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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 March 31, 1999
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 April 23, 1999 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 AND PER SHARE AMOUNTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ASSETS 1998 1999
------------ ---------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 20,535 $ 27,214
Short-term investments 103,069 84,903
Other current assets 192 168
--------- ---------
Total current assets 123,796 112,285
--------- ---------
TOTAL $ 123,796 $ 112,285
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Payable to Dura Pharmaceuticals, Inc. $ 4,597 $ 5,008
Accrued Liabilities 281 185
--------- ---------
Total current liabilities 4,878 5,193
--------- ---------
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 169,404 169,647
Accumulated other comprehensive income 224 161
Accumulated deficit (50,717) (62,723)
--------- ---------
Total shareholders' equity 118,918 107,092
--------- ---------
TOTAL $ 123,796 $ 112,285
--------- ---------
--------- ---------
</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 THREE (DATE OF
MONTHS MONTHS INCORPORATION)
ENDED ENDED THROUGH
MARCH 31, MARCH 31, MARCH 31,
1998 1999 1999
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Interest income $ 2,333 $ 1,587 $ 10,048
-------- -------- --------
EXPENSES:
Research and development 10,985 13,316 71,155
General and administrative 264 277 1,409
-------- -------- --------
Total expenses 11,249 13,593 72,564
-------- -------- --------
OPERATING LOSS BEFORE INCOME TAXES (8,916) (12,006) (62,516)
PROVISION FOR INCOME TAXES 26 207
-------- -------- --------
NET LOSS $ (8,942) $(12,006) $(62,723)
-------- -------- --------
-------- -------- --------
NET LOSS PER SHARE:
Basic and diluted $ (1.41) $ (1.90) $ (9.92)
-------- -------- --------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES:
Basic and diluted 6,325 6,325 6,325
-------- -------- --------
</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
THREE MONTHS THREE MONTHS, (DATE OF INCORPORATION)
ENDED MARCH 31, ENDED MARCH 31, THROUGH MARCH 31,
1998 1999 1999
--------------- ----------------- -----------------------
<S> <C> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $ (11,812) $ (11,424) $ (56,941)
--------- --------- ---------
INVESTING ACTIVITIES:
Purchases of short-term investments (81,978) (11,264) (185,622)
Sales of short-term investments 29,367 100,880
--------- --------- ---------
Net cash provided by (used in) investing activities (81,978) 18,103 (84,742)
--------- --------- ---------
FINANCING ACTIVITIES:
Net proceeds from issuance of special common and callable
common stock 93,897
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) 168,897
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (95,079) 6,679 27,214
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 139,035 20,535
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 43,956 $ 27,214 $ 27,214
--------- --------- ---------
--------- --------- ---------
</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, 1998 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
periods 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 in September 1997
to continue the development of Spiros(R), a dry powder pulmonary drug
delivery system, and to conduct formulation work, clinical trials and
commercialization for certain specified leading drugs used to treat asthma
and chronic obstructive pulmonary disease, also known as COPD, for use with
Spiros. The Company commenced operations on December 22, 1997 when the
Company and Dura Pharmaceuticals, Inc. ("Dura") completed a $101 million
initial public offering of 6,325,000 units, each unit consisting of one share
of the Company's callable common stock and one warrant to purchase one-fourth
of one share of Dura's common stock. The offering resulted in net proceeds to
the Company of approximately $94 million. Concurrent with the offering, Dura
contributed $75 million to our operations. Substantially all funds from the
offering, the $75 million contribution, and interest earned on these funds
are expected to be paid to Dura for the development and commercialization of
Spiros and the use of Spiros with specified compounds.
3. REPORTING COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130") requires reporting and displaying comprehensive income
(loss) and its components which, for Spiros Corp. II, includes net loss and
unrealized gains and losses
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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 months ended March 31, 1998 and 1999, and the period September
23, 1997 (date of incorporation) through March 31, 1999, comprehensive income
(loss) consisted of (in thousands):
<TABLE>
<CAPTION>
September 23, 1997
Three Months Three Months (date of incorporation)
Ended Ended through
March 31, 1998 March 31, 1999 March 31, 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Net Loss $(8,942) $(12,006) $(62,723)
Other Comprehensive Income (Loss):
Unrealized Income (Loss) on
Investments (193) (63) 161
------- -------- --------
Comprehensive Loss $(9,135) $(12,069) $(62,562)
------- -------- --------
------- -------- --------
</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 year
ended December 31, 1998 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 our business. See
"Risks and Uncertainties" for a discussion of factors known to us that could
cause reported financial information not to be necessarily indicative of
future results. We undertake 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.
GENERAL
Spiros Development Corporation II, Inc. was incorporated in the state of
Delaware on September 23, 1997 for the purpose of continuing the development
of Spiros(R), a dry powder pulmonary drug delivery system, and to conduct
formulation work, clinical trials and commercialization for certain specified
leading drugs used to treat asthma and chronic obstructive pulmonary disease,
also known as COPD, for use with Spiros. We commenced operations on December
22, 1997.
6
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On December 22, 1997, we and Dura completed an initial public offering of
6,325,000 units, each unit consisting of one share of callable common stock
of our company and one 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 us of approximately $94 million. Concurrently, Dura contributed
$75 million to us. 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 Spiros and the
use of Spiros with certain drugs under various agreements as described below.
Through December 31, 1999, the units will trade publicly. Effective January
1, 2000, the units will separate into the two underlying securities and the
callable common stock will trade separately.
Dura, as holder of 100% of the outstanding shares of our special common
stock, has an irrevocable option to purchase all, but not less than all, of
the issued and outstanding shares of callable 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 we provide Dura
with our quarterly financial statements showing cash or cash equivalents of
less than $5 million, although Dura may extend such period through December
31, 2002 by providing additional funding for the continued development of
Spiros, or (c) upon termination of the technology license, development, or
the manufacturing agreements between the us and Dura. If this purchase option
is exercised, the per share price will be $24.01 through December 31, 1999,
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.
In November 1997, Dura submitted on our behalf, a new drug application to the
FDA for albuterol in the Spiros cassette system which we call Albuterol
Spiros(TM). On November 4, 1998, we announced the receipt of a complete
response letter from the FDA indicating that the new drug application is not
approvable until and unless certain deficiencies are addressed. The FDA
requested that Dura, on our behalf, complete additional clinical trials on
the Spiros system to ensure the system is reliable and to demonstrate that
the system can achieve the same results as the original clinical trials. The
FDA has also requested that several chemistry, manufacturing, and control
issues, as well as certain electromechanical reliability issues be resolved.
As a result of several meetings with the FDA, we and Dura have determined the
requirements to address these issues and support a resubmission of the
Albuterol Spiros new drug application. Dura, on our behalf, expects to
initiate clinical trials for both Albuterol Spiros and Beclomethasone
Spiros(TM) in the fourth quarter of 1999 and to commercialize these products
in 2001, pending successful development and FDA approval. We cannot predict
or assure the successful outcome of additional clinical trials to support the
resubmission of the new drug application, or if the FDA will ever approve
this new drug application.
RESULTS OF OPERATIONS
We incurred a net loss of $8.9 million, $12 million, and $62.7 million for
the three months ended March 31, 1998, March 31, 1999, and for the period
September 23, 1997 (date of
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incorporation) through March 31, 1999, respectively. For the first quarter of
1998 and 1999, research and development costs totaled $11 million and $13.3
million, respectively, and general and administrative expenses totaled
$264,000 and $277,000, respectively. The research and development expenses
were for Spiros-related activities performed by Dura under a development
agreement. The Company's interest income for the first quarter of 1998 and
1999 totaled $2.3 million and $1.6 million, respectively, with the decline
resulting from lower balances of cash and short-term investments in the first
quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our initial capitalization totaled $169 million, consisting of net proceeds
from our initial public offering of approximately $94 million and a $75
million contribution from Dura. At March 31, 1999, we had cash, cash
equivalents, and short-term investments totaling $112.1 million and working
capital totaling $107.1 million. We believe that our working capital and
expected cash flows from our cash and short-term investments will be
sufficient to fund our cash requirements through at least the next twelve
months. However, we may not have sufficient funds to complete the development
of any Spiros product. Based on our current development plan and budget for
the Spiros projects, we expect to expend all of our existing funds in the
second half of 2000.
YEAR 2000 COMPLIANCE
We rely entirely on Dura for our operating and financial systems. We have
made inquiries of Dura, and Dura has responded 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.
Processing errors due to software failure arising from calculations using the
year 2000 date are a recognized risk. Dura has advised us that during 1998
they completed the identification of their systems with year 2000 exposure.
They expect to complete their year 2000 evaluation, testing and contingency
planning by September 30, 1999. Dura's identification of their most
significant year 2000 exposure does not involve the research and development
work Dura is performing on our behalf. While we believe that Dura's 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 us. In addition, the potential impact of the year 2000 on others with whom
we, through agreements with Dura, do 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. We caution 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.
8
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SPIROS REQUIRES SIGNIFICANT ADDITIONAL DEVELOPMENT WHICH IS COSTLY,
TIME-CONSUMING AND MAY NEVER BE COMMERCIALLY SUCCESSFUL. Spiros, our
proprietary dry powder pulmonary drug delivery system, will require
significant additional development efforts as well as clinical testing. This
work is very costly and time consuming. Even after spending significant
amounts of money and time, the development and commercialization, if any, of
any Spiros product may not be successful.
BEFORE ANY SPIROS PRODUCT CAN BE MARKETED, CERTAIN REQUIRED GOVERNMENTAL
APPROVALS WILL HAVE TO BE OBTAINED, WHICH IS NOT ASSURED; FAILURE TO OBTAIN
SUCH APPROVALS WOULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS. The development,
testing, manufacturing and marketing of pharmaceutical products are subject
to extensive regulation by governmental authorities, including the FDA. Each
Spiros product will have to obtain approval from the FDA before that product
can be manufactured or marketed. The review and approval process mandated by
the FDA is very rigorous, requiring testing as well determining manufacturing
capability and product performance. None of the products currently in
development may ever be approved by the FDA. Failure to obtain approvals
would have an adverse effect on our business and results of operations.
OUR REGULATORY APPLICATION SUBMITTED TO THE FDA FOR ALBUTEROL SPIROS-TM- WILL
NOT BE APPROVED WITHOUT ADDITIONAL CLINICAL TRIALS, WHICH WILL DELAY THE
COMMERCIALIZATION OF ALBUTEROL SPIROS. On November 4, 1998, we and Dura
announced the receipt of a complete response letter from the FDA. The letter
indicated that the new drug application submitted by Dura on our behalf for
Albuterol Spiros will not be approved unless certain deficiencies are
addressed. The FDA requested that we complete additional clinical trials on
the Spiros inhaler to ensure the inhaler is reliable and to replicate
clinical outcomes of the initial trials. The FDA also requested that several
chemistry, manufacturing and control issues, as well as certain
electromechanical reliability issues be resolved. As a result of a series of
meetings with the FDA, we and Dura have determined the requirements to
address these issues to support the resubmission of the new drug application
for Albuterol Spiros. Dura, on our behalf, expects to initiate clinical
trials for both Albuterol Spiros and Beclomethasone Spiros(TM) in the fourth
quarter of 1999 and to commercialize these products in 2001, pending
successful development and FDA approval. We cannot predict or assure the
successful outcome of additional trials to support the resubmission of the
new drug application, or if the FDA will ever approve this new drug
application.
WE MAY NOT HAVE SUFFICIENT FUNDS TO COMPLETE THE DEVELOPMENT OF ANY SPIROS
PRODUCT. Based on our current development plan and budget for the Spiros
projects, we expect to expend all of our existing funds in the second half of
2000. Further, we do not believe that our current available funds will be
adequate to complete the development or regulatory review process for any of
the Spiros products. Until the expiration of Dura's purchase option, we are
significantly restricted from raising additional funds without Dura's
consent. While Dura may, at its sole option, provide funds for further
development of the Spiros products or infuse additional cash into Spiros
Corp. II through the exercise of the albuterol or product options, it is not
obligated to do so. If the purchase option is not exercised, we would have to
raise substantial funding while hiring, or otherwise obtaining access to,
research and management
9
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personnel. We may not be successful in doing any of these tasks. Failure to
do so would have an adverse effect on our business and results of operations.
WE ARE DEPENDENT ON DURA FOR ALL ACTIVITIES IN THE DEVELOPMENT OF SPIROS
PRODUCTS. We do not have manufacturing or marketing capabilities. Under our
agreements with Dura, we are obligated to only utilize Dura's manufacturing
facilities for manufacturing in the U.S. during the term of the manufacturing
and marketing agreement. Dura has the right 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 our needs. In addition, Dura
or its contract manufacturers 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 for commercially reasonable cost or on a
timely basis. We have no experience in sales, marketing or distribution.
Under the manufacturing and marketing agreement, Dura has exclusive worldwide
marketing rights to the Spiros products. Dura's sales and marketing force may
not be able to establish commercially successful sales and distribution
capabilities for the Spiros products.
Dura will determine unilaterally certain activities to be undertaken under
the development agreement. In all events Dura will have substantial influence
over all activities and procedures (including the timing and priorities
thereof) to be undertaken under our agreements with Dura. Dura has no
obligation to complete any development or other activity after all of our
funds have been spent. Dura's own projects and other third party projects may
compete for time and resources with projects undertaken under our agreement
with Dura. The resources that Dura uses under these agreements may therefore
be limited.
WE HAVE NO ASSURANCE THAT DURA WILL EXERCISE ITS OPTIONS. Dura is not
obligated to exercise its 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 any
of its options, we will be required to find alternative ways to commercially
market or exploit the Spiros products. We may not be able to do so. If we
determine to market the Spiros products ourselves, we will require
substantial additional funds. We may not be able to raise funds when needed.
Similarly, if we determine to license the Spiros products to third parties,
such arrangements, if available, may be on terms less favorable to us than
the terms of our arrangements with Dura.
THERE IS NO ASSURANCE THAT THE PURCHASE OPTION WILL BE REPRESENTATIVE OF THE
VALUE OF SPIROS CORP. II. Dura's purchase option exercise price was set as of
the date of the closing of our 1997 units offering. Should Dura elect to
exercise this option, the exercise price may not be representative of the
value of our common stock at the time of the exercise of the purchase option.
DURA WILL NEED TO SIGNIFICANTLY EXPAND ITS MANUFACTURING CAPABILITY AND
COMPLY WITH GOVERNMENT REGULATIONS BEFORE WE CAN MANUFACTURE OUR SPIROS
PRODUCT. Dura will need to significantly expand its current manufacturing
operations and comply with current good manufacturing practices and other
regulations prescribed by various regulatory agencies in
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the U.S. and other countries to achieve the quality and required levels of
production of such products to obtain marketing approval. In addition, Dura's
manufacturing facility must be registered with and licensed by various
regulatory authorities and must comply with current good manufacturing
practice requirements prescribed by the FDA and the State of California. Dura
intends to utilize third parties to produce components of and assemble the
Spiros inhaler. Such third parties have only produced limited quantities of
components and assembled limited numbers of inhalers. These third parties
will be required to significantly scale up their activities and to produce
components which meet applicable specifications on a timely and consistent
basis. Such third parties may not be successful in attaining acceptable
service levels or meeting regulatory requirements which would have an adverse
effect on our ability to commercialize the Spiros products.
THE PHARMACEUTICAL INDUSTRY IS EXTREMELY COMPETITIVE. Many companies,
including large pharmaceutical firms with financial and marketing resources
and development capabilities substantially greater than ours, are engaged in
developing, marketing and selling products that compete with those offered or
planned to be offered by us. 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 our current or future
products. The industry is characterized by rapid technological change, and
competitors may develop their products more rapidly than we are able.
Competitors may also be able to complete the regulatory process sooner, and
therefore, may begin to market their products in advance of our products. Our
failure to effectively respond to the competitive pressures of our industry
would have an adverse effect on our business and results of operations.
WE DO NOT HAVE A LONG OPERATING HISTORY AND THERE IS NO ASSURANCE OF
PROFITABILITY OR DIVIDENDS. We were recently formed and have a limited
operating history upon which investors may base an evaluation of our likely
financial performance. We anticipate that substantially all of our available
funds will be expended prior to the receipt of any significant revenues,
resulting in significant losses. Further, even if the Spiros products are
developed or marketed under the agreements with Dura, they may not be able to
be marketed profitably. Even if such Spiros products are commercialized
profitably, the initial losses incurred by us may never be recovered. We are
prevented from paying dividends on our common stock without the approval of
Dura, and accordingly, do not expect to pay any dividends.
POTENTIAL COMPETITION FROM DURA MAY HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
Dura is engaged in ongoing licensing and development of new products. While
Dura has licensed the rights to develop, manufacture and commercialize the
Spiros products, 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 lead to the development, in-licensing or acquisition of
products that compete with the Spiros products being developed by us. 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.
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DURA HAS THE ABILITY TO LIMIT CERTAIN OF OUR ACTIVITIES. Until the expiration
of the purchase option, Dura must approve certain of our activities,
including:
- the issuance of our securities
- borrowing an aggregate of more than $1 million at any one time
- the sale or other disposition of a material part of our business or
assets
- the declaration or payment of dividends or the making of any other
distributions to our shareholders
- the merger or consolidation of us with or into any other corporation or
- the adoption, amendment or repeal of our Bylaws.
Accordingly, Dura could preclude our shareholders and board of directors from
taking any of these actions during such period. Dura, as holder of all of the
outstanding special common stock, 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 common stock, 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 common stock will have the same financial resources or
development, manufacturing or marketing capabilities as Dura, which may
reduce the likelihood of the exercise of the albuterol option, the product
option or the purchase option.
OUR ABILITY TO OBTAIN PATENTS AND PROTECT OUR PROPRIETARY RIGHTS IS UNCERTAIN
AND COULD RESULT IN AN ADVERSE EFFECT ON OUR BUSINESS. Our ability to obtain
patents on current or future products or formulations, defend our patents,
maintain trade secrets and operate without infringing upon the proprietary
rights of others both in the U.S. and abroad is uncertain. Patents may never
issue. Even if issued or licensed to us, patents may not be enforceable,
provide substantial protection from competition or be of commercial benefit
to us. Even if all these are true, we may not possess the financial resources
necessary to enforce or defend any of our patent rights. Our success will
also depend upon avoiding the infringement of patents issued to competitors
and upon maintaining the technology licenses upon which certain of our
products are based. Litigation, which is costly, may be necessary to enforce
our patent and license rights or to determine the scope and validity of
proprietary rights of third parties. If any of our products are found to
infringe upon patents or other rights owned by third parties, we could be
required to obtain a license to continue to manufacture or market such
products. Licenses to such patent rights may not be available to us on
commercially reasonable terms, if at all. If we do not obtain such licenses,
we could encounter delays in marketing affected products or we could find
that the development, manufacture or sale of products requiring such licenses
is not possible.
We are 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 we determine to market any Spiros
product in the United Kingdom and further determine that such activity would
infringe upon such third party patents, we 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.
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OUR STOCK PRICE IS VOLATILE AND YOU MAY NOT GET A RETURN ON YOUR INVESTMENT.
The market prices for securities of emerging companies, including ours, have
historically been highly volatile. Future announcements concerning us or our
competitors may have a significant impact on the market price of our Units.
Such announcements might include:
- financial results
- the results of clinical testing of our or our competitors' products
- regulatory developments
- technological innovations
- new commercial products
- changes to government regulations
- regulatory decisions on commercialization of products
- developments concerning proprietary rights
- litigation or public concern as to safety of our products or
- our failure to achieve securities analysts' expectations concerning our
earnings per share.
WE MAY BE IMPACTED BY YEAR 2000 ISSUES WHICH COULD HAVE AN ADVERSE EFFECT ON
OUR BUSINESS. We rely on Dura for our operating and financial systems. We
have made inquiries of Dura, and Dura has responded 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.
Processing errors due to software failure arising from calculations using the
year 2000 date are a recognized risk. Dura has advised us that during 1998
they completed the identifications of their system with year 2000 exposure.
They expect to complete their year 2000 evaluation, testing and contingency
planning by September 30, 1999. Dura's identification of their most
significant year 2000 exposure does not involve the research and development
work Dura is performing on our behalf. While we believe that Dura's 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 us. In addition, the potential impact of the year 2000 on others with whom
we, through agreements with Dura, do 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
We invest our excess cash and short term investments in U.S. government and
corporate debt securities with high quality credit ratings and maturities of
less than two years. These investments are not held for trading or other
speculative purposes. Changes in interest rates affect the investment income
we earn on our investments and, therefore, impact our cash flows and results
of operations. We are not exposed to risks for changes in foreign currency
exchange rates, commodity prices, or any other market rates.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
Use of Proceeds from Registered Securities
On December 22, 1997, Spiros Development Corporation II, Inc. and Dura
Pharmaceuticals, Inc. completed the offering of 6,325,000 units. Each unit
consists of one share of our callable common stock of Spiros Corp. II and one
warrant to purchase one-fourth of one share of Dura common stock. The
offering was registered under 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 March 31, 1999, we had
used $56.9 million of our cash, cash equivalents and short-term investments
for our operating activities and had $107.1 million of working capital.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C> <C>
(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>
(b) Reports on Form 8-K
None.
14
<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: May 14, 1999 /s/ Erle T. Mast
- -------------------- -------------------
(Erle T. Mast)
Vice President, and Chief
Financial Officer
(Principal Financial Officer)
15
<PAGE>
EXHIBIT INDEX
TO
FORM 10-Q
SPIROS DEVELOPMENT CORPORATION II, INC.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C> <C>
(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>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET AS OF MARCH 31, 1999, AND THE RELATED STATEMENT OF
OPERATIONS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1999 AND THE NOTES
THERETO, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 27,214
<SECURITIES> 84,903
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 112,285
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 112,285
<CURRENT-LIABILITIES> 5,193
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 107,092
<TOTAL-LIABILITY-AND-EQUITY> 112,285
<SALES> 0
<TOTAL-REVENUES> 1,587
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,593
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (12,006)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,006)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,006)
<EPS-PRIMARY> ($1.90)
<EPS-DILUTED> ($1.90)
</TABLE>
