. Further, even if the Spiros Products
are developed in accordance with the Development Agreement and marketed pursuant
to the Manufacturing and Marketing Agreement, there can be no assurance that any
of them can be marketed profitably. Even if such Spiros Products are
commercialized profitably, the initial losses incurred by Spiros Corp. II may
never be recovered. Spiros Corp. II is prevented from paying dividends on the
Spiros Corp. II Common Stock without the approval of Dura, and accordingly, does
not expect to pay any dividends.
COMPETITION. Many companies, including large pharmaceutical firms with
financial and marketing resources and development capabilities substantially
greater than those of Spiros Corp. II, are engaged in developing, marketing
and selling products that compete with those planned to be offered. The
selling prices of such products typically decline as competition increases.
Further, other products now in use or under development by others may be more
effective than the Company's future products. The industry is characterized
by rapid technological change, and competitors may develop their products
more rapidly than the
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Company. Competitors may also be able to complete the regulatory process
sooner, and therefore, may begin to market their products in advance of the
Company's products. The Company believes that competition among pulmonary
drug delivery systems aimed at the asthma and chronic obstructive pulmonary
disease markets will be based on, among other things, product efficacy,
safety, reliability, availability and price.
There are at least 10 companies currently involved in the development,
marketing or sales of dry powder pulmonary drug delivery systems. There are
two types of dry powder inhalers ("DPIs") currently in commercial use
worldwide, individual dose and multiple dose. Individual dose DPIs currently
marketed in the U.S. include the Rotohaler-TM- (developed and marketed by
Glaxo Wellcome ("Glaxo")) and the Spinhaler-Registered Trademark- (developed
and marketed by Fisons Limited). The Turbuhaler-Registered Trademark-
(developed and marketed by Astra Pharmaceuticals, Inc. ("Astra")), a multiple
dose DPI, is the leading DPI in worldwide sales. In June 1997, the FDA
approved the first Turbuhaler product, the Pulmicort Turbuhaler, for
marketing in the U.S., which Astra launched in early 1998. The FDA also
approved two multiple dose DPIs developed by Glaxo, the Flovent-Registered
Trademark-Rotadisk-Registered Trademark- and the Serevent-Registered
Trademark-Diskus-Registered Trademark-, both launched in early 1998.
NO ASSURANCE OF EXERCISE OF DURA'S OPTIONS. Dura has the option through
specified dates to acquire Spiros Corp. II's exclusive rights for the use of
Spiros with albuterol (the "Albuterol Option") and with a second product
other than albuterol (the "Product Option") for cash. Dura is not obligated
to exercise the Purchase Option, the Albuterol Option or the Product Option,
and it will exercise such options only if, in the opinion of Dura's Board of
Directors, it is in Dura's best interest to do so. Even if any of the Spiros
Products are developed and approved, if Dura does not exercise the Purchase
Option, Spiros Corp. II will be required to find alternative ways to
commercially market or exploit the Spiros Products and there can be no
assurance that Spiros Corp. II will be able to do so. If, in the event Dura
fails to exercise the Purchase Option, and Spiros Corp. II determines to
market the Spiros Products itself, Spiros Corp. II will require substantial
additional funds. There can be no assurance that such funds will be available
on attractive terms, if at all. Similarly, if Spiros Corp. II determines to
license the Spiros Products to third parties, such arrangements, if
available, may be on terms less favorable to Spiros Corp. II than the terms
of Spiros Corp. II's arrangements with Dura.
NO ASSURANCE OF SUFFICIENT FUNDS. There can be no assurance that Spiros
Corp. II has sufficient funding to enable it to advance any of the Spiros
Products through the FDA approval stage. Until the expiration of the Purchase
Option, Spiros Corp. II is significantly restricted from raising additional
funds without Dura's consent and there can be no assurance that Spiros Corp.
II will have sufficient funds to successfully develop any Spiros Products.
While Dura may, at its sole option, provide funds for further development of
the Spiros Products, it is not obligated to do so. If the Purchase Option is
not exercised, Spiros Corp. II would have to raise substantial funding while
hiring, or otherwise obtaining access to, research and management personnel.
NO ASSURANCE THAT THE PURCHASE OPTION WILL BE REPRESENTATIVE OF THE VALUE OF
SPIROS CORP. II. The Purchase Option exercise price was determined and set
forth in the Spiros Corp. II Amended and Restated Certificate of Incorporation
as of the date of the closing of the Offering
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and therefore may not be representative of the value of the Spiros Corp. II
callable common stock at the time of the exercise of the Purchase Option.
POTENTIAL COMPETITION FROM DURA. Dura is engaged in ongoing licensing and
development of new products. While Dura has exclusively licensed the rights
to develop, manufacture and commercialize the Spiros Products in connection
with the Spiros technology to Spiros Corp. II, Dura is not prohibited from
developing other products using Spiros, including those that may compete with
the Spiros Products, or from in-licensing or acquiring products that may
compete with the Spiros Products. Dura's activities may, in some
circumstances, lead to the development, in-licensing or acquisition of
products that compete with the Spiros Products being developed by Spiros Corp
II. It is possible that Dura's rights with respect to such competitive
products could reduce Dura's incentive to exercise the Albuterol Option, the
Product Option or the Purchase Option.
ABILITY OF SPECIAL STOCKHOLDER TO LIMIT CERTAIN SPIROS CORP. II ACTIVITIES.
Pursuant to the Company's Amended and Restated Certificate of Incorporation,
until the expiration of the Purchase Option, no resolution or act of the
Company to authorize or permit any of the following will be effective without
the prior written approval of Dura as the holder of all of the outstanding
Special Common Stock (the "Special Shares"): (i) the allotment or issue of
shares or other securities of the Company or the creation of any right to
such an allotment or issue; (ii) the reduction of the Company's authorized
capital stock; (iii) the alteration of or any change to the rights, powers,
preferences and restrictions of the Special Shares; (iv) outstanding
borrowings of an aggregate of more than $1 million at any one time; (v) the
sale or other disposition of or the creation of any lien or liens on the
whole or a material part of the Company's business or assets; (vi) the
declaration or payment of dividends or the making of any other distributions
to the Company's stockholders; (vii) the merger, consolidation or
reorganization of the Company with or into any other corporation; (viii) the
sale, liquidation or other disposition of all or substantially all of the
assets of the Company; (ix) the alteration or amendment of Articles IV or VII
of the Company's Amended and Restated Certificate of Incorporation; and (x)
the adoption, amendment or repeal of the Bylaws of the Company. Accordingly,
Dura could preclude the holders of a majority of the outstanding Spiros Corp.
II Common Stock and the Board of Directors of Spiros Corp. II from taking any
of the foregoing actions during such period. Dura, as holder of all of the
outstanding Special Shares, may transfer or sell all, but not less than all,
of such shares. As a result, an unrelated third party may acquire rights
associated with the Special Shares, including the rights discussed in this
section and the right to exercise the Albuterol Option, the Product Option
and the Purchase Option. There can be no assurance that any transferee of
the Special Shares will have the same financial resources or development,
manufacturing or marketing capabilities as Dura, which may have a material
adverse effect on the likelihood of the exercise of the Albuterol Option, the
Product Option or the Purchase Option.
POTENTIAL LOSS OF TECHNOLOGY BY SPIROS CORP. II. Under the Development
Agreement, Spiros Corp. II is obligated to make payments to Dura equal in the
aggregate to substantially all of its available funds. If Spiros Corp. II
does not use its available funds as provided in the Development Agreement or
otherwise breaches any of its material obligations under the Major
13
<PAGE>
Agreements, Dura has the right to terminate the Technology Agreement, the
Development Agreement and the Manufacturing and Marketing Agreement, and
thereby reacquire rights to all technology licensed to Spiros Corp. II
thereunder, including improvements made to such technology using funds
provided by Spiros Corp. II. In the event of such a termination by Dura, it
is unlikely that Dura would exercise the Albuterol Option, the Product Option
or the Purchase Option.
ACCELERATION OF PURCHASE OPTION. If Spiros Corp. II terminates all Major
Agreements due to a material breach of any of the Major Agreements by Dura,
the Purchase Option automatically accelerates. The Purchase Option also
terminates in the event of certain voluntary or involuntary bankruptcy events
affecting Dura or an uncured material breach by Dura under any of its
material loan agreements. There can be no assurance that, at that time, the
development of any of the Spiros Products will have progressed to a point
where Dura will have sufficient information to determine whether to exercise
the Purchase Option. As a result, Dura may determine not to exercise the
Purchase Option. There can be no assurance that, upon termination of the
Development Agreement by Spiros Corp. II as described above, alternative
arrangements for the development of some or all of the Spiros Products could
be made or that such development of the Spiros Products by Spiros Corp. II
would be successful.
THIRD-PARTY REIMBURSEMENT; PRICING PRESSURES. The Company's commercial
success will depend in part on the availability of adequate reimbursement
from third-party healthcare payors, such as government and private health
insurers and managed care organizations. Third-party payors are increasingly
challenging the pricing of medical products and services. There can be no
assurance that reimbursement will be available to enable the Company to
achieve market acceptance of its products, if approved, or to maintain price
levels sufficient to realize an appropriate return on the Company's
investment in development. The market for the Company's products, if
approved, may be limited by actions of third-party payors. For example, many
managed healthcare organizations are now controlling the pharmaceuticals that
are on their formulary lists. The resulting competition among pharmaceutical
companies to place their products on these formulary lists has created a
trend of downward pricing pressure in the industry. In addition, many
managed care organizations are pursuing various ways to reduce pharmaceutical
costs and are considering formulary contracts primarily with those
pharmaceutical companies that can offer a full line of products for a given
therapy sector or disease state. There can be no assurance that the
Company's products, if approved, will be included on the formulary lists of
managed care organizations or that downward pricing pressure in the industry
generally will not negatively impact the Company's operations.
LIMITED MANUFACTURING EXPERIENCE. Dura's principal manufacturing facility is
intended to be used to formulate, mill, blend and manufacture drugs to be
used with Spiros, pending regulatory approval. Equipment purchases and
validation are currently scheduled into 1999. Dura's manufacturing facility
must be registered with and licensed by various regulatory authorities and
must comply with current Good Manufacturing Practice ("cGMPs") requirements
prescribed by the FDA and the State of California. Dura will need to
significantly scale up its current manufacturing operations and comply with
cGMPs and other regulations prescribed by
14
<PAGE>
various regulatory agencies in the U.S. and other countries to achieve the
prescribed quality and required levels of production of such products to
obtain marketing approval. Any failure or significant delay in the
validation of or obtaining a satisfactory regulatory inspection of the new
facility, failure to successfully scale up or failure to maintain necessary
regulatory approvals for such facilities could have a material adverse effect
on the ability of Dura to manufacture any of the Spiros Products. Dura
intends to utilize third parties to produce components of and assemble the
Spiros aerosol generator. Such third parties have only produced limited
quantities of components and assembled limited numbers of generators and will
be required to significantly scale up their activities and to produce
components on a timely and consistent basis and which meet applicable
specifications. There can be no assurance that such third parties will be
successful in attaining acceptable service levels or meeting cGMP
requirements. Any failure or delay in the scale-up or supply or meeting cGMP
requirements associated with aerosol generator manufacturing would have a
material adverse effect on the ability of Dura to manufacture Spiros Products.
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY TECHNOLOGY; UNPREDICTABILITY OF
PATENT PROTECTION. The Company's success will depend in part on its ability
to obtain patents, maintain trade secrets and operate without infringing upon
the proprietary rights of others both in the U.S. and abroad. There can be
no assurance that patent applications for any Spiros Product will be
approved, that Spiros Corp. II will develop any Spiros Product to the point
that it is patentable, that any issued patents for any Spiros Product will
provide Spiros Corp. II with adequate protection or will not be challenged by
others, or that the patents of others will not impair the ability of Spiros
Corp. II to do business. Furthermore, there can be no assurance that others
will not independently develop similar products, duplicate any unpatented
Spiros Products or design around any patented Spiros Products in development
or marketed by Spiros Corp. II.
The Company will rely on secrecy to protect technology where patent
protection is not believed to be appropriate or obtainable. There can be no
assurance that any confidentiality agreement entered into by Dura with third
parties will not be breached, that Spiros Corp. II will have adequate
remedies for any breach, that others will not independently develop
substantially equivalent proprietary information or that third parties will
not otherwise gain access to proprietary information concerning the Spiros
Products or program technology.
The Company may be required to obtain licenses to patents or other
proprietary rights of others. No assurance can be given that any licenses
required under any such patents or proprietary rights would be made available
on terms acceptable to the Company, if at all. If the Company does not obtain
such licenses, it could encounter delays in Spiros product market
introductions or could find that the development, manufacture or sale of the
Spiros Products requiring such licenses could be foreclosed. Moreover, the
Company could incur substantial costs and diversion of management time in
defending itself in any suits brought against it claiming infringement of the
patent rights of others or in asserting the Company's patent rights.
The Company is aware of foreign patents granted to third parties in the
United Kingdom that claim proprietary rights in areas that may overlap with
certain Spiros technology. In the event that the Company determines to
market any Spiros Product in the United Kingdom and further
15
<PAGE>
determines that such activity would infringe upon such third party patents,
the Company may need to either design around these patents, obtain licenses
to such patents, or avoid marketing products in the United Kingdom and other
areas in Europe in which these patents provide protection. There can be no
assurance that patents or patent applications do not exist or will not exist
in the future that may materially affect the Company's ability to make, use
or sell any current or future products.
ATTRACTION AND RETENTION OF KEY PERSONNEL. The Company will be highly
dependent on the principal members of Dura's scientific and management staff,
the loss of whose services might impede the achievement of development
objectives. Recruiting and retaining management and operational personnel and
qualified scientific personnel to perform research and development work for
the Company will also be critical to the Company's success. Although the
Company believes Dura will be successful in attracting and retaining skilled
and experienced management, operational and scientific personnel, there can
be no assurance that Dura will be able to attract and retain such personnel
on acceptable terms.
VOLATILITY OF THE COMPANY'S STOCK PRICE. The market prices for securities of
emerging companies have historically been highly volatile. Future
announcements concerning the Company, Dura or their competitors may have a
significant impact on the market price of the Units. Such announcements
might include financial results, the results of testing, regulatory
developments, technological innovations, new commercial products, changes to
government regulations, government decisions on commercialization of
products, developments concerning proprietary rights, litigation or public
concern as to safety of Spiros Corp. II's and Dura's products.
YEAR 2000 COMPLIANCE CONSIDERATIONS. Spiros Corp. II relies on Dura for its
operating and financial systems pursuant to the various agreements described.
The Company has made inquiries of Dura and Dura has stated that it
recognizes the need to ensure its operations will not be adversely impacted
by the inability of Dura's systems to process data having dates on or after
January 1, 2000 ("Year 2000"). Processing errors due to software failure
arising from calculations using the Year 2000 date are a recognized risk.
Spiros Corp. II is relying entirely on Dura to address Year 2000 compliance
issues. Dura has indicated that it is currently addressing the risk, with
respect to the availability and integrity of its financial systems and the
reliability of its operating systems, and is in the process of communicating
with suppliers, customers, financial institutions and others with whom it
conducts business to assess whether they are Year 2000 compliant. While the
Company believes that Dura's planning efforts are adequate to address the
Year 2000 concerns, there can be no assurance that the systems of other
companies on which Dura's systems and operations rely will be converted on a
timely basis and will not have a material effect on the Company. In
addition, the potential impact of the Year 2000 on others with whom the
Company, through agreements with Dura, does business cannot be reasonably
estimated at this time. The cost of Dura's Year 2000 initiatives will be
paid entirely by Dura.
16
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
PART II - OTHER INFORMATION
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
Use of Proceeds from Registered Securities
On December 22, 1997, the Company and Dura completed the offering of
6,325,000 Units, each Unit consisting of one share of Common Stock of the
Company and one Warrant to purchase one-fourth of one share of Dura common
stock, pursuant to a registration statement on Form S-1/S-3 (No.
333-37673/37673-01). The registration statement was declared effective on
December 16, 1997. The net proceeds from the offering were invested in cash,
cash equivalents and short-term investments. As of September 30, 1998, the
Company has used $34.1 million of its cash, cash equivalents and short-term
investments for its operating activities and has $162.1 million of working
capital.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
(1) 3.1 Amended and Restated Certificate of Incorporation
(1) 3.2 Amended and Restated Bylaws
27 Financial Data Schedule
(1) Incorporated by reference to the Company's Registration Statement on
Forms S-1/S-3 (No. 333-37673/37673-01) filed on October 10, 1997, as
amended.
17
<PAGE>
(b) Reports on Form 8-K
None.
18
<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.
SPIROS DEVELOPMENT CORPORATION II, INC.
Date: November 13, 1998 /s/ Erle T. Mast
----------------- ----------------------------
(Erle T. Mast)
Vice President, and Chief
Financial Officer
(Principal Financial Officer)
19
<PAGE>
EXHIBIT INDEX
TO
FORM 10-Q
SPIROS DEVELOPMENT CORPORATION II, INC.
EXHIBIT NO. DESCRIPTION
----------- -----------
(1) 3.1 Amended and Restated Certificate of Incorporation
(1) 3.2 Amended and Restated Bylaws
27 Financial Data Schedule
(1) Incorporated by reference to the Company's Registration Statement on
Forms S-1/S-3 (No. 333-37673/37673-01) filed on October 10, 1997, as
amended.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET AS OF SEPTEMBER 30, 1998, AND THE RELATED STATEMENT OF
OPERATIONS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND THE NOTES
THERETO, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 31,738
<SECURITIES> 103,494
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 135,448
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 135,448
<CURRENT-LIABILITIES> 5,175
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 130,266
<TOTAL-LIABILITY-AND-EQUITY> 135,448
<SALES> 0
<TOTAL-REVENUES> 6,434
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 38,569
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (32,135)
<INCOME-TAX> 146
<INCOME-CONTINUING> (32,281)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32,281)
<EPS-PRIMARY> $(5.10)
<EPS-DILUTED> $(5.10)
</TABLE>
