<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File number 000-19809
DURA PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3645543
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7475 LUSK BLVD., SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE IS (619) 457-2553
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ X ] Yes [ ] No
The number of shares of the Registrant's Common Stock outstanding as of October
30, 1998 was 46,372,348.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DURA PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS, EXCEPT SHARE AMOUNTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1997 1998
------------ -------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 72,003 $ 57,482
Short-term investments 313,218 310,950
Accounts and other receivables 40,987 27,097
Inventory 15,201 12,730
------------ -------------
Total current assets 441,409 408,259
License agreements and product rights 250,781 286,320
Property 48,525 79,451
Other assets 34,165 38,675
------------ -------------
TOTAL $ 774,880 $ 812,705
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 45,741 $ 55,365
Current portion of long-term obligations 2,798 2,948
------------ -------------
Total current liabilities 48,539 58,313
Convertible subordinated notes 287,500 287,500
Other long-term obligations 9,564 13,426
------------ -------------
Total liabilities 345,603 359,239
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.001; shares authorized - 5,000,000;
no shares issued or outstanding
Common stock, par value $.001; shares authorized - 200,000,000;
issued and outstanding - 45,608,414 and 46,370,276, respectively 46 46
Additional paid-in capital 604,991 608,596
Accumulated other comprehensive income 176 860
Warrant subscriptions receivable (12,252) (10,117)
Accumulated deficit (163,684) (145,919)
------------ -------------
Total stockholders' equity 429,277 453,466
------------ -------------
TOTAL $ 774,880 $ 812,705
------------ -------------
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</TABLE>
See accompanying notes to consolidated financial statements.
2
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DURA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
1997 1998 1997 1998
----------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Sales $ 36,098 $ 24,961 $ 105,437 $ 95,759
Contract 7,245 18,402 22,430 48,308
-------- -------- --------- ---------
Total revenues 43,343 43,363 127,867 144,067
-------- -------- --------- ---------
OPERATING COSTS AND EXPENSES:
Cost of sales 7,426 5,798 23,373 21,348
Clinical, development and regulatory 5,807 11,298 18,160 32,375
Selling, general and administrative 16,733 25,224 49,485 70,685
-------- -------- --------- ---------
Total operating costs and expenses 29,966 42,320 91,018 124,408
-------- -------- --------- ---------
OPERATING INCOME 13,377 1,043 36,849 19,659
-------- -------- --------- ---------
OTHER:
Interest income 5,058 5,578 11,437 16,931
Interest expense (2,242) (2,945) (2,531) (9,155)
Other - net (14) 1 (3) (504)
-------- -------- --------- ---------
Total other 2,802 2,634 8,903 7,272
-------- -------- --------- ---------
INCOME BEFORE INCOME TAXES 16,179 3,677 45,752 26,931
PROVISION FOR INCOME TAXES 4,854 1,253 16,357 9,166
-------- -------- --------- ---------
NET INCOME $ 11,325 $ 2,424 $ 29,395 $ 17,765
-------- -------- --------- ---------
-------- -------- --------- ---------
NET INCOME PER SHARE:
Basic $ 0.26 $ 0.05 $ 0.67 $ 0.38
-------- -------- --------- ---------
-------- -------- --------- ---------
Diluted $ 0.24 $ 0.05 $ 0.62 $ 0.37
-------- -------- --------- ---------
-------- -------- --------- ---------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES:
Basic 43,875 46,367 43,633 46,216
-------- -------- --------- ---------
-------- -------- --------- ---------
Diluted 47,606 47,578 47,392 47,647
-------- -------- --------- ---------
-------- -------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
3
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DURA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
(UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1998
----------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 44,504 $ 56,628
---------- ---------
INVESTING ACTIVITIES:
Purchases of short-term investments (335,983) (277,617)
Sales and maturities of short-term investments 157,334 280,569
Product acquisitions (71,973) (40,223)
Capital expenditures (18,757) (34,627)
Issuance of convertible note receivable 0 (5,000)
Other 842 (583)
---------- ---------
Net cash used for investing activities (268,537) (77,481)
---------- ---------
FINANCING ACTIVITIES:
Issuance of common stock and warrants - net 4,840 6,332
Issuance of convertible subordinated notes, net 278,175 0
Principal payments on long-term obligations (23,500) 0
---------- ---------
Net cash provided by financing activities 259,515 6,332
---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 35,482 (14,521)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 131,101 72,003
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 166,583 $ 57,482
---------- ---------
---------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 206 $ 11,312
Income taxes $ 1,215 $ 5,890
</TABLE>
See accompanying notes to consolidated financial statements.
4
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DURA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by Dura Pharmaceuticals, Inc. ("Dura" or the "Company") in
accordance with the instructions to Form 10-Q. The consolidated financial
statements reflect all adjustments, consisting of only normal recurring
accruals, which are, in the opinion of management, necessary for a fair
statement of the results of the interim periods presented. These consolidated
financial statements and notes thereto should be read in conjunction with the
audited financial statements and notes thereto included in the Company's 1997
Annual Report to Shareholders, which statements and notes are incorporated by
reference in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997. The results of operations for the interim periods are not
necessarily indicative of results to be expected for any other interim period
or for the year as a whole.
The consolidated financial statements include the accounts of Dura and its
wholly owned subsidiaries. All intercompany transactions and balances are
eliminated in consolidation. Certain reclassifications have been made to
amounts included in the prior year's financial statements to conform to the
financial statement presentation for the three months and nine months ended
September 30, 1998.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported in the consolidated financial statements and
related notes. Changes in those estimates may affect amounts reported in
future periods.
2. NEW ACCOUNTING STANDARD
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 requires reporting and displaying comprehensive income and its
components which, for Dura, includes net income and unrealized gains and
losses on investments. In accordance with SFAS 130, the accumulated balance
of other comprehensive income is disclosed as a separate component of
shareholders' equity. Prior year financial statements have been reclassified
to conform to the requirements of SFAS 130.
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For the three months and nine months ended September 30, 1997 and 1998,
comprehensive income consisted of (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $11,325 $2,424 $29,395 $17,765
Other comprehensive income:
Unrealized gain on
investments 119 767 233 684
---------- -------- ---------- -----------
Comprehensive income $11,444 $3,191 $29,628 $18,449
---------- -------- ---------- -----------
---------- -------- ---------- -----------
</TABLE>
3. LICENSE AGREEMENTS AND PRODUCT RIGHTS
On August 3, 1998, the Company acquired from an affiliate of American Home
Products ("AHP") exclusive U.S. marketing rights to the single-source
tuberculosis drug Myambutol-Registered Trademark-. The purchase price
consisted of a $33.5 million cash payment made at closing, plus additional
payments over the next four years based upon net sales of Myambutol during
that period. Based on historical sales data for Myambutol provided by AHP,
the Company estimates that such future payments could approximate $50 million.
4. CAPITAL STOCK
COMMON STOCK.On May 21, 1998, the Company's stockholders approved an
amendment to the Company's Certificate of Incorporation increasing the number
of authorized shares of Common Stock from 100 million to 200 million.
SHAREHOLDER RIGHTS PLAN. In May 1998, the Company adopted a Shareholder Rights
Plan in which Preferred Stock purchase rights ("Rights") were distributed as a
dividend at the rate of one Right for each share of Common Stock held as of the
close of business on June 5, 1998. Each Right entitles stockholders to buy, upon
certain events, one one-thousandth of a share of a new series of junior
participating Preferred Stock of the Company at an exercise price of $175.00.
The Rights are designed to guard against partial tender offers and other abusive
tactics that might be used in an attempt to gain control of the Company or to
deprive stockholders of their interest in the long-term value of the Company.
The Rights are exercisable only if a person or group acquires 15% or more of the
Company's Common Stock or announces a tender offer of which the consummation
would result in ownership by a person or group of 15% or more of the Company's
Common Stock. The Rights are redeemable for one cent per Right at the option of
the Board of Directors prior to this event occurring. The Rights expire on June
5, 2008.
5. COMMITMENTS AND CONTINGENCIES
TERMINATION OF MERGER AGREEMENT WITH SCANDIPHARM, INC. On December 1, 1997, the
Company terminated a merger agreement with Scandipharm, Inc. ("Scandipharm")
entered into on October 20, 1997. On January 16, 1998, Scandipharm filed suit
against the Company for breach of
6
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contract. On January 19, 1998, the Company filed suit against Scandipharm
seeking a declaratory judgment that Dura's termination of the merger
agreement did not breach the agreement and for damages against Scandipharm.
The Company believes that it had the right to terminate the merger agreement,
that Scandipharm's claims in its lawsuit and its claims for damages are
without merit, and the outcome of this matter will not have a material
adverse effect on the Company's operations.
ACQUISITION OF SPIROS DEVELOPMENT CORPORATION. On December 19, 1997, the Company
acquired all of the outstanding callable common stock of Spiros Development
Corporation. The Company is in the process of determining the appropriate values
to be assigned to the assets and liabilities assumed in the acquisition. The
Company's estimate of these values is subject to revision upon completion of its
evaluation which may result in an adjustment to the amount recorded in 1997 for
the acquisition of in-process technology.
6. SUBSEQUENT EVENTS
On October 1, 1998, DJ Pharma, Inc. ("DJ") exercised its option under the
July 28, 1998 Co-promotion and Option Agreement with Dura to acquire the
Rondec product line, Keftab, and certain cough, cold and allergy products
from the Company. As consideration for the products, the Company received a
secured note receivable and is entitled to receive a percentage of the net
sales of certain of the products over a four year period. Dura has committed
to providing DJ a $5 million loan upon the closing by DJ of an aggregate
equity offering of not less than $15 million.
COMMON STOCK REPURCHASE. On October 12, 1998, the Board of Directors authorized
the Company to repurchase up to $50 million of the Company's common stock. Any
repurchases made under the program are expected to be funded from existing cash
and short- term investments.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This information should be read in conjunction with the consolidated financial
statements and the notes thereto included in Item 1 of this Quarterly Report and
the audited financial statements and notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations for the year ended
December 31, 1997 contained in the Company's 1997 Annual Report to Shareholders,
which is incorporated by reference in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997. See "Risks and Uncertainties" below for a
discussion of factors 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. The Company undertakes
no obligation to release publicly any revisions to any forward-looking
statements contained in this report to reflect events and circumstances arising
after the date of this report.
RECENT DEVELOPMENTS
On November 4, 1998, Dura and Spiros Development Corporation II, Inc.
("Spiros Corp. II") announced the receipt of a complete response letter from
the U.S. Food and Drug Administration ("FDA") indicating that the new drug
application ("NDA") submitted by Dura on behalf of Spiros Corp. II for the
use of albuterol with the Spiros system ("Albuterol Spiros-TM- is not
approvable until and unless certain deficiencies are addressed. The FDA has
requested additional clinical trials on the to-be-marketed Spiros inhaler in
order to ensure inhaler reliability and replicate clinical outcomes of the
initial trials. The FDA has also requested the resolution of a number of
chemistry, manufacturing, and control issues. The letter also raised certain
issues regarding electromechanical reliability. During the clinical trials,
Dura made improvements to the Spiros inhaler which it believes have addressed
these issues. Representatives from Dura and the FDA are scheduled to meet to
develop a mutually agreed upon plan to resolve these issues.
On September 23, 1998, the Company announced its collaboration with Eli Lilly
and Company ("Lilly") to develop pulmonary delivery technology for insulin
products under a previously established agreement. The product under
development is based on the Company's proprietary Spiros-Registered
Trademark- pulmonary drug delivery technology for proteins and peptides.
Under the terms of the agreement, the Company received an up-front payment
and will receive funding for research as well as additional payments if
defined milestones are achieved. In addition, the Company will receive
royalties and manufacturing payments on products that reach the market. Lilly
has received worldwide commercialization rights for any resulting inhaled
insulin products.
On August 3, 1998, the Company acquired from an affiliate of AHP exclusive U.S.
marketing rights to the single-source tuberculosis drug Myambutol. The purchase
price consisted of a $33.5 million cash payment made at closing, plus additional
payments over the next four years based upon net sales of Myambutol during that
period. Based on historical sales data for Myambutol provided by AHP, the
Company estimates that such future payments could approximate an aggregate of
$50 million.
8
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RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
Total revenues for the three months ended September 30, 1998 were $43.4 million,
unchanged from the same period in 1997. Net income for the three months ended
September 30, 1998 was $2.4 million, or $0.05 per diluted share, a decrease of
$8.9 million, or $0.19 per diluted share, from the same period in 1997. The
principal factors causing this change are discussed below.
Pharmaceutical sales for the three months ended September 30, 1998 were $25
million, a decrease of $11.1 million, or 31%, over the same period in 1997.
The decrease is due in part to a decline in sales of certain of the Company's
cough, cold and allergy products resulting from lower prescription volume for
such products. In addition, the sales of certain other products declined
during the three months ended September 30, 1998 as compared to the same
period in 1997 due to differences between the periods in wholesaler buying
patterns. These decreases were partially offset by increases in sales of
Myambutol, acquired in August 1998.
Gross profit (pharmaceutical sales less cost of sales) for the three months
ended September 30, 1998 was $19.2 million, a decrease of $9.5 million, or 33%,
as compared to the same period in 1997. This decrease is due to the decrease in
pharmaceutical sales discussed above. Gross profit as a percentage of sales was
77% for the three months ended September 30, 1998 compared to 79% for the same
period in 1997.
Contract revenue relates primarily to amounts received by the Company for the
development of Spiros, the Company's proprietary dry powder pulmonary drug
delivery system. Pursuant to agreements with several companies, the Company
conducts feasibility testing and development work on various compounds for
use with Spiros. Contract revenues include payment for feasibility and
development work performed by the Company as well as milestone and technology
access payments. Contract revenue for the three months ended September 30,
1998 was $18.4 million, an increase of $11.2 million, or 154%, over the same
period in 1997. This increase is due to increased development activity
conducted primarily on behalf of Spiros Corp. II and Eli Lilly and Company
("Lilly"). Contract revenues from Spiros- related development and feasibility
agreements totaled $17.5 million for the three months ended September 30,
1998 as compared to $6.7 million for the same period in 1997, including $12.6
million from Spiros Corp. II as compared to $6.1 million from Spiros
Development Corporation for the same period in 1997. Contract revenues from
Lilly totaled $4.8 million for the three months ended September 30, 1998 as
compared to $191,000 for the same period in 1997. Contract revenue may
fluctuate from period to period base on the achievement of milestones and
technology access payments from new partners.
9
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Clinical, development and regulatory expenses for the three months ended
September 30, 1998 were $11.3 million, an increase of $5.5 million, or 95%, over
the same period in 1997. The increase reflects additional expenses incurred by
the Company under feasibility and development agreements covering the use of
various compounds with Spiros as discussed above.
Selling, general and administrative expenses for the three months ended
September 30, 1998 were $25.2 million, an increase of $8.5 million, or 51%,
over the same period in 1997, and increased as a percentage of total revenues
to 58% for the three months ended September 30, 1998 as compared to 39% for
the same period in 1997. The dollar and percentage increases are primarily
due to increased costs associated with expanding the Company's sales force
(increase of $7.5 million) and increases in operating costs related to
general corporate activities (increase of $612,000). During 1998, the Company
has expanded its sales force from approximately 270 representatives to
approximately 400 representatives as of September 30, 1998. The rapid
expansion of the Company's sales force has resulted in an increase in fiscal
1998 in its selling, general, and administrative expenses, both in total and
as a percentage of revenues, as compared to fiscal 1997.
Interest expense for the three months ended September 30, 1998 was $2.9 million,
an increase of $703,000, or 31%, as compared to the same period in 1997. The
increase is due to interest expense on the Notes issued in July 1997 (see
"Liquidity and Capital Resources" below).
The Company records interim provisions for income taxes based on the estimated
effective combined tax rate to be applicable for the fiscal year. This
estimate is reevaluated by management each quarter based on forecasts of income
before income taxes for the year as well as anticipated adjustments from
statutory federal and state tax rates. The Company's effective tax rate for
the three months ended September 30, 1998 was 34%, compared to 30% for the same
period in 1997. During the quarter ended September 30, 1997, the Company
reduced its estimate of the combined effective tax rate for fiscal 1997 from
39% to 36%, resulting in an effective tax rate of 30% for the third quarter.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
Total revenues for the nine months ended September 30, 1998 were $144.1 million,
an increase of $16.2 million, or 13%, over the same period in 1997. Net income
for the nine months ended September 30, 1998 was $17.8 million, or $0.37 per
diluted share, a decrease of $11.6 million, or $0.25 per diluted share, from the
same period in 1997. The principal factors causing these changes are discussed
below.
Pharmaceutical sales for the nine months ended September 30, 1998 were
$95.8 million, a decrease of $9.7 million, or 9%, over the same period in 1997.
This decrease is primarily due to a decline in sales of certain of the Company's
cough, cold and allergy products resulting from lower prescription volume for
such products, partially offset by an increase in sales of Nasarel-Registered
Trademark- and Nasalide-Registered Trademark-, acquired in May 1997, and
Myambutol, acquired in August 1998.
10
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Gross profit (pharmaceutical sales less cost of sales) for the nine months
ended September 30, 1998 was $74.4 million, a decrease of $7.7 million, or
9%, as compared to the same period in 1997. This decrease is due to the
decrease in pharmaceutical sales discussed above. Gross profit as a
percentage of sales was 78% for the nine months ended September 30, 1998 and
1997.
Contract revenue relates primarily to amounts received by the Company for the
development of Spiros, the Company's proprietary dry powder pulmonary drug
delivery system. Pursuant to agreements with several companies, the Company
conducts feasibility testing and development work on various compounds for
use with Spiros. Contract revenues include payment for feasibility and
development work performed by the Company as well as milestone and technology
access payments. Contract revenue for the nine months ended September 30,
1998 was $48.3 million, an increase of $25.9 million, or 115%, over the same
period in 1997. This increase is due to increased development activity
conducted on behalf of Spiros Corp. II and Lilly. Contract revenue from
Spiros- related development and feasibility agreements for the nine months
ended September 30, 1998 totaled $47 million as compared to $21.3 million for
the same period in 1997, including $35.6 million from Spiros Corp. II as
compared to $18.3 million from Spiros Development Corporation for the same
period in 1997. Contract revenues from Lilly totaled $9.6 million for the
nine months ended September 30, 1998 as compared to $214,000 for the same
period in 1997. Contract revenue may fluctuate from period to period based on
the achievement of milestones and technology access payments from new
partners.
Clinical, development and regulatory expenses for the nine months ended
September 30, 1998 were $32.4 million, an increase of $14.2 million, or 78%,
over the same period in 1997. The increase reflects additional expenses incurred
by the Company under feasibility and development agreements covering the use of
various compounds with Spiros as discussed above.
Selling, general and administrative expenses for the nine months ended
September 30, 1998 were $70.7 million, an increase of $21.2 million, or 43%,
over the same period in 1997, and increased as a percentage of total revenues
to 49% for the nine months ended September 30, 1998 as compared to 39% for
the same period in 1997. The dollar and percentage increases are primarily
due to increased costs incurred to support the Company's sales and contract
revenue, including costs associated with expanding the Company's sales force
(increase of $18.9 million), amortization of newly acquired product rights
(increase of $564,000) and increases in operating costs related to general
corporate activities (increase of $2 million). During 1998, the Company has
expanded its sales force from approximately 270 representatives to
approximately 400 representatives as of September 30, 1998. The rapid
expansion of the Company's sales force has resulted in an increase in fiscal
1998 in its selling, general, and administrative expenses, both in total and
as a percentage of revenues, as compared to fiscal 1997.
Interest income for the nine months ended September 30, 1998 was $16.9
million, an increase of $5.5 million, or 48%, as compared to the same period
in 1997. The increase is due to higher balances of cash and short-term
investments during the nine months ended September 30, 1998 resulting
primarily from the investment of the net proceeds of the Notes offering in
the third quarter of 1997 (see "Liquidity and Capital Resources" below).
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Interest Expense for the nine months ended September 30, 1998 was $9.2 million,
an increase of $6.6 million, or 262%, as compared to the same period in 1997.
The increase is due to interest expense on the Notes (see "Liquidity and
Capital Resources" below).
The Company records interim provisions for income taxes based on the estimated
effective combined tax rate to be applicable for the fiscal year. This estimate
is reevaluated by management each quarter based on forecasts of income before
income taxes for the year as well as anticipated adjustments from statutory
federal and state tax rates. The Company's effective tax rate for the nine
months ended September 30, 1998 was 34%, compared to 36% for the same period in
1997. This reduction is due primarily to an increase in 1998 in income earned at
foreign subsidiaries which is taxed at lower rates.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments decreased by $16.8 million to
$368.4 million at September 30, 1998 from $385.2 million at December 31, 1997.
The decrease is due primarily to cash used for the purchase of Myambutol in
August 1998 and for capital expenditures, offset by cash generated by
operations. Working capital decreased by $42.9 million to $349.9 million at
September 30, 1998 from $392.9 million at December 31, 1997.
On October 12, 1998, the Board of Directors authorized the Company to
repurchase up to $50 million of the Company's common stock. Any repurchases
made under the program are expected to be funded from existing cash and
short-term investments.
In the third quarter of 1997, the Company issued $287.5 million principal amount
of 3 1/2% Convertible Subordinated Notes ("Notes") due July 15, 2002 with
interest payable semiannually. Proceeds from the offering of the Notes are
expected to be used for general corporate purposes, including (i) to acquire,
in-license, co-promote, develop and commercialize pharmaceuticals targeted at
the Company's physician base or in areas related or otherwise complementary to
its existing business; (ii) to fund Spiros development programs; and (iii) for
working capital and facilities expansion. The Notes are convertible, at the
option of the holder, into shares of Dura's Common Stock at any time prior to
maturity or redemption at a conversion price of $50.635 per share.
In addition to the Notes, as of September 30, 1998, the Company had
outstanding an aggregate of $16.4 million in current and other long-term
obligations, of which $2.9 million is to be paid during the next 12 months.
Also as of September 30, 1998, future contingent obligations existed relating
to product acquisitions. Payments totaling approximately $50 million are
contingent upon the levels of future sales of certain products, and
approximately $80 million are contingent upon the continued absence of
competing formulations of certain products as defined in the respective
agreements. Such contingent obligations are payable through 2004, including
approximately $30 million due within the next 12 months.
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The Company has entered into a loan agreement which provides for the borrowing
of up to $50 million, subject to maintaining certain financial ratios, through
May 1, 1999. As of September 30, 1998, no borrowings were or have been
outstanding under this agreement.
The Company anticipates that its existing capital resources, together with cash
expected to be generated from operations and available bank borrowings, will be
sufficient to finance its operations and working capital through at least the
next 12 months. Significant additional resources, however, may be required in
connection with product or company acquisitions or in-licensing opportunities.
There can be no assurance that such additional resources will be available to
the Company when needed or on terms acceptable to the Company. At present, the
Company is actively pursuing the acquisition of rights to 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.
YEAR 2000
The Company utilizes computer systems throughout its business to carry out
its day-to-day operations. Beginning in 1997, the Company implemented a
program to ensure that its operations would not be adversely impacted by an
inability of its computer operating systems to process data having dates on or
after January 1, 2000 ("Year 2000"). The program includes an assessment of
the Company's information technology ("IT") systems as well as technology
systems embedded in the Company's facilities and equipment ("Non-IT").
The first phase in the Company's Year 2000 program was to identify the IT and
Non-IT systems with Year 2000 exposure. This phase was completed during 1998.
Substantially all the hardware and software comprising the Company's IT
systems were replaced in 1997 with systems that are Year 2000 compliant.
Accordingly, no further evaluation or testing of these systems is required.
The Company is currently evaluating its Non-IT systems to assess whether they
are Year 2000 compliant or, if not, whether the systems will be impacted by
the change in year. The Company will not be able to assess what, if any,
remediation to its Non-IT systems will be necessary until the evaluation
phase is complete.
The Company has contacted its significant suppliers, customers, and key
business partners to determine the extent to which the Company's business may
be affected in the event these parties fail to address their Year 2000
issues. The Company intends to monitor the progress made by these parties and
to include in its remediation and contingency plan steps to address any risks
arising from their failure to adequately prepare for the Year 2000. In
addition, the Company will test key interfacing data systems with its
business partners to ensure that all measures taken to become Year 2000
compliant are effective.
The Company will develop a contingency plan to address any Year 2000
exposures from internal and third-party systems that may not be adequately
remediated or replaced. While it is difficult to identify all potential Year
2000 exposures, the greatest risks to the Company are an inability to receive
and process orders from its customers or for its vendors to supply product
inventory. If necessary, the Company's contingency plan will include steps to
address these risks such as identification of alternative suppliers, stocking
of inventory supply, and developing back-up systems to process sales orders.
Management expects to complete its Year 2000 evaluation, testing and
contingency planning by June 30, 1999. The Company estimates that the
aggregate costs of its Year 2000 program will be less than $1 million,
including costs incurred to date. This estimate excludes the cost of the IT
systems implemented in 1997 as the implementation was not in response to the
Year 2000 issue. The majority of these costs are not expected to be
incremental expenses but rather an allocation of existing resources. The
estimated impact, cost, and timing of the Company's Year 2000 program are
based on management's best estimate using information currently
available. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans.
RISKS AND UNCERTAINTIES
FORWARD-LOOKING STATEMENTS. The Company cautions readers that the statements in
this Quarterly Report that are not descriptions of historical facts may be
forward-looking statements that are subject to risks and uncertainties. Actual
results could differ materially from those currently anticipated due to a number
of factors, including those identified below.
REDUCTION IN GROSS MARGINS. There is no proprietary protection for most of the
products sold by Dura and substitutes for such products are sold by other
pharmaceutical companies. The average selling prices for many of the Company's
products may decline over time due to competitive and reimbursement pressures.
While Dura will seek to mitigate the effect of this decline in average selling
prices, there can be no assurance that Dura will be successful in these efforts.
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THIRD-PARTY REIMBURSEMENT; PRICING PRESSURES. The Company's commercial success
will depend in part on the availability of adequate reimbursement from
third-party healthcare payors, such as government and private health insurers
and managed care organizations. Third-party payors are increasingly challenging
the pricing of medical products and services. There can be no assurance that
reimbursement will be available to enable the Company to achieve market
acceptance of its products 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 payors. For example, many managed healthcare
organizations are now controlling the pharmaceuticals that are on their
formulary lists. The resulting competition among pharmaceutical companies to
place their products on these formulary lists has created a trend of downward
pricing pressure in the industry. In addition, many managed care organizations
are pursuing various ways to reduce pharmaceutical costs and are considering
formulary contracts primarily with those pharmaceutical companies that can offer
a full line of products for a given therapy sector or disease state. There can
be no assurance that the Company's products 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.
DEPENDENCE ON ACQUISITION OF RIGHTS TO PHARMACEUTICALS. Dura's strategy for
growth is dependent, in part, upon acquiring, in-licensing and co-promoting
pharmaceuticals to targeted physicians. Other companies, including those with
substantially greater resources, are competing with Dura for the rights to
such products. There can be no assurance that Dura will be able to acquire,
in-license or co-promote additional pharmaceuticals on acceptable terms, if
at all. The failure to acquire, in-license, co-promote, develop or market
commercially successful pharmaceuticals would have a material adverse effect
on the Company's operations. Furthermore, there can be no assurance that
Dura, once it has obtained rights to a pharmaceutical and committed to
payment terms, will be able to generate sales sufficient to create a profit
or otherwise avoid a loss on such product.
DEVELOPMENT RISKS ASSOCIATED WITH SPIROS. Spiros will require significant
additional development efforts. There can be no assurance that development of
Spiros will be completed successfully, that Spiros will not encounter
problems in clinical trials that will cause the delay or suspension of such
trials, that current or future testing will show any Spiros product to be
safe or efficacious or that any Spiros product will receive regulatory
approval in a timely manner, if at all. In addition, regulatory approvals
will have to be obtained for each drug to be delivered through the use of
Spiros prior to commercialization. Moreover, even if Spiros does receive
regulatory approval, there can be no assurance that Spiros will be
commercially successful, have all of the patent and other protections
necessary to prevent competitors from producing similar products and not
infringe on patent or other proprietary rights of third parties. On November
4, 1998, Dura and Spiros Corp. II announced the receipt of a complete
response letter from the FDA (the "FDA Letter") relating to the Albuterol
Spiros-TM- NDA filed by Dura on behalf of Spiros Corp. II in November 1997.
The FDA Letter indicated that the NDA was not approvable until and unless
certain deficiencies are addressed, and raised issues including but not
limited to chemistry, manufacturing and control, and electromechanical
properties and reliability of the inhaler.
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The FDA has indicated that an additional clinical trial or trials will be
necessary to address the issues raised in the FDA Letter. Such trial or
trials may be costly and time-consuming. There can be no assurance that such
trial or trials will be successful, and/or that regulatory approval of the
Albuterol Spiros-TM- product will be obtained. In any event, conduct of such
additional trials would result in a substantial delay in the marketing
approval and launch, if any, of the Albuterol Spiros-TM-product (see
"Government Regulation; No Assurance of FDA Approval" below). The failure of
any Spiros product to receive timely regulatory approval and achieve
commercial success would have a material adverse effect on the Company's
operations.
CUSTOMER CONCENTRATION; CONSOLIDATION OF DISTRIBUTION NETWORK. The distribution
network for pharmaceutical products is largely controlled by a few large
wholesale distributors, and, in recent years, the number of independent and
small chain drug stores 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 operations.
Dura's principal customers are wholesale drug distributors and major drug store
chains. For the nine months ended September 30, 1998, one wholesale customer
(McKesson Corporation) accounted for 13% of sales. For the same period in 1997,
three wholesale customers (McKesson Corporation, Cardinal Health, Inc., and
AmeriSource Health Corporation) individually accounted for 11%, 11%, and 10% of
sales, respectively.
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 Dura's results of
operations in the past. While the growth and productivity of Dura's sales
force and the introduction by Dura of new products have historically
mitigated the impact of seasonality on Dura's results of operations, recent
product acquisitions by Dura, especially Ceclor-Registered Trademark- CD, which
is used to treat respiratory infections, increase the impact of seasonality
on Dura's results of operations. No assurances can be given that Dura's
results of operations will not be materially adversely affected by the
seasonality of product sales.
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 or planned to be offered by Dura. 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
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respiratory infection, allergy, cough and cold, and asthma and chronic
obstructive pulmonary disease markets will be based on, among other things,
product efficacy, safety, reliability, availability and price.
There are at least 25 other companies in the U.S. that 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, individual dose and multiple dose. Individual dose
DPIs currently marketed in the U.S. include the Rotohaler-TM- (developed and
marketed by Glaxo Wellcome ("Glaxo")) and the Spinhaler-Registered Trademark-
(developed and marketed by Fisons Limited). The Turbuhaler-Registered
Trademark- (developed and marketed by Astra Pharmaceuticals, Inc. ("Astra")),
a multiple dose DPI, is the leading DPI in worldwide sales. In June 1997, the
FDA approved the first Turbuhaler product, the Pulmicort Turbuhaler, for
marketing in the U.S., which Astra launched in early 1998. The FDA has also
approved two multiple dose DPIs developed by Glaxo, the Flovent-Registered
Trademark-Rotadisk-Registered Trademark-and the Serevent-Registered
Trademark-Diskus-Registered Trademark-, both launched in early 1998.
DEPENDENCE ON THIRD PARTIES. Dura's strategy for development and
commercialization of certain of its products, including Spiros, 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 Dura 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 Dura's competitors. Dura's partners and
licensors also have the ability to terminate the contracts in certain
circumstances with limited prior notice. Dura 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 Dura's products is subject to cGMP
regulations prescribed by the FDA. Dura relies on a single manufacturer for each
of its products. There can be no assurance that Dura 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 Dura will be able to
enter into agreements for the manufacture of future products, including Spiros
products, with manufacturers whose facilities and procedures comply with cGMP
and other regulatory requirements. In the event that Dura is unable to obtain or
retain third-party manufacturing, it may not be able to commercialize its
products as planned. Dura's current dependence upon others for the manufacture
of its products may adversely affect future profit margins on the sale of those
products and Dura's ability to develop and deliver products on a timely and
competitive basis.
LIMITED MANUFACTURING EXPERIENCE. Dura's principal manufacturing facility is
intended to be used to formulate, mill, blend and manufacture drugs to be used
with Spiros, pending regulatory approval. Equipment purchases and validation are
currently scheduled into 1999. Dura's manufacturing facility must be registered
with and licensed by various regulatory authorities and
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must comply with current cGMP requirements prescribed by the FDA and the
State of California. Dura will need to significantly scale up its current
manufacturing operations and comply with cGMPs and other regulations
prescribed by various regulatory agencies in the U.S. and other countries to
achieve the prescribed quality and required levels of production of such
products to obtain marketing approval. Any failure or significant delay in
the validation of or obtaining a satisfactory regulatory inspection of the
new facility, failure to successfully scale up or failure to maintain
necessary regulatory approvals for such facilities could have a material
adverse effect on the ability of Dura to manufacture products in connection
with Spiros. Dura intends to utilize third parties to produce components of
and assemble the Spiros aerosol generator. Such third parties have only
produced limited quantities of components and assembled limited numbers of
generators and will be required to significantly scale up their activities
and to produce components on a timely and consistent basis and which meet
applicable specifications. There can be no assurance that such third parties
will be successful in attaining acceptable service levels or meeting cGMP
requirements. Any failure or delay in the scale up or supply or meeting cGMP
requirements associated with aerosol generator manufacturing would have a
material adverse effect on the ability of Dura to commercialize Spiros
products.
MANAGING GROWTH OF BUSINESS. Dura has experienced significant growth primarily
as a result of the acquisition and in-licensing of additional respiratory
pharmaceutical products. Due to Dura's emphasis on acquiring and in-licensing
respiratory pharmaceutical products, Dura anticipates that the integration of
its acquired products, as well as any future acquisitions, will require
significant management attention and expansion of its sales force. On February
22, 1998, the Company announced that it planned to begin expanding its field
sales force immediately from approximately 270 representatives to approximately
450 representatives by the end of 1998. The rapid expansion of the Company's
sales force has resulted in an increase in fiscal 1998 in its selling, general
and administrative expenses, both in total and as a percentage of revenues, as
compared to fiscal 1997.
UNCERTAINTY OF PROFITABILITY; NEED FOR ADDITIONAL FUNDS. Dura has experienced
significant operating losses in the past, and at September 30, 1998, Dura's
accumulated deficit was $145.9 million. The acquisition and in-licensing of
products, the expansion and maintenance of Dura's sales force in response to
acquisition, in-licensing, and enhanced promotion of products, the upgrade and
expansion of its facilities, continued pricing pressure on its pharmaceutical
products, or the exercise of the Stock Purchase Option or Product Options
(defined below) will require the commitment of substantial capital resources and
may also result in significant impairment of profits, or losses. Depending upon,
among other things, the acquisition and in-licensing opportunities available,
Dura may need to raise additional funds for these purposes. Adequate funds for
these purposes may not be available when needed or on terms acceptable to Dura.
Insufficient funds may require Dura to delay, scale back or suspend some or all
of its product acquisition, in-licensing and promotional programs, the upgrade
and expansion of its facilities, or the potential exercise of the Stock Purchase
Option and/or the Product Options. Dura 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 the next 12 months.
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EFFECT OF EXERCISE OF THE STOCK PURCHASE OPTION AND THE PRODUCT OPTIONS;
DILUTION. Dura has a purchase option with respect to the outstanding shares of
callable common stock of Spiros Corp. II which expires on December 31, 2002
("Stock Purchase Option"). If Dura exercises the Stock Purchase Option, it will
be required to make a substantial cash payment or to issue shares of Dura Common
Stock, or both. A payment in cash would reduce Dura's capital resources. A
payment in shares of Dura Common Stock would result in a decrease in the
percentage ownership of Dura's shareholders at that time. If Dura determines to
exercise the Stock Purchase Option, it will likely require Dura to record a
significant charge to earnings and may have an adverse impact on future
operating results. If Dura does not exercise the Stock Purchase Option prior to
its expiration, Dura's rights in and to Spiros with respect to certain compounds
will terminate.
As part of Dura's contractual relationship with Spiros Corp. II, Dura received
options to purchase certain rights to the use of Spiros with albuterol and with
an additional product other than albuterol ("Product Options"). If Dura
exercises either of the Product Options, it will be required to make a
significant cash payment which could have an adverse effect on its capital
resources. Dura may not have sufficient capital resources to exercise the
Product Options, which may result in Dura's loss of valuable rights.
GOVERNMENT REGULATION; NO ASSURANCE OF FDA APPROVAL. Development, testing,
manufacturing and marketing of pharmaceutical products, including drug
delivery systems, are subject to extensive regulation by numerous
governmental authorities in the U.S. and other countries. The process of
obtaining FDA approval of pharmaceutical products and drug delivery systems
is costly and time consuming. Any new pharmaceutical product must undergo
rigorous preclinical and clinical testing and an extensive regulatory
approval process mandated by the FDA. Such regulatory review includes the
determination of manufacturing capability and product performance. Marketing
of drug delivery systems also requires FDA approval, which can be costly and
time consuming to obtain. A separate regulatory approval will need to be
obtained for each Spiros drug delivery system. There can be no assurance that
the products currently in development by Dura or in collaboration with third
parties, or those products acquired or in-licensed will be approved by the
FDA. In addition, there can be no assurance that all necessary approvals will
be granted for future products or that FDA review or actions will not involve
delays caused by the FDA's request for additional information or testing that
could adversely affect the time to market and sale of the products. On
November 4, 1998, Dura and Spiros Corp. II announced the receipt of a
complete response letter from the FDA (the "FDA Letter") relating to the
Albuterol Spiros-TM- NDA filed by Dura on behalf of Spiros Corp. II in
November 1997. The FDA Letter indicated that the NDA was not approvable until
and unless certain deficiencies are addressed, and raised issues including
but not limited to chemistry, manufacturing and control, and
electromechanical properties and reliability of the inhaler. The FDA has
indicated that an additional clinical trial or trials will be necessary to
address the issues raised in the FDA Letter. Such trial or trials may be
costly and time-consuming. There can be no assurance that such trial or
trials will be successful, and/or that regulatory approval of the Albuterol
Spiros-TM-product will be obtained. In any event, conduct of such additional
trials would result in a substantial delay in the marketing approval and
launch, if any, of the Albuterol Spiros-TM- product (see "Development Risk
Associated with Spiros" above). For both currently marketed products and
future products of
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Dura, 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.
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 DESI program and will determine which drugs are considered "new drugs"
requiring approval through an 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. This 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 final
determination is made that a particular drug required 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 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
products must be removed from the market. Dura believes that twenty-one of its
prescription pharmaceutical products may be covered by paragraph B of the Policy
Guide or may be DESI-related. Also, Dura 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 Dura's pharmaceutical products or whether Dura 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 business of
Dura. Dura's Health Script Pharmacy Services, Inc. ("Health Script") subsidiary
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.
PATENTS AND PROPRIETARY RIGHTS. Dura'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 five of
the pharmaceuticals currently marketed by Dura are covered by patents. Dura 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 Dura, they will be
enforceable or will provide substantial protection from competition or be of
commercial benefit to Dura or that Dura 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 Dura will also depend upon
avoiding the infringement of patents issued to competitors and upon maintaining
the technology licenses upon which certain of Dura's current products are, or
any future products under development might be,
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based. Litigation, which could result in substantial cost to Dura, may be
necessary to enforce Dura's patent and license rights or to determine the
scope and validity of proprietary rights of third parties. If any of Dura's
products are found to infringe upon patents or other rights owned by third
parties, Dura 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 Dura on commercially
reasonable terms, if at all. If Dura 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. Dura 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.
PRODUCT LIABILITY AND RECALL. Dura 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 Dura 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. Dura currently has product
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
Company's operations.
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 corporate 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.
TERMINATION OF MERGER AGREEMENT WITH SCANDIPHARM, INC. On December 1, 1997, the
Company terminated a merger agreement with Scandipharm entered into on October
20, 1997. On January 16, 1998, Scandipharm filed suit against the Company for
breach of contract. On January 19, 1998, the Company filed suit against
Scandipharm seeking a declaratory judgment that Dura's termination of the merger
agreement did not breach the agreement, and for damages against Scandipharm. The
Company believes that it had the right to terminate the merger agreement, that
Scandipharm's claims in its lawsuit and its claims for damages are without
merit, and that the outcome of this matter will not have a material adverse
effect on the Company's operations.
CHANGE IN CONTROL. Certain provisions of Dura's charter documents and terms
relating to the acceleration of the exercisability of certain warrants and
options in the event of a change in
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control may have the effect of delaying, deferring or preventing a change in
control of Dura, thereby possibly depriving shareholders of receiving a
premium for their shares of the Dura Common Stock. In addition, upon a Change
in Control (as defined), Dura 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 (as defined). The Change in Control purchase features
of the Notes may in certain circumstances have an anti-takeover effect. If a
Change in Control were to occur, there can be no assurance that Dura would
have sufficient funds to pay the Change in Control Purchase Price (as
defined) 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.
In May 1998, the Company adopted a Shareholder Rights Plan in which Preferred
Stock purchase rights ("Rights") were distributed as a dividend at the rate of
one Right for each share of Common Stock held as of the close of business on
June 5, 1998. Each Right entitles shareholders to buy, upon certain events, one
one-thousandth of a share of a new series of junior participating Preferred
Stock of the Company at an exercise price of $175.00. The Rights are designed to
guard against partial tender offers and other abusive tactics that might be used
in an attempt to gain control of the Company or to deprive shareholders of their
interest in the long-term value of the Company. The Rights are exercisable only
if a person or group acquires 15% or more of the Company's Common Stock or
announces a tender offer of which the consummation would result in ownership by
a person or group of 15% or more of the Company's Common Stock. The Rights are
redeemable for one cent per Right at the option of the Board of Directors prior
to this event occurring. The Rights expire on June 5, 2008.
VOLATILITY OF DURA STOCK PRICE. The market prices for securities of emerging
companies, including Dura, have historically been highly volatile. Future
announcements concerning Dura or its competitors may have a significant impact
on the market price of the Dura Common Stock. Such announcements might include
financial results, the results of testing, regulatory developments,
technological innovations, new commercial products, changes to government
regulations, government decisions on commercialization of products, developments
concerning proprietary rights, litigation or public concern as to safety of
Dura's products.
ABSENCE OF DIVIDENDS. The Company has never paid any cash dividends on its
Common Stock. In accordance with a bank loan agreement, Dura is prohibited from
paying cash dividends without prior bank approval. Dura 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.
YEAR 2000 COMPLIANCE CONSIDERATIONS.
The Company utilizes computer systems throughout its business to carry out
its day-to-day operations. Beginning in 1997, the Company implemented a
program to ensure that its operations would not be adversely impacted by an
inability of its computer operating systems to process data having dates on or
after January 1, 2000 ("Year 2000"). The program includes an assessment of
the Company's information technology ("IT") systems as well as technology
systems embedded in the Company's facilities and equipment ("Non-IT").
The first phase in the Company's Year 2000 program was to identify the IT and
Non-IT systems with Year 2000 exposure. This phase was completed during 1998.
Substantially all the hardware and software comprising the Company's IT
systems were replaced in 1997 with systems that are Year 2000 compliant.
Accordingly, no further evaluation or testing of these systems is required.
The Company is currently evaluating its Non-IT systems to assess whether they
are Year 2000 compliant or, if not, whether the systems will be impacted by
the change in year. The Company will not be able to assess what, if any,
remediation to its Non-IT systems will be necessary until the evaluation
phase is complete.
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The Company has contacted its significant suppliers, customers, and key
business partners to determine the extent to which the Company's business may
be affected in the event these parties fail to address their Year 2000
issues. The Company intends to monitor the progress made by these parties and
to include in its remediation and contingency plan steps to address any risks
arising from their failure to adequately prepare for the Year 2000. In
addition, the Company will test key interfacing data systems with its
business partners to ensure that all measures taken to become Year 2000
compliant are effective.
The Company will develop a contingency plan to address any Year 2000
exposures from internal and third-party systems that may not be adequately
remediated or replaced. While it is difficult to identify all potential Year
2000 exposures, the greatest risks to the Company are an inability to receive
and process orders from its customers or for its vendors to supply product
inventory. If necessary, the Company's contingency plan will include steps to
address these risks such as identification of alternative suppliers, stocking
of inventory supply, and developing back-up systems to process sales orders.
Management expects to complete its Year 2000 evaluation, testing and
contingency planning by June 30, 1999. The Company estimates that the
aggregate costs of its Year 2000 program will be less than $1 million,
including costs incurred to date. This estimate excludes the cost of the IT
systems implemented in 1997 as the implementation was not in response to the
Year 2000 issue. The majority of these costs are not expected to be
incremental expenses but rather an allocation of existing resources. The
estimated impact, cost, and timing of the Company's Year 2000 program are
based on management's best estimate using information currently
available. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
22
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -------------
<S> <C>
(1) 3.1 Certificate of Incorporation
(2) 3.2 Certificate of Amendment of Certificate of Incorporation,
effective May 21, 1998
(2) 3.3 Certificate of Designation of Series A Junior Participating
Preferred Stock
(1) 3.4 Bylaws
10.1 Amendment No. 5 to Business Loan Agreement dated October 12, 1998
between the Company and Bank of America National Trust and Savings
Association
10.2 Amendment No. 6 to Business Loan Agreement dated November 13, 1998
between the Company and Bank of America National Trust and Savings
Association
10.3 Employment letter agreement dated July 1, 1998 between the
Company and Robert S. Whitehead
10.4 Notice of Grant of Stock Option dated July 10, 1998 between the
Company and Robert S. Whitehead
11 Statements re Computations of Net Income Per Share
27 Financial Data Schedule
</TABLE>
(1) Incorporated by reference to the Company's Form 10-Q for the quarter
ended June 30, 1997.
(2) Incorporated by reference to the Company's Registration Statement on
Form 8-A filed on May 22, 1998.
(b) Reports on Form 8-K
None.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DURA PHARMACEUTICALS, INC.
DATE NOVEMBER 13, 1998 /S/ MICHAEL T. BORER
- ----------------------- --------------------
MICHAEL T. BORER
SENIOR VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
(Principal Financial and Accounting
Officer)
24
<PAGE>
EXHIBIT INDEX
TO
FORM 10-Q
DURA PHARMACEUTICALS, INC.
<TABLE>
<CAPTION>
Exhibit No. Description
- ---------- -------------
<S> <C>
(1) 3.1 Certificate of Incorporation
(2) 3.2 Certificate of Amendment of Certificate of Incorporation,
effective May 21, 1998
(2) 3.3 Certificate of Designation of Series A Junior Participating
Preferred Stock
(1) 3.4 Bylaws
10.1 Amendment No. 5 to Business Loan Agreement dated October 12, 1998
between the Company and Bank of America National Trust and Savings
Association
10.2 Amendment No. 6 to Business Loan Agreement dated November 13, 1998
between the Company and Bank of America National Trust and Savings
Association
10.3 Employment letter agreement dated July 1, 1998 between the
Company and Robert S. Whitehead
10.4 Notice of Grant of Stock Option dated July 10, 1998 between the
Company and Robert S. Whitehead
11 Statements re Computations of Net Income Per Share
27 Financial Data Schedule
</TABLE>
(1) Incorporated by reference to the Company's Form 10-Q for the quarter
ended June 30, 1997.
(2) Incorporated by reference to the Company's Registration Statement on
Form 8-A filed on May 22, 1998.
<PAGE>
AMENDMENT NO. 5 TO BUSINESS LOAN AGREEMENT
This Amendment No.5 (the "Amendment") dated as of October 12, 1998 is
between Dura Pharmaceuticals, Inc. (the "Borrower") and Bank of America National
Trust and Savings Association (the "Bank").
RECITALS
A. The Bank and the Borrower entered into that certain Business Loan
Agreement dated as of April 14, 1997, as modified by amendments of May 8, 1997,
July 30, 1997, October 28, 1997, and June 25, 1998 (as amended, the
"Agreement").
B. The Bank and the Borrower desire to amend the Agreement on the terms
and conditions set forth below:
AGREEMENT
1. DEFINITIONS. Capitalized terms used but not defined in this
Amendment shall have the meaning given to them in the Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
2.1 In Paragraph 6.3 of the Agreement, the period is deleted
from the end of subparagraph (g) and is replaced with "; MINUS" and the
following is added as a new subparagraph (h):
"(h) the amount of treasury stock held by the
Borrower not to exceed Fifty Million Dollars ($50,000,000)."
2.2 Paragraph 6.11 of the Agreement is amended in full to read
as follows:
"6.11 Dividends. Not to declare or pay any dividends
on any of its shares except dividends payable in capital stock
of the Borrower, and not to purchase, redeem or otherwise
acquire for value any of its shares, or create any sinking
fund in relation thereto; provided, however, that the Borrower
may acquire treasury stock in an amount not to exceed Fifty
Million Dollars ($50,000,000)."
2.3 The form of compliance certificate appearing as Exhibit A
to Amendment No. 3 to the Agreement as referenced in Paragraph 6.2(d)
is amended to read as set forth on Exhibit A to this Amendment.
3. REPRESENTATIONS AND WARRANTIES. When the Borrower signs this
Amendment, the Borrower represents and warrants to the Bank that: (a) except as
disclosed to the Bank by the Borrower in its letter dated October __, 1998,
there is no event which is, or with notice or lapse of time or both would be, a
default under the Agreement (b) except as disclosed to the Bank by the Borrower
in its letter dated October __, 1998, the representations and warranties in the
Agreement are true as of the date of this Amendment as if made on the date of
this Amendment, (c) this Amendment is within the Borrower's powers, has been
duly authorized, and does not conflict with any of the Borrower's organizational
papers, and
1
<PAGE>
(d) this Amendment does not conflict with any law, agreement, or obligation
by which the Borrower is bound.
4. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of
the terms and conditions of the Agreement shall remain in full force and effect.
This Amendment is executed as of the date stated at the beginning of
the Amendment.
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION
By: /s/ Susan J. Pepping
-------------------------------
Name: Susan J. Pepping
Title: Vice President
DURA PHARMACEUTICALS, INC.
By: /s/ Erle Mast
-------------------------------
Name: Erle Mast
Title: Vice President, Finance
By: /s/ Mitchell R. Woodbury
Name: Mitchell R. Woodbury
Title: Senior V.P., General Counsel and Secretary
2
<PAGE>
EXHIBIT "A"
COMPLIANCE CERTIFICATE
To: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
Reference is made to that certain Business Loan Agreement dated as of
April 14, 1997, as amended, between Bank of American National Trust and Savings
Association and Dura Pharmaceuticals, Inc., (the "Business Loan Agreement").
Capitalized terms not otherwise defined in this Certificate shall have the
meanings ascribed to them in the Business Loan Agreement. This Certificate is
delivered in accordance with Paragraph 6.2(d) of the Business Loan Agreement.
I. COMPLIANCE WITH FINANCIAL COVENANTS
Computations showing compliance with certain paragraphs of the Business
Loan Agreement are as follows:
Paragraph 6.3; Net Worth.. As of the date of the attached financial
statements, the Borrower and Domestic Subsidiaries' Net Worth, on a consolidated
and cumulative basis, is at least the sum of:
<TABLE>
<S> <C>
Calculated Net Worth from the immediately preceding
fiscal quarter. Net Worth amount as of the 6/30/97
fiscal quarter shall begin with $450,000,000. $____________
PLUS, in each quarterly accounting period, commencing with the
quarter ended 6-30-97 the sum of:
50% of net income after income taxes
(without subtracting losses), $_____________
PLUS the net proceeds from the issuance of any equity
securities (including shares issued upon exercise
of stock options), $_____________
PLUS any increase in stockholders' equity resulting
from the conversion of debt securities to equity securities $_____________
PLUS any increase in stockholders equity resulting from
the transactions as described in the Form S-3 dated
October 10, 1997 $_____________
MINUS, cash and noncash charges for in-process technology
purchased from Spiros Development Corporation and for any
contribution to Spiros Development Corporation II, Inc., as
described in the Form S-3 ( the "Spiros Charges"), up to a
maximum of One Hundred Twenty Five Million
Dollars ($125,000,000) in the aggregate; $_____________
<PAGE>
Compliance Certificate
Page 2
<S> <C>
MINUS any decrease in stockholders' equity resulting from the
acquisition by the Borrower of Spiros Development Corporation or
a cash contribution from the Borrower to Spiros Development
Corporation II,
Inc. as described in the Form S-3, $____________
MINUS the amount of treasury stock held by the
Borrower not to exceed $50,000,000. $_____________
minimum permitted $_____________
actual Net Worth $_____________
</TABLE>
PARAGRAPH 6.4; ADJUSTED FUNDED DEBT TO ADJUSTED EBITDA. As of the date of
the attached financial statements for Borrower and its Domestic Subsidiaries,
the ratio of funded debt to adjusted EBITDA was calculated as follows:
(a) The sum of:
<TABLE>
<S> <C>
All funded debt (including interest bearing obligations) $_____________
MINUS obligations owing to Procter & Gamble Pharmaceuticals, Inc.
for Entex Products (maximum $20,000,000) less domestic cash and
domestic cash equivalents up to an amount equal the face amount of
the Notes issued pursuant to
and as defined in the Indenture. $_____________
adjusted funded debt $_____________
DIVIDED by
(b) For the current fiscal quarter and each of the three immediately
preceding quarters, the sum of :
net income $_____________
MINUS interest income $(____________)
PLUS interest expense $_____________
PLUS depreciation $_____________
PLUS depletion $____________
PLUS amortization $_____________
PLUS all federal, state, local and foreign income taxes $_____________
<PAGE>
Compliance Certificate
Page 3
<S> <C>
PLUS Spiros Charges (up to maximum of $125,000,000
in aggregate) $_____________
Adjusted EBITDA $_____________
EQUALS (EXPRESSED AS A RATIO) __________:1.00
maximum permitted:
Up to and including August 31, 1997 2.00 to 1.00
From and including September 1, 1997 and thereafter 1.75 to 1.00
</TABLE>
PARAGRAPH 6.5; MINIMUM EBIT. For the fiscal quarter ended as of the
date of the attached financial statements, EBIT was calculated as
follows:
<TABLE>
<S> <C>
(a) the sum of:
net income $____________
minus interest income $(____________)
plus interest expense $____________
plus all federal, state, local and foreign income
taxes $____________
plus the Spiros Charges (maximum of $125,000,000
in aggregate) $_____________
equals $_____________
minimum permitted: $(1,000,000)
</TABLE>
Paragraph 6.7; Other Indebtedness. As of the date of the attached
financial statements for the Borrower and its subsidiaries, the
outstanding amount of debts for acquisition of fixed or capital assets
permitted under Paragraph 6.7 (e) was $_______________.
<TABLE>
<S> <C>
maximum permitted in any single fiscal year: $5,000,000
(excludes debt pursuant to that certain Indenture
dated as of July 30, 1997)
</TABLE>
PARAGRAPH 6.8; LIENS. As of the date of the attached financial
statements for the Borrower and its subsidiaries, the amount of
obligations secured by a lien under the last provision of Paragraph 6.8
was $___________.
<TABLE>
<S> <C>
maximum permitted in any fiscal year: $5,000,000
</TABLE>
<PAGE>
Compliance Certificate
Page 4
Paragraph 6.9; Capital Expenditures. As of the date of the attached
financial statements for the Borrower and its subsidiaries, the total
amount expended year to date to acquire fixed or capital assets was
$_____________.
<TABLE>
<S> <C>
maximum permitted during 1997 fiscal year: $30,000,000
maximum permitted during 1998 fiscal year: $55,000,000
</TABLE>
PARAGRAPH 6.11, DIVIDENDS. As of the date of the attached
financial statements for the Borrower and its subsidiaries, the total
amount of treasury stock was $____________
<TABLE>
<S> <C>
maximum permitted $50,000,000
</TABLE>
PARAGRAPH 6.12; LOANS TO AFFILIATED COMPANIES. Since the date of
the Business Loan Agreement, the total amount of loans or other
extensions of credit made by the Borrower or any Domestic Subsidiary
(including subsidiaries of the Borrower) to its affiliates was
$________________; and the total investments in Foreign Subsidiaries was
$___________; and the total Loans to Dura (Bermuda) Trading Company,
Ltd.was $________________.
<TABLE>
<S> <C>
maximum permitted: $10,000,000
Investments in Foreign Subsidiaries permitted $90,000,000
Loans to Dura (Bermuda) Trading Company, Ltd.
permitted $190,000,000
</TABLE>
Paragraph 6.21 (h); Asset Acquisitions. Since the date of the
Business Loan Agreement, the total amount of asset acquisitions,
including license agreements and product rights, permitted under
Paragraph 6.21 (h) was $__________________.
<TABLE>
<CAPTION>
<S> <C>
Maximum permitted in aggregate $100,000,000
</TABLE>
II PERFORMANCE OF OBLIGATIONS
A review of the activities of Borrower during the fiscal period
covered by this Certificate has been made under the supervision of the
undersigned with a view to determining whether during such fiscal period
Borrower performed and observed all of its obligations. The best
knowledge of the undersigned, during the fiscal period covered by this
Certificate, all covenants and conditions have been so performed and
observed by Borrower and no Event of Default or event which with notice
or lapse of time or both would be an Event of Default has occurred based
on the activities of Borrower and is continuing, with any exceptions set
forth below, in response to which Borrower has taken or propose to take
the following actions (if none, so state). Without limiting the
foregoing, the Borrower has no Significant Subsidiaries except those that
have executed and delivered to Bank a guaranty as required under
paragraph 6.6 of the Business Loan Agreement.
<PAGE>
Compliance Certificate
Page 5
III. COMPLIANCE WITH INDENTURE
To the best knowledge of the undersigned, no event or circumstance has
occurred that constitutes violation of the Indenture Agreement, as
evidenced by the attached copy of the most recent Indenture compliance
certificate .
------------------------------------------------------------------
IV. NO MATERIAL ADVERSE CHANGE
To the best knowledge of the undersigned, no event or circumstance
has occurred that constitutes a Material Adverse Effect regarding
Borrower under Paragraph 8.7 of the Business Loan Agreement since the
date the most recent Certificate was executed and delivered, with any
exceptions being set forth below (if none, so state):
This Certificate is executed on _________, 19___, by a responsible
officer of Borrower. the undersigned hereby certify that each and every
matter contained herein is derived from Borrower's books and records and
is, to the best knowledge of the undersigned, true and correct.
Dated: ____________, 19___
Dura Pharmaceuticals, Inc.
-----------------------------
By:
<PAGE>
AMENDMENT NO. 6 TO BUSINESS LOAN AGREEMENT
This Amendment No. 6 (this "Amendment") dated as of November 13, 1998
is between Dura Pharmaceuticals, Inc. (the "Borrower") and Bank of America
National Trust and Savings Association (the "Bank").
RECITALS
A. The Bank and the Borrower entered into that certain Business Loan
Agreement dated as of April 14, 1997, as modified by amendments dated May 8,
1997, July 30, 1997, October 28, 1997, June 25, 1998, and October 12, 1998 (as
amended, the "Agreement").
B. The Bank and the Borrower desire to amend the Agreement on the terms
and conditions set forth below:
AGREEMENT
1. DEFINITIONS. Capitalized terms used but not defined in this
Amendment shall have the meanings given to them in the Agreement.
2. AMENDMENTS. Effective as of September 28, 1998, the Agreement is
hereby amended as follows:
2.1 The following is added as a new Article 3A:
"3A COLLATERAL
3A.1 Stock of Certain Subsidiaries: Upon consummation
of the transactions described in Paragraph 6.24 below, the
Borrower's obligations under this Agreement will be secured by
the following property:
(a) Sixty-six percent (66%) of the issued
and outstanding common stock of Dura (Barbados)
Holding Company Ltd.;
(b) Sixty-six percent (66%) of the issued
and outstanding common stock of Dura (Barbados) Ltd.;
and
(c) Sixty-six percent (66%) of the issued
and outstanding common stock of Dura (Burmuda)
Trading Company Ltd.
2.2 The following is added as a new Paragraph 5.14:
"5.14 TAXES ON INCOME FROM FOREIGN SUBSIDIARIES.
Income received by the Borrower from its Foreign Subsidiaries (as
defined in Paragraph 6.6 below) is subject only to taxation by the
United States Internal Revenue Service and other state and local taxing
authorities within the United States of America."
2.3 Paragraph 6.3 is amended and restated in its
entirety to read as follows:
1
<PAGE>
"6.3 NET WORTH. To maintain on a consolidated basis
for each quarterly accounting period Net Worth equal to, on a
cumulative basis, at least the sum of:
(a) Four Hundred Thirty Million Dollars
($430,000,000); plus
(b) the sum of 50% of the net income after income
taxes (without subtracting losses) earned in each quarterly
accounting period commencing with the quarter ended September
30, 1998; PLUS
(c) the net proceeds from any equity securities
(including shares issued upon the exercise of stock options)
issued in each quarterly accounting period commencing with the
quarter ended September 30, 1998; plus
(d) any increase in stockholders' equity resulting
from the conversion of debt securities to equity securities
issued in each quarterly accounting period commencing with the
quarter ended September 30, 1998; MINUS
(e) the amount of treasury stock held by the Borrower
not to exceed Fifty Million Dollars ($50,000,000).
`Net Worth' means the gross book value of the
Borrower's assets less total liabilities, including but not
limited to accrued and deferred income taxes, and any reserves
against assets."
2.4 Paragraph 6.4 is amended and restated in its entirety
to read as follows:
"6.4 MAXIMUM ADJUSTED FUNDED DEBT TO EBITDA. To
maintain on a consolidated basis a ratio of (i) funded debt,
including all interest bearing obligations, less the sum of
the following up to an amount equal to the face amount of the
Notes issued pursuant to and as defined in the Indenture: (A)
domestic cash and domestic cash equivalents, (B) one hundred
percent (100%) of offshore cash balances up to an amount equal
to the capital directly or indirectly contributed to Dura
(Burmuda) Trading Company Ltd. (as of the date hereof, this
amount is Sixty Million Dollars ($60,000,000)), and (C) fifty
percent (50%) of such offshore cash balances in excess of such
capital contributions, to (ii) EBITDA of not greater than 1.75
to 1.00.
Upon the Bank's request from time to time , the
Borrower shall provide evidence acceptable to the Bank of cash
equivalents. For purposes of this Agreement, cash equivalents
means:
(a) domestic certificates of deposit or
domestic time deposits;
(b) U.S. treasury bills and other direct
obligations of the federal government;
(c) shares in domestic money market funds;
2
<PAGE>
(d) readily marketable obligations of an
agency of the United States of America that are
generally considered in the securities industry to be
implicit obligations of the federal government;
(e) prime bankers' acceptances and
commercial paper issued by financial institutions
rated as least A-1 by Standard & Poors Ratings Group
or at least P-1 by Moody's Investors Service, Inc.;
and
(f) repurchase agreements covering U.S.
government securities.
For purposes of this Agreement, `EBITDA' means net
income for such period, LESS, to the extent added in
determining such net income, interest income, PLUS, to the
extent deducted in determining such net income, (i) interest
expense, (ii) depreciation, (iii) depletion, (iv)
amortization, and (v) all federal, state, local and foreign
income taxes. This ratio will be calculated at the end of each
fiscal quarter using the results of that quarter and each of
the three immediately preceding quarters."
2.5 Paragraph 6.5 is amended and restated in its entirety
to read as follows:
"6.5 MINIMUM EBIT; MINIMUM U.S. EBIT. To maintain for
each quarterly accounting period (i) on a consolidated basis
EBIT of not less than zero dollars ($0); and (ii) on
consolidated basis only for the Borrower and its Domestic
Subsidiaries EBIT of not less than a NEGATIVE Six Million
Dollars (-$6,000,000) for the fiscal quarter ended September
30, 1998, and not less than a NEGATIVE One Million Dollars
(-$1,000,000) for each fiscal quarter thereafter.
For purposes of this Agreement: `EBIT' means net
income for such period, LESS, to the extent added in
determining such net income, interest income, PLUS, to the
extent deducted in determining such net income, (i) interest
expense and (ii) all federal, state, local and foreign income
taxes; `Domestic Subsidiaries' means direct or indirect
subsidiaries of the Borrower that is incorporated or otherwise
organized under the laws of (x) the United States of America,
(y) any state, territory, or possession of the United States
of America, or (z) any other jurisdiction located within
either the United States of America or any state, territory,
or possession of the United States of America; individually, a
`Domestic Subsidiary.'"
2.6 Paragraph 6.6 is amended and restated in its entirety
to read as follows:
"6.6 ADDITIONAL GUARANTIES. If at any time after the
date of this Agreement a subsidiary of the Borrower or any
guarantor becomes a Significant Subsidiary, to cause such
Significant Subsidiary to execute and deliver to the Bank, as
soon as reasonably practicable but not later than thirty (30)
days after the Bank's request therefor, a continuing guaranty
in the principal amount of at least Fifty Million Dollars
($50,000,000) and otherwise in form and substance acceptable
to the Bank, together with satisfactory
3
<PAGE>
evidence of such Significant Subsidiary's authority to execute
and deliver such guaranty. For purposes of this Agreement
`Significant Subsidiary' means a corporation (i) that is
wholly-owned by the Borrower or any guarantor and (ii) that
owns twenty percent (20%) or more of the Borrower's total
consolidated assets or twenty percent (20%) or more of the
Borrower's total consolidated sales for any fiscal quarter.
Notwithstanding the foregoing, `Significant Subsidiary' shall
not include any Foreign Subsidiary. `Foreign Subsidiary' means
any direct or indirect subsidiary of the Borrower that is not
a Domestic Subsidiary."
2.7 The following is added as a new Paragraph 6.24:
"6.24 PLEDGES OF STOCK. On or before December 15,
1998, to take all actions and execute and deliver to the Bank
all documentation (including without limitation opinion of
counsel), in form and substance satisfactory to the Bank, and
to cause all subsidiaries to take such actions and execute and
deliver to the Bank such documentation, necessary to grant to
the Bank a first position perfected security interest in and
to the following shares of stock: sixty-six percent (66%) of
the issued and outstanding shares of the common stock of Dura
(Barbados) Holding Company Ltd. owned by the Borrower;
sixty-six percent (66%) of the issued and outstanding shares
of common stock of Dura (Barbados) Ltd. owned by Dura
(Barbados) Holding Company Ltd.; and sixty-six percent (66%)
of the issued and outstanding shares of common stock of Dura
(Burmuda) Trading Company Ltd. owned by Dura (Barbados) Ltd.
2.8 The form of compliance certificate appearing as Exhibit A
to Amendment No. 3 to the Agreement as referenced in Paragraph 6.2(d)
is amended to read as set forth on Exhibit A to this Amendment.
3. REPRESENTATIONS AND WARRANTIES. When the Borrower signs this
Amendment, the Borrower represents and warrants to the Bank that: (a) there is
no event which is, or with notice or lapse of time or both would be, a default
under the Agreement (b) the representations and warranties in the Agreement are
true as of the date of this Amendment as if made on the date of this Amendment,
(c) this Amendment is within the Borrower's powers, has been duly authorized,
and does not conflict with any of the Borrower's organizational papers, and (d)
this Amendment does not conflict with any law, agreement, or obligation by which
the Borrower is bound.
4. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of
the terms and conditions of the Agreement shall remain in full force and effect.
[Signatures continue on next page]
4
<PAGE>
This Amendment is executed as of the date stated at the beginning of
the Amendment.
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION
By: /s/ Susan J. Pepping
--------------------------------------------------
Name: Susan J. Pepping
Title: Vice President
DURA PHARMACEUTICALS, INC.
By: /s/ Erle T. Mast
--------------------------------------------------
Name: Erle T. Mast
--------------------------------------------------
Title: Vice President, Finance
--------------------------------------------------
By: /s/ Mitchell R. Woodbury
--------------------------------------------------
Name: Mitchell R. Woodbury
--------------------------------------------------
Title Senior V.P., General Counsel and Secretary
--------------------------------------------------
5
<PAGE>
EXHIBIT "A"
COMPLIANCE CERTIFICATE
To: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
Reference is made to that certain Business Loan Agreement dated as of
April 14, 1997, as amended, between Bank of American National Trust and Savings
Association and Dura Pharmaceuticals, Inc., (the "Business Loan Agreement").
Capitalized terms not otherwise defined in this Certificate shall have the
meanings ascribed to them in the Business Loan Agreement. This Certificate is
delivered in accordance with Paragraph 6.2(d) of the Business Loan Agreement.
I. COMPLIANCE WITH FINANCIAL COVENANTS
Computations showing compliance with certain paragraphs of the Business
Loan Agreement are as follows:
PARAGRAPH 6.3; NET WORTH.. As of the date of the attached financial
statements, the Borrower's Net Worth, on a consolidated and cumulative basis, is
at least the sum of:
<TABLE>
<S> <C>
Calculated Net Worth from the immediately preceding
fiscal quarter. Net Worth amount as of the 6/30/98
fiscal quarter shall begin with $430,000,000. $____________
PLUS, in each quarterly accounting period, commencing with the
quarter ended 9/30/98 the sum of:
50% of net income after income taxes
(without subtracting losses), $____________
PLUS the net proceeds from the issuance of any equity
securities (including shares issued upon exercise
of stock options), $____________
PLUS any increase in stockholders' equity resulting
from the conversion of debt securities to equity
securities $____________
PLUS any increase in stockholders equity resulting from
the transactions as described in the Form S-3 dated
October 10, 1997 $____________
MINUS the amount of treasury stock held by the
Borrower not to exceed $50,000,000. $____________
minimum permitted $____________
<PAGE>
Compliance Certificate
Page 2
<S> <C>
actual Net Worth $____________
</TABLE>
PARAGRAPH 6.4; ADJUSTED FUNDED DEBT TO EBITDA. As of the date of the
attached consolidated financial statements, the ratio of adjusted funded debt to
EBITDA was calculated as follows:
(a) The sum of:
<TABLE>
<S> <C>
All funded debt (including interest bearing obligations) $____________
MINUS the sum of the following not to exceed the
face amount of Notes issues under the Indenture: $_____________
domestic cash and domestic cash equivalents
100% of offshore cash balances not to exceed capital
contributed to Dura (Burmuda) Trading Company Ltd. $_____________
50% of other offshore cash balances $_____________
</TABLE>
DIVIDED BY
(b) For the current fiscal quarter and each of the three immediately
preceding quarters, the sum of :
<TABLE>
<S> <C>
net income $_____________
MINUS interest income $(____________)
PLUS interest expense $_____________
PLUS depreciation $_____________
PLUS depletion $_____________
PLUS amortization $_____________
PLUS all federal, state, local and foreign income taxes $_____________
EBITDA $_____________
EQUALS (EXPRESSED AS A RATIO) __________:1.00
<PAGE>
Compliance Certificate
Page 3
<S> <C>
maximum permitted: 1.75 to 1.00
</TABLE>
PARAGRAPH 6.5; MINIMUM EBIT; MINIMUM U.S. EBIT; For the fiscal quarter
ended as of the date of the attached consolidated financial statements,
consolidated EBIT was calculated as follows:
(a) the sum of:
<TABLE>
<S> <C>
net income $____________
MINUS interest income ($___________)
PLUS interest expense $____________
PLUS all federal, state, local and foreign income
taxes $____________
EQUALS $____________
minimum permitted: $0
</TABLE>
EBIT for the Borrower and its Domestic Subsidiaries was calculated as
follows:
(a) the sum of:
<TABLE>
<S> <C>
U.S. net income $____________
MINUS U.S. interest income ($___________)
PLUS U.S. interest expense $____________
PLUS all federal, state, local,
and foreign taxes $____________
EQUALS $____________
minimum permitted:
quarter ended 9/30/98 ($6,000,000)
each quarter thereafter ($1,000,000)
</TABLE>
PARAGRAPH 6.7; OTHER INDEBTEDNESS. As of the date of the attached
financial statements for the Borrower and its subsidiaries, the
outstanding amount of debts for
<PAGE>
Compliance Certificate
Page 4
acquisition of fixed or capital assets permitted under Paragraph
6.7 (e) was $_______________.
<TABLE>
<S> <C>
maximum permitted in any single fiscal year: $5,000,000
(excludes debt pursuant to that certain Indenture
dated as of July 30, 1997)
</TABLE>
PARAGRAPH 6.8; LIENS. As of the date of the attached financial
statements for the Borrower and its subsidiaries, the amount of
obligations secured by a lien under the last provision of Paragraph 6.8
was $______________.
<TABLE>
<S> <C>
maximum permitted in any fiscal year: $5,000,000
</TABLE>
PARAGRAPH 6.9; CAPITAL EXPENDITURES. As of the date of the attached
financial statements for the Borrower and its subsidiaries, the total
amount expended year to date in fiscal year 1998 to acquire fixed or
capital assets was $_____________.
<TABLE>
<S> <C>
maximum permitted: $55,000,000
</TABLE>
PARAGRAPH 6.11, DIVIDENDS. As of the date of the attached
financial statements for the Borrower and its subsidiaries, the total
amount of treasury stock was $_______________.
<TABLE>
<S> <C>
maximum permitted $50,000,000
</TABLE>
PARAGRAPH 6.12; LOANS TO AFFILIATED COMPANIES. Since the date of
the Business Loan Agreement, the total amount of loans or other
extensions of credit made by the Borrower or any Domestic Subsidiary
(including subsidiaries of the Borrower) to its affiliates was
$___________________;
and the total investments in Foreign Subsidiaries was $___________;
and the total Loans to Dura (Bermuda) Trading
Company, Ltd. was $________________.
<TABLE>
<S> <C>
maximum permitted: $10,000,000
Investments in Foreign Subsidiaries permitted $90,000,000
Loans to Dura (Bermuda) Trading Company, Ltd.
permitted $190,000,000
</TABLE>
PARAGRAPH 6.21 (h); ASSET ACQUISITIONS. Since the date of the
Business Loan Agreement, the total amount of asset acquisitions,
including license agreements and product rights, permitted under
Paragraph 6.21 (h) was $__________________.
<TABLE>
<S> <C>
Maximum permitted in aggregate $100,000,000
</TABLE>
<PAGE>
Compliance Certificate
Page 5
II PERFORMANCE OF OBLIGATIONS
A review of the activities of Borrower during the fiscal period
covered by this Certificate has been made under the supervision of the
undersigned with a view to determining whether during such fiscal period
Borrower performed and observed all of its obligations. The best
knowledge of the undersigned, during the fiscal period covered by this
Certificate, all covenants and conditions have been so performed and
observed by Borrower and no Event of Default or event which with notice
or lapse of time or both would be an Event of Default has occurred based
on the activities of Borrower and is continuing, with any exceptions set
forth below, in response to which Borrower has taken or propose to take
the following actions (if none, so state). Without limiting the
foregoing, the Borrower has no Significant Subsidiaries except those that
have executed and delivered to Bank a guaranty as required under
paragraph 6.6 of the Business Loan Agreement.
III. COMPLIANCE WITH INDENTURE
To the best knowledge of the undersigned, no event or circumstance has
occurred that constitutes violation of the Indenture Agreement, as
evidenced by the attached copy of the most recent Indenture compliance
certificate .
IV. NO MATERIAL ADVERSE CHANGE
To the best knowledge of the undersigned, no event or circumstance
has occurred that constitutes a Material Adverse Effect regarding
Borrower under Paragraph 8.7 of the Business Loan Agreement since the
date the most recent Certificate was executed and delivered, with any
exceptions being set forth below (if none, so state):
<PAGE>
This Certificate is executed on _________, 19___, by a responsible
officer of Borrower. the undersigned hereby certify that each and every
matter contained herein is derived from Borrower's books and records and
is, to the best knowledge of the undersigned, true and correct.
Dated: ____________, 19___
Dura Pharmaceuticals, Inc.
-------------------------------
By:
<PAGE>
July 1, 1998
Mr. Robert S. Whitehead
P.O. Box 877
16140 El Camino Real
Rancho Santa Fe, CA 92067
Dear Bob:
This letter will serve as the basis by which you will be employed by Dura
Pharmaceuticals, Inc. (the "Company") as its President.
During your employment beginning July 1, 1998, you will devote your time,
attention and energy to the Company. Such service will become full time on or
after October 15, 1998. In your capacity as President of the Company, you will
perform such executive duties as are from time to time prescribed by the
Chairman & Chief Executive Officer and the Board of Directors of the Company.
Except for certain interim consultant services to be provided to, and serving
on the Board of, Trega Biosciences and Spiros Development Corporation II, Inc.,
you will not, without the prior written consent of the Company's Board of
Directors, directly or indirectly, during the term of your employment: (A)
render significant services of a business, professional or commercial nature to
any other person or entity, either for compensation or otherwise; or (b) engage
in any business activity competitive with or adverse to the Company's business
or welfare, whether alone, as a partner or member, or as an officer, director,
employee or shareholder of another business entity. The Company will require
you to execute its standard form of employee confidentiality agreement.
Your beginning compensation and bonus arrangements have been separately
established by prior communication from the Company. In addition, you will
receive such fringe benefits as are made available generally to executive
employees of the Company.
The term of your employment will end on July 1, 1999, unless extended by
mutual agreement; provided, however, that unless the Company notifies you at
least nine (9) calendar months prior to any relevant expiration date of its
intention not to renew your employment, your employment will be, at your option
and unless we mutually agree on a larger extension, automatically extended for
additional successive one-year periods. However, your employment shall
terminate earlier upon (1) your death, (2) in the event you become physically
or mentally disabled so as to become unable, for a period of more than 120
consecutive working days or for more than 120 working days in the aggregate
during any 12-month period, to perform your duties hereunder on substantially a
full-time basis, in which case the Company may, at its option, terminate your
employment hereunder upon not less than thirty (30) days' written notice, (3)
for Cause, and (4) without Cause upon not less than sixty (60) days' written
notice. For the purposes of this letter agreement, the Company shall have
"Cause" to terminate your employment
<PAGE>
Mr. Robert S. Whitehead
July 1, 1998
Page 2
hereunder upon (A) your indictment for a felony, or (B) the engaging by you
in misconduct which is injurious to the Company or any parent, subsidiary or
affiliate of the Company, or (C) the violation by you of any of the material
provisions of this letter agreement. If the Company terminates your
employment without Cause, you will be entitled to six (6) months' base salary
at the then current annual rate as severance pay unless there has been a
Change of Control as defined below. In the event that there has been a
Change of Control of the Company during the period in which you serve as
President pursuant to this letter agreement, if the Company terminates your
employment without Cause or if there is an Involuntary Termination (as
defined below), you will be entitled to nine (9) months' base salary at the
then current annual rate as severance pay. In the event of payment of
severance under this agreement, stock option vesting shall continue during
the severance period. Other than the benefits described in this letter, you
will not be entitled to any other salary, benefits or bonus subsequent to
termination.
The term "Change of Control" shall mean (i) any transaction or series of
related transactions (including but not limited to, any merger or other
reorganization) in which the ownership of more than 50% of the voting power of
the Company is transferred; (ii) a sale, transfer or other disposition of all
or substantially all of the assets of the Company; (iii) the successful
acquisition of thirty percent (30%) or more of the Company's outstanding voting
stock pursuant to a third-party tender or exchange offer; or (iv) a change in
composition of the Board which occurs because the individuals nominated for
election or re-election by majority vote of those members of the Board elected
at the last shareholder meeting at which there were not contested elections for
Board membership fail to be elected or re-elected by the shareholders.
The term "Involuntary Termination" shall mean the termination of your
employment with the Company: (i) involuntarily by your dismissal without cause;
or (ii) voluntarily or involuntarily following (a) a change in your position
with the Company which materially reduces your level of responsibility; (b) a
reduction of ten percent (10%) or more in your level of compensation (including
base salary, bonuses or fringe benefits); or (c) a change in your place of
employment which is more than twenty (20) miles from your place of employment
prior to the Change of Control, PROVIDED AND ONLY IF such change or reduction
is effected without your written concurrence.
If a Change of Control of the Company occurs and the Company does not
survive the transaction as an entity, the Company will require the purchaser to
assume the Company's obligations hereunder, and if the purchaser is a
subsidiary of a parent entity, the Company will require the parent entity to
guarantee the performance of the obligations hereunder or to assume directly
the obligations hereunder.
You also agree that for a period ending three (3) years after a
termination of your employment with the Company, you will not (a) divert,
directly or indirectly, any business of the Company to any other person or
entity; (b) disrupt, damage, impair or interfere with the Company's
relationships with its employees, customers, agents or vendors; (c) directly or
<PAGE>
Mr. Robert S. Whitehead
July 1, 1998
Page 3
indirectly, solicit or otherwise induce any person to leave his or her
employment with the company; or (d) attempt to do any of the foregoing.
No provisions of this letter agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in
writing signed by the parties hereto. No waiver by any party hereto at any
time of any breach by the other party hereto of, or compliance with, any
condition or provision of this letter agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or
considerations at the same or at any prior or subsequent time. This letter
agreement shall be binding upon and inure to the benefit of the Company, its
successors and assigns and you and your heirs, executors, administrators and
legal representatives. The validity, interpretation, construction and
performance of this letter agreement shall be governed by the laws of the State
of California without reference to conflict of laws.
This letter agreement shall supersede all prior agreements and
understandings between us, oral or written, with respect to your employment.
Should this letter reflect your understanding, please sign below and
return one signed copy to me as soon as possible.
Very truly yours,
DURA PHARMACEUTICALS, INC.
/s/ Cam L. Garner
----------------------------------
By: Cam L. Garner
Chairman and Chief Executive Officer
ACCEPTED:
/s/ Robert S. Whitehead
- -----------------------
Robert S. Whitehead
<PAGE>
DURA PHARMACEUTICALS, INC.
NOTICE OF GRANT OF STOCK OPTION
Notice is hereby given of the following stock option grant (the "Option")
to purchase shares of Common Stock of Dura Pharmaceuticals, Inc. (the
"Company"):
OPTIONEE: Robert S. Whitehead
GRANT DATE: July 10, 1998
OPTION PRICE: $21.94 per share
NUMBER OF OPTION SHARES: 250,000 shares
TYPE OF OPTION: Non-Qualified Stock Option
EXPIRATION DATE: July 10, 2008
EXERCISE SCHEDULE. The Option shall become exercisable for the Option
Shares in a series of installments as follows: the Option will become
exercisable for twenty-five percent (25%) of the Option Shares upon completion
of one year of service measured from the Grant Date, and the balance of the
Option Shares shall become exercisable in equal daily installments over a
period of three years measured from the first anniversary of the Grant Date.
In no event shall any additional Option Shares vest after Optionee ceases to be
employed by the Company.
OTHER PROVISIONS. Optionee agrees to be bound by the terms and conditions
set forth in the Stock Option Agreement attached hereto as EXHIBIT A.
NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Notice of Grant or in
the attached Stock Option Agreement shall confer upon Optionee any right to
continued employment for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Company (or any parent or
subsidiary employing Optionee) or Optionee, which rights are hereby expressly
reserved by each, to terminate Optionee's employment at any time for any reason
whatsoever, with or without cause.
DURA PHARMACEUTICALS, INC.
By: /s/ Cam L. Garner /s/ Robert S. Whitehead
-------------------- -------------------------
Cam L. Garner OPTIONEE
Chairman & CEO Robert S. Whitehead
<PAGE>
EXHIBIT A
STOCK OPTION AGREEMENT
DURA PHARMACEUTICALS, INC.
RECITALS
A. The Board of Directors of Dura Pharmaceuticals, Inc. (the
"Corporation") grants stock options to selected individuals for the purpose of
attracting and retaining the services of persons who contribute to the growth
and financial success of the Corporation.
B. Optionee is a person who the Corporation believes has and will
contribute to the growth and financial success of the Corporation.
AGREEMENT
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT. Corporation hereby grants Optionee an option ("Option") to
purchase shares of Common Stock of the Corporation ("Option shares") as
specified in the attached Notice of Grant of Stock Option (the "Grant Notice")
at an exercise price specified in the Grant Notice (the "Exercise Price")
subject to the terms and conditions of this Agreement and the Grant Notice.
2. VESTING OR EXERCISE PERIOD. Subject to the terms and conditions of
this Agreement and that certain letter agreement dated July 1, 1998 between the
Corporation and Optionee, this Option will vest as set forth in the Grant
Notice. Provided, however, that this Option will expire at midnight on the
expiration date shown in the Grant Notice, which date is 10 years after the
Grant Date set in the Grant Notice (the "Expiration Date"), and this Option
must be exercised, if at all, on or before the Expiration Date.
3. DESIGNATION OF OPTION TYPE. Optionee understands that the Option is a
non-qualified stock option.
4. TERMINATION.
(a) If Optionee ceases to be an employee of the Corporation or a
subsidiary or parent of the Corporation for any reason except death or
disability, this Option may be exercised (for shares vested on the date
Optionee ceased to be an employee) within THREE (3) MONTHS after the date
Optionee ceased to be an employee, but in no event later than the Expiration
Date.
1
<PAGE>
(b) If Optionee ceases to be an employee of the Corporation or a
subsidiary or parent of the Corporation because of disability or death, this
Option may be exercised (for shares vested on the date Optionee ceased to be an
employee) within TWELVE (12) MONTHS after Optionee ceased to be an employee,
but in no event later than the Expiration Date.
For purposes of this section, Optionee will be deemed an "employee" if Optionee
is providing services as an independent contractor or consultant to the
Corporation or a subsidiary or parent of the Corporation.
5. EXERCISE.
(a) This Option is exercisable by delivery of an executed Notice of
Exercise, in a form satisfactory to the Corporation. The Notice of Exercise
will set forth the Optionee's election to exercise this Option and the number
of Option Shares being purchased.
(b) Full payment of the Exercise Price must be made in one or more
of the following forms:
(1) check made payable to the Corporation;
(2) promissory note;
(3) shares of Common Stock of the Corporation held for the
requisite period to avoid a charge to the Corporation's earnings and valued as
of the Exercise Date; or
(4) delivery of a properly executed Notice of Exercise,
together with irrevocable instructions to a broker to promptly deliver to the
Corporation the amount of sale or loan proceeds to pay the Exercise Price.
For purposes of subparagraphs (2) and (4) immediately above, the effective date
of the exercise (the "Exercise Date") will be the date the Notice of Exercise
is delivered to the Corporation. In all other cases, the Exercise Date will be
the date on which the Notice of Exercise and actual payment are received by the
Corporation.
6. TRANSFERABILITY. This Option may be assigned in whole or in part
during the Optionee's lifetime. The assigned portion may only be exercised by
the person or persons who acquire a proprietary interest in the Option pursuant
to the assignment. The terms applicable to the assigned portion shall be the
same as those in effect for the Option immediately prior to such assignment and
shall be set forth in such documents issued to the assignee as the Corporation
may deem appropriate. This Option may, after Optionee's death, be transferred
by Will or state law of descent and distribution.
2
<PAGE>
The terms of this Option are binding upon the executors, administrators,
successors and assigns of Optionee.
7. WITHHOLDING. Optionee agrees, as a condition to the exercise of this
Option, to make appropriate arrangements with the Corporation or a subsidiary
or parent of the Corporation employing Optionee for the satisfaction of any
federal, state or local income or employment tax requirements applicable to the
exercise of this Option or to the sale of shares acquired under this Option.
8. ADJUSTMENTS. If any change is made to the Option Shares (whether by
reason of merger, consolidation, reorganization, recapitalization, stock
dividend, stock split, combination of shares, exchange of shares or other
change in corporate or capital structure of the Corporation) then the
Corporation will make appropriate adjustments to the kind, price per share and
maximum number of shares subject to this Option. Adjustments made by the
Corporation will be final, binding and conclusive. No adjustment will be made
if such change results in the acceleration and termination of all outstanding
options in accordance with the Acceleration and Termination of Options
provisions of the following paragraph.
9. ACCELERATION AND TERMINATION OF OPTIONS. In the event of one or more
of the following transactions ("Corporate Transactions"):
(a) a merger or consolidation in which the Corporation is not the
surviving entity, except for a transaction the principal purpose of which is to
change the State of the Corporation's incorporation,
(b) the sale, transfer or other disposition of all or substantially
all of the assets of the Corporation,
(c) any reverse merger in which the corporation is the surviving
entity but in which 50% or more of the Corporation's outstanding voting stock
is transferred to holders different from those who held such securities
immediately before the merger, or,
(d) an acquisition by any person or related group of persons (other
than the Corporation or a person that directly or indirectly controls, is
controlled by or is under common control with, the Corporation) of ownership of
more than 50% of the Corporation's outstanding Common Stock, pursuant to a
tender or exchange offer
then the Option holder may exercise this Option for all of the Option Shares,
including shares previously unvested, provided the Option is exercised
immediately before the consummation of the Corporate Transaction and before the
Expiration Date. Upon consummation of the Corporate Transaction, this Option,
to the extent not previously exercised, will terminate and cease to be
exercisable.
3
<PAGE>
10. NOTICES. Any notice required to be given to the Corporation under
this Agreement will be in writing and addressed to the Corporation and its
corporate offices. Any notice required to be given to Optionee under this
Agreement will be in writing and addressed to Optionee at the address specified
in Optionee's employment file maintained by the Corporation. All notices will
be deemed to have been given or delivered upon personal delivery or upon
deposit in the United State mail, postage prepaid and properly addressed to the
party to be notified.
11. NO EMPLOYMENT CONTRACT. This Option shall not confer upon Optionee
any right to continue in the employ of or to provide services to the
Corporation or a subsidiary or parent of the Corporation or constitute any
contract or agreement of employment or services or interfere in any way with
the right of the Corporation or a subsidiary or parent of the Corporation to
reduce such Optionee's compensation or to terminate Optionee's employment or
services at any time, with or without cause.
12. COMPLIANCE. This Option may not be exercised unless the exercise is
in compliance with all applicable requirements of federal and state law and
with the requirements of any stock exchange on which the Corporation's Common
Stock may be listed at the time of exercise.
13. SHAREHOLDER RIGHTS. Optionee will have no shareholder rights with
respect to any Option Shares prior to the Exercise Date of the option.
14. CORPORATION RIGHTS. The grant this Option shall in no way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
4
<PAGE>
EXHIBIT 11
DURA PHARMACEUTICALS, INC.
STATEMENTS RE COMPUTATIONS OF NET INCOME PER SHARE
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -----------------
1997 1998 1997 1998
---------- ------- ------- --------
<S> <C> <C> <C> <C>
NET INCOME PER SHARE - BASIC
Net Income ................................................. $ 11,325 $ 2,424 $29,395 $17,765
---------- ------- ------- --------
---------- ------- ------- --------
Weighted Average Number of Common Shares ................... 43,875 46,367 43,633 46,216
---------- ------- ------- --------
---------- ------- ------- --------
Net Income per Share ....................................... $ 0.26 $ 0.05 $ 0.67 $ 0.38
---------- ------- ------- --------
---------- ------- ------- --------
NET INCOME PER SHARE - DILUTED
Net Income ................................................. $ 11,325 $ 2,424 $29,395 $17,765
---------- ------- ------- --------
---------- ------- ------- --------
Weighted Average Number of Common and Common
Equivalent Shares Assuming Issuance of All
Dilutive Contingent Shares:
Common stock ........................................... 43,875 46,367 43,633 46,216
Stock options .......................................... 1,124 482 1,138 602
Warrants ............................................... 2,607 729 2,621 829
---------- ------- ------- -------
Total ............................................... 47,606 47,578 47,392 47,647
---------- ------- ------- --------
---------- ------- ------- --------
Net Income per Share .................................... $ 0.24 $ 0.05 $ 0.62 $ 0.37
---------- ------- ------- --------
---------- ------- ------- --------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998, AND THE RELATED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998 AND THE NOTES THERETO, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH CONSOLIDATED FINANCIAL STATEMENTS AND NOTES.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 57,482
<SECURITIES> 310,950
<RECEIVABLES> 27,097
<ALLOWANCES> 0
<INVENTORY> 12,730
<CURRENT-ASSETS> 408,259
<PP&E> 79,451
<DEPRECIATION> 0
<TOTAL-ASSETS> 812,705
<CURRENT-LIABILITIES> 58,313
<BONDS> 287,500
0
0
<COMMON> 46
<OTHER-SE> 453,420
<TOTAL-LIABILITY-AND-EQUITY> 812,705
<SALES> 0
<TOTAL-REVENUES> 144,067
<CGS> 21,348
<TOTAL-COSTS> 124,408
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,155
<INCOME-PRETAX> 26,931
<INCOME-TAX> 9,166
<INCOME-CONTINUING> 17,765
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,765
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.37
</TABLE>
