<PAGE>
PROSPECTUS
$250,000,000
[LOGO]
3 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 2002
--------------
The 3 1/2% Convertible Subordinated Notes due 2002 (the "Notes") of Dura
Pharmaceuticals, Inc., a Delaware corporation (the "Company"), offered hereby
will be convertible at any time prior to maturity, unless previously redeemed,
into shares of common stock, par value $.001 per share, of the Company (the
"Common Stock") at a conversion price of $50.635 per share, subject to
adjustment under certain conditions. The Common Stock is traded on the Nasdaq
National Market under the symbol "DURA." On July 24, 1997, the last sale price
of the Common Stock as reported on the Nasdaq National Market was $41 1/16 per
share. Interest on the Notes will be payable semi-annually on January 15 and
July 15 of each year, commencing January 15, 1998.
The Notes are not redeemable prior to July 15, 2000. Thereafter, the Notes
are redeemable at the option of the Company, in whole or in part, at any time
and from time to time, at the redemption prices set forth herein, plus accrued
interest. Upon a Change in Control (as defined), holders of the Notes will have
the right, subject to certain conditions and restrictions, to require the
Company to purchase all or any part of their Notes at the principal amount
thereof plus accrued and unpaid interest. See "Description of Notes--Purchase of
Notes at the Option of Holders Upon a Change in Control."
The Notes will be subordinated in right of payment to all existing and
future Senior Indebtedness of the Company. As of June 30, 1997, the Company had
approximately $29.8 million of indebtedness outstanding (excluding accrued
interest thereon and contingent payment obligations) that would have constituted
Senior Indebtedness. See "Capitalization" and "Description of
Notes--Subordination of Notes." The Notes have been approved for quotation,
subject to official notice of issuance, on The Nasdaq SmallCap Market under the
symbol "DURAH."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE NOTES OFFERED HEREBY.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
<S> <C> <C> <C>
Per Note........................................ 100% 3% 97%
Total(4)........................................ $250,000,000 $7,500,000 $242,500,000
</TABLE>
(1) Plus accrued interest, if any, from the date of issuance.
(2) The Company has agreed to indemnify the several Underwriters against, and to
provide contribution with respect to, certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(3) Before deducting expenses of the offering estimated at $550,000 payable by
the Company.
(4) The Company has granted the several Underwriters an option to purchase up to
an additional $37,500,000 aggregate principal amount of Notes, solely to
cover over-allotments, if any. If such option is exercised in full, the
total Price to Public, Underwriting Discount and Proceeds to Company will be
$287,500,000, $8,625,000 and $278,875,000, respectively. See "Underwriting."
-------------------
The Notes are being offered by the several Underwriters, subject to prior
sale, when, as and if issued to and accepted by them, subject to the approval of
certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Notes will be made in New York, New York on or about July 30,
1997.
-------------------
MERRILL LYNCH & CO. GOLDMAN, SACHS & CO.
------------
The date of this Prospectus is July 24, 1997.
<PAGE>
DURA'S CURRENT PRODUCT LINE
[PHOTO OF PRODUCTS]
The U.S. respiratory market is the focus of Dura's strategy. Dura divides
this market into three primary markets:
1) respiratory infection
2) allergy, cough and cold
3) asthma and chronic obstructive pulmonary disease.
These classes of respiratory ailments are treated by the 31 products in
Dura's portfolio. Twenty-four of these products are owned and promoted by Dura,
six are marketed under licensing agreements with Eli Lilly and Company and
Sanofi-Winthrop, Inc., and one is co-promoted with Bausch & Lomb
Pharmaceuticals, Inc.
Dura's marketing strategy is to promote its products to allergists,
pulmonologists and ENT specialists, as well as to high prescribing generalist
physicians and pediatricians who treat a large number of allergy and asthma
patients.
RECENT ACQUISITIONS
[PHOTO OF CECLOR-Registered Trademark- CD AND KEFTAB-Registered Trademark-]
Dura acquired the U.S. rights to two respiratory antibiotics,
Keftab-Registered Trademark- (cephalexin hydrochloride, USP) and
Ceclor-Registered Trademark- CD (cefaclor extended release tablets), from Eli
Lilly and Company in September 1996.
[PHOTO OF NASAREL/NASALIDE]
In May 1997, Dura acquired the exclusive U.S. rights to the intranasal
steroid products Nasarel-Registered Trademark- and Nasalide-Registered
Trademark- (flunisolide) Nasal Solutions 0.025%.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected at the Commission's Public
Reference Section, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as
well as at the Commission's regional offices at 7 World Trade Center, 13th
Floor, New York, New York 10048; and at Citicorp Center, 500 West Madison
Street, Room 1400, Chicago, Illinois 60661-2511. Copies of such material can
also be obtained at prescribed rates at the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the
Commission maintains a World Wide Web site on the Internet at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The Common
Stock of the Company is traded on the Nasdaq National Market.
INFORMATION INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission are hereby
incorporated by reference in this Prospectus: (1) the Annual Report of the
Company on Form 10-K for the fiscal year ended December 31, 1996; (2) the
Quarterly Report of the Company on Form 10-Q for the quarter ended March 31,
1997; (3) the Quarterly Report of the Company on Form 10-Q for the quarter ended
June 30, 1997; (4) the Proxy Statement of the Company dated April 16, 1997 in
connection with the Annual Meeting of Shareholders held on May 28, 1997; (5) the
Current Report of the Company on Form 8-K filed on May 22, 1997; and (6) the
description of the Company's Common Stock contained in its Registration
Statement on Form 8-A filed on July 22, 1997.
All reports and other documents subsequently filed by the Company pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of this offering shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of filing
of such reports and documents. Any statement incorporated herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent that
a statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any or all of the foregoing documents incorporated herein by reference (other
than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into any such document). Requests for such documents
should be submitted in writing to Mitchell R. Woodbury, Senior Vice President
and General Counsel, at Dura Pharmaceuticals, Inc., 5880 Pacific Center
Boulevard, San Diego, California 92121 or by telephone at (619) 457-2553.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES OR THE
COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING AND THE PURCHASE OF
NOTES TO COVER SYNDICATE SHORT POSITIONS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
INCORPORATED BY REFERENCE IN THIS PROSPECTUS, INCLUDING THE INFORMATION UNDER
"RISK FACTORS." EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THIS PROSPECTUS
MAY CONTAIN, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED UNDER
"RISK FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS OR IN
THE DOCUMENTS INCORPORATED BY REFERENCE.
THE COMPANY
Dura Pharmaceuticals, Inc. ("Dura" or the "Company") is a specialty
respiratory pharmaceutical and pulmonary drug delivery company. The Company is
engaged in developing and marketing prescription pharmaceutical products for the
treatment of asthma, hay fever, chronic obstructive pulmonary disease ("COPD"),
the common cold and related respiratory ailments, and is developing a pulmonary
drug delivery system. Dura has strategically focused on the U.S. respiratory
market because of its size and growth opportunities. The estimated size of the
target market for antihistamines, asthma/rhinitis therapies, cough/cold
preparations and anti-infectives in 1996 was approximately $9.5 billion. The
size and fragmented nature of the market and the identifiable base of physician
prescribers allow the Company to achieve significant market penetration with a
specialized sales force. The Company currently markets 31 prescription products.
The Company also has a separate mail service pharmacy, Health Script Pharmacy
Services, Inc. ("Health Script"), which dispenses respiratory pharmaceuticals.
Dura employs a dual marketing strategy utilizing its focused field sales
force of over 230 people and a dedicated managed care sales and marketing group
that covers managed care organizations and retail pharmacy chains. Dura's field
sales force targets a physician base that includes approximately 80,000 U.S.
allergists, ear, nose, and throat specialists ("ENTs"), pulmonologists and a
selected subset of pediatricians and generalist physicians, who the Company
believes collectively write a significant portion of respiratory pharmaceutical
prescriptions. Dura believes that its field sales force calls on approximately
one-half of the target physician base. The Company's managed care sales and
marketing group concentrates on sales to large regional and national managed
care organizations. The Company expects to continue expanding both the field
sales force and the managed care sales and marketing group as warranted by
market opportunities.
This marketing strategy has allowed Dura to leverage its distribution
capabilities by acquiring the rights to market additional prescription
pharmaceutical products through acquisition, in-license or co-promotion
arrangements. Since 1992, the Company has acquired 19 products targeted at the
U.S. respiratory market. In September 1996, the Company acquired from Eli Lilly
and Company ("Lilly") exclusive U.S. marketing rights to the antibiotics
Keftab-Registered Trademark- and Ceclor-Registered Trademark- CD. The Company
began marketing Keftab in September 1996, and launched Ceclor CD in October
1996. In May 1997, the Company acquired from Syntex (USA) Inc. and other members
of the Roche Group ("Syntex") the exclusive U.S. rights to the intranasal
steroid products Nasarel-Registered Trademark- and Nasalide-Registered
Trademark-.
Another key component of Dura's strategy is to develop the Spiros-TM-
pulmonary drug delivery system ("Spiros"). Spiros is being designed to
aerosolize pharmaceuticals in dry powder formulations for delivery to the lungs
while providing certain advantages over other currently-used methods of
pulmonary drug delivery. The Company has a three-level development program for
Spiros which entails (i) developing, on behalf of Spiros Development Corporation
("Spiros Corp."), certain drug applications for use in Spiros, including in the
near-term albuterol, beclomethasone and ipratropium, three of the pharmaceutical
agents most frequently prescribed to treat respiratory conditions, (ii)
licensing Spiros primarily to pharmaceutical
4
<PAGE>
companies, including Mitsubishi Chemical Corporation ("Mitsubishi") and Fujisawa
Pharmaceutical Co., Ltd. ("Fujisawa"), generally for use with certain of their
proprietary respiratory products, and (iii) developing Spiros, generally in
collaboration with third parties, for the systemic delivery of compounds,
including certain proteins and peptides, through the lungs for respiratory and
non-respiratory indications as an alternative to current invasive delivery
techniques. The Company has licensed certain rights to Spiros Corp. to continue
a significant portion of the Spiros development program, including funding of
ongoing and future clinical trials of albuterol and beclomethasone in Spiros,
and formulation, preclinical development and clinical trials of ipratropium in
Spiros. The Company has the right to purchase all of the outstanding shares of
callable common stock of Spiros Corp. through December 31, 1999 at predetermined
prices.
In March 1997, the Company completed patient dosing in long-term and
short-term pivotal clinical trials that, along with earlier studies, are
intended to serve as the basis for the filing of a New Drug Application ("NDA")
by Dura in late 1997 seeking U.S. Food and Drug Administration ("FDA") approval,
on behalf of Spiros Corp., to market albuterol in the Spiros cassette system.
The Company has also filed, on behalf of Spiros Corp., an Investigational New
Drug ("IND") Application for U.S. studies on beclomethasone in the Spiros
cassette system. In the first quarter of 1997, clinical trials of beclomethasone
in the U.S. commenced under this IND Application. In addition, Dura, on behalf
of Spiros Corp., has performed powder formulation work with the peptide drug
salmon calcitonin which, in a clinical trial, demonstrated the ability to
develop macromolecule aerosol powder formulation and achieve systemic delivery
using the Spiros technology.
The Company was incorporated under the laws of California in 1981 and
reincorporated in Delaware in 1997. The Company's principal executive offices
are located at 5880 Pacific Center Boulevard, San Diego, California 92121. Its
telephone number is (619) 457-2553.
RECENT DEVELOPMENTS
In May 1997, the Company acquired from Syntex the exclusive U.S. rights to
the intranasal steroid products Nasarel and Nasalide. The U.S. market for
intranasal steroids for the treatment of perennial and allergic rhinitis was
approximately $700 million in 1996, and has averaged 24% growth over the last
two years. The Company believes that this acquisition complements its existing
strategy because the products fit within the Company's respiratory focus while
adding a new respiratory category, nasal steroids, to its product portfolio. In
addition, the Company believes that it will be able to further leverage its
field sales force by offering these new products to high-prescribing physicians
during sales calls. A portion of the revenues from these products is being
utilized to fund the expansion of the Company's existing field sales force.
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the discussion of risk factors
on pages 8 through 15 of this Prospectus in evaluating an investment in the
Notes.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Notes Offered Hereby.............. $250,000,000 of principal amount of 3 1/2% Convertible
Subordinated Notes due 2002 ($287,500,000 if the
Underwriters' overallotment option is exercised in
full).
Interest Payment Dates............ January 15 and July 15, commencing January 15, 1998.
Maturity.......................... July 15, 2002.
Conversion Rights................. The Notes are convertible, at the option of the holder,
into shares of Common Stock at any time prior to
maturity or redemption at a conversion price of $50.635
per share, subject to adjustment under certain
conditions. See "Description of Notes--Conversion
Rights."
Optional Redemption by the
Company......................... The Notes are not redeemable prior to July 15, 2000.
Thereafter, the Notes are redeemable at any time and
from time to time at the option of the Company, in whole
or in part, at the redemption prices set forth herein,
plus accrued interest. See "Description of
Notes--Optional Redemption by the Company."
Change in Control................. Upon a Change in Control, holders of the Notes will have
the right, subject to certain restrictions and
conditions, to require the Company to purchase all or
any part of their Notes at 100% of the principal amount
thereof, plus accrued interest. See "Description of
Notes--Purchase of Notes at the Option of Holders Upon a
Change in Control."
Subordination..................... The Notes will be subordinated to all existing and
future Senior Indebtedness of the Company. The Indenture
governing the Notes will not restrict the incurrence of
Senior Indebtedness or other indebtedness by the
Company. As of June 30, 1997, the Company had
approximately $29.8 million of indebtedness outstanding
(excluding accrued interest thereon and contingent
payment obligations) that would have constituted Senior
Indebtedness. See "Description of Notes--Subordination
of Notes."
Use of Proceeds................... The Company intends to use the net proceeds from this
offering, together with the Company's existing cash,
cash equivalents, short-term investments and cash
generated from operations, for general corporate
purposes, including: (i) to acquire, in-license,
co-promote, develop and commercialize pharmaceuticals
targeted at Dura's physician base or in areas related or
otherwise complementary to Dura's existing business;
(ii) to fund product development programs, including
Spiros products; and (iii) for working capital and
facilities expansion. See "Use of Proceeds."
Listing........................... The Notes have been approved for quotation, subject to
official notice of issuance, on The Nasdaq SmallCap
Market under the symbol "DURAH." The Common Stock is
quoted on the Nasdaq National Market under the symbol
"DURA."
</TABLE>
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:(1)
Sales............................. $ 9,561 $ 15,816 $ 22,199 $ 39,308 $ 79,563 $ 26,960 $ 69,339
Contract revenues................. -- 2,297 10,481 12,194 24,556 10,426 15,184
Total revenues.................. 9,561 18,113 32,680 51,502 104,119 37,386 84,523
Operating income (loss)(2)........ (7,016) (8,240) 1,456 (37,252) 21,647 7,573 23,472
Net income (loss)(2).............. (6,769) (8,173) 1,936 (35,778) 24,328 8,665 18,069
Net income (loss) per share(2).... (0.47) (0.55) 0.10 (1.53) 0.60 0.23 0.38
Weighted average number of common
and common equivalent shares.... 14,506 14,988 19,860 23,440 40,479 37,277 47,285
Ratio of earnings to fixed
charges(3)...................... -- -- 7.7x -- 22.0x 12.8x 62.2x
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------
DECEMBER 31, AS
1996 ACTUAL ADJUSTED(4)
------------ ---------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments......................... $ 240,345 $ 186,194 $ 428,144
Working capital........................................................... 219,864 165,944 407,894
Total assets.............................................................. 504,670 535,536 785,536
Long-term obligations (excluding current portion)......................... 6,670 6,910 256,910
Shareholders' equity...................................................... 443,577 468,718 468,718
</TABLE>
- ------------------------
(1) Summary Consolidated Financial Information includes Health Script subsequent
to its acquisition on March 22, 1995, the Rondec-Registered Trademark-
product line subsequent to its acquisition on June 30, 1995, the
Entex-Registered Trademark-product line subsequent to its acquisition on
July 3, 1996, the Ceclor CD and Keftab products subsequent to their
acquisition on September 5, 1996, and the Nasarel and Nasalide products
subsequent to their acquisition on May 7, 1997.
(2) In 1993 and 1995, the Company incurred charges for purchase options and
acquired in-process technology totaling $2.3 million and $43.8 million,
respectively. If these charges were excluded, Dura would have reported a net
loss of $5.9 million, or $0.39 per share, for 1993 and net income of $8.0
million, or $0.28 per share, for 1995.
(3) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income (loss) before income taxes and fixed charges (net of
capitalized interest). Fixed charges include interest expense, capitalized
interest and the interest factor management deemed to be included in rental
expense. Earnings were inadequate to cover fixed charges for the years ended
December 31, 1992, 1993 and 1995 by approximately $6.8 million, $8.2 million
and $35.9 million, respectively. Earnings in 1993 and 1995 were impacted by
$2.3 million and $43.8 million, respectively, for charges for purchase
options and acquired in-process technology.
(4) Adjusted to reflect the consummation of this offering and the application of
the net proceeds as set forth under "Use of Proceeds." See also
"Capitalization."
7
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RISK FACTORS
AN INVESTMENT IN THE NOTES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS OR INCORPORATED
HEREIN BY REFERENCE, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS BEFORE PURCHASING THE NOTES OFFERED HEREBY.
REDUCTION IN GROSS MARGINS
There is no proprietary protection for most of the products sold by the
Company and substitutes for such products are sold by other pharmaceutical
companies. The Company expects average selling prices for many of its products
to decline over time due to competitive and reimbursement pressures. While the
Company will seek to mitigate the effect of this decline in average selling
prices, there can be no assurance that the Company will be successful in these
efforts. See "Business--Competition."
THIRD-PARTY REIMBURSEMENT; PRICING PRESSURES
The Company's commercial success will depend in part on the availability of
adequate reimbursement from third-party health care payers, such as government
and private health insurers and managed care organizations. Third-party payers
are increasingly challenging the pricing of medical products and services. There
can be no assurance that reimbursement will be available to enable the Company
to achieve market acceptance of its products or to maintain price levels
sufficient to realize an appropriate return on the Company's investment in
product acquisition, in-licensing and development. The market for the Company's
products may be limited by actions of third-party payers. For example, many
managed health care organizations are now controlling the pharmaceuticals that
are on their formulary lists. The resulting competition among pharmaceutical
companies to place their products on these formulary lists has created a trend
of downward pricing pressure in the industry. In addition, many managed care
organizations are pursuing various ways to reduce pharmaceutical costs and are
considering formulary contracts primarily with those pharmaceutical companies
that can offer a full line of products for a given therapy sector or disease
state. There can be no assurance that the Company's products will be included on
the formulary lists of managed care organizations or that downward pricing
pressure in the industry generally will not negatively impact the Company's
operations. See "Business--Government Regulation."
DEPENDENCE ON ACQUISITION OF RIGHTS TO PHARMACEUTICAL PRODUCTS
The Company's strategy for growth is dependent, in part, upon acquiring,
in-licensing and co-promoting pharmaceuticals targeted primarily at allergists,
ENTs, pulmonologists and a selected subset of pediatricians and generalist
physicians. Other companies, including those with substantially greater
resources, are competing with the Company for the rights to such products. There
can be no assurance that the Company will be able to acquire, in-license or
co-promote additional pharmaceuticals on acceptable terms, if at all. The
failure of the Company to acquire, in-license, co-promote, develop or market
commercially successful pharmaceuticals would have a material adverse effect on
the Company. Furthermore, there can be no assurance that the Company, once it
has obtained rights to a pharmaceutical product and committed to payment terms,
will be able to generate sales sufficient to create a profit or otherwise avoid
a loss. See "Business--Strategy" and "Business--Strategic Alliances."
DEVELOPMENT RISKS ASSOCIATED WITH SPIROS
Spiros will require significant additional development. There can be no
assurance that development of Spiros will be completed successfully, that Spiros
will not encounter problems in clinical trials that will cause the delay or
suspension of such trials, that current or future testing will show Spiros to be
safe or efficacious or that Spiros will receive regulatory approval. In
addition, regulatory approvals will have to be obtained for each drug to be
delivered through the use of Spiros prior to commercialization. Moreover, even
if Spiros does receive regulatory approval, there can be no assurance that
Spiros will be commercially
8
<PAGE>
successful, have all of the patent and other protections necessary to prevent
competitors from producing similar products and not infringe on patent or other
proprietary rights of third parties. The failure of Spiros to receive timely
regulatory approval and achieve commercial success would have a material adverse
effect on the Company. See "Business--Spiros" and "Business--Relationship with
Spiros Corp."
RISKS ASSOCIATED WITH RECENT ACQUISITIONS
In September 1996, the Company acquired from Lilly the exclusive U.S. rights
to market and distribute Keftab and Ceclor CD and entered into a manufacturing
agreement with Lilly which terminates in certain circumstances. In May 1997, the
Company acquired from Syntex the exclusive U.S. rights to the intranasal steroid
products Nasarel and Nasalide. Any interruption in the supply of these products
due to regulatory or other causes could result in the inability of the Company
to meet demand and could have a material adverse impact on the Company.
The Company has limited experience in marketing antibiotic products, such as
Keftab and Ceclor CD, and steroid products, such as Nasarel and Nasalide. Ceclor
CD was not previously marketed to physicians prior to its October 1996 launch by
Dura, and no assurance can be given that the Company will be able to continue to
successfully compete with currently available products. Failure to successfully
market and sell Keftab, Ceclor CD, Nasarel or Nasalide would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Dura's Current Products" and "Business--Sales and
Marketing."
CUSTOMER CONCENTRATION; CONSOLIDATION OF DISTRIBUTION NETWORK
The distribution network for pharmaceutical products has in recent years
been subject to increasing consolidation. As a result, a few large wholesale
distributors control a significant share of the market and the number of
independent drug stores and small chains has decreased. Further consolidation
among, or any financial difficulties of, distributors or retailers could result
in the combination or elimination of warehouses thereby stimulating product
returns to the Company. Further consolidation or financial difficulties could
also cause customers to reduce their inventory levels, or otherwise reduce
purchases of the Company's products which could result in a material adverse
effect on the Company's business, financial condition or results of operations.
Dura's principal customers are wholesale drug distributors and major drug
store chains. For the first six months of 1997, four wholesale customers
individually accounted for 20%, 18%, 17% and 14% of sales. For 1996, three
wholesale customers individually accounted for 17%, 14% and 13% of sales. Two
wholesale customers individually accounted for 16% and 11% of 1995 sales, and
three wholesale customers individually accounted for 21%, 14% and 12% of 1994
sales. The loss of any of these customers could have a material adverse effect
upon the Company's business, financial condition or results of operations.
SEASONALITY AND FLUCTUATING QUARTERLY RESULTS
Historically, as a result of the winter cold and flu season, industry-wide
demand for respiratory products has been stronger in the first and fourth
quarters than in the second and third quarters of the year. In addition,
variations in the timing and severity of the winter cold and flu season have
influenced the Company's results of operations in the past. While the growth and
productivity of the Company's sales force and the introduction by the Company of
new products have historically mitigated the impact of seasonality on the
Company's results of operations, recent product acquisitions by the Company,
especially Keftab and Ceclor CD, which are used to treat respiratory infections,
are likely to increase the impact of seasonality on the Company's results of
operations. No assurances can be given that the Company's results of operations
will not be materially adversely affected by the seasonality of product sales.
9
<PAGE>
COMPETITION
Many companies, including large pharmaceutical firms with financial and
marketing resources and development capabilities substantially greater than
those of Dura, are engaged in developing, marketing and selling products that
compete with those offered by the Company. 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 Dura's current or
future products. The industry is characterized by rapid technological change,
and competitors may develop their products more rapidly than Dura. Competitors
may also be able to complete the regulatory process sooner, and therefore, may
begin to market their products in advance of Dura's products. Dura believes that
competition among both prescription pharmaceuticals and pulmonary drug delivery
systems aimed at the respiratory infection, allergy, cough and cold, and asthma
and COPD markets will be based on, among other things, product efficacy, safety,
reliability, availability and price.
Dura directly competes with at least 25 other companies in the U.S. which
are currently engaged in developing, marketing and selling respiratory
pharmaceuticals. Additionally, there are at least 10 companies currently
involved in the development, marketing or sales of dry powder pulmonary drug
delivery systems. There are two types of dry powder inhalers ("DPIs") currently
in commercial use worldwide. In the U.S., individual dose DPIs currently are
marketed, including the Rotohaler-TM- (developed and marketed by Glaxo Wellcome,
Inc.) and the Spinhaler-Registered Trademark- (developed and marketed by Fisons
Limited). The Turbuhaler-Registered Trademark- (developed and marketed by Astra
Pharmaceuticals), a multiple dose DPI and the leading DPI in worldwide sales, is
considered the current industry standard. In June 1997, the FDA approved for
marketing the first Turbuhaler product in the United States. See
"Business--Competition."
DEPENDENCE ON THIRD PARTIES
The Company's strategy for development and commercialization of certain of
its products is dependent upon entering into various arrangements with corporate
partners, licensors and others and upon the subsequent success of these
partners, licensors and others in performing their obligations. There can be no
assurance that the Company will be able to negotiate acceptable arrangements in
the future or that such arrangements or its existing arrangements will be
successful. In addition, partners, licensors and others may pursue alternative
technologies or develop alternative compounds or drug delivery systems either on
their own or in collaboration with others, including the Company's competitors.
The Company has limited experience manufacturing products for commercial
purposes and currently does not have the capability to manufacture its
pharmaceutical products and therefore is dependent on contract manufacturers for
the production of such products for development and commercial purposes. The
manufacture of the Company's products is subject to current Good Manufacturing
Practice ("cGMP") regulations prescribed by the FDA. The Company relies on a
single manufacturer for each of its products. In the event that the Company is
unable to obtain or retain third-party manufacturing, it may not be able to
commercialize its products as planned. There can be no assurance that the
Company will be able to continue to obtain adequate supplies of such products in
a timely fashion at acceptable quality and prices. Also, there can be no
assurance that the Company will be able to enter into agreements for the
manufacture of future products with manufacturers whose facilities and
procedures comply with cGMP and other regulatory requirements. The Company's
current dependence upon others for the manufacture of its products may adversely
affect future profit margins, if any, on the sale of those products and the
Company's ability to develop and deliver products on a timely and competitive
basis. See "Business--Manufacturing."
LIMITED MANUFACTURING EXPERIENCE
The Company's principal manufacturing facility is located in a Company-owned
building adjacent to its headquarters. The facility initially is intended to be
used to formulate, mill, blend and manufacture drugs to be used with Spiros,
pending regulatory approval. Equipment purchases and validation are currently
scheduled through 1997. The Company's manufacturing facility must be registered
with and
10
<PAGE>
licensed by various regulatory authorities and must comply with cGMP
requirements prescribed by the FDA and the State of California. The Company is
currently expanding its facilities to provide additional manufacturing
capabilities. The Company will need to significantly scale up its current
manufacturing operations and comply with cGMPs and other regulations prescribed
by various regulatory agencies in the United States and other countries to
achieve the prescribed quality and required levels of production of such
products and to obtain marketing approval. Any failure or significant delay in
the validation of or obtaining a satisfactory regulatory inspection of the new
facility or failure to successfully scale up could have a material adverse
effect on the Company's ability to manufacture products in connection with
Spiros. See "Business--Manufacturing."
MANAGING GROWTH OF BUSINESS
The Company has experienced significant growth as total revenues increased
58% in fiscal 1995, 102% in fiscal 1996, and 126% for the first six months of
1997, as compared to prior periods, primarily as a result of the acquisition or
in-licensing of additional respiratory pharmaceutical products. During fiscal
1997, the Company executed an agreement relating to the acquisition of the
rights to the Nasarel and Nasalide products. During fiscal 1996, the Company
executed agreements relating to the acquisition of the rights to the Entex,
Ceclor CD and Keftab products. During fiscal 1995, the Company executed three
agreements relating to the acquisition, in-licensing and co-promotion of
products and acquired Health Script. Due to the Company's emphasis on acquiring
and in-licensing respiratory pharmaceutical products, the Company anticipates
that the integration of the recently acquired businesses and products, as well
as any future acquisitions, will require significant management attention and
expansion of its sales force. The Company's ability to achieve and maintain
profitability is based on management's ability to manage its changing business
effectively. See "--Attraction and Retention of Key Personnel" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
UNCERTAINTY OF PROFITABILITY; NEED FOR ADDITIONAL FUNDS
The Company has experienced significant operating losses in the past, and,
at June 30, 1997, the Company's accumulated deficit was $60.9 million. Although
the Company achieved profitability on an annual basis in 1996 and in the first
six months of 1997, there can be no assurance that revenue growth or
profitability will continue on an annual or quarterly basis in the future. The
acquisition and in-licensing of products, the expansion of the Company's sales
force in response to acquisition and in-licensing of products, the maintenance
of the Company's existing sales force, the upgrade and expansion of its
facilities, continued pricing pressure and the potential exercise of the Spiros
Purchase Option or the Albuterol Purchase Option (as defined below), as well as
funds that Dura, at its option, may provide for Spiros development, both
internally and through Spiros Corp., will require the commitment of substantial
capital resources and may also result in significant losses. Depending upon,
among other things, the acquisition and in-licensing opportunities available,
the Company may need to raise additional funds for these purposes. The Company
may seek such additional funding through public and private financing, including
equity or debt financing. The terms of the Notes do not restrict the incurrence
by the Company of additional indebtedness, including indebtedness secured by any
or all of the Company's assets or ranking senior in right of payment to the
Notes. Adequate funds for these purposes, whether through financial markets or
from other sources, may not be available when needed or on terms acceptable to
the Company. Insufficient funds may require the Company to delay, scale back or
suspend some or all of its product acquisition and in-licensing programs, the
upgrade and expansion of its facilities, the potential exercise of the Spiros
Purchase Option and/or the Albuterol Purchase Option and further development of
Spiros. The Company anticipates that its existing capital resources, together
with cash expected to be generated from operations and available bank
borrowings, should be sufficient to finance its current operations and working
capital requirements through at least June 1998. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
11
<PAGE>
POTENTIAL EXERCISE OF PURCHASE OPTIONS FOR SPIROS CORP. CALLABLE COMMON STOCK
AND ALBUTEROL PRODUCT; DILUTION
Dura has an option to purchase all of the currently outstanding shares of
callable common stock of Spiros Corp. ("Spiros Purchase Option"). If Dura
exercises the Spiros Purchase Option, it will be required to make a substantial
cash payment or to issue shares of Common Stock, or both. A payment in cash
would reduce Dura's capital resources. A payment in shares of Common Stock would
result in a decrease in the percentage ownership of Dura's shareholders at that
time. The exercise of the Spiros Purchase Option will likely require Dura to
record a significant charge to earnings and may adversely impact future
operating results. If Dura does not exercise the Spiros Purchase Option prior to
its expiration in December 1999, the Company's rights in and to Spiros with
respect to certain compounds will terminate. Dura also has the option to provide
funding for Spiros development in certain circumstances. Development of Spiros
Corp. products will require significant additional funds. Dura believes that the
current funds of Spiros Corp. will be sufficient to fund product development by
Spiros Corp. through 1997.
As part of the Company's contractual relationship with Spiros Corp., the
Company received an option to purchase certain rights to an albuterol product in
a cassette version of Spiros ("Albuterol Purchase Option") exercisable at any
time through the earlier of 60 days after FDA approval of such albuterol product
or December 31, 1999. If the Company exercises the Albuterol Purchase Option, it
will be required to make a cash payment of at least $15.0 million which could
have an adverse effect on its capital resources. The Company may not have
sufficient capital resources to exercise the Albuterol Purchase Option which may
result in the Company's loss of valuable rights. In addition, continuation of
development and commercialization of an albuterol product in a cassette version
of Spiros may require substantial additional expenditures by Dura. Dura has not
made any determination as to the likelihood of its exercise of the Spiros
Purchase Option or the Albuterol Purchase Option. See "Business--Relationship
with Spiros Corp."
GOVERNMENT REGULATION; NO ASSURANCE OF FDA APPROVAL
Development, testing, manufacturing and marketing of the Company's products
are subject to extensive regulation by numerous governmental authorities in the
U.S. and other countries. The process of obtaining FDA approval of
pharmaceutical products and drug delivery systems is costly and time-consuming.
Any new pharmaceutical product must undergo rigorous preclinical and clinical
testing and an extensive regulatory approval process mandated by the FDA.
Marketing of drug delivery systems also requires FDA approval, which can be
costly and time consuming to obtain. The Company will need to obtain regulatory
approval for each drug to be delivered through the use of Spiros. There can be
no assurance that the pharmaceutical products currently in development, or those
products acquired or in-licensed by the Company, will be approved by the FDA. In
addition, there can be no assurance that all necessary clearances will be
granted to the Company or its licensors for future products or that FDA review
or actions will not involve delays adversely affecting the marketing and sale of
the Company's products. For both currently marketed and future products, failure
to comply with applicable regulatory requirements can, among other things,
result in the suspension of regulatory approval, as well as possible civil and
criminal sanctions. In addition, changes in regulations could have a material
adverse effect on the Company.
The FDA is continuing an evaluation of the effectiveness of all drug
products containing ingredients marketed prior to 1962 (the year of enactment of
the "Drug Amendments of 1962" to the Federal Food, Drug and Cosmetic Act) as
part of its Drug Efficacy Study Implementation ("DESI") program and will
determine which drugs are considered "new drugs" requiring approval through a
New Drug Application ("NDA") for marketing. A Policy Guide (CPG 440.100) issued
by the FDA indicates that the FDA will implement procedures to determine whether
the new drug provisions are applicable to existing products. If a final
determination is made that a particular drug requires an approved NDA, such
approval will be required for marketing to continue. If such a determination is
made, the FDA might impose various
12
<PAGE>
requirements; for example, it might require that the current product be the
subject of an approved NDA, that the product be reformulated and an NDA approval
be obtained, that the product must be sold on an over-the-counter basis rather
than as a prescription drug or that the product must be removed from the market.
The Company believes that nine of its prescription pharmaceutical products may
be covered by paragraph B of the Policy Guide and is aware that one of its
products may be considered to be similar or related to a DESI drug. Also, it is
not aware of evidence to substantiate that three of its products have the same
formulation or conditions for use as products marketed before November 13, 1984.
There can be no assurance as to which regulatory course the FDA will follow, if
any, with respect to many of the Company's pharmaceutical products or whether
the Company will be able to obtain any approvals that the FDA may deem
necessary. If any negative actions are taken by the FDA, such actions could have
a material adverse effect on the Company's business. Health Script is subject to
regulation by state regulatory authorities, principally state boards of
pharmacy. In addition, Health Script is subject to regulation by other state and
federal agencies with respect to reimbursement for prescription drug benefits
provided to individuals covered primarily by publicly-funded programs. See
"Business--Government Regulation."
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to obtain patents
on current or future products or formulations, defend its patents, maintain
trade secrets and operate without infringing upon the proprietary rights of
others, both in the U.S. and abroad. However, only six of the pharmaceuticals
currently marketed by the Company are covered by patents. The Company also has
licenses or license rights to certain other U.S. and foreign patent and patent
applications. There can be no assurance that patents, U.S. or foreign, will be
obtained, or that, if issued or licensed to the Company, they will be
enforceable or will provide substantial protection from competition or be of
commercial benefit to the Company or that the Company will possess the financial
resources necessary to enforce or defend any of its patent rights. Federal court
decisions establishing legal standards for determining the validity and scope of
patents in the field are in transition. There can be no assurance that the
historical legal standards surrounding questions of validity and scope will
continue to be applied or that current defenses as to issued patents in the
field will offer protection in the future. The commercial success of the Company
will also depend upon avoiding the infringement of patents issued to competitors
and upon maintaining the technology licenses upon which certain of the Company's
current products are, or any future products under development might be, based.
Litigation, which could result in substantial cost to the Company, may be
necessary to enforce the Company's patent and license rights or to determine the
scope and validity of proprietary rights of third parties. If any of the
Company's products are found to infringe upon patents or other rights owned by
third parties, the Company could be required to obtain a license to continue to
manufacture or market such products. There can be no assurance that licenses to
such patent rights would be made available to the Company on commercially
reasonable terms, if at all. If the Company does not obtain such licenses, it
could encounter delays in marketing affected products while it attempts to
design around such patents or it could find that the development, manufacture or
sale of products requiring such licenses is not possible. The Company currently
has certain licenses from third parties and in the future may require additional
licenses from other parties to develop, manufacture and market commercially
viable products effectively. There can be no assurance that such licenses will
be obtainable on commercially reasonable terms, if at all, or that the patents
underlying such licenses will be valid and enforceable. See "Business--Patents
and Proprietary Rights."
PRODUCT LIABILITY AND RECALL
The Company faces an inherent business risk of exposure to product liability
claims in the event that the use of its technologies or products is alleged to
have resulted in adverse effects. Such risks will exist even with respect to
those products that receive regulatory approval for commercial sale. While the
Company has taken, and will continue to take, what it believes are appropriate
precautions, there can be no assurance that it will avoid significant product
liability exposure. The Company currently has product
13
<PAGE>
liability insurance; however, there can be no assurance that the level or
breadth of any insurance coverage will be sufficient to fully cover potential
claims. There can be no assurance that adequate insurance coverage will be
available in the future at acceptable costs, if at all, or that a product
liability claim or recall would not materially and adversely affect the business
or financial condition of the Company.
ATTRACTION AND RETENTION OF KEY PERSONNEL
The Company is highly dependent on the principal members of its management
staff, the loss of whose services might impede the achievement of development
objectives. Although the Company believes that it is adequately staffed in key
positions and that it will be successful in retaining skilled and experienced
management, operational and scientific personnel, there can be no assurance that
the Company will be able to attract and retain such personnel on acceptable
terms. The loss of the services of key scientific, technical and management
personnel could have a material adverse effect on the Company, especially in
light of the Company's recent significant growth.
CHANGE IN CONTROL
Certain provisions of the Company's charter documents and terms relating to
the acceleration of the exercisability of certain warrants and options relating
to the purchase of such securities by the Company in the event of a change in
control may have the effect of delaying, deferring or preventing a change in
control of the Company, thereby possibly depriving shareholders of receiving a
premium for their shares of the Common Stock. In addition, upon a Change in
Control (as defined) of the Company, the Company will be required to offer to
purchase for cash all of the outstanding Notes at a purchase price of 100% of
the principal amount thereof, plus accrued but unpaid interest through the
Change in Control Purchase Date. The Change in Control purchase features of the
Notes may in certain circumstances have an anti-takeover effect. See
"Description of Notes--Purchase of Notes at Option of Holders upon a Change in
Control." If a Change in Control were to occur, there can be no assurance that
the Company would have sufficient funds to pay the Change in Control Purchase
Price for all Notes tendered by the holders thereof and to repay other
indebtedness that may become due as a result of any Change in Control.
VOLATILITY OF COMPANY STOCK PRICE
The market prices for securities of emerging companies, including the
Company, have historically been highly volatile. Future announcements concerning
the Company or its competitors may have a significant impact on the market price
of the Common Stock. Such announcements might include financial results, the
results of testing, technological innovations, new commercial products, changes
to government regulations, government decisions on commercialization of
products, developments concerning proprietary rights, litigation or public
concern as to safety of the Company's products.
ABSENCE OF DIVIDENDS
The Company has never paid any cash dividends on its Common Stock. In
accordance with a bank loan agreement, the Company is prohibited from paying
cash dividends without prior bank approval. The Company currently anticipates
that it will retain all available funds for use in its business and does not
expect to pay any cash dividends in the foreseeable future.
ABSENCE OF EXISTING MARKET FOR NOTES
The Notes will constitute a new issue of securities with no established
trading market. The Notes have been approved for quotation, subject to official
notice of issuance, on The Nasdaq SmallCap Market. No assurance can be given
that an active trading market for the Notes will develop, or, if such market
develops, as to the liquidity or sustainability of such market. If a trading
market does not develop or is not maintained, holders of the Notes may
experience difficulty in reselling the Notes or may be unable to sell
14
<PAGE>
them at all. If a market for the Notes develops, any such market may be
discontinued at any time. If a public trading market develops for the Notes,
future trading prices of the Notes will depend on many factors, including, among
other things, prevailing interest rates, the Company's results of operations and
the market for similar securities. Depending on prevailing interest rates, the
market for similar securities and other factors, including the financial
condition of the Company, the Notes may trade at a discount from their principal
amount.
SUBORDINATION
The Notes will be unsecured and subordinated in right of payment to all
existing and future Senior Indebtedness and will be structurally subordinated to
all liabilities (including trade payables) of the Company's subsidiaries. The
Indenture will not restrict the incurrence of Senior Indebtedness or other
indebtedness by the Company or its subsidiaries. As of June 30, 1997, the
Company had approximately $29.8 million of indebtedness outstanding (excluding
accrued interest thereon and contingent payment obligations) that would have
constituted Senior Indebtedness. As of the date hereof, substantially all of the
Company's operations are conducted by Dura, and not through subsidiaries. The
Indenture will not limit the ability of the Company to transfer assets to, or to
acquire assets in, subsidiaries of the Company in the future. The Company is
currently considering transferring a substantial portion of its assets to
subsidiaries of the Company; however, no decision has been made with respect to
such transfer. The right of the Company to participate in the assets of any
subsidiary (and thus the ability of holders of the Notes to benefit indirectly
from such assets) are generally subject to the prior claims of creditors,
including trade creditors, of that subsidiary except to the extent that the
Company is recognized as a creditor of such subsidiary, in which case the
Company's claims would still be subject to any security interest of other
creditors of such subsidiary. The Notes, therefore, will be subordinated by
operation of law to creditors, including trade creditors, of subsidiaries of the
Company with respect to the assets of the subsidiaries against which such
creditors have a claim.
FORWARD-LOOKING STATEMENTS
Prospective investors are cautioned that the statements in this Prospectus
that are not descriptions of historical facts may be forward-looking statements
that are subject to risks and uncertainties. Actual results could differ
materially from those currently anticipated due to a number of factors,
including those identified under "Risk Factors" and elsewhere in this Prospectus
or documents incorporated by reference herein.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from this offering are estimated to be
$241,950,000 ($278,325,000 if the Underwriters' over-allotment option is
exercised in full). These proceeds, together with the Company's existing cash,
cash equivalents, short-term investments and cash generated from operations,
will be used for general corporate purposes, including: (i) to acquire,
in-license, co-promote, develop and commercialize pharmaceuticals targeted at
Dura's physician base or in areas related or otherwise complementary to Dura's
existing business; (ii) to fund product development programs, including Spiros
products; and (iii) for working capital and facilities expansion. At present,
the Company is actively pursuing the acquisition of rights to several products
and/or companies which may require the use of substantial capital resources;
however, there are no present agreements or commitments with respect to any such
acquisition.
The cost, timing and amount of funds required for all specific uses by the
Company cannot be precisely determined by the Company at this time and is at
management's discretion. The rate of the Company's progress in acquiring and
in-licensing new products, the timing and nature of regulatory action and the
availability of alternative methods of financing, including agreements with
other companies relating to the development, manufacture and marketing of
products, will also determine the allocation and timing of the Company's use of
the proceeds from this offering.
Pending applications of the proceeds as described above, the Company plans
to invest the net proceeds of the offering in high-grade, short-term,
interest-bearing investments.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is traded on the over-the-counter market and prices are
quoted on the Nasdaq National Market under the symbol "DURA." The following
table sets forth the intraday high and low prices for the Common Stock for the
periods indicated, as reported on the Nasdaq National Market, as adjusted for
the 2-for-1 stock split in the form of a 100% stock dividend, effective July 1,
1996.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1995:
1st Quarter................................................................................... $ 7 1/2 $ 5 3/4
2nd Quarter................................................................................... 9 7/8 6 1/2
3rd Quarter................................................................................... 17 1/2 9 1/8
4th Quarter................................................................................... 17 3/4 13 1/4
1996:
1st Quarter................................................................................... $ 27 1/4 $ 16 3/8
2nd Quarter................................................................................... 34 11/16 22
3rd Quarter................................................................................... 40 1/2 19 3/4
4th Quarter................................................................................... 47 7/8 29 1/2
1997:
1st Quarter................................................................................... 47 1/8 31 3/4
2nd Quarter................................................................................... 44 22 3/4
3rd Quarter (through July 24)................................................................. $ 44 7/8 $ 39 3/4
</TABLE>
On July 24, 1997, the last reported sale price of the Common Stock on the
Nasdaq National Market was $41 1/16 per share. As of July 1, 1997, there were
approximately 360 holders of record of the Common Stock.
The Company has never paid any cash dividends on its Common Stock. In
accordance with a bank loan agreement, the Company is prohibited from paying
cash dividends without prior bank approval. The Company currently anticipates
that it will retain all available funds for use in its business and does not
expect to pay any cash dividends in the foreseeable future.
16
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
June 30, 1997 and as adjusted to give effect to this offering and the
application of the net proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and short-term investments........................................ $ 186,194 $ 428,144
---------- -----------
---------- -----------
Current portion of long-term obligations................................................. $ 22,896 $ 22,896
---------- -----------
---------- -----------
Long-term obligations (excluding current portion of long-term obligations)............... $ 6,910 $ 6,910
% Convertible subordinated notes due 2002.............................................. -- 250,000
---------- -----------
6,910 256,910
---------- -----------
SHAREHOLDERS' EQUITY:
Preferred Stock; 5,000,000 shares authorized;
no shares issued or outstanding...................................................... -- --
Common Stock; 100,000,000 shares authorized;
43,847,803 shares outstanding (1).................................................... 531,377 531,377
Accumulated deficit.................................................................... (60,923) (60,923)
Unrealized gain (loss) on investments.................................................. 76 76
Warrant subscriptions receivable....................................................... (1,812) (1,812)
---------- -----------
Total shareholders' equity........................................................... 468,718 468,718
---------- -----------
Total capitalization................................................................. $ 475,628 $ 725,628
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) Excludes (a) 3,178,254 shares of Common Stock issuable upon the exercise of
options outstanding at June 30, 1997 under the Company's stock option plan,
(b) 1,671,959 shares of Common Stock available for future grants under such
plan and (c) 3,856,016 shares of Common Stock issuable upon exercise of
warrants outstanding at June 30, 1997. Also excludes 4,937,296 shares of
Common Stock issuable upon conversion of the Notes offered hereby. See
"Description of Capital Stock."
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The statement of operations data set forth below for each of the three years
in the period ended December 31, 1996, and the balance sheet data at December
31, 1996, are derived from, and are qualified by reference to, the audited
financial statements incorporated by reference in this Prospectus and should be
read in conjunction with those financial statements and notes thereto. The
statement of operations data for the fiscal years ended December 31, 1992 and
1993 are derived from audited financial statements not included or incorporated
by reference herein. The management of the Company believes that the unaudited
information at June 30, 1997, and for the six-month periods ended June 30, 1996
and 1997, contains all adjustments, consisting of only normal recurring
accruals, necessary for a fair presentation of the financial position at such
date and the results of operations for such periods. Operating results for the
six-month period ended June 30, 1997, are not necessarily indicative of results
to be expected for the fiscal year ending December 31, 1997 or any other interim
period. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included elsewhere in this Prospectus and the Company's financial
statements and related notes incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:(1)
Revenues:
Sales....................................... $ 9,561 $ 15,816 $ 22,199 $ 39,308 79,563 $ 26,960 $ 69,339
Contract.................................... -- 2,297 10,481 12,194 24,556 10,426 15,184
--------- --------- --------- --------- --------- --------- ---------
Total revenues................................ 9,561 18,113 32,680 51,502 104,119 37,386 84,523
--------- --------- --------- --------- --------- --------- ---------
Operating costs and expenses:
Cost of sales............................... 2,700 3,782 3,894 10,618 21,301 7,422 15,946
Clinical, development and regulatory........ 1,354 2,819 9,354 8,408 18,540 7,119 12,353
Selling, general and administrative......... 12,523 17,437 17,976 25,955 42,631 15,272 32,752
Other charges(2)............................ -- 2,315 -- 43,773 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)....................... (7,016) (8,240) 1,456 (37,252) 21,647 7,573 23,472
Other income-net.............................. 247 67 514 1,880 6,220 1,892 6,101
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes............. (6,769) (8,173) 1,970 (35,372) 27,867 9,465 29,573
Provision for income taxes.................... -- -- 34 406 3,539 800 11,504
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)(2).......................... $ (6,769) $ (8,173) $ 1,936 $ (35,778) $ 24,328 $ 8,665 $ 18,069
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per share(2)................ $ (0.47) $ (0.55) $ 0.10 $ (1.53) $ 0.60 $ 0.23 $ 0.38
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average number of common and common
equivalent shares............................ 14,506 14,988 19,860 23,440 40,479 37,277 47,285
Ratio of earnings to fixed charges(3)......... -- -- 7.7x -- 22.0x 12.8x 62.2x
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ---------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments....................................... $ 240,345 $ 186,194
Working capital......................................................................... 219,864 165,944
Total assets............................................................................ 504,670 535,536
Long-term obligations (excluding current portion)....................................... 6,670 6,910
Shareholders' equity(4)................................................................. 443,577 468,718
</TABLE>
- ------------------------------
(1) Selected financial data includes Health Script subsequent to its acquisition
on March 22, 1995, the Rondec product line subsequent to its acquisition on
June 30, 1995, the Entex product line subsequent to its acquisition on July
3, 1996 and the Ceclor CD and Keftab products subsequent to their
acquisition on September 5, 1996, and the Nasarel and Nasalide products
subsequent to their acquisition on May 7, 1997.
(2) The 1993 charge of $2.3 million represents the charge for the option to
acquire all of the outstanding stock of DDSI. The 1995 charge of $43.8
million represents the $30.8 million charge for acquired in-process
technology associated with the DDSI acquisition and the $13.0 million charge
for the contribution to Spiros Corp. If these charges were excluded, Dura
would have reported a net loss of $5.9 million, or $0.39 per share, for 1993
and net income of $8.0 million, or $0.28 per share, for 1995.
(3) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income (loss) before income taxes and fixed charges (net of
capitalized interest). Fixed charges include interest expense, capitalized
interest and the interest factor management deemed to be included in rental
expense. Earnings were inadequate to cover fixed charges for the years ended
December 31, 1992, 1993 and 1995 by approximately $6.8 million, $8.2 million
and $35.9 million, respectively. Earnings in 1993 and 1995 were impacted by
$2.3 million and $43.8 million, respectively, for charges for purchase
options and acquired in-process technology.
(4) No cash dividends were declared or paid during the periods presented.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following comments should be read in conjunction with the Consolidated
Financial Statements and Notes incorporated herein by reference. See "Risk
Factors" for trends and uncertainties known to the Company that could cause
reported financial information not to be necessarily indicative of future
results, including discussion of the effects of seasonality on the Company.
RECENT DEVELOPMENTS
During the second half of 1996 and the first half of 1997, the Company made
significant acquisitions of product rights and licenses. In July 1996, the
Company acquired the worldwide rights to the Entex-Registered Trademark-
products, consisting of four prescription upper respiratory drugs. In September
1996, the Company acquired the exclusive U.S. marketing rights to the patented
antibiotics Ceclor CD and Keftab. In May 1997, the Company acquired the
exclusive U.S. rights to the intranasal steriod products Nasarel and Nasalide.
The acquisition of these products has had a material impact on the Company's
financial position and results of operations.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Total revenues for the six-month period ended June 30, 1997 were $84.5
million, an increase of $47.1 million, as compared to the same period in 1996.
Net income for the six-month period ended June 30, 1997 was $18.1 million, an
increase of $9.4 million, or $0.15 per share, over the same period in 1996.
Pharmaceutical sales for the six-month period ended June 30, 1997 were $69.3
million, an increase of 157% over the same period in 1996. This increase is due
primarily to new product acquisitions of the Entex products, Ceclor CD, Keftab,
Nasarel and Nasalide.
Gross profit (pharmaceutical sales less cost of sales) for the six-month
period ended June 30, 1997 was $53.4 million, an increase of $33.9 million as
compared to the same period in 1996. Gross profit as a percentage of sales for
the six-month period ended June 30, 1997 was 77%, as compared to 72% for the
same period in 1996. This increase is due to higher gross margins earned on
sales of the Entex products, Ceclor CD, Keftab, Nasarel and Nasalide as compared
to the average gross margins earned on the Company's other products.
Contract revenues for the six-month period ended June 30, 1997 were $15.2
million, an increase of $4.8 million, or 46%, as compared to the same period in
1996. The Company, under agreements with several companies, conducts feasibility
testing and development work on various compounds for use with Spiros, a
proprietary pulmonary drug delivery system. Contract revenues from
Spiros-related development and feasibility agreements for the six-month period
ended June 30, 1997 were $14.6 million, including $12.2 million from Spiros
Corp., as compared to $8.7 million, including $7.8 million from Spiros Corp. for
the same period in 1996. Contract revenues from royalties were $619,000 for the
six-month period ended June 30, 1997 and $1.7 million for the same period in
1996.
Clinical, development and regulatory expenses for the six-month period ended
June 30, 1997 were $12.4 million, an increase of $5.2 million over the same
period in 1996. The increase reflects expenses incurred by the Company under
feasibility and development agreements covering the use of various compounds
with Spiros.
Selling, general and administrative expenses for the six-month period ended
June 30, 1997 were $32.8 million, an increase of $17.5 million as compared to
the same period in 1996. Such expenses decreased as a percentage of total
revenues to 39% as compared to 41% for the same period in 1996. The dollar
increase is primarily due to increased costs incurred to support the Company's
sales and contract
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revenue growth, including costs associated with expanding the Company's sales
force, higher marketing costs relating to the newly-acquired products, and
amortization of newly-acquired product rights. The decrease as a percentage of
revenues reflects the growth of pharmaceutical sales due to new product
acquisitions and the growth of contract revenues.
Other income--net (primarily interest income) for the six month period ended
June 30, 1997 increased $4.2 milllion to $6.1 million as compared to the same
period in 1996. This increase is due to an increase in interest income of $4.0
million from higher balances of cash and short-term investments resulting from
public stock offerings completed in May and November 1996.
The Company's effective tax rate was 39% for the six-month period ended June
30, 1997 compared to 8% for the same period in 1996. This increase is primarily
due to the utilization of net operating loss carryforwards in 1996. Net
operating loss carryforwards available in 1997 relate primarily to tax
deductions for previously exercised stock options; accordingly, the related
benefit from their utilization will be credited to Common Stock.
FISCAL YEAR 1996 ("1996") COMPARED TO FISCAL YEAR 1995 ("1995")
Total revenues in 1996 increased $52.6 million, up 102%, as compared to
1995. Net income for 1996 was $24.3 million as compared with a net loss of $35.8
million for 1995, a change of $60.1 million or $2.13 per share. The 1995 net
loss of $35.8 million was due to charges totalling $43.8 million relating to the
Company's Spiros development program, consisting of a $30.8 million noncash
charge for in-process technology acquired in connection with Dura's acquisition
of DDSI and a $13.0 million purchase option charge resulting from the cash
contribution to Spiros Corp.
Pharmaceutical sales in 1996 increased by $40.3 million, or 102%, as
compared to 1995 due primarily to sales of products acquired in 1996 as well as
higher sales at Health Script, acquired in March 1995.
Gross profit for 1996 increased by $29.6 million, or 103%, as compared to
1995 due to the increase in pharmaceutical sales. Gross profit as a percentage
of sales remained steady at 73%.
Contract revenues in 1996 increased by $12.4 million, or 101%, as compared
to 1995. The Company, under agreements with several companies, conducts
feasibility testing and development work on various compounds for use with
Spiros. In addition, the Company receives royalties primarily from the co-
promotion of pharmaceutical products. Contract revenues from Spiros-related
development and feasibility agreements generated $21.2 million in 1996,
including $19.1 million from Spiros Corp., compared to $9.5 million, including
$8.0 million from DDSI, in 1995. Contract revenues from royalties were $3.4
million in 1996 as compared to $2.6 million for 1995.
Clinical, development and regulatory expenses for 1996 increased by $10.1
million to $18.5 million as compared to 1995. The increase reflects expenses
incurred by the Company under feasibility and development agreements covering
the use of various compounds with Spiros.
Selling, general and administrative expenses in 1996 increased $16.7 million
to $42.6 million as compared to 1995, and decreased as a percent of total
revenues to 41% in 1996 from 50% in 1995. The dollar increase results primarily
from marketing costs related to newly acquired products as well as higher costs
at Health Script to support its increased sales. The decrease as a percentage of
revenues reflects increased productivity of the sales force, the growth of
pharmaceutical sales due to product acquisitions, and the growth of contract
revenues.
Other income--net (primarily interest income) for 1996 increased $4.3
million to $6.2 million as compared to 1995. The increase is due to an increase
in interest income of $4.1 million from cash generated from the August 1995 and
May and November 1996 public stock offerings as well as cash generated from
operations.
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The Company recorded an income tax provision of $3.5 million for 1996 as
compared to $406,000 for 1995. The increased provision is due to the increase in
income before income taxes in 1996. The 1996 provision reflects the expected
combined federal and state tax rate of approximately 40% largely offset by the
benefit from the utilization of net operating loss carryforwards.
FISCAL YEAR 1995 ("1995") COMPARED TO FISCAL YEAR 1994 ("1994")
Total revenues in 1995 increased $18.8 million, or 58%, over 1994. However,
the Company incurred a net loss in 1995 of $35.8 million, or $1.53 per share,
due to charges totaling $43.8 million related to the Company's Spiros
development program. The charges consisted of a $30.8 million non-cash charge
for in-process technology acquired in connection with Dura's acquisition of DDSI
and a $13.0 million purchase option charge resulting from the cash contribution
to Spiros Corp. If the charges were excluded, the Company would have reported
net income in 1995 of $8.0 million or $0.28 per share.
Pharmaceutical sales in 1995 increased by $17.1 million, or 77%, over 1994
due primarily to the $15.3 million in sales generated by Health Script, 1995
product acquisitions and internally-developed products that were launched in the
second half of 1994. The remaining increase was generated by the pre-existing
product line for which sales growth was impacted by the relatively weak
cough/cold season experienced across the country in the first quarter of 1995.
Gross profit for 1995 increased by $10.4 million, or 57%, as compared to
1994. Gross profit as a percentage of sales decreased to 73% in 1995 from 82% in
1994 due primarily to the lower margins generated on sales by Health Script in
addition to the impact of contract pricing to managed care organizations.
Contract revenues in 1995 increased by $1.7 million as compared to 1994. In
1995 and 1994, the Company recorded contract revenues of $1.6 million and
$400,000, respectively, relating to an agreement with Drug Royalty Corporation
USA Inc. ("DRC") under which the Company received funding through December 1995
to expand its sales force. In addition, the Company conducts development work
under contracts with several companies and receives royalties. The development
contracts relate to the testing and development of various compounds for use
with Spiros and generated revenues in 1995 and 1994 of $9.5 million and $9.9
million, respectively, including $8.0 million and $9.2 million from DDSI. The
Company recorded royalties under the co-promotion arrangement with Bausch & Lomb
Pharmaceuticals, Inc. ("Bausch & Lomb") of $813,000 in 1995.
Clinical, development and regulatory expenses in 1995 decreased by $946,000,
or 10%, from 1994. Under an agreement with DDSI, the Company managed the
development of DDSI products and incurred development expenses on behalf of DDSI
in 1995 and 1994 of $6.4 million and $8.3 million, respectively, for which it
received contract revenues. The decrease in DDSI development expenses resulted
primarily from the shift from use of outside contractors to Dura employed
personnel and resources. This decrease was partially offset by increased
expenses associated with work being performed under development contracts, for
which the Company recorded contract revenues of $1.0 million in 1995, and by
costs associated with the internal development of respiratory pharmaceutical
products.
Selling, general and administrative expenses in 1995 increased by $8.0
million over 1994 and decreased as a percentage of revenues from 55% in 1994 to
50% in 1995. The dollar increase results primarily from the operating costs of
Health Script, acquired in March 1995, and increased sales and contracting
levels. The decrease as a percentage of revenues reflects an increase in the
productivity of the sales force, the growth of pharmaceutical sales due to
product acquisitions and the growth of contract revenues.
Other income--net (primarily interest income) in 1995 increased by $1.4
million as compared to 1994. The increase resulted primarily from interest
income on cash balances generated by the November 1994
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<PAGE>
and August 1995 stock offerings which was partially offset by interest expense
resulting from obligations incurred in connection with 1995 acquisitions.
The Company recorded income tax provisions of $406,000 and $34,000 in 1995
and 1994, respectively. The provisions reflect the expected combined federal and
state tax rate of 40% offset by the benefit from utilization of net operating
loss carryforwards, which are generally limited to 90% of taxable income.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments decreased by $54.1 million
to $186.2 million at June 30, 1997 from $240.3 million at December 31, 1996. The
decrease is due primarily to the acquisition of the intranasal steroid products
Nasarel and Nasalide for $70 million in May 1997 and capital expenditures of
$13.7 million, partially offset by cash generated from operations. Working
capital decreased by $54.0 million to $165.9 million at June 30, 1997 from
$219.9 million at December 31, 1996.
At June 30, 1997, the Company had an aggregate of $29.8 million in long-term
obligations, of which $22.9 million is to be paid during 1997. As of June 30,
1997, additional future contingent obligations totaling $97.9 million relating
to product acquisitions are due through 2004.
In April 1997, the Company entered into a loan agreement which provides for
the borrowing of up to $50 million on an unsecured basis through May 1, 1999. As
of June 30, 1997, no borrowings were outstanding under this loan.
The Company provides development and management services to Spiros Corp.
pursuant to various agreements for the development of Spiros Corp.'s dry powder
drug delivery technology. Dura records contract revenues from Spiros Corp. equal
to amounts due for such services, less a pro rata amount allocated to a warrant
subscription receivable. The Company has a purchase option to acquire all of the
shares of Spiros Corp., which is exercisable through December 31, 1999, at
predetermined prices, payable at the Company's option in cash or Common Stock or
a combination thereof. In addition, the Company has an option, through specified
dates, to acquire Spiros Corp.'s exclusive rights for use of Spiros with
albuterol in the cassette version for a minimum of $15 million in cash.
The Company anticipates that its existing capital resources, together with
cash expected to be generated from operations and available bank borrowings,
should be sufficient to finance its operations and working capital needs through
at least June 1998. Significant additional resources, however, may be required
in connection with product or company acquisitions, in-licensing opportunities,
or the development of Spiros products. At present, the Company is actively
pursuing the acquisition of rights to several products and/or companies which
may require the use of substantial capital resources; however, there are no
present agreements or commitments with respect to such acquisitions.
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BUSINESS
OVERVIEW
Dura is a specialty respiratory pharmaceutical and pulmonary drug delivery
company. The Company is engaged in developing and marketing prescription
pharmaceutical products for the treatment of asthma, hay fever, COPD, the common
cold and related respiratory ailments, and is developing a pulmonary drug
delivery system. Dura has strategically focused on the U.S. respiratory market
because of its size and growth opportunities. The estimated size of the target
market for antihistamines, asthma/rhinitis therapies, cough/cold preparations
and anti-infectives in 1996 was approximately $9.5 billion. The size and
fragmented nature of the market and the identifiable base of physician
prescribers allow the Company to achieve significant market penetration with a
specialized sales force. The Company currently markets 31 prescription products.
The Company also has a separate mail service pharmacy, Health Script, which
dispenses respiratory pharmaceuticals.
Dura employs a dual marketing strategy utilizing its focused field sales
force of over 230 people and a dedicated managed care sales and marketing group
that covers managed care organizations and retail pharmacy chains. Dura's field
sales force targets a physician base that includes approximately 80,000 U.S.
allergists, ENTs, pulmonologists and a selected subset of pediatricians and
generalist physicians, who the Company believes collectively write a significant
portion of respiratory pharmaceutical prescriptions. Dura believes that its
field sales force calls on approximately one-half of the target physician base.
The Company's managed care sales and marketing group concentrates on sales to
large regional and national managed care organizations. The Company expects to
continue expanding both the field sales force and the managed care sales and
marketing group as warranted by market opportunities.
This marketing strategy has allowed Dura to leverage its distribution
capabilities by acquiring the rights to market additional prescription
pharmaceutical products through acquisition, in-license or co-promotion
arrangements. Since 1992, the Company has acquired 19 products targeted at the
U.S. respiratory market. In September 1996, the Company acquired from Lilly
exclusive U.S. marketing rights to the antibiotics Keftab and Ceclor CD. The
Company began marketing Keftab in September 1996, and launched Ceclor CD in
October 1996. In May 1997, the Company acquired from Syntex the exclusive U.S.
rights to the intranasal steroid products Nasarel and Nasalide.
Another key component of Dura's strategy is to develop Spiros. Spiros is
being designed to aerosolize pharmaceuticals in dry powder formulations for
delivery to the lungs while providing certain advantages over other
currently-used methods of pulmonary drug delivery. The Company has a three-level
development program for Spiros which entails (i) developing, on behalf of Spiros
Corp., certain drug applications for use in Spiros, including in the near-term
albuterol, beclomethasone and ipratropium, three of the pharmaceutical agents
most frequently prescribed to treat respiratory conditions, (ii) licensing
Spiros primarily to pharmaceutical companies, including Mitsubishi and Fujisawa
generally for use with certain of their proprietary respiratory products, and
(iii) developing Spiros, generally in collaboration with third parties, for the
systemic delivery of compounds, including certain proteins and peptides, through
the lungs for respiratory and non-respiratory indications as an alternative to
current invasive delivery techniques. The Company has licensed certain rights to
Spiros Corp. to continue a significant portion of the Spiros development
program, including funding of ongoing and future clinical trials of albuterol
and beclomethasone in Spiros, and formulation, preclinical development and
clinical trials of ipratropium in Spiros. The Company has the right to purchase
all of the outstanding shares of callable common stock of Spiros Corp. through
December 31, 1999 at predetermined prices.
In March 1997, the Company completed patient dosing in long-term and
short-term pivotal clinical trials that, along with earlier studies, are
intended to serve as the basis for the filing of an NDA by Dura in late 1997
seeking FDA approval, on behalf of Spiros Corp., to market albuterol in the
Spiros cassette system. The Company has also filed, on behalf of Spiros Corp.,
an IND Application for U.S. studies on beclomethasone in the Spiros cassette
system. In the first quarter of 1997, clinical trials of beclomethasone
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in the U.S. commenced under this IND Application. In addition, Dura, on behalf
of Spiros Corp., has performed powder formulation work with the peptide drug
salmon calcitonin which, in a clinical trial, demonstrated the ability to
develop macromolecule aerosol powder formulation and achieve systemic delivery
using the Spiros technology.
U.S. RESPIRATORY MARKET
Dura divides the U.S. respiratory market into three primary markets: (i)
respiratory infection, (ii) allergy, cough and cold and (iii) asthma and COPD.
RESPIRATORY INFECTION. Respiratory infections are generally caused by a
variety of bacteria and can affect either the upper respiratory tract (nasal
cavity, sinuses and throat) or the lower respiratory tract (lungs). The
resulting diagnoses include sinusitis, tonsillitis and bronchitis. These
infections are treated with antibiotics, which kill the bacteria causing the
symptoms. There are a variety of classes of antibiotics that treat specific
ranges, or spectrums, of bacteria. Classes used to treat respiratory infection
include cephalosporins, broad spectrum macrolides and quinolones. The market for
these classes is very large, totaling $4.6 billion in 1996 for the oral solid
forms alone. The cephalosporin class accounts for approximately $1.3 billion of
this total.
ALLERGY, COUGH AND COLD. While the causes of allergies (which can be
seasonal or perennial) and cough and colds differ, nasal congestion and sneezing
are common symptoms of these diseases. The U.S. combined market for therapeutic
drugs to treat allergies, cough and cold was over $2.1 billion in 1996.
Antihistamines and antihistamine/decongestant combinations are the most widely
used forms of therapy for allergies and represent the largest portion of the
allergy, cough and cold market in the United States. An additional form of
therapy for allergies includes intranasal steroids, such as Nasarel and
Nasalide, which are increasingly being prescribed for allergic rhinitis. Cough
and cold preparations represent the next largest portion of the allergy, cough
and cold market and include decongestant and decongestant/ expectorant
combinations, cough suppressants and antihistamine combinations and
expectorants.
ASTHMA AND COPD. 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
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 therapeutic drugs to treat
asthma and COPD was approximately $2.8 billion in 1996. The primary categories
of therapeutic drugs used in the treatment of asthma and COPD include
bronchodilators and anti-inflammatories. Bronchodilators dilate the airways and
include beta agonists (such as bitolterol and albuterol), xanthines (such as
theophylline) and anticholinergics (such as ipratropium). Anti-inflammatories
reduce inflammation and include cromolyns and glucocorticoids (such as
triamcinolone, beclomethasone, flunisolide and budesonide).
STRATEGY
The Company's objective is to be a leading supplier of respiratory
pharmaceuticals and pulmonary drug delivery systems. The Company attempts to
achieve this objective through the implementation of the following:
- FOCUSING MARKETING EFFORTS ON RESPIRATORY PHYSICIAN SPECIALISTS. Dura
employs a dual marketing strategy utilizing its focused field sales force
and a dedicated managed care sales and marketing group. Dura's field sales
force targets a physician base that includes approximately 80,000 U.S.
allergists, ENTs, pulmonologists and a selected subset of pediatricians
and generalist physicians, who the
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Company believes collectively write a significant portion of respiratory
pharmaceutical prescriptions. Dura believes that its field sales force
calls on approximately one-half of the target physician base. The
Company's managed care sales and marketing group concentrates on sales to
large regional and national managed care organizations. The Company
expects to continue expanding both the field sales force and the managed
care sales and marketing group as warranted by market opportunities.
- ACQUIRING, IN-LICENSING OR CO-PROMOTING RESPIRATORY PRESCRIPTION
PHARMACEUTICALS. The Company seeks to acquire, in-license or co-promote
respiratory prescription pharmaceuticals or companies developing and/or
marketing such pharmaceuticals. The Company is particularly focused on
respiratory drugs that are under-promoted by large pharmaceutical
companies. The Company believes that the pharmaceutical industry is
undergoing a restructuring that may create greater opportunities for the
Company. For example, many large pharmaceutical companies are
consolidating and merging and/or redirecting their sales forces, which may
lead to the underpromotion of certain products deemed too small for large
sales forces and create significant acquisition, in-licensing and co-
promotion opportunities. Additionally, consolidation within the sector may
make small product lines less desirable to large pharmaceutical companies.
The Company is actively pursuing the acquisition of rights to products
and/or companies, which may require the use of substantial capital
resources.
- DEVELOPING SPIROS. The Company has a three-level development program for
Spiros which entails (i) developing, on behalf of Spiros Corp., certain
drug applications for use in Spiros, including in the near term albuterol,
beclomethasone and ipratropium, three of the most frequently prescribed
pharmaceutical agents to treat respiratory conditions, (ii) licensing
Spiros primarily to pharmaceutical companies generally for use with
certain of their proprietary respiratory products, and (iii) developing
Spiros, generally in collaboration with third parties, for the systemic
delivery of compounds, including certain proteins and peptides, through
the lungs for respiratory and non-respiratory indications as an
alternative to current invasive delivery techniques. These Spiros
development programs are currently being undertaken primarily through
strategic relationships with Spiros Corp., Mitsubishi, Fujisawa, and Trega
Biosciences, Inc. ("Trega").
DURA'S CURRENT PRODUCTS
The Company currently markets 31 prescription products, including 25 that
are off-patent, in the following therapeutic categories: respiratory infection
(five products); allergy, cough and cold (24 products); and asthma and COPD (two
products). The following is a list of the Company's principal prescription
pharmaceuticals:
<TABLE>
<CAPTION>
RIGHTS
OBTAINED FROM OR
PRODUCTS DEVELOPED BY
- ---------------------------------------------------------------------------------------- ------------------------
<S> <C>
Respiratory Infection
Ceclor CD Tablets (anhydrous cefaclor)................................................ Lilly
Keftab (cephalexin hydrochloride)..................................................... Lilly
Allergy, Cough and Cold
Nasarel (flunisolide) Nasal Solution.................................................. Syntex
Nasalide (flunisolide) Nasal Solution................................................. Syntex
ENTEX Products........................................................................ P&G
DURA-VENT Products.................................................................... Dura
RONDEC Products....................................................................... Abbott, Dura
Asthma and COPD
TORNALATE-Registered Trademark- Products.............................................. Sanofi-Winthrop, Inc.
</TABLE>
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In September 1996, the Company acquired the exclusive U.S. rights to the
cephalosporin antibiotics Keftab and Ceclor CD from Lilly. The U.S. antibiotic
market was $4.6 billion in 1996, of which $1.3 billion was accounted for by
cephalosporin antibiotics. The Company believes that this acquisition
complements its existing strategy because approximately 60% of antibiotics are
prescribed for respiratory infections. Keftab is an antibiotic indicated for
respiratory tract, skin and soft tissue infections. Ceclor CD is a twice-a-day
dosage form of cefaclor typically taken for seven days. Ceclor, Lilly's
currently marketed cefaclor, is normally taken three times a day for 10 days.
The Company believes these product acquisitions further its strategy of
acquiring prescription pharmaceuticals which are marketed by its sales force to
its targeted physicians.
In May 1997, the Company acquired from Syntex the exclusive U.S. rights to
the intranasal steroid products Nasarel and Nasalide. The U.S. market for
intranasal steroids for the treatment of perennial and allergic rhinitis was
approximately $700 million in 1996, and has averaged 24% growth over the last
two years. The Company believes that this acquisition complements its existing
strategy because the products fit within the Company's respiratory focus while
adding a new respiratory category, nasal steroids, to its product portfolio. In
addition, the Company believes that it will be able to further leverage its
field sales force by offering these new products acquired from Lilly and Syntex
to high-prescribing physicians during sales calls. A portion of the revenues
from these products is being utilized to fund the expansion of the Company's
existing field sales force.
The two Tornalate products, Keftab and Ceclor CD are the subject of approved
NDAs. Dura also markets Capastat Sulfate-Registered Trademark- and
Seromycin-Registered Trademark-, which are also the subject of approved NDAs.
Crolom-TM- is the subject of an approved Abbreviated New Drug Application
("ANDA"). The remaining products are branded pharmaceuticals which are not the
subject of NDAs or ANDAs.
SPIROS
Spiros is a proprietary pulmonary dry powder drug delivery system that is
designed to aerosolize pharmaceuticals in dry powder formulations for delivery
to the lungs. Currently, metered dose inhalers ("MDIs") are the most commonly
used inhalation delivery system. The Company believes dry powder inhalers
("DPIs") will gradually replace MDIs as the leading pulmonary delivery system,
due primarily to the phasing out of chlorofluorocarbons ("CFCs") and
coordination problems associated with MDIs. Many companies are studying
alternative propellants, such as hydrofluorocarbons ("HFAs"), for use in MDIs,
and one potential competitor has obtained FDA approval and has begun marketing
an albuterol MDI using an HFA propellant. However, the Company believes any
product utilizing alternative propellants 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. There are
currently two general classes of DPIs in commercial use worldwide, individual
and multiple dose systems, and both are breath powered and flow rate dependent.
In the U.S., only individual dose DPIs are marketed. Turbuhaler, a multiple dose
DPI and the leading DPI in worldwide sales, is considered the current industry
standard. In June 1997, the FDA approved for marketing the first Turbuhaler
product in the United States.
POTENTIAL ADVANTAGES OF SPIROS. The Company believes Spiros may have
certain advantages over other currently used methods of delivery including the
following:
- INSPIRATORY FLOW RATE INDEPENDENCE. 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,
effort or physical abilities. Recently completed tests of Spiros on human
subjects have shown a relatively consistent and significant level of drug
deposition throughout the clinically relevant inspiratory range. Currently
available DPIs can vary significantly in their level of drug deposition
depending on the patient's inspiratory flow rate and can deliver
significantly less drug at the lower flow rates typically associated with
asthma attacks.
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- 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 the user to coordinate their
breathing with actuation 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 patients' lungs as they inhale.
- FREE OF CHLOROFLUOROCARBON PROPELLANTS. CFC propellants have ozone
destructive characteristics and are subject to worldwide regulations aimed
at eliminating their usage within the decade. Spiros will not use CFCs
while most MDIs, currently the most popular form of aerosol drug delivery,
use CFCs. Virtually all of the world's industrial nations, under the
auspices of the United Nations Environmental Program, pledged to cease use
of CFCs by the year 2000. As a result of the phase out of CFCs, the
Company believes that DPIs will become a leading method for pulmonary drug
delivery.
- REDUCED SIDE EFFECTS. Spiros is designed to efficiently deliver drugs to
the lungs thereby reducing drug deposition to the mouth and throat which
could reduce the possibility of unwanted side effects of certain
pharmaceutical agents, such as coughing and local irritation. With MDIs, a
significant portion of the dose is delivered to the mouth and throat and
is swallowed.
- PATIENT CONVENIENCE. Spiros is designed to be convenient for patients,
with features such as breath actuation (Spiros is triggered by
inhalation), portability (light weight and small size), quick delivery
time, simple operation, dose delivery feedback and multi-dose capability.
DEVELOPMENT PROGRAM FOR SPIROS. The Company intends to proceed with a
three-level development program for Spiros. The first level entails developing
certain drug applications for use in Spiros, including in the near-term
albuterol, beclomethasone and ipratropium, three of the most frequently
prescribed pharmaceutical agents to treat respiratory conditions. The Company,
on behalf of Spiros, is engaged in ongoing discussions with the FDA regarding
clinical testing requirements for Spiros for albuterol, beclomethasone and
ipratropium aimed at facilitating the regulatory approval process.
In 1994, an IND Application was filed with the FDA to begin clinical testing
with Dura's own albuterol dry powder formulation with the Spiros cassette
system. Dura has exclusively licensed rights to this formulation to Spiros Corp.
In April 1996, Dura completed dosing of subjects in a clinical trial in the
United States on behalf of Spiros Corp. focusing on dose selection using a
formulation of powdered albuterol with Spiros under an IND Application filed
with the FDA. In March 1997, the Company completed patient dosing in long-term
and short-term pivotal clinical trials that, along with earlier studies, are
intended to serve as the basis for the filing of an NDA by Dura in late 1997
seeking FDA approval, on behalf of Spiros Corp., to market albuterol in the
Spiros cassette system. Considerable formulation work for use of beclomethasone
with Spiros has also been done. A study has been completed in Canada to evaluate
dose selection in 24 subjects. The Company has commenced a second dose selection
study in the U.S. under an IND Application for beclomethasone in Spiros, which
was filed by Dura on behalf of Spiros Corp. The Company also intends to conduct
clinical trials on ipratropium in the Spiros system on behalf of Spiros Corp.
Dura, on behalf of Spiros Corp., has performed powder formulation work with
the peptide drug salmon calcitonin which, in a clinical trial, demonstrated the
ability to develop macromolecule aerosol powder formulation and achieve systemic
delivery using the Spiros technology. Particle size reduction appropriate for
aerosol administration was achieved, and in vitro measurements showed good
aerosol characteristics in Spiros. The formulation was sufficiently stable, and
a clinical trial batch was manufactured in Dura's facility.
The second level of Spiros development consists of licensing Spiros
primarily to pharmaceutical companies for use with certain of their proprietary
respiratory products. Dura currently has development
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agreements with Fujisawa and Mitsubishi and is conducting feasibility studies
for other pharmaceutical companies to assess the suitability of certain
compounds to be delivered using Spiros. There can be no assurance that any of
these feasibility studies will prove successful, or even if successful, that the
pharmaceutical companies will proceed to license Spiros for use with these
compounds. See "--Strategic Alliances."
The third level of Spiros development is to develop Spiros, in collaboration
with other companies, for the systemic delivery of compounds through the lungs
for respiratory and non-respiratory indications as an alternative to current
invasive delivery techniques. The Company commenced development efforts on the
use of Spiros with peptides and proteins in 1995. In February 1996, Dura entered
into a collaborative agreement with Trega to develop inhalation formulations of
new compounds discovered and developed by Trega. Dura is also performing
feasibility studies for pharmaceutical companies that desire to develop Spiros
for use with both respiratory drugs and drugs for systemic pulmonary delivery
now being developed by those companies. See "--Strategic Alliances."
SALES AND MARKETING
FIELD SALES FORCE. Dura's specialized sales and marketing organization
targets a physician base that includes approximately 80,000 U.S. allergists,
ENTs, pulmonologists, and a selected subset of pediatricians and generalist
physicians who treat a large number of allergy and asthma patients. The Company
believes this relatively small group of physicians writes a significant portion
of respiratory pharmaceutical prescriptions. This concentration allows for
effective market penetration by a specialized sales and marketing organization.
As of June 30, 1997, Dura had 205 pharmaceutical sales representatives
nationwide, supervised by 19 district managers, seven area recruiter-trainers
and two regional directors. Dura believes its focused sales force currently
calls on approximately one-half of its target physician base. The Company
intends to continue expansion of its field sales force as warranted by market
opportunities.
The Company believes that the personal relationships of Dura's sales
representatives with their physician customers are essential to the Company's
business. Dura's sales representatives differentiate themselves from the
competition by focusing primarily on respiratory infections, allergy, cough and
cold, and asthma and COPD, and by promoting pharmaceuticals used by respiratory
specialists in treating patients. With a relatively small target audience,
promotional spending by Dura on advertising and direct mail is generally
inexpensive and efficient. The Company regularly participates in local, regional
and national medical meetings of the key specialty groups. The Company believes
that it has established a national awareness of the Dura name within the U.S.
respiratory market.
MANAGED CARE SALES AND MARKETING GROUP. To implement Dura's marketing
strategy, the Company established a dedicated managed care sales and marketing
group, currently consisting of five managed care executives and five regional
account managers, supervised by two corporate executives, which concentrates on
sales to large regional and national managed care organizations. These
organizations include health maintenance organizations ("HMOs"), preferred
provider organizations ("PPOs"), large drug merchandising chains, nursing home
providers and mail order pharmacies. A primary goal of the managed care sales
and marketing group is to place Dura's products on approved formulary lists of
HMOs and PPOs.
HEALTH SCRIPT
In March 1995, the Company acquired Health Script, located in Denver,
Colorado. Health Script is a mail service pharmacy which dispenses respiratory
pharmaceuticals. Mail order services are particularly well-suited for
respiratory patients who are long-term, chronic users of certain pharmaceuticals
and to whom the convenience and cost efficiency of mail order is appealing.
Health Script was formed in 1990 to supply value-priced respiratory
pharmaceutical products to patients through the mail. Health Script
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currently dispenses to its approximately 30,000 patients nationwide over 100
respiratory products manufactured by third parties. Health Script is focused on
working with home healthcare providers and patients to coordinate respiratory
medication services and patients' management programs. Health Script markets its
services through specialty field sales representatives and telemarketing. The
existing patient base is maintained by telephone contact with patients to
monitor compliance with their doctors' prescriptions.
RELATIONSHIP WITH SPIROS CORP.
In December 1995, Spiros Corp. completed a $28.0 million private placement.
The net proceeds of this private placement and a $13.0 million cash contribution
from Dura are being used by Spiros Corp. to continue a significant portion of
the development program for Spiros, including funding of formulation,
preclinical development and ongoing and future clinical trials of albuterol,
beclomethasone and ipratropium in Spiros.
The financing involved the issuance and sale of 933,334 units at $30.00 per
unit. Each unit consisted of one share of Spiros Corp. callable common stock and
one Series S Warrant exercisable for 2.4 shares of Common Stock at an exercise
price of $19.47 per share. In consideration for the issuance of the Series S
Warrants and Dura's cash contribution, the Company received an option, which can
be exercised through December 31, 1999, to purchase all of the currently
outstanding shares of Spiros Corp. callable common stock at predetermined
prices, beginning at $46.88 per share (an aggregate of $43.7 million) at any
time prior to December 31, 1997 and increasing on a quarterly basis thereafter
to a maximum of $76.17 per share (an aggregate of $71.1 million) on October 1,
1999 through December 31, 1999 ("Spiros Purchase Option"). Such purchase price
may be paid, at the Company's discretion, in cash, shares of Common Stock or a
combination thereof. Any shares of Common Stock delivered in payment of the
purchase price must be covered by an effective registration statement. If the
development efforts of Spiros Corp. are successful, the Company may exercise its
right to purchase Spiros Corp.'s callable common stock; however, the Company
does not have a legal obligation to do so. In addition, pursuant to the
Albuterol Purchase Option, Dura has the option at any time through the earlier
of 60 days after FDA approval of an albuterol product or December 31, 1999, to
purchase Spiros Corp.'s rights for use of Spiros with albuterol product in a
cassette. In the event Dura exercises the Albuterol Purchase Option and does not
exercise the Spiros Purchase Option, Dura will pay a royalty to Spiros Corp. on
net sales of such albuterol product.
In connection with the private placement, the Company entered into the
following agreements with Spiros Corp.:
- TECHNOLOGY LICENSE AGREEMENT. Under this agreement, the Company and DDSI
granted to Spiros Corp., subject to existing agreements with Mitsubishi, a
royalty-bearing, perpetual, exclusive license to use Spiros in connection
with albuterol, beclomethasone and ipratropium and certain other proteins
and peptides (including salmon calcitonin) and certain non-exclusive
rights to all other compounds to which Dura and/or DDSI have or acquire
rights capable of transfer during the term of the Development and
Management Agreement.
- INTERIM MANUFACTURING AND MARKETING AGREEMENT. Under this agreement,
Spiros Corp. granted to the Company an exclusive license to manufacture
and market Spiros Corp. products in the U.S. in exchange for a royalty of
10.0% on net product sales, as defined in the agreement. This agreement
expires upon termination or expiration of the Spiros Purchase Option.
- DEVELOPMENT AND MANAGEMENT AGREEMENT. Under this agreement, Spiros Corp.
has engaged the Company to develop the Spiros Corp. products and provide
general management services to Spiros Corp. During 1996, the Company
recorded contract revenues of $19.1 million under this agreement.
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STRATEGIC ALLIANCES
MITSUBISHI CHEMICAL CORPORATION. In October 1994, Dura, DDSI and Mitsubishi
entered into a license and supply agreement, under which Mitsubishi was granted
the exclusive right to use and sell Spiros together with a dry powder
formulation of an asthma compound in Japan, Hong Kong, Singapore, the Republic
of China (Taiwan), the Republic of Korea and the People's Republic of China
(collectively the "Territory"). DDSI's rights under the agreement were assigned
to Spiros Corp. in December 1995. Spiros Corp. has agreed to develop a dry
powder formulation of such compound for Mitsubishi and will manufacture and
supply to Mitsubishi its requirements for both Spiros and such compound.
Mitsubishi will be responsible for conducting all clinical and other work needed
to obtain regulatory approvals of Spiros and such compound in the Territory. In
connection with the license and supply agreement, Mitsubishi is obligated to
make milestone and other payments to Dura and Spiros Corp. in certain
circumstances.
FUJISAWA PHARMACEUTICAL CO., LTD. In April 1995, the Company entered into a
collaborative development agreement with Fujisawa covering the use of Spiros to
deliver one of Fujisawa's new chemical entity asthma compounds. The agreement
was an extension of previous feasibility work completed by Dura. Pursuant to the
agreement, the Company will provide dry powder formulation assistance,
manufacturing process development and clinical trial supplies to Fujisawa
through the completion of clinical trials in Japan or June 30, 1998, whichever
occurs first. The Company received an up-front payment and is to receive
additional milestone payments and reimbursement of costs from Fujisawa. Fujisawa
can terminate the agreement upon 30 days' notice to the Company. If Fujisawa's
clinical trials are successful, the parties have agreed to negotiate additional
agreements, which could include license and supply agreements.
TREGA BIOSCIENCES, INC. In February 1996, the Company entered into a
research and development agreement with Trega to develop inhalation formulations
of new compounds discovered and developed by Trega. In addition, Dura will
provide to Trega, for a four-year period, contract services for Trega's drug
development programs using Dura's development capabilities and proprietary
formulation and delivery technology. The Company will receive a percentage of
proceeds received by Trega with respect to jointly developed compounds, and will
receive contract revenues from Trega for services provided. Concurrently, Dura
made a $5.0 million equity investment in Trega, which was subsequently converted
into 775,193 shares of Trega common stock.
In addition, the Company has executed agreements with a number of
international pharmaceutical companies to conduct feasibility studies on
formulations of certain compounds for use with Spiros, including growth hormones
and proteins and peptides.
COMPETITION
The Company directly competes with at least 25 other companies in the U.S.
which are currently engaged in developing, marketing and selling respiratory
pharmaceuticals. Additionally, there are at least 10 companies currently
involved in the development, marketing or sales of dry powder pulmonary drug
delivery systems. There are two types of DPIs currently in commercial use
worldwide. In the U.S., individual dose DPIs currently are marketed, including
the Rotohaler (developed and marketed by Glaxo Wellcome, Inc.) and the Spinhaler
(developed and marketed by Fisons Limited). The Turbuhaler (developed and
marketed by Astra Pharmaceuticals), a multiple dose DPI and the leading DPI in
worldwide sales, is considered the current industry standard. In June 1997, the
FDA approved for marketing the first Turbuhaler product in the United States.
Many of these companies, including large pharmaceutical firms with financial
and marketing resources and development capabilities substantially greater than
those of the Company, are engaged in developing, marketing and selling products
that compete with those offered by the Company. The selling prices of such
products typically decline as competition increases. Further, other products now
in use or under development by others may be more effective than the Company's
current or future products. The industry is characterized by rapid technological
change, and competitors may develop their products more
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rapidly than the Company. Competitors may also be able to complete the
regulatory process sooner and, therefore, may begin to market their products in
advance of the Company's products. Dura believes that competition among both
prescription pharmaceuticals and pulmonary drug delivery systems aimed at the
respiratory infection, allergy, cough and cold and asthma and COPD markets will
be based on, among other things, product efficacy, safety, reliability,
availability and price.
CLINICAL, DEVELOPMENT AND REGULATORY
The Company's clinical, development and regulatory expenses relate primarily
to product development and regulatory compliance activities. Clinical,
development and regulatory expenses were $9,354,000, $8,408,000, and $18,540,000
for the years ended December 31, 1994, 1995 and 1996, respectively, and
$7,119,000 and $12,353,000 for the six-month periods ended June 30, 1996 and
1997, respectively. The clinical, development and regulatory expenses associated
with Spiros development, for which the Company recorded contract revenues from
DDSI and Spiros Corp., were $8,260,000, $6,428,000, and $15,932,000 for the
years ended December 31, 1994, 1995, and 1996, respectively, and $6,460,000 and
$10,011,000 for the six-month periods ended June 30, 1996 and 1997,
respectively.
PATENTS AND PROPRIETARY RIGHTS
The Company considers the protection of discoveries in connection with its
development activities important to its business. The Company intends to seek
patent protection in the U.S. and selected foreign countries where deemed
appropriate. On July 12, 1994, the Company was issued a U.S. patent on Spiros
and the Company has filed a continuation-in-part covering certain improvements
to the Spiros technology. The issued patent, which expires in 2011, covers,
among other claims, use in Spiros of an impeller to create an aerosol cloud of a
drug intended for inhalation. There can be no assurance that the issued patent
or subsequent patents, if issued, will adequately protect the Company's design
or that such patents will provide protection against infringement claims by
competitors. Dura has also filed certain foreign patent applications relating to
Spiros technology. There can be no assurance that additional patents, U.S. or
foreign, will be obtained covering Company products or that, if issued or
licensed to the Company, the patents covering Company products will provide
substantial protection or be of commercial benefit to the Company. Federal court
decisions establishing legal standards for determining the validity and scope of
patents in the field are in transition. There can be no assurance that the
historical legal standards surrounding questions of validity and scope will
continue to be applied or that current defenses as to issued patents in the
field will offer protection in the future.
The Company also relies upon trade secrets, unpatented proprietary know-how
and continuing technological innovation to develop its competitive position. The
Company enters into confidentiality agreements with certain of its employees
pursuant to which such employees agree to assign to the Company any inventions
relating to the Company's business made by them while in the Company's employ.
There can be no assurance, however, that others may not acquire or independently
develop similar technology or, if patents are not issued with respect to
products arising from research, that the Company will be able to maintain
information pertinent to such research as proprietary technology or trade
secrets.
Tornalate Inhalation Solution and Tornalate MDI are covered by patents filed
by Sanofi-Winthrop, Inc. which expire in the near-term. The Keftab, Ceclor CD,
Nasarel and Nasalide products or processes to make such products are covered by
patents which expire between 2003 and 2007. The Company's other pharmaceutical
products are not protected by patents.
GOVERNMENT REGULATION
The manufacturing and marketing of the Company's products are subject to
regulation by Federal and state government authorities, including the FDA, the
Environmental Protection Agency and the Occupational Safety and Health
Administration, in the U.S. and other countries. In the U.S., pharmaceuticals
and
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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 the Company's
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 Spiros and the compounds to be used with it, Dura
is required to conduct each of the following steps and possibly others: (i)
preclinical testing (laboratory and possibly animal tests), (ii) the submission
to the FDA of an IND Application, which must become effective before human
clinical trials may commence, (iii) adequate and well-controlled human clinical
trials to establish safety and efficacy, (iv) the submission of an NDA to the
FDA and for marketing approval, and (v) FDA approval of the NDA prior to any
commercial sale or shipment. 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 cGMPs for both drugs and devices. To supply
products for use in the U.S., foreign manufacturing establishments must comply
with cGMP 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.
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 ("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 (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 are submitted to the FDA
in the form of an NDA (or a Product License Application for biological products)
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
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additional indications. The FDA may also require post-marketing testing and
surveillance to monitor for adverse effects, which can involve significant
additional expense.
Although the FDA has considerable discretion to decide what requirements
must be met prior to approval, the Company believes the FDA is likely to
regulate each combination of Spiros with a compound as a discrete pharmaceutical
or drug product requiring separate approval as a new drug. The Company believes
that the approval process for each drug/delivery combination now under
development may be shorter than the full NDA process described above because the
safety and efficacy of the compounds have already been established in currently
marketed formulations and delivery mechanisms. There can be no assurance,
however, that the approval process will be shorter or that any NDA submitted by
the Company will eventually be approved.
For both currently marketed and future products, failure to comply with
applicable regulatory requirements after obtaining regulatory approval can,
among other things, result in the suspension of regulatory approval, as well as
possible civil and criminal sanctions. In addition, changes in regulations could
have a material adverse effect on the Company.
The Federal Food, Drug, and Cosmetic Act requires that any "new drug" must
be approved pursuant to an NDA. The term "new drug" is defined as any drug which
is not generally recognized among qualified experts as safe and effective for
its labeled intended uses. Certain exemptions from this definition exist for
products marketed without change since prior to 1938 (the date of enactment of
the Federal Food, Drug, and Cosmetic Act) or, with respect to the need to show
effectiveness, for drug products marketed prior to October 10, 1962 (the date of
enactment of the "Drug Amendments of 1962"). The Company presently markets 21
drug products for which the FDA has not yet made a determination as to their
status as new drugs under the Federal Food, Drug, and Cosmetic Act. The FDA is
continuing an evaluation of the effectiveness of all products containing
ingredients marketed prior to 1962 that are not the subject of an approved NDA
as part of its DESI program and will determine which are new drugs requiring
approval through an NDA for marketing. The existence of currently-marketed
prescription pharmaceuticals that contain one or more active ingredients first
introduced in the marketplace before 1962 and that are marketed based on their
manufacturers' belief that such products are not subject to the new drug
provisions of the Act is recognized in paragraph B of the Food and Drug
Administration's Compliance Policy Guide, 440.100. This Policy Guide indicates
that the FDA will implement procedures to determine whether the new drug
provisions are or are not applicable to these products. The Policy Guide
requires that products covered by paragraph B not be similar or related to any
drug included in the DESI program, or have a different formulation or conditions
for use than products marketed before November 13, 1984. If a product is not
covered by paragraph B, the FDA could make a determination as to whether or not
the new drug provisions are applicable to it without first implementing the
procedures called for by the Policy Guide. The Company believes that nine of its
prescription pharmaceutical products may be covered by paragraph B of the Policy
Guide and it is aware that one of its products may be considered to be similar
or related to a DESI drug. Also, it is not aware of evidence to substantiate
that three of its products have the same formulation or conditions for use as
products marketed before November 13, 1984. These products could be subject at
any time to an FDA determination that an NDA is required. If a final
determination is made that a particular drug requires an approved NDA, such
approval will be required for marketing to continue. If such a determination is
made, the FDA might impose various requirements: for example, it might require
that the current product be the subject of an approved NDA, that the product be
reformulated and NDA approval obtained, that the product must be sold on an
over-the-counter basis rather than as a prescription drug, or that the product
must be removed from the market. There can be no assurance as to which of these
courses the FDA will require or whether the Company will be able to obtain any
approvals which the FDA may deem necessary. If any of these actions are taken by
the FDA, such actions could have a material adverse effect on the Company's
business.
In April 1996, the export provisions of the Federal Food, Drug, and Cosmetic
Act were relaxed to permit the export of unapproved drugs to a foreign country,
provided the product complies with the laws of
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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, the Company 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 the Company or any of its collaborators will be
able to meet and fulfill the statutory requirements in a particular country.
Health Script is subject to regulation by state regulatory authorities,
principally state boards of pharmacy. In addition, Health Script is subject to
regulation by other state and Federal agencies with respect to reimbursement for
prescription drug benefits provided to individuals covered primarily by publicly
funded programs.
MANUFACTURING
The Company's principal manufacturing facility is located in a Company-owned
building adjacent to its headquarters. The facility initially is intended to be
used to formulate, mill, blend and manufacture drugs to be used with Spiros,
pending regulatory approval. Equipment purchases and validation are currently
scheduled through 1997. The Company's manufacturing facility must be registered
with and licensed by various regulatory authorities and must comply with cGMP
requirements prescribed by the FDA and the State of California. The Company is
currently expanding its facilities to provide additional manufacturing
capabilities. The Company will need to significantly scale up its current
manufacturing operations and comply with cGMPs and other regulations prescribed
by various regulatory agencies in the United States and other countries to
achieve the prescribed quality and required levels of production of such
products and to obtain marketing approval. Any failure or significant delay in
the validation of or obtaining a satisfactory regulatory inspection of the new
facility or failure to successfully scale up could have a material adverse
effect on the Company's ability to manufacture products in connection with
Spiros.
The Company has limited experience manufacturing products for commercial
purposes and currently does not have the capability to manufacture its
pharmaceutical products and therefore is dependent on contract manufacturers for
the production of such products for development and commercial purposes. The
Company's current dependence upon others for the manufacture of its products may
adversely affect the future profit margin, if any, on the sale of those products
and the Company's ability to develop and deliver products on a timely and
competitive basis.
FACILITIES
The Company owns and occupies two buildings that are situated on one parcel
of land and has acquired land for the construction of a new corporate facility.
The two buildings and the land are located in San Diego, California. One
building, consisting of approximately 31,000 square feet, is used primarily as
office space for research, regulatory, sales and administrative personnel. The
second building, consisting of approximately 49,000 square feet, contains the
Company's manufacturing facility that will be used to formulate, mill, blend and
fill drugs to be used with Spiros, lab and research facilities and warehouse
space. The Company also occupies an additional 34,000 square feet of office and
laboratory space pursuant to a short-term lease. The Company is constructing a
77,000 square foot facility expected to be completed in the second half of 1997,
to which certain corporate functions will be relocated. The Company expects to
commence construction of a 125,000 square foot facility in the second half of
1997 adjacent to the new 77,000 square foot facility, to be used initially for
research and development purposes.
The Company also leases approximately 16,660 square feet of space in Denver,
Colorado which houses the operations of Health Script's mail service pharmacy.
The lease term expires in January 2001 with one five-year renewal option.
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HUMAN RESOURCES
The Company employed 555 employees (of which 522 are full-time) as of June
30, 1997, consisting of 275 people in sales and marketing (of which 243
constitute the field sales force and the managed care field sales and marketing
group), 63 in administration and finance, 83 in clinical, regulatory and
research and development, 33 in operations and 101 at Health Script. None of the
Company's employees are represented by a labor union and the Company believes it
maintains positive relations with both field and corporate personnel.
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DESCRIPTION OF NOTES
The Notes will be issued pursuant to an indenture, to be dated as of July
30, 1997 (the "Indenture"), between the Company and Chase Trust Company of
California, as trustee (the "Trustee"). A copy of the form of Indenture is filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part. The terms of the Notes will include those stated in the Indenture and
those provisions required by, or made a part of the Indenture by reference to,
the Trust Indenture Act of 1939, as in effect on the date of the Indenture (the
"Trust Indenture Act"). The Notes will be subject to all such terms, and
prospective investors are referred to the Indenture for a statement thereof.
The following summary of certain provisions of the Notes does not purport to
be complete and is subject to and qualified in its entirety by express reference
to all of the provisions of the Notes and the Indenture, including the
definitions therein of certain terms. Whenever particular sections, articles or
defined terms of the Indenture are referred to herein, such sections, articles
or defined terms are incorporated herein by reference. As used in this
"Description of Notes," the "Company" refers to Dura Pharmaceuticals, Inc. and
does not include its subsidiaries or affiliates.
GENERAL
The Notes will be unsecured general obligations of the Company, subordinated
in right of payment to certain other obligations of the Company as described
under "--Subordination of Notes." The Notes will be convertible into shares of
Common Stock as described under "--Conversion Rights." The Notes will be limited
to an aggregate principal amount of $250,000,000 ($287,500,000 if the
Underwriters' over-allotment option is exercised in full) and will mature on
July 15, 2002, unless earlier converted, redeemed at the option of the Company,
or repurchased by the Company at the option of the Holder upon a Change in
Control (as defined). The Notes will be issued only in registered form, without
coupons, and only in denominations of $1,000 and integral multiples thereof.
The Notes will bear interest at the rate per annum shown on the cover page
of this Prospectus from the date of issuance or from the most recent Interest
Payment Date to which interest has been paid or duly provided for, payable
semi-annually on January 15 and July 15 of each year, commencing January 15,
1998, to Holders of record at the close of business on January 1 or July 1, as
the case may be, immediately preceding each such interest payment date, except
as otherwise provided in the Indenture. Interest will be computed on the basis
of a 360-day year composed of twelve 30-day months. Principal of and interest on
the Notes will be payable at the office of the Paying Agent. Payment of interest
on the Notes may, at the option of the Company, be made by check mailed to each
Holder's registered address. The Trustee will initially act as the Paying Agent.
Notes may be presented for conversion at the office of the Conversion Agent
and for exchange or registration of transfer at the office of the Registrar. The
Trustee will initially act as the Conversion Agent and the Registrar. Any
exchange or transfer will be without charge, except that the Company or the
Registrar may, subject to certain exceptions, require payment of a sum
sufficient to cover any tax, assessment or other governmental charge that may be
imposed in relation thereto.
When issued, the Notes will be a new issue of securities of the Company with
no established trading market. Although the Notes have been approved for
quotation, subject to official notice of issuance, on The Nasdaq SmallCap
Market, there can be no assurance that an active public market will develop for
the Notes or that, if such market develops, the market price will equal or
exceed the initial public offering price of the Notes. The initial public
offering price of the Notes will be determined by negotiation between the
Company and the Underwriters and may not be indicative of the market price of
the Notes after the offering of the Notes hereby.
The Indenture does not contain any financial covenants or restrictions on
the payment of dividends, the incurrence of Senior Indebtedness or the issuance
or repurchase of securities of the Company. The Indenture contains no covenants
or other provisions to afford protection to Holders in the event of a highly
leveraged transaction or a change in control of the Company, except to the
extent any such
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<PAGE>
transaction constitutes a "Change in Control" as described under "--Purchase of
Notes at the Option of Holders Upon a Change in Control."
CONVERSION RIGHTS
A Holder may, at any time prior to maturity, convert the principal amount of
a Note (or any portion thereof equal to $1,000 or an integral multiple of
$1,000) into shares of Common Stock at the conversion price set forth on the
cover page of this Prospectus, subject to adjustment as described below (the
"Conversion Price"). No fractional shares of Common Stock will be issued upon
conversion of a Note, but a cash payment will be made for any fractional
interest based upon the market price of the Common Stock on the last Trading Day
prior to the date of conversion. The right to convert a Note called for
redemption will terminate at the close of business on the Redemption Date for
such Note or such earlier date as the Holder presents the Note for redemption
(unless the Company shall default in making the redemption payment when due, in
which case the conversion right shall terminate at the close of business on the
date such default is cured and such Note is redeemed). If a Holder has exercised
its option to require the Company to repurchase such Note upon a Change in
Control, such Note may be converted only if such Holder validly withdraws its
election to exercise its repurchase option in accordance with the terms of the
Indenture.
Except as provided in the Indenture, no payment or adjustment will be made
for dividends or distributions with respect to shares of Common Stock issued
upon conversion of a Note, and no interest accrued will be paid on Notes
converted. If any Holder surrenders a Note for conversion between the record
date for the payment of an installment of interest and the related interest
payment date, then, notwithstanding such conversion, the interest payable on
such interest payment date will be paid to the Holder of record on such record
date. However, in such event, such Note, when surrendered for conversion, must
be accompanied by delivery of a check or draft payable in an amount equal to the
interest payable on such interest payment date on the portion so converted.
Notwithstanding the foregoing, if any Note is called for redemption on any
interest payment date and such Note is surrendered for conversion at any time
during the ten business days immediately preceding the date fixed for
redemption, interest shall accrue on such Note through, but not including, the
date fixed for redemption and shall be payable on such redemption date to the
person who surrenders such Note for conversion and the conversion date of such
Note will be deemed to be the redemption date. In such event, no check or draft
payable in an amount equal to the interest payable shall accompany the Note on
surrender.
The Conversion Price is subject to adjustment upon the occurrence of certain
events, including: (i) the issuance of shares of Common Stock as a dividend or
distribution on the Common Stock; (ii) the subdivision or combination of the
outstanding Common Stock; (iii) the issuance to all or substantially all holders
of Common Stock of rights or warrants to subscribe for or to purchase Common
Stock (or securities convertible into Common Stock) at a price per share less
than the then current market price per share; (iv) the distribution to all or
substantially all holders of Common Stock of shares of capital stock of the
Company (other than Common Stock), evidences of indebtedness, or other non-cash
assets (including securities of any company other than the Company); (v) the
distribution to all or substantially all holders of Common Stock of rights or
warrants to subscribe for its securities (other than those referred to in (iii)
above); and (vi) distributions consisting of cash, excluding any quarterly cash
dividend on the Common Stock to the extent that the aggregate cash dividend per
share of Common Stock in any fiscal quarter does not exceed the greater of (a)
the amount per share of Common Stock of the next preceding quarterly cash
dividend on the Common Stock to the extent that such preceding quarterly
dividend did not require an adjustment of the conversion price pursuant to this
clause (vi) (as adjusted to reflect subdivisions or combinations of the Common
Stock), and (b) 3.75% of the average of the daily Closing Prices (as defined in
the Indenture) of the Common Stock for the 10 consecutive Trading Days
immediately prior to the date of declaration of such dividend, and excluding any
dividend or distribution in connection with the liquidation, dissolution or
winding up of the Company. No adjustment of the Conversion Price will be
required to be made until the cumulative adjustments require an increase or
decrease of at least 1% in the
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Conversion Price as last adjusted. In addition, the Company reserves the right
to reduce the conversion price from time to time, either permanently or for a
period of not less than 20 Business Days.
Notwithstanding the foregoing, (i) if the options, rights or warrants
described in clauses (iii) and (v) of the preceding paragraph are exercisable
only upon the occurrence of certain triggering events, then the conversion price
will not be adjusted until such triggering events occur, and (ii) if such
options, rights or warrants expire unexercised, the conversion price will be
readjusted to take into account only the actual number of such options, rights
or warrants which were exercised. In addition, the provisions of the preceding
paragraph will not apply to the issuance of Common stock or the issuance or
exercise of options to purchase Common stock under any stock-based employee
compensation plan now existing or hereafter adopted.
In addition to any rights of the Holders upon a Change in Control, if the
Company reclassifies or changes its outstanding Common Stock, or consolidates
with or merges into or sells or conveys all or substantially all of the assets
of the Company as an entirety to any person or is a party to a merger that
reclassifies or changes its outstanding Common Stock, the Notes will become
convertible into the kind and amount of shares of stock, other securities and
property (including cash) that the Holders would have owned immediately after
the transaction if the Holders had converted the Notes immediately before the
effective date of the transaction.
Certain adjustments to the Conversion Price to reflect the Company's
issuance of certain rights, warrants, evidences of indebtedness, securities, or
other property (including cash) to holders of Common Stock may result in
constructive distributions taxable as dividends to Holders of the Notes. See
"Certain Federal Income Tax Considerations."
The term "all or substantially all" as used in the previous paragraphs has
not been interpreted under New York law (which is the governing law of the
Indenture) to represent a specific quantitative test. As a consequence, in the
event the Holders elected to exercise their rights under the Indenture and the
Company elected to contest such election, there could be no assurance as to how
a court would interpret the phrase under New York law, which may have the effect
of preventing the Trustee or the Holders from asserting that the Conversion
Price is subject to adjustment or that the Notes are convertible into other
shares of stock and other securities and property that the Holders would have
owned immediately after the transaction if the Holders had converted the Notes
immediately before the effective date of the transaction.
OPTIONAL REDEMPTION BY THE COMPANY
The Notes may not be redeemed at the option of the Company prior to July 15,
2000. Thereafter, at any time the Notes may be redeemed at the option of the
Company, in whole or from time to time in part, upon not less than 15 or more
than 60 days' notice given to the Holders by mail.
The redemption prices (expressed as a percentage of principal amount), in
each case together with accrued interest up to but not including the date of
redemption, for the 12-month period beginning on July 15, of the following years
are:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2000............................................................................. 101.40%
2001............................................................................. 100.70
</TABLE>
PROVIDED, that any semi-annual payment of interest becoming due on the date
fixed for redemption shall be payable to the Holders of record on the relevant
record date of the Notes being redeemed, PROVIDED that in the case in which a
Note is called for redemption on any interest payment date and such Note is
surrendered for conversion at any time during the ten business days immediately
preceding the date fixed for redemption, such interest shall be payable on such
redemption date to the person who surrenders such Note for conversion.
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<PAGE>
If fewer than all the Notes are to be redeemed, the Trustee will select the
Notes to be redeemed PRO RATA or by lot, or by any other method permitted by any
stock exchange on which the Notes are listed at the time of such redemption. If
any Note is to be redeemed in part only, a new Note or Notes in principal amount
equal to the unredeemed principal portion thereof will be issued. If a portion
of a Holder's Notes is selected for partial redemption and, prior to such
redemption, such Holder has elected to convert a portion of such Notes, such
converted portion shall be deemed to be taken from the portion selected for
redemption.
No sinking fund is provided for the Notes.
PURCHASE OF NOTES AT THE OPTION OF HOLDERS UPON A CHANGE IN CONTROL
In the event of a Change in Control (as defined below), each Holder will
have the option, subject to the terms and conditions of the Indenture, to
require the Company to repurchase all or any part (PROVIDED, that the principal
amount must be $1,000 or an integral multiple thereof) of the Holder's Notes as
of the date that is 30 Business Days after the date of the Company's notice of
the occurrence of such Change in Control (the "Change in Control Purchase Date")
for a purchase price equal to 100% of the principal amount thereof, plus accrued
and unpaid interest up to but not including the Change in Control Purchase Date;
PROVIDED, that any semi-annual payment of interest becoming due on the Change in
Control Purchase Date shall be payable to the Holders of record on the relevant
record date of the Notes being repurchased.
Within 10 Business Days after the occurrence of a Change in Control, the
Company is required to mail to each Holder and to the Trustee a written notice
of the occurrence of such Change in Control, setting forth, among other things,
the terms and conditions of, and the procedures required for exercise of, the
Holder's right to require the repurchase of such Holder's Notes.
To exercise the repurchase right upon a Change in Control, a Holder must
deliver written notice of such exercise to the Paying Agent at any time prior to
the close of business on the Change in Control Purchase Date, specifying the
Notes with respect to which the repurchase right is being exercised. Such notice
of exercise may be withdrawn by the Holder by a written notice of withdrawal
delivered to the Paying Agent at any time prior to the close of business on the
Change in Control Purchase Date.
A Change in Control shall be deemed to have occurred if any of the following
occurs after the original issuance of the Notes:
(i) the acquisition by any Person (including any syndicate or group deemed
to be a "person" under Section 13(d)(3) or 14(d)(2) of the Exchange Act
or any successor provision) of beneficial ownership, directly or
indirectly, through a purchase, merger, or other acquisition transaction
or series of transactions, of shares of capital stock of the Company
entitling such Person to exercise more than 50% of the total voting power
of all shares of capital stock of the Company entitling the holders
thereof to vote generally in elections of directors; or
(ii) any consolidation of the Company with, or merger of the Company into,
any other Person, any merger of another Person into the Company, or any
sale, lease, or exchange, in one transaction or a series of related
transactions, of all or substantially all of the property and assets of
the Company to another Person (other than (a) any such transaction
pursuant to which the holders of 50% or more of the total voting power of
all shares of capital stock of the Company entitled to vote generally in
elections of directors immediately prior to such transaction have,
directly or indirectly, at least 50% or more of the total voting power of
all shares of capital stock of the continuing or surviving corporation
entitled to vote generally in elections of directors of the continuing or
surviving corporation immediately after such transaction, and (b) a
merger which (1) does not result in any reclassification, conversion,
exchange, or cancellation of outstanding shares of capital stock of the
Company or (2) is effected primarily to change the jurisdiction of
incorporation of the Company and results in reclassification, conversion,
or exchange of outstanding shares of Common Stock solely into shares of
Common Stock of the surviving entity);
39
<PAGE>
provided, however, that a Change in Control shall not be deemed to have occurred
if the Closing Price per share of the Common Stock for any 10 Trading Days
within the period of 20 consecutive Trading Days ending immediately before the
occurrence of the event that would otherwise constitute a Change in Control
shall equal or exceed 105% of the conversion price of the Notes in effect on
each such Trading Day.
A "beneficial owner" shall be determined in accordance with Rule 13d-3
promulgated by the Commission under the Exchange Act, as in effect on the date
of execution of the Indenture.
The term "all or substantially all" as used in clause (ii) of the definition
of Change in Control has not been interpreted under New York law (which is the
governing law of the Indenture) to represent a specific quantitative test. As a
consequence, in the event the Holders of the Notes elected to exercise their
rights under the Indenture and the Company elected to contest such election,
there could be no assurance as to how a court would interpret the phrase under
New York law, which may have the effect of preventing the Trustee or the Holders
of the Notes from successfully asserting that a Change in Control has occurred.
The Company will comply with the provisions of Rule 13e-4 and Rule 14e-l
under the Exchange Act, will file Schedule 13e-4 or any successor or similar
schedule required thereunder, and will otherwise comply with all federal and
state securities laws in connection with any offer by the Company to repurchase
Notes at the option of the Holders upon a Change in Control.
If a Change in Control were to occur, there can be no assurance that the
Company would have sufficient financial resources, or would be able to arrange
financing, to pay the repurchase price for all Notes tendered by Holders
thereof.
The Company's revolving credit facility, which constitutes Senior
Indebtedness, provides that the Company receive its lenders written consent
prior to entering into a consolidation, merger or other combination. Failure to
receive such consent would cause any repurchase of the Notes, absent a waiver,
to be blocked by the subordination provisions of the Notes. Even if such event
of default did not occur or was waived, the exercise by any Holder of Notes of
the right to require the Company to repurchase Notes as a result of the
occurrence of a Change in Control could create an event of default under Senior
Indebtedness of the Company, as a result of which any repurchase could, absent a
waiver, be blocked by the subordination provisions of the Notes. See
"Subordination of Notes." Further, the terms of future Senior Indebtedness or
other future indebtedness ranking pari passu in right of payment with the Notes
could require that such indebtedness be repaid upon the occurrence of a Change
in Control. Failure by the Company to repurchase the Notes when required will
result in an Event of Default with respect to the Notes whether or not such
repurchase is permitted by the subordination provisions thereof. Any such
default may, in turn, cause a default under Senior Indebtedness or other
Indebtedness of the Company.
The Change in Control repurchase feature of the Notes may in certain
circumstances have the effect of delaying, deferring or preventing a Change of
Control or other attempts to acquire control of the Company. Consequently, this
right may render more difficult or discourage a merger, consolidation or tender
offer (even if such transaction is supported by the Company's Board of Directors
or is favorable to the stockholders), the assumption of control by a holder of a
large block of the Company's shares and the removal of incumbent management. The
Company is not aware of any specific effort to accumulate shares of Common Stock
or to obtain control of the Company by means of a merger, tender offer,
solicitation, or otherwise, nor is the Change of Control repurchase feature part
of a plan by management to adopt a series of anti-takeover provisions. Rather,
the Change in Control repurchase feature is a result of negotiations between the
Company and the Underwriters.
The foregoing provisions would not necessarily afford the Holders protection
in the event of a highly leveraged transaction, reorganization, restructuring,
merger, spin-off or similar transaction involving the Company that may adversely
affect the Holders.
40
<PAGE>
SUBORDINATION OF NOTES
To the extent set forth in the Indenture, the indebtedness evidenced by the
Notes will be subordinated and subject in right of payment to the prior payment
in full of all Senior Indebtedness of the Company, whether outstanding on the
date of the Indenture or thereafter created, assumed, or guaranteed. "Senior
Indebtedness" means the following, whether outstanding upon issuance of the
Notes or thereafter incurred or created: (i) the principal and premium, if any,
and interest (including post-petition interest) on and fees, costs, enforcement
expenses, collateral protection expenses, and other reimbursement or indemnity
obligations in respect of all indebtedness or obligations of the Company to any
Person, including but not limited to banks and other lending institutions, for
money borrowed (other than that evidenced by the Notes) or in respect of credit
or other banking facilities evidenced by a note, bond, debenture, loan
agreement, a lease intended as security or similar instrument or agreement
(including purchase money obligations with original maturities in excess of one
year and noncontingent reimbursement obligations in respect of the amounts paid
under letters of credit), or cash management operating agreements which involve
short term automated clearing house credit risk of no more than five days; (ii)
commitment or standby fees due and payable to lending institutions with respect
to credit facilities available to the Company; (iii) all obligations of the
Company (a) for the reimbursement of any obligor on any letter of credit,
banker's acceptance, or similar credit transaction, (b) under interest rate
swaps, caps, collars, options, and similar arrangements and (c) under any
foreign exchange contract, currency swap agreement, futures contract, currency
option contract, or other foreign currency hedge; (iv) purchase money
obligations, including contingent payment obligations, with respect to the
acquisition by the Company of products or businesses; (v) all obligations and
liabilities (contingent or otherwise) in respect of leases of the Company
required, in conformity with generally accepted accounting principles, to be
accounted for as capitalized lease obligations on the balance sheet of the
Company and all obligations and other liabilities (contingent or otherwise)
under any lease or related document (including a purchase agreement) in
connection with the lease of real property which provides that the Company is
contractually obligated to purchase or cause a third party to purchase the
leased property and thereby guarantee a minimum residual value of the leased
property to the lessor and the obligations of the Company under such lease or
related document to purchase or to cause a third party to purchase such leased
property; (vi) any liabilities of others described in the preceding clauses that
the Company has guaranteed or which are otherwise its legal liability; and (vii)
renewals, extensions, refundings, refinancings, restructurings, amendments, and
modifications of any such indebtedness or guarantee. Notwithstanding anything to
the contrary in the Indenture or the Notes, "Senior Indebtedness" does not
include any indebtedness of the Company (a) to any person under any employee
benefit plan or to any employee or affiliates of the Company, or (b) any
indebtedness or other obligation of the Company that by its terms or the terms
of the instrument creating or evidencing it is stated to be pari passu or junior
in right of payment to the Notes.
By reason of the subordination, in the event of any payment or distribution
of assets of the Company in any dissolution, winding-up, liquidation, or
reorganization of the Company (whether in an insolvency or bankruptcy proceeding
or otherwise), all Senior Indebtedness must be paid in full (including the
principal thereof, interest thereon, and fees and expenses relating thereto)
before any payment is made on or in respect of the Notes. In the event of a
default in payment (whether at maturity or at a date fixed for prepayment or by
acceleration or otherwise) of principal of or interest on Designated Senior
Indebtedness, no payment may be made by the Company on or in respect of the
Notes until payment in full of the Designated Senior Indebtedness then due is
made or the default is cured. Upon a default with respect to any Designated
Senior Indebtedness (other than a default in the payment of principal of or
interest on such Designated Senior Indebtedness) permitting a holder thereof to
accelerate its maturity, and upon written notice of such default to the Trustee
and the Company by any holder of such Designated Senior Indebtedness or its
representative, then, unless and until such default has been cured, waived in
writing, or has ceased to exist, no payment may be made by the Company in
respect of the Notes; provided, that nothing in the above-described provision
will prevent the making of any payment in respect of the Notes for a period of
more than 120 days after the date such written notice of default is given unless
the maturity
41
<PAGE>
of the Designated Senior Indebtedness has been accelerated, in which case no
payment on the Notes may be made until such acceleration has been waived or such
Designated Senior Indebtedness has been paid in full. No such subordination will
prevent the occurrence of any Event of Default (as defined in the Indenture)
with respect to the Notes, but, as a result of these subordination provisions,
in the event of insolvency, Holders may recover less ratably than other
creditors of the Company.
The Indenture does not limit the amount of future or additional
indebtedness, including Senior Indebtedness, that the Company can create, incur,
assume, or guarantee, nor does the Indenture limit the amount of indebtedness
that any subsidiary can incur.
As of June 30, 1997, the Company had approximately $29.8 million of
indebtedness outstanding (excluding accrued interest thereon and contingent
payment obligations of $97.9 million) that would have constituted Senior
Indebtedness. All indebtedness of the Company incurred from time to time under
the Company's revolving credit facility will constitute Senior Indebtedness. See
"Capitalization."
In addition, the Notes will be effectively subordinated to all liabilities,
including trade payables, of the Company's subsidiaries. As of the date hereof,
substantially all of the Company's operations are conducted by the Company and
not through subsidiaries. The Indenture will not limit the ability of the
Company to transfer assets to, or to acquire assets in, subsidiaries of the
Company in the future. The Company is currently considering transferring a
substantial portion of its assets to subsidiaries of the Company; however, no
decision has been made with respect to such transfer. Any right of the Company
to receive assets of any of its subsidiaries upon their liquidation or
reorganization (and the consequent right of the Holders of the Notes to
participate in those assets) will be effectively subordinated to the claims of
that subsidiary's creditors (including trade creditors), except to the extent
that the Company is itself recognized as a creditor of such subsidiary, in which
case the claims of the Company would still be subordinate to any security
interests in the assets of such subsidiary and any indebtedness of such
subsidiary senior to that held by the Company.
EVENTS OF DEFAULT; NOTICE AND WAIVER
Events of Default under the Indenture include: (i) failure of the Company to
pay interest for 30 days after the same is due or failure to pay principal when
due; (ii) failure of the Company to comply with any of its other agreements
contained in the Notes or the Indenture for 30 days after receipt of notice from
the Trustee or the Holders of the Notes of such failure; (iii) default under any
bond, debenture, note, or other evidence of indebtedness for money borrowed of
the Company having an aggregate outstanding principal amount of in excess of $10
million, which default shall have resulted in such indebtedness being
accelerated, without such indebtedness being discharged or such acceleration
having been rescinded or annulled, within ten days from the date of such
acceleration; and (iv) certain events of bankruptcy or insolvency, including
without limitation appointment of a Custodian of the Company's property, or
liquidation of the Company.
The Indenture requires the Trustee to give notice of a default to the
Holders within 90 days after the occurrence of any default known to it;
PROVIDED, that, except in the case of a default in the payment of principal of
or interest on any of the Notes, the Trustee may withhold such notice if it in
good faith determines that the withholding of such notice is in the interests of
the Holders.
If an Event of Default (other than an Event of Default resulting from
bankruptcy, insolvency, or reorganization) occurs and is continuing, the Trustee
may, by notice to the Company, declare all unpaid principal of and accrued
interest to the date of acceleration on the Notes then outstanding to be due and
payable immediately. Also, in such event, the Holders of at least 25% in
principal amount of the Notes then outstanding may notify the Company and the
Trustee with respect thereto, and upon the request of such Holders, the Trustee
shall declare all unpaid principal of and accrued interest to the date of
acceleration on the Notes then outstanding to be due and payable immediately. If
an Event of Default resulting from certain events of bankruptcy, insolvency, or
reorganization shall occur, all unpaid principal of and accrued interest on the
Notes then outstanding shall become and be immediately due and payable without
any declaration or other act on the part of the Trustee or any Holders.
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<PAGE>
The Indenture provides that the Holders of a majority in principal amount of
the Notes may on behalf of all Holders waive any existing default or Event of
Default and its consequences, except (i) a default in the payment of principal
of or accrued interest on the Notes, (ii) a failure by the Company to convert
any Notes to Common Stock, (iii) a default in the payment of the redemption
price or the repurchase price in connection with a repurchase upon a Change in
Control, or (iv) any default in respect of any provision of the Indenture that
cannot be modified or amended without the consent of the Holder of each Note
affected.
No Holder may pursue any remedy under the Indenture or the Notes against the
Company (except actions for payment of overdue principal or interest or for the
conversion of the Notes), unless (i) the Holder gives to the Trustee written
notice of a continuing Event of Default, (ii) the Holders of at least 25% in
principal amount of the outstanding Notes make a written request to the Trustee
to pursue the remedy, (iii) such Holder or Holders offer satisfactory indemnity
to the Trustee against any loss, liability, or expense, (iv) the Trustee does
not comply with the request within 60 days after receipt of the request and the
offer of indemnity, and (v) the Trustee shall not have received during such
60-day period a contrary direction from the Holders of at least a majority in
principal amount of the outstanding Notes.
The Company must deliver an Officer's Certificate to the Trustee within 90
days after the end of each fiscal year of the Company as to the signer's
knowledge of the Company's compliance with all conditions and covenants on its
part contained in the Indenture, and stating whether or not the signer knows of
any default or Event of Default. If such signer knows of such a default or Event
of Default, the Officer's Certificate shall describe the default or Event of
Default and the efforts to remedy the same.
AMENDMENT
The Company and the Trustee may amend or supplement the Indenture or the
Notes without notice to any Holder but with the written consent of the Holders
of at least a majority in principal amount of the outstanding Notes. The Holders
of a majority in principal amount of the Notes then outstanding may waive
compliance in a particular instance by the Company with any provision of the
Indenture or the Notes without notice to any Holder. Without the consent of the
Holder of each Note affected thereby, however, an amendment, supplement, or
waiver may not (i) reduce the principal amount of Notes whose Holders must
consent to an amendment, supplement, or waiver, (ii) reduce the rate of or
change the time for payment of interest on any Note, (iii) reduce the principal
of or premium on or change the fixed maturity of any Note or alter the
redemption provisions with respect thereto in a manner adverse to the Holder
thereof, (iv) change the obligation of the Company to repurchase any Note upon
the occurrence of any Change in Control in a manner adverse to the Holders, (v)
alter the conversion provisions with respect to any Note in a manner adverse to
the Holder thereof, (vi) waive a default in the payment of the principal of or
premium or interest on any Note, (vii) make any changes that could alter the
rights of Holders to waive defaults or Events of Default, or to receive payment
of the Notes, (viii) modify the subordination provisions of the Indenture in a
manner adverse to the Holders, or (ix) make any Note payable in money other than
that stated in the Note.
The Company and the Trustee may amend or supplement the Indenture or the
Notes without notice to or consent of any Holder in certain events, such as to
comply with the certain conversion adjustment, liquidation, and merger
provisions described in the Indenture to provide for uncertificated Notes in
addition to or in place of certificated Notes, to cure any ambiguity, defect, or
inconsistency or to make any other change that does not adversely affect the
rights of the Holders to comply with the provisions of the Trust Indenture Act,
or to appoint a successor Trustee.
SATISFACTION AND DISCHARGE
The Company may terminate all of its obligations under the Indenture, other
than its obligation to pay the principal of and interest on the Notes and
certain other obligations (including its obligation to deliver
43
<PAGE>
shares of Common Stock upon conversion of the Notes), when all of the Notes
shall have become due and payable or are by their terms to become due and
payable within one year, or are to be called for redemption within one year and
the Company has deposited funds with the Trustee or a paying agent other than
the Company sufficient to pay the principal of and interest on the Notes then
outstanding to maturity or redemption, as the case may be.
MERGERS AND CONSOLIDATIONS
Subject to the right of the Holders to require the Company to purchase the
Notes in the event of a Change in Control, the Company may not consolidate or
merge with or into any other corporation, and the Company may not transfer its
property and assets substantially as an entirety to any other person or group of
related persons, unless (i) either the Company is the resulting or surviving
corporation, or the successor corporation is a domestic corporation and the
successor expressly assumes, by supplemental indenture executed and delivered to
the Trustee, payment of the principal of and interest on the Notes and
performance and observance of every covenant of the Indenture, and (ii)
immediately before and immediately after giving effect to such transac-tion, no
default or Event of Default shall have occurred and be continuing. Thereafter,
the surviving corporation or the corporation to which such assets are
transferred will be substituted for the Company, and all obligations of the
Company under the Indenture and the Notes will terminate. A transfer of the
Company's property and assets substantially as an entirety includes a transfer
of any one or more of the Company's subsidiaries' properties and assets
substantially as an entirety, which properties and assets, if held by the
Company instead of any such subsidiary or subsidiaries, would constitute all or
substantially all of the property and assets of the Company on a consolidated
basis.
CONCERNING THE TRUSTEE
Chase Trust Company of California will be the Trustee under the Indenture
and has been appointed by the Company as the initial Paying Agent, Conversion
Agent, Registrar, Transfer Agent and Custodian with regard to the Notes.
The Indenture will contain certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; PROVIDED, that, if it acquires any conflicting interest (as
defined) and there exists a default with respect to the Notes, it must eliminate
such conflict or resign.
The Holders of a majority in principal amount of all outstanding Notes will
have the right to direct the time, method, and place of conducting any
proceeding for exercising any remedy or power available to the Trustee,
PROVIDED, that such direction does not conflict with any rule of law or with the
Indenture, is not unduly prejudicial to the rights of another Holder or the
Trustee, and does not involve the Trustee in personal liability.
GOVERNING LAW
The Indenture and the Notes will be governed by and construed in accordance
with the laws of the State of New York.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock and 5,000,000 shares of Preferred Stock, par value $.001 per
share ("Preferred Stock"). All share amounts and per share exercise prices have
been adjusted to give effect to this stock dividend.
COMMON STOCK
At June 30, 1997, there were 43,847,803 shares of Common Stock outstanding
and held of record by approximately 360 shareholders. The holders of Common
Stock are entitled to one vote for each share held of record on all matters
submitted to a vote of the shareholders. Subject to the prior or equal rights of
holders of all classes of stock at the time outstanding having prior or equal
rights as to dividends, the holders of the Common Stock are entitled to receive,
when and as declared by the Board of Directors, out of any assets of the Company
legally available therefor, such dividends as may be declared from time to time
by the Board of Directors. See "Price Range of Common Stock and Dividend
Policy." In the event of liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities and the liquidation preference of any outstanding
Preferred Stock. Holders of Common Stock have no preemptive rights and no right
to convert their Common Stock into any other securities. All outstanding shares
of Common Stock are fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue the Preferred Stock in one
or more series and to fix the rights, priorities, preferences, qualifications,
limitations and restrictions, including the dividend rates, conversion rights,
voting rights, terms of redemption, terms of sinking funds, liquidation
preferences and the number of shares constituting any series of the designation
of such series, without any further vote or action by the shareholders, which
could decrease the amount of earnings and assets available for distribution to
holders of Common Stock or adversely affect the rights and powers, including
voting rights, of the holders of the Common Stock. The issuance of Preferred
Stock may have the effect of delaying, deferring or preventing a change in
control of the Company without further action by the shareholders, may
discourage bids for the Common Stock at a premium over the market price of the
Common Stock and may adversely affect the market price of and the voting and
other rights of the holders of Common Stock. At present, the Company has no
plans to issue any of the Preferred Stock.
WARRANTS TO PURCHASE COMMON STOCK
At June 30, 1997, there were outstanding warrants (other than the Series W
Warrants and the Series S Warrants, described below) to purchase an aggregate of
3,000 shares of Common Stock at $.25 per share; 1,014 shares at $2.44 per share;
600,000 shares at $4.38 per share; and 200,000 shares at $6.48 per share. Such
warrants expire on April 2, 1999, September 27, 1998, April 17, 1999, and
September 21, 1999, respectively. Each warrant contains provisions for the
adjustment of the exercise price and the aggregate number of shares issuable
upon exercise of the warrant under certain circumstances, including stock
dividends, stock splits, reorganization, reclassifications or consolidations.
The holders of certain of the warrants are entitled to certain registration
rights with respect to the Common Stock issued or issuable upon exercise
thereof. The Company has registered the resale of 204,014 shares of Common Stock
issuable upon exercise of the warrants on a "shelf registration statement" on
Form S-3 filed with the Commission. See "--Registration Rights."
Also outstanding at June 30, 1997 were Series W Warrants to purchase an
aggregate of 812,000 shares at $2.38 per share and Series S Warrants to purchase
an aggregate of 2,240,000 shares at an exercise price of $19.47 per share,
subject to adjustment as defined in the warrants (collectively, the Series W
Warrants and the Series S Warrants are referred to herein as the "Warrants").
The Series W Warrants are currently exercisable through September 27, 2000. The
Series S Warrants will be exercisable after December 29,
45
<PAGE>
1997 or sooner under certain circumstances (the "Series S Exercise Date"),
through December 29, 2000. The Warrants contain provisions for the adjustment of
the exercise price and the aggregate number of shares issuable upon exercise of
the Warrants under certain circumstances, including stock splits, stock
combinations, rights offerings, stock dividends or certain special dividends
with respect to the Common Stock. In addition, the exercise price and the number
of shares issuable upon exercise of the Series W Warrants and the Series S
Warrants will be appropriately adjusted, with respect to the Series W Warrants,
in the event of the issuance of Common Stock at a per share price less than the
exercise price of the Series W Warrants, and, with respect to the Series S
Warrants, in the event of the issuance of Common Stock below "fair market value"
(as defined in the Series S Warrants). The Company has registered the resale of
shares of Common Stock issuable upon exercise of the Series W Warrants on a
"shelf registration statement" on Form S-3 filed with the Commission. The
Company is obligated to register the shares of Common Stock issuable upon
exercise of the Series S Warrants, and in certain circumstances, the Series W
Warrants, upon demand or with the registration of other securities of the
Company. See "--Registration Rights."
REGISTRATION RIGHTS
Pursuant to the Investors' Rights Agreement dated as of September 27, 1993
(the "1993 Registration Rights Agreement"), the Company has registered on a
shelf registration statement on Form S-3 the resale of the 812,000 shares of
Common Stock (the "Series W Shares") issuable upon exercise of all of the
currently outstanding Series W Warrants issued by the Company. The Company is
further obligated to file a registration statement with respect to the resale of
the Series W Warrants and the Series W Shares within 30 days after a
registration statement on Form S-3 becomes available for use by the Company with
respect to the registration of the resale of the Series W Warrants. Moreover,
if, prior to the earlier of (i) September 27, 1996 (or, in the case of any
holder who cannot resell his Series W Warrants under Rule 144(k), September 27,
1998) or (ii) the effective date of a registration statement on Form S-3 with
respect to the resale of the Series W Warrants, the Company registers any of its
securities, the holders of the Series W Warrants will have the right to include
their Series W Warrants in such registration.
Pursuant to the Registration Rights Agreement dated as of April 17, 1994,
the holder of 914,024 outstanding shares of the Common Stock (and 600,000 shares
issuable upon exercise of an outstanding warrant) is entitled to notice of
registration of any of the Company's securities under the Securities Act and is
entitled to include its registrable securities in such registration. In
addition, such holder is entitled to request registration of at least 51% of its
registrable securities on Form S-3 (or other successor form) under the
Securities Act. All registration expenses in connection with Company
registrations will be borne by the Company, and all registration expenses in
connection with the holder's requested registration on Form S-3 will be borne by
the holder, up to a maximum of $100,000. All selling expenses will be borne by
the holder. The Company is required to indemnify the holder and the underwriters
for such holder, if any, under certain circumstances. Registration rights may be
transferred only to a transferee of registrable securities who, after such
transfer, holds 200,000 shares of registrable securities. The registration
rights granted under this agreement terminate on April 17, 1999 (or, with
respect to registration on Form S-3, if earlier, the date on which the holder is
able to sell all registrable securities under Rule 144(k)).
Pursuant to the Investors' Rights Agreement dated as of December 29, 1995
(the "1995 Registration Rights Agreement"), the Company is obligated to use its
best efforts to file a registration statement on Form S-3 with respect to the
resale of the shares of Common Stock issuable upon exercise of the Series S
Warrants (the "Series S Shares") on or before December 29, 1997. In addition, if
at any time after December 29, 1997, the Company registers its securities, the
holders of the Series S Warrants will have the right to include the resale of
the Series S Shares in such registration.
Pursuant to the 1993 Registration Rights Agreement and the 1995 Registration
Rights Agreement, the Company is required to bear all the registration expenses.
The Company is required to indemnify the holders and the underwriters for such
holders, if any, under certain circumstances. The Company's
46
<PAGE>
respective obligations to register the Series W Warrants and the Series S Shares
will each terminate in certain circumstances.
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
CERTIFICATE OF INCORPORATION AND BYLAWS
The Company's Certificate of Incorporation authorizes the Board to establish
one or more series of undesignated Preferred Stock, the terms of which can be
determined by the Board at the time of issuance. See "--Preferred Stock." The
Certificate of Incorporation also provides that all stockholder actions must be
effected at a duly called meeting of stockholders and not by a consent in
writing. The Company's Bylaws provide that the Company's Board will be
classified into two classes of directors serving staggered two-year terms, with
one class of directors to be elected at each annual meeting of stockholders. In
addition, the Bylaws do not permit stockholders of the Company to call a special
meeting of stockholders; only the Company's Chief Executive Officer or the
Chairman of the Board, or the President or Secretary at the written request of a
majority of the Board, are permitted to call a special meeting of stockholders.
The Bylaws also require that stockholders give advance notice to the Company's
secretary of any nominations for director or other business to be brought by
stockholders at any stockholders' meeting and require a majority vote of members
of the Board or stockholders to amend Bylaw provisions. These provisions of the
Certificate of Incorporation and the Bylaws could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company. Such provisions may also have the effect of preventing changes in the
management of the Company.
DELAWARE TAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder (defined as any person or entity that is the beneficial owner of at
least 15% of a corporation's voting stock) for a period of three years following
the time that such stockholder became an interested stockholder, unless: (i)
prior to such time, the board of directors of the corporation approved either
the business combination or the transaction that resulted in the stockholder's
becoming an interested stockholder; (ii) upon consummation of the transaction
that resulted in the stockholder's becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding, for purposes of
determining the number of shares outstanding, those shares owned (x) by persons
who are directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer;
or (iii) at or subsequent to such time, the business combination is approved by
the Board and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the interested stockholder.
Section 203 defines business combination to include:. (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, lease, exchange, mortgage, transfer, pledge or other disposition involving
the interested stockholder and 10% or more of the assets of the corporation;
(iii) subject to certain exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the corporation to the
interested stockholder; (iv) any transaction involving the corporation that has
the effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or through
the corporation.
47
<PAGE>
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services.
48
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain federal income tax considerations for
original purchasers of the Notes and is based on the Company's review and
analysis of the federal income tax law now in effect, which is subject to
change, possibly retroactively. This summary does not discuss all aspects of
federal income taxation that may be relevant to particular holders of Notes in
light of their individual investment circumstances or to certain types of
investors subject to special tax rules (e.g., financial institutions, insurance
companies, tax-exempt organization, and foreign taxpayers), nor does it discuss
any aspects of state, local or foreign tax law consequences. This summary
assumes that investors will hold their Notes as "capital assets" (generally,
property held for investment) under the Internal Revenue Code of 1986, as
amended. Prospective purchasers are urged to consult their tax advisors
regarding their specific federal, state, local and foreign income and other tax
consequences of purchasing, holding, converting and disposing of the Notes.
SALE OR EXCHANGE
A holder will recognize capital gain or loss upon the sale or other
disposition of a Note in an amount equal to the difference between the amount
realized from such disposition and his tax basis in the Note. Such gain or loss
will be long-term if the Note has been held for more than one year.
CONVERSION
A holder's conversion of a Note into Common Stock is generally not a taxable
event (except with respect to cash received in lieu of a fractional share). The
holder's tax basis in the Common Stock received on conversion of a Note will be
the same as the holder's tax basis in the Note at the time of conversion
(exclusive of any tax basis allocable to a fractional share), and the holding
period for the Common Stock received on conversion will include the holding
period of the Note converted.
CONSTRUCTIVE DIVIDEND
If at any time the Company makes a distribution of property to stockholders
that would be taxable to such stockholders as a dividend for federal income tax
purposes and, in accordance with the antidilution provisions of the Notes, the
Conversion Price of the Notes is decreased, the amount of such decrease may be
deemed to be the payment of a taxable dividend to holders. See "Description of
the Notes--Conversion Rights."
49
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement") among the Company and Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Goldman, Sachs & Co. (the "Underwriters"), the Company
has agreed to sell to each of the Underwriters named below, and each of the
Underwriters has severally agreed to purchase from the Company, the respective
principal amounts of Notes set forth opposite its name below. In the Purchase
Agreement, the Underwriters have agreed, subject to the terms and conditions set
forth therein, to purchase all of the Notes offered hereby if any of such Notes
are purchased.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
- ---------------------------------------------------------------------------- ----------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ................ $ 150,000,000
Goldman, Sachs & Co......................................................... 100,000,000
----------------
Total............................................................ $ 250,000,000
----------------
----------------
</TABLE>
The Underwriters have advised the Company that they propose to offer the
Notes to the public at the offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of 1.80% of the principal amount thereof. After the offering contemplated
hereby, the offering price and other selling terms may be changed by the
Underwriters.
The Company has granted to the Underwriters an option, exercisable for 30
days after the date of this Prospectus, to purchase up to an aggregate of $37.5
million principal amount of the Notes at the public offering price set forth on
the cover page hereof, less the underwriting discount. The Underwriters may
exercise such option only to cover over-allotments, if any, made in connection
with the sale of the Notes offered hereby. To the extent that the Underwriters
exercise this option, each Underwriter will have a firm commitment, subject to
certain conditions, to purchase approximately the same percentage thereof which
the principal amount of Notes to be purchased by it shown in the above table is
of the $250 million principal amount of Notes initially offered hereby. If
purchased, the Underwriters will offer such additional Notes on the same terms
as those on which the $250 million principal amount of Notes are being offered.
Until the distribution of the Notes is completed, rules of the Securities
and Exchange Commission may limit the ability of the Underwriters and certain
selling group members (if any) to bid for and purchase the Notes and the Common
Stock. As an exception to these rules, the Underwriters are permitted to engage
in certain transactions that stabilize the price of the Notes or the Common
Stock. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Notes or the Common Stock.
If the Underwriters create a short position in the Notes in connection with
the offering, i.e., if they sell a greater principal amount of Notes than is set
forth on the cover page of this Prospectus, the Underwriters may reduce that
short position by purchasing Notes in the open market. The Underwriters may also
elect to reduce any short position by exercising all or part of the
over-allotment option described above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Notes. In addition, neither the
Company nor any of the Underwriters makes any representation that the
Underwriters will engage in any such transactions or that such transactions,
once commenced, will not be discontinued without notice.
49
<PAGE>
The Company has agreed to indemnify the Underwriters against, and to provide
contribution with respect to, certain liabilities, including certain liabilities
under the Securities Act.
The Company and holders of 46,927 shares of Common Stock (and 646,825 shares
of Common Stock issuable upon exercise of outstanding stock options) have agreed
that they will not sell or otherwise dispose of any Common Stock without the
prior written consent of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated for a period of 90 days from the date of this Prospectus,
except that the Company may, without such consent issue shares upon the exercise
of options granted pursuant to the Company's stock option plans, or upon
exercise or conversion of other outstanding options or warrants.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Notes offered
hereby are being passed upon for the Company by Brobeck, Phleger & Harrison LLP,
San Diego, California. Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles,
California, is acting as counsel for the Underwriters in connection with certain
legal matters relating to the sale of the Notes offered hereby.
EXPERTS
The consolidated financial statements incorporated in this Prospectus by
reference from the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report, which is incorporated herein by reference,
and have been so incorporated in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
The statements concerning the U.S. federal regulatory process for
investigating and obtaining FDA clearance of drugs and medical devices in this
Prospectus under the caption "Risk Factors-- Government Regulation; No Assurance
of FDA Approval," "Business--Government Regulation" and other references herein
relating to such processes have been reviewed and approved by Kleinfeld, Kaplan
and Becker, regulatory counsel for the Company, as an expert in such matters,
and are included herein in reliance upon that review and approval. In conducting
this review, Kleinfeld, Kaplan and Becker assumed the accuracy and adequacy of
the factual statements and conclusions in this Prospectus concerning the
Company's manufacturing capabilities and procedures, compliance with regulatory
requirements, the status of its marketed drugs and drugs under development and
the potential significance of such drugs in targeting the disease states
identified.
ADDITIONAL INFORMATION
The Company has filed the Registration Statement with the Commission under
the Securities Act with respect to the Notes offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules filed therewith. For further information with
respect to the Company and the Notes offered hereby, reference is hereby made to
such Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus regarding the contents of any contract
or other document are not necessarily complete, and in each instance reference
is made to the copy of such contract or document filed as an exhibit to the
Registration Statement or the documents incorporated into the Prospectus by
reference, each such statement being qualified in all respects by such
reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge at the principal office of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or
any part thereof may be obtained from such office upon payment of the prescribed
fees.
50
<PAGE>
SPIROS-TM- PULMONARY DRY POWDER DRUG DELIVERY SYSTEM
[PHOTO OF INDIVIDUAL USING SPIROS-TM-]
Spiros-TM- is a proprietary dry powder delivery system under development
that is designed to aerosolize pharmaceuticals in dry powder formulations for
propellant-free delivery to the lungs.
Spiros-TM- features:
-- Inspiratory Flow Rate Independence
-- Minimum Need for Patient Coordination
-- Absence of Chlorofluorocarbon Propellants
-- Patient Convenience
Product candidates based on Spiros-TM- are in various stages of research or
development and have not been cleared by the United States Food and Drug
Administration for commercial sale. There can be no assurance that the Company's
products will be successfully developed or approved by regulatory authorities
for commercial sale.
[PHOTO OF SPIROS-TM- MODELS]
Spiros-TM- cassette system, the first to be developed and
currently in use in clinical trials with albuterol and
beclomethasone; and Spiros-TM- blisterdisk system, being developed
for use with drugs sensitive to moisture or light, including
macromolecules such as peptides and proteins.
DURA-VENT-Registered Trademark-, DURA-TAP-Registered Trademark-/PD,
Dryhaler-Registered Trademark-, DURA-GEST-Registered Trademark-,
ENTEX-Registered Trademark-, RONDEC-Registered Trademark-, RONDEC-TR-Registered
Trademark-, NASAREL-Registered Trademark- and NASALIDE-Registered Trademark- are
registered trademarks of the Company. The Company claims common law trademark
rights to Spiros-TM-, FENESIN-TM-, DURA-VENT/DA-TM-, D.A. CHEWABLE-TM-,
D.A.II-TM-, GUAI-VENT/PSE-TM- and Healthco HomeRx-TM-. TORNALATE-Registered
Trademark- is a registered trademark of Sanofi-Winthrop, Inc. CROLOM-TM- is a
trademark of Bausch & Lomb Pharmaceuticals, Inc. Capastat-Registered Trademark-,
Seromycin-Registered Trademark-, Ceclor-Registered Trademark- CD and
Keftab-Registered Trademark- are registered trademarks of Eli Lilly and Company.
Spinhaler-Registered Trademark- is a registered trademark of Fisons Limited.
Turbuhaler-Registered Trademark- is a registered trademark of Astra
Pharmaceuticals. Rotohaler-TM- is a trademark of Glaxo Wellcome, Inc.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE NOTES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 3
Information Incorporated by Reference..................................... 3
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 16
Price Range of Common Stock and Dividend Policy........................... 16
Capitalization............................................................ 17
Selected Consolidated Financial Data...................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 19
Business.................................................................. 23
Description of Notes...................................................... 36
Description of Capital Stock.............................................. 45
Certain Federal Income Tax Considerations................................. 48
Underwriting.............................................................. 49
Legal Matters............................................................. 50
Experts................................................................... 50
Additional Information.................................................... 50
</TABLE>
$250,000,000
[LOGO]
3 1/2% CONVERTIBLE SUBORDINATED NOTES
DUE 2002
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
JULY 24, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
