<PAGE>
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 June 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 July 31, 1998 were 6,325,000 and 1,000,
respectively.
<PAGE>
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, JUNE 30,
1997 1998
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 139,035 $ 52,186
Short-term investments 31,471 94,357
Prepaid and other current assets 157
--------- ---------
Total current assets 170,506 146,700
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TOTAL $ 170,506 $ 146,700
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Payable to Dura Pharmaceuticals, Inc. $ 8,399 $ 5,110
Accrued liabilities 26 152
--------- ---------
Total current liabilities 8,425 5,262
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STOCKHOLDERS' 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 168,977 168,960
Accumulated other comprehensive income (loss) 21 (71)
Accumulated deficit (6,924) (27,458)
--------- ---------
Total stockholders' equity 162,081 141,438
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TOTAL $ 170,506 $ 146,700
--------- ---------
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</TABLE>
See accompanying notes to financial statements.
2
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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 SIX (DATE OF
MONTHS MONTHS INCORPORATION)
ENDED ENDED THROUGH
JUNE 30, JUNE 30, JUNE 30,
1998 1998 1998
-------- -------- ------------------
<S> <C> <C> <C>
REVENUES:
Interest income $ 2,106 $ 4,439 $ 4,661
-------- -------- --------
EXPENSES:
Research and development 13,360 24,345 31,385
General and administrative 278 542 648
-------- -------- --------
Total expenses 13,638 24,887 32,033
-------- -------- --------
OPERATING LOSS BEFORE INCOME TAXES (11,532) (20,448) (27,372)
PROVISION FOR INCOME TAXES 60 86 86
-------- -------- --------
NET LOSS $(11,592) $(20,534) $(27,458)
-------- -------- --------
-------- -------- --------
NET LOSS PER SHARE:
Basic and diluted $ (1.83) $ (3.25) $ (4.34)
-------- -------- --------
-------- -------- --------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES:
Basic and diluted 6,325 6,325 6,325
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to financial statements.
3
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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
(DATE OF
SIX MONTHS INCORPORATION)
ENDED THROUGH
JUNE 30, JUNE 30,
1998 1998
---------- ------------------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $ (22,582) $ (22,354)
--------- ---------
INVESTING ACTIVITIES:
Purchases of short-term investments (88,103) (119,553)
Sales and maturities of short-term investments 25,125 25,125
--------- ---------
Net cash used in investing activities (62,978) (94,428)
--------- ---------
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 (86,849) 52,186
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 139,035
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 52,186 $ 52,186
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to financial statements.
4
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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 period is 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
stockholders' equity.
For the three and six months ended June 30, 1998, and the period September
23, 1997 (date of incorporation) through June 30, 1998, comprehensive loss
consisted of (in thousands):
<TABLE>
<CAPTION>
September 23,
1997
(date of
Three Months Six Months incorporation)
Ended Ended through
June 30, 1998 June 30, 1998 June 30, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net Loss $(11,592) $(20,534) $(27,458)
Other Comprehensive Income (Loss):
Unrealized Income (Loss)
on Investments 101 (92) (71)
-------- -------- --------
Comprehensive Loss $(11,491) $(20,626) $(27,529)
-------- -------- --------
-------- -------- --------
</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 release publicly the
results of any revisions to these forward-looking statements to reflect
events and circumstances arising after the date hereof.
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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.
RESULTS OF OPERATIONS
The Company incurred a net loss of $11,592,000, $20,534,000, and $27,458,000
for the three months ended June 30, 1998, six months ended June 30, 1998, and
for the period September 23, 1997 (date of incorporation) through June 30,
1998, respectively. For the three months and six months ended June 30, 1998,
research and development costs totaled $13,360,000 and $24,345,000,
respectively, and general and administrative expenses totaled $278,000 and
$542,000, 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 six months ended June 30,
1998 totaled $2,106,000 and $4,439,000, respectively.
7
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LIQUIDITY AND CAPITAL RESOURCES
The Company's initial capitalization totaled $169 million, consisting of net
proceeds from the Offering of approximately $94 million and a $75 million
contribution from Dura. At June 30, 1998, the Company had cash, cash
equivalents, and short-term investments totaling $146.5 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
pursuant to the various agreements described above. 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. 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.
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. 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
8
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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 use of albuterol with the Spiros system
("Albuterol Spiros-TM-"). 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.
There can be no assurance that 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,
9
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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 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, which include substantially
all of the available funds. In 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. Three 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
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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 they 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.
Furthermore, 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 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 COPD 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 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) and the
Spinhaler-Registered Trademark-(developed and marketed by Fisons Limited).
The Turbuhaler-Registered Trademark- (developed and marketed by 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. Recently 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 by
Glaxo 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 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
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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. Although Spiros Corp. II believes that its
current funding will be sufficient to enable it to advance three Spiros
Products through the FDA approval stage, there can be no assurance that this
will be the case. 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 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
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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
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 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 be impacted by the availability of adequate reimbursement from
third-party health care payers, 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 health care organizations are now controlling the pharmaceuticals
that are on their formulary lists. The resulting competition among
pharmaceutical companies
13
<PAGE>
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 through 1998. 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 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 products in connection with Spiros. 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 generators and will be required to significantly
scale up their activities. There can be no assurance that such third parties
will be successful in completing these activities in a timely manner or can
meet cGMP requirements. Any failure or delay in the scale up or supply
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, protect trade secrets and other proprietary
information 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 a 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 a 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
14
<PAGE>
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 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 given the competition among numerous pharmaceutical
companies, universities and research institutions for such personnel.
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, 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
15
<PAGE>
calculations using the Year 2000 date are a recognized risk. 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.
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. Securities were first offered on December 17, 1997, and
the offering closed on December 22, 1997. Merrill Lynch & Co. and Donaldson,
Lufkin & Jenrette Securities Corporation acted as managing underwriters of
the offering. The Units were sold to the public at an offering price of
$16.00 per Unit, with aggregate proceeds of $101.2 million. The Company
received all proceeds from the offering, which totaled $94 million, net of
offering expenses and underwriters' discounts of $7.2 million. Offering
expenses included $161,000 paid to Dura as reimbursement for direct costs
incurred by Dura in connection with the offering. The net proceeds from the
offering were invested in cash, cash equivalents and short-term investments.
As of June 30, 1998, the Company has used $22.4 million of its cash, cash
equivalents and short-term investments for its operating activities.
16
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 20, 1998, the Company's Annual Meeting of Stockholders was held at the
offices of the Company for the following purposes:
(a) The following five (5) directors were elected to serve one-year terms
to expire at the 1999 Annual Meeting of Stockholders:
For Against Withheld
--- ------- --------
Sol Lizerbram 5,431,966 0 16,900
Alain B. Schreiber 5,432,666 0 16,200
Robert S. Whitehead 5,432,666 0 16,200
Cam L. Garner 1,000 0 0
David S. Kabakoff 1,000 0 0
(b) The Stockholders ratified the appointment of Deloitte & Touche LLP as
the Company's independent public accountants for the year ending
December 31, 1998. The total number of votes cast for, against and
withheld were 5,440,491, 6,975 and 1,400, respectively.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
Exhibit No. Description
----------- -----------
(1) 3.1 Amended and Restated Certificate of Incorporation
(1) 3.2 Amended and Restated Bylaws
(2) 4.1 Purchase option held by Dura Pharmaceuticals, Inc. to purchase
all of the outstanding Callable Common Stock of the Company
(included in Exhibit 3.1)
(2) 4.2 Specimen Unit Certificate
(2) 4.3 Specimen Certificate of Callable Common Stock
4.4 Stock Certificate of Special Common Stock
27 Financial Data Schedule
17
<PAGE>
(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.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
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: August 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
(2) 4.1 Purchase option held by Dura Pharmaceuticals, Inc. to purchase
all of the outstanding Callable Common Stock of the Company
(included in Exhibit 3.1)
(2) 4.2 Specimen Unit Certificate
(2) 4.3 Specimen Certificate of Callable Common Stock
4.4 Stock Certificate of Special Common Stock
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.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
20
<PAGE>
THE SPECIAL COMMON STOCK, PAR VALUE $1.00, OF SPIROS DEVELOPMENT CORPORATION
II, INC., A DELAWARE COMPANY (THE "COMPANY"), EVIDENCED HEREBY ENTITLES THE
HOLDERS OF A MAJORITY OF THE SHARES OF SUCH SPECIAL COMMON STOCK TO PURCHASE
ALL, BUT NOT LESS THAN ALL, OF THE OUTSTANDING SHARES OF THE COMPANY'S
CALLABLE COMMON STOCK, PAR VALUE $0.001 PER SHARE (THE "CALLABLE COMMON
STOCK"), EXERCISABLE BY NOTICE GIVEN AT ANY TIME BEGINNING ON THE CLOSING
DATE OF THE OFFERING OF THE UNITS, EACH UNIT COMPRISED OF ONE SHARE OF
CALLABLE COMMON STOCK AND ONE WARRANT TO PURCHASE ONE-FOURTH OF ONE SHARE OF
THE COMMON STOCK OF DURA PHARMACEUTICALS, INC. AND ENDING ON THE EARLIER OF
(i) DECEMBER 31, 2002, (ii) THE 90TH DAY AFTER THE DATE THE COMPANY PROVIDES
SUCH HOLDER WITH QUARTERLY FINANCIAL STATEMENTS OF THE COMPANY SHOWING CASH
OR CASH EQUIVALENTS OF LESS THAN $5,000,000 OR (iii) THE DATE OF TERMINATION
BY THE COMPANY OF THAT CERTAIN TECHNOLOGY LICENSE AGREEMENT, DEVELOPMENT
AGREEMENT OR MANUFACTURING AND MARKETING AGREEMENT DATED ON OR ABOUT DECEMBER
22, 1997, ALL AS DESCRIBED IN THE AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION OF THE COMPANY. COPIES OF THE AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION OF THE COMPANY ARE AVAILABLE AT THE OFFICES OF THE COMPANY,
7475 LUSK BOULEVARD, SAN DIEGO, CALIFORNIA 92121, ATTENTION: MITCHELL R.
WOODBURY AND WILL BE FURNISHED TO ANY STOCKHOLDER OF THE COMPANY ON REQUEST
AND WITHOUT COST.
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD
OR OTHERWISE TRANSFERRED PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES, OR DELIVERY
OF AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF
THESE SECURITIES THAT SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION
IS IN COMPLIANCE WITH THE ACT.
THE COMPANY WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS A
COPY OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF SHARES OF THE COMPANY OR
SERIES THEREOF, AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH
PREFERENCES AND/OR RIGHTS.
No. S-1 *1,000 shares*
SPIROS DEVELOPMENT CORPORATION II, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
FULLY PAID AND NON-ASSESSABLE SPECIAL COMMON STOCK
PAR VALUE $1.00 PER SHARE
This certifies that Dura Pharmaceuticals, Inc. is the owner of One
Thousand (1,000) shares of Special Common Stock of Spiros Development
Corporation II, Inc., transferable on the books of the Company by the holder
thereof, in person or by duly authorized attorney, upon surrender of this
certificate properly endorsed. This certificate and the shares represented
hereby are
<PAGE>
subject to the laws of Delaware, and to the Amended and Restated Certificate
of Incorporation of the Company as now or hereafter amended (copies of which
are on file at the offices of the Company) which are made a part hereof with
the same force and effect as if they were set forth herein, to all of which
the holder, by acceptance hereof, assents.
IN WITNESS WHEREOF, the Company has caused the signatures of its duly
authorized officers and its corporate seal to be hereunto affixed.
Dated: December 18, 1997
/s/David S. Kabakoff /s/ Mitchell R. Woodbury
- -------------------- ------------------------
President Secretary
<PAGE>
The following abbreviations, when used in the inscription on the first page of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants in
common
UNIF GIFT MIN ACT . . . . . Custodian . . . . . . . . . . .
(Cust) (Minor)
under Uniform Gifts to Minors Act
. . . . . . . . . . . . . . . . .
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, _______________ hereby sells, assigns and transfers unto
_______________________________________________________________________________
(Please insert Social Security
or other identifying number of assignee)
_______________________________________________________________________________
(Please print or typewrite name and address
including postal zip code of assignee)
____________________________ shares of Special Common Stock represented by the
within certificate, and do hereby irrevocably constitute and appoint _________
______________________________________________________________________________
attorney, to transfer the said same on the books of the within named Company,
with full power of substitution in the premises.
Dated:________________________
_______________________________________
Signature
_______________________________________
Signature
Notice: The signature to this assignment must
correspond with the name as written upon the face of
the Certificate, in every particular, without alteration
or enlargement, or any change whatever.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET AS OF JUNE 30, 1998, AND THE RELATED STATEMENT OF
OPERATIONS FOR THE SIX MONTH PERIOD ENDED JUNE 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 52,186
<SECURITIES> 94,357
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 146,700
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 146,700
<CURRENT-LIABILITIES> 5,262
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 141,431
<TOTAL-LIABILITY-AND-EQUITY> 146,700
<SALES> 0
<TOTAL-REVENUES> 4,439
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 24,887
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (20,448)
<INCOME-TAX> 86
<INCOME-CONTINUING> (20,534)
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> (20,534)
<EPS-PRIMARY> $(3.25)
<EPS-DILUTED> $(3.25)
</TABLE>
