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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --------- SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 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 (858) 457-2553
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF
THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g)
OF THE ACT:
CALLABLE COMMON STOCK, $.001 PAR VALUE.
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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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
The aggregate market value of the Callable Common Stock held by
non-affiliates of the registrant as of March 1, 2000 was $38.1 million. For the
purposes of this calculation, shares owned by officers, directors (and their
affiliates) and 10% or greater shareholders known to the registrant have been
deemed to be affiliates which should not be construed to indicate that any such
person possesses the power, direct or indirect, to direct or cause the direction
of the management or policies of the Registrant or that such person is
controlled by or under common control with the Registrant.
The number of shares of the Registrant's Callable Common Stock and
Special Common Stock outstanding as of March 1, 2000 were 6,325,000 and 1,000,
respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits filed with the Registrant's prior registration
statement, Forms 10-K and 10-Q are incorporated as provided in Part IV.
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INDEX
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<S><C>
Part I:
Item 1. Business....................................................................4
Item 2. Properties.................................................................23
Item 3. Legal Proceedings..........................................................24
Item 4. Submission of Matters to a Vote of Security Holders........................24
Part II:
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters........................................................24
Item 6. Selected Financial Data....................................................25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................25
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.................28
Item 8. Financial Statements and Supplementary Data................................28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................................28
Part III:
Item 10. Directors and Executive Officers of the Registrant.........................28
Item 11. Executive Compensation.....................................................30
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................................32
Item 13. Certain Relationships and Related Transactions.............................33
Part IV:
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K...................................................................34
Signatures.................................................................37
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PART I
ITEM 1. BUSINESS
The discussion of Spiros Development Corporation II, Inc.'s ("Spiros Corp. II")
business contained in this report may contain certain projections, estimates and
other forward-looking statements that involve a number of risks and
uncertainties. For a discussion of factors which may affect the outcome
projected in such statements, see "Risks and Uncertainties" on pages 20 through
23 of this Annual Report on Form 10-K. While this outlook represents our current
judgment on the future direction of the business, such risks and uncertainties
could cause actual results to differ materially from any future performance
listed below. 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 of this annual report. Unless the context
otherwise requires, "Dura" refers to Dura Pharmaceuticals, Inc., a Delaware
corporation, and its subsidiaries.
OVERVIEW
Spiros Corp. II was incorporated in the state of Delaware in September 1997
to continue the development of Spiros-Registered Trademark-, a dry powder
pulmonary drug delivery system, and to conduct formulation work, clinical
trials and commercialization for specified leading asthma and chronic
obstructive pulmonary disease, also known as COPD, drugs for use with Spiros.
We commenced operations on December 22, 1997 when we and Dura completed a $101
million initial public offering of 6,325,000 units, each unit consisting of one
share of our 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 us 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 have been and are
expected to be paid to Dura for the development and commercialization of Spiros
and the use of Spiros with applications for albuterol, beclomethasone,
budesonide, ipratropium, albuterol-ipratropium combination, and additional
designated compounds. Current product development efforts focus on
beclomethasone and budesonide. We may also expend funds on enhancements to the
existing Spiros technology and development of a next generation inhaler
technology.
The warrants issued in the offering are exercisable through December 31, 2002
at an exercise price of $54.84 per share of Dura common stock. As of January
1, 2000, the callable common stock and the warrant began trading publicly as
separate securities. In consideration of the warrants and the contribution of
$75 million we received, Dura has an irrevocable option through December 31,
2002, to purchase all, but not less than all, of the then outstanding shares
of our callable common stock at predetermined prices. Such purchase price may
be paid, at Dura's option, in cash, shares of Dura's common stock or a
combination of cash and stock. In addition, Dura received an option through
specified dates, to acquire for cash exclusive rights for the use of Spiros
with albuterol and with a second product other than albuterol.
In March 2000 we entered into a merger agreement with Dura. Under the agreement,
for each share of our callable common stock our shareholders will receive $13.25
in cash and one five-year warrant to purchase a fractional share of Dura's
common stock at $17.94 per share, which represents a 25% premium over the
average closing price of Dura's common stock for the 10
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trading days prior to the date of the merger agreement. The exact fraction of
a share of Dura's common stock purchasable under the warrant will be
determined based on the average closing price of Dura's common stock for the
10 trading days prior to the vote of our shareholders on the merger and will
result in a calculated Black-Scholes value for each warrant of between $3.22
and $1.81 using an agreed upon volatility of 65% based on recent volatility
of Dura's common stock. Based on the market price of Dura's common stock used
to calculate the exercise price of the warrant, the total consideration for
the merger as of the date of the merger agreement was calculated to be $100.8
million, or $15.75 per share of callable common stock. Closing of the
transaction is subject to Hart-Scott-Rodino clearance, effectiveness of the
registration statement for Dura's warrants, and our shareholder approval. We
and Dura have received voting agreements in favor of the merger from holders
of approximately 22% of our outstanding callable common stock. A special
committee of independent members of our board, formed in December 1999 to
evaluate our strategic alternatives, has approved the merger agreement and is
recommending that our shareholders approve the merger. We expect to deliver a
proxy statement describing the terms of the merger agreement in greater
detail to our shareholders in the near term.
In connection with the initial public offering, we entered into a number of
agreements with Dura under which Dura currently performs development of the
Spiros products as further discussed below under "Relationship with Dura." We do
not expect to have our own research, development, clinical, licensing,
administration, manufacturing or marketing employees or facilities, and thus
will be entirely dependent on Dura in these areas.
ASTHMA AND COPD MARKET
Asthma is a complex physiological disorder characterized by airway hyperactivity
to a variety of stimuli such as dust, pollen, stress or physical exercise,
resulting in airway obstruction that is partially or
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temporarily reversible. The U.S. asthma population has grown steadily in
recent years. COPD is a complex condition comprising a combination of chronic
bronchitis, emphysema and airway obstruction. The disease affects males more
often than females and is exacerbated by smoking and other insults to the
lung. Incidence is as high as 20% of the adult male population, though only a
minority are clinically disabled. The U.S. combined market for inhaled
therapeutic drugs to treat asthma and COPD was approximately $2.1 billion in
1998.
PULMONARY DRUG DELIVERY SYSTEMS
Inhaled therapeutic drugs have been shown to be effective in treating or
preventing the symptoms of asthma, COPD and other respiratory diseases. When
treating respiratory diseases, inhalation delivery puts the drug directly into
the lung for topical treatment. If administered in capsule, tablet or liquid
form, rather than through inhalation, the patient must take sufficient drug
dosages to achieve a systemic therapeutic blood level to benefit the lungs. In
many instances, this may cause serious side effects by affecting other organs.
Because inhaled therapy delivers the drug directly into the lungs, it provides
comparable efficacy with less risk of systemic side effects at greatly reduced
dosages. Inhalation delivery also yields a fast onset of action, reducing the
time for patient relief.
TRADITIONAL INHALATION DELIVERY DEVICES
Most currently-approved inhalation devices are one of the following three types:
- METERED DOSE INHALERS. Metered dose inhalers, also known as
MDIs, are currently the most widely used inhalation delivery
system due to their relative convenience and portability. MDIs
consist of a suspension or solution of drug filled into a
canister, sealed with a metering valve and pressurized using a
propellant, most commonly a chloroflorcarbon or CFC.
Unfortunately, it is estimated that only 10% to 20% of the
dose from an MDI actually reaches the lung, with the remainder
of the drug being deposited in the mouth and throat or the
stomach where it has no therapeutic effect and may cause
unwanted side effects. The limited amount of drug that reaches
the lung is caused primarily by the inability of most patients
to coordinate their inhalation with the initiation of the
delivery system and the resulting high velocity of the
propellant-driven aerosol. To increase the amount of drug that
actually reaches the lung, patients are sometimes prescribed
spacers to use with their MDIs, thereby increasing the
complexity and reducing the portability of the device.
- JET NEBULIZERS. Jet nebulizers aerosolize a liquid solution of
medicine, either ultrasonically or with compressed air,
creating a fine mist that patients inhale slowly over several
minutes. Jet nebulizers are much larger than other inhalation
delivery systems and, because of their size, are primarily
used to deliver aerosol to hospitalized patients, patients
with acute asthma and patients unable to coordinate the use of
other inhalation delivery devices. Jet nebulizers are
generally considered to be less convenient and less portable
because of their size and the complexity of use.
- DRY POWDER INHALERS. Dry powder inhalers represent a
significant advancement in the development of inhalation
delivery systems. Dry powder inhalers are relatively
convenient and portable, and are CFC-free. They are breath
actuated, so they eliminate the need for the press-and-breathe
coordination associated with MDIs. Although dry powder
inhalers overcome the need to coordinate inhalation with the
initiation of the device, currently marketed dry powder
inhalers require high inspiratory flow rates, making the
ultimate dose delivered to the patient
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dependent on the patient's inspiratory effort. This high
inspiratory flow rate is difficult to achieve for children,
the elderly and patients with breathing difficulties.
We anticipate that dry powder inhalers like Spiros will gradually replace MDIs
as the leading pulmonary delivery systems, due primarily to the phasing out of
CFC propellants and coordination problems associated with many MDIs. Some
companies are studying alternative propellants, such as hydrofluorocarbons, for
use in MDIs. We believe, however, that any product using an alternative
propellant will still suffer from many of the limitations of currently marketed
MDIs, including the need for patients to coordinate breathing with actuation of
the drug delivery system. In Europe, where several pharmaceutical companies have
marketed dry powder inhalers for a number of years, sales of dry powder inhalers
had increased to 27% of the total sales of inhaled asthma products in 1999.
POTENTIAL ADVANTAGES OF SPIROS
We believe Spiros, if approved by the FDA, may provide advantages over other
currently available pulmonary drug delivery systems:
- INSPIRATORY FLOW RATE INDEPENDENCE AND LOW FLOW RATE
CAPABILITY. Spiros is designed to deliver a relatively
consistent drug dose to the lungs over a wide range of
inspiratory flow rates, which can vary depending on a
patient's health, age, effort or physical abilities. Tests of
Spiros on human subjects have shown a relatively consistent
amount of drug deposition throughout the clinically relevant
inspiratory range. Existing dry powder inhalers can vary
significantly in their level of drug deposition depending on
the patient's inspiratory flow rate. Many of them also require
high inspiratory flow rates for the patient to obtain the
labeled dose of the drug. Therefore, they may deliver
significantly less drug at the lower flow rates typically
associated with compromised pulmonary function.
- MINIMUM NEED FOR PATIENT COORDINATION. Spiros is breath
actuated and does not require the user to coordinate
inhalation and actuation of the drug delivery system. MDIs
generally require users to coordinate their breathing with
initiation of the MDI. Studies indicate that a significant
percentage of patients, particularly young children and the
elderly, do not use MDIs correctly. Spiros is designed to
solve these coordination problems by delivering the drug to
patient's lungs as they inhale.
- PATIENT CONVENIENCE. Spiros is designed to be convenient for
patients, with features such as breath actuation and
portability due to its light weight and small size, quick
delivery time, simple operation, dose delivery feedback and
multi-dose capability. Spiros also allows the patient to see
the actual number of doses remaining in a cassette or blister
pack and an LED light alerts the patient of the need to
replace Spiros prior to the end of its useful life.
- FREE OF CHLOROFLUOROCARBON PROPELLANTS. Spiros does not use
CFCs while most MDIs, currently the most popular form of
aerosol drug delivery, use CFCs. CFC propellants have ozone
destructive characteristics. Virtually all of the world's
industrial nations, under the auspices of the United Nations
Environmental Program, have pledged to cease use of CFCs by
the year 2000. Continued use of CFCs in medical products has
been permitted under annual exemptions. As a result of the
planned phase out of CFCs, we believe that dry powder
inhalers will become a leading method for pulmonary drug
delivery.
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THE SPIROS PULMONARY DRUG DELIVERY SYSTEM
Spiros uses electromechanical energy to aerosolize pharmaceuticals in dry powder
formulations for delivery to the lungs while providing advantages over
traditional pulmonary delivery systems.
CORE TECHNOLOGY
The core technology contained in the Spiros system is an aerosol generator that
uses electromechanical energy to disperse dry powder to form an aerosol for
inhalation. The main components of the aerosol generator include the impeller,
the motor, the breath-actuated switch, and the dosing chamber. When the switch
is activated, the electric circuit is completed and the impeller rotates. The
action of the impeller on the dry powder formulation supplies the energy to
disperse the drug and provide a cloud of aerosolized drug for inhalation. The
cloud of aerosolized drug is suspended in the dosing chamber and is delivered to
the lungs only as the patient inhales. This technology controls both the powder
dispersion to form the aerosol and allows for patient-actuated inhalation,
making the drug delivery independent of the inspiratory force generated by the
patient. Virtually the same dose is delivered at low and high inspiratory
efforts, making the system relatively flow rate independent.
Products are currently under development in two separate Spiros systems, a
cassette system and a blisterdisk system, both using the same core technology
with different powder storage systems. Because of the physical and chemical
requirements of the specific drugs deliverable by Spiros, as well as the varying
needs of the patients and marketplace, we believe that our cassette and
blisterdisk systems will provide flexibility for delivery of many different
types of drugs.
CASSETTE SYSTEM. The cassette system was the first Spiros system developed. The
powder storage device in this system is a 30-dose plastic cassette packed in a
foil pouch. To use the cassette system, a patient first removes the cassette
from the pouch and opens the lid of the Spiros generator to load the cassette.
When the lid is closed, the cassette rotates to deliver a dose of drug into the
dosing chamber. An impeller is located within the dosing chamber. When the
patient inhales through the mouthpiece, the impeller is automatically activated
at a relatively low flow rate. The action of the impeller on the powder in the
chamber generates the aerosol, which the patient inhales. When the cassette is
empty, the patient opens the lid, removes the empty cassette and loads a new
cassette.
BLISTERDISK SYSTEM. Although many drugs and powder formulations are
sufficiently stable using the cassette system, some drugs, are sensitive to
relative humidity. We have developed a blisterdisk system for drugs that
require a barrier against moisture or light. This system uses powder-filled
sealed foil blisters, which prevent moisture contact with the powder. The
powder storage device in this system is a 16-dose blisterdisk and is
sufficiently flexible to accommodate a wide variety of drugs. To use the
blisterdisk system, a patient opens the mouthpiece cover, pushes a button to
open the blister and inhales through the mouthpiece to actuate the impeller
and aerosolize the dose. As the patient closes the mouthpiece cover, the next
blister is advanced to the dosing position. When the blisterdisk is empty,
the patient opens the lid, removes the empty blisterdisk and loads a new
blisterdisk.
SPIROS PRODUCTS IN DEVELOPMENT
Five compounds were initially selected to be developed for delivery through
Spiros: a beta-agonist, albuterol, two steroids, beclomethasone and
budesonide, an anticholinergic, ipratropium, and a combination of albuterol
and ipratropium. However, to focus resources on the development of the
steroid products, we have suspended funding for work on albuterol,
ipratropium and the albuterol-ipratropium combination products.
Albuterol was the first product developed in the Spiros system. On our
behalf, Dura filed a new drug application for Albuterol Spiros-TM- in 1997
and in November 1998 received a complete response letter from the FDA. The
response letter indicated that the new drug application would not be approved
unless certain deficiencies were addressed. The FDA requested that several
chemistry, manufacturing, and control issues, as well as certain
electromechanical reliablility issues, be resolved. After several meetings
with the FDA, the requirements that would address the issues raised by the
FDA and support a resubmission of the Albuterol Spiros new drug application
were identified. The chemistry, manufacturing and control issues for
Albuterol Spiros were being addressed at the time we made our decision to
suspend funding for the future development of Albuterol Spiros.
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BECLOMETHASONE. Beclomethasone is a steroid used to treat the inflammatory
component of asthma and selected symptoms of COPD. Sales of beclomethasone in
1998 in the major countries of the world were approximately $700 million. In
the first quarter of 1997, Dura completed dose ranging studies for a one
dosage strength of beclomethasone in the Spiros cassette system under an
investigational new drug application. In the fourth quarter of 1997, Dura
commenced a late-stage 12-week trial in humans to demonstrate safety and
efficacy. Enrollment of patients was completed by the second quarter of 1998.
The study demonstrated that Beclomethasone Spiros-TM- provided improved
potency and comparable safety and efficacy to the approved MDI product to
which it was compared. After receiving feedback from the FDA, we reformulated
Beclomethasone Spiros and finalized the commercial Spiros inhaler design. In
the fourth quarter of 1999, Dura, on our behalf, initiated the first in a
new series of pivotal clinical studies for Beclomethasone Spiros. An
important objective of these studies is to demonstrate the reliability of the
Spiros system, to confirm the results of the earlier trials and to
demonstrate that comparable efficacy and potentially improved safety may be
achieved with Beclomethasone Spiros using lower dosages than currently
approved MDI formulations. If the clinical trials are successful, we
currently plan to file a new drug application for Beclomethasone Spiros in
late 2000 or early 2001 and, if the product is approved by the FDA, to launch
the product in late 2001 or 2002.
BUDESONIDE. Budesonide is a new generation steroid used to treat the
inflammatory component of asthma. Sales of budesonide in 1998 in the major
countries of the world were approximately $720 million. Dura, on our behalf,
initiated screening of patients for a dose-targeting study for Budesonide
Spiros in the first quarter of 2000 and plans to begin a pivotal clinical
program in the second half of 2000. If the clinical trials are successful, we
currently plan to file a new drug application for Budesonide Spiros-TM- in
late 2002 and, if the product is approved by the FDA, to launch the product
in 2003.
OTHER PRODUCT DEVELOPMENT EFFORTS
On our behalf, Dura's scientists have recently invented a new technology for
forming aerosols from powder formulations. This new technology builds on
earlier work with Spiros and its aerosol delivery system, using a motorless
inhaler system which can use existing powder storage systems or new unit dose
systems. Broad patent coverage is being sought for this new technology.
Our Board of Directors has the right, with the consent of Dura, to select
additional designated compounds for the treatment of respiratory diseases,
including asthma, allergy, cystic fibrosis or respiratory infection for delivery
using Spiros. However, we have decided to focus our resources on the development
of the steroid products and do not anticipate that we will select any additional
designated compounds for development.
RELATIONSHIP WITH DURA
The following is a summary of selected provisions of our agreements with Dura.
The summary is qualified in its entirety by reference to the full text of such
agreements, copies of which may be obtained upon request to us.
MERGER AGREEMENT
In March 2000 we entered into a merger agreement with Dura. Under the
agreement, for each share of our callable common stock our shareholders will
receive $13.25 in cash and one five-year warrant to purchase a fractional
share of Dura's common stock at $17.94 per share, which represents a 25%
premium over the average closing price of Dura's common stock for the ten
trading days prior to the date of the merger agreement. The exact fraction of
a share of Dura's common stock purchasable under the warrant will be
determined based on the average closing price of Dura's common stock for the
ten trading days prior to the vote of our shareholders on the merger and will
result in a calculated Black-Scholes value for each warrant of between $3.22
and $1.81 using an agreed upon volatiity factor of 65% based on recent
volatility of Dura's common stock. Based on the market price of Dura's common
stock used to calculate the exercise price of the warrant, the total
consideration for the merger as of the date of the merger agreement was
calculated to be $100.8 million, or $15.75 per share of callable common
stock. Closing of the transaction is subject to Hart-Scott-Rodino clearance,
effectiveness of the registration statement for Dura's warrants, and our
shareholder approval. We and Dura have received voting agreements in favor of
the merger from holders of approximately 22% of our outstanding callable
common stock. A special committee of independent members of our board, formed
in December 1999 to evaluate our strategic alternatives, has approved the
merger agreement and is recommending that our shareholders approve the
merger. We expect to deliver a proxy statement describing the terms of the
merger agreement in greater detail to our shareholders in the near term.
STOCK PURCHASE OPTION
According to our certificate of incorporation, Dura, as holder of all issued and
outstanding shares of special common stock, has the right to purchase all,
but not less than all, of our callable common stock outstanding at the time the
right is exercised. The purchase option is exercisable at any time
beginning on December 22, 1997 and ending on the earlier of December 31, 2002 or
the 90th day after
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the date we provide Dura with notice that we have spent substantially all of
our available cash. Dura may, at its election, extend such period by
providing additional funding for the continued development of the Spiros
products, but in no event beyond December 31, 2002. If the purchase option is
exercised, the exercise price, calculated on a per share basis, will be as
follows:
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<CAPTION>
If the callable common stock is
acquired under the purchase option Exercise price
- -------------------------------------------------------------------------------- ---------------
<S> <C>
Before January 1, 2000 $ 24.01
On or after January 1, 2000 and on or before March 31, 2000 25.26
On or after April 1, 2000 and on or before June 30, 2000 26.57
On or after July 1, 2000 and on or before September 30, 2000 27.96
On or after October 1, 2000 and on or before December 31, 2000 29.41
On or after January 1, 2001 and on or before March 31, 2001 31.10
On or after April 1, 2001 and on or before June 30, 2001 32.88
On or after July 1, 2001 and on or before September 30, 2001 34.77
On or after October 1, 2001 and on or before December 31, 2001 36.76
On or after January 1, 2002 and on or before March 31, 2002 38.87
On or after April 1, 2002 and on or before June 30, 2002 41.10
On or after July 1, 2002 and on or before September 30, 2002 43.46
On or after October 1, 2002 and on or before December 31, 2002 45.95
</TABLE>
The exercise price was mutually determined by us and Dura, giving consideration
to:
- a compound annual rate of return upon exercise, as required by
potential investors, to be achieved upon any exercise of the
purchase option,
- the implied returns to investors purchasing securities with a
similar structure historically,
- the comparability of the offering to those prior offerings,
- the value of the warrants,
- the nature of Spiros products,
- the agreements between us and Dura, and
- other factors as we and Dura deemed appropriate and advice
given by the underwriters of the offering.
The exercise price may be paid in cash or shares of Dura common stock, or any
combination of cash and stock, at Dura's sole discretion. Any such shares of
Dura common stock will be valued based upon the average of the closing price
for Dura common stock on the Nasdaq National Market for 10 trading days
immediately preceding the date of the exercise notice. In the event the
purchase option were transferred, the payment by the subsequent holder of the
majority of the special common stock could also be made in cash or, if such
holder or its parent is a company whose common equity securities are listed
on a national securities exchange or admitted to unlisted trading privileges
or listed on the Nasdaq National Market, in the sole discretion of such
holder, in shares of such listed common equity security. Dura presently
intends to aquire our callable common stock pursuant to the merger agreement,
and therefore does not currently intend to exercise the purchase option
described above.
Dura owns all of our issued and outstanding special common stock, which grants
Dura the purchase option and confers voting and other rights, including the
right to elect two directors to our board. Under our certificate of
incorporation, we are prohibited, until the expiration of the purchase option,
from
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taking or permitting actions inconsistent with Dura's rights under the
purchase option. Examples of prohibited actions on our part without the
consent of Dura include:
- paying dividends,
- issuing additional shares of capital stock,
- borrowing more than $1 million in total,
- merging, liquidating, or selling all or substantially all of
our assets, or
- altering the terms of the purchase option.
At present, Dura has indicated it has no intention of transferring its shares of
special common stock.
TECHNOLOGY LICENSE AGREEMENT
We entered into a technology license agreement with Dura. Under the agreement,
Dura granted us an exclusive, worldwide, perpetual, royalty-bearing license to
use the core Spiros technology in research, development and commercialization
(except with respect to beclomethasone in Asia) of the Spiros products,
including rights to patents, patent applications and other intellectual property
rights.
As consideration for these license rights granted to us by Dura, we will pay
Dura a technology access fee equal to the greater of 5% of the net sales of each
Spiros product or $2 million for all Spiros products in any calendar year
beginning in 1998. Our obligation will terminate, on a country-by-country basis,
within 10 years from the first sale of such Spiros product in those countries
where no patents covering such product are issued and in those countries where
patents covering the Spiros products are issued, upon the expiration of the
last-to-expire patent covering such Spiros product in such country.
In addition, we granted Dura:
- a worldwide, exclusive, royalty-free license to use the core
technology and the program technology to develop the Spiros
products under the terms of our development agreement,
- a worldwide, exclusive, royalty-bearing license to use the
program technology to sell Spiros products worldwide under the
terms of our manufacturing and marketing agreement,
- upon Dura's exercise of the option for Albuterol Spiros, a
worldwide, exclusive, royalty-free, irrevocable, perpetual
license to the program technology to develop, manufacture and
commercialize Albuterol Spiros,
- upon Dura's exercise of the product option, a worldwide,
exclusive, royalty-free, irrevocable, perpetual license to the
program technology to develop, manufacture and commercialize
sell the Spiros product for which the option is exercised, and
- a worldwide, exclusive, royalty-free, irrevocable, perpetual
license to the program technology, including technology
relating to enhancements to the existing Spiros technology or
any next generation inhaler system, to develop, manufacture
and commercialize products other than the Spiros products,
including products that compete with the Spiros products.
Under this agreement, Dura must use commercially reasonable efforts to secure
the rights of third parties in technology that is necessary or useful to the
development of the Spiros products. We have no obligation to accept any grant of
such rights or to assume any obligation without our prior written consent. If we
desire to obtain any such rights, we and Dura both agree to negotiate in good
faith regarding the allocation of any royalty, license fee or other payments
payable to the third party and the assumption of any obligations applicable to
such license.
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Until the expiration of the purchase option, Dura will direct and cause, at
our expense, appropriate patent applications to be prepared, prosecuted and
maintained with respect to patents licensed to us and with respect to any
technology developed or acquired on behalf of us by Dura. Upon the
termination of the unexercised purchase option, all patents and patent
applications developed or acquired by Dura on our behalf will be assigned to
us.
Under the terms of the technology agreement, if we or Dura receive notice of
alleged infringement of any patent, the other party must be notified of such
infringement. All recoveries in any action to enforce patent rights will be
retained by the parties in proportion to costs paid by the parties in
enforcing such action.
We have agreed to indemnify Dura against specified third party claims,
including patent infringement claims, relating to our use of the program
technology or breach of the technology agreement, development agreement or
manufacturing and marketing agreement. Dura agreed to indemnify us against
specified third party claims, including patent infringement claims, relating
to Dura's use of the program technology, performance of development or breach
of the three main agreements with Dura.
Prior to the expiration of the purchase option, without Dura's prior written
consent we cannot:
- license, sublicense, encumber or otherwise transfer any rights
in the program technology;
- make, use or sell any of the program technology; or
- authorize, cause or assist in any way any other person to do
any of the above.
Following the expiration or termination of the purchase option, these
limitations will cease to be applicable. Thereafter, we will have the right
to license, sublicense, encumber or otherwise transfer the program technology
for use with any Spiros products that have not been acquired by Dura through
the exercise of either product option. Dura may assign its rights and
delegate its obligations under the technology agreement only to an affiliate
of Dura, selected successors of Dura or selected persons that acquire
substantially all of Dura's assets.
The technology agreement will remain in full force and effect indefinitely,
unless terminated by mutual agreement of the parties or Dura's exercise of
the purchase option. Either Dura or we may terminate the technology agreement
prior to its expiration if the other party:
- breaches any material obligation under the technology
agreement or the development agreement, which breach continues
for a period of 60 days after written notice of such breach;
- enters into any voluntary proceeding in bankruptcy,
reorganization or an arrangement for the benefit of its
creditors, or its Board of Directors or stockholders authorize
such action; or
- fails to dismiss any such proceeding within 60 days after the
same is involuntarily commenced.
If we terminate the technology agreement, our license to use the program
technology will continue, except with respect to any Spiros products that
have been previously acquired by Dura through exercise of the product
options. We will be free to enter into arrangements with third parties to
research, develop and commercialize the Spiros products. If Dura terminates
the technology agreement:
- our license to use the core Spiros technology under the
technology agreement will terminate;
- all of our rights to the program technology will revert to
Dura; and
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- all rights to develop, use and sell the Spiros products will
revert to Dura.
Both parties will use reasonable efforts for a period of 120 days after the
technology agreement is terminated by Dura to reach agreement on royalties
and other compensation to be paid to us by Dura, solely with respect to the
Spiros products and the program technology. In the absence of such agreement,
the matter will be submitted to binding arbitration. Upon termination of the
technology agreement by us, we may not be able to make alternative
arrangements for the research, development and commercialization of some or
all of the Spiros products.
ALBUTEROL AND PRODUCT OPTION AGREEMENT
We entered into the albuterol and product option agreement with Dura under
which Dura may obtain the assets related to Albuterol Spiros and the assets
related to the other option product.
The assets related to the product acquired under this agreement include:
- the relevant Spiros product;
- the compound as formulated for use in the product;
- a perpetual, sublicensable, non-exclusive, royalty-free
license to the technology owned, developed, or acquired by
Dura during the term of the development agreement applicable
to the product for use solely with the product; and
- all applications and documents filed with the FDA or a foreign
regulatory authority to obtain regulatory approval to commence
commercial sale or use of the product.
The option to acquire Albuterol Spiros is currently exercisable and ends on
the earlier of 360 days after receipt of FDA approval to market Albuterol
Spiros or the date Dura ceases to manufacture or market Albuterol Spiros in
accordance with the terms of the manufacturing and marketing agreement.
Upon exercise of the option to acquire Albuterol Spiros, Dura will make a
single payment to us in cash equal to the aggregate purchase option exercise
price, assuming acquisition of all shares of callable common stock in
December 2001, multiplied by a fraction, the numerator of which will equal
the development and commercialization costs and expenses incurred by us in
connection with the development and commercialization of Albuterol Spiros and
the denominator of which will equal the funds available for development of
Spiros products. Proceeds, if any, from the exercise of any product option
are excluded.
The other product option is currently exercisable with respect to each other
Spiros product and ends 90 days after receipt of FDA approval to market such
Spiros product. This option may only be exercised with respect to a single
Spiros product.
Upon exercise of the other product option, Dura will make a single payment to
us in cash equal to 110% of the aggregate purchase option exercise price,
assuming acquisition of all shares of callable common stock in December 2001,
multiplied by a fraction, the numerator of which will equal the development
and commercialization costs and expenses incurred by us in connection with
the development of such product and the denominator of which will equal the
funds available for development of Spiros products. Proceeds, if any, from
the exercise of any product option are excluded.
Any payments received by us with respect to the exercise of either product
option will be available to us to further develop Spiros products.
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The product option agreement will automatically terminate in the event that
we terminate the technology agreement, the development agreement or the
manufacturing and marketing agreement, consistent with the terms of those
agreements. Additionally, the product option agreement will terminate on the
date the purchase option terminates, whether by exercise or otherwise.
DEVELOPMENT AGREEMENT
We entered into a development agreement with Dura under which Dura agreed to
use commercially reasonable efforts to develop the Spiros products and to
make other development expenditures. Dura will furnish all labor,
supervision, services, supplies, and materials necessary to perform the
development.
Dura also agreed to use commercially reasonable efforts to obtain the rights
to, and to sublicense to us, any patent or technology license held by a third
party that Dura reasonably determines to be necessary or useful to enable
Dura to conduct the development. Dura will act as our exclusive agent for the
filing and prosecuting of all regulatory applications and permits required
for FDA approval in Dura's name and any other necessary regulatory approvals
for the Spiros products. In the event that the purchase option expires
unexercised, Dura will use its reasonable efforts to cause all applications
and documents filed with the FDA or a foreign regulatory authority to obtain
regulatory approvals for the Spiros products, with respect to which Dura has
not acquired exclusive rights, to be assigned to us.
Dura will conduct the development in accordance with an annual workplan and
budget. Dura provides us with annual workplans and budgets, which are subject
to approval and acceptance by our board of directors. Dura must report any
significant deviations from an annual workplan and budget in a timely manner.
Further, our reimbursement for expenditures to Dura may not exceed in any
calendar year 120% of the amount allocated in the applicable annual workplan
and budget, unless otherwise approved by us. Our current development plan and
budget for 2000 are expected to result in expending all cash during the
second half of the year. The development plan and budget for the second half
of 2000 are subject to change, in the event the merger with Dura is not
completed, as described under "Overview."
During the term of the development agreement, both companies will provide the
other with quarterly reports with respect to all payments due and all credits
taken for such quarter. Dura's quarterly report to us includes a statement of
the development costs as defined in the agreement incurred during the quarter
and a summary of work performed for us. Additionally, each company is
required to maintain and make available for inspection by an independent
public accountant selected by the requesting party such records of the other
party as may be necessary to verify the accuracy of reports and payments made
under the development agreement. The inspection may occur once in each
calendar year and upon reasonable notice and during regular business hours.
Payments to Dura 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 described above. Our
payments are limited to the maximum amount of the funds we have available.
Development costs will include development expenses, including salaries,
benefits, supplies, and facilities and overhead allocations, that are billed
at a rate of fully burdened cost plus 25%. Services provided by third parties
will be billed at a rate of cost plus 20%. This pricing structure is
considered by Dura to be consistent with contractual relationships it has had
with other third parties.
If either company determines that the development of a particular Spiros
product should be discontinued because continued development is not feasible
or is uneconomic, or that the development should be
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expanded to include additional compounds, then both companies will use
reasonable efforts to agree on the nature of the development and the identity
of any other compound to be developed.
Under the development agreement, the costs of the manufacture and sale of
Spiros products to conduct clinical trials necessary to obtain FDA approval
or any other required regulatory approval are included in development costs.
Dura will pay us any revenue received from the sale of such Spiros products
prior to receipt of FDA approval to market.
Either company may terminate the development agreement prior to its
expiration if the other party:
- breaches any material obligation under the technology
agreement or the development agreement, which breach continues
for a period of 60 days after written notice thereof;
- enters into any voluntary proceeding in bankruptcy,
reorganization or an arrangement for the benefit of its
creditors, or its Board of Directors or stockholders authorize
such action; or
- fails to dismiss any such proceeding within 60 days after the
same is involuntarily commenced.
Dura's obligation to perform development work under the development agreement
will terminate when we have cash or cash equivalents of less than $5 million.
We project this to occur during the second half of 2000 based on our current
development program. Dura may elect to provide additional funding for the
development of the Spiros products in its sole discretion.
Dura may assign its rights and delegate its obligations under the development
agreement only to an affiliate of Dura, selected successors of Dura or
selected persons that acquired substantially all of the assets of Dura. We
may not assign our rights or delegate our obligations under the agreement.
MANUFACTURING AND MARKETING AGREEMENT
We entered into a manufacturing and marketing agreement with Dura under which
we granted to Dura an exclusive, worldwide license to manufacture and market
the Spiros products. Dura will pay us on a quarterly basis a royalty of 7% of
the net sales of each Spiros product. The royalty begins upon receipt of FDA
approval to market such product. Prior to the expiration of the option to
acquire assets related to Albuterol Spiros, no royalty payment is due with
respect to net sales of Albuterol Spiros.
Under this agreement, Dura agreed to use diligent efforts to commence sales
of each Spiros product promptly upon receiving FDA approval for such product.
Dura will be responsible for maintaining competent, qualified sales
personnel, and agreed not to make any representations inconsistent with the
approved labeling of each Spiros product.
"Net sales" for purposes of this agreement and the technology agreement is
defined as the gross amount invoiced for sales of the Spiros products by Dura
or its sublicensees, if any, to third parties less:
- discounts actually allowed;
- credits for claims, allowances, retroactive price reductions
or returned Spiros products;
- prepaid freight charges incurred in transporting Spiros
products to customers;
- sales taxes and other governmental charges actually paid in
connection with the sales, but excluding income taxes; and
- royalty obligations paid to the inventor of some aspects of
the Spiros technology.
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Net sales will not include sales between or among Dura, its affiliates and
its sublicensees unless such sales are for end use rather than for purposes
of resale.
This agreement will terminate upon the exercise or termination of the
purchase option or by mutual agreement of the parties at any time. In the
event Dura exercises either product option, this agreement will terminate
with respect to relevant product, but will otherwise continue in full force
and effect.
SERVICES AGREEMENT
We entered into a services agreement with Dura. Dura provides specified
management and administrative services to us, performed either internally or
externally on our behalf, at the rate of $100,000 per calendar quarter. This
agreement terminates on the earlier of the exercise of the purchase option or
12 months after expiration of the purchase option.
SPECIAL COMMON STOCK
There are currently 1,000 shares of our special common stock issued, all of
which are held by Dura. The special common stock does not confer on its
holder the right to vote at any meeting of our stockholders except as
required by law or as described in the next paragraph. The holder of special
common stock is entitled to elect two of our directors. In the event we are
dissolved, our callable common stock has a priority over the special common
stock with respect to return of capital. The special common stock is not
otherwise entitled to participate in any way in our profits or assets. We do
not presently intend to issue any additional shares of special common stock.
Until the expiration of the purchase option, no resolution or act of us or
our board of directors to authorize or permit any of the following will be
effective without the prior written approval of the holders of a majority of
the outstanding special common stock:
- the allotment or issue of shares or other securities of us or
the creation of any right to such an allotment or issue;
- the reduction of our authorized capital stock;
- the alteration of or any change to the rights, powers,
preferences and restrictions of the special common stock;
- outstanding borrowings of an aggregate of more than $1 million
at any one time;
- the sale or other disposition of or the creation of any lien
or liens on the whole or a material part of our business or
assets;
- the declaration or payment of dividends or the making of any
other distributions to our stockholders;
- the merger, consolidation or reorganization of us with or into
any other corporation;
- the sale, liquidation or other disposition of all or
substantially all of our assets;
- the alteration or amendment of Articles IV or VII of our
certificate of incorporation; and
- the adoption, amendment or repeal of our bylaws.
As a result, Dura, as the holder of the outstanding special common stock,
could preclude the holders of a majority of the shares of our callable common
stock and our board of directors from taking any of the actions described
above for so long as Dura continues to hold its shares. Dura may transfer or
sell all, but not less than all, of its shares of special common stock. As a
result, an unrelated third party may acquire rights associated with the
special common stock, including the rights discussed in this section. Any
resolution to wind up our affairs or to liquidate us will confer upon the
holders of the special common
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stock a right to vote. Shares of special common stock will carry a number of
votes equal to the total number of votes carried by our callable common stock
at the time outstanding. For a discussion of risks associated with Dura's
ownership of special common stock, see "Risks and Uncertainties" below.
SALES AND MARKETING
We will rely entirely on Dura under the manufacturing and marketing agreement
for our sales and marketing efforts. Under the manufacturing and marketing
agreement, Dura will submit an annual marketing plan to be approved by us.
COMPETITION
There are at least 10 companies currently involved in the development,
marketing or sales of single and/or multiple dose dry powder pulmonary drug
delivery systems. Many of these companies, which include 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 our proposed products. In addition, Dura
may develop or acquire products, which may compete with Spiros products.
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. We believe that competition among both
prescription pharmaceuticals and pulmonary delivery systems will be based on,
among other things, product efficacy, safety, reliability, availability and
price.
MANUFACTURING
A substantial amount of the work under the development agreement and the
manufacturing and marketing agreement will be conducted at Dura's facilities.
Dura has informed us that it believes that its available facilities are
sufficient to satisfy its obligations under the development agreement and the
manufacturing and marketing agreement. However, the same facilities may be
used by Dura for work performed on its own account and in the performance of
third party contracts.
PATENTS AND PROPRIETARY RIGHTS
Dura presently holds 12 U.S. patents and 13 U.S. patent applications relating
to the Spiros technology to be further developed by us. The issued patents
include a patent with claims covering the use in Spiros of an impeller to
create an aerosol cloud of a drug intended for inhalation, which expires in
2011. Dura has also filed certain continuations in part and foreign patent
applications relating to Spiros. All of the above patents and patent
applications, relating to the Spiros technology, together with their
respective continuations in part and foreign patent applications, have been
licensed to us for specified users under the technology agreement. Until the
expiration or termination of the purchase option, Dura is required to file
patent applications, at our expense, with respect to inventions included in
our technology. Dura will be the owner, while we will be the exclusive
licensee for use with the Spiros products of any patents included in our
technology. Our success will therefore depend in part upon the ability of
Dura or us, as the case may be, to obtain strong patent protection both in
the United States and other countries.
On our behalf, Dura's scientists have recently invented a new technology for
forming aerosols from powder formulations. This new technology builds on
earlier work with Spiros and its aerosol delivery system, using a motorless
inhaler system which can use existing powder storage systems or new unit dose
systems. Broad
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patent coverage is being sought for this new technology.
We consider the protection of discoveries in connection with our development
activities important to our business. We intend to seek patent protection in
the U.S. and selected foreign countries where deemed appropriate. Dura has
also filed foreign patent applications relating to selected aspects of Spiros
technology.
We also rely upon trade secrets, unpatented proprietary know-how and
continuing technological innovation to develop our competitive position. For
a discussion of risks related to our intellectual property rights, see "Risks
and Uncertainties" below.
GOVERNMENT REGULATION
The manufacturing and marketing of Spiros products are subject to regulation
by Federal and state government authorities. In the U.S., pharmaceuticals and
drug delivery systems, including Spiros, are also subject to rigorous FDA
regulation and may be subject to regulation by other jurisdictions, including
the State of California. The Federal Food, Drug, and Cosmetic Act and the
Public Health Service Act govern the testing, manufacture, safety, efficacy,
labeling, storage, record keeping, approval, advertising and promotion of
Spiros products. Product development and approval within this regulatory
framework takes a number of years and involves the expenditure of substantial
resources.
To obtain FDA approval for each of the Spiros products, Dura, on our behalf,
must conduct each of the following steps and possibly others:
- laboratory and possibly animal tests;
- the submission to the FDA of an investigational new drug, or
IND, application, which must become effective before human
clinical trials may commence;
- adequate and well-controlled human clinical trials to
establish safety and efficacy;
- the submission of an NDA to the FDA for marketing approval;
and
- FDA approval of the NDA prior to any commercial sale or
shipment.
The NDA must include, in addition to a compilation of preclinical and
clinical data, complete information about product performance and
manufacturing facilities and processes. Prior to completion of the regulatory
review process, the FDA may conduct an inspection of the facility,
manufacturing procedures, operating systems and personnel qualifications. In
addition to obtaining FDA approval for each product, each domestic drug
and/or device manufacturing facility must be registered with and approved by
the FDA. Domestic manufacturing facilities are subject to biennial
inspections by the FDA and inspections by other jurisdictions and must comply
with good manufacturing practice for both drugs and devices. To supply
products for use in the U.S., foreign manufacturing establishments must
comply with current good manufacturing practice and other requirements and
are subject to periodic inspection by the FDA or by regulatory authorities in
such countries under reciprocal agreements with the FDA.
Preclinical testing includes laboratory evaluation of product chemistry and
animal studies, if appropriate, to assess the safety and efficacy of the
product and its formulation. The results of the preclinical tests are
submitted to the FDA as part of an IND application, and unless the FDA
objects, the IND application will become effective 30 days following its
receipt by the FDA, thus allowing the product to be tested in humans.
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Clinical trials involve the administration of the pharmaceutical product to
healthy volunteers or to patients identified as having the condition for
which the pharmaceutical agent is being tested. The pharmaceutical product is
administered under the supervision of a qualified principal investigator.
Clinical trials are conducted in accordance with Good Clinical Practice and
protocols previously submitted to the FDA as part of the IND application that
detail the objectives of the study, the parameters used to monitor safety and
the efficacy criteria evaluated. Each clinical study is conducted under the
auspices of an independent Institutional Review Board, or IRB, at the
institution at which the study is conducted. The IRB considers, among other
things, the design of the study, ethical factors, the safety of the human
subjects and the possible liability risk for the institution.
Clinical trials for new products are typically conducted in three sequential
phases that may overlap. In Phase I, the initial introduction of the
pharmaceutical into healthy human volunteers, the emphasis is on testing for
safety and adverse effects, dosage tolerance, metabolism, distribution,
excretion and clinical pharmacology. Phase II involves studies in a limited
patient population to determine the initial efficacy of the pharmaceutical
for specific targeted indications, to determine dosage tolerance and optimal
dosage and to identify possible adverse side effect and safety risks. Once a
compound is found to be effective and to have an acceptable safety profile in
Phase II evaluations, Phase III trials are undertaken to more fully evaluate
clinical outcomes. The FDA reviews both the clinical plans and the results of
the trials and may require the study to be discontinued at any time if there
are significant safety issues.
The results of the preclinical and clinical trials for pharmaceutical drug
products such as those being developed by Dura, on our behalf, are submitted
to the FDA in the form of an NDA for marketing approval. FDA approval can
take several months to several years, or approval may be denied. The approval
process can be affected by a number of factors, including the severity of the
side effects, the availability of alternative treatments and the risks and
benefits demonstrated in clinical trials. Additional animal studies or
clinical trials may be requested during the FDA review process and may delay
marketing approval. After FDA approval for the initial indication, further
clinical trials are necessary to gain approval for the use of the product for
any additional indications. The FDA may also require post-marketing testing
and surveillance to monitor for adverse effects, which can involve
significant additional expense.
The FDA has considerable discretion to decide what requirements must be met
prior to approval. We believe, based upon the FDA's historical practice with
respect to drug inhalers, that the FDA will regulate each combination of
Spiros with a compound as a discrete pharmaceutical or drug product requiring
separate approval as a new drug.
The Federal Food, Drug, and Cosmetic Act permits the export of unapproved
drugs to a foreign country, provided the product complies with the laws of
that country and has valid marketing authorization in at least one of a list
of designated "Tier 1" countries. Once a product is exported to a qualified
foreign country, we will be subject to the applicable foreign regulatory
requirements governing human clinical trials and marketing approval in that
country. The requirements relating to the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely from country to country and
there can be no assurance that we will be able to meet and fulfill the
statutory requirements in a particular country.
RESEARCH AND DEVELOPMENT EXPENSES
We incurred research and development expenses for the period from September
23, 1997 (date of incorporation) through December 31, 1997, and the years
ended December 31, 1998 and 1999, of $7.0 million, $50.8 million, and $59.2
million, respectively.
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HUMAN RESOURCES
We have no employees. Our officers, Dr. David S. Kabakoff, Chairman,
President and Chief Executive Officer, Erle T. Mast, Vice President and Chief
Financial Officer, and John R. Cook, Secretary, are employees of Dura.
RISKS AND UNCERTAINTIES
SPIROS-Registered Trademark- 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.
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. As a
result, 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 provide additional cash to us through
the exercise of the albuterol or product purchase options, it is not
obligated to do so. Dura may not have adequate information available to it
when our funds are depleted to make a decision on the exercise of the
albuterol or product option. If the purchase option or either the albuterol
or product options is not exercised by Dura, and the merger agreement is not
completed, we would have to raise substantial funding while hiring, or
otherwise obtaining access to, research and management personnel to perform
the work now performed by Dura. We may not be successful in doing any of
these tasks.
DURA MAY NOT EXERCISE ITS OPTIONS.
In the event the merger with Dura is not completed, Dura is not obligated to
exercise its stock purchase option, the albuterol purchase option or the
second product purchase option, and it will exercise these options only if
Dura's Board of Directors determines that 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 attempt to develop or market the Spiros products ourselves, we will
require substantial additional funds. We may not be able to raise funds when
needed. Similarly, if we elect 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.
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BEFORE WE CAN MARKET ANY SPIROS PRODUCT, WE WILL HAVE TO OBTAIN REQUIRED
GOVERNMENTAL APPROVALS, WHICH IS NOT ASSURED.
The development, testing, manufacturing and marketing of pharmaceutical
products are subject to extensive regulation by governmental authorities,
including the FDA. The FDA must approve each Spiros product before that
product can be manufactured or marketed for commercial sale. Failure to
obtain such approvals could result in Dura not exercising its purchase option
for our callable common stock. The review and approval process mandated by
the FDA is very rigorous, requiring extensive preclinical and clinical
testing as well as determining manufacturing capability and product
performance. None of the products currently in development may ever be
approved by the FDA.
WE ARE DEPENDENT ON DURA FOR ALL ACTIVITIES IN THE DEVELOPMENT OF SPIROS
PRODUCTS.
We do not have manufacturing or marketing capabilities. We and Dura will
determine specified 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 of these
activities and procedures, 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 our projects. The resources
that Dura uses for our projects may therefore be limited.
Under our agreements with Dura, we are obligated to use only Dura's
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. Dura's facilities or those of its contract manufacturers may not be
adequate for our needs. In addition, Dura or its contract manufacturers may
require additional FDA approvals prior to commencing manufacturing of Spiros
products. The Spiros products may not be manufacturable, 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 NEED TO SIGNIFICANTLY EXPAND ITS MANUFACTURING CAPABILITY AND COMPLY
WITH GOVERNMENT REGULATIONS BEFORE IT CAN MANUFACTURE ANY SPIROS PRODUCTS ON OUR
BEHALF.
If Dura or other third parties are not successful in attaining acceptable
manufacturing quality levels or meeting regulatory requirements, our ability
to commercialize the Spiros products will be adversely affected. Dura will
need to significantly expand its current manufacturing operations and comply
with regulations prescribed by various regulatory agencies to achieve the
quality and required levels of production of our 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. Any third parties used in manufacturing Spiros will be
required to significantly scale up their activities and to produce components
which meet applicable specifications on a timely and consistent basis.
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
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selling products that compete with those that we plan to offer. Our failure
to effectively respond to the competitive pressures of our industry would
have an adverse effect on our ability to effectively sell our products. 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 us. Competitors may also be able to complete the regulatory
process sooner, and therefore, may begin to market their products in advance
of our products.
WE DO NOT HAVE A LONG OPERATING HISTORY AND WE MAY NEVER ACHIEVE PROFITABILITY
OR PAY DIVIDENDS.
We 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, we may never recover our
initial losses. 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 exclusively licensed to us the rights to develop, manufacture and
commercialize the specified Spiros products, Dura is not prohibited from
developing other products using Spiros, including those products that may
compete with our 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 our
Spiros products. It is possible that Dura's rights with respect to such
competitive products could reduce Dura's incentive to exercise the albuterol
option, the other product option or the stock purchase option.
DURA HAS THE ABILITY TO LIMIT SPECIFIED ACTIVITIES.
Until the expiration of the purchase option, Dura must approve specified
activities, including:
- issuing our securities;
- borrowing an aggregate of more than $1 million at any one
time;
- selling a material part of our business or assets;
- declaring or paying dividends or making any other
distributions to our shareholders;
- merging or consolidating with any other corporation; and
- adopting, amending or repealing our bylaws.
Accordingly, Dura could preclude our shareholders and board of directors from
taking any of these actions prior to the expiration of the purchase option.
Dura, as holder of all of our outstanding special common stock, may transfer
or sell all, but not less than all, of its 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. An acquiror of
the special common stock may not 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 other
product option or the stock purchase option.
22
<PAGE>
OUR ABILITY TO OBTAIN PATENTS AND PROTECT OUR PROPRIETARY RIGHTS IS UNCERTAIN
AND COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
Our ability to obtain patents on current or future products or technologies,
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 patent rights we hold or obtain.
Our commercial 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 or
technologies 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 or technologies. 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
technologies or we could find that the development, manufacture or sale of
products requiring such licenses is not possible.
OUR STOCK PRICE IS VOLATILE.
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 callable
common stock. Such announcements might include:
- - financial results;
- - the results of clinical testing or other developments with 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.
ITEM 2. PROPERTIES
Our corporate offices are located in Dura's executive offices in San Diego,
California. We do not own or lease any facilities.
23
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The following table sets forth the high and low sale prices of our units, of
which our callable common stock was a part through December 31, 1999, as
reported on the Nasdaq National Market, without retail mark-up, mark-down, or
commissions, for the last two years by quarter. Each unit consisted of one share
of our callable common stock and a warrant for Dura common stock. As of January
1, 2000, the callable common stock and the warrant began trading publicly as
separate securities.
<TABLE>
<CAPTION>
Units
High Low
---- ---
<S> <C> <C>
1998
First Quarter $19.00 $13.75
Second Quarter $17.38 $15.88
Third Quarter $17.00 $9.38
Fourth Quarter $11.75 $6.63
1999
First Quarter $10.38 $8.13
Second Quarter $10.63 $8.38
Third Quarter $9.00 $6.50
Fourth Quarter $8.25 $4.38
</TABLE>
At March 1, 2000, the closing price of our callable common stock was $12.50. At
March 1, 2000 there were approximately 1,000 beneficial holders of record of our
callable common stock and one holder of record of special common stock.
We have not paid any dividends on our callable common stock and do not expect to
do so in the foreseeable future. Holders of our callable common stock are
entitled to receive any such dividends as may be recommended by the board of
directors and approved by the holder of the special shares. The special common
stock is not entitled to receive dividends.
On December 22, 1997, we and Dura completed an initial public offering of
6,325,000 units. Each unit consisted of one share of our callable common stock
and one warrant to purchase one-fourth of one share
24
<PAGE>
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 December 31, 1999,
we have used $97.7 million of our cash, cash equivalents and short-term
investments, all of which has been paid to Dura, for our operating activities
and have $64.2 million of working capital.
ITEM 6. SELECTED FINANCIAL DATA
The following data has been derived from our audited financial statements. The
information set forth below is not necessarily indicative of the results of
future operations and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 and our financial statements and related notes in Item 8.
(In thousands, except per share data)
<TABLE>
<CAPTION>
September 23, 1997 September 23, 1997
(date of (date of
incorporation) incorporation)
through Year ended Year ended through
December 31, December 31, December 31, December 31,
1997 1998 1999 1999
------------------ -------------- ------------ ------------------
<S> <C> <C> <C> <C>
Total revenues $ 222 $ 8,239 $ 5,341 $ 13,802
Net loss $ (6,924) $ (43,793) $ (55,064) $ (105,781)
Net loss per share:
basic and diluted $ (1.09) $ (6.92) $ (8.71) $ (16.72)
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1998 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Total assets $ 170,506 $ 123,796 $ 71,139
Total liabilities $ 8,425 $ 4,878 $ 6,893
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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-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
drugs for use with Spiros-Registered Trademark-. We commenced operations on
December 22, 1997.
On December 22, 1997, we and Dura completed an initial public offering of
6,325,000 units, each unit consisting of one share of our callable common stock
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. We
expect to pay to Dura
25
<PAGE>
substantially all funds from the offering and the $75 million contribution
from Dura and interest earned on these funds for the development and
commercialization of Spiros and the use of Spiros with specified drugs under
our various agreements with Dura described in Item 1 "Business" above.
In March 2000 we entered into a merger agreement with Dura. Under the
agreement, for each share of our callable common stock our shareholders will
receive $13.25 in cash and one five-year warrant to purchase a fractional
share of Dura's common stock at $17.94 per share, which represents a 25%
premium over the average closing price of Dura's common stock for the ten
trading days prior to the date of the merger agreement. The exact fraction of
a share of Dura's common stock purchasable under the warrant will be
determined based on the average closing price of Dura's common stock for the
ten trading days prior to the vote of our shareholders on the merger and will
result in a calculated Black-Scholes value for each warrant of between $3.22
and $1.81 using an agreed upon volatility of 65% based on recent volatility
of Dura's common stock. Based on the market price of Dura's common stock used
to calculate the exercise price of the warrant, the total consideration for
the merger as of the date of the merger agreement was calculated to be $100.8
million, or $15.75 per share of callable common stock. Closing of the
transaction is subject to Hart-Scott-Rodino clearance, effectiveness of the
registration statement for Dura's warrants, and our shareholder approval. We
and Dura have received voting agreements in favor of the merger from holders
of approximately 22% of our outstanding callable common stock. A special
committee of independent members of our board, formed in December 1999 to
evaluate our strategic alternatives, has approved the merger agreement and is
recommending that our shareholders approve the merger. We expect to deliver a
proxy statement describing the terms of the merger agreement in greater
detail to our shareholders in the near term.
Our current development plan and budget for 2000 are expected to result in
expanding all of our cash during the second half of the year. The development
plan and budget for the second half of 2000 are subject to change in the
event the merger with Dura is not completed.
In the event the merger is not completed, Dura, as holder of 100% of the
outstanding shares of our special common stock, still has an irrevocable
option to purchase all, but not less than all, of the issued and outstanding
shares of our common stock at predetermined prices. Dura may exercise the
purchase option at any time through the earlier of:
- - December 31, 2002;
- - 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 by providing additional
funding for the continued development of Spiros, but in no event beyond
December 31, 2002; or
- - upon termination the technology license, development, or the
manufacturing agreements with Dura.
26
<PAGE>
The purchase option exercise price per share was $24.01 through December 31,
1999, and increases 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 December 1997, we entered into a technology license agreement with Dura. Dura
granted us an exclusive, worldwide, perpetual royalty-bearing license to use
technology owned by Dura relating to the use of Spiros with the asthma and COPD
drugs albuterol, beclomethasone, ipratropium, budesonide, and a combination of
albuterol and ipratropium. We also executed a series of agreements with Dura,
which provide for the development, marketing, and manufacturing of Spiros with
specified compounds and for the provision of general and administrative services
by Dura. Since Dura conducts all of our current activities under these
agreements, we do not maintain any research staff or occupy any research
facilities.
RESULTS OF OPERATIONS
We incurred net losses of $43.8 million and $55.1 million for the years ended
December 31, 1998 and 1999, respectively. For 1998 and 1999, research and
development costs totaled $50.8 million and $59.2 million, respectively, and
general and administrative expenses totaled $1 million and $1.2 million,
respectively. The research and development expenses were for Spiros-related
activities performed by Dura under agreements with us. Our interest income for
1998 and 1999 totaled $8.2 million and $5.3 million, respectively. The decline
results from lower balances of cash and short-term investments during 1999
versus 1998. We expect our interest income to continue to decrease in 2000 as
our funds are used to continue the development of the Spiros products.
We commenced operations in December 1997 and incurred a net loss of $6.9
million for the period ended December 31, 1997 on research and development
expenses of $7 million. The lower amount of revenues and expenses in 1997
reflect the fact that our operations commenced that year.
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 December 31, 1999, we had cash, cash
equivalents, and short-term investments totaling $71 million and working
capital totaling $64.2 million, a decrease of $52.6 million and $54.7
million, respectively, from December 31, 1998. Our existing working capital
and expected interest income will not be sufficient to fund our cash
requirements through December 31, 2000. Based on our current development plan
and budget for the Spiros products, we expect to expend all of our existing
cash during the second half of 2000. Further, we do not believe that our
existing funds will be sufficient to complete the development of any Spiros
product. In the event the merger with Dura is not consummated, the use of our
existing funds will require Dura to consider whether to exercise its option
to purchase our callable common stock under the contractual terms, which it
may not be prepared to do at that time. Until the expiration of Dura's
option, we are 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 capital into us
through the exercise of Dura's product purchase options, it is not obligated
to do so. If Dura fails to provide additional funding, we will explore the
other strategic alternatives available to us, including liquidation, sale to
a third party, or licensing of the technology. There can be no assurance that
any of these alternatives will be successful.
As noted above, in March 2000, we entered into a definitive merger agreement
with Dura for the acquisition by Dura of all the outstanding shares of our
callable common stock. Under the merger agreement, Dura will purchase each share
of callable common stock for $13.25 in cash plus one five-year
27
<PAGE>
warrant to purchase a fractional share of Dura common stock at $17.94 per
share. Closing of the acquisition is subject to approval by our stockholders.
ITEM 7A. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are filed as part of this Annual Report on Form 10-K
(see Item 14).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On February 23, 2000, we engaged Ernst & Young LLP as our independent
accountants to audit our financial statements in place of Deloitte & Touche LLP
(the "Former Accountants"). The decision to change accountants was approved by
our Board of Directors and by our Audit Committee.
During the period ended December 31, 1999, and the subsequent period through
February 23, 2000, there were no disagreements or reportable events between the
Former Accountants and us on any matter relating to accounting principles or
practices, financial statement disclosure, or auditing scope or procedures. In
addition, the Former Accountants' report on our financial statements for the
year ended December 31, 1998, and the periods September 23, 1997 (date of
incorporation) through December 31, 1997 and 1998, contained no adverse opinions
or disclaimers of opinion, and was not qualified or modified as to uncertainty,
audit scope or accounting principles.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS
CAM L. GARNER, 51, has served as Chairman of the Board of Dura, a specialty
respiratory pharmaceutical company, since 1995, as Chief Executive Officer since
1990 and as President from 1990 until 1998. He joined Dura in 1989 as Executive
Vice President. From 1987 to 1989, he served as President of Syntro Corporation,
a biotechnology company. He has served as a director since our formation in
1997. Mr. Garner currently serves as a director of Dura, CardioDynamics
International Corporation, a manufacturer of medical devices, and Nanogen, Inc.,
a biotechnology company.
DAVID S. KABAKOFF, PH.D., 52, has served as Chairman, Chief Executive Officer,
President and a director since our formation in 1997. He joined Dura in 1996 as
Executive Vice President and a director, and he was named President, Dura
Technologies in 1998. From 1989 to 1996, Dr. Kabakoff was employed by
28
<PAGE>
Corvas International, Inc., a biopharmaceutical company, and served in a
number of capacities during that time period, including Chief Executive
Officer, President, Chief Operating Officer and Chairman.
SOL LIZERBRAM, RPH., D.O., 52, has served as Chairman of HealthFusion.com
(formerly Total Business Internet Connectivity), a healthcare communication
company, since 1998. Prior to joining Total Business, Dr. Lizerbram was a
co-founder of FPA Medical Management, Inc., a physician practice management
company, and served as Chairman of FPA from 1993 through 1998. FPA filed a
petition under the Federal bankruptcy laws in 1998. Dr. Lizerbram was first
elected a director in 1998 and currently serves as a member of our Audit and
Special Committees.
WILLIAM H. RASTETTER, PH.D., 51, has served as Chairman of IDEC Pharmaceuticals
Corporation, a pharmaceutical company, since 1996 and as President and Chief
Executive Officer since 1986. He served as Chief Financial Officer of IDEC from
1988 to 1993. From 1984 to 1986, he was Director of Corporate Ventures at
Genentech, Inc. and from 1982 to 1984, he served in a scientific capacity at
Genentech, directing the Biocatalysis and Chemical Sciences groups. Dr.
Rastetter was first elected a director in 1998 and currently serves as a member
of our Audit and Special Committees.
ALAIN B. SCHREIBER, M.D., 44, has served as President and Chief Executive
Officer and a director of Vical, Inc., a pharmaceutical company, since 1992.
Prior to joining Vical, Dr. Schreiber held various executive level positions at
Rhone-Poulenc Rorer Inc., a pharmaceutical company, from 1985 to 1992, most
recently as Senior Vice President of Discovery Research. From 1982 to 1985, he
served as Biochemistry Department Head at Syntex Research. Dr. Schreiber was
first elected a director in 1998 and currently serves as a member of our Audit
and Special Committees.
IDENTIFICATION OF EXECUTIVE OFFICERS
Our executive officers are:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
---- ---- -------------
<S> <C> <C>
David S. Kabakoff 52 Chairman, President, Chief Executive Officer and director
Erle T. Mast 37 Vice President and Chief Financial Officer
</TABLE>
DR. KABAKOFF is a director. See "Identification of Directors" for a
discussion of his business experience.
ERLE T. MAST has served as our Vice President and Chief Financial Officer since
our formation in 1997. Mr. Mast also has served as Vice President, Finance of
Dura since 1997. From 1984 through 1997, Mr. Mast served in various positions at
Deloitte & Touche LLP, an accounting and consulting firm, most recently as a
partner, where he specialized in providing accounting, auditing and business
consulting services to companies in various industries, including the healthcare
and life science industries. He has been a Certified Public Accountant in
California since 1986.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our executive
officers, directors and holders of more than 10% of our callable common stock to
file with the SEC reports regarding their
29
<PAGE>
ownership and changes in ownership of our securities. We believe that, during
fiscal year 1999, our executive officers, directors and 10% stockholders
complied with all Section 16(a) filing requirements. In making this
statement, we have relied upon examination of the copies of Forms 3, 4 and 5
provided to us and the written representations of our executive officers,
directors and 10% stockholders.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides summary information concerning compensation earned
by our Chairman, President and Chief Executive Officer and our only other
executive officer (collectively, the "Named Executive Officers") for services
rendered to us in all capacities for fiscal years ended December 31, 1999, 1998
and 1997. We were formed in September 1997. Our Named Executive Officers are
also employees of Dura and, except as set forth in the table, received no other
compensation from us.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
---------------------------
Number of
Securities
Name and Underlying
Principal Position Year Options/SARs
------------------ ---- ------------
<S> <C> <C>
David S. Kabakoff 1999 0
Chairman, President and 1998 0
Chief Executive Officer 1997 71,000
Erle T. Mast 1999 0
Vice President and 1998 0
Chief Financial Officer 1997 22,000
</TABLE>
STOCK OPTIONS
No stock options or stock appreciation rights were granted under our 1997 Stock
Option Plan to our Named Executive Officers in the fiscal year ended December
31, 1999.
OPTION EXERCISES AND HOLDINGS
The following table provides information, with respect to our Named Executive
Officers, concerning unexercised options held under our Stock Option Plan as of
December 31, 1999. No options were exercised during the 1999 fiscal year. Value
is defined as market price of our callable common stock at fiscal year end less
exercise price. As of December 31, 1999, our callable common stock traded on the
Nasdaq National Market as a component of units, consisting of our callable
common stock and a warrant to purchase Dura common stock. The Unit market price
at December 31, 1999 was $8.00 per share. We believe the fair market value of
our Callable Common Stock on that date was $7.50 per share, based on estimated
valuation of the warrant component of the units at $.50 per warrant. As of
January 1, 2000, our callable common stock and the warrant separated and now
trade independently.
30
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at Options/SARs at
December 31, 1999 December 31, 1999
----------------- -----------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David S. Kabakoff 0 71,000 $0 $0
Erle T. Mast 0 22,000 $0 $0
</TABLE>
DIRECTOR COMPENSATION
We reimburse our directors for their out-of-pocket expenses incurred in
attending meetings of our Board of Directors or any committee other than the
Special Committee. The Special Committee of our Board was formed in December
1999 for the purpose of considering strategic alternatives available to us,
including any proposed transaction with Dura and any other proposals, offers or
expressions of interest in a possible business combination with us. Dr.
Rastetter receives $16,000 for each month of service as chairman of the Special
Committee. Drs. Lizerbram and Schrieber each receive $12,000 for each month of
service as members of the Special Committee. In addition, directors may
receive options under our Stock Option Plan in connection with their service on
our Board, as determined at the discretion of our Board. There were no options
granted to our directors under our Stock Option Plan during the 1999 fiscal
year.
EMPLOYMENT CONTRACTS, SEVERANCE AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
We have not entered into any employment contracts, severance agreements and/or
change of control agreements with our executive officers.
Each option granted under our Stock Option Plan becomes exercisable five years
following the grant date. The option vesting accelerates in the event Dura
exercises its stock purchase option to acquire all of our callable common stock.
Our Stock Option Plan also provides for acceleration of outstanding options in
the event of specified corporate transactions, including a merger, sale or
change of control.
In March 2000, we entered into a definitive merger agreement with Dura for
the acquisition by Dura of all of the outstanding shares of callable common
stock. See "Management's Discussion and Analysis of Financial Condition and
results of Operations."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We do not have a standing Compensation Committee as all matters are considered
by our full Board of Directors. We have no insider relationships reportable
under this item.
31
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following are the only persons we know of to beneficially own more than 5%
of our callable common stock or our special common stock as of March 1, 2000.
Except as indicated in the footnotes to this table, the entities named in the
table have sole voting and investment power with respect to all shares of
callable common stock or special common stock shown as beneficially owned by
them. Percentage of ownership is calculated under SEC Rule 13d-3(d)(1).
<TABLE>
<CAPTION>
Number
Number of Shares Percentage
Title of Name and Address of Shares Underlying of Shares
Class of Beneficial Owner Owned Options Outstanding
-------- ------------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Callable Dura Pharmaceuticals, Inc. (1) 0 6,325,000 100%
Common Stock 7475 Lusk Blvd.
San Diego, California 92121
Callable Funds managed by Farallon Partners, L.L.C. (2) 1,374,400 0 21.7%
Common Stock One Maritime Plaza, Suite 1325
San Francisco, California 94111
Callable Elan International Services, Ltd. (3) 937,500 0 14.8%
Common Stock 102 St. James Court
Flatts, Smiths FL04
Bermuda
Callable Lehman Brothers Holdings Inc. (4) 441,400 0 7.0%
Common Stock 3 World Financial Center, 24th Floor
New York, New York 10285
Callable HBK Investments, L.P. (5) 935,400 0 14.8%
Common Stock 300 Crescent Court, Suite 700
Dallas, Texas 75201
Special Dura Pharmaceuticals, Inc. (1) 1,000 0 100%
Common Stock 7475 Lusk Blvd.
San Diego, California 92121
</TABLE>
- -------------------
(1) Pursuant to Amendment No. 2 to Schedule 13D dated February 14, 2000. Dura
holds beneficially and of record all shares of our special common stock.
Dura is also deemed, under the rules and regulations of the SEC, to be
the beneficial owner of all of the outstanding shares of our callable
common stock by virtue of its stock purchase option to acquire all of our
callable common stock.
(2) Pursuant to Amendment No. 1 to Schedule 13D dated March 21, 2000. Such
entities reported shared voting and dispositive power over the shares,
and certain affiliates disclaim beneficial ownership. Certain Farallon
entities entered into a Voting Agreement under which they agreed to vote
in favor of the merger with Dura.
(3) Pursuant to Schedule 13D dated March 12, 1998.
(4) Pursuant to Amendment No. 1 to Schedule 13G dated December 31, 1998.
(5) Pursuant to Schedule 13D dated February 15, 2000.
32
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information regarding the ownership of our
callable common stock as of March 1, 2000, by each director, by our Named
Executive Officers and by our directors and executive officers as a group. The
address for each beneficial owner listed below is 7475 Lusk Blvd., San Diego,
California 92121. The persons named in the table have sole voting and investment
power with respect to all shares of our callable common stock shown as
beneficially owned by them, subject to community property laws, where
applicable. Percentage of ownership is calculated under SEC Rule 13d-3(d)(1).
Asterisk denotes ownership of less than 1%.
<TABLE>
<CAPTION>
Number Percentage
Name Of Shares Of Shares
Title of Class of Beneficial Owner Owned Outstanding
-------------- ------------------- ----- -----------
<S> <C> <C> <C>
Callable Sol Lizerbram 0 *
Common Stock
Callable William H. Rastetter 0 *
Common Stock
Callable Alain B. Schreiber 0 *
Common Stock
Callable Cam L. Garner 18,250 *
Common Stock
Callable David S. Kabakoff 10,660 *
Common Stock
Callable Erle T. Mast 1,050 *
Common Stock
Callable Directors and executive 29,960 *
Common Stock officers as a group
(6 persons)
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
See "Director Compensation" for a discussion of the formation of the Special
Committee of our Board of Directors and fees payable to Drs. Lizerbram,
Rastetter and Schreiber as members of the Committee.
Our officers and directors are indemnified under Delaware General Corporation
Law and our Certificate of Incorporation and Bylaws to the fullest extent
permitted under Delaware law. We have also entered into indemnification
agreements with each of our officers and directors.
33
<PAGE>
CERTAIN BUSINESS RELATIONSHIPS
Dr. Kabakoff currently serves as President, Dura Technologies, and Mr. Garner
serves as Chairman and Chief Executive Officer of Dura. Under various
agreements, we have engaged Dura to develop products to which we have rights,
for use with Spiros-Registered Trademark-, a proprietary dry powder pulmonary
drug delivery system. For fiscal year 1999, we incurred research and
development expenses of $59.2 million for activities conducted under the
agreements with Dura.
Dura has a purchase option which entitles it to purchase all, but not less
than all, of our Callable Common Stock. The purchase option is exercisable at
any time before December 31, 2002, which exercise period may be shortened or
lengthened in certain circumstances. If the purchase option is exercised, the
per share exercise price is $25.26 through March 31, 2000, and increases on a
quarterly basis to $45.95 per share through December 31, 2002. The purchase
option exercise price may be paid in cash or shares of Common Stock of Dura,
or any combination of the foregoing, at Dura's sole discretion. Dura has no
legal obligation to exercise the purchase option. Dura owns all of our issued
and outstanding Special Common Stock which confers certain voting and other
rights, including the right to elect two of our directors. In addition, Dura
holds an option to acquire our exclusive rights for use of the
Spiros-Registered Trademark- system with albuterol and with a second product
other than albuterol. The purchase price for these options is payable in
cash.
In March 2000 we entered into a merger agreement with Dura. Under the
agreement, for each share of our callable common stock our shareholders will
receive $13.25 in cash and one five-year warrant to purchase a fractional
share of Dura's common stock at $17.94 per share, which represents a 25%
premium over the average closing price of Dura's common stock for the ten
trading days prior to the date of the merger agreement. The exact fraction of
a share of Dura's common stock purchasable under the warrant will be
determined based on the average closing price of Dura's common stock for the
ten trading days prior to the vote of our shareholders on the merger and will
result in a calculated Black-Scholes value for each warrant of between $3.22
and $1.81 using an agreed upon volatitility of 65% based on recent volatility
of Dura's common stock. Based on the market price of Dura's common stock used
to calculate the exercise price of the warrant, the total consideration for
the merger as of the date of the merger agreement was calculated to be $100.8
million, or $15.75 per share of callable common stock. Closing of the
transaction is subject to Hart-Scott-Rodino clearance, effectiveness of the
registration statement for Dura's warrants, and our stockholder approval. We
and Dura have received voting agreements in favor of the merger from holders
of approximately 22% of our outstanding callable common stock. A special
committee of independent members of our board, formed in December 1999 to
evaluate our strategic alternatives, has approved the merger agreement and is
recommending that our shareholders approve the merger. We expect to deliver a
proxy statement describing the terms of the merger agreement in greater
detail to our shareholders in the near term.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) 1. INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report
Balance Sheet
Statement of Operations
Statement of Shareholders' Equity
Statement of Cash Flows
34
<PAGE>
Notes to Financial Statements
(a) 2. INDEX TO FINANCIAL STATEMENT SCHEDULES
Financial statement schedules are omitted because they are not required, are not
applicable or the information is included in the financial statements or notes
thereto.
(a) 3. EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
<S><C>
(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 Spiros Corp. II (included in Exhibit 3.1).
4.2 Certificate of Callable Common Stock.
(2) 4.3 Certificate of Special Common Stock.
(2) 10.1 Technology License Agreement dated December 22, 1997
between Spiros Corp. II, Dura Pharmaceuticals, Inc.,
Dura Delivery Systems, Inc. and Spiros Development
Corporation.
(2) 10.2 Development Agreement dated December 22, 1997 between
Spiros Corp. II and Dura Pharmaceuticals, Inc.
(2) 10.3 Albuterol and Product Option Agreement dated December
22, 1997 between Spiros Corp. II and Dura
Pharmaceuticals, Inc.
(2) 10.4 Manufacturing and Marketing Agreement dated December
22, 1997 between Spiros Corp. II and Dura
Pharmaceuticals, Inc.
(2) 10.5 Services Agreement dated December 22, 1997 between
Spiros Corp. II and Dura Pharmaceuticals, Inc.
(2) 10.6 + 1997 Stock Option Plan.
(2) 10.7 + Form of Notice of Grant of Stock Option.
(2) 10.8 + Form of Stock Option Agreement.
(1) 10.9 + Form of Indemnification Agreement between Spiros Corp.
II and each of its directors.
(1) 10.10 + Form of Indemnification Agreement between Spiros Corp.
II and each of its
35
<PAGE>
officers.
(3) 16.1 Letter from Deloitte & Touche LLP to the Securities
and Exchange Commission concerning its dismissal as th
registrant's principal accountant.
23.1 Independent Auditors' Consent for Ernst & Young LLP
23.2 Independent Auditors' Consent for Deloitte & Touche LLP
24.1 Power of Attorney (See Signature page).
27.1 Financial Data Schedule.
(1) Incorporated by reference to Spiros Corp. II'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 Spiros Corp. II's Form
10-K for the year ended December 31, 1997.
(3) Incorporated by reference to Spiros Corp. II's current
report on Form 8-K filed February 29, 2000.
+ Management contract or compensation plan or arrangement.
</TABLE>
(b) REPORTS ON FORM 8-K.
None.
SUPPLEMENTAL INFORMATION
The Annual Report on Form 10-K and proxy material will, if required, be
furnished to our shareholders subsequent to the filing of this report and we
will furnish such proxy material to the Securities and Exchange Commission at
that time.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: MARCH 28, 2000 SPIROS DEVELOPMENT CORPORATION II, INC.
--------------------
By: /s/ David S. Kabakoff
-------------------------------
David S. Kabakoff, Ph.D.
Chairman, President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints David S. Kabakoff and Erle T. Mast, or either of them,
as his true and lawful attorneys-in-fact and agents, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes may lawfully do or cause to be done
by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS ANNUAL
REPORT ON FORM 10-K HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ David S. Kabakoff Chairman, President and March 28, 2000
- --------------------------- Chief Executive Officer --------------
(David S. Kabakoff, Ph.D.) (Principal Executive Officer)
/s/ Erle T. Mast Vice President and March 28, 2000
- --------------------------- Chief Financial Officer --------------
(Erle T. Mast) (Principal Financial and Accounting Officer)
/s/ Cam L. Garner Director March 28, 2000
- --------------------------- --------------
(Cam L. Garner)
/s/ Sol Lizerbram Director March 28, 2000
- --------------------------- --------------
(Sol Lizerbram, RPh., D.O.)
/s/ Alain B. Schreiber Director March 28, 2000
- --------------------------- --------------
(Alain B. Schreiber, D.O.)
/s/ William H. Rastetter Director March 28, 2000
- ------------------------------------- --------------
(William H. Rastetter, Ph.D.)
</TABLE>
37
<PAGE>
EXHIBIT INDEX
TO
FORM 10-K
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S><C>
(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 Spiros Corp. II (included in Exhibit 3.1).
4.2 Certificate of Callable Common Stock.
(2) 4.3 Certificate of Special Common Stock.
(2) 10.1 Technology License Agreement dated December 22, 1997 between Spiros Corp. II, Dura
Pharmaceuticals, Inc., Dura Delivery Systems, Inc. and Spiros Development
Corporation.
(2) 10.2 Development Agreement dated December 22, 1997 between Spiros Corp. II and Dura
Pharmaceuticals, Inc.
(2) 10.3 Albuterol and Product Option Agreement dated December 22, 1997 between Spiros
Corp. II and Dura Pharmaceuticals, Inc.
(2) 10.4 Manufacturing and Marketing Agreement dated December 22, 1997 between Spiros Corp.
II and Dura Pharmaceuticals, Inc.
(2) 10.5 Services Agreement dated December 22, 1997 between Spiros Corp. II and Dura
Pharmaceuticals, Inc.
(2) 10.6 + 1997 Stock Option Plan.
(2) 10.7 + Form of Notice of Grant of Stock Option.
(2) 10.8 + Form of Stock Option Agreement.
(1) 10.9 + Form of Indemnification Agreement between Spiros Corp. II and each of its
directors.
(1) 10.10 + Form of Indemnification Agreement between Spiros Corp. II and each of its officers.
(3) 16.1 Letter from Deloitte & Touche LLP to the Securities and Exchange Commission
concerning its dismissal as the registrant's principal
38
<PAGE>
accountant.
23.1 Independent Auditors' Consent for Ernst & Young LLP
23.2 Independent Auditors' Consent for Deloitte & Touche LLP
24.1 Power of Attorney (See Signature page).
27.1 Financial Data Schedule.
(1) Incorporated by reference to Spiros Corp. II'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 Spiros Corp. II's Form 10-K for the year ended
December 31, 1997.
(3) Incorporated by reference to Spiros Corp. II's current report on Form 8-K filed
February 29, 2000.
+ Management contract or compensation plan or arrangement.
</TABLE>
39
<PAGE>
SPIROS DEVELOPMENT CORPORATION II, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S><C>
Balance Sheets as of December 31, 1998 and 1999 F-1
Statements of Operations for the Years Ended December 31, 1998 and 1999, and F-2
the Periods September 23, 1997 (Date of Incorporation) through December 31,
1997 and 1999
Statement of Shareholders' Equity for the Period September 23, 1997 (Date F-3
of Incorporation) through December 31, 1999
Statements of Cash Flows for the Years Ended December 31, 1998 and 1999, and F-4
the Periods September 23, 1997 (Date of Incorporation) through December 31,
1997 and 1999
Notes to Financial Statements F-5
Independent Auditors' Report for the Year Ended December 31, 1999, and the F-12
Period September 23, 1997 (Date of Incorporation) through December 31, 1999
Independent Auditors' Report for the Year Ended December 31, 1998, and the F-13
Periods September 23, 1997 (Date of Incorporation) through December 31, 1997
and 1998
</TABLE>
<PAGE>
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $20,535 $13,325
Short-term investments 103,069 57,718
Other current assets 192 96
--------- -------
Total current assets 123,796 71,139
--------- -------
TOTAL $123,796 $71,139
--------- -------
--------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Payable to Dura Pharmaceuticals, Inc. $4,597 $6,720
Accrued liabilities 281 173
--------- -------
Total current liabilities 4,878 6,893
--------- -------
COMMITMENTS AND CONTINGENCIES (Note 5)
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 169,404 170,191
Accumulated other comprehensive income (loss) 224 (171)
Accumulated deficit (50,717) (105,781)
--------- -------
Total shareholders' equity 118,918 64,246
--------- -------
TOTAL $123,796 $71,139
--------- -------
--------- -------
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999, AND
THE PERIODS SEPTEMBER 23, 1997 (DATE OF INCORPORATION)
THROUGH DECEMBER 31, 1997 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 23, 1997 SEPTEMBER 23, 1997
(DATE OF INCORPORATION) (DATE OF INCORPORATION)
THROUGH YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999 1999
----------- ------------ ------------ -----------------------
<S> <C> <C> <C> <C>
REVENUES:
Interest income $222 $8,239 $5,341 $13,802
----------- ------------ ------------ -----------------------
EXPENSES (with related party, Note 5):
Research and development 7,040 50,799 59,211 117,050
General and administrative 106 1,026 1,194 2,326
----------- ------------ ------------ -----------------------
Total 7,146 51,825 60,405 119,376
----------- ------------ ------------ -----------------------
LOSS BEFORE INCOME TAXES (6,924) (43,586) (55,064) (105,574)
PROVISION FOR INCOME TAXES 207 207
----------- ------------ ------------ -----------------------
NET LOSS $(6,924) $(43,793) $(55,064) $(105,781)
----------- ------------ ------------ -----------------------
----------- ------------ ------------ -----------------------
NET LOSS PER SHARE:
Basic and diluted $(1.09) $(6.92) $(8.71) $(16.72)
----------- ------------ ------------ -----------------------
----------- ------------ ------------ -----------------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES:
Basic and diluted 6,325 6,325 6,325 6,325
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD SEPTEMBER 23, 1997 (DATE OF INCORPORATION)
THROUGH DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SPECIAL CALLABLE
COMMON STOCK COMMON STOCK ADDITIONAL ACCUMULATED
---------------- ---------------- PAID-IN COMPREHENSIVE OTHER COMP.
SHARES AMOUNT SHARES AMOUNT CAPITAL LOSS INCOME
----------------- ----------------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SETEMBER 23, 1997 (Date
of Incorporation)
Sale of special common stock 1 $1
Sale of callable common stock 6,325 $6 $93,961
Contribution from Dura
Pharmaceuticals, Inc. 75,000
Compensation expense for stock
options granted 16
Comprehensive loss:
Net loss $(6,924)
Unrealized gain on investments 21 $21
--------
Comprehensive loss (6,903)
------ ----- ------- -- --------- -------- ------
--------
BALANCE, DECEMBER 31, 1997 1 1 6,325 6 168,977 21
------ ----- ------- -- --------- ------
Additional issuance costs on sale of
callable common stock (71)
Compensation expense for stock
options granted 498
Comprehensive loss:
Net loss (43,793)
Unrealized gain on investments 203 203
--------
Comprehensive loss (43,590)
------ ----- ------- -- --------- -------- ------
--------
BALANCE, DECEMBER 31, 1998 1 1 6,325 6 169,404 224
------ ----- ------- -- --------- ------
Compensation expense for stock
options granted 787
Comprehensive loss:
Net loss (55,064)
Unrealized loss on investments (395) (395)
--------
Comprehensive loss $(55,459)
------ ----- ------- -- --------- -------- ------
--------
BALANCE, DECEMBER 31, 1999 1 $1 6,325 $6 $170,191 $(171)
------ ----- ------- -- --------- ------
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- -----
<S> <C> <C>
BALANCE, SETEMBER 23, 1997 (Date
of Incorporation)
Sale of special common stock $ 1
Sale of callable common stock 93,967
Contribution from Dura
Pharmaceuticals, Inc. 75,000
Compensation expense for stock
options granted 16
Comprehensive loss:
Net loss $(6,924) (6,924)
Unrealized gain on investments 21
Comprehensive loss
------- ---------
BALANCE, DECEMBER 31, 1997 (6,924) 162,081
------- ---------
Additional issuance costs on sale of
callable common stock (71)
Compensation expense for stock
options granted 498
Comprehensive loss:
Net loss (43,793) (43,793)
Unrealized gain on investments 203
Comprehensive loss
------- ---------
BALANCE, DECEMBER 31, 1998 (50,717) 118,918
------- ---------
Compensation expense for stock
options granted 787
Comprehensive loss:
Net loss (55,064) (55,064)
Unrealized loss on investments (395)
Comprehensive loss
------- ---------
BALANCE, DECEMBER 31, 1999 $(105,781) $ 64,246
------- ---------
------- ---------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999, AND
THE PERIODS SEPTEMBER 23, 1997 (DATE OF INCORPORATION)
THROUGH DECEMBER 31, 1997 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 23,1997 SEPTEMBER 23,1997
(DATE OF (DATE OF
INCORPORATION) INCORPORATION)
THROUGH YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999 1999
---------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (6,924) $(43,793) $(55,064) $(105,781)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Compensation expense for stock options granted 16 498 787 1,301
Changes in assets and liabilities:
Other current assets (192) 96 (96)
Payable to Dura Pharmaceuticals, Inc. 7,110 (2,513) 2,123 6,720
Accrued liabilities 26 255 (108) 173
---------------- ------------- ------------- -----------------
Net cash provided by (used in) operating activities 228 (45,745) (52,166) (97,683)
---------------- ------------- ------------- -----------------
INVESTING ACTIVITIES:
Purchases of short-term investments (31,450) (142,908) (29,559) (203,917)
Sales and maturities of short-term investments 71,513 74,515 146,028
---------------- ------------- ------------- -----------------
Net cash provided by (used in) investing activities (31,450) (71,395) 44,956 (57,889)
---------------- ------------- ------------- -----------------
FINANCING ACTIVITIES:
Net proceeds from issuance of special common and
callable common stock 93,968 (71) 93,897
Contribution from Dura Pharmaceuticals, Inc. for purchase option 75,000 75,000
Increase (decrease) in payable to Dura Pharmaceuticals, Inc.
for issuance costs 1,289 (1,289)
---------------- ------------- ------------- -----------------
Net cash provided by (used in) financing activities 170,257 (1,360) 168,897
---------------- ------------- ------------- -----------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 139,035 (118,500) (7,210) 13,325
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 139,035 20,535
---------------- ------------- ------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $139,035 $20,535 $13,325 $13,325
---------------- ------------- ------------- -----------------
---------------- ------------- ------------- -----------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
SPIROS DEVELOPMENT CORPORATION II, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
1. ORGANIZATION
Spiros Development Corporation II, Inc. (the "Company") 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 to conduct 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.
On December 22, 1997, the Company and Dura Pharmaceuticals, Inc. ("Dura")
completed 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 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 Spiros and the use of Spiros with
certain drugs pursuant to various agreements (Note 5). Through December
31, 1999, each share of the Company's callable common stock was combined
to trade publicly as a unit with the warrant to purchase one-fourth of one
share of Dura's common stock at a price per share of $54.84. As of January
1, 2000, the warrant began trading as a separate security.
2. DEFINITIVE MERGER AGREEMENT WITH DURA PHARMACEUTICALS, INC.
In March 2000 we entered into a merger agreement with Dura. Under the
agreement, for each share of our callable common stock our shareholders
will receive $13.25 in cash and one five-year warrant to purchase a
fractional share of Dura's common stock at $17.94 per share, which
represents a 25% premium over the average closing price of Dura's
common stock for the ten trading days prior to the date of the merger
agreement. The exact fraction of a share of Dura's common stock
purchasable under the warrant will be determined based on the average
closing price of Dura's common stock for the ten trading days prior to
the vote of our shareholders on the merger and will result in a
calculated Black-Scholes value for each warrant of between $3.22 and
$1.81. The total consideration for the merger as of the date of the
merger agreement was calculated to be $100.8 million, or $15.75 per
share of callable common stock. Closing of the transaction is subject
to Hart-Scott-Rodino clearance, effectiveness of the registration
statement for Dura's warrants, and our shareholder approval. We and
Dura have received voting agreements in favor of the merger from
holders of approximately 22% of our outstanding callable common stock.
A special committee of independent members of our board, formed in
December 1999 to evaluate our strategic alternatives, has approved the
merger agreement and is recommending that our shareholders approve the
merger.
The Company's current development plan and budget for 2000 are expected to
result in the Company expending all cash during the second half of the
year. The development plan and budget for the second half of 2000 are
subject to change in the event the merger with Dura is not completed.
F-5
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - Because the Company has not yet completed product
development, obtained regulatory approval or verified the market
acceptance and demand for Spiros, its activities have been accounted for
as those of a "development stage enterprise," as set forth in Statement of
Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting
by Development Stage Enterprises."
USE OF ESTIMATES - 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.
CASH AND CASH EQUIVALENTS - The Company considers cash equivalents to
include only highly liquid securities with an original maturity of three
months or less. Investments with an original maturity of more than three
months from the date of acquisition are considered short-term investments.
SHORT-TERM INVESTMENTS - The Company has classified all of its short-term
investments as available-for-sale. The entire amount of the Company's
portfolio is available for current operations. Investments are carried at
fair value as determined by quoted market prices, with unrealized gains
and losses reported as accumulated other comprehensive income within
shareholders' equity. Investment income is recognized when earned and
includes the amortization of premiums and discounts on investments. The
Company invests its excess cash in money market and fixed income
securities of companies with strong credit ratings and U.S. government
obligations.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs are
expensed as incurred.
STOCK BASED COMPENSATION - As permitted by SFAS No. 123, "Accounting for
Stock Based Compensation," the Company accounts for the costs associated
with stock option grants to employees in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations ("APB 25"). Compensation expense
for costs associated with stock option grants to non-employees is
recognized ratably over the vesting period.
COMPREHENSIVE INCOME - 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 the
Company, 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.
NET LOSS PER SHARE - The Company incurred a net loss for the periods ended
December 31, 1997, 1998 and 1999, and as such, the weighted average number
of shares of Callable Common Stock used for basic and diluted earnings per
share does not include potential common shares from outstanding stock
options as their inclusion would be antidilutive. The weighted average
number of shares also exclude shares of special common stock ("Special
Shares") outstanding since such shares are not entitled to participate in
the profits of the Company.
4. SHORT-TERM INVESTMENTS
The following is a summary of short-term investments as of December 31,
1998 and 1999 (in thousands):
F-6
<PAGE>
<TABLE>
<CAPTION>
UNREALIZED ESTIMATED
COST GAINS (LOSSES) FAIR VALUE
<S> <C> <C> <C>
December 31, 1998:
U.S. government securities $ 5,127 $ 6 $ 5,133
U.S. corporate debt securities 97,718 218 97,936
--------- -------- ---------
Total $ 102,845 $ 224 $ 103,069
========= ======== =========
December 31, 1999:
U.S. corporate debt securities $ 57,889 $ (171) $ 57,718
========= ======== =========
</TABLE>
The following is a summary of the amortized cost and estimated fair value
of short-term investments by contractual maturity at December 31, 1999 (in
thousands):
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
<S> <C> <C>
Due in one year or less $ 46,702 $ 46,727
Due after one year through two years 11,187 10,991
--------- ----------
Total $ 57,889 $ 57,718
========= ==========
</TABLE>
5. ARRANGEMENTS WITH DURA PHARMACEUTICALS, INC.
The Company and Dura are party to various agreements entered into in
December 1997 which provide for the development, marketing, and
manufacturing of Spiros with specified compounds and for the provision of
general and administrative services by Dura. A summary of these agreements
is presented below.
TECHNOLOGY LICENSE AGREEMENT - Under this agreement, Dura granted to the
Company an exclusive, worldwide (except for the use of beclomethasone in
certain parts of Asia), perpetual, royalty-bearing license to use
technology owned or controlled by Dura relating to the use of Spiros (the
"Core Technology") with the following asthma and COPD drugs: albuterol (a
beta-agonist), beclomethasone (an anti-inflammatory), budesonide (an
anti-inflammatory), ipratropium (an anticholinergic), and an
albuterol/ipratropium combination drug (collectively, the "Spiros
Products"). In consideration for these rights, the Company pays an annual
technology access fee equal to the greater of (a) 5% of the net sales of
each Spiros Product, or (b) $2 million. For 1998 and 1999, the Company
paid a technology access fee of $2 million. This obligation will
terminate, on a country-by-country basis, (a) within 10 years from the
first sale of such Spiros Product in those countries where no patents
covering such product are issued and (b) in those countries where patents
covering the Spiros Products are issued, upon the last expiration of the
applicable patents.
The Technology License Agreement will remain in effect indefinitely,
unless terminated by mutual agreement of the Company and Dura or upon
Dura's exercise or expiration of its Purchase Option (see Note 6).
ALBUTEROL AND PRODUCT OPTION AGREEMENT - Under this agreement, the Company
granted to Dura the option to acquire for specified time periods the
Albuterol Option and the Product Option. Pursuant to the Albuterol Option,
Dura has the right to acquire from the Company all assets related to the
use of
F-7
<PAGE>
Spiros with albuterol. The Albuterol Option is currently exercisable
and expires 360 days after receipt of U.S. Food and Drug Administration
(the "FDA") approval to market. Pursuant to the Product Option, Dura
has the right to acquire from the Company all assets and rights related
to the use of Spiros with a second product other than albuterol. The
Product Option is currently exercisable and expires 90 days after
receipt of FDA approval to market such Spiros Product. The formula for
determining the purchase price for each of the products is set forth in
the agreement and is based, in part, on the costs incurred by the
Company for the development of the products.
DEVELOPMENT AGREEMENT - Under this agreement, the Company has engaged Dura
to develop Spiros for use with the Spiros Products. Dura furnishes all
labor, supervision, services, supplies, and materials necessary to perform
the development activities and obtain regulatory approvals for the sale
and marketing of the Spiros Products. These activities are carried out by
Dura in accordance with annual workplans and budgets which are subject to
approval and acceptance by the Company's Board of Directors. Payments to
Dura for services provided under the Development Agreement are based on
fully-burdened costs incurred by Dura plus rates ranging from 20% to 25%
of such costs.
MANUFACTURING AND MARKETING AGREEMENT - Under this agreement, the Company
granted to Dura an exclusive, worldwide license to manufacture and market
the Spiros Products. Dura will pay the Company on a quarterly basis a
royalty of 7% of the net sales of each Spiros Product. Prior to the
expiration of the Product Option for albuterol, no royalty payment will be
made with respect to net sales of the albuterol product. The Manufacturing
and Marketing Agreement will terminate upon exercise or termination of the
Purchase Option or by mutual agreement of the Company and Dura at any
time. In the event Dura exercises either of its options under the
Albuterol and Product Purchase Option Agreement, the Manufacturing and
Marketing Agreement will terminate with respect to the applicable Spiros
Product.
SERVICES AGREEMENT - Under this agreement, Dura provides certain
management and administrative services to the Company and is compensated
$100,000 per calendar quarter. In 1998, the Company reimbursed Dura $1.3
million for costs and expenses incurred by Dura in connection with the
Offering, net of amounts reimbursed by the underwriters. The Services
Agreement terminates upon exercise by Dura of the Purchase Option or 12
months after the expiration of the Purchase Option.
The Company's President and Chief Executive Officer, Vice President and
Chief Financial Officer, and Secretary are also officers of Dura. In
addition, two members of the Company's board of directors are officers of
Dura, one of whom is the Company's Chief Executive Officer.
6. SHAREHOLDERS' EQUITY
The Company's authorized capital stock consists of 7,500,000 shares of
Callable Common Stock, of which 6,325,000 shares were issued and
outstanding as of December 31, 1998 and 1999, and 1,000 shares of Special
Shares, all of which were issued and outstanding as of December 31, 1998
and 1999.
Dura, as the holder of 100% of the Special Shares, 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 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 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 the Spiros Products, but in no event beyond
December 31, 2002, or (c) upon termination of the Technology License,
Development, or the Manufacturing and Marketing Agreements between the
F-8
<PAGE>
Company and Dura (Note 5). Assuming the exercise of the Purchase Option,
the per share purchase price was $24.01 through December 31, 1999, and
increases on a quarterly basis to $45.95 per share through December 31,
2002. The Purchase Option price may be paid, at Dura's discretion, in
cash, shares of Dura common stock, or any combination thereof. Dura has no
legal obligation to exercise the Purchase Option. For a description of
the definitive merger agreement with Dura, see Note 2.
As holder of the Special Shares, Dura also has the right to elect two
members of the Company's board of directors (currently comprised of 5
total members) and must approve certain corporate transactions as set
forth in the Company's Amended and Restated Certificate of Incorporation,
including (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 shareholders; (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. As holder
of the Special Shares, however, Dura does not have the right to any
profits of the Company.
7. STOCK COMPENSATION PLAN
The Company adopted the 1997 Stock Option Plan (the "Plan"), which
provides for the initial issuance of up to 700,000 stock options to
employees, board members, and consultants or other independent advisors
who provide services to the Company. The number of shares issuable under
the Plan is subject to an automatic annual increase on February 15 of each
calendar year, beginning with the 1998 calendar year, by the number of
shares necessary to cause the total number of shares authorized under the
Plan to be equal to 15% of the then outstanding shares of Common Stock of
the Company. On February 15, 1998, the total number of authorized shares
increased to 948,750, which has remained constant through December 31,
1999. Generally, options are to be granted at prices equal to at least
100% of the fair market value of the Company's Common Stock at the date of
grant, expire not later than 10 years from the date of grant, and become
vested upon Dura's exercise of its Purchase Option (Note 6) or five years
from the date of grant, whichever is earlier. Options shall be cancelled
if the optionee ceases to provide services to the Company prior to the
vesting date.
F-9
<PAGE>
The following table summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
SHARES
----------------------------- AVERAGE
OPTIONS EXERCISE
OPTIONS AVAILABLE FOR PRICE PER
OUTSTANDING GRANT SHARE
-------------- ---------------- --------------
<S> <C> <C> <C>
Balance, September 23, 1997 (date of incorporation)
Options authorized 700,000
Options granted 548,000 (548,000) $ 14.00
--------- ---------
Balance, December 31, 1997 548,000 152,000 $ 14.00
Options authorized 248,750
Options granted 272,000 (272,000) $ 14.35
--------- ---------
Balance, December 31, 1998 820,000 128,750 $ 14.12
Options granted 12,500 (12,500) $ 14.00
Options cancelled (78,000) 78,000 $ 14.01
-------- ---------
Balance, December 31, 1999 754,500 194,250 $ 14.13
======== =========
</TABLE>
No options were exercisable as of December 31, 1998 and 1999.
The following table summarizes information concerning outstanding options
as of December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
RANGE OF NUMBER CONTRACTUAL LIFE EXERCISE
EXERCISE PRICES OUTSTANDING (YEARS) PRICE
----------------- ------------- -------------- ---------
<S> <C> <C> <C>
$14.00 - $15.88 754,500 8.2 $14.13
</TABLE>
In accordance with SFAS No. 123, the Company applies the provisions of
APB 25 in accounting for stock options granted to employees and,
accordingly, no compensation expense has been recognized for options
granted to employees. In accordance with SFAS 123, options granted to
non-employees are accounted for based on their estimated fair value at
grant date. Compensation expense equal to the options' estimated fair
value is recognized over the expected vesting period. During 1997, the
Company granted 341,000 options to non-employees, for which the Company
recorded compensation expense of $16,000, $384,000, and $374,000 for the
periods ended December 31, 1997, 1998, and 1999, respectively. During
1998, the Company granted 232,000 options to non-employees, for which
the Company recorded compensation expense of $114,000 and $400,000 for
the years ended December 31, 1998 and 1999, respectively. During 1999,
the Company granted 12,500 options to non-employees for which the
Company recorded compensation expense of $13,000. If the Company had
elected to recognize compensation expense for options granted to
employees based on the estimated fair value of the options as of the
grant date, the net loss for the periods ended December 31, 1997, 1998,
and 1999 would have been increased by $10,000, $271,000 and $402,000,
respectively. The estimated weighted average fair value at grant date of
options granted during the periods ended December 31, 1997, 1998 and
1999 was $4.58, $3.99, and $2.62, respectively. The fair value was
estimated using the Black-Scholes option-pricing model with the
following assumptions:
F-10
<PAGE>
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield None None None
Expected stock price volatility 30% 30% 30%
Risk-free interest rate 5.7 % 4.4 - 5.7 % 5 %
Expected life of options 4 years 3.1 - 3.9 years 1.6 - 1.8 years
</TABLE>
8. INCOME TAXES
The provision for income taxes for the year ended December 31, 1998
totaled $207,000, which consisted entirely of current state income taxes.
There was no provision for income taxes for 1999. As of December 31, 1998
and 1999, the Company had deferred tax assets totaling approximately $20.5
million and $42.8 million, respectively, which primarily relate to federal
and state net operating loss carryforwards which approximate $104 million
for federal and $24 million for state purposes as of December 31, 1999.
The federal tax loss carryforwards begin to expire in 2012, and the state
tax loss carryforwards begin to expire in 2002. Because the Company
performs research and development and the prospect of generating future
earnings is uncertain, the deferred tax assets have been fully reserved.
F-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Spiros Development Corporation II, Inc.
We have audited the accompanying balance sheet of Spiros Development Corporation
II, Inc. (a development stage company) as of December 31, 1999, and the related
statements of operations, shareholders' equity and cash flows for the year then
ended and for the period September 23, 1997 (inception) through December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements as of December 31, 1998,
and for the period September 23, 1997 (inception) through December 31, 1997 and
1998 were audited by other auditors whose report dated February 9, 1999
expressed an unqualified opinion on those statements. The financial statements
for the period September 23, 1997 (inception) through December 31, 1998 include
no revenues and a net loss of $50.7 million, respectively. Our opinion on the
statements of operations, shareholders' equity and cash flows for the period
September 23, 1997 (inception) through December 31, 1999, insofar as it relates
to amounts for prior periods through December 31, 1998, is based solely on the
report of other auditors.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit and the report of other auditors provide
a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Spiros Development Corporation II, Inc. at December
31, 1999, and the results of its operations and its cash flows for the year then
ended and the period from September 23, 1997 (inception) through December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
San Diego, California
March 21, 2000
F-12
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Spiros Development Corporation II, Inc.:
We have audited the accompanying balance sheet of Spiros Development
Corporation II, Inc. (a development stage company) (the "Company") as of
December 31, 1998, and the related statements of operations, shareholders'
equity and cash flows for the year ended December 31, 1998 and the period
September 23, 1997 (date of incorporation) through December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1998, and the
results of its operations and its cash flows for the year ended December 31,
1998 and the period September 23, 1997 (date of incorporation) through December
31, 1997 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
San Diego, California
February 9, 1999
F-13
<PAGE>
Exhibit 4.2
THE SECURITIES OF SPIROS DEVELOPMENT CORPORATION II, INC., A DELAWARE COMPANY
(THE "COMPANY") EVIDENCED HEREBY ARE SUBJECT TO AN OPTION OF THE HOLDER OF A
MAJORITY OF THE SPECIAL COMMON STOCK OF THE COMPANY, AS DESCRIBED IN THE AMENDED
AND RESTATE CERTIFICATE OF INCORPORATION OF THE COMPANY, TO PURCHASE SUCH
SECURITIES AT AN AGREED UPON PRICE, EXERCISABLE BY NOTICE GIVEN AT ANY TIME
BEGINNING ON THE CLOSING DATE OF THE UNIT OFFERING OF THE CALLABLE COMMON STOCK,
PAR VALUE $0.001 PER SHARE (THE "CALLABLE COMMON STOCK"), OF SPIROS DEVELOPMENT
CORPORATION II, INC. AND THE WARRANTS (THE "WARRANTS") TO PURCHASE ONE-FOURTH OF
ONE COMMON SHARE COMMON SHARES OF DURA PHARMACEUTICALS, INC. ("DURA") 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. 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 SHAREHOLDER OF THE COMPANY ON REQUEST AND WITHOUT COST.
SPIROS DEVELOPMENT CORPORATION II, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP 848936 10 0 CERTIFICATE NO. 1
FULLY PAID AND NON-ASSESSABLE CALLABLE COMMON STOCK,
PAR VALUE OF $.001 PER SHARE OF
SPIROS DEVELOPMENT CORPORATION II, INC.
THIS CERTIFIES that Cede & Co. is the owner of 6,325,000 Shares of
Callable Common Stock of SPIROS DEVELOPMENT CORPORATION II, INC. (the
"Company"), transferable on the books of the Company by the holder hereof, in
person or by duly authorized attorney, upon surrender of this Certificate
properly endorsed. This certificate and the shares represented hereby are
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 and the Transfer Agent), 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. This certificate is not
valid unless countersigned by the Transfer Agent and registered by the
Registrar.
IN WITNESS WHEREOF, the Company has caused the signatures of its duly
authorized officers and the of its corporate seal to be hereunto affixed.
Dated: January 1, 2000
SPIROS DEVELOPMENT CORPORATION II, INC.,
a Delaware corporation
By: /s/ David S. Kabakoff
---------------------------------------------------
David S. Kabakoff
Chairman, President and Chief Executive Officer
By: /s/ John R. Cook
---------------------------------------------------
John R. Cook
Secretary
Transfer Agent and Registrar:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
By: /s/ Brenda Buth
------------------------------
Name: Brenda Buth
----------------------------
Title: Unit Manager
----------------------------
<PAGE>
The Company will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative participating,
optional, or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights. Such requests shall be made to the Company's Secretary at the principal
office of the Company.
The following abbreviations, when used in the inscription on the face
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)
UNIF TRF MIN ACT Custodian (until age )
----------- ------------------------
(Cust)
under Uniform Transfers
-----------------------------------
(Minor)
to Minors Act
-----------------------------------------------
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, ________________________ hereby sell, assign and
transfer unto
Please insert Social Security or Other
Identifying Number of Assignee:
- -------------------------------------------
- --------------------------------------------------------------------------------
(please print or typewrite name and address, including zip code, or assignee)
- --------------------------------------------------------------------------------
__________________________________________________ Shares of the Callable Common
Stock represented by the Certificate within, 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(s) 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.
Signature(s) Guaranteed:
By:
------------------------------------------------
The signature must be guaranteed by an eligible
guarantor institution (banks, stockbrokers, savings
and loan associations and credit unions with member-
ship in an approved signature guarantee medallion
program), pursuant to S.E.C. Rule 17Ad-15.
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
(Form S-8 NO. 333-52067) pertaining to the 1997 Stock Option Plan of Spiros
Development Corporation II, Inc. of our report dated March 21, 2000, with
respect to the financial statements of Spiros Development Corporation II, Inc.
included in its Annual Report (Form 10-K) for the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
San Diego, California
March 23, 2000
<PAGE>
Exhibit 23.2
CONSENT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement No.
333-52067 of Spiros Development Corporation II, Inc. (a development stage
company) on Form S-8 of our report dated February 9, 1999, appearing in this
Annual Report on Form 10-K of Spiros Development Corporation II, Inc. (a
development stage company) for the year ended December 31, 1999.
/s/ Deloitte & Touche LLP
San Diego, California
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET AS OF DECEMBER 31, 1999 AND THE RELATED STATEMENT OF
OPERATIONS AND THE NOTES THERETO, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,325
<SECURITIES> 57,718
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 71,139
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,139
<CURRENT-LIABILITIES> 6,893
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 64,239
<TOTAL-LIABILITY-AND-EQUITY> 71,139
<SALES> 0
<TOTAL-REVENUES> 5,341
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 60,405
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (55,064)
<INCOME-TAX> 0
<INCOME-CONTINUING> (55,064)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (55,064)
<EPS-BASIC> (8.71)
<EPS-DILUTED> (8.71)
</TABLE>
